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Call us at 800.311.1145 to speak with one of our alternative investment specialists. We answer the phone in One Ring. Try It.Sign up to view performance on 100s of Managed Futures Programs, Trading Systems, and Managed Forex Programs. Sign up FREEWhat are Managed Futures? Is this the same as CTAs? How do I invest? Click here  to learn all of this and more on our extensive managed futures education pageHow to set watchlists? Build portfolios? Find correlations? and more. Click here to take a tour of our advanced toolsUse our most popular tool to create custom multi-program portfolios. Click here to get started today by signing up for FREE ACCESSClick below to learn how attain can assist your CTA in everything from back office creation and trade execution to finding a lawyer to create your D-DocNo upfront fees for managed futures funds is one of the unique benefits of a managed futures account at AttainOur alternative investment books list includes some of the most thought provoking and interesting books on alternative investmentsLearn how family offices outsource the managed futures research, due diligence, data collection, and ongoing monitoring of accounts to AttainWhat is a trading system? Who develops them, and how are they executed for client accounts? Our trading system education explains this and moreWe assist talented traders in getting their trading ideas into an automated trading system, do testing, marketing, and more

Managed Futures the Contrarian Way (investing in drawdowns)

June 8, 2009


We have written in this space a few times before how taking a contrarian approach to managed futures and trading systems, by investing in programs in drawdowns rather than those at equity highs, can be a better risk adjusted method. Think of it as getting in at the bottoms rather than the tops.

The Dighton Capital program was the poster child for DD investing, having come back to new equity highs five different times in 2006 and 2007 before failing to do so after their Nov. 2008 DD (which they are still in). The Compass trading system has likewise been a good candidate for investing during DD phases, having posted new equity highs earlier this year after nearly 10 years of real time trading and more drawdowns than we care to remember. [past performance is not necessarily indicative of future results]

The basic logic of investing in a drawdown is similar to investing in beaten down stocks or buying something on sale. You get in for a lot less than you would have normally, and you stand to make a lot more than you normally would have should the program return to its winning ways. As the old saying goes: If you liked it at $50, you'll LOVE it at $25. Starting a CTA that is in the midst of a 30% drawdown not only means an investor saved losses of 30% by not getting involved with the system until those losses were realized, but also means that investor could make that same 30% in profits when and if the system returns to its original level.

Several of Attains clients have bought into the wisdom of investing in DDs, and some have set up accounts in Dighton and others to catch the next "bounce" off of whatever DD they are looking at (the 30% drawdown level in Dighton’s case). Their accounts are open, the CTAs management documents signed, and money ready to trade sitting in T-Bills earning interest - while all they have to do is say "Go!" the second we notify them the CTA they have targeted has hit the intramonth DD level they have as their trigger.

The returns for this approach across six such -30% intramonth DDs  on the Dighton program since 2006 are as follows:

Past Performance is Not Necessarily Indicative of Future Results







Performance in following:


DD Date










































While the verdict is still out on the longer term performance (12 to 24 mo) of the last three cases, the other cases show very strong performance in the 3, 6, and 12 month periods after the program hits the 30% DD level, with only the most recent DD (the Nov. 2008) not seeing gains in the 3 and 6 month period following the -30% level being breached on an intramonth basis.

"Reverting to the Mean"

What is likely going on here is a statistical phenomenon called reverting to the mean. This is really just a fancy way of saying what goes up must come down, and the less often heard: "what goes down must come back up", and a good way of thinking about it is that performance usually comes back to its averages over time.

Unlike stocks or funds, a trading system investment won't benefit from increased money flow, and on the flip side won't suffer from decreased interest or money flow. A stock can gain momentum one way or the other by a lot of people simultaneously buying it and running the price higher, or conversely a lot of people selling it and driving the price lower.

A managed futures program operates independently of how much money is coming into or out of the investment, crunching its technical formulas on the current market environment, whether that market be soybeans or S&Ps. The problem(or benefit) inherent in any mechanical system or trading strategy is that it is designed to do well in a particular type of environment, meaning it is not likely to do well outside of that environment.

The same thing that makes investing in "hot" systems dangerous makes investing in beaten down systems advantageous, and that is the fact that environments change. Governments, economic cycles, weather, science, and people change every day, causing the specific environment a particular CTA (or its current positions) likes to either be in or out of phase. If a particular strategy is currently out of phase - a change in environment could be just what the doctor ordered for a program in a drawdown. The tough part, as always, is knowing just when that change occurred.

The benefit of investing in a program at or near its historical Max DD is that the program has most likely just lived through one of the least desirable market environments it could imagine. Many times, there is a perfect storm of sorts in which several conditions fail to line up for a program. Will things continue to go against that system in the same way? Will market conditions NOT change? Don't bet on it. To the contrary, bet on them changing.

Now, there's an old saying that ‘you will run out of money before the market returns to reason’, which could just as easily be stated you'll run out of money before a system or CTA drawdown ends; and that's exactly why investor's need to limit the downside of investing in drawdowns as best as they can.

Limit the downside with ‘Lines in the Sand’

Part of the attractiveness of buying a stock after it has been beaten down or investing in a futures program at or near its maximum drawdown is not just the potentially unlimited upside, but is also about the limited downside (or at least less of a downside than before). This is especially important for those investors who are saying, "But what if it never makes any more money? What if the program just keeps going down, adding to its drawdown?"

I'm glad you asked. The truth is, there is no way to know for sure whether you are picking a bottom with a drawdown, or whether it will keep going – and for that reason we highly recommend setting a “line in the sand” for your DD investment at the same time.

The "line in the sand" is nothing more than a worst case scenario level at which point an investor should consider the CTA or system ‘broken’ and stop trading it, thereby protecting the account from going further and further down.  Just like a stop order placed in the market, there is no guarantee this level will protect the account from going through that level; but more often than not drawdowns are a slow bleed rather than gushing wound – meaning you should have time to act on the ‘line in the sand’ level.

Where to set this line in the sand is the million dollar question. Too tight and you risk getting “stopped” out just before the drawdown ends. Too loose and you’ll risk losing more than you want if the drawdown continues without a bounce.

Attain uses several measures for calculating "lines in the sand" for each system - but the math usually works out in such a way that the line in the sand is usually 1.5 times the tested, prerelease maximum drawdown of a system and 1.5 times the maximum intramonth DD for an established  CTA (for a newer CTA with less than 3 years of history, it is best to ask the manager what the worst case DD is predicted to be, and multiply that number by 2 or 3).

A trading system's backtested hypothetical results give investors the ability to see what the hypothetical worst case scenario was, and base the line in the sand off of that. For a CTA investment, investors need to look "behind" the numbers and find out what the maximum intramonth DD has been and get the tested or expected worst case maximum DD.  The Paskewitz Contrarian 3x CTA program, for example, posts a month end drawdown number of just -11%, but it had a max intramonth drawdown of -24% last fall.

So, for an investor thinking of investing in a DD with the Dighton program while that system was in a 30% intramonth DD last fall - they could calculate their downside by looking back at the program's past worst maximum DD and multiplying that by 1.5. The past maximum intramonth DD had been 30% (twice), meaning the line in the sand could be 45%, and so the risk on investing in this DD was simply the difference between the current DD level and the line in the sand level, or 15%.

The potential gain over the following 12 months was the sum of the 30% DD and the system's average annual return of nearly 55%, while the risk was just 15%. That's the potential for 85% gains and a risk of just 15%, or nearly six times as much profit potential than risk. You can look around for a long time and not find much better odds than that with an investment.

This didn’t work out as designed for those who set their line in the sand at the -45% level during the November 2008 DD. Dighton actually went down as far as -52% before rebounding slightly (it is still down -35% or so), stopping many DD investors out. But even this failed attempt made the loss a more manageable -15% versus the full -45% loss someone investing at equity highs and getting out at the same line in the sand would have seen.

2009 DDs  = Opportunity (in our opinion)

With several successful CTAs seeing drawdowns through the first five months of the year, including Attain Portfolio Advisors, Mesirow, and  Clarke Capital’s Global Basic program - many contrarian style investors are wisely asking if right now might not be a great time to invest in some of these names. Our answer is a resounding yes, this is a great time to get invested in some very highly rated CTAs.

But we also wanted to put that feeling to the test, statistically, and we set out to test whether investing in DDs is a good idea for CTAs in general, as it appears to be with Dighton Capital (excusing the last case). The results were encouraging; with the averages showing good performance in the quarter, half year, and full year after our drawdown trigger was hit.

Our process for testing this investing in a drawdown strategy was to use the Credit Suisse/Tremont CTA Index data to represent the "average CTA". There are many issues with assuming the CTA index is representative of the average CTA, including some CTAs don’t trade like managed futures as an asset class should (option sellers) and survivorship bias; but we believe it is as fair a test as any to see how CTA perform coming off of drawdowns (DDs).

The problem with investing in DDs, of course, is you don't know when the DD is over, until after the fact. So if you start your investment in the midst of a DD, there is no way to know if the month just completed is the low point of the DD, or whether the DD will keep heading lower in the coming months. For that reason, any strategy to invest in a DD has to start with identifying what level of DD is large enough for you to invest in, and where your exit point (line in the sand) is.  

The table below shows the results of investing in the drawdowns of the CTA Index at various DD trigger levels. We measured the 3, 6, and 12 month performance after each DD level was triggered in succession, and then averaged each time period to see the average 3, 6, and 12 month performance for each trigger level. The average 3, 6, and 12 month performance of the Index itself is listed on the far right for comparison.

The trigger levels were calculated in two ways. First, we took the max DD of the CTA Index from Jan. 1, 1994 and Dec 31, 1999 (-17.74%), and used fractions of that level as the trigger for investing in drawdowns between 2000 and the present, looking at investing every time the next DD after a new equity high was 50% of the -17.74% DD( -8.74%) and at 75% of that DD (-13.31%). We wanted to also test the results when the DD hit 100% of the past DD, and 125% of the past DD – but the CTA index has not yet eclipsed the 1994 to 1999 Max DD level since (a good thing I suppose)

The second trigger level looked at the current DD versus the average DD between Jan. 1, 1994 and Dec 31, 1999; with us testing the performance when the current DD was 125%, 150%, 175%, and 200% of the average. The average is computed as the average of each DD valley (no matter how small) between equity highs.

The performance was calculated assuming investment in the CTA index the month after the trigger level was triggered – July if that DD level was eclipsed in June, for example. Please note that you can’t technically invest in an index, thus this does not represent trading in an actual account.

The results show that performance after waiting for certain drawdown triggers can be better than normal performance, with 69% of the periods tested showing better performance than the average for the same period. For example, using 200% of the average max DD as the trigger, the average 3 month performance for the three occasions the trigger was hit was 7.57%, versus the index's “normal” 3 month average of just 1.78%. The testing also shows that waiting for a bigger DD helps a lot, with the two higher trigger levels for both methods markedly higher.

To insure we were not cherry picking trigger levels and/or optimizing our test, we tested across two different DD metrics (max and average DD) and across six different trigger levels. When averaging the results across all 6 trigger levels, we see that there is a positive improvement for each period when waiting for a DD.


The one big hole in this practice which we don’t have space to address today is the opportunity cost of waiting for these DD trigger levels. If you miss out on 10% gains for the year, while trying to improve your average 12 month performance by 9%; you are -1% worse off.

This is a real problem with waiting for drawdowns to enter into managed futures investments, but it is only a problem when the program you are considering is NOT at your trigger levels. When a program is at the DD trigger levels, there is no opportunity cost to waiting because there is no waiting – the trigger level has been eclipsed. This opportunity cost appears only when the time to the trigger level is indeterminate. It is also worth noting for those starting a managed futures program that a real loss of -10% hurts much more than an opportunity cost of -10%, meaning it still pays to wait for a DD for more people – so they don’t start off on the wrong foot and sour on the investment choice altogether.

With several of our recommended CTAs not just in drawdowns, but at levels which represent 150% to 200% of their average DDs (Attain Strategic Diversification, APA Modified, DMH, and Mesirow)  and the stats supporting this contrarian approach, we believe its time investors put money to work now. Programs like Mesirow, APA Modified, Clarke Global Basic, and the others will not be in drawdowns indefinitely in our opinion, and setting such a trigger as the ones outlined herein could get you into one of these programs at a nice discount. We can work with individual investors to run tests on specific CTAs you're interested in, and find a trigger that fits into your risk tolerance levels. Please email us at for more information.

It is also worth noting that the Compass system is currently in a DD of about -41%, essentially cutting the risk on that system in half (if looking to risk down to the system’s previous Max DD of -82%) We have long held that the Compass system is an essential part of any futures portfolio, and this is a wonderful opportunity to get involved with the program “at a discount” in our opinion.

-          Jeff Eizenberg


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Feature | Week In Review: More of the same in first week of new month, with stocks/energies higher | Chart of the Week


Brighter news from abroad and another round of positively construed economic reports continued to support in some sectors as the stock index futures and energies continued to build on momentum that has lasted for the last three months. The headline report was the monthly unemployment data which did show further deterioration last month, but the numbers came in better than analysts’ expectations.  Stronger economic growth was also reported in Asia as the Chinese economy grew better than most pundits had earlier indicated.  News from Europe was again quiet as the marketplace continued to digest the recent cut in key lending rates. Overall, the stock index sector was the leading gainer of all sectors for the week led by the small caps as the Russell 2000 futures ended +5.82% followed by the Mid-Cap 400 futures +3.51%. The large caps stock index futures were led by the tech heavy NASDAQ +4.14% followed by Dow futures +3.23% and S & P 500 futures +2.44%.                 

Energy markets rallied last week as better than expected economic releases in the U.S. and Asia led the market up on ideas that demand could be on the upswing in the foreseeable future. The marketplace also found a boost on several market prognosticators indicating that they have upwardly revised their target price for the last part of 2009 mostly based on improving economic conditions and recent cuts in production by OPEC. For the week Heating Oil futures +5.51% lead the way up followed by Crude Oil futures +3.21%, RBOB Gasoline futures +3.13% and Natural Gas futures +0.86%.    

Metals ended the week in the a mixed state as Gold and Silver seemed to fall victim to the advance by the U.S. dollar which seemed to ease the inflationary buying the sector has seen recently. Industrial metals were a different story as they were sparked by stronger economic news in China and possibilities that usage worldwide could be stronger than earlier anticipated. For the week Gold was -1.81% and Silver ended -1.42%. The gains in the Industrials were led by Palladium +8.70% followed by Platinum +7.81% and Copper +3.94%. 

The Commodity and Food sectors were mostly mixed last week with most grains firm on weather worries during the U.S. planting season not to mention strong demand especially for old crop Soybeans. The Livestock sector continued to be under the weather due to heavy supplies and worries of lighter demand due to the last remnants of the swine flu debacle.  Soybeans +3.50%, Corn +1.79% and Cocoa +1.35% were the gainers for the week. The balance of the complex finished with losses led by Lean Hogs -10.56%, followed by OJ -3.98%, Cotton -3.26%, Coffee -2.58%, Wheat -2.23%, Cattle -1.44% and Sugar -0.32%.

Activity in currency futures led to the U.S. Dollar gaining against the balance of the complex mostly due to news that China indicated to the U.S. that they were not happy with U.S. Dollar trading levels given the fact that they are major holders of U.S. debt. For the week the U.S. Dollar index +1.64% with the balance of the complex lower led by the Japanese Yen +3.39%, Swiss Franc -1.65%, Euro Currency -1.40% and British Pound -1.33%. The Rate sector also found pressure from the Chinese news as the 30-year Bonds lost -3.53% and the 10-year Notes -3.31%.     

Managed Futures

After finishing strong in May many multi-market managers had tough first week in June.   Most of the trade was directionless and choppy as the commodity, bond, currency and stock index markets all seemed to be in flux at the same time.  Most of the market’s attention is focused on inflation and interest rate with most believing that interest rates will eventually need to go higher in order to contain inflation.   The wildcard is that higher interest rates are not what the economy or housing market need right now.  It should be an interesting FOMC meeting on June 23 & 24.   

Multi-market managers that have positive results thus far in June include Clarke Capital whose Global Basic program is up and estimated +1.01% and Global Magnum program is up approximately +0.44%.   Lone Wolf Investments LLC Diversified has also had a strong start in June and is up approximately +1.47% after several well-timed trades in metals and treasuries.   Robinson – Langley is also in the black at +0.20% (est) as is Mesirow Financial Commodities Absolute Return +0.06% (est) and Mesirow Financial Commodities Low Volatility Absolute Return +0.03% (est). 

Managers who have had a slower start to the month include DMH which is down approximately -0.46%, the APA Strategic Diversification Program at an estimated -0.60%, Integrated Asset Management Concentrated at -0.81%, APA Modified Program at approximately -1.00% and Futures Truth MS4 at -1.10% (est).   Managers with slightly larger losses include Futures Truth SAM 101 at -3.55% (est) and Hoffman Asset Management at -3.81% (est).

Shorter-term stock index traders have started out June mixed as well with MSLO gaining approximately +1.04% while Paskewitz Asset Management Contrarian 3X Stock Index down an estimated -0.83%.

After sharp run-ups in many option trading managers during the 1st quarter, the past two months have and continue to offer mixed results.  The top program to start June is Financial Commodity Investments (FCI) CPP strategy with an estimated gain of +2.26 after falling -5.69% in May.  While many trades remain open, in the short run, the strategy has benefited from the short term reversals in commodities and currencies (Silver, Oil, EC, etc). 

Other Option trading estimates for the month are as follows: ACE Investment Strategists -0.64%, Cervino Diversified Options +0.42%, Cervino Diversified 2x +0.65%, Crescent Bay PSI -0.09%, Crescent Bay BVP +0.66%, FCI OSS -0.46%, and Raithel Investments +0.18%.

Agriculture and Grain traders remain a bit “shell shocked” from last month’s wild ride and are very quiet so far this month.  NDX Shadrach and Abednego have had no new positions and Rosetta is slowly gearing up for some new agriculture and grain positions – they are currently down an estimated -0.52%.  According to the manger, Rosetta has their eye on several back-month contracts (i.e October – December) as a potential catalyst to jumpstart their trading.

Trading Systems 

Trading systems had a slow first week of June with most finishing in the red on significantly less trades than the average week. The choppy market conditions kept many of the programs on the sidelines and those that did trade probably wished they could have a mulligan (or several).

Beginning with the day trading programs, three systems that were able to stay above water were Rayo Plus Dax +495€, BetaCon 4/1 ESX +80€ and Clipper ERL +$70. On the wrong side of the tracks last week were Viper II ES - $156.65, Waugh ERL - $796.70 and Compass SP - $1,625.

Moving on to the swing systems, results were more mixed with three out of five active systems staying north of breakeven. Those three programs were AG Mechwarrior ES +$440, Jaws US 60 +$345 and Jaws US 400 + $290.80. Losing out to the choppiness were Strategic SP -$7,625 and Strategic ES - $1,592.50. Strategic SP and ES are not the same program despite the same underlying logic, the SP and ES trade on their respective markets (pit traded S&P 500 and Emini S&P respectively) and therefore can and will have different signals from time to time do to the different tick sizes, etc…  

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.