Ram Management Group at first blush looks like a typical long-term trend-following commodity trading advisor. Its aggressive program earned 38.36% in 2010 and returned 71.96% in 2008, a layup year for most trend followers. After all, Ram’s chairman and president, Robert Moss, learned at the foot of legendary trend follower Rich Dennis and was a floor broker for C&D Commodities, executing the firm’s orders on various New York commodity exchanges.
But while there are many similarities, Ram Principal Jeff Earle says, "We are different from most trend followers." Some differences are obvious based on countertrend elements in its core pattern recognition methodology and some more subtle, like how Ram focuses in on the best market to exploit a move.
"We are not in 60 markets simultaneously; we are much more selective. We are looking for the driving market," Earle says. "We are looking to be short the euro during the European debt crisis, not be short all the currencies and wasting units in the yen when the [weakest] market is the euro."
The sharper focus was created by improvements implemented by Ram in late 2006. "We were finding that there were too many correlations in the positions that we had," Moss says. He adds that their adjustments run contrary to the prevailing wisdom in the industry that being in more markets creates diversification and is better for the overall portfolio. "Since we did that, we actually reduced our drawdown and have enhanced returns," Moss says. "We are trying to do it a little bit differently so that we can add some value to a portfolio and have something less correlating to some of these consistent programs that have been operating for some time."
Earle adds, "A lot of trend followers fire the shotgun and spray the bullets everywhere; we are a little more fine-tuned."
"If the markets are going to go through a jolt because of higher oil prices, you don’t want to be buying corn and wheat because crude has broken out, but your shotgun approach gets you long crude, corn, beans, wheat and sugar," he says. "When the market turns, the weakest of those is going to hurt you."
Ram’s non-correlation was obvious in May when it returned more than 20%, while the Barclay CTA Index dropped 1.16%.
Earle says that even though Ram was successful along with many trend followers, they accomplished it in a different way. "A lot of commodities were up 30%, but intra-year there were a lot of drops. We were able to capture some of those drops in the long-term trend."
One example is in sugar. "Sugar probably rallied 30% on the year, but we didn’t make our money being long sugar. We made our money being short sugar during its short, rapid drops during the rally," Earle says.
In developing his strategy, Moss took advantage of some of his observations from the floor. "Some markets move for reasons that are important, but aren’t revealed for a certain period of time. Price really does dictate what the true value of a commodity is at any give time."
This led to his pattern recognition style. "What we are looking at is pattern and we are also looking at price movement within a certain area of the pattern and that is what constitutes a signal for us," Moss says. "Patterns have a way of repeating themselves over and over again."
When Moss executed large positions for C&D Commodities, other traders watched what he was doing. "It would take a little finesse to get the positions on and it would take a lot of finesse to get the positions off, particularly if they knew what way we were set up. My job was to keep them guessing," Moss says. This led Moss to take some circuitous routes to filling an order, but also educated him as to how to spot patterns.
Ram’s systematic approach to trading is nothing like the way Moss executed orders in the pits, but that experience helped him to spot patterns and understand when traders were caught on one side of the market, knowledge he would use in creating his systematic approach. "Some of it came from those observations," Moss says.
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