It took Stanley Haar, president of Haar Capital Management, only two years to receive his undergraduate degree from American University in Washington DC. He was awarded a National Science Foundation Fellowship and traveled throughout Brazil as a Fulbright Scholar researching the International Coffee Agreement. Haar would go on to spend much of his professional career in Brazil learning the intricacies of the agricultural markets that play such an important role in that economy.
He learned the trading business at Continental Grain working on agricultural hedging in Brazil. It is this experience that forms the basis of his discretionary commodity trading advisor (CTA). The program is diversified with the ability to trade more than 25 markets in all the major sectors, but Haar likes to concentrate on the best opportunities, never having more than five positions on at a time, and his trades gravitate towards physical commodities. “Our approach is a little bit different in the sense that the program is discretionary [and] although we will trade any and every market, the focus is skewed towards tangible commodities,” Haar says.
Haar’s strategy has produced an average annual return of more than 100% in four years of proprietary trading. He has cut the leverage in half for his CTA, which began trading in 2005. He uses a margin to equity ratio of only 10%, which is necessarily low because of his position concentration. “I look to make bigger bets by having concentration,” he says, adding that he aggressively added to a long sugar position as the market moved in his direction.
“Having been involved in the commercial side of trading I know what it is like to have a position that is so big that you are the market. If you are a commercial grain house that may be okay because you have the physical side. But as a speculative manager I never want to get to that point,” he says.
He studies fundamentals from a global perspective. “I try and identify an array of possible states of the world, attach probabilities to those, try and estimate what the impact of those different states of the world would be on futures prices and if I see a situation where there is a 50% chance that the price can go down 10% versus a 50% chance it could go up 30%, that is a bet I’ll make all of the time,” Haar says.
Sugar is a perfect example. Four years ago when it was wallowing at 5¢ per lb. Haar saw an opportunity and when the fundamentals lined up, he got long. “Here we are at historically low prices and we are switching from a series of annual surpluses to a small deficit in 2002,” he says. “Clearly in any year there could be adverse weather that can create a deficit on the production side, but behind that I could see these longer secular trends like the move towards ethanol [and] what was going on in the energy markets. Long-term fundamental factors skewed more towards bullish than bearish.”
Turns out all those bullish scenarios occurred. “You had adverse weather in India and Thailand, you had the explosion in crude oil and gasoline prices, which accelerated the move towards ethanol, and you had Europeans dismantling their subsidy system,” Haar says.
While historically low prices are not reason enough to initiate a position, it creates greater opportunity once the fundamentals shift. “Low prices are a relative thing. It increases the odds you are going to make money if you are buying a commodity at an incredibly low price. Last year we made money in coffee. I knew at 50¢ to 60¢ a pound there was no way anyone was going to put a new tree in the ground. It was a matter of time before prices went up.”
Given his position concentration, Haar is aware of the large commodity funds that can whip around less liquid sectors. That is why he thinks it is a particularly good time to be a discretionary manager. “I am very aware of [the long-only funds] and try to sort out exactly what the impact of that is going to be because we have reached unprecedented levels in terms of open interest in corn and wheat. If you add the open interest of Chicago, Kansas City and Minneapolis wheat all together it is now equal to or larger than the projected world carryout of wheat stocks for next year.”
Haar’s size allows him to avoid the big boys by entering the market in back months, but his real advantage is his more than 30 years of expertise studying agricultural markets. “Once the number of people trading similar technical systems become [so] huge, they are not measuring the underlying commodity trend anymore. They are measuring themselves.”
Haar adds, “It creates an advantage for discretionary people who can look through all that and try and see what is going on at the real supply-demand level of the commodity.”
