When Jay Feuerstein, chief investment officer of 2100 Xenon Group, was working on his MBA from the University of Chicago, he took a couple of courses in “Decision Theory,” which sparked in him a passion for trading. “It has always been my dream and my passion [since] to try and understand markets and learn from markets and attempt to profit from markets,” Feuerstein says.
He was fortunate to be at the U of C at an important time. “Some great minds were teaching and discovering many interesting things that impacted markets. Guys like [Merton] Miller and [George] Stigler and [Gary] Becker. It was a great time to be there.”
When he graduated in 1980, he got a job with Conti Commodity Services and over the next 15 years built businesses related to trading for Paine Webber, Kidder Peabody, Lehman Brothers and Drexel Burnham Lambert, but his passion was to build programs and trade. “I always had ideas, I always structured trades.”
In 1997, he took a position at Bear Stearns, where he was allowed to put some of his trading theories into practice. By 2001, he went out on his own, opening commodity trading advisor Xenon. The CTA used a high volatility directional fixed income strategy but did not survive the market upheavals in 2001. The strategy actually made money after 9/11 but Feuerstein believed the fundamentals of the strategy were no longer valid.
He relaunched Xenon in 2004 (now 2100 Xenon) with a fixed income strategy and a diversified strategy. Both are extremely conservative and use multiple models and multiple time frames. “I learned about instantaneous risk management. I learned that you had to be diversified, not just in terms of markets, but in terms of models and time frames,” he says.
Xenon evolved to a shorter-term strategy and now has an average holding period of fewer than 10 days. “We have six different models, four of which trade everything and then we net the signals. We have a long-term trend following, a medium-term trend following, a short-term trend following and a reversal [model] and when we get the signal we net everything,” Feuerstein says.
The multiple models allowed Xenon to profit from the January reversal in bonds. “We were short 10-year and bonds within a week of those things hitting their highs. We are up in fixed income in the first week of January,” Feuerstein says.
The strategies have done well given their low risk properties, 5% to 7% annualized volatility, but Feuerstein continued to improve them. He noticed that their largest drawdowns occurred following volatility shocks, so he worked on building a dynamic resizing model. “If you stay the same size in your positions when volatility skyrockets, then you’ve got a big problem. I have a way of measuring regime shifts in volatility so [that during the] spikes that we saw in September and October we were able to cut our sizing algorithm,” he says, adding, “At the beginning of October we were 10 times the size in our positions than we were at the end of October.”
Despite the risk reduction, Xenon earned 19% in its managed futures program in October. The program launched in 2006 at twice the gearing of the diversified program.
“I worked on this for three years, trying to solve the problem of shocks to volatility. I am not saying it is solved but this is something that is helping us,” Feuerstein says.
Xenon takes intraday snapshots of what their portfolio will look like and the likely volatility. “We trade eight times a day. At 9 in the morning we have an expected portfolio but if there is a big move, that expected portfolio is much different. Maybe we started the day long grains, short metals and long bonds, but if there is a big shock during the day we may end up with opposite positions,” Feuerstein says.
By keeping current with volatility, Xenon stays true to its risk models. On Sept. 16, volatility increased 200% and Xenon’s entire portfolio shifted. “We were able to downsize our positions dramatically and make the trades that were reflective of that instantaneous look at volatility. We ended up taking our positions down by 50% and when it reversed the next day we didn’t lose,” he says. “We [made] 1.8% in September, effectively on that day. We were able to get smaller [and] reshape the portfolio in very quick fashion. This was the work we have been doing and it ended up paying off in 2008.”
The results for Xenon in 2008 have been eye-popping, especially when you look on a risk/reward basis. The managed futures program earned 42.46% and the fixed income 13.10% for the year based on December estimates. “We’ve got a 5% volatility program that made 13% that uses 2% margin to equity. For the past five years it has made 350% return on margin,” Feuerstein says. In 2007, Xenon became an affiliate of Old Mutual U.S. Holdings though Feuerstein retains a share of the business. “It helps us in term of structure, support and back office [and] allows me to focus on the markets,” Feuerstein says, adding, “I feel like I don’t work anymore. I get to do what I love to do and get paid for it.”