When Davide Accomazzo and Mack Frankfurter had lunch back in 2004, basically to bitch about life in the corporate grind at UBS, they discovered that they had a lot in common and began to map commodity trading advisor Cervino Capital Management.
That, for one, was an interesting coincidence. Accomazzo was Italian and Frankfurter’s dad grew up in Switzerland. The two countries are split by the Matterhorn, Cervino in Italian, which would become the name of their CTA. “My family has been skiing on that mountain for three generations and Mack’s father grew up in Switzerland so we had this geographical icon that represented both of our heritages,” Accomazzo says.
Accomazzo had spent his entire adult career in trading and Frankfurter had worked with some of the most talented traders around on the operations side.
Frankfurter, as head of operations for the Echelon Group in the 1990s, made sure the firm’s $250 million managed futures business operated smoothly and worked with all-star traders such as Bill Dreiss and William Plummer. Frankfurter left Echelon in 1998 when it changed its focus away from managed futures, but he built on his strong operational expertise through several consulting gigs. Until his chance meeting with Accomazzo at UBS, he always planned on finding a sharp trader to partner with.
Frankfurter met many great traders, but they didn’t all succeed. “Some of them were successful in trading but not in business. A lot of them shot themselves in the foot,” Frankfurter says. “I am sort of a connoisseur of trading and traders. In Davide I saw a unique and rare combination of skills.”
Frankfurter says the best traders can balance quantitative and qualitative elements, which allows them to stay disciplined while also being able to adapt to changing market conditions.
Accomazzo became interested in trading options and derivatives while studying for his MBA at Pepperdine and upon graduation scored a job at Jefferies in New York as a convertible bond trader. He went back to Italy to work in private banking for a Monaco-based firm before returning to the States to launch a CTA and then to work for the private banking arm of UBS.
“To be frank, we both hated the banking side,” Accomazzo says. “So one day we were having lunch and complaining about the corporate culture of the Swiss bank and we looked at each other and [saw] we are very complimentary. He is one of the best at the operational side and I have traded every market and every derivative in my career so we started to discuss Cervino.”
Frankfurter thought, “What are we doing? We really should be doing what we do best.”
Accomazzo had been trading proprietary money for years so they basically adopted the option strategy he was trading with some alterations. “We are options traders, not options writers,” Accomazzo says. “We kind of play the reinsurance model which is a variation of your typical option writing.”
“The idea has always been to not be just pure options sellers but also option buyers. The program goes to four layers: We look at market analysis, technical analysis, support and resistance and sentiment analysis,” Accomazzo says. “Behavioral analysis is so much more important in understanding markets than anything else,” -- or as Frankfurter would put it, putting both the quantitative and qualitative elements to work.
Their 2008 returns illustrate this as Cervino stayed positive, 3.65%, in one of the most difficult atmospheres for option writers. Their worst drawdown is 5.93% since launching in 2006.
Cervino attributes that risk control to a focus on capital preservation and their discretionary approach. “If you are relying on rational expectation theory, something that happened in 2008 should probably never happen or should happen every 25,000 years. The reality is in financial markets that kind of event happens frequently,” Accomazzo says. “If that sensitivity and discretionary approach is built into your trading, you will be much quicker to react to changing conditions.”
While the options program performed well in difficult market conditions, there is a strange vibe in recent years and Cervino was looking to tap into it. “It became very apparent after 2008 that gold might be part of the solution,” Accomazzo says. But gold is so volatile that even many bulls have failed to take advantage of its 10-year move. “Gold has a tendency of producing these mini crashes that take people out of positions even though the long-term trend is positive,” he adds.
They researched many ideas and settled on a covered call strategy with a discretionary put option attached. They figured a covered call strategy would produce long-term returns close to the beta of gold with much lower volatility. The program is long futures, short calls and long on out-of-the money put.
“We take a lot of stress out of [being long gold],” Accomazzo says. “Sure, we will underperform when gold goes parabolic but the reality is over the [long-term we] will be capturing that long beta [with] a much lower standard deviation.”
While their histories are from opposite sides of a mountain, Mack and Davide are on the same page as far as risk.
(Cervino closed its program shortly following the PFG bankruptcy.)
Photo of Frankfurter by David Lubarsky; Photo of Accomazzo by Jonah Light
