Managed Futures Spotlight: Protec Energy Partners
August 13, 2013
As is tradition for us over the past several years – we like to take a closer look at one of the highest ranked programs listed in our Semi-Annual Managed Futures Rankings in the following newsletter. We've covered such programs as M6 Capital (up 1.86% since highlighted Feb 2013), Briarwood Capital (up 9.06% since highlighted August 2012) and Newport Capital (down -3.41% since February 2012) since our new rankings formula was released in 2012.
In looking through our most recent rankings updated through the first half of 2013 - the obvious choice to us was #2 ranked Protec Energy Partners, LLC, who has one of the most unique methods to inform trading decisions you'll hear from a managed futures manager.
Who is the Manager:
Protec Energy Partners, LL C was founded in September, 2009, registered as a CTA with the NFA in March 2010, and started trading client accounts in April of that year. The CTA company (Protec Energy) is an affiliate of Protec Fuel Management, LLC – a company on the ‘physical’ or ‘cash’ side of the commodity business that was founded in February 1999 by Todd Garner and Andrew Greenberg to service physical energy commodity producers and consumers who are in need help with purchasing and hedging large quantities of fuel. The company serves a wide range of corporate clients including petroleum refiners and wholesalers, industrial companies, transportation companies, fleet operators, and other high volume users including state & local government as well as the U.S. Military.
In short, the parent company Protec Fuel is a gasoline wholesaler, securing and transporting gasoline to end users (think supermarkets and convenience stores with gas stations) all over the country. As part of this business, Protec Fuel receives daily usage reports from their customers (so as to better know when and how much gas the customers will need in their next order) This is important to remember when we discuss the managed futures strategy…
As for the CTA firm’s principals, Mr. Garner and Mr. Greenburg are the primary traders for the CTA, sharing responsibilities for the development and execution of the trading decisions, risk management strategies, risk analyses, and portfolio management; while Ms. Cate Wylie is the Director of Risk Management and Compliance.
Todd Garner is the classic energy trader turned risk manager. Now with Protec for 14 years, Mr. Garner has experience trading and managing risk for large corporations including Texas Utilities, North Canadian Oils, Enron, and Polaris Pipeline Corporation. Prior to starting Protec, Todd was the Director of Refined Products and Vice President of Risk Management with the Williams Companies, Inc. a publicly traded energy company based in Tulsa, Oklahoma. Outside of the office, Todd is active in various independent fuels based organizations and enjoys racing, fishing, and boating.
Mr. Andrew Greenburg took a more traditional Wall St. route into the trading business, culminating in his founding and managing the Energy Physical and Derivatives brokering operations for Exco / Nooan Intercapital Energy Products (ICAP). Prior to working with Exco, Mr. Greenburg was an energy trader for BCMG, Tricon USA, Bear Stearns, Clayton Brokerage and Paine Webber Jackson & Curtis. Since co-founding Protec Fuel in February 1999, Mr. Greenberg has been principally responsible for its risk management and trading policy for its refined fuel clientele. In that capacity, his duties include the development and execution of client risk management strategies, risk analyses, and portfolio management.
Finally, Ms. Wylie has over 23 years of experience working as an energy trader and risk manager including spending the last 9 years as Director of Procurement at Protec Fuel Management. More recently, Ms. Wylie also joined the CTA side of the business as Director of Risk Management and Compliance where she assists with risk management, trading policy, and administrative duties for the advisor. Prior to working with Protec, Cate worked as a risk manager at FCStone as a hedge consultant in Refined Products and Natural Gas.
Protec Energy Partners managed futures offering is a pure discretionary energy trading program that relies on 60 combined years of energy market experience for alpha generation and risk management. The program was born in 2009 out of interest from existing Protec Fuel Management clients who saw an opportunity to have Todd and Andrew utilize some of their experience, knowledge, and contacts to trade energy markets speculatively, not just on behalf of clients with an eye towards hedging.
Protec hit the ground running, so to speak, being able to quickly leverage their existing ‘cash market’ trading operations and ‘cash market’ knowledge of the energy sector build what we believe at Attain to be one of the most unique managed futures products out there.
That uniqueness stems from Protec’s day job of procuring and delivering fuel for gas stations in and around the East Coast, Southeast, and Texas. Todd, Andrew, and the rest of the team are able to analyze the near real time data that comes to them on the procurement side to generate alpha opportunities for CTA clients (and for their cash market clients, in a hedging capacity). Essentially, Protec has a daily look at the supply/demand statistics for gasoline across multiple US markets, and use those statistics to inform their trading decisions – finding (or not finding) inefficiencies and/or trade opportunities in exchange traded options and futures.
While many managed futures programs talk of an ‘edge’, few if any have something as defined as this ability of Protec to generate their own demand and use statistics days to weeks before official reports on national fuel usage are released.
That’s it for the sexy part (the real time supply/demand feed). What they do once a trading idea has been formed with the help of that information is a lot more boring (but probably a lot more relevant to how the program actually works).
The core of the investment methodology is a relative value strategy where Protec uses their knowledge of physical commodity supply /demand curve to find pricing inefficiencies in refined energy products like RBOB Gasoline and Heating Oil, going long what they believe to be undervalued markets, and short what they believe to be overvalued markets.
Trades are primarily executed as Asian Option Spreads (or Average Price Options) on RBOB Gasoline futures and Heating Oil futures. Asian options aren’t done on some exchange in Shanghai, the term simply refers to how the options settle. While so called American and European style options use the price of the underlying instrument on the last day of trading to determine whether or not the option is in the money (European style can only be executed at expiration while American can be executed at any time), Asian options use the average price over some set period of time (usually a month). Asian options are commonly used in the energy cash markets as most cash players desire less volatility, and most delivery contracts in energy are based off an average price. There are also average price futures in the energy markets, which Protec utilizes.
A typical spread trade that the manager will put on is vertical spread where the manager buys and sells options on the same market, with the same date of expiration, but at different prices. For example:
NYMEX Non-Seasonal Trade:
The Structure: A March 2013 Heating Oil Average Price futures contract is purchased. Simultaneously, a March 2013 Average Price ATM (at the market) Put position is established to mitigate downside risk. In addition, a short June 2013 OTM call is sold to partially defray the cost of a the March 2013 ATM put.
Trade Date: January 30, 2013
1) Long 1 March 2013 Heating Oil $3.08 Avg. Price Futures Contract
2) Long 1 March 2013 Heating Oil $3.08 Avg. Price Put Option
3) Short 1 June 2013 $3.34 Avg. Price Call Option
Premium Cost: $0.03 cts per/gallon = -$1260.00 per NYMEX Futures Contract
Profitability Window: Heating Oil average March price between $3.11 and $3.34
Downside Risk: $0.03 cts per/gallon = -$1260.00 per NYMEX Futures Contract
Trade Result: Gain of $0.045 per gallon = +$1890 per NYMEX Futures Contract
NYMEX Non-Seasonal Trade2
The Structure: Option Strangle : September 2013 RBOB Gasoline Average Price Call is sold and simultaneously a September 2013 RBOB Gasoline Average Price Put Option is sold:
Trade Date: May 1, 2013
1) Short 1 September 2013 $3.45 Average Price Call Option
2) Short 1 September 2013 $2.40 Average Price Put Option
Premium Collected: $0.06 cts per/gallon = +$2520 per NYMEX Contract
Downside Risk: unlimited on short call
Payout Window: Average September price between $2.40 and $3.45, for a potential maximum gain of $0.06 per gallon (the collected premium).
Trade Result: Position liquidated on June 1, 2013 at $0.1675 for a loss of -$0.1075 cts per gallon = -$4,515.00 per NYMEX Contract
These are general examples of Protec trades, but Protec is far from a one trick pony when it comes to alpha generation. Trades will also be expressed as calendar spreads, seasonal spreads, crack spreads, and inter-commodity spreads. They may also take outright futures positions to take advantage of certain market trends or ranges.
Over the course of the year, the manger expects to take 15 to 20 trades per year with an average hold time of 30 to 180 days per signal. When position sizing, spreading, rolls, and the rest is included - Protec expects to trade approximately 4000 round turns per million each year.
As with most other CTAs - the Protec program is a long volatility strategy that does best when market volatility is on the rise, with increasing(ed) volatility meaning the potential for more trades in addition to larger profits per trade. But let’s not confuse Protec with a bunch of "risk jockeys" out searching for big moves in energy markets known for big volatility. First and foremost – Protec has a risk committee that is comprised of Mr. Garner, Mr. Greenburg, and Ms. Wylie. This risk committee has implemented policies to cover both market risk and operational risk. For the purposes of this discussion, we will focus on the market risk aspect.
Market risk is measured daily on the portfolio level using Value at Risk (VaR) at a 95% confidence level, with risk parameters stipulating that VaR should not exceed 5% of the amount under management. In addition, the risk protocols stipulate that maximum exposure to abnormal or extreme market events should not exceed 20% on a per trade basis, and that the maximum cumulative monthly portfolio loss should not exceed 15%. (Disclaimer: this cannot guarantee against losses larger than 15%)
Risk thresholds are triggered when Value at Risk (VaR) exceeds 4% of allocated investment capital as well as an actual monthly loss of 5% of adjusted allocated investment capital. These thresholds are designed to prompt a review of the trades by the risk committee, and initiate appropriate corrective actions where necessary.
Over the course of the past 9 months, the Protec portfolio has undergone a substantial deleveraging where risk has been cut in half by approximately 50%. The decision to deleverage is primarily a reflection of the overall reduction in volatility seen across all market sectors in the last 12 months where Protec preferred to be more cautious in anticipation of potential spikes in market volatility, although such delivering is also quite common for managers in a high growth phase and moving from its initial seed investors to more professional type clients. The manager has the ability to increase leverage as market conditions change – however they expect portfolio risk to remain significantly less than what was used in 2010 and 2011. Current target returns are set at 25% with a max drawdown of 15%.
One of the primary attributes we look for in newer CTA programs is the ability for the program to add diversification to portfolios. In other words, there are times when we prefer programs that have the ability to "zig" when more traditional programs (aka trendfollowers) "zag" in the markets. Over the past 40 months, the Protec Energy Partners LLC – ET1 program has certainly outperformed during one of the most difficult periods we have ever seen for traditional multi-market systematic managed futures programs. Not surprisingly, the program exhibits a low correlation of 0.23 to the Barclay CTA Index as well as a 0.21 correlation to the S&P 500. Of course, non correlation does not equal negative correlation, so we don’t need to expect Protec to suffer when trend followers return to glory. Rather, we expect Protec’s strategy to exhibit substantially different return drivers than what you would expect out of a traditional trend follower who is primarily using technical analysis to generate trading signals.
In terms of risk management, Protec’s ability to manage downside risk has been pretty good up to this point – and is the primary reason why the program is near the top of our rankings. However, now that the program has gone through a significant deleveraging it becomes harder to project the potential return / risk profile of this program. We advise clients and those that are interested in potentially investing to discount the returns prior to October 2012 by approximately 50%. Drawdown expectations should remain at 15% as this is the predetermined max risk level set by the manager. However, it is not unreasonable to hypothesize that the reduction in leverage is nothing but a positive for the risk management side of the equation.
One question we’ve put to the managers is why don’t the trading desks of the oil majors (Exxon, BP, Shell, etc) use their internal gasoline supply and demand statistics (and 100s of years of combined experience) to trade in much the same manner. In short, are the majors a major source of competition for Protec in the zero sum game of Energy trading? Their answer is that the majors could surely do the same thing, but that in their experience it is too small and insignificant for them to bother with – thinking why mess around with making pennies in an unleaded gas trade, when you are making billions a year in profit from pulling it out of the ground and refining it. They also welcome the competition, and hope the majors find the same trades after they do, pushing the position in their desired direction.
The only other concern we have with this program is that it has grown rather quickly in terms of AUM and the number of accounts they manage. But their management of hundreds of clients on the physical side of the business (chasing down invoices from a convenient store in Alabama) surely bodes well for being able to manage numerous futures accounts. While we do not anticipate any problems on the horizon, drastic growth can result in decreased ability to trade certain less liquid markets (like Heating Oil).
All in all, we expect Protec’s experience, real time data feed, and trading techniques with hedging large amounts of physical energy exposure will carry over into the CTA business very well – keeping them amongst the highest ranked programs at Attain for years to come.
IMPORTANT RISK DISCLOSURE
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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.