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

Hot New CTAs: What new managers can teach the old pros

Vergho: Profits over pedigree

Kevin Vergho is a self taught trader who credits the lessons of trading guru Linda Bradford Raschke for influencing his trading philosophy.

Vergho has been trading full time since 1999, and in 2008 launched his Northern California based short-term diversified technical CTA Vergho Asset Management.

Vergho worked for Fisher Investments after graduating from Santa Clara University in 1992 but was not involved on the trading side and wanted to be. He started his own education company in the late 1990s to spend more time on his personal trading.

By 2000, Vergho was concentrating on futures and the burgeoning equity index sector, trading intraday. “I gravitated to short-term strategies because I found it to be the easiest way to develop income on a monthly basis,” Vergho says.

As his expertise grew and philosophy evolved, he added other financial markets and metals and expanded his time horizon. “It has been an evolution. Even guys [who] develop black box systems tweak them,” he says.

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Vergho describes his Kinematics program as a volatility breakout system. “The downside of such a program is that you get the false breakouts. I have gotten better at screening out those false breakouts, exiting when necessary to avoid any serious damage and being able to stay with the winners a little longer. That has been the tweaking that was going on for the 10 years before I launched the program,” he says.

No one can accuse Vergho of rushing the product to market or not doing his due diligence, as the program has returned 55.5% since its November 2008 launch (compound annual return of 28.73%) with a worst drawdown of 1.95%, monthly standard deviation of 2.22 and a Sharpe ratio of 3.71.

“I took what I was doing on a proprietary level and deleveraged to the point that it made sense for the average investor. The main concern was that I wanted to keep the drawdowns to a reasonable level. I tried to find the sweet spot for the average investor,” Vergho says.

ImageJudging by his short track record, he seems to have found the spot.

Vergho uses two technical based systems: one short- to medium-term system that will hold positions two to 20 days that he applies to the approximate 15 markets he trades; the other is an intraday model based on the same underlying philosophy that he applies just to equity index markets.

“I have a model that generates signals, the discretionary element comes from how much we put on and in terms of managing the trade as well as keeping track of correlations among markets.”

Vergho looks at multiple timeframes. “We use a 15-minute chart to enter, which would be confirmed by the 60-minute chart. We are looking for a higher time frame consolidation, we step down to a lower time frame to initiate the entry,” Vergho says.

Even though he is entering a trend confirmed by a longer-term trend, the strategy can appear countertrend at times. “We could actually catch a reversal at some level because a lot of time the consolidation is at the top or the bottom,” Vergho adds.

The intraday program is based on the same philosophy, though looking at much shorter time frames. “I started out as an intraday equity index guy. The longer-time, I added later. It is just doing the same thing on the volatility breakout level.”

He says expansion into a longer timeframe was a natural progression. “You see these larger moves and say, ‘Hey I was in on that at the beginning, [so] how can I expand that out and take advantage of it?’ The only answer I could come up with is to step it out to a higher timeframe.”

Despite his impressive returns, Vergho is in no hurry to grow and understands institutional investors may be weary of his lack of pedigree. “They look at me and say, ‘You learned how to trade by yourself; that is so unusual.’ I didn’t come from a big bank background, which is fine. I am happy with the way we have grown so far. I am not in any hurry to make any changes to impress the institutional side.”

If Vergho keeps this up, the institutional side will come find him.

For more on Vergho Asset Management including contact information, click here.

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