A good trading system with sound risk management and markets that are active as hell.”
That is what Bob Pardo attributes his 142.02% returns in 2008 to. Pardo has operated his Kenilworth, Ill.-based CTA since 1999 and although it has featured some impressive years, including a return of 63.73% in 2007, 2008 was far and away his best.
“We are designed to take advantage of powerful trends and in all the years that we have [traded], this last year has been the largest collection of powerful trends in all markets that I have seen,” Pardo says. “We were able to get a hold of these trends early on and stay with them.”
But don’t call Pardo a trend follower. Though his program maintains a roughly 0.64 correlation to long-term trend followers, he says there are significant differences in his approach. “We are usually in before the long-term trend followers are in and we are usually out before the long-term trend followers get out,” Pardo says.
He prefers to refer to his methods as trend anticipatory, but he acknowledges that any manager who rides trends should have done well last year. “If we can’t make money when there are trends like these then we are not competent professionals.”
Pardo looks at 60 different markets but actively trades 45. The basic model is the same for each market but the parameters are adjusted to different trading paces and different levels of volatility. “There are different components to volatility and we are going to be less inclined to get involved in markets that are noisy,” Pardo says.
This was important this year as many markets that may not normally correlate began to correlate. “We size all of our entries based on new volatility levels. It is important to always be adjusting to current volatility levels and one of the ways we do this is when we roll,” Pardo says, adding, “Frequently it will have the effect of taking profits.”
Like many CTAs Pardo made money on both the rally in crude oil in the first part of the year and the plummet in the second half but had less exposure late in the year due to volatility. “We got long crude in January, we got short $10 or $15 off the high on the way down,” Pardo says, adding, “Energy got so volatile that it became less a part of our portfolio.”
Pardo was a pioneer in building trading system design and testing software. His “Chartist” program was one of the first commercially marketed computer charting programs and the precursor to his “Advanced Trader” program. Around the same time he also designed his “Walk Forward Analysis” software as a way to optimize trading systems without curve fitting.
By the mid 1990s Pardo decided to concentrate his energies on building his CTA business instead of simply designing software. His XT99 program, which is a component of the Dunn D’Best fund, has produced a compound annual return of 29.26%.
While it would be hard to duplicate 2008’s performance this year, Pardo says that many of the economic drivers that made 2008 such a good year are still in place. “This year stands to be an extremely good year for futures trading and for some years to come,” he says.
The risk of loss in futures trading is substantial and is not suitable for everyone. Past performance is no guarantee of future success.