This is the 20th year Futures has profiled emerging commodity trading advisors (CTAs) and it has been an interesting and tough year.
After 2008, one of the best years in decades for managed futures programs, the going has been much tougher in 2009. More emerging managers lost money than made money in 2009, according to the Barclay Hedge database. The returns have not been terrible, as was the case with equities and convergent hedge fund strategies in 2008, but most managers gave back open equity from established positions in the first quarter and have been chopping around ever since.
When reviewing candidates, we look at not only recent performance but also overall performance and the manager’s general approach to trading.
This year we again looked at where a manager’s allocations came from and fee structure. While acknowledging that raising money with short track records is extremely difficult, we favor managers who refrain from taking allocations from futures commission merchants (FCMs) or introducing brokers who charge added management fees or exorbitant execution fees.
Some previous “Hot New CTA” profiles have gone on to great success and some have slipped into obscurity. This is not an endorsement, but a review of new talent. We would like to thank all the managers who sent us their documentation. We will do this again next year, so look for our announcements.
ASCENDANT: RISING ABOVE THE CROWD
Jacques DeVore has spent the majority of his adult life in the money management business and the Ascendant Asset Advisors’ JLD Managed Futures Trading program, launched in June 2008, is the result of lessons learned along the way.
DeVore went to work at RNC Capital Management after a short stint in the oil business after graduating from the University of California at Davis. He would go on to run his own money management firm and to manage institutional portfolios for Deutsche Bank.
DeVore, a wrestler in college and a competitive athlete throughout his life, describes himself as extremely disciplined, which he says is the key to trading. “Trading futures is the perfect forum for someone with my personality,” he says.
While working as an investment advisor, he noticed a desire among investors for short-term low risk strategies. “Clients were looking for a program that would get them out at the end of the night,” DeVore says. “Closing positions every night makes you a more disciplined trader.”
He describes his methodology as momentum with a counter trend element. “I am looking for extremes throughout the day,” DeVore says. The program looks for the second derivative of price and volume, which is the acceleration of those indicators. “It is kind of like a skate board ramp. The direction of the change is going up, but it is going up at a slower rate. I am looking for those changes and buy or sell based on that,” DeVore says. He mainly applies this method to the E-mini S&P and Nasdaq, but also trades the Treasury complex and occasionally the euro currency. “I put together a lot of programs that identify when those changes are taking place. They are weighted differently depending on which one is giving me the most indication: price, volume, rate of change of volume and direction of trend throughout the day.”
DeVore also will go into the day with a directional bias based on fundamentals. That bias may help him on his exits but won’t dictate what trades he will take. “If I feel the trend for the day is up, I will try and be more long than short but it doesn’t mean the set ups won’t give me more shorts than longs.”
He looks at three-, five- and 10-minute charts to pinpoint changes in the second derivative of price and volume. When the acceleration of those indicators decrease, he looks to enter a position opposite the medium-term trend. “I am looking at the second derivative of all those indicators to come up with where I think a particular move within the day has exhausted itself,” DeVore says. The program is up more than 100% in a little over a year and 31.08% year-to-date through August after its first sizable drawdown (7.93%) in July.
He has been so consistently profitable that he says his July drawdown was beneficial because it assured folks the system was real. “Finally being down 7% in July was great for marketing. It was good that I had the down side. It allows people to look at the numbers,” DeVore says.
The average duration of a trade in the program is 17 minutes. While he is looking for reversals, he may just find a short-term correction in a medium-term trend that lasts a couple of bars. “If I am in the trade long usually it is a mistake. In some cases the ramp flattens out and the ball keeps going. That is the danger zone for me. That is where stops and money management come in,” he says. He rarely carries a trade overnight and if he does, he will cover it with options. “I lean to the short side. Most of the time the market moves up more than down. If that is the case, I see more looks based on my acceleration and velocity model,” he says.
But the short-term nature of the program allows him a lot of looks and his disciplined approach keeps him from hanging on to a losing proposition.
For more information on Ascendant, visit their Web site, www.ascendantasset.com
NUMBERS: IT’S ALL ABOUT PROFITS
Trying to describe the methodology of Numbers SA’s Global Diversified Futures program is difficult as there are many elements, but they all work together to produce solid risk- adjusted returns. The program is up 54.51% since its February 2008 launch with a worst drawdown of 6.26% and a Sharpe ratio of 1.88.
It combines mean reversion, trend following, statistical and spreading strategies. In addition to the 11 independent sub portfolios, Numbers applies different time horizons to different sectors.
“The mean reverting is one algorithm that applies to all markets. In the portfolio structure we try and diversify the time horizon,” says Numbers CEO Bertrand Savatier. “For example, stock indexes work on a five-day trend duration whereas currencies work on a 15-day trend duration.”
The different time horizons are not based so much on what works in the markets, but on adding diversification. “We want the portfolio to be diversified by time horizon. It is basically a choice of portfolio construction,” Savatier says.
Numbers applies its mean reversion and trend following strategies to interest rates, currencies and stock indexes; it applies a fundamental mean reversion and trend following approach to commodities as well as a strategy to trade calendar spreads, and it applies a statistical model to all the markets.
Everything is modeled in this highly systematic approach. “[For] each instrument, we have 50 or 60 data series we study,” Savatier says.
Applying both the mean reversion and trend following approach to many markets means that the program will, at times, have opposing positions in certain markets. “In mean reverting we look at two trends that are completely independent of the trend following model. It could reinforce positions within the trend. If there is a correction within the middle-term trend, then the mean reverting can reinforce the position in the direction of the middle term trend against the short-term trend,”
While they look at fundamentals, it is not from a discretionary seat of the pants perspective. Numbers will assign values for fundamental inputs and work that into the program in a completely systematic fashion. “We have some models that are purely fundamental. Then we combine those with models that are purely technical,” Savatier says.
As if this combining mean reversion and trend following is not complex enough, part of the program seeks to exploit money flows in the commodity sector. The strategy is long-term and does not simply put on a bear spread in front of the commodity rolls.
“When trading calendar spreads, we try and take into account the evolution of the [contango/backwardation] situation,” Savatier says. They could be trading with or against the commodity funds. “The big advantage of this strategy is its non-correlation, even with the underlying instruments. A calendar spread on corn has zero correlation with the way corn is moving,” he says. Creating numerous non-correlated streams of return is the key to Numbers’ complex systematic approach to trading. It is why they also include a statistical model applied to all markets.
“It is a simple algorithm that is placed on different markets,” Savatier says of their statistical model. “If you trade a pure trend-following system, it is difficult to add diversification because even if the algorithm looks very different, they tend to react the same way in the same situation. If you look at very different sources — including fundamental analysis — then at some point you will be different,” he adds. In backtests, the program has been positive in each of the last 27 years. They test intensively to ensure the program will perform in different market environments. Even so, they are not resting on their laurels. Savatier says they are looking to add a currency overlay based on the carry trade. If they do, expect the new model to be tested in every possible way. Numbers is different and they appear to have covered all of their bases.
For more information on Numbers, visit their Web site, www.numbers-am.com
LAST YEAR’S HNC SCORECARD
Every year we profile emerging CTAs we preface the story with the qualification that the feature is “not an endorsement but a review of new talent.” But we certainly like it when our Hot New CTAs follow up that distinction with solid performance and are recognized with allocations. Two of the three managers we profiled are down for the last 12 months, but have performed relatively well in their peer groups.
MAD Group Investments
Discretionary CTA MAD Group Investments continued its strong performance in the last quarter of 2008, finishing the year up 70.48% in its aggressive program and 22.56% in its standard program. Both programs are up through July 2009 despite the tougher environment, 6.72% and 8.68% respectively, though MAD has not added to its funds under management.
Apparently Futures was not the only one looking at L1 Partners last fall as its money under management more than tripled in the last half of 2008. The short-term quantitative program finished the year up 15.79% but has struggled so far in 2009, -5.4% through July. Despite being down, the program continues to display low volatility and risk.
Crescent Bay Capital Management
Option seller Crescent Bay dropped more than 20% from when we spoke to them, but its overall performance for 2008, -5.05%, is strong for an option seller given last year’s environment. More disappointing perhaps is this year’s performance of -6.74%. Crescent was hurt with upside volatility in 2009, but any option writer that has survived the last 18 months or so with single digit drawdowns is pretty solid.