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2005 Year in Review: Attain recommended CTAs

January 23, 2006

 

Regular newsletter readers saw the annual system by system review a few weeks ago detailing what did and didn't work in the trading system world in 2005; and this week's newsletter shifts gears to look at what kind of 2005 the handful of professional Commodity Trading Advisors (CTAs) Attain recommends had.

For a quick refresher, professional Commodity Trading Advisors are like the NFL or FIFA of traders, the professionals where the best of the best manage accounts for individuals, pension funds, and endowments. Unlike trading system developers who develop their system and sell it for a monthly lease fee or one time purchase price - CTAs charge an annual management fee (usually 2%) and take a portion of profits like hedge funds do (usually 20%).

The growth in CTA assets has been tremendous over the past four years - with the Barclay group reporting assets under management with CTAs rising from $51 Billion in 2002 to $131 Billion as of the 3rd Quarter of 2005. This growth reflects the decision of large pension funds such as CALPERS and big endowments finally catching up to sophisticated individual investors and mandating a certain percentage of their assets be devoted to alternative investments with commodity exposure.

Attain recommends several CTA programs, all of which are systematic and mechanical in line with our philosophy that a systematic approach leads to better long term performance. The minimum investment amounts may seem daunting at first, coming in between $1 Million and $10 Million - but several of these CTAs have privately offered funds with minimums as low as $75,000 that are available to clients of Attain and others. Please call us at 800.11.1145 or email invest@attaincapital.com for more information.

A brief review of some of the CTA programs Attain recommends and places clients with is listed below:

 

Chesapeake Capital
Program:	Diversified
Returns	2005: -0.70%	Avg Ann. ROR: +16.90%
Minimum:	$10,000,000
AUM:	$1.7 Billion
Website:	none

Chesapeake Capital is considered one of the good old boys when it comes to systematic long term trend following. The strategy boasts of an 18 year track record with an average annualized rate of return of 16.89%, over 1.7 BILLION dollars under management, and diversified asset investors ranging from high net worth individuals to large pension funds and the S&P Commodity Index. Beyond the above details Chesapeake can be diversified into as many as 90 world markets.

Despite their track record, Chesapeake saw below average returns along with most other trend following CTA’s. In 2005 Chesapeake ended down -0.7% after solid gains in November and December pulled them back toward break even for the year. Generally speaking Chesapeake’s goal is to protect downside volatility while providing investors with an investment vehicle that is non –correlated to traditional investment approaches. In recent years the programs swelling assets under management have forced the managers to continue to research and include additional markets to ensure the opportunity for continued absolute returns moving forward.

 

Clarke Capital Management
Program:	Millennium
Returns	2005: -10.60%	Avg Ann. ROR: +21.40%
Minimum:	$1,000,000
AUM:	$158.6 Million
Website:	None

You don't need to look much further than Clarke Capital Management's (CCM) Millennium program to see just how tough a year it was in 2005 for technical based, systematic CTAs. CCM's Millennium program came into the year with 7 straight profitable years and an average annual return of about 26%; but struggled to a loss of -10.6% in 2005 as it couldn't overcome a difficult start to the year and -11% September.

The problems for CCM mirrored those at many other CTAs, and that was a lack of trends in global markets outside of the metals and foreign stock indices which have traditionally been non-trending markets. Most older CTAs are widely diversified into the agricultural, interest rate, and currency markets; and those markets were range bound throughout the year, making it difficult to sustain any momentum to the upside for CTAs like CCM tracking those sectors.

We fully expect the Chicago-area based CCM to bounce back in 2006 and see returns closer to the 20% average over the 1998-2004 period. For those looking for a "CTA on sale", so to speak, investing with Clarke in the midst of a drawdown after an abnormal down year represents a good chance to get in on a low spot on the equity curve.

 

Dekker Capital Management
Program:	Global Diversified Futures - 3X
Returns	2005: +25.80%	Avg Ann. ROR: +39.40%
Minimum:	$1,500,000 ($250,000 Fund)
AUM:	$14.8 Million
Website:	www.dekkercapital.com

In a year when most trend following CTA’s generated flat returns Dekker Capital’s Global Diversified Futures strategy proved that the glory days of double digit returns are still possible. In 2005 their 3x strategy returned +25.9% with a maximum drawdown of only 11.28%. After 15 months of trading (inception in September 2004) the strategy is returning an impressive +39.44% average annual return.

Dekker’s managers boast of their fully systematic trading approach and superior trend filters as a key to their success and low correlation to the typical trend following CTA. While typical trend followers will identify a trend and subsequently enter in line with the trend until it is exhausted or stopped out Dekker boasts of its momentum style of trading which ensures limited exposure to non trending markets coupled with more aggressive positions in the most active trends. As an example we can all attest to the strength of the equity markets during the 4th quarter – Dekker had 25% of its exposure in the stock index sector to close out 2005. By investing in the most active trends of the year (Metals, Energy, Cotton, Sugar, and Foreign Equities) Dekker was able to one up the competition and appears to be one of the elite emerging CTA’s in the industry.

 

Meyer Capital Management
Program:	Meyer Capital Management
Returns	2005: +0.17%	Avg Ann. ROR: +20.80%
Minimum	$3,000,000 ($75,000 fund)
AUM:	$180.0 Million
Website:	www.meyercapmgt.com

The Meyer Capital Management program struggled to its 7th straight year of profitability in 2005. How do you struggle to profitability? Well, the program needed 4th quarter returns of nearly 25% to post gains of just 0.17% for 2005 - continuing its impressive streak of 7 year since inception without a losing year, but falling short of its average annual return of just over 20%.

The struggles at MCM were very similar to those elsewhere, as a tough environment persisted for trend following CTAs, and especially those with more relative exposure to grains and softs markets. The profits to be made in 2005 were in the metals and foreign stock markets (mainly the Nikkei), and while MCM did have exposure to those sectors and benefited from them - their risk controls keeping total sector exposure under certain limits kept them from posting higher gains. MCM did add some new markets over a year ago, most notably in the base metals - and that decision paid off in 2005.

MCM asks somewhat rhetorically in their annual review email whether it is a new era for CTAs as billions of dollars have flowed into passive commodity index investments and actively managed commodity programs, and is actively researching whether market conditions are merely in a phase or have in fact fundamentally changed because of the tremendous amount of assets pouring into this sector. If they find it is the latter, we expect to see a more dynamic approach from MCM that capitalizes on the new paradigm.

Whether MCM adjusts their program slightly or not - they remain among the best of the best for technical based CTAs - and remain our top recommended CTA program.

 

Nu Wave Investment Corp.
Program:	Combined Futures Portfolio - 1X, 2X
Returns	2005: (2X) +16.27%	Avg Ann. ROR: (2X) +20.08%
Minimum	$2,500,000 // $250,000 fund (2X)
AUM:	$93.2 Million
Website:	www.nuwavecorp.com

With 2005 being a difficult year for many CTAs, any CTAs seeing significant gains were definitely doing something different and deserve our attention. Nu Wave Investment Corp. proved that it is indeed doing something a little bit different than the rest of the CTA universe, as it brushed aside the losses and struggles many other trend following CTAs were having to post impressive gains of 8.73% in its 1X program and 16.27% in its 2X program (the 4th straight year of double digit gains in that program).

The different approach Nu Wave uses in its Combined Futures Portfolio comes from its diversification among models, not just markets. The program tracks over 35 markets, but runs three different sub programs on those markets. These subprograms do not rely on traditional "trend following" methods to profit, instead using models with as short as a 9 day holding period. In addition, Nu Wave has over 60% of its exposure in financial futures such as interest rate, currency, and stock indices; allowing it's shorter term models to benefit form the extremely liquid trading conditions in those markets.

With NuWave having just completed a fourth full year in its track record and moving its assets under management above $50 Million, it will now be on the radar of bigger pension funds and endowments which could quickly double or triple its assets under management and close the door to smaller investors. Now is the time to get involved with NuWave, before their minimums get to $10 Million to $25 Million.

 

Zenith Resources Inc.
Program:	Index Options
Returns	2005: +14.40%	Avg Ann. ROR: +25.10%
Minimum	$50,000
AUM:	$21.8 Million
Website:	www.zenith-resources.com

If we had to characterize Zenith’s trading it would be deemed Mr. Consistency! Zenith Index Options strategy topped off 2005 with a gain of +2.08% in December to finish the year +14.36% ($50,000 minimum investment). Miraculously their strategy did not have one losing month during the year and has only had 2 losing months in the past 3 years.

That’s right only 2 losing months in 3 years…How is that possible? Well - that is what an option selling strategy is supposed to do, just take in premium month after month to build a nice steady stream of income. The problem with option selling, of course, is that one trade out of one hundred can wipe away all the gains. The trick for professional option sellers is avoiding the volatility spikes and theoretical unlimited risk of selling options.

Zenith uses several money management rules and parameters to mitigate the naked option risk as much as possible, only selling options with a 2% chance of going "in the money", and often hedging by buying other options or spreads to protect against a big move in one direction or the other.

The results are hard to argue with, even if an option selling program's risk worries you. Zenith commenced trading for investor accounts in 1999 and is averaging +25.14% per year with a maximum drawdown of just –3.12%. And the ability to get involved with a professional CTA for as little as $50,000 is appealing as well - with most advisors with track records over 5 years and assets managed in the tens of millions requiring initial investments in the millions.

Many investors have flocked to the ACE Investment program over the past two years, as that option selling CTA has done pretty good itself. But with that manager's assets ballooning from less than $1 Million just three years ago to over $90 MM and performance declining every year since inception, Zenith looks like a better choice, with a longer and more consistent track record and more room to grow to the upside. There is also the added bonus of lower commissions, a 0% management fee, and no up front sales fee as many investors pay with ACE.