For Paul Kim, president and managing member of Chicago-based LaSalle Asset Management, it’s all about making the ideal trade. “It’s about seeing something early, calculating the risk, having the discipline to wait until the right time to execute the trade and then being disciplined enough to exit the trade. That is more important than the dollar amount. [Profit] is very important, it’s a nice reward, but making the ideal trade is what drives me,” he says.
Kim focuses on the trade and figures the returns will follow. Judging from his track record, four years of positive returns,
it seems to work well. The LaSalle Futures Fund II LP has been trading since October 2004 and has a year-to-date performance of 9.16% as of June with about $50 million under management.
Within the fund he trades corn, soybeans, wheat, rice, oats, soybean meal and oil. “We look at the relationship between nearby cash markets vs. futures prices; we look at deferred spreads, like old crop vs. new crop and spreads in [back] months, and those with delivery months a year or sometimes two years away. We look at intercommodity spreads: wheat vs. corn; corn vs. soybeans; Chicago Board of Trade (CBOT) wheat vs. the Kansas City Board of Trade and the Minneapolis Grain Exchange [wheat contracts]. We look at how prices compare basis relative supply/ demand scenarios,” he says.
Kim, who has an economics degree from Northwestern University, worked for Cargill for seven years trading cash grains and spent nine years on the CBOT floor as a local. He’s been off the trading floor for eight years now, but still has a partner on the floor executing trades. He says understanding the floor is part of what makes LaSalle unique. “We know how [the floor] thinks and how it operates and what it can and cannot do,” Kim says.
Kim uses fundamentals for trading ideas and technical analysis for position management. “Essentially we are fundamental traders. Understanding the fundamentals gives you an opportunity to anticipate what the market is going to do, so you can plan for your trades better. The markets are extremely efficient and the fundamentals work,” Kim says. “We’re also technical because being on the floor forces you be technical because market timing is such a premium on the floor.”
Kim looks for markets that are out of line with the fundamentals. He assesses market composition including knowing where the large funds are positioned. Then he assesses the best way to execute the opportunity, whether it’s via spreads or a directional trade, through the use of options or all three. LaSalle trades options primarily for directional bias. LaSalle holds its spread positions long-term, 30 to 120 days; and its directional trades for a shorter period, three to 21 days.
Kim admits focusing on grains spreads limits trading opportunities, but says LaSalle has an exceptional edge versus others in this arena and can translate that edge to produce better returns for its investors. They are also developing the Vanquish Fund that will trade the full range of commodities and should launch in late 2006 or early 2007.
The program is discretionary and while Kim says his underlying principles have not changed, there have been changes in the way LaSalle trades in the last two years.
“We give the markets a lot more room to move directionally and lot more respect when we fade markets and we watch other commodities like crude, metals and some softs. This is all because the new influx of investment money flowing into commodities in general. But we constantly monitor how the investment environment is changing and in turn, change our style/execution accordingly.”
Kim says he and his partner continued to trade on the floor prior to 2003 and didn’t dedicate all of their time to their strategy. “We were so involved in our own personal trading that we didn’t monitor our positions well. In 2003 we started taking it more seriously,” Kim says. Seems to have worked, as LaSalle returned 2.33% in 2002, but rocketed to 39.52% in 2003 and 25.31% in 2004.
LaSalle had what Kim describes as its worst trade in 2005, which had a final return of only 1.28%. The trade was a large rice position that they eventually saw a small profit on, but it limited their ability to make other trades and the position was too large for such a thin market. “We believed in the position, but we weren’t sure we could manage it well because we were too large a part of the open interest.”
He entered his best trade in the summer of 2004 and held it through the fall. It made 22.5% selling the Sept/Nov soybean old crop/new crop spread at $1 premium and buying it back even. “We sold the top and very nearly bought the bottom and never experienced any losses. It was the perfect trade.
“We love the markets, the dynamics and the participants. It’s not the money that drives us,” he says, pausing, “although it is a nice by product.”
