From the February 01, 2010 issue of Futures Magazine • Subscribe!

Cuddehe: Back in business

Michael Cuddehe was a major commodity trading advisor in the formative years for the industry. His CTA Cuddehe Corporation Inc. (later called Fairfield Financial Group) posted average annual returns of more than 45% from 1981 through 1996. At its height, Fairfield managed $15 million, a significant amount at that time.

Cuddehe, a carpenter by trade, got interested in the market when a friend exposed him to a market newsletter written by notable gold bug Jim Sinclair in the late 1970s.

“I found the whole thing fascinating and found that I had a natural affinity towards markets,” says Cuddehe, who lived in Kansas City at that time. A trip to the Kansas City Board of Trade cemented that interest. “It sounds weird, but I felt like I walked into a temple, like I belonged there. So I studied on my own, bought books, studied different systems until I had sufficient knowledge to get hired as a broker.”

Cuddehe was hired as a commodity specialist in 1979 by Dean Witter Reynolds. A year later he moved to Clayton Brokerage Co. and in 1981 he established Cuddehe Corp. and registered as a CTA.

His discretionary program took advantage of the high interest rate environment of the time, which he says created a great deal of volatility. “You had to have a strong stomach for volatility in that environment. I think gunslinger was the appropriated description [of our trading] at that time, but I am considerably older now and hopefully wiser. I don’t trade like that anymore. It was pretty exciting while it lasted.”

While his aggressive nature led to some eye-popping returns, including 325% in 1982, it was not that unique at the time. “I don’t think my leverage was out of line with what most CTAs were doing. The industry was much smaller and [managers] were looking for big numbers. Now it is a much more institutional environment and people don’t want that volatility,” Cuddehe says.

After 16 years, Cuddehe decided to take a break and explore other interests, including running for political office. He did not win and found getting back into the managed futures industry was not so easy. He continued to trade for himself and work as a consultant, while researching new methods. In 2006, he launched Seven Trust Global Advisors along with Patrick Hart, who was an early investor of his original CTA.

Cuddehe found the industry had changed. It was more formal and a lot more institutional and fewer people were willing to take a risk on an emerging manager, even one with quite a bit of trading experience. “I didn’t know how difficult it would be to restart my business,” Cuddehe says.

It is not like Cuddehe returned to his gunslinging ways. “I am very defensive in my orientation. We built this for the existing investor paradigm, which is essentially risk averse. Investors want good returns, but they are not willing to accept a lot of risk, so we created a program from the ground up with that in mind,” he says. “We focus on defense and controlling drawdowns and pursue profit opportunities within the constraints that our risk management allows.”

And it shows. The Global Select program has produced a compound annual return of 7.31% since its December 2006 launch with a worst drawdown of 4.2% and a Sharpe ratio of 1.27. Seven Trust also offers an X2 program. “My risk-adjusted returns are now considerably better,” says Cuddehe of the diversified program that trades 19 markets in six sectors.

While he still maintains discretion, he does so within a systematic framework. “I have an intermediate-term trend following program that provides the framework. I have several shorter-term models that [produce] specific trading opportunities and then I execute those trades or not with discretion, so I maintain my right to protect equity and to discard trades that I feel have too much risk.”

He uses discretion to avoid trading on numbers and to take profits. “If I get a good move that gives me 80% of what I might expect out of a trade then I am going to bank that.”

Although his current program is largely systematic, Cuddehe likes to stay in control and makes sure he runs his models instead of the other way around. “My relationship is with the market and that is what I focus on and the modeling is supportive [of] that relationship. We have a lot of people in the marketplace today whose primary relationship is with their models.” While Cuddehe takes advantage of the latest technological advances, he tries to stay grounded. “Fortunately I had an experience very early in my trading career of faithfully following my model right over a cliff and wiping out myself and my few clients at the time and this was an extremely valuable experience. There are an awful lot of people out there today who are writing models and have never had this experience, but sooner or later they will.”

Cuddehe, on the other hand, is content to take what the market offers. “I have learned over and over again that I cannot predict what a market will do but what I can do is control the amount of risk I will take.”

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