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Managed Futures Spotlight: 2100 Xenon Fixed Income Program
April 12, 2010
With the benchmark 10 year Note yield breaking above the 4.00% level for the first time since October of 2008 early last week, many investors were wondering aloud if the so called US Treasury bubble was starting to show signs of bursting.
Whether or not there really is a US Treasury bubble, and what could cause that bubble to burst are questions that remain to be answered. But whether it's a bubble or just a normal downtrend (rates higher) off of historic highs (historic lows for rates), rising interest rates could easily be one of the main market drivers over the next few years. How you can play this potential market moving trend is a question on more than one investor's mind, and the subject of this month's managed futures spotlight, the 2100 Xenon Fixed Income program, may just be the answer some investors are looking for.
Who is the Manager:
The manager of the 2100 Xenon Fixed Income Program is Jay Feuerstein, CEO and founder of the 2100 Xenon Group. Mr. Feuerstein has been involved with fixed income trading for nearly 30 years, having begun trading interest rate vehicles in the early 1980’s as a trader on the Drexel Burnham Lambert futures trading desk. In Jay’s words, he immediately became fascinated with the treasury markets, learning his craft from veteran traders who specialized in trades such as buying the “basis”, which is when a trader simultaneously buys treasuries in the cash market while selling that treasury’s futures contract, or inter-market spreads (i.e. buy 5yr, sell 10yr) which were typically mispriced and required much less margin to trade.
Mr. Feurstein graduated with an MBA in Finance from the University of Chicago, where he first became interested in trading in 1979 when taking a class in decision theory. Jay now realizes that he was heavily influenced by studies that discussed the relationships between decision makers and their rules, in turn making him become “systematic” in his thinking throughout his career.
Mr. Feurstein shared the trading desk in his early career at Drexel with none other than Richard Sandor and John Harding, who are credited, according to Jay, with creating and drafting the first financial (bond) futures contract. This exposure allowed Jay to learn firsthand how bond futures were constructed, and it was during this time that he built the yield curve model that is still used today in the 2100 Xenon Fixed Income Program. Mr. Feurstein later moved to Kidder Peabody where he learned about structured mortgage products. During this time, the idea of “convexity” became very important to the bond market and this experience has influenced the convexity trading model that is also currently used at 2100 Xenon.
In 1996, while working at Bear Stearns, Mr. Feurstein met Steve Schnur, a fellow Bear Stearns employee, working in the Futures Sales and Trading Department. Several years later, the duo left Bear Stearns to start Xenon Capital Management, with Mr. Feurstein focused on model creation and Mr. Schnur tasked with conducting the trading. As luck would have it, the duo started Xenon a few months ahead of the 9/11 tragedy, which was a very volatile time to be a bond trader (especially for a product that was just getting started). Ultimately, Jay and Steve learned from the experience, and eventually called on those lessons plus their cash bond backgrounds to launch the fixed income strategy in 2004.
In 2008, Xenon Capital Management became 2100 Xenon, and an affiliate of Old Mutual Holdings, a $250 billion asset management holding company. Old Mutual provides 2100 Xenon with state-of-the-art infrastructure and a great depth of resources out of reach of most other managed futures programs, which allows Mr. Feuerstein and his team to focus on what they feel they do best – trading.
Other key employees of 2100 Xenon include Malcolm Lambe, the CFO/COO of 2100 Xenon, Jeffrey Bolduc, Sr. Quantitative Analyst, and the newest hire, Bruce Mumford, 2100 Xenon’s Director of Marketing/Investor Relations.
How Does the Program Work:
The 2100 Xenon Fixed Income Program’s general approach is to take advantage of inefficiencies in interest rate futures markets such as the futures on 30yr Bonds, 10yr Notes, 2Yrs, and Euro Dollars. But such a general description begs the questions: How? and… Are there inefficiencies?
As for the second question, Xenon believes the fixed income markets are structurally inefficient, saying: “For a bunch of ex-University of Chicago graduates, this statement could be considered grounds for ex-communication, but efficient markets hinge on perfect information, lack of government intervention, and rational decisions from market participants – in other words a far cry from the world we live in.” According to Jay the fixed income market inefficiencies are created by central banks, governments, risk management practices and behavioral tendencies of traders and individuals, leading to systematic trading opportunities across multiple markets and time frames.
As to the how, 2100 Xenon utilizes six separate model families applied across nineteen fixed income markets to identify and attempt to capitalize on inefficiencies. These models are based off their team’s three decades of trading experience in the global fixed income/debt markets, and the belief that global liquidity, which is the available supply of cash and credit, drives market pricing across all asset classes (especially in interest rate futures).
The six different models used by 2100 Xenon can be split further into three groups; with three models using multiple time frame momentum based strategies, one model analyzing volatility, and the final two models using what we’ll call fixed income specific strategies, and what 2100 calls opportunistic strategies.
The three multi-horizon momentum models can be looked at as different trend following methods on varying time frames, where 2100 looks to a. identify and participate in markets which are showing momentum in one direction or the other, and b. confirm or filter those trends based off of momentum readings across multiple time frames typically ranging from two hours for certain models, to one year, in other models (the average holding period across all models is 15 days).
The volatility based model tries to accentuate the trend following components by looking at factors not usually considered in trend following, while the two fixed income specific strategies are reliant on market characteristics unique to fixed income markets such as convexity and US fed interest rate decisions.
All six of these systematic models, with the exception of the US yield curve model, are technical in nature, and are explained in more detail below:
The Six Models making up the program:
· Trend Efficiency: The trend efficiency model looks to measure short and medium term market trends with the purpose of measuring trend durability and the probability of trend divergence. To do this, a medium- term trend following strategy is paired with a short-term counter-trend strategy. The short-term model only initiates a trade when a market trend has entered a fat tail area, which signals a likely reversion to the mean. Once the market returns to the mean the model returns to following the medium-term trend. Average hold time for this model is 20 days and it is in the market approximately 90% of the time.
· Breakout: The breakout model is designed to recognize shifts in medium-term trends. This model operates on multiple time frames and measures variable range breakout potential across all markets. This model looks to be an early adopter to new market trends and will hold trades for 97 days on average.
· Momentum: The final piece of the trend following components is the long-term trend following model, which looks to confirm long-term momentum in the markets. The premise behind this model is that momentum is self-sustaining; and that once a market establishes momentum in a given direction, it tends to continue in that direction. The average hold time for this model is 18 days.
· Kinetic: Is based on the idea that liquidity imbalances will at times interrupt trending markets, the kinetic model is designed to indentify short-term trends that develop in response to aftershocks in volatility. This model trades all markets and profits from expansion of trading range and volatility. Average hold time is 3 days.
· Yield Curve: One trading strategy unique to 2100 Xenon is that they systematically “trade the Treasury yield curve”. The yield curve model looks to capture profits from Federal Reserve monetary policy decisions by trading spreads in the 2-year note and 30-year bond futures markets. This model measures the impact of monetary policy and the effect on the yield curve. The premise is that changes in Federal Reserve policies are captured as the yield curve steepens and flattens. This is the only 2100 Xenon model that uses fundamental values to determine its positions. Average hold time is 196 days.
· Convexity: This model is designed to exploit convexity imbalances in the fixed income markets. The premise is that interest rate movements require convexity hedging by mortgage-backed investors and 2100 Xenon believes they can profit from these inefficiencies. Markets traded include US 10 Year Notes, US 30 Year Bonds, and the Euro Bund. Average Hold time is 2 hours and trades are typically initiated during treasury auctions and major US economic data announcements.
Having the models in place is only half the battle for 2100 Xenon, however. The rest of the puzzle is how 2100 systematically blends the different models together into a single program based upon their inherent risk, quality, and correlation with one another.
How the Programs Work Together:
According to Jay and his research staff, one advantage that discretionary traders typically have over systematic programs is the ability to scale in and out of positions as necessary; aka flexibility. As trends grow more powerful, the discretionary trader can look to add to a position, likewise they also have the ability to scale down as the markets become more risky. The multi-horizon trend systems listed above work together to systematically model this process. For example, if the market is at the height of a long term trend, the breakout model, momentum model and trend efficiency model would most likely have open positions in the direction of trend. As that trend begins to break, the trend efficiency model will probe a countertrend trade, reducing the portfolio’s position in the long-term trade. Next, as there is confirmation of change in the trend, the kinetic model will produce a further countertrend move. Now the overall position is effectively out of the market. As the trend truly rolls over, the momentum model will exit its long-term trend position and the portfolio will be positioned in the direction of the new trend. Finally, as the new trend becomes established, the momentum and breakout models will establish themselves as anchors of the new trend. Average hold time across all models is 15 days.
Experience has taught the 2100 Xenon team that the ability to effectively manage risk is a key component to being a successful trading program, and they view risk management as a key component of the strategy. The first level of risk management employed by 2100 Xenon is the use of stops on all trades [disclaimer: stop orders can not guarantee an order is filled at the desired price]. The next level is a little more esoteric, and follows from 2100 belief that the fixed income markets are ever changing ‘organisms’ where the inherent risks and relationships with each other are changing all the time.
This is a fancy way of saying that basic stops and normal risk management techniques likely won’t hold up in the ever changing bond markets where surprise rate cuts, set policy directives, and so on can quickly end a trend or start a new one. Thus, in addition to stops and basic risk control, 2100 Xenon also considers when concentrated themes develop or markets become more risky or illiquid in the risk management, by looking to systematically reduce its exposure to these themes or markets as necessary. A multitude of metrics are used for this including downside deviation, distributional characteristics (skew, kurtosis), drawdowns, distributions of drawdowns and value-at-risk just to name a few. On an intraday basis Xenon forecasts its portfolio structure (as defined by the models) to further direct the process on how many contracts to buy or sell.
The last level of risk management employed by 2100 Xenon is the intraday evaluation of both model risk and portfolio risk, whereby the program will look to enter and exit positions in real time as conditions warrant. Essentially, Xenon is deciding how many contracts to buy or sell on today’s market conditions, and not basing their risk only on previous day(s) data like so many other managers. Xenon prefers to take a snapshot of the market several times per day in real time when placing trades. This way they have the most current risk numbers at their fingertips and use this data to determine how many contracts to enter or exit as conditions warrant.
While we’re usually highlighting a program which has done well in this space, our desire to do a spotlight on 2100 Xenon’s Fixed Income program was borne more out of a feeling that this is a program which is going to do well in the near future.
With global central bank rates close to zero across the world, commodity prices rising again, and debt to GDP ratios at historic highs – many (those at Attain included) feel something has to give, and that the something will be much higher interest rates. Even if it isn’t higher interest rates, it seems logical to believe there will be some increased activity in the interest rate sector as the US Fed, just for starters, starts to unwind the massive quantitative easing it did and slowly ratchet up interest rates so we don’t find ourselves right back in the cheap money problem scenario which caused the financial crisis in the first place.
With 2100 Xenon’s singular focus on the fixed income (or interest rate) markets through the Fixed Income program, this is a unique opportunity to potentially capitalize on the (we think) coming volatility in interest rates. Manager Jay Feuerstein believes the opportunities in the current bond marketplace are nearly as good as they were back in the early 1980's when he got his start, saying “the combination of zero percent interest rates and concerted global interest policy could make fixed income futures trading extremely successful in the coming years”.
Many traditional managed futures programs will have exposure to trends in fixed income markets should they emerge, and indeed, a large component of most managed futures portfolios is fixed income/interest rate futures. But those programs are not designed to analyze and profit from interest rate markets specifically, they are only looking to catch a trend - with most not caring what market that trend is on.
So while you could let your normal multi-market program capture a down trend in bond prices (rates higher), buy the short treasury ETF, sell bond futures, or buy long dated puts as methods to catch a move higher in global interest rates – it seems to us the better method is to enlist a manager who will be actively trading any future moves in interest rates, and managing the risk of any such move being a false move.
If you are one of those investors who is saying – yeah, but the past returns just aren’t attractive to me, we have two comments. One, you are missing the point that this is a play on its future possibilities based on what may happen with interest rates, not on its past performance. Two, those returns can be increased via notional funding because of 2100 Xenon’s low margin usage.
For investors who are looking to leverage the program’s returns to more attractive levels, the manager is open to considering investments from the 2X level ($250k traded as $500k) all the way up to 5X ($100k traded as $500k) level. The effect of such leveraging on their past performance is listed in the table below.
Past Performance is Not Necessarily Indicative of Future Results
2100 Xenon Fixed Income (Aug. 2004 – current)
Compounded Ann RoR
[Disclaimer – the use of leverage can substantially increase the risk of loss.]
If considering this, please read our newsletter last week (click here) covering the risks of, and how to, invest at lower minimums through the use of notional funding. The important part to know is that your fees are based on the nominal level (the traded as level), meaning $100k traded as $500K will pay fees on the $500K, not the lower $100K in your account.
One last note concerning the minimum investment, the manager typically requires a minimum investment of $2,000,000 and a 2% annual management fee for this program; but is offering Attain clients a lower minimum of just $500K and a 1% management fee in conjunction with this newsletter. And as mentioned above, if you understand the risks associated with notional funding – that $500K can be traded with as little as $100K in your account ($100K traded as $500K).
Playing devil’s advocate for a minute - most investors will likely be underwhelmed by the past performance, where it could be argued that their 4.43% compound annual rate of return is just too low. There are also the risks associated with any single market or single market sector program; which is that you lose the power of diversification.
But in the end, we think this program represents a unique opportunity to be forward looking in your investment choices, instead of the more normal backwards looking pattern most investors are trapped in. We expect interest rate volatility in the near future, and haven’t seen a manager more qualified or more focused on profiting on that volatility than 2100 Xenon. They will still have to perform when and if the time comes, but the fact that you can get access to this $2 Million minimum program with just a $500K investment, and at 50% off the normal management fee make it that much more appealing to invest with 2100 Xenon to see if they can deliver.
IMPORTANT RISK DISCLOSURE
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Feature | Week In Review: Managed Futures programs mixed as energies, metals, and stocks rally | Chart of the Week
Overall market action in most sectors was fixed in a mixed to choppy state during the past week, although late reports of a possible weekend EU/IMF agreement about Greek sovereign debt and another week of constructive U.S. economic reports helped support price activity in the stock index sector. The firm tone was led by the Russell 2000 futures +2.81% followed by Mid-Cap 400 futures +2.29%, NASDAQ futures +2.05%, S&P500 futures +1.61% and Dow futures +0.86%.
Indication of an imminent weekend EU membership/IMF agreement to come to the aid of Greece if their sovereign debt issue imploded into a default did not seem to aid continental currencies during the past week. The marketplace seemed to take a wait and see approach after several earlier attempt fell by the wayside. For the week the Japanese Yen added +0.75%, followed by the British Pound +0.58% and the U.S. Dollar Index +0.33%. Swiss Franc -1.11% and the Euro -0.63% remained clouded by uncertainty over a potential agreement.
Commodity and Food products were again mixed last week as fundamental factors ruled price activity in most cases. Grains bounced back some as Wheat +2.31%, Soybeans +1.14% and Corn +0.34% were aided by weather concerns which offset a USDA release showing larger production and stocks for the upcoming crop year. Livestock activity remained firm with Live Cattle +1.32% and Lean Hogs +1.20% gaining ground on tighter supplies and better wholesale markets. Soft sector price action was weak as pressure stemmed from higher production estimates and improvement in growing region weather last week. Cocoa -4.83% lead price action lower followed by OJ -4.46%, Cotton -3.92%, Coffee -3.27% and Sugar -0.65%.
Energy futures ended the week mixed with a lack of news and weekly stocks reports that came in a bit larger than expected keeping a cap on market activity. Heating Oil +0.42% and Crude Oil +0.06% posted slight price increases. RBOB Gasoline -1.48% and Natural Gas -0.39% were hampered by the supply increases on a week on week basis.
Specialty market managers have been leading the way thus far in April, with Emil Van Essen Low Minimum Spread program ahead an estimated +5.99% for the month. Emil Van Essen focuses on systematic spread trading across a wide range of commodities – in particular this month they are experiencing significant upside in the energy markets. The program was ahead +19.05% in 2009 and has averaged +38.03% return with a 35.9% drawdown since its inception in January 2007. E-mail us at firstname.lastname@example.org to see if you qualify for the program (QEP investors only).
Other Specialty market manger estimates include agriculture specialist NDX Capital Abednego -0.17%, NDX Capital Shadrach -0.17%, Oak Investment Group +4.06%, and Rosetta Capital +1.26%.
Multi –Market managers have gotten off to an up and down start in April. On the up side, Hoffman Asset Management posted a nice week of trading and is up +2.90% est. for the month. Other managers in the black include Quantum Leap Capital Management +1.52% est., Robinson Langley +0.60% est., Futures Truth SAM 101 +0.58% est., Accela Capital Management Global Diversified +0.53% est., Covenant Capital Management Aggressive +0.52% est., Clarke Capital Worlwide +0.51%, DMH +0.37% est., APA Strategic Diversification +0.30% est., and Integrated Managed Futures Global Concentrated +0.04% est.
Managers who started in the opposite direction include 2100 Xenon Managed Futures (2x) Program -0.18% est., Mesirow Financial Commodities Low Volatility -0.36% est., Sequential Capital Management -0.64% est., Applied Capital Systems -0.72% est., Mesirow Financial Commodities Absolute Return -0.77% est., Dighton Capital USA Aggressive Futures Trading -0.48% est., Futures Truth MS4 -0.62% est., Dominion Capital Management Sapphire -1.67% est., and GT Capital -2.87% est.
Short-term index trader Paskewitz Asset Management Contrarian 3X St. Index remains short in the ES and is down -2.74% est. this month.
Option trading managers have also started April with mixed results across both index and diversified strategies. The top performer thus far has been FCI CPP with an estimated gain of +1.44% after recovering some open trade losses from March where the program ended down -1.72%. FCI CPP is a diversified option trading strategy focusing on 10-20 different futures markets. The program was ahead +29.04% in 2009 and is +0.65% so far this year.
Other Option estimates are as follows: ACE SIPC -0.17%, ACE DCP +0.21%, Cervino Diversified Options -0.08%, Cervino Diversified 2x -0.02%, Crescent Bay PSI -0.18%, Crescent Bay BVP -1.78%, FCI OSS -0.25%, and HB Capital -0.01%.
Like their CTA counterparts, the first full week in April brought mixed results for trading systems. Jaws US 400 was able to take advantage of the upward trend in the US 30 Yr Bond market by posting a result of +$1251.25. While Rayo Plus rode the brief up and down moves in the DAX futures market to post a gain of +$792.50. Waugh Swing, which trades in the Mini S&P, rode the moderate uptrend to post a result of +$715.00. The other positive results were PSI! at $555.00, Waugh at $290.00, AG Mechwarrior at $252.50, Polaris at $177.50, and BetaCon 4/1 at $30.00.
On the downside last week, were Bam 90 Single Contract at -$147.50, Bam 90 at -$275.00, Clipper at -$280.00, Waugh CTO -$460.00, MoneyBeans at -$465.00, Ultramini at -$517.00, UpperHand at -$555.00, Money Maker at -$667.50, Strategic(Mini S&P) -$712.50, and Strategic(Big S&P) at -$1125.00.
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.