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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

Anatomy of a Style Drift

April 16, 2012

 

 

One of the benefits we often tout for working with a managed futures broker like Attain is ongoing due diligence. We’ve all been told a million times over how important due diligence is, and it makes a lot of sense intuitively - making sure you understand all the ins and outs of a strategy and manager before risking your hard earned money.  But what about once you have invested… what about making sure the ship remains on course once you’ve gotten involved?  Does a pilot just check the plane before takeoff and then ignore the instruments while in the air? One would hope not- they need to be constantly monitoring their instruments throughout the flight to make sure the plane stays in the air.

In the managed futures world, ongoing due diligence means continued monitoring of not just the manager (are they still putting in 50 hour weeks, problems at home, etc.), but also how they are trading.  You see, there can be times where a manager starts to do different things than you signed up for (the classic example being trading Natural Gas options when you invested in a trend following program), which we call “style drift."

Style drift can be a problem for the obvious reason that it can lead to you not getting what you thought you were getting. Think of buying a Mercedes, and next thing you know you’re in a Hyundai. This is not to say that a change is necessarily a bad thing - there are times when change is necessary and welcome. What it does mean, however, is that the program no longer what you bought, and is probably not fulfilling the same role in your portfolio as it was when you bought it. If that nimble, aggressive program has grown conservative, or a program you were counting on for low volatility has started ramping up the risk, then it it may not be right for you anymore. Identifying these changes in time to act on them - that’s where it gets difficult.

You see, style drift isn’t as cut and dried as a manager saying they only do ag products and next thing you know they are day trading stock indices.  Think about it like stepping up to the plate in baseball. Different pitches will be easier or harder to hit. You'll have your soft pitches that your 6 year old could get a homer off of, the fast pitches straight over the plate that you just need to keep your eye on to make contact with, and those dreaded change-ups that leave you wondering what, exactly just happened- it simply depends on the subtlety of the changes and the nuance executed in evaluation.

Just how nuanced are we talking? We thought we'd break down just a handful of the elements that need to be monitored and let you decide for yourself- is this something you feel can do on your own, or would you feel more comfortable knowing you have someone on your side, looking out for your best interests every step of the way?

The Soft Pitch

When it comes to keeping tabs on a program, there are some changes that you should stick out like a sore thumb in the piles of data flowing in on their performance.

Changes in what they’re trading - One of the most basic elements of a managed futures program is the type of instrument traded - outright futures, options on futures, or cash forex are in most cases mutually exclusive, meaning you don’t usually see all of them being handled by a single manager. That’s because each of these “instruments” requires a different skill set, where what makes options go (gammas and deltas and such) aren’t usually the things that make futures go (crop reports, violence in the Mideast, etc).  So a futures trader moving to trading options, or an options trader moving into directional bets in futures, is an easy one to spot.

Changes in how they’re trading -  Sometimes the structure of a program’s trades is not dependent on the type of contract, but how different contracts are traded together to manage risk/reward levels.  This mainly shows up in spread trading, be it option spreads or futures spreads. The style drift alert here is when your spread trading program has started taking only one side of the spread, or doing inter-market spreads when it had previously only done calendar spreads. Or perhaps your outright futures program has started taking on calendar spreads, leading to questions such as: how did they back-test their models given the difficulties in acquiring spread data? Changes in the structure of trades may result in substantially different risk/reward levels, which may not be what you’re looking for, nor serve the allocation's original purpose in your portfolio. 

Changes in the market(s) they’re trading - When a CTA develops a managed futures program, market selection is typically a huge component of the program's development. They're specifically hand-picked for a variety of reasons, ranging from field of expertise (think a former floor trader in the grain pits in Chicago) to suitability with a given algorithm for a systematic trader. If the program track record represents trades in index futures but recent trades have included softs, for example, you should be on high alert. Different markets can have vastly different levels of volume and volatility, and a manager who has excelled in trading a particular market may not be able to successfully trade a different one. At the very least, exposure to a different market or sector is likely going to affect the program’s correlation levels to other assets, which can diminish its diversification value.

These changes are usually ones you pick up on by looking at the position breakdowns you receive from your FCM. In some ways, you'd think that these are the ones the individual investor can handle on their own, but whether or not that's true depends on both the investor and the extent of the discrepancy. For instance, not every investor is checking their statements daily, and if the program in question has a shorter average holding time, but a higher frequency of trading, finding these out of the ordinary movements would require a great attention to detail.

The Fast Balls

If so far you're thinking you could handle this job on your own, you may be right. If you're an investor that pays close attention to the basics of how a program is executing, you may be able to catch some of those soft pitches in the heat of the moment. But some of these changes aren't going to come with a flashing neon sign attached to them. They'll be straight over the plate, and noticeable to the trained eye, but the nuance of the changes may make it harder for the individual investor to hit that shift over the wall. Not only will they typically require calculations beyond what your daily statement provides you, you'll likely need data from multiple statements and a thorough understanding of the program and manager to help contextualize the information.

Risk per trade -  For systematic traders, the risk they take per trade is usually the backbone of their risk management strategy. A change from risking 1% of equity per trade to 2% of equity can mean annualized volatility changes of 10% or more. Problem is, managers who are looking to perhaps double up during a drawdown, who are facing nothing more than a 2% management fee and a long climb before seeing any incentive fees, may not advertise a change in risk per trade.  And it isn’t something displayed on your daily statement, either - the risk on the trade is not discernable until and unless the trade is closed out at a loss.  This is a tough one to find, but not impossible if you’re looking in the right direction.

But how much of a change in risk per trade is too much? Is it a temporary phenomenon or a long-term shift? Depending on the answers to these questions - and whether the manager is forthcoming or not, higher (or even lower) levels of risk per trade may be cause for concern.  On the flip side - what if a manager has made a lot of money for you, and then ratchets down risk in an attempt to protect the assets? If you are expecting a certain level of volatility and return from that manager, paying him to sit on cash is probably not what you had in mind when you allocated.  

Frequency of trading - Higher or lower frequency of trading could be a cause for concern. For instance, is a manager that typically puts on a half dozen trades for month suddenly putting on thirty or forty? Is a previously active manager suddenly down to a handful of trades each month? Individual investors will sometime be able to pick up on this, but it's not just the difference that matters. The real question is how severe the difference is. Is the change in trading frequency a product of market conditions or manager behavior? If unusual market conditions are behind the change, it is probably nothing to worry about. If, however, the manager has become substantially more aggressive or conservative in his or her trading frequency, you may not see the same performance from the program. 

Size of positions - Many managers will outline the size of trades they're willing to take on when their program is described, but what happens when their trades suddenly fall outside of their described bounds? If you have always seen Gold trades amounting to 2 contracts in your account, and then you see 20 - that’s some style drift. Are they making one big bet? How does it fit with the model? The answers to these questions may not always be obvious, and will often interact with a host of other statistics you'll need to sort through for context.

Management changes - There's a reason you often see businesses advertising that they are "under new management"- it typically dictates a change in direction for the organization. However, such changes are not always shouted from the roof top in managed futures, as it may set off concerns about program continuity and operation stability (sometimes, rightfully so). If you're an individual investor, unless you have a personal relationship with the manager you're investing with (which, in our experience, is not the norm) knowing about these changes as they're happening can be difficult.

But it goes beyond simply knowing the staffing changes are taking place - you have to interpret what the changes mean, as well. For instance, while a change in management would be an obvious red flag for purely discretionary programs, it may not be as clear-cut for systematic traders. You have to know the operational role of the person leaving to really know the impact the change could have, as well. For instance, say a discretionary program is a partnership, with one manager handling the trading and another handling the business and marketing side of things. The trader leaving would likely be of greater significance to the investor than the business head. You also have to know who's coming in - what's their experience? How will they impact the program's philosophy and structure? Unless you're familiar with the industry, getting a hold on that information and being able to sort marketing spin from important details can be next to impossible.

The Change-up

Most everyone can hit a softly tossed ball over the plate. A fair number of people can even make contact with a fast pitch if they concentrate (and know it’s coming). But hitting a change-up is a whole different ball game, so to speak. These changes will happen at varying speeds with a flair that only someone with extensive experience in the field will pick up on. Evaluating these shifts requires making judgment calls - it comes down to qualitative analysis that you simply can't code into an algorithm or reference on your statements - making these the hardest shifts to catch.

The Discretionary Overlay - If you're working with a discretionary program, you know that the trades are being placed at the judgment of the manager, but many programs, even the systematic ones, will have what's called a "discretionary overlay." This is essentially a caveat built into the program description that allows them to use their discretion when it comes to the trading. If you're working with a systematic manager, this is ideally non-existent or less than 5%.

This number, typically, is a catch-all to give the manager some leeway during extreme circumstances. For instance, should some global event create a severe risk on/risk off atmosphere, the manager may want to close out of a trade in order to protect the client's capital. The problem with a move like this, and most other discretionary calls, is two-fold. For starters, is it repeatable? If the same circumstances arise, will the manager make the same call this time?  If not, why was this time different? Secondly,  how is it affecting the overall strategy? If it is used to ratchet down risk during extreme events like 2008, for example, that sounds good – but what if you need every bit of profit in 2008 to make up for down times ahead? If the discretionary overlay reduces profits during good time, and does nothing for losses during bad times, that is a problem.

Sometimes those discretionary calls can be necessary though, so the more important question is whether those trades are emotionally driven or placed in a calculated sense. Do they happen at a whim, or through a drawn-out process where such circumstances are indentified and confirmed? Not only does this require knowing the program and its parameters, but you have to know the manager well enough to know when they're putting on an act. Sometimes that requires digging on a manager in unique places. None of these things are easy or simple, making this one of the more difficult components of ongoing due diligence.

Operational risk - We talk a lot about statistical risks with a program, but the other side of a program's risk is operational. We already talked about one of the more obvious operational risks (management change), but sometimes those operational risks are only visible to those looking at the CTA with a magnifying glass. As an example, how are they managing growth? Let's say you see a manager's AUM grow by 30% in a given quarter - are they able to take that added performance pressure? And what kind of pressure are they facing? Was that 30% increase one new account, or 300 accounts, each requiring attention? If it's 300 accounts, are they trying to run their business in the same way that they were before? If so, can their office infrastructure handle it? If they've expanded their office to take on the new workflow, how reliable is the new infrastructure? These are the kinds of things you simply will not see if you aren’t looking in the right places and digging deep enough.

Stylistic Elements - We'll be honest. This is definitely a cop-out, catch-all category of changes when it comes to manager evaluation, but, to be fair, that's because this is how most overall style drift happens. You won't often wake up and see a meats trader dealing in bond futures, and it's not typical to see a manager suddenly trading at 10x the rate they were before. Instead, seemingly miniscule changes get implemented gradually over time. They get worked into the disclosure documents. Introducing brokers will be informed of the alterations, and the reasons for the changes.

On face, every one of these shifts will be done the right way. Everything will appear to be on the up and up, and most of the time, it will be. Don't get us wrong - we're all for the evolution of a manager - but it has to be at the right pace, and for the right reasons.

Even in a world where that's the case, and even when these changes are for the best, monitoring the drift is essential. These little changes add up, and, if significant and regular enough, the program you invested in on day one may be unrecognizable five years down the road. Unless you're conducting this ongoing due diligence on a long-term basis, and you're exceedingly thorough, this style drift is the easiest to overlook. Yet it is also potentially the most dangerous, as this ends up manifesting as not just a change to one aspect of the program, but a total transformation.

Do you need a broker?

There are obviously a lot of moving parts in this ongoing due diligence dance, and most investors will agree that they are probably not the best suited individual to handle said monitoring. However, the follow up that realization is often a pointed question - why should I trust you?

For us, the answer is simple: experience. We've been around the block, we know the people you're working with, we know the right questions to ask, and we know where to dig when we're not getting the answers we need. We'll be entirely honest with you, though - there is not magic bullet solution on this. Every broker can (and will) be a little slow on the draw sometimes, or miss a warning altogether. Due diligence, despite the statistical advancement that technology provides us, is not a science. It's an art. You'll find that the qualitative elements of the monitoring are often even more important than the basic quantitative analysis, and there is simply no way to code that into a recommendation.  

That being said, we'll return to our original question: is this something you feel can do on your own, or would you feel more comfortable knowing you have someone on your side, looking out for your best interests every step of the way? When you work with a broker like Attain, there's no additional cost to you as an investor, so look at it this way - you can either attempt to vet and monitor some of the most complex investments on the planet on your own, or you can make your investing decisions with the support of experienced professionals who know the investments inside and out - without paying a penny more. Neither is a guarantee of success, but in our minds, the right decision is pretty clear.

 

IMPORTANT RISK DISCLOSURE


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Feature | Week In Review: An Erratic Week

 

It was an erratic week for the indices, with big price swings down, up, and back down again. By the end of the week the Dow was down -1.46%, the S&P 500 was down -1.81%, the Nasdaq was down -2.19%, the S&P Mid-Cap 400 E-mini fell -1.83%, and the Russell 2000 E-mini lost -2.45%. In bonds, US 10-year notes gained 0.13%, and US 30-year bonds were up 0.85%. In currencies, the US Dollar was down -0.04%, the Japanese Yen was up 0.51%, the British Pound fell -0.14%, the Euro lost -0.03%, and the Swiss Franc was down -0.19%.

In metals, Gold gained 1.85%, Silver fell -1.07%, Copper was down -4.44%, Platinum lost -1.23%, and Palladium rose 0.37%. In energies, Crude fell -0.46%, Heating Oil gained 0.17%, RBOB Gasoline rose 0.17%, and Natural Gas was down -5.17%, posting a new 10-year low as well as a new all-time inflation adjusted low.

In grains, Corn fell -4.41%, Wheat fell -2.35%, and Soy was up 0.19%. In meats, Live Cattle broke a long streak of losing weeks, finishing up 0.22% for the first gain since March 2nd, while Live Hogs lost -3.53%. In softs, Cocoa rose 4.36%, Orange Juice fell -7.75% to hit a new 6-month low, Cotton was up 1.34%, Coffee was down -1.53%, and Sugar fell -4.92%.

Trading Systems

In day trading systems Bounce EMD was up $814.35, and PSI! TF gained $122.09. On the swing trading side, MoneyBeans S was up $440, MoneyMaker ES was down -$780, and Strategic ES lost -$822.50.

CTAs

Another decent week for CTAs as April is shaping up to be the month of “not bad.” As was the case last week, agriculture programs have continued to shine with the highest category average. Both the trendfollowing and short-term programs we track are showing mixed results, with some big winners and losers in each strategy category. Check out the full heat map below:

 

 

Program

%**

Max DD*

Strategy Type

Quantum Leap Capital (QEP Only)

3.30%

-24.44%

Short Term

Global Ag (QEP Only)

2.48%

-17.57%

Agriculture

Clarke Capital Management, Inc. Global Basic

2.13%

-46.49%

Trendfollowing

HB Capital

1.45%

-13.79%

Option

2100 Xenon Fixed Income Program:

1.25%

-7.46%

Fixed Income

2100 Xenon Managed Futures (2x) Program:

1.14%

-18.40%

Multi-Strategy

FCI OSS

1.03%

-52.73%

Option

Futures Truth SAM 101

0.98%

-12.62%

Multi-Strategy

Tanyard Creek Capital (QEP Only)

0.74%

-14.17%

Agriculture

NDX Shadrach

0.74%

-19.38%

Agriculture

Crescent Bay BVP

0.65%

-32.69%

Option

NDX Abedengo

0.56%

-10.28%

Agriculture

Emil Van Essen, LLC Commodity Only (Low Min)

0.37%

-36.21%

Spread Trading

P/E Investments FX Strategy - Standard

0.33%

-15.01%

Currency

GT Capital

0.29%

-11.79%

Discretionary

Auctos Capital Management (QEP Only)

0.24%

-12.25%

Multi-Strategy

Emil Van Essen, LLC Combined (Low Min)

0.22%

-36.21%

Spread Trading

James River Capital Corp. - Navigator

0.21%

-18.60%

Trendfollowing

Hoffman Asset Management, INC. Managed Account

0.21%

-19.38%

Trendfollowing

Clarke Capital Management, Inc. Worldwide

0.20%

-30.83%

Trendfollowing

Paskewitz

0.19%

-18.21%

Stock Index

FCI CPP

0.18%

-18.73%

Option

Rosetta (QEP Only)

0.13%

-39.67%

Agriculture

AFB LLC FortyEighter Gold Options

-0.01%

-44.10%

Gold

Futures Truth MS4 (QEP Only)

-0.04%

-9.18%

Multi-Strategy

Integrated Managed Futures Corp. IMFC Global Concentrated (QEP Only)

-0.07%

-10.31%

Multi-Strategy

Bluenose Capital Management LLC - BNC BI

-0.08%

-5.77%

Option

Bluenose Capital Management LLC - BNC EI

-0.10%

-9.98%

Option

Clarke Capital Management, Inc. Global Magnum

-0.17%

-41.50%

Trendfollowing

Reynoso Capital Management - Small Accounts

-0.18%

-16.05%

Option

Mesirow Absolute Return

-0.28%

-1.56%

Discretionary

Cervino Gold

-0.47%

-6.69%

Gold

Cervino Diversified Options

-0.48%

-8.34%

Option

Cervino Diversified 2x

-0.89%

-17.32%

Option

Attain Portfolio Advisors - Strategic Diversification Program (QEP Only)

-1.22%

-24.39%

Multi-Strategy

Bel Air Capital Asset Management

-1.81%

-24.05%

Multi-Strategy

Dominion Capital Management (QEP Only)

-2.02%

-15.22%

Short Term

White River Group Diversified Option Writing

-2.24%

-15.08%

Option

Covenant Capital Management Aggressive (QEP Only)

-3.36%

-20.41%

Trendfollowing

Bouchard Capital, LLC Short Term Multi Commodity

-8.72%

-13.79%

Short Term

 

 

 

*Max DD= A drawdown is the “pain” experienced by an investor in a specific investment. As an example, an investor starting out with a $100,000 account who sees it fall down to $80,000 before it runs back up to $110,000 saw a $20,000 loss ($100K – $80K), which would equal a -20% ($20K/$100K) drawdown. The so called Maximum Drawdown (Max DD) is the worst such peak to valley down period for an investment.

**Disclaimer: Past performance is not necessarily indicative of future results.  These performance numbers are calculated using the liquidating value of a single client at Attain trading the listed program, and are believed to be representative of all similar clients invested in the program.  A 20% incentive fee and 2% annual management fee are deducted from all profitable months, regardless of whether the program is at a new equity high.  These numbers may vary from the actual performance numbers presented by the CTA upon completing their accounting for the month gone by, and should not be considered apart from the performance numbers listed in the disclosure document for the program listed.

 

 

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.