Keith Ganzer, chief investment officer at Claughton Capital, says his Auto-Reactive Positioning (ARP) strategy provides managed futures portfolio managers positive returns when they need it most: during non-trending periods when trend followers tend to get chopped up.
Claughton’s lack of correlation with traditional trend followers, and negative correlation with them in non-trending markets, makes the fully systematic ARP strategy successful.
“Trend followers differentiate themselves as short-term or long-term trend followers, or by market or sector allocations. We differ from most other trend followers in how we handle the consolidation or nontrending periods,” says Eric Schreiber, president of Claughton.
“We dynamically expand and contract our range using previous price pattern scenarios that have proven to be successful,” Schreiber says. “Sometimes we profit from trades within that range during nontrending periods.”
Most trend followers have to give back profits before reversing their position or wait on the sidelines for a breakout in a moving average. Schreiber says, ARP’s ability to trade within the range reduces drawdowns.
Schreiber, who’s been trading futures for 13 years, started his career trading German Bunds on the International Financial Futures and Options Exchange (Liffe) in 1993. Ganzer and Schreiber founded Claughton in New York in 2003.
Ganzer, who’s been in the futures and commodities industry for 19 years, explains that essentially every trend follower defines some kind of range, in which they will go long once the market breaks through the top of that range or go short when the market breaks through the bottom of the range. “With the ARP strategy our signals to trade don’t rely on breaking out of that range, we trade within that range. If a market is going up, we would have gotten long much quicker because we would have gotten long within the range,” Ganzer says.
Most trend followers would not have acted, Ganzer points out, they’d still be short or waiting on a breakout signal. ARP’s ability to catch trends earlier gives it greater profit potential as well as making it negatively correlated to the majority of trend followers.
Ganzer first started working on the ARP strategy in 1991 when he conducted research on trading programs using a top down approach. Through his research he found there’s really only two ways to improve upon a trend following strategy: “You have to better manage what happens during nontrending periods, and you have to have better trend determination,” Ganzer says.
“One of the key research questions was ‘how can I better determine trending periods and then trade tactically within the range so as to improve performance?’” Ganzer says. “But my research showed it was more significant, in terms of its effect on performance, to manage the trading within the range versus trend determination. In other words, no matter what gets you in the trend, what really makes you the profit is the fact that you’re in the trend,” he says.
The ARP strategy was initially the main algorithm for Brookville Investments, a firm owned by Ganzer, which traded client funds from August 1993 to July 2000. Claughton took the same ARP method that was successfully used by Brookville Investments and added a “liquidity filter” in its market selection process to improve the results.
Ganzer and Schreiber’s additional research on ARP found a positive correlation between market liquidity and ARP’s performance, so they decided to trade a diversified set of highly liquid markets, which include currencies, energies, U.S. interest rates, equities and agricultural markets.
Allocations to each sector are selected on an equal risk adjusted basis. Claughton began trading the revamped ARP program in January of 2004 and has about $2.5 million under management as of May 2006. The strategy has earned 15.14% year-to-date through April. It returned 9.13% in 2005, a difficult year for trend followers.
“We look at each market individually and what affects our performance is how an individual market is trending,” says Schreiber.
Ganzer says Claughton is profiting from recent megatrends in crude oil and gold. “New highs and new lows tend to continue for a while and any kind of trend following strategy is going to profit right now, but we typically get in before other trend followers and we typically get out a lot quicker at the reversal,” Ganzer says.
