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Managed Futures Spotlight: Dominion Capital Mgmt. Sapphire Program

August 24, 2009

 

We often associate uniqueness with greatness. There is only one Mona Lisa, Taj Mahal, and Statue of Liberty, for example. And uniqueness holds a special place in the hearts of investors, who often believe that people doing something different are worth an extra look. Indeed, one of the most popular questions we receive when talking with managed futures investors is “Who’s doing something different?”

Most managed futures investors crave something different, because most have exposure to longer term trend following in one form or another. As can be seen thus far in 2009, that can put pressure on a portfolio when managed futures as a whole are underperforming.

This month’s managed futures spotlight is on a manager we believe to be doing something quite different than most others in the managed futures universe: Dominion Capital Management.   Dominion’s uniqueness lies in the time frame they operate on, which is just under two days on average. 

Who is the Manager:

Scott Foster is President and Chief Executive Officer of Dominion Capital Management, Inc. Dominion was established in 1994 in Chicago and since its inception has been primarily focused on short term trading strategies within the managed futures industry. Dominion moved to Traverse City, Michigan in 2001.

Scott’s trading career began in 1988 when he started the Dominion Financial Group, a proprietary trading company. In 1991, Scott joined A.O. Management Corporation, a commodity trading advisor specializing in long term trend following strategies. As Senior Trader at A.O. Management, Scott was involved with the research and development of technical and fundamental trading strategies, product development, and managed all trading desk activities. 

Scott holds a bachelor’s degree from Grove City College where he studied philosophy and religion. Scott’s background in philosophy and interest in behavioral economics have greatly influenced his research and trading methodologies. These disciplines are manifested in Scott’s basic trading rules and principles and form the core of all of Dominion’s systematic trading models. These core trading ideas and concepts are then translated into code and used to express a trading rule in a systematic manner.

Scott has a true passion for short term trading. He has spent the majority of his career perfecting Dominion’s short term trading strategies and is deeply involved in a perpetual research effort. He has given presentations and keynote speeches at numerous industry conferences around the world and has been interviewed for and contributed to several books and articles about alternative investment.

Dominion has a strong team that consists of six full time employees including three fulltime traders with approximately 80+ years of trading experience.    The trading desk is staffed 24 hours a day across trading sessions in Australia, Asia, Europe, and the US.  The strategies themselves are fully systematic and fully automated.   The trading desk manager Mr. Ronald Murray began his career with Scott at A.O. Management Corporation in the mid 90’s and they have worked side-by-side ever since.   Other key employees include Mr. Joseph Vanderbosch who is Executive Vice President of Marketing and Client Services, as well as Mr. Gregory J. Donahue, Esq. who is General Counsel.

How Does the Program Work:

Dominion Capital specializes in what they like to call short term trend following – which seems like a bit of an oxymoron – across a portfolio of 40 different futures markets across currencies, bonds, stock indices, and traditional commodities.  This short term trend following is comprised of short term momentum and short term mean reversion trading strategies.  Momentum trading does exactly what it sounds like – getting in line with a short term trend, while mean reversion trading does pretty much the opposite - looking for overbought and oversold market conditions that are showing signs of reverting back to average prices.

The Dominion Sapphire Program is the end result of a major research effort in 2005 where the manager attempted to improve risk management without sacrificing return.   The major innovation of this research effort was what Dominion calls their ‘Dynamic De-leveraging tool’, which is designed to help manage market exposure in the portfolio as individual market volatility increases and decreases.  Dominion also developed a proprietary automated trade entry tool during the research effort that is used to scale into trades at various price points. With more and more trading moving into electronic markets – the use of such technology gives them a distinct edge, in their opinion.

Dominion uses two core strategies for its short term trading programs. The first is a directional momentum strategy, in which models look for a market to exhibit acceleration. This acceleration is typically caused by a technical breakout: a government report, fund liquidation, or anything that would cause a market to be suddenly and aggressively bid up or sold off. The system(s) would establish a position as the market is moving and anticipate momentum follow through over the next few days.  The momentum strategy also tries to reflect manager Scott Foster’s belief in the old trading adage of never taking home a losing trade – by exiting the majority of trades which are losing money at the close of the market that day.

The second strategy used is a mean reverting momentum strategy that looks for momentum failure after a directional momentum breakout loses its initial strength. When the momentum begins to fail, positions are taken in the opposite direction of the breakout in anticipation of the so called reversion to the mean (which is just a fancy way of saying if something goes well above its average price, it will eventually come back to the average, and vice versa).

The basic tenet behind these two core strategies is Dominion’s belief that there are two basic psychologies at work when prices are moving significantly in one direction or the other – with traders either believing that move is the start of something and piling into the trade in the same direction (“I have to get in”), or traders thinking such a move is overdone and bound to not just end, but reverse course quickly (“I have to get out”).  They believe these two base emotions drive short term price fluctuations, and have designed their models to try and take advantage of the price movements brought about by that type of market psychology.

Over the long term, fundamentals will dictate price and market direction. However, in the short run, a sudden event may cause a market to move from, say, a 1 percent range to suddenly trade in a range of 2 or 3 percent. At this point of expansion, they believe traders will become emotional and fear and greed take over and cause them to act. This emotional or psychological aspect is what Dominion tries to profit from. They believe it to be simple human nature (a sort of fight or flee reaction hardwired into our brains), and take comfort in the fact that human nature isn’t likely to change any time soon.

Within these two core strategies are sixteen separate models (eight short term momentum & eight mean reversion) that attempt to capture these ‘fight or flee’ short term trading opportunities in both expanding and contracting volatility environments.  All of the models are designed to perform well when there are material changes in volatility (either increases or decreases), but each go about that in a slightly different way. No systematic model works well all the time, and this sort of model diversification is enlisted in order to reduce the risk of any one momentum or mean reversion strategy struggling in the short term. Dominion does note that even with this strategy diversification, they will underperform in times when volatility is constant and not changing across the markets they trade in.

Dominion shares a philosophy held by many other successful investment managers - that the most important part of the job is risk management. Along those lines, Dominion employs risk management tools on the portfolio level as well as the individual market level, and has dynamic risk management which responds differently to different trading environments as they occur.   Several other filters (what they call defensive tools) are also employed in an attempt to keep losses at a minimum and survive difficult trading environments. Finally, all positions are protected with stops, including trailing stops and time stops. [Disclaimer: Stop orders cannot guarantee that an order will be filled at the desired price]

Attain Comments:

We believe the manager behind impressive performance numbers are at least as important, if not more so, than the numbers themselves.   You never know if past performance was pure luck, just being in the right place at the right time, or contrived in some manner – but you can get a great look into how a manager will perform his or her duties moving forward by learning more about them personally.  There are sure to be tough times ahead for any model,  and having confidence in the philosophy & pedigree behind the team developing the models (as well as the people actually trading the strategies) helps one believe in a program based on more than just the numbers.

We are quite impressed with the team that developed the models and those who trade them on a daily basis. Most of the Dominion team (including the traders and principles) have been together since the mid nineties, having managed approximately $380mm under a previous program.  (Current AUM for the Dominion Sapphire Program are estimated at $50mm)  We also liked seeing that Dominion has their own 24 hour trading desk with complete order automation – proving for us that the manager takes trade execution very seriously.   This type of commitment to a business behind the trading model is a refreshing change from what is seen by many of the one and two man CTA’s that invariably climb to the top of many CTA ranking services, and shows us Dominion will be around for quite some time.  

In terms of philosophy, we are also impressed with Dominion’s commitment to research.  They are constantly evaluating their models as well as the markets they trade.  Dominion’s research team has and will consider small modifications to systems in order to remain robust in changing market conditions, while also looking to improve overall profitability and lowering daily volatility.     The manager comments that Dominion is in a constant state of research by evaluating, on a trade-by-trade basis, slippage & cost of trading, broker execution (side by side basis), daily monitoring of system performance on a market by market basis looking for subtle drifts, as markets are consistently evolving overtime.

There aren’t a lot of concrete criticisms for Dominion, but if we had to come up with some – we could point to their low annual return on investment as one.   The Dominion team will be the first to tell you that they are not looking to generate supernatural returns at the risk of large drawdowns.  But with their Compound ROR just over 8% with a max drawdown of -8.70%, many managed futures investors are likely to pass over Dominion for something with a higher return.  Investors can always notionally fund and account to increase the percentage return on their capital, but that also increases the risk in percentage terms.

Another potential concern to us is that the short term models traded by Dominion have (until this month when Dominion has gained approx. 3% behind some energy and metals trades) struggled in 2009, almost as much as their longer term trend following counterparts.  This suggests to us that despite having a completely different trading philosophy these models still depend on trends in the marketplace and will struggle in times of consolidation. 

Overall - our impression of the Dominion Capital Management Sapphire program is quite favorable.   It will be hard for individual investors to find a better pedigree in a short term manager than Scott and his team, and the avoidance of risk is evident in the low drawdown in the track record. [past performance is not necessarily indicative of future results].  Add to that their very short, 2 day average hold time; and there is a lot to like about Dominion either as a standalone managed futures investment or component to a portfolio of commodity trading advisors.

-John Cummings

IMPORTANT RISK DISCLOSURE


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Feature | Week In Review: Stocks hit new 2009 highs | Chart of the Week

Overview

Another round of favorable U.S. economic reports coupled with signs of demand growth in some energy and foodstuffs sent stock index futures to new annual highs last week. Commentary by Fed Chairman Bernanke that the U.S. economy is on the cusp of recovery also led to support with traders taking this news as further confirmation that the economic growth, although slight could be nearing. On the economic front most reports seemed to be near or better than market expectations, although a few were a bit off of the mark which didn’t seem to upset the apple cart as the week proceeded. The lineup for economic reports this week is on the light side although numbers for the consumer side could stir volatility for the market place. The energy sector was the most active last week with a strong rally due to heavy draws in supply area being the main catalyst. Crude Oil futures +6.16% led the rally followed by RBOB Gasoline futures +3.98% and heating Oil +3.25%. Natural Gas Futures -11.35% continued to be hampered by heavy supplies and lighter than expected usage heading into the key storage time ahead of fall and winter.   

Stock Index futures regained their upside momentum after a week off with the rally fuel coming from better U.S. economic news and the Bernanke commentary. Jitters from the consumer sector seemed to wane, especially with new and existing home sales beating expectations.  For the week S&P 500 futures +1.93% led the way followed by Russell 2000 Futures +1.93%, Dow futures +1.80%, NASDAQ futures +1.27% and Mid-Cap 400 futures +1.18%.

Weaker price activity continued to rule most Commodity and Food sectors as ideas of heavy U.S. production continued to weigh on the marketplace for Grains. The Soft arena was again mostly weaker during the past week as another round of profit taking and ideas that improving world economic conditions might be factored in at current price levels continued to stall inflationary buying seen during the past couple of months. The livestock sector firmed on improving margins in the meatpacking sector. For the week OJ -5.14% led the decliners followed by Coffee -4.52% Wheat -4.36%, Cotton -4.07%, Soybeans -0.86%, Sugar -0.64% and Corn -0.43%. The Cocoa +4.57% was a bright spot for the sector as tight supplies and possible growing area weather issues continue to be a cause of concern. Lean Hogs +7.11% and Live Cattle +0.06% also added to their values.                  

The metals complex was again a mixed bag as the worrisome world economic inputs from the past few weeks kept the recent corrective phase in motion for products such as Silver -3.79% and Platinum -0.20%. Continued positive developments in the manufacturing sector continued to support some of the industrial metals with Palladium +2.78% and Copper +1.51%. Gold +0.63% also eked out a positive return during the past week.     

Subdued activity in the currency arena was again fairly evident, but U.S. Dollar index futures -1.14% continued to be hampered by stronger than expected economic conditions in the U.S. and abroad. The Bernanke commentary also was a catalyst of investors seeking refuge in other higher yielding foreign currencies. For the week Swiss Franc ended +1.32% followed by the Euro +0.87% and Japanese Yen +0.54. The rate sector experienced another round of better than expected auction results, but positive economic data kept market activity in check.  30-year Bond futures ended +0.01% and 10-year Notes futures were -0.03%.

Managed Futures

Multi-Market manager performance has been mixed so far in August with several managers doing exceeding well while others have continued to struggle.    Integrated Managed Futures Global Concentrated continues to lead the pack with estimated returns of 8.00% this month.   Integrated has benefited from rising prices in sugar and energies on their way to the top of the list.  Next in line is today’s highlighted manager Dominion Capital Management Sapphire Program at +3.37% est.  Dominion has done well trading in the energies and metals this month.  

Other multi-market programs in the black include Futures Truth MS4 +2.22% est. and Futures Truth SAM 101 +0.42%, Robinson-Langley Capital Management +0.47% est., Dighton Capital USA Aggressive Futures +0.26% and Mesirow Financial Commodities Low Volatility +0.10% est.  Attain Portfolio Advisors Strategic Diversification Program is near breakeven for the month at approximately +0.25%, as is DMH at 0.00% est.

Multi-market managers in the red include Mesirow Financial Commodities Absolute Return who is just barely in the red at -0.10% est., Lone Wolf Investments LLC Diversified -0.96% est.,  Attain Portfolio Advisors Modified Program -2.01% est.,  Hoffman Asset Management -5.86% est., Clarke Global Magnum -6.41% est.,  and Clarke Global Basic -12.87% est.

In short term stock index trading Paskewitz Asset Management Contrarian 3X Stock Index +1.55% est. has seen success this month, while MSLO at approximately -2.28% continues to struggle.

Option traders are also mixed thus far in August. Profitable programs include stock index option writers Crescent Bay PSI +0.88%, ACE Investment Strategists SIPC +0.86% est., and Raithel Investments +0.39% est.   Diversified option writers have not done as well so far with Cervino Diversified Options -0.49% est., and Cervino Diversified 2X -1.09%.  FCI has gotten hit a little harder with the FCI OSS program -5.00% est. and the FCI CPP program -2.36% both down for the month.    Finally, Zephyr Investment Group is at -3.77% est. in August.

Elsewhere, Emil Van Essen Spread trading +0.21% est. is trying to hold on until the end of the month, while NDX Abedengo -0.57% est., NDX Shadrach -0.91% est., Livestock CTA -1.22% est., and Rosetta -1.24% est. all try to fight back.

Trading Systems 

Trading systems rebounded last week - led by swing systems that were able to capitalize on the run-up in equities and their corresponding futures contracts. Day trading systems weren’t as flashy as their swing trading counterparts, but they still added some value with the majority of the programs that were active finishing in positive territory.

Starting with the programs that stole the show last week, Strategic SP and ES had a breakout week +$13,475 and +$2,690 on a closed trade basis. Both programs came into the week with a bearish bias and closed out the trades before buying into the rally that paid dividends later in the week.  Other swing programs that didn’t share the same fortune were AG Mechwarrior -$15, Jaws US 60 -$560.30, Polaris ES -$780 and Ultramini ES -$377.50.

Moving on to the day trading programs, the top performers were Rayo Plus Dax +720€, Clipper ERL +$440, PSI! ERL +$200, BetaCon 4/1 ESX +120€, Upper Hand ES +$82.50 and Waugh ERL +$63.89. On the losing side, ATB Welcome v2 Dax lost -$810€, Freedom ES -$105, Rayo Plus 1815 Dax -225€ and Rayo Plus 2130 Dax -25€.

IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.

Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Advisor ("CTA") and Managed Forex programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain") own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses are for closed out trades. The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and money management techniques. Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.

Please read carefully the CFTC required disclaimer regarding hypothetical results below.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.