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Managed Futures Spotlight: Briarwood Capital Management, Inc.
August 6, 2012
It’s been a week since we released our semi-annual CTA rankings, which means it’s time for us to spotlight one of our top ranked managers. Since we already highlighted Newport Capital Management when they sat perched atop the rankings at the beginning of the year, we decided to put the focus on the #2 ranked Briarwood Capital Management.
They aren’t what you might expect out of a top ranked CTA (and neither was Newport). Their program was not developed to rake in 30%+ returns on a monthly basis. They do not have a slew of computer programmers from MIT on their staff. They aren’t a Winton or a Transtrend in terms of AUM.
No, Briarwood does not fit the mold of a typical managed futures superstar, but that may be exactly why they’ve got our attention. From a refreshing perspective on program creation to a no frills approach to trading, Briarwood has their ducks in a row, and offers, in our opinion, a solid opportunity for those looking for a trend following addition to their portfolio. Let’s get into the details.
Fred Schutzman and Paul DeMarco are two guys from New York who just happen to have a passion for commodity trading. The men grew up in Queens and Brooklyn, respectively, and fondly reflect on games of baseball in the streets with neighborhood kids. They didn’t come from big money or anything of the sort, and both of them lamented the tedium of traditional schooling.
Fred did, however, have a thing for numbers. He went to school to study actuarial science, but as time went on, he realized that a practical application of the numbers was of way more interest to him. The Zweig Forecast newsletter turned his attention to stocks and commodities, and after a class with technical charting legend Ralph Acampora at the New York Institute of Finance(NYIF) in 1985, there was no turning back- he was hooked.
In 1986, Fred started working with one John Murphy, acclaimed author of some of the top technical analysis books on the market. He had no way of knowing it at the time, but he had just signed on with a man who was about to solidify his position as the worldwide leader in technical analysis, giving him the opportunity to learn from the best. In the beginning, he lived and died by the charts, serving only as an analyst, but Mr. Murphy knew that Fred was looking for an opportunity to expand into trading, and gave him his shot in 1988. By 1990, as a Chartered Market Technician with ample experience under his belt, Fred had made himself enough of a name to land a teaching slot at the NYIF.
In the meantime, a man from another borough was busy following in his father’s footsteps. Paul DeMarco worked for 15 years with his dad in the New York City trading pits, but in the early days, it was baseball that held his attention. All of those days of neighborhood ball games culminated in a baseball reign at St. John’s University, but when the final scores were in, trading was still calling his name. For Paul, the game changer was Market Wizards by Jack Schwager. The stories found within those pages revealed a world far beyond the frantic hustle of the pits, and he knew there was a better way to trade. Looking for more knowledge, he signed up for a class on at the NYIF- Fred’s class.
This was the spark that would set the ball rolling. Bucky was enamored with the risk management techniques taught by Fred, and the two began talking about the possibilities in the markets. Sometimes, when you get two trading professionals together with similar priorities, the chemistry is palpable, and the intellectual connection here set off a chain of events that led to duo partnering to trade in 1991.
The rest, as they say, is history, but it’s worth noting that the trajectory was not one of astronomical ascent. These guys started their trading in a one bedroom apartment they rented as an office, relying largely on a single administrative assistant for years, and that’s what they wanted. They’ve been incredibly protective of their strategy and trading rules, prioritizing the program’s health over the raising of assets. They never hired a computer superstar, opting instead to teach themselves programming in 1993. For two guys who joked that they didn’t know how to turn on a computer when they started out, to see them now is sort of mind-boggling.
In fact, it was not until recently that they made the decision to expand the staff fairly substantially, but even then, their hiring stayed true to their emphasis on protecting the program. These weren’t young hot shots, but mentors of theirs, including John Murphy himself, and Dennis Hynes, another colleague from Fred’s days under Murphy’s tutelage. Both men come from extensive trading and business backgrounds, adding another layer of seasoned expertise to the operations as a whole. For Briarwood, as they put it, the expansion was about creating a development atmosphere that was “intellectually stimulating.”
If you ask us, that’s the way to go.
The managers at Briarwood and the unique way they brought the program together is overshadowed only by the distinctive, if not deceptively simple, construction of the program itself. There are many CTAs that will describe sophisticated, complicated development processes, but for Fred and Paul, it was a very basic wind at their backs: how do we turn a profit on our own money? There would never be 15 different Briarwood programs. Instead, they’ve focused all of their time, resources, and efforts on making their singular program the best it can be.
One of the things we look for in our due diligence process is whether or not a manager has his own capital invested in a program, but for Briarwood, that was never a question- their entire program was based on what they wanted their own funds to do. This spurred them to create a program that was, in some ways, more conservative, but also a trend following option that doesn’t quite march in line with the rest.
Briarwood trades 19 different markets, with their marketing materials describing as a split of 24% currency, 21% interest rate, 15% soft commodity, 15% grain, 10% energy, 5% base metal, 5% equity index, and 5% precious metal. It's worth noting that we're looking at the same core markets they’ve been using for the past ten years, which varies drastically from some of the larger trend followers trading upwards of 50 markets. The guys are quick to point out that, should a strong opportunity present itself in another market, they’re willing to take it, but such a chance doesn’t come about very often. As they see it, they’re open to looking at new markets, but it’s not a risk they’re going to take lightly.
Briarwood describes the program as, in practice, 70% systematic, 28% “rules” based, and 2% discretionary. The program trades the same three basic systems on each market, with each one based on their hefty experience in technical analysis. While basic technical analysis can rely on simple cross-overs and such to generate a signal, the more advanced side of technical analysis usually delves into multi-threaded charts where signals on top of signals are used to confirm market moves. For instance, they might look at something like volume behind a pricing move to determine the strength of a signal.
Here is where the rules and discretion come into play. Should the signal pass the programmed rules, Briarwood will also use what they refer to as a "checklist" of rules that can be exceedingly difficult to program as a means of determining whether or not they take the trade. Here, they consider how the systems have been performing recently in the same markets on similar types of signals, analyzing the equity curves of the systems to calculate out what they call a "mathematical probability of profit." If the trade hits 90% of the checkboxes, for instance, they assume a 90% probability of profit. This is by no means a guarantee of profit- after all, no one has a crystal ball- but is definitely a unique way to view the trading.
These percentages separate the trades into three buckets- high potential to profit, average potential and low potential. They attempt to avoid the low potential trades altogether, but when the numbers place a trade on the fence between the buckets, they usually will take the trade. This approach relies on a great deal of experience in recognizing the trajectory of a chart and the past behavior of a system, but it's also not a purely discretionary call, which is probably why they use the description they do. In our minds, it might be easier to view such rules as "structured discretion."
Finally, unlike many trend followers, which tend to focus primarily on a long-term timeframe, two of Briarwood's systems focus on a more medium-term trading periods, with only one focusing on the long-term. As Fred explains, “We're medium-term in our entry, medium to short-term on the exit.”
The different timeframes have helped contribute to a track record that’s correlated to other trend followers and managed futures as a whole, but not always (see 2004 and 2009). They believe it’s the combination of the systems that has helped to smooth out their equity curve during the tough times for other managed futures programs.
It's in risk management that Briarwood begins to separate itself from the pack. Some elements of their risk management are pretty standard- ideas such as trailing stops and the like. Of course, the use of stop orders does not guarantee one can get out of the market at a specific price, but these tactics are common safeguards built into systematic trading programs. Beyond that, however, things get a little more dynamic.
Beyond the entry rules, Briarwood also has a set of rules guiding their exits and position adjustments that will vary over time. This set of rules was created to address a pervasive lament among trend followers- the dreaded give back. Trend following can be infuriating at times. They’ll benefit from a sustained trend in one direction, bringing in profits, but when the trend reverses, it can often take them a frustrating long time to get out of the trade, causing them to “give up” a good-sized chunk of the money they made.
For Briarwood, that was unacceptable. They wanted to find a way to “dampen” the give-back. Here, they're monitoring the movements in a given market and on each specific trade for parabolic activity, and adjusting their stops and exposure accordingly. It’s about evaluating the potential for drawdown based on how overextended the markets trading might be, and while imperfect, the results of the strategy are evident in their track record.
One of the more unique components of the Briarwood program, however, has little bearing on the performance of their program as a whole, and a lot more to do with the investors. They understand that the risk in a program doesn’t exist in a vacuum; the people making allocations are investors who, much like themselves, are looking to bolster their portfolio. As a result, they developed a separate system which follows the equity curve of the program itself, attempting to evaluate the often cyclical performance of managed futures to help investors time their allocations.
As you’ll often here us say, the best time to invest in a managed futures program, in our experience, is during a drawdown, and the system built by Briarwood has the sole purpose of helping investors to isolate such opportunities. Past performance is not necessarily indicative of future results, but according to Briarwood the system has been able to give investors quite accurate timing analysis for when to invest.
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If we had to sum up the Briarwood program in one word, it would be “solid,” and much of this comes back to their risk management. From a portfolio construction perspective, this dynamic makes them an interesting addition for appropriate investors, especially those with stock market exposure. One of the highest scores they get within our ranking algorithm is their near perfect non-correlation to the S&P 500 of -0.10. On top of that, they have a quite high correlation to the Barclay Hedge CTA Index of .664, while having managed to avoid many of the downturns other trend followers fall victim to. They attribute this distinction to the methods they use in identifying exit points and opportunities to take money off the table.
This creates mixed results. For instance, in 2008, Briarwood's returns were not what some of their peers can claim, which may be attributed to those aggressive risk management tactics. To be sure, returns of over 8% are by no means bad, but they definitely pale in comparison next to the double digit gains nearly all other trend followers saw. It was after this point that the entry checklist came into play, and they credit that development for their performance in 2009. When many trend followers were struggling, these measures allowed them to effectively navigate some choppy waters, again bringing in returns of over 8%. Of course, past performance is not necessarily indicative of future results, and 2011 highlighted this. Not even Briarwood's risk management could dodge the volatility swings that plagued us last year, with performance coming in at -2.87%. The takeaway? It's traditional trend following- with a twist.
That being said, it’s important to keep in mind that if you’re looking for a 20%+ returns on an annual basis, Briarwood may not be the program to get you there. Briarwood, in our opinion, is an excellent choice for those looking for a more conservative trend follower to enter the managed futures space through, but may not appeal to more aggressive investors. It all comes back to your preferences, but on our end, we like to see this kind of aggressive risk management in place.
That being said, with a very low margin-to-equity ratio (3-5%), sophisticated investors who desire more aggressive returns can trade between 2 to 3 times leverage with notional funding. An account funded in this manner might have $1 million cash traded at a $3 million dollar trading level, for example. However, it's important to remember that trading on leverage increases risk metrics, as well, and drawdowns will be 2 to 3 times higher on a percentage basis than they would for investors who trade with a fully funded account.
We’re happy to see Briarwood sitting near the top of our rankings, if only as a source of self-affirmation- our rankings are doing their job. Here we have a program with a decent amount of consistency, robust risk management rules, managers with extensive experience, and development priorities that put the client first. It’s hard not to like a program like that, not to mention managers that are so down to earth. There’s no denying that Fred and Paul have made good since their days of street ball, and from our perspective, we love seeing hard work pay off like that. We’ll be keeping a close eye on Briarwood as time goes on, and look forward to seeing what they have to offer in the coming years.
IMPORTANT RISK DISCLOSURE
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After the Friday rally, the major indices managed to make up the week’s losses; the Dow gained 0.17%, the S&P 500 gained 0.47%, the Nasdaq rose 1.10%, the S&P Mid-Cap 400 E-mini fell -0.75%, and the Russel 2000 E-mini fell -1.24%. In bonds, US 10-year notes lost -0.16%, and US 30-year bonds were down -0.33%. In currencies, the US Dollar fell -0.39%, the Japanese Yen fell -0.02%, the British Pound was down -0.52%, the Euro rose 0.53%, and the Swiss Franc gained 0.49%.
In metals, Gold was down -0.83%, Silver rose 1.10%, Copper was down -1.71%, Platinum was up 0.44%, and Palladium rose 1.11%. In energies, Crude rose 1.41%, Heating Oil was up 1.23%, RBOB Gasoline was up 4.80%, and Natural Gas fell -4.58%.
Grains continued to wobble at or near their recent record highs last week; Corn was up 1.44%, Wheat lost -0.75%, and Soy rose 1.69%. In meats, Live Cattle fell -0.72%, and Lean Hogs took a tumble, finishing the week down -6.73%. In Softs, Cocoa gained 2.92%, Orange Juice gained 1.95%, Cotton gained 3.48%, Coffee gained 0.06%, and Sugar lost -2.31%.
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.