• 
• 
• 

• Performance
• Services
• Company
• Learn About
• My Attain

System Spotlight: .Interplay, Fusion, Checkmate, Synergy

July 11, 2005

 

With the average YTD return across trend following systems Aberration, Andromeda, Brix, and SEMA4 Symmetry a dismal -17.5% through the end of June, it was hard for me to believe Strategic Trading Systems, Inc. developer Dean Hoffman when he told me his personal trading account hit new equity highs last week.

Many of Attain's clients trading any of the Strategic Trading Systems' suite of systems: Synergy, Checkmate, Fusion, and their newest system - Interplay; have not been as fortunate as Dean so far this year. But I held the actual account statements for Mr. Hoffman's partnership account in my hand, and personally audited the results to find Mr. Hoffman ahead by more than 16% YTD and +40.29% since starting in January 2003.

Just like everyone else, I wanted to know the secret behind the good numbers, and sat down with Dean to find out exactly what he's doing in his own account.

Five Keys to Dean Hoffman's Success:

1. The first secret is he has diversified himself by trading all four of his trend following systems: Synergy, Checkmate, Fusion, and the newest one - Interplay. With both Checkmate and Interplay operating on a quicker time frame, the mix of the four tends to see the portfolio get into trends earlier and out of them earlier, before the dreaded turn around and loss of open trade equity.

2. The second secret, he only trades in the most liquid markets, using his diversified 17 market high liquidity portfolio on all four systems. The 17 market portfolio consists of: 3 Currencies — Japanese Yen, British Pound, European Currency, 3 Softs — Sugar, Coffee, Cotton, 3 Interest Rates - Euro Bund, Ten Year Notes, Two Year Notes; 3 Energies - Crude Oil, Natural Gas, Heating Oil; 2 Metals - London Copper, London Nickel, 2 Grains — Corn, Kansas City Wheat and 1 Stock Index — Nikkei.

3. He overlays a risk filter which limits the exposure to any one market by only allowing two of the four systems to be in the same market at the same time.

4. In the case of two or more of the systems getting simultaneous signals in the same market, he has a distinct pecking order which specifies which of the four systems gets to take the signal and which do not. Dean considers this part of the proprietary logic of the system, and asked us not to disclose the pecking order to the general public. If you own any of the Strategic Trading Systems' systems, please call or email us for the specifics.

5. If trading with less than $150,000 - ignore fixed fractional money management and only trade one contract per market if the risk is less than a preset risk filter - say $2,000. So, using the figures in our example, if a trade was issued by Synergy in the Corn market where the risk on the trade was $750, the investor would trade one contract. If the risk was above the risk filter, say $2,300 - then the trade would be skipped altogether. Mr. Hoffman sets different risk filter levels for each system, and again has asked that we only provide those specifics to owners of the system. Please call or email for the specifics.

Who is the Developer?

As mentioned above, Dean Hoffman is the developer of trend following systems Synergy, checkmate, Fusion, and Interplay. Dean is both the President and founder of Strategic Trading Systems Inc. as well as the President and founder of Hoffman Asset Management, Inc. (a money management firm) He holds a commodity license and is also registered as a Commodity Trading Advisor with the Commodity Futures Trading Commission (CFTC).

In addition to his background in computer science at Penn State University he has over 16 years of experience in the futures industry. He started out as a commodity broker in 1987 and eventually became a top producer with a major Chicago Futures Commission Merchant (FCM). He later went on to form his own commodity brokerage firm at the Chicago Mercantile Exchange.

Dean states "During my years as a broker and later as a brokerage firm owner I gained tremendous experience watching clients trade in many different ways. Unfortunately, most of the approaches did not work and I saw the vast majority of my clients and my firms clients lose money. This was very painful on many levels and I decided there must be a better way. My early experiences motivated me to begin a full blown research project into commodity trading systems."

At this point Dean has invested over a decade researching thousands of trading systems. He started out developing simple single market based systems and then evolved to far more complex portfolio based systems and system combinations. He has tested much of what was available in the public domain "without satisfaction" and then created his own proprietary indicators, methods and software. He also spent many years researching the critical areas of money management, position sizing & trading psychology.

Dean firmly believes that all system developers should align their interests with that of their clients, and he personally trades all of the systems that he offers for sale.

How does it Work?

Each of the four Strategic Trading System systems have unique logic which defines them, but each share the important characteristic that all Strategic Trading Systems Inc.'s systems are non-optimized in that they trade every market with the exact same rules and inputs.

Interplay - The newest system from Dean Hoffman, it has had a very good 2005, managing to stay positive while other trend followers have been underwater. The system aggressively enters shorter term market trends and quickly locks down on profitable trades, and for that reason Interplay provides great diversification for Dean’s other three systems or other trend followers.

Fusion — We highlighted Fusion in our December, 2004 System Spotlight newsletter, and it has done quite well since then — with profits in 5 out of the 7 months so far this year and honors as the top trend following performer this year - at +7% as of July 8th while other trend followers are down double digits. True to its name, Fusion uses a combination of logic from all of the developer’s other systems to scan shorter time frames in search of longer term trends. The system will often exit profitable positions but look to re-enter a continuing trend in the market. Fusion has found success by not being too aggressive in entering positions and has been able to perform in both choppy and trending condition

Synergy - The original system from Dean Hoffman had a bad 2003, a good 2004, and has been the worst performer of the four so far this year. But the system is starting to show signs of life in 2005 with a good July so far. Synergy is an extra long term trend following system that attempts mitigate the initial risk to its trades by pinpointing market entries. The system has a unique profit taking strategy, and as such is expected to perform best when trading multiple contracts. Investors can expect to see winning trades held for extended periods of time (6-18 months) while losing trades are typically exited quickly.

Checkmate - Checkmate made a name for itself in 2003 as it posted gains while most other trend following systems were losing money. Checkmate is a mid-term system that is very selective in its entries and will often aggressively exit profitable trades. It trades considerably less than the other three systems and is the most aggressive in trailing its stops. Checkmate adds diversification to the typical long-term system that gives back open trade profits in search of the home run trades by taking profits off the table.

Attain Comments:

It can be beyond frustrating to see losses on the same system another investor is booking profits with, and that is the scenario facing some of the investors who own Synergy, Checkmate, Fusion, and/or Interplay. Whether they are trading multiple contracts with balances under $100,000, using markets not in Dean Hoffman's 17 market high liquidity portfolio, or only trading a single of the four systems - they may not be doing the exact same thing as developer Dean Hoffman, and that could mean they haven't seen the same kind of success.

This is not to say everyone trading the systems should immediately switch over to the parameters Mr. Hoffman has had in place since November. For one thing, he has taken on more leverage than most are comfortable with, and is willing to have his personal investments see a lot more volatility. In our minds, trading 4 different systems with only $50,000 is extremely aggressive, and only a very few investors could stomach the swings. A single contract backtest using these parameters showed a drawdown of $30,000, meaning you would be pretty close to having to drop one of the systems to free up margin and would have to have a severe look in the mirror as your account could be sitting at a drawdown of -60%.

Having said that, there is no arguing with the results Mr. Hoffman has managed to achieve in the midst of a historically tough time for trend following systems and CTAs. Commodity Trading Advisors who use trend following to manage hundreds of millions of dollars are seeing some of their worst returns ever in 2005, which makes the gains across the Synergy, Checkmate, Fusion, and Interplay portfolio that much more impressive.

And while Mr. Hoffman has certainly done better than most trading his systems because of the parameters he uses, the second and third tables below showing the average performance of all clients trading Interplay and Fusion (regardless of settings) reveal that the majority of the gains are due to the systems themselves.

The gains for Mr. Hoffman do depend one way or another on his specific parameters and risk filters, however, and in our opinion every one trading on of his systems should implement at least some of these parameters to achieve better risk adjusted returns moving forward.

- Walter Gallwas