Normally when researching managers for the Top Traders issue, a worst drawdown of 85% would automatically eliminate a manager. But when a program comes back from that type of drawdown to earn a compound annual return of 48.45% throughout a three-year period it raises our curiosity. John Di Tomasso was featured in 1995 as a top trader. His money under management (MUM) today is where it was then, approximately $5 million. He was coming off of back-to-back 50% plus years, which would allow his MUM to grow to $100 million, but the program then dropped more than 60% in 1998 and 2001.
Despite the near fatal drawdowns, Di Tomasso characterizes the changes to his Equilibrium Trading program as minor. “We have learned a little bit having been beat up twice. We now have slightly less leverage and we are not as quick to roll our contracts,” Di Tomasso says. “We found that in our worst years we were too keen to remain in a position fully.”
He describes his strategy as value investing. “It is systematic but it is not trend following. One of the few CTAs who are, like Warren Buffett, value investing; We buy low and when something gets to its historical normal price we sell it and try and find something else.”
Di Tomasso looks for undervalued commodities and holds them long term. He will take a short position but only with options. “We own put options on the energies because, by historical standards, [they’re] way too high.”
To some extent Di Tomasso’s resurgence — 20.16% in 2002, 38.02% in 2003, 58.75% in 2004 and 49.29% in 2005 — has been the result of the current bull commodity market, but he will take short positions if he thinks a commodity is overpriced. “We had no energies in 2005 because at the beginning of the year we said energies are overpriced,” Di Tomasso says. The Canadian based CTA profited on rallies in zinc, soy meal, sugar, aluminum and late in the year gold and silver.
Early in the year the program benefited from long grain positions and locked in profits. “In June the grains became so expensive that we eliminated most of the positions before they crashed,” Di Tomasso says. His fortunate exit from grains was not due to a more conservative approach but due to his value investing philosophy. He will hold a position as long as he sees value. “We are in no big rush. We are not traders. We are solid long-term value investors. Our average holding period for a commodity [is about] three years.”
Di Tomasso believes changes to the program while relatively small will prevent the huge drawdowns it has seen in the past. “Any market that goes down a lot will take us with it, but I can’t see under the way we manage money now [with] the more conservative leverage and more conservative tactics, [that] we would go down close to what we did in the past.” Not that this program can be considered conservative; “If anybody wants T-bill rate of return they should go talk to someone else,” Di Tomasso says. The program is based on reversion to the mean, which means that even when it is right, if the timing is off it will get hurt.
“We have not made any incorrect judgments as to what we should own; the hard part is getting the timing right. If you wanted to buy crude oil at $15 and you said ‘man this is so cheap I am going to buy it,’ guess what, it went to $11. You got killed down to $11, now if you threw in the towel at $11, you missed the $11 to $35 run. At $35 we were out. We said that is were it belongs but it went to $70 so we missed from $35 to $70 but from $70 on down we have been correct and we think it should go down a lot more,” he says.
Many analysts may challenge his thinking but Di Tomasso points out, “Every time [analysts] predict a new paradigm, turns out it doesn’t happen. My analysis goes back to 1920 and I look at all of the commodities that are available out there and in that 80-odd- year period, in all of those various commodities, there has not been one single paradigm shift.”
After years of being ignored due to the large drawdown, Di Tomasso is seeing renewed interest in his Equilibrium program. “Recently we have been hired to manage commodity pools and by the end of the year assets under management will be remarkably high,” Di Tomasso says.
Di Tomasso seems to have his timing right and may be in the sweet spot of his value program as many commodities look to be undervalued. “I am going to just buy value and let all the rest of it takes care of itself. Right now we are buying grains, we love grains. Why? Because they are extremely cheap.”
