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Managed Futures Spotlight: Paskewitz Asset Management
February 8, 2010
Last week we attempted to answer the most popular client question: What is your best managed futures program? After churning the numbers and evaluating managers based on return, drawdown, ratios (Sharpe, Sterling, and Sortino), length of track record, and more; we were able to come up with our Top 15 Managers based on performance for the period ending 12/31/2009. The program that floated to the top of the rankings is the Paskewitz Asset Management Contrarian 3X Stock Index program. Congratulations to Mr. Paskewitz and his team! This is the first time that they have finished #1 in our semi-annual rankings!
By his historical standards, Paskewitz had a rather pedestrian 2009 with returns of just 3.03% and a drawdown of -5.52%. However, the program still managed to outperform many of its managed futures peers when comparing the positive performance to the negative 2009 performance of the New Edge CTA Index -4.24% and the New Edge Short Term Traders Index -4.01%.
Mr. Paskewitz blames the less than optimal 2009 performance on a lack of zig and zag in the marketplace. According to the manager, "the worst possible market place for a contrarian trader is a trendy market that goes either straight up or straight down." Those that follow the markets closely, understand that 2009 was the worst case scenario for a strategy that is looking for back and forth price activity from the market, as stock index futures traded consistently higher for most of the year. The good news is that markets will not trade higher forever, and trading conditions will eventually improve for short-term traders who like to see both up and DOWN days in the market. In fact, with the S&P 500 falling -7.30% over the last two weeks we are already starting to see drastically better trading conditions for short term contrarian style managers.
For those interested in the entire rankings list it can be found at: http://www.attaincapital.com/managed_futures_newsletter/370
About the Manager
Paskewitz Asset Management is owned and operated by Mr. Bradford Paskewitz. As we have said in the past, we will not give him too hard of a time for lack of originality on the name, as his background is more in rocket science than marketing. Brad started Paskewitz Asset Management in late 2002, and became registered as a CTA in 2007.
Brad graduated from Princeton University with a Bachelor's degree in Electrical Engineering and Computer Science in 1980. He then went on to get a Master's in Systems Engineering from the University of Pennsylvania, where he specialized in signal processing and machine learning. He worked the first seven years of his career as an engineer - starting out at General Electric doing radar signal processing for missiles [the rocket scientist reference], and then leading an artificial heart project for a medical device company.
After spending the first half of his career tracking missiles and building hearts, Brad went in search of more excitement (and money) in the world of financial markets (having toyed around with trading previously), joining the New Products group at Banque Indosuez.
As luck would have it the Black Monday crash of 1987 happened shortly after Mr. Paskewitz entered into the trading world, and he quickly found out just how risky these markets can be, saying it was a "wakeup call to how much risk is possible in the markets."
With that firsthand knowledge fresh in hand, Paskewitz went to work developing and trading quantitative strategies; eventually doing so for a who’s who of major firms including Lehman Brothers, Credit Suisse, and Bear Stearns. Despite all of his success, we do not believe that Mr. Paskewitz expected his firm to outlast two of these Wall St. titans, as both Bear Stearns and Lehman Brothers were victims of the financial crisis of 2008.
Mr. Paskewitz lives in Princeton Junction, New Jersey and is married with three children. Other than trading and building his Commodity Trading Advisor business, his interests include reading, running, hiking and involvement in his children's many activities.
New to the Paskewitz team in 2009 is Steve Dymant who was hired as COO and Director of Marketing. Other team members include Diana King who is the CFO, Aaron Eisman - Director of Technology who is responsible for quantitative developments and hardware procurement, and 9 full-time "quants" in China who continue to evolve the R&D and production infrastructure, as well as the soon to be launched Paskewitz Diversified Program.
How The Program Works:
The stated goal of Paskewitz Asset Management is not much different from the goal of many other CTAs - to provide consistent and superior risk-adjusted returns to clients. However, the way that Mr. Paskewitz manages his trading is much different from traditional trend following managers, and is the reason why PAM looks great when added to a portfolio of traditional style managed futures products.
Paskewitz implements what they call the S & P Contrarian Strategy trading program for accounts they manage, trading exclusively through the liquid S&P 500 e-mini futures on a short term basis. As you can tell from the name, the base trading philosophy of Paskewitz is a contrarian approach, which looks to buy into oversold markets and sell into overbought markets. The strategy itself sounds simple, but when considering that the majority of the managed futures industry subscribes to the "trend is your friend" philosophy, contrarian style trading is definitely not the easy way to build an absolute return vehicle.
PAM Contrarian 3X Stock Index is a fully-systematic contrarian program that employs three separate models which forecast short and intermediate term tops and bottoms in the S&P 500 index – identifying a top when the market prices are above where Paskewitz's models say the true value should be, and vice versa for identifying bottoms. Once the values have been assigned and prices analyzed, the models place a trade, buying identified bottoms, and selling identified tops. The strategy will only trade a maximum of once per day and often times has no trades at all, being out of the market about 23% of the time.
The trading portfolio represents the net outcomes of the predictive sub-models. For example, if two of the sub-models wanted to buy, and one wanted to short, then the portfolio trade would be to "buy 1 unit", since the other buy and simultaneous short signals would be cancelled out. Brad Paskewitz has used these three models without modification since he discovered them in 1991.
Risk control is both pro-active and reactive. Pro-active risk controls include limits on leverage and scaling of positions based on quarterly volatility measurements. Reactive risk controls include a maximum loss on any position of -21% of equity. This is a worst case scenario stop loss to assure that catastrophic losses are limited, and has only been hit two times in the past six years of live trading.
One of these times was in October 2008 when stock index futures sold off on 10 consecutive days. This was exactly the type of environment Paskewitz will not do well in; when "value" is temporarily not important due to forced liquidations, panic, and so on. The best scenario is an oscillating market which sells off a bit after sharp rallies and rallies a bit after sharp sell offs.
It is important to remember that Paskewitz is not looking to call the market top or bottom for the next 6 months. Rather, they want to identify a short term top or bottom, which gives them a relatively low risk entry point at which to grab a small portion of any reversion to the mean. In Dow terms, if the market sold off from 10,000 to 8,000, they would not be looking to buy at 8,000 and make money all the way back to 10,000. They would be looking to buy at 8,000 and take a quick bite out of the market for a few hundred points.
One final objective of the Paskewitz program is to be in as few of the same trades as their competitors. The goal is uncorrelated or negatively correlated performance to the various managed futures Indices, the S&P 500 index, the U.S. Government Bond index, as well as all other major hedge fund indices.
The new Paskewitz diversified trading program will be a completely new animal so-to-speak. First, this new product will be trading thirty-five markets across six sectors (stock indices, energy, metals, agriculture, fixed income, currency). Second, the systems are designed to have a low correlation to each other as well as the original program. Styles of trading will include short term momentum, trend following, as well as additional contrarian systems. This program is scheduled to be unveiled to the public in the second quarter of 2010. We are looking forward to learning more soon!
Paskewitz's focus on the stock index market makes them a specialty manager in our opinion which should not be considered as the core portion of a managed futures portfolio, but which can add a good deal of strategy diversification and the potential for a boost in performance to a portfolio which already has core commodity based strategies.
2009 was a tough year on many CTAs, who were forced to suffer through very difficult trading conditions. Specifically, short term index traders were hit with a double whammy of a very bullish market and declining market volatility. Most short term traders including Paskewitz are long volatility type managers who typically perform better when volatility (trading range) is expanding, not contracting. Moreover, as we mentioned above, the "Achilles heel" of PAM is a market that is constantly trending in one direction or the other. With this in mind, posting a net gain in a strong trending year like 2009 + Paskewitz outperformed the major CTA Indexes should be considered a win.
In our opinion, the key to the manager's 2009 success was money management as PAM gradually decreased their trading size throughout the year as market volatility contracted. We were very impressed watching the manager adjust his risk exposure as market conditions worsened, and we believe this is the main reason PAM remained in the black with a manageable drawdown in '09.
Critics will say that the major con of trading one market is that you are only trading ONE market! In other words, your strategy is at the mercy of one market behaving the exact way you had seen it behave in the past. Advocates of one market trading strategies like Mr. Paskewitz will argue that there is no reason to force a model on markets where it does not have a reasonable chance to succeed. Who is right? Well, in this case, both sides are correct. The fact that PAM outperformed in both 2008 and 2009 proves that PAM's strategy is robust. However, we also believe that this type of program is best suited for an investor who already has a full complement of traditional CTAs, as those types of programs will typically perform when PAM struggles. Especially when considering the potential risk per trade that PAM can have when fully invested.
In terms of risk, the willingness to risk up to 21% on a single trade needs to be a calculated risk that investors are willing to endure in order to have a chance to benefit from a contrarian style over time. To some, the amount of risk feels a little bit like an option seller profile where they risk large but rare losses in exchange for small but consistent gains. However, it has only been hit twice in the past 6 years (one of those being the incredible sell off in Oct. '08) and unlike option sellers PAM is ONLY trading directional futures vs options. In addition, upon putting this worry to Brad Paskewitz, he replied that he disagrees – because his winning percentage is only about 65% (not 85% or 90% like an option seller) and his win/loss ratio. (Average winner divided by average loser) is about one. In contrast, an option seller would have a win/loss ratio of maybe .10 or .25 – with the average loss being many times the average gain.
The future looks bright for Mr. Paskewitz and his team. First, they are expanding operations by adding new programs and additional members to their team. Growth is one of the key indicators of a healthy company and PAM seems to be expanding at the right pace. Second, the original PAM Contrarian 3X Stock Index model outperformed over the toughest twenty-four months of market conditions that most active managed futures products have had to navigate. It is hard for us to imagine trading conditions that could be any worse for a contrarian trader or trend follower for that matter. Moving forward, it is only a matter of time before conditions improve, which should benefit all traders. It is worth noting that if we move into a range bound market similar to the 1970's, a top and bottom picker like Paskewitz could be just what the doctor ordered.
IMPORTANT RISK DISCLOSURE
Managed futures accounts can be subject to substantial charges for management and advisory fees. The above numbers include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.
Regulations require managed futures performance to be calculated as a composite of all accounts of non qualified eligible persons trading the same program. This 'averaging' of individual account performance can cause individual performance to be higher or lower than the reported composite performance depending on several factors, including commission and fee levels and investment amount and duration. Some of the statistics above show rates of return for only the listed period (i.e 12mos, 36mos, 5yrs, 10 yrs), where rates of return for periods longer than the period shown may be higher or lower than those shown.
Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFTC rules. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investors interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs. Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document are considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.
IMPORTANT RISK DISCLOSURE
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Fears and disappointment led to a turbulent week of market activity as worries about the health of the global financial system came into sight after news of rising deficits in some weaker European economies sparked investors unrest. Further indication from the Chinese government about restraining economic growth and proposed rules changes by the U.S. government about institutional trading also were key factors for pressure in several sectors of stock index and commodity futures. The exodus out of commodity based growth and inflationary sectors and into the U.S. Dollar for safety was very evident in the both base and precious metals. For the week Silver futures -8.40% led the way down followed by Copper futures -6.39%, Palladium futures -3.49%, Gold futures -2.86% and Platinum futures -2.05%.
European debt issues seemed to have the most bearing on the lower trade in the stock index sector, despite several decent economic releases and strong corporate news. For the week the Russell 2000 futures -1.83% led declines followed by Mid-Cap 400 futures -1.03%, S&P 500 futures -0.99% and Dow Jones futures ended -0.76%. NASDAQ futures +0.33 eked out a small advance on earnings support.
Most of the energy sector fell victim to worries that strong growth estimates for 2010 may not come to fruition after indications of debt trouble in Europe and a hint by the Chinese that they will take steps to contain growth. Supply and demand scenarios also weakened on with additions to most weekly supplies. Crude Oil futures -2.33% led the decline followed by Heating Oil -2.00% and RBOB Gasoline -1.41%. Natural Gas +7.48% was supported by lighter than expected weekly supply and spread trading against the balance of the complex.
Development of debt issues in Europe and some stronger U.S. economic reports led to a decent rally in the U.S. Dollar +1.83%. The Japanese Yen +3.15% also was a safe haven for worries in other world economies. The Euro -3.26% led the under the weather continentals down followed by the Swiss Franc -2.47% and the British Pound -1.18%.
The rate sector benefited from debt issues in Europe, although another round of better economic reports kept a cap on enthusiasm. The 30-year Bond futures ended +0.76% and 10-year note future shed +0.19% for the week.
Commodity and Food products were mostly lower with continued news that larger southern hemisphere crops could be on the horizon capping activity in some sectors. The ebbing of stronger economic growth ideas led to some demand worries as well. In the grains for the week Corn -1.40%, Wheat -0.68% and Soybeans -0.07% were pressured by larger production indications for the upcoming crop year. The livestock sector was mixed to lower as poor demand and heavier supplies sparked pressure with Lean Hogs -2.94%, but Live Cattle +1.14% were supported by bad weather in the U.S. cattle feeding belt. Weaker activity in the soft sector was led by Sugar -12.47% followed by Cocoa -6.65%, Cotton -3.49%, Coffee -2.20% and OJ -1.58%.
Last week was the week short to medium term multi market traders have been waiting for. Sharp market reversals in commodities and stock indexes proved to be great trading opportunities and quite a few managers took advantage of the best trading conditions thus far in 2010. Leading the way was Clarke Global Magnum with estimated returns of +5.30%, with sister program Clarke Global Basic right behind at +4.42%. Short term momentum trader Dominion Capital Management Sapphire has had a great month as well at +4.19%, with most of those gains coming in the last week!
Other managers that have enjoyed February include Futures Truth MS4 +3.07%, Futures Truth SAM 101 +3.07%, Dighton USA Aggressive Futures Trading +1.30%, Quantum Leap Capital +0.87%, APA Modified Program +0.84%, GT Capital +0.49%, Mesirow Absolute Return +0.47%, Integrated Managed Futures Global Concentrated +0.43%, APA Strategic Diversification +0.40%, Hoffman Asset +0.20%, Mesirow Low Volatility +0.15%, and Accela Capital Management Global +0.08%. Managers in the red include: Sequential Capital Management -0.17%, 2100 Xenon Managed Futures (2X) -0.72%,Clark Worldwide -1.38%, and Robinson-Langley -7.20%.
With an uptick in volatility, Option Trading managers had a mixed start to the month. Once again, it has been the diversified trading of FCI who is proving their worth – Financial Commodity Investments CPP is ahead an estimated 3.84% while the OSS is ahead an estimated +3.14%. FCI’s current positions are well diversified across the grain, metal, energy, softs, and currency markets.
Other Option Trading estimates are as follows: ACE SIPC -2.27%, ACE DCP -2.51%, Cervino Diversified Options +0.03%, Cervino Diversified 2x +0.03%, Crescent Bay PSI +0.45%, Crescent Bay BVP -3.10%, and Oak Investment Group +0.69%.
Specialty managers also enjoyed the benefits of their diversification during last week’s equity market selloff. Rosetta Capital lead the way earning an estimated +1.75% as market fundamentals shifted back in their favor. NDX Capital, who also focuses on market fundamentals in the agriculture and grain markets, was ahead slightly on the week. NDX Abednego was ahead +0.19% and NDX Shadrach was ahead 0.15%. 2100 Xenon Fixed Income Program was up +1.02%. Finally, Emil Van Essen also pushed ahead +1.62% and is trading close to new equity highs.
Despite increased selling pressure on stock index futures and commodities alike, system trading performance was mixed to lower on the week with swing systems outpacing their day trading counterparts overall. The silver lining is that the VIX is starting to show signs of life which essentially equates to investor fear of the stock market, and this could mean more opportunities in the days, weeks and months to come.
Starting with the swing trading programs, MoneyBeans was the top performer up +$2,257 on the week on four trades. Moneybeans, developed by Andrew Gibbs (AG Mechwarrior, Strategic), swing trades the CBOT Soybeans, which is definitely a unique focus from the typical stock index/bond trading program. Polaris had a strong showing last week +$1,320 on the week while Waugh Swing ES added +$695 to the bottom line. Other winning programs included Jaws US 60 +$938.75, Ultramini ES +$497.50 and MoneyMaker E +$95.
On the losing side, results were as follows: AG Mechwarrior ES -$792.50, Bam 90 ES -$660, Bam 90 Single Contract -$342.50 and Bounce EMD -$120.
Moving over to the day trading programs, results were more skewed towards the downside. Results were as follows: BetaCon 4/1 ESX +€260, BounceMOC EMD -$120, Clipper ERL -$790, Compass SP -$2,350, Freedom ES -$502.50, PSI! ERL +$230, Rayo Plus -€155, Upper Hand ES +$695 and Waugh ERL -$1,150.
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.