Clarke Capital Management (CCM) has produced consistently solid returns through its numerous trading programs for more than a decade. While trend following programs have struggled at times in recent years, six of the eight programs have a compound annual return of 15% or better and nearly all of his programs produced outstanding returns in 2007.
The Worldwide program, launched in 1996, returned 43.79% in 2007 and has a compound annual return (CAR) of 14.99%; the Alpha program, launched in 2000, returned 41.89% in 2007 and has a CAR of 33.41%; the Global Basic program, launched in 1996, returned 35.53% in 2007 and has a CAR of 28%; Global Magnum, launched in 1997, returned 25.67% in 2007 and has a CAR of 19.07%; the Jupiter program, launched in 2005, returned 28.44% in 2007 and has a CAR of 19.40%.
Michael J. Clarke, president and sole principal of CCM, was a computer programmer in the 1980s who wanted to get into trading, so he struck a deal with a Chicago Board Options Exchange trading firm. He would help them with their technology and they would teach him the trading game. He signed a multiple year contract and agreed to work for free for the first six months.
“I will be your low paid clerk while you teach me the option arbitrage business,” is how Clarke describes it. The firm also would bankroll his trading once he learned the ropes. “I ended up building them a computer system where we took a live feed and did options arbitrage,” Clarke says. Clarke did very well trading options, but when the contract was up he moved over to Shatkin Investments in 1985 and became the first proprietary trader for that firm.
“I was a premium buyer,” Clarke says. “If you are a premium buyer, you can lose most of the time but when you make it, you make it all back plus some.”
When equities crashed in the fall of 1987, Clarke was well positioned — basically being long volatility — but the vast majority of traders at the firm were premium sellers putting the firm on shaky ground. The crash also caused liquidity on the CBOE floor to dry up, and Clarke decided to leave. Well capitalized and on his own, Clarke decided to take his knowledge in another direction. “My background in programming and computer design lent itself to develop futures trading models,” Clarke says. “I built some models and did pretty good. I said, ‘hey these are pretty good, maybe I should turn pro,’ so in 1993 I got a CTA license and incorporated Clarke Capital.”
“Built some models” is a little bit of an understatement. The newest program, Jupiter, uses 69 separate trading models. Each of his programs incorporates a specific number of trading models that Clarke has developed. While Clarke’s overall strategy can generally be defined as trend following, he incorporates counter trend models in many of his programs.
While all of the models that are bundled together in the separate trading programs can stand on their own, Clarke has one added step before a trade signal is generated. He calls it the “fuzzy logic filter” and each model has one.
“The fuzzy logic trend filter examines trends from very short to very long and every point in between for that commodity and sees what has worked in the past and it makes a decision whether to go or not go,” Clarke says. The filter eliminates 80% to 90% of trade signals basically by asking if the setup is ideal. “If it doesn’t find any enhancement for the trade, it does not do it. It has to find some way to say, ‘this is an ideal situation to get in.’”
Key to Clarke’s long-term success is the discipline to stick with proven strategies in difficult times, being able to learn from what the markets are saying and the ability to balance the two. When his systems struggle he overweights his models to more recent market data to “make sure the current environment is more reflected in the model.” “I slightly overweight the current stuff and the past stuff (50-years) is so voluminous that you get a good blend,” he says.
CCM lost money on the sharp equity reversals in February and August but Clarke says that increased equity volatility tends to be good for managed futures. “We saw more sustained trends driven by fundamental imbalances of supply and demand. The ideal situation is gentle sustained moves, enough to get us into a position but not enough to get us stopped out. It is hard to find those kinds of markets, but grains have been that way in 2007.”
Despite his strong track record, Clarke tends to be cautious. While many of the underlying factors that made 2007 such a strong year appear to be in place in 2008, he is not counting his money yet. “It would seem like that, but too many people are thinking that and it is scaring the hell out of me.” Chances are, regardless of the overall environment in 2008, CCM’s programs will make money.
