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2009 Managed Futures Program by Program Annual Reviews

January 18, 2010

 

We covered the 2009 performance and 2010 outlook of managed futures as an asset class in last week’s newsletter (2010 Managed Futures Outlook), and this week get into specifics on many of the programs Attain clients are invested in.

Where 2008 saw profitability in nearly every managed futures category (except option selling), 2009 was a near reverse image; with everything from systematic trend followers to discretionary counter-trend traders seeing losses. There were some managers who managed to buck the trend, but the only category wide gains were seen in option selling (which many had left for dead at the end of 2008).

Generally speaking – it was a tough 2009 for multi-market systematic programs (the bulk of managed futures investments), a down year for discretionary traders, a mixed bag for specialty managers and short term CTAs; and a good year for option selling managed futures programs.

There were outright winners (HB Capital, FCI, Emil Van Essen), outright losers (Clarke, APA, Dighton), and a few managers (Mesirow, Paskewitz) just barely positive or down less than -1% or -2% who considered the near flat performance a definite win given the tough trading environment. For more on just how tough an environment it was, please read the recent Bloomberg article ‘Futures Funds Fall Most since 1987’ (click here to read)

This week's newsletter gives a brief review of the 2009 performance for many of the CTAs Attain clients are invested in. The reviews are done alphabetically within the main categories (option sellers, discretionary, multi-market, etc.) we track.

The following section lists an advisor by advisor report of each CTA tracked by Attain with a minimum of $1 MM or less, with a link to that CTA's performance record. You will see CTAs that did well, and CTAs that did not.

 

Important Risk Disclosure Managed futures accounts can be subject to substantial charges for management and advisory fees. The performance numbers outlined below include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets. Regulations require managed futures performance to be calculated as a composite of all accounts of non qualified eligible persons trading the same program. This 'averaging' of individual account performance can cause individual performance to be higher or lower than the reported composite performance depending on several factors, including commission and fee levels, investment amount and duration. The statistics may show rates of return for only the listed period (i.e 2008, 2009), where rates of return for periods longer than the period shown may be higher or lower than those shown. Past performance is not necessarily indicative of future results. Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFTC rules. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investors are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs. Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document are considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

 

-----------------------------------     Multi-Market Systematic      ------------------------------------

The bread and butter of managed futures, and the drivers of the crisis period performance managed futures are known for – this area was unfortunately the worst performing amongst managed futures categories in 2009. The main reason was the precipitous drop in volatility from all time highs in 2008 across nearly every market, which in turn caused for more trading around the mean for many markets, making it hard for systematic programs to stay involved in those trends which did emerge.

APA: performance / performance

It was, quite simply, a bad year for the Attain Strategic Diversification and Modified programs; where the planned diversification amongst different markets, time frames, and model types did not offset losses amongst one another as designed.  The conditions which caused this included a decrease in volatility across over 90% of markets (removing the benefit of market diversification), smaller moves across all time frames (removing the benefit of time frame diversification), and just enough remaining volatility (and false volatility through government intervention) to make some of their shorter term models, which should do well in a decreasing volatility environment, struggle (removing the benefit of model diversification).

The good news is that this environment is not likely to last through 2010. For one, volatility has already fallen in 90% of the markets they track, making the likelihood of volatility rising (on average) in these markets in the New Year a good possibility. In the manager’s opinion, the worst case scenario is a 40/60 environment in 2010 (with 40% of markets seeing increased volatility, and 60% seeing decreased), and the likely scenario is something like 60/40 or 70/30 as the world deals with the aftershocks of the financial crisis and starts to realize the currently unknown unintended consequences of the massive government stimulus and bailouts.

Perhaps more importantly, however, is that Mr. Malec and his team have been hard at work throughout 2009 improving their overall model, and believe they will not be as unfortunate in performance should the same sort of environment repeat in 2010. The APA team continues to push full steam ahead with their research, and truly view the program today as better than the program which saw 25%+ gains in 2007 and 2008.  For the year the full size APA Strategic Diversification Program was down -16.87%, while the APA Modified Program fell -43.33%

Clarke Capital: performance / performance / performance

2008 and 2009 could not have been more different for Clarke and their time tested strategies (track records starting in 1996).  2008 boasted of some of the largest annual returns since the manager’s inception, while 2009 experienced sharp negative annual totals for all of his programs.   Clarke Global Basic fell -29.77% and is trading just off its all time month end drawdown low of -31.18% reached during the 2001 – 2002 drawdown.  Clarke Global Magnum had a similar result ending the year down -32.42% just off its all time drawdown.  Clarke Worldwide on the other hand, did not suffer as much due to its “longer term” component that turned a negative month for the smaller programs into a profitable one for Worldwide.  Worldwide was down -11.10% for the year and remains well off its 2006-2007 lows.

While the end result for 2009 is not the result Clarke investors were hoping for; it is very important to recognize that the manner in which the drawdowns occurred is very much in line with the historical trading patterns of the manager and all the more reason to be optimistic about the manager moving forward.  From a fundamental portfolio perspective, investors hire Clarke Capital to systematically participate in the emerging trends of a wide range of markets on an intermediate and long term basis.  During periods of consistent and or rapid market expansion of trends and volatility Clarke has historically performed head and shoulders ahead of other managers because they are generally one of the first managers to identify the trend.  Unfortunately, this tendency is also the root of the 2009 troubles, in that they jumped on board with several market trends only to see them quickly reverse course forcing them out of their positions and decreasing the percentage of winning trades for the year.

We do not view the Clarke program as broken (and in fact it remains well within our stop trade levels), and instead view 2009 as a realization of the risk inherent in a systematic trend following approach. There will be good time, and there will be bad times – but you hire Clarke to manage the down times as best as they can and keep you involved for when the good times come back around. Much of that risk is already apparent in Clarke’s 13 year track record, and we fully expect Clarke to be around 13 years from now, seeing some reversion to the mean after a strong up period.

Futures Truth: performance / performance

Futures Truth SAM 101 looks to have finished the year just barely in the black at approximately +0.63% est. and is officially in the “since we didn’t lose money we had a good year club.”  Futures Truth MS4 also appears to have barely made it in the black at +0.75% est. as well.   Their shorter term focus allowed them to escape many of the false breakouts other managers struggled through, while the decreasing volatility kept them from being able to latch onto any large winners.

We would be more impressed with these results if it wasn’t for the fact that FT marketed SAM 101 as a $50k program before quickly pulling the plug and officially upping the minimum investment level to $200,000 when market conditions proved too volatile for the smaller account size.  The $200K level may be the right one, but the worry here is that the account size was fit to the performance a little bit, making it hard to measure how the program performs based on its minimum.  

While the Futures Truth SAM 101 program is still relatively new CTA to Attain, Futures Truth is not short on system trading experience.   Well known in the system trading arena, Futures Truth CTA is the end result of an extensive research project which produced a group of systems called the Samurai Strategies which began trading in October of 2007.  Futures Truth CTA is a true “family affair” Run by John Hill Sr. and his daughter Holliston Hill Hurd. Together they spent five years researching models for these latest programs. One is a short term pattern recognition strategy called SAM 101.  The other is the Futures Truth MS4 Program which includes a 50% allocation to the SAM 101 short term strategy and three other models, including two medium term strategies and a longer term strategy.  

At the end of the day, Futures Truth is looking for expanding volatility just as other systematic programs are, and should benefit from more markets seeing expanding volatility in 2010.

Hoffman Asset Management: performance

Like many of his systematic trading peers, Hoffman Asset Management followed a great year in 2008 with a down year in 2009.  The down year could be seen as a bit of a disappointment, seeing as how the Hoffman program’s dynamic portfolio selection is designed to avoid those markets which aren’t set up to produce sustainable trends the program can profit from – but we’ll cut Dean some slack seeing as how literally every market saw year over year decreases in volatility (meaning even the best algorithm would be left with markets not set up to deliver trend following profits).

This dynamic portfolio selection is one thing we like about Hoffman’s program. Their unique strategy looks at over 60 markets, but only implements a dozen or so of them at the time (based on which ones his models believe will have the best success in the near term). This puts their program in the enviable position of offering the most diversification at the lowest capital investment amount. To get access to so many markets usually requires $250,000 at the very least, and usually more like $1 Million, but Hoffman’s methodology of trading a dynamic selection of the top markets allows them to do it at a minimum investment of just $125,000.

One thing we don’t like about this low minimum is that larger accounts ($250k and higher) fared significantly better in 2009 than the smaller $125k accounts because they had a higher “risk budget” and therefore participated in some higher risk trades which became winners.  Because of this the manager is recommending clients consider increasing their investment level in an effort to be exposed to more trading opportunities.   For the year the composite return for the program (all accounts) was -10.56%.

The good news for Mr. Hoffman and his multi market program is that it is highly unlikely all 60 markets he tracks see decreasing volatility again.  The global decrease in volatility took away one of the program’s ways of making money while other trend followers aren’t, but we believe that edge will be back in 2010. Mr. Hoffman tells us his own back tested data going back over 30 years bears out this same statistical tendency for negative years to be followed by consecutive winning years.

If market conditions improve as expected Mr. Hoffman should have a better year in 2010.

Integrated Managed Futures Corp.  IMFC Global Concentrated: performance

The IMFC Global Concentrated program was a new systematic multi-market CTA for 2009.   The program is a derivative of the larger IMFC Global Investment Program whose track record began in 2007.  Mr. Roland Austrup is the manager of both programs and he built the Global Concentrated program for investors (at Attain’s request) who wanted exposure to his trading systems but weren’t ready to commit to a $2,000,000 minimum investment level that the larger program requires.   The early returns for IMFC Global Concentrated have been in impressive.  Launched in April the program finished 2009 at +13.76% with a drawdown of -5.78%.  We did a recent Managed Futures Spotlight on IMFC (click here to read)

Most of the alpha generated this past year by IMFC can be attributed to long positions in commodities (especially Sugar), foreign currencies, interest rates, and stock index futures as all of these markets rallied higher off the March lows.  However, the weakness of this ultra long strategy was exposed late in the year when many markets including Gold and the US Dollar corrected themselves in late November and throughout December.  This correction caused the max drawdown in December.  Another sobering point is that the larger IMFC Global Investment Program did not post positive returns in 2009, however it should be noted that it outperformed most of its peers. 

Heading into 2010 we expect that IMFC will continue to have success and if market conditions improve as expected they could be setup for a great year.  The other advantage that IMFC has over comparable CTA’s is that they are housed within a larger investment company that is publicly traded on the Toronto Stock Exchange (TSE).  This relationship allows Mr. Austrup and is team to concentrate on trading and research, and prevents them from becoming bogged down by the issues that so many other CTA’s have trouble with.  Therefore, even though IMFC is still an emerging CTA they are setup for aggressive growth.  All clients who are looking for additional multi-market programs in 2010 should consider IMFC Global Concentrated or its big brother the IMFC Global Investment Program.

Quantum Leap Capital: performance

Quantum Leap entered 2009 on the heels of a remarkable +118.2% return in 2008 – a very tough year to top!  After starting the year off with a difficult -7.1% ROR in January, Quantum’s systematic models began to recognize the heightened volatility and ensuring “choppy” market conditions causing their models to spend more time sitting on the sidelines than in the market.   For the year the program ended down -15.76%.

How is it that a program that participated fully in the 2007 – 2008 Managed Futures gains only saw a fraction of the drawdown vs their prior gains?  The secret is in the sauce, so to speak, in that QL’s models are designed to limit the initial risk per trade to a very small fraction of the total account (although this is not a necessarily a new concept to the trend following world) and ONLY when the trend is confirmed (by price and momentum) will they fully invest into the ensuing trend.  In other words, their philosophy is to test the waters of a trend with a single unit and then increase exposure or scale in.  It is also worth noting that their models are designed to quickly adjust the trailing stops on profitable trades as not to experience as much open trade volatility as a traditional long term trend follower- hence an average hold time of 5-15 days on QL vs 25-50 days on other programs.

For investors invested with Quantum Leap or considering adding a quality multi-market systematic manager currently in drawdown, we believe that Quantum Leap has a unique profile compared to most traditional trend based strategies and if our predications of more trending days in 2010 come to pass we’d expect to see some excellent trading opportunities for QL.

Robinson Langley Capital 2009: performance                                       

The Robinson Langley Capital Managed Account Program ended its third full-year of trading at -3.92%.  Again, not impressive in and of itself, but quite impressive when viewed against the larger backdrop of losses for most multi-market systematic managers. Since inception in January 2007, the program has generated a compounded ROR of 21.15% with a max drawdown of -13.2%. 

RL Capital uses a 100% systematic multi market trading method, believing that consistent results are difficult to produce through discretionary trading given emotional and behavioral biases that many times result in second-guessing and indecisiveness in the trading process.  It applies this method to a diversified portfolio of commodities, currencies, and financial futures markets.

Being focused on strong risk-adjusted returns, 2009 has not provided ideal market conditions for large returns.  However, RL Capital believes this year has clearly illustrated the program’s ability to preserve capital through minimizing losses in less than ideal conditions.  Despite the volatile, yet trendless price action seen in 2009, Robinson-Langley is still less than 10% from its all-time highs.  Understanding that drawdowns and trendless market behavior are inevitable, periods such as 2009 have, at least historically, provided profit opportunities.  RL Capital believes the key to catching the next profitable period is to continue to be disciplined in its approach; following the system and having complete confidence in its risk management models.

The near breakeven performance of RL in 2009 was quite an achievement in a poor environment for their strategy, and we expect them to do quite well in 2010 should the trading environment improve for all.

 

-------------------------------------     Discretionary      -------------------------------------

Perhaps the most upsetting group of managers in 2009 was the discretionary trader space, which is added to portfolios to sidestep poor environments and generally perform when their purely systematic counterparts struggle. Unfortunately, discretionary traders found the 2009 landscape just as tough as other commodity trading advisors – unable to latch onto what they perceived to be low risk/high reward trades. The knock on systematic models is that they can’t recognize a rally like the one in stocks and commodities off the March lows until it is well underway (say June). We would have hoped discretionary traders would have looked at the March lows and said enough is enough – this thing is going to bounce and gotten long (Dighton nearly had it long Crude Oil from around $40). But discretionary managers, on the whole, didn’t play this diversifying role – instead being cautious and waiting for more ‘normal’ conditions.

Dighton Capital USA Aggressive Futures Trading 2009: performance

2009 was a tough year for many managers including Dighton USA Aggressive Trading which posted negative returns for the first time since inception.  The year started out very rough with Dighton holding long in crude oil while the market was tanking down towards the $30 per barrel market in January.  Dighton was very nearly 2009’s top performer if they could have held on just a few days longer in Crude Oil. Their long exits were just days from the low in Crude, which rallied over $50 through the rest of the year….showing Dighton investors it takes more than just picking the right direction.

The Crude Oil exit left the program down -25.33% and on shaky ground with many clients.  After the rough start Dighton USA decided to remain on the sidelines and was only placing occasional trades throughout the year.  Finally, in November, Dighton saw an opportunity to go long US Dollar Index while the rest of the world was betting that the Dollar was headed for complete destruction.  This was a “typical” Dighton Aggressive countertrend trade that saw the manager enter long when virtually every other CTA program had or was considering a short position. At first the trade went against the manager but eventually it did work out in their favor and Dighton was able to end 2009 on a strong note with a positive return of +11.37% in December. The program seemed to turn the corner in December and we hope this is a sign of better times to come.  Overall the program finished 2009 at -16.84%.

Heading into this year we are not sure whether we are going to see the Dighton of 2009 or years past.  Dighton likes to bet into extreme price moves, and essentially bets on prices reverting to normal – so the further we get from the huge swings associated with the financial crisis and bounce off its lows, the better it should be for Dighton.

DMH Futures Management: performance

DMH’s discretionary ability did not exempt them from experiencing a difficult 2009 as well.  The silver lining, however, is that because DMH is a discretionary trader, their drawdown was less than most of their systematic counterparts. As we noted in last year’s report, DMH’s gains were less robust than the systematic CTAs.  This year the table was reversed, and their losses were a lot more moderate, remaining in the single digits, while quite a few systematic programs suffered much larger drawdowns into double digits.

According to David Heinz, DMH’s principal trader, “though results this year have not been spectacular, neither were they horrible, and a savvy investor knows the long term advantages of having Managed Futures in one’s portfolio. He or she is also very much aware of a CTA’s extended track record and is less likely to exit a program when a downside “blip” occurs in performance. In fact, the smart money will add to a program when they feel the manager is beginning to come out of a drawdown.”

Like many other discretionary managers, 2009 was the year of the Dollar dilemma for DMH Futures Management.  In the managers opinion the U.S. Dollar had a dramatic and dominant affect on all domestic futures markets. Each morning David’s first rule of business was to examine what the dollar had done overnight because this factor exceeded the importance of technical and other fundamental analysis on a particular commodity; the result being that it made it difficult at times for them to interpret trading signals. Mr. Heinz was also faced with historically wide daily market ranges that complicated their tight risk parameters resulting in fewer trades. As the year progressed DMH experienced a string of consecutive small monthly losses. In David’s experience as 25 year trading veteran,  he says that it has always served him well during the inevitable times when a string of losses occur to maintain discipline in keeping losses small and backing off some until the markets get back into sync with your particular trading style.  Unfortunately, despite the conservative approach, DMH finished 2009 in the red at -6.42%.

As for 2010, DMH feels that Gold and the US Dollar will remain volatile, that there may be an up- tick in U.S. interest rates, and that inflation may begin to creep into the picture. They plan on being more aggressive in the placement of orders when possible.  

Mesirow Financial Commodities: performance / performance

2009 was a year focused on aggressively managing risk for Mesirow.  Unlike many systematic trading strategies which kept throwing trades into the same poor environment hoping for a different result, Mesirow has the full benefit of human intervention through their discretionary trading philosophy and their managers chose not to force a square peg into a round hole.  A tough December left them down for the year, with the Absolute Return program down -0.58% and Low Volatility off -0.22%.

Mesirow, like all other managers, is in this business to generate alpha.  With this in mind we completely understand that it is difficult for clients to get excited about program’s returns when all the program did was end the year basically where it started (after paying them fees). However, when viewed in light of the losses many of the other managers in this report had and the poor performance across managed futures - we were impressed with Mesirow’s flat 2009 performance. Ideally they would have used that discretionary ability to make profits while others were not, but that would have likely involved taking on larger risks than they care for (and than investors signed up for). If anything, 2009 proved to us that they are indeed implementing the disciplined risk management tools outlined in our recent 12/21 Managed Futures Spotlight (click here to read).

 In a recent conversation with Sr. Vice President Tom Willis Sr. he noted, “All it takes is a few good trades over the course of one or two quarters and we’ll be right back on track to hitting our performance goals…in the mean time it is all about managing the risk.”  Given Mesirow’s stance that it is better to “keep your powder dry” at times, it is very important to target a 2-3 year investment window with Mesirow.

Looking ahead, 2010 will be a make or break year for Mesirow. They have parlayed their low risk approach into assets under management near $400 Million, but investors want low risk and some upside – not just flat performance. We believe Mesirow will be able to deliver, and urge interested investors to get involved at the $800,000 minimum level before they get too much larger and raise their minimum to $5 Million or some other multi-million number usual for such a large asset base.

Rosetta Capital Management: performance

The market conditions surrounding 2009 was a discretionary agriculture trader’s nightmare according to Rosetta manager Jim Green.  According to Mr. Green  “Throughout 2009 we saw markets driven more by macro events than by the individual fundamentals of the meat and grain contracts. Market movements caused by long only funds and macro speculators (that did not necessarily base their trades on the underlying values of the commodity markets) made trading very difficult for us as fundamental traders, giving us our first negative year in the nine years we’ve traded this program.”

For us and our clients the most frustrating part of Rosetta’s performance is that the slide, all be it not significant, has gone on for quite a few months now. For some investors the length of a manager’s drawdown can outweigh the depth, especially psychologically – and Rosetta will be looking at 24 months since their last equity high come February, 2010.  It takes a lot to stick with a manager through such a slump, and after ending 2009 at -3.90% with a max drawdown of approximately - 6.40%; Rosetta will need to not just return to profitability in 2010, but hit new equity highs to instill confidence in their abilities moving forward.  

The Rosetta management team remains very optimistic about 2010 and feel there will be strong opportunities on both the long and short side of the grain markets and in the long term bullish bias in the meats.  2010 is a make or break year for Mr. Green and his team.  Clients are getting antsy and are ready to see returns comparable to those posted in the manager’s track record from 2001-2006.

-------------------------------------     Option Selling      -------------------------------------

This was the place to be in 2009, just as it was the place to avoid in 2008, as volatility in markets across the globe saw volatility drop substantially. Option sellers are in the business of selling volatility, so this was a perfect environment for them. The question is now what… with many still below their equity highs after 2008’s sharp losses and potentially poised for trouble ahead with volatility now back to levels from which surprise spikes to the upside emanate. The answer could be diversified option sellers, who generally speaking, outdid those who trade stock index futures only in both 2008 and 2009.

ACE: performance / performance

To borrow from the old hardware store ad campaign, ACE was the place in 2009  - with the original program, SIPC, which trades options on the SP only, returning +31.17%. The brand new DCP program which only trades options on markets other than indices, and started its first official month in June of 2009, returned 47.54%. 

The problem is, ACE was not the place in 2008, with it, like most option sellers, experiencing the largest drawdowns of their professional trading careers. Despite the great returns of 2009, Yu-Dee and his team still have a lot of ground to make up and a lot to prove to investors after a disastrous 2008.  We would still like to see the SICP program return to equity highs before banging the ACE drum too loud.  It is hard to get too excited with a program that remains in a 55% drawdown. So, while it is encouraging to see ACE bounce back and perform well, investors should still be cautious with this program especially during periods of heightened market volatility (or put more correctly – periods in which we may see spikes to heightened volatility).

Cervino Capital Management Diversified Options: performance / performance

If we can be allowed the indignity of complaining about a manager who posted positive returns for 2009, we’ll do just that with Cervino. In short, we expected much more out of Cervino in 2009 with the dramatic drop in volatility; and many clients had Cervino as their diversification against such a drop in volatility.

But it is never wise to complain about winning, and when looking at Cervino amid the bigger picture, here is a program focused on trading volatility which has managed to produce consistent returns with a manageable drawdown in some of the most volatile market conditions on record.   Cervino is never going to consider rebranding themselves with the old Pontiac slogan of “We Build Excitement” but at the end of the day Cervino isn’t in the car or for that matter the entertainment business.   They manage money and are dead set on protecting the downside as much as possible (quite a feat for a manager who can and will be short options).  The estimated final numbers for 2009 are +2.93% for the original 1X program and +5.23% for the 2X program, after similar returns in the landmine plagued 2008.

The secret to Cervino’s consistency is they are an Option Trader, versus Option Seller – meaning they aren’t always at risk of a volatility spike as other option managers are.  This enabled them to not get killed in 2008, but kept them from reaping the big rewards pure sellers did in 2009.  Cervino is definitely the tortoise, and not the hare; but most investors looking at an overpriced stock markets and 0% on savings are hoping that 2010 is another ho-hum year for the Cervino team.  If that’s the case the 2X program should end up at 7% or 8% with about the same level of drawdown.   If we had a criticism about this program it is that 2009 was a little too slow for us and we would like the manager to pick up the pace from a fast walk to a slow jog.  Traders can follow along with the manager’s yearly outlook at: http://cervinocapital.blogspot.com/

Financial Commodity Investments (FCI): performance / performance

FCI was another option trading CTA that had a much better 2009 than 2008.  Perhaps even more impressive is that Mr. Kendall and his team were able to stick to their guns after a very tough year, and right the ship.  Some option sellers decided to take the easy route and close up shop and/or rebrand themselves as a new program after a tough 2008. But FCI’s efforts were rewarded as the OSS program ended 2009 as one of the top performing programs tracked by Attain.   After dropping -23.02% in 2008 the Option Selling Strategy (OSS) program successfully recovered the full drawdown for active clients during the period and posted a composite return of +38.91% in 2009 with an end of month drawdown of only -7.78%.  FCI also began trading their Credit Premium Program (CPP) for client accounts in January which earned +29.04% with a 6.46% max drawdown during the year.

Heading into 2009, the most important item on FCI’s list and the list of nearly every option trading manager was “NOT to repeat 2008” and they did just that.  But they also did it in what can only be considered the perfect option selling environment (volatility steadily declining month after month).

The question for us is how much FCI has learned from 2008’s expanding volatility when we see start to see volatility spikes in markets. That said, FCI has held true to their promise to rework their risk management policies to allow for quicker exits on losing trades and spread the portfolio risk across a wider range of markets. But again, controlling risk is easy when the risk isn’t there. We want to see how they perform when the volatility spike risk returns.

Looking ahead to 2010, we do not think the perfect trading conditions of 2009 for both the OSS and CPP programs will continue, and view the coming year as more likely to be like 2007 (where volatility saw spikes in some markets) than either of the past two years. The good news – FCI managed to make money in 2007, and could be about twice that good even in the face of expanding volatility if they have indeed applied the lessons from volatility spikes in 2007 and 2008.

HB Capital Management, INC. Diversified: performance

HB Capital Management was another new managed futures product at Attain in 2009.  The program, managed by Mr. Howard Bernstein, is a commodity option selling strategy that looks to collect premium by selling naked options in the energies, metals, grains, and softs sectors.   HB Capital was profiled in our November Managed Futures Spotlight. (Click here to read)

Just like the other option selling programs we have profiled,  it was good year to be in Mr. Bernstein’s program at +20.09% and a minimal max drawdown 0f -2.80%.   Because his strategy is so similar to other commodity option sellers who had success in 2009, it is tough to tell if HB was just in the right place at the right time or is that good.  In our opinion it was a combination of both. Market conditions were great for option sellers in 2009 as has been covered above, but it does take some skill to know which markets to focus on and how to manage risk.  The better gauge for the HB program’s ability to manage risk was their positive performance across 10 months in 2008 (something very few option sellers can say)

With some volatility spikes expected in 2010, HB Capital’s ability to control the short option risk as they did in 2008 will be a must. If they can do that, we expect HB to outperform other option sellers who were not able to control risk in 2008.  We expect that HB will have a good year but the ride might be a little bumpier (larger drawdowns) in 2010.

-------------------------------------     Short Term      -------------------------------------

A newer category to Attain and managed futures in general – short term traders are usually in and out of trades in less than two days. Given these abbreviated hold times, these managers aren’t able to be very correlated with traditional managed futures programs who are holding positions 10 to 20 times as long. With longer time frame managers struggling – it is no surprise these managers outperformed on the whole.

Dominion Capital Management, Sapphire Program: performance

New to the Attain Managed Futures recommended manager list in 2009 was Dominion Capital Management.   Dominion is a familiar name in the managed futures industry as it was establish in 1994 and since inception has been concentrated on managing short term futures trading strategies.  Head trader Scott Foster has been trading since 1988 and has devoted his career to short term systematic modeling and trading.   The end result has been good.  With a compound ROR of just over 8% and a drawdown of about 8%, Mr. Foster has developed one of the most consistent short term strategies on the market today, in our opinion.   The returns may not bowl anyone over, but the consistency of those returns may.  For more on how their program works – please read our managed futures spotlight on Dominion (click here to read)

The Sapphire Program saw some volatility early in 2009 during the first quarter but by June the program had returned to its consistent ways and finished the year at +5.12% with a -8.70% drawdown.  With an average hold time of 2 days Dominion was able to avoid much of the whipsaw action and false breakouts which plagued longer term multi market strategies.   The program trades approximately 40 markets and uses both momentum and mean reversion strategies in what Dominion calls a short term trend following trading philosophy.

2010 should be a year of opportunity for Dominion, as markets shed the US Dollar link and start reacting to their own market internals more.  If market volatility picks up as expected the Sapphire program could see larger than normal gains ala 2008.  If trading ranges remain concentrated the program will more than likely produce a repeat performance of this year, which should be just fine with investors.

GT Capital CTA Dynamic Trading: performance

GT Capital was a brand new CTA to Attain in 2009.  However, we have been working with GT Capital CTA’s chief trading advisor, Guerman Teitelbaum, for the past three years in his role as Dighton Capital USA risk manager, trading system developer, and back office manager.  Currently, Guerman still holds these positions at Dighton, in addition to his role as chief trader at GT.

Mr. Teitelbaum’s trading approach is different from many CTAs that we work with.  He trades a hybrid discretionary and systematic model where the trading signals have been computerized, but the decision to take them is discretionary based on the advisor’s fundamental and technical evaluation of the market, as well as his intuitive feel. 

In general the GT strategy is designed to go against the crowd by attempting to capitalize on fear, anticipating trader psychology at market turning points. Simply put, if the market has fallen, the advisor will wait until selling is exhausted and short sellers would likely buy back their positions with new buyers coming into the market. The opposite would hold true for establishing short positions.  The idea is to establish long positions at the point where bulls are taking control from bears and enter short positions when bears are taking control from the bulls.  In a trending market, the program is also designed to take partial profits by exiting portions of positions at pre-determined retracement levels, while leaving the remainder of the position open to take advantage of a continuation in the trend.

Approximately 70% of the trades that comprise the GT Capital track record have been day trades in the e-mini S&P 500. According to Guerman, the best type of market for GT’s type of trading is one with heightened volatility (not to be confused with expanding volatility), a trading environment which he expects to continue in 2010. 

For a rookie manager Mr. Teitelbaum is off to a good start with a 15.38% ROR after only 7 months of client trading.  However, the program has yet to enter significant drawdown, and as any managed futures investor with some experience will tell you – a new max drawdown is always in the future. We’re cautiously optimistic about the GT program heading into 2010, knowing a drawdown will eventually come. How GT handles that bit of adversity will tell us a lot about their long term future.

Sequential Capital Management LLC, Sequential 1: performance

Sequential Capital Management LLC is the most recent short term trader to begin trading Attain client assets.   Developed by a “dream team” of programmers and traders, the program was flat to negative for most of 2009 – showing just how tough an environment it was.  The programs management team includes traders with experience on Wall St., Institutional Forex Trading, an ex – CBOT floor trader, and one team member managed trade execution for a very large managed futures fund. 

Despite all their experience and expertise, even some of the best systematic minds found it tough to make money in 2009.  For the year Sequential finished down -1.14% with a -3.48% drawdown.  The program itself is truly short term in nature with an average hold time of 4 to 5 hours.  However, the program will hold trades over night from time-to-time. Markets traded include commodities, foreign exchange (futures), interest rates, and stock indexes.  Trades can be both with and against the overall market trend.

Like many of the other programs we are profiling we expect Sequential to have a better year in 2010.  The manager’s track record is still fairly short at just over two years but in that short time the managers have proven that they have what it takes to be successful.  Risk management will be the key component in 2010 as expanding volatility should lead to plenty of trading opportunities for Sequential.   Clients who are looking for short term multi market diversification and are willing to stick their neck out a little for a newer program should consider Sequential in 2010.

 

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This group of managers is a catch all of sorts, including everything from systematic emini S&P traders to spread trading Hog futures; and are generally considered non correlated to traditional managed futures programs (multi-market systematic). Like the discretionary space, adding these managers can provide much needed diversification when traditional managed futures programs are struggling – but like the discretionary traders – this relationship was not a given in 2009, with some of these managers also finding 2009 tough sledding indeed.

 

Emil Van Essen Spread Trading – Low Minimum: performance

The Emil Van Essen (EVE) Spread Trading program was a new addition to the Attain CTA stable in 2009, and a welcome one with the best non-option seller performance amongst managed futures programs we track.

Mr. Van Essen and his team focus on buying and selling the same commodity across different contract months, with the goal of the trade to profit when the large funds and long only commodity ETF’s roll their positions each quarter (creating demand in the contract being rolled to, and selling pressure in the contract being rolled from).  This type of strategy is not unique and was made famous by large Wall St. firms and has even been nicknamed the Goldman Roll strategy by traders after Goldman Sachs, but the Emil Van Essen program is the only accessible one to most investors at this point.   For more on the EVE trading strategy please read our Managed Futures Spotlight on the program (click here to read).

In 2009 the EVE low minimum program had another successful year and outperformed most other managed futures products after posting a +19.05% number for the year. The one problem was that the gains all came in the first four months of the year, with the program essentially flat since April. Mr. Van Essen and his team have noted that sharp up trending markets are the least desirable market conditions for this program, and the sharp rallies in most markets since April can be blamed for the flat performance.

With commodity markets unlikely to continue the torrid pace to the upside logged since March 2009, we can expect the Van Essen program to get back to its winning ways soon – but with more volatility in returns than seen last year.  We have witnessed significant intra-month volatility in this program,  and investors should expect 20% to 30% intra-month drawdowns in the future.  

NDX Capital Management: performance / performance / performance

NDX Capital Management completed their 3^rd full year of trading in 2009 moving their track record beyond the emerging manager status and into established program territory.  Subsequently, their assets under management have also grown to a more mature level as well – total assets managed by NDX as of December 31^st 2009 were approximately $70 Million.

Despite their growing assets, 2009 was a difficult year for their flagship programs; Abednego and Shadrach.  The fundamental market conditions that the manager uses to initiate and complete trades were mostly obsolete as the Agriculture commodities traded in lock step with the US Dollar vs actual supply and demand (cash market prices).  For the year Abednego fell -5.03% while Shadrach dropped -9.30% after returning 23.30% and 67.53% respectively in 2008.

In general, investors are typically attracted to the NDX agriculture programs because they offer a level of portfolio diversification (discretionary live hog spread trading) which is usually uncorrelated to any other investment.  Despite the strategies correlation with other managed futures programs in 2009, we don’t expect the same relationship to hold for a second year as the US Dollar/commodity link becomes less pronounced. This should mean a return to the mean for the NDX programs, with gains in the 10% to 20% range.

In addition to Abednego and Shadrach, NDX Capital’s Methuselah program ended the year down approximately -10.6%.  The program was launched in June 2007 and is designed to capitalize on the intraday volatility of the stock index markets.  Beyond the first few months of the year when market volatility began to subside the strategy’s activity level dropped off significantly resulting in limited trading beyond March.  Methuselah is a true long volatility program and will need the market conditions to pick back up in order to reengage the markets. 

Paskewitz Asset Management Contrarian 3X St. Index: performance

Unless you were the contrarian who picked the bottom in stocks on March 9^th, 2009 was not a good year to be a contrarian trader in the stock index markets.  World stocks rallied approximately 60% off their 2008 lows in 2009 and those that tried a counter trend approach of selling into that rally didn’t find much success.  There were repeated streaks of 5 – 10 day winning streaks for US stocks, causing Mr. Paskewitz and his team who focus on short term contrarian stock index trading a tougher year than expected in 2009.

The good news is that despite this environment, the program stayed positive on the year at +2.67% with a drawdown of -5.52%.  The better news is that stocks can’t keep going up 15 out of 20 days month after month (can they?). We expect that stock markets will see some pullbacks in 2010, and any such back and forth market conditions would result in a much improved trading environment for all short term traders including Pasketwitz.  If we see stocks up in about half the months in 2010 and down in the other - investors should expect this program to product numbers closer to historical Compound ROR of +22.94%.  

It should also be noted that with increased volatility comes increased risk; meaning a return to higher returns for Paskewitz could also mean drawdowns for this program higher than the -5.50% posted last year, and more in the -20% range.

Pere Trading Group, LLC Pere Trading Program: performance  

Coming off of a crazy 2008 which saw 100% monthly returns followed by -55% losses the next month, what would the supremely volatile Pere program do for an encore? Would you believe a very normal loss of -3.71%?

After the high flying act of Pere in the previous years, this small loss was unexpected, but in a way it was also welcome, showing that Pere was not trying to force large returns, and taking what the market would give him. There were still large months (+48% in April) and big losers (-18%in Feb), but on the whole the volatility came way down.

Mr. Pere will admit that 2009 was one of the toughest trading years of his career; even tougher than the tumultuous trading conditions of 2008.  The short term strategy used by Mr. Pere will trade both with and against the market trend, although it seems like contrarian trades are more frequent.  Plus, this program is always in the market and therefore has constant risk exposure even during the most volatile market conditions. The early returns in 2009 were almost disastrous as the program sunk into a 60% drawdown (from the equity highs of 2008).  However a late rally by the program in November and December prevented 2009 from being a terrible year.   The program finished 2009 at -3.71% with a -25.50% drawdown for the year, and remains significantly below its all time high set last September.

If it is possible for system to be “streaky” the Pere program is definitely the best example.  There are not any other programs that we know of that have had the significant runs up and down that Mr. Pere has, and for investors who want a high risk, high reward investment – Pere can double your money (or lose half of it) in a very short time. To his credit he has had an even keel throughout the best and worst of times; and is a true systematic trader.