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

BAM: Ready to take off

When John Becker and RJ Mehnert worked together at Houston-based energy wholesaler Entergy Power Marketing Corporation, they mainly hedged the firm’s cash positions, but both dreamed of running their own trading advisory and planned for it.

Becker grew up in Chicago and holds a bachelor's degree from DePaul and a master's in financial markets and trading from the Illinois Institute of Technology. A position with fixed income manager CSI Asset Management, while in college gave Becker the trading bug. His interest in trading and energy markets brought him to Houston, where he met Mehnert.

Mehnert holds a bachelor's degree from University of Houston-Clear Lake and a Master of Science from Lund University in Sweden.

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The two met in 1999 at Entergy. “We had discussed what our interests were and our backgrounds," Mehnert says. “We traded commodities, we talked about what we wanted to do later on. Both of us wanted to open up our own commodity fund and manage a portfolio. Right around 2003, it was a tough time in energy so we thought it was a good time.”

RJ traded electricity and John traded natural gas, mainly buying and selling for the power plant needs.

By January 2004, they began trading a proprietary account and registered Magnolia, Texas-based Becker Asset Management (BAM) as a commodity trading advisor (CTA). “We really were from the 'build the track record and they will come' kind of philosophy,” Mehnert says.

At the core of the program are two models: a multi-time frame trend following model that Mehnert developed and a short-term countertrend model that Becker developed.

“There are multiple systems within both models,” Becker says. “In a broad sense, we have a more traditional trend following system that RJ has developed some proprietary filters for, and we have a countertrend shorter term system that I developed that trades over different time frames.”

They follow their models to the letter, but leave a little room for discretionary trades when they see an opportunity in the 35 liquid markets they trade. They use it rarely, however.

The combination helps BAM meet its goal of managing risk while looking for opportunities in a diverse group of markets. “You can’t be in the game looking for opportunities if you blow up, so [strong risk management] is a big part of our philosophy,” Becker says.

“We have a philosophy to look for low-risk/high-return opportunities,” Mehnert adds. “We don’t want to take too much risk on any one trade. We want to be disciplined and using multiple systems over multiple time frames allows us quite a few more opportunities.”

That philosophy has worked well, particularly in 2009, a difficult year for most CTAs. Ironically, the trend following model produced more than half of BAM’s profits, but by design it is not a typical trend following model.

“We knew going into this that trend following had big following -- it does work -- but do you want to become another fish in the pond swimming with the Chesapeake’s, Saxon’s and Dunn’s?” Mehnert asks. “What is going to be your competitive edge?"

So Mehnert designed a trend following model that works on multiple time frames and is non-correlated to the typical long-term trend followers.

“I am not always holding trades for multiple months; sometimes I am holding trades for a couple of weeks. Also blending with John’s model, when I do go into a drawdown, his model is there to absorb it and limit the amount of time to recovery,” Mehnert says.

When you mix that with the countertrend model, you get something that is truly unique as evidenced by its 39.59% return for 2009 and its year-to-date return of 12.65% through May. “They do tend to hedge each other,” Becker says. “There are times that I am not doing well and things are trending and RJ is doing great and then there are times when it might have reversed and then there are times like in ’09 when RJ’s [system earned] 55% of the profits and [mine] did 45%. They tend to blend very well.”

While at times they traded customer accounts, their five-year track record represents mainly proprietary trading. What they built is impressive and they expect to draw interest.

“It was a reality check. We did not pay much attention to the marketing side. We are trying to play catch up,” Mehnert says.

With a compound return of 34.35% since 2007 and a Sharpe ratio of 1.6, that interest should come.

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