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2006 CTA Annual Reviews

January 29, 2007

 

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

 

ACE Investment Strategists: performance / website

While the 2006 return for Ace’s SIPC program was 11.7% as compared to the S & P’s 13%, an investment with Ace over the past 5 years has shown a 57% average annualized rate of return - outpacing the S & P 500 hands down! The good news is it looks like the volatility in the US stock market is starting to return, as witnessed by a higher return so far for Ace in January of this year. If volatility can continue to rise, ACE could see the performance levels of several years ago when Ace achieved 30-60% annual returns. Most of the profits in 2006 occurred as volatility returned in the last 1/3 of the year, and returns should be higher if that volatility remains. As an example, their estimated return for Jan 07 is 3.6%, which would be an annual return over 40%. Their newer aggressive program, which started in late 2005, showed 18.4% in 2006 and is estimated at 4.8% for Jan, 2007. Ace has also surprised us with yet another new program, their Limited Risk stock index credit spread method which is off to a great start.

Argus Capital Management: performance / website

The Argus program burst onto the scene in 2006, with gains of 50% in 2005 followed up by YTD gains of +47% through the end of August of last year. Such heady performance led to Argus seeing its assets under management increase nearly ten fold - but then the program hit some hard times, losing money in the next three months before rebounding slightly in December. When all was said and done, Argus finished the year up a very respectable 13.5%, but posted a new Max DD about twice its historical one in the midst of that three month losing streak.

October & November saw the exact scenario Argus does poorly in (a rise in US stocks), but per the logic of many investors when getting started with Argus - that's ok because they should be making money in their normal buy and hold stock investments. In general, Argus will do well when US stocks are down, and do poorly when US stocks consistently rally week after week. The type of rally we saw in October and November hadn't been seen in sever years, and it could be several more years before we see it again. We expect Argus climb its way back to new equity highs again in 2007, and it can be a good fit for those looking for a little more of a hedge against a falling stock market than some of the other option selling CTAs provide.

Attain Portfolio Advisors (Standard Program): performance / website

2006 was the best year since inception for Attain Portfolio Advisors (APA), with a gain of +12.6% for the year. Once again, the program generated its best returns in the fourth quarter with gains of 7.30%. The increased performance can be attributed to several factors including improved commodity and treasury market trends as well as the introduction of our Rotational Day Trading Model. This model capitalizes on the best performing day trading strategies by rotating in and out of systems based on short term risk adjusted performance. Other notable non-traditional models include volatility based swing trading strategies which trade both the US and Asian stock markets. Attain's strategy uses many of the same systems available to the public, but with added risk filters and proprietary contract sizing.

If the Attain program's 12% return in 2006 doesn't impress - those looking for a little higher return can leverage the program 4 to 1 by trading the $1 Million program with just $250,000. Given the fact that the Attain program uses just around 12% of equity for margin purposes, actual cash on hand need only be between $100,000 and $250,000. The returns for 2006 would have been +50.4% with such leverage, with a Max DD of about 33% in 2005.

Cervino Capital Management: performance / website

Cervino is another relatively new CTA to Attain - but impressed us by finishing the year ahead 10.3% with ZERO losing months. This was right in line with their target returns of 10-15% with very low risk. With just one year of live trading under their belt some investors may be looking for a bit more time and money under management before jumping on board. We would typically agree; however after extensive due diligence into their strategy, conversations with their owners and traders we are very comfortable listing them on our recommended list and look forward to participating in their trading moving forward.

The main key to their success has been in their market diversification and more importantly their strategy diversification. Their belief is that opportunity and risk exposure is further diversified through the use of different types of complex option positions such as strangles, credit and debit spreads, ratio spreads, calendar spreads, as well as naked options. The variety of positions contributes to the creation of multifaceted and versatile strategies tailored to market conditions and trading outlook. One note for sophisticated investors – Cervino has a very low margin use and may accept up to 2x leveraged accounts for qualified investors.

Crescent Bay Capital Management: performance / website

2006 marked the first complete year of trading for Crescent Bay, and the results were very impressive - posting returns of 23.37%. Crescent Bay is one of the newer CTA programs to Attain - but fills an important niche in our list of recommended CTAs, in that the minimum account size for them is just $10,000, contrasted with minimums of $50,000+ for all other CTAs we recommend. This certainly opens up the door for investors with less then $50,000 to invest to get their feet wet and gain experience with managed futures.

How can they have a minimum so low? They use emini S&P options instead of the full size contract, thus can be at 1/5 the level of the others. So if you are looking to get started with a CTA but only have $10,000 in risk capital you're looking to invest, we see this as an excellent opportunity for you.

Diamond Capital Management: performance / website

After a year with just 2 losing months, totaling less than 1%, Diamond Capital finished off December up 2.15% and 2006 up 10.09%. December represented their strongest month of the year, and was actually the biggest one month return since Jan 2004, representing the uptick in volatility and how much that can help option selling CTAs like Diamond. Their objective is to produce consistent positive returns with a maximum monthly drawdown of less than 5 percent not to exceed 10 percent during any given period. Judging by their returns, which show an all time Max DD of just 3.17% which happened 4 years ago this month, there is a lot to like on the risk side about Diamond.

With one of the longest track records among the option selling CTAs on this list, including trading through the 9/11 tragedy and market spike which followed - we recommend taking a long look at Diamond if you're after very consistent returns with low drawdowns. The program is very similar to the successful Zenith program which closed to new investors, and can be leveraged 2 to 1 to increase returns (and risk).

Dighton Capital USA: performance / website

Dighton,who had previously worked with European investors only, made a big splash in 2006 by opening up a program to US investors. The results were impressive - with gains of over 37% in the last six months of the year when Dighton the CTA began managing US accounts in earnest.

The results prior to that were mainly for the personal trading and accounts managed by head trader Alex Mosieyev. Unlike the rest of Attain's recommended CTAs, Dighton relies 100% on Alex's trading - making Dighton more of a discretionary trading approach than systematic. But having said that, Mr. Mosieyev does employ several different technical models and system to generate his views on the market - and uses a trading approach where he buys into oversold markets and sells into overbought markets. But once a level is triggered, he does not put on the entire position at once, instead legging into the full position of several contracts in order to bring the average price to a more beneficial level.

Dighton is not for the faint of heart, and its aggressive style will likely mean big returns and some bigger drawdowns in the future. But there is a place for non option selling exposure to commodity markets, as well as a place for a discretionary trader of Mr. Mosieyev's talents if you can handle the volatility.

Financial Commodity Investments: performance / website

One of the least aptly named CTAs, FCI (as they're known) actually trades more traditional commodities like Corn, Coffee, and Crude Oil, than most of the managers on this list - so the title Financial Commodity Investments is a a bit of a misnomer as they do much more than just financial commodities like Bonds and Currencies. 2006 was a stellar year for FCI, with gains of 58.5% for the year behind three separate months with gains greater than 7% - and just two losing months, which were both under -2%.

The FCI program sells options on any market which is showing high volatility and a favorable risk/return profile. This is a very strong approach, when contrasted to other CTAs who sell options on the S&P 500 only. Stock index option sellers live in constant fear of an October 1987 type sell off - which would mean big losses - but FCI actually looks for such moves in other markets - then sells that high volatility. So instead of taking whatever volatility one market will give, and fearing a spike - they take the volatility they want from any market, hopefully after the spike has already happened. This is a very unique approach, and one that has provided steady gains not only last year, but for the last 2.5 years. We expect m,ore good things out of FCI.

Meyer Capital Management: performance / website

The MCM program was unfortunately on the losing end of the ledger in 2006 as traditional trend following strategies like MCM's struggled for the second consecutive year. MCM was amongst the top rated CTAs in the country at the end of 2003 after a 5th straight profitable year - and in meeting with the manager James Meyer - they fully expect to get back to that prominent level. Along those lines, MCM is not sitting on their hands waiting for traditional trend following to rebound, and instead have beefed up their research department in looking for opportunities to extract returns from directional commodity moves. MCM is well overdue for a bounce to the upside, and 2007 may be the year.

NDX Capital Management: performance1 / performance 2 / website

As mentioned in our intro - NDX's Shadrach program was the top performing CTA at Attain in 2006, earning an incredible 138% on a non-compounded basis. NDX's more conservative program, Abednego, was no slouch either - posting gains of 37%. Both of the NDX programs are doing something completely different than all of the other CTAs in this review. They are doing spreads in the Hog futures. The spreads are a delta neutral strategy (meaning they don't care which way the market moves) which rely on the prices of Hog futures in different months either coming together or moving further apart as time expires. This fundamentally different approach can be a real diversifier for accounts which rely on volatility or the lack there of in stock index markets - and for that reason NDX is even more attractive than its returns make it. And the returns make it pretty darn attractive.

The big news out of NDX so far in 2007 is that they will be raising their minimum account size from $50,000 to $100,000 for new clients as of February 1st (just three days away). This often happens with successful advisors, as it is easier to manage 20 clients making up $10 Million versus 200 clients making up $10 Million. If you are interested in either NDX-Shadrach or NDX-Abednego at the $50,000 minimum level - contact us as soon as possible at 800.311.1145.

Phoenix Energy: performance / website

The Phoenix Energy program had a mixed year - impressing with solid returns through the first seven months of the year(+14%), but struggling in August and September (down 14%) during the energy market's historic sell off. (Crude lost over 22%, and Natural Gas lost over 41% in the two month period). While those losses were unfortunate, it bodes well that the program bounced back in the 4th quarter (+7%) and finished with gains for the year.

The Aug/Sep losses brought the Phoenix risk controls and filters under review - and we believe the subsequent adaptive seasonally filter we've implemented and procedure of delaying entries on inventory report days will prohibit such losses in the future. In fact, the program would have been down just 1%, versus a loss of -14% in those two months if the filters we're now using were in place. Looking ahead to 2007, we believe energy market volatility is here to stay, and remain confident in the Phoenix program's ability to extract returns not correlated with other investments thanks to that volatility.

Potential Unlimited: performance / website

While this CTA is new to Attain, they are not new to the futures markets. Their diversified, multi-market portfolio is traded by a team of individuals dedicated to their proprietary "PUL" method. This advisor has been developing the "PUL" method since 1999 with proprietary funds and began managing assets in August, 2005. While in 2005, their starting year, the method struggled in an abbreviated trading year, they redeemed themselves in 2006 with a 38.5% return! With dedication to the market and the clients they are managing, they vow to continue what they started in 1999 and have full confidence that their first full year returns are more in line with what they are capable of. This is an advisor we are watching closely because of their dedication, solid methodology and most of all, their well diversified (non option selling) portfolio.

World Capital: performance / website

World Capital is another of the option selling CTAs, but uses Iron Condors (short call and put spreads simultaneously) instead of naked options. This approach allows World Capital to put on a few more options than those advisors doing naked short sales, and because of that World has averaged better returns than the others. 2006 was no different, with a gain of +26.2% for the year. Kudos to them! This is quite an enviable return and right in the 20-25% consistent range that World Capital looks for and has achieved each year in their 3 year track record for this trading program.

With a defined risk on each trade (the difference between strikes in their spreads), the World Capital program is an easy and logical choice for most investment portfolios. Not having the naked option exposure also allows investors to sleep a little easier at night! World Capital should benefit right alongside other option selling CTAs with market volatility stepping up a bit in 2007, and continue to post solid returns absent any October 1987 type market crash.

Zenith Resources: performance1 / performance 2 / website

Zenith Resources closed to new investors towards the end of 2006, and while we were sad to see them go, we are happy that so many of our clients managed to invest before the cutoff. A CTA with double digit returns and very low drawdowns inevitably attracts the attention of large commercial interests, and we respect owner Ed Padon for shutting down to new investors in order to protect the integrity of his trading. Zenith Diversified finished out 2006 up 20% and since it’s inception in Feb. 2005 still has not had a losing month. Zenith Index Option Program finished 2006 up 12.8% and has not had a losing month since Sept. of 2003. With record low volatility in the index options in 2006, performance has been somewhat below average for most index option selling CTA’s. But a rise in the VIX should rectify that and bring performance back to it’s previous robust levels.

Zephyr Asset Management: performance1 / performance 2 / website

Of all the recommended S&P option selling CTA’s in our database, Zephyr really impressed in 2006 with their ability to successfully generate returns above those other naked option seller were able to generate during the lowest volatility period in recent history. After closing the year out with 5 consecutive winning months, Zephyr's Aggressive program has now had just four losing months out of the last 42. That's 9 out of 10 months profitable, which is hard to argue with!

In our opinion, the key to Zephyr’s success is his constant adaptation to changing market conditions and trends. While most option sellers position themselves in one direction (calls or puts) or are market neutral, Zephyr will actively rebalance their positions into calls or puts depending on the market trends and volatility. Zephyr Aggressive finished the year up 17.1% while the Moderate program finished up 13.0%. These numbers are below their average; however above the returns of other option sellers as noted above. In talking to the managers, they are comfortable with how the returns were achieved and more important how risk was managed during the 2 down months for the year (May and July). Zephyr remains one of our top recommendations for consistent risk adjusted returns and deserves a long look.

 

Looking for a CTA review that wasn't included on this list. We researched and tested numerous CTAs in 2006, and would be happy to share our thoughts on any CTA you are considering. Call us at (800)311-1145 or email invest@attaincapital.com for a review of any CTA not listed above - or for more detailed information about the above CTAs.