From the March 01, 2011 issue of Futures Magazine • Subscribe!

Top Traders of 2010

VACA: A scientific approachFrancisco Vaca

Chicago-based Vaca Capital Management takes a scientific approach to the markets. Before becoming a trader, CEO and CIO Francisco Vaca worked on the Superconducting Super Collider particle accelerator for the University of Illinois at Chicago (UIC) while at Fermilab. When funding for the program waned in 1996, Vaca answered an ad for a research job at C&D Commodities, where he would work with legendary trader Richard Dennis and in 2000 launched his firm with current partner Paul Rabar.

However, Vaca’s approach is not similar to the turtle trading methodology. Vaca says, “What I learned from Rich Dennis is that you can beat the markets. I saw him do it. My approach to trading is statistically based; it has to be proven in a scientific way that what we are doing is correct.”

He has done that by building multiple levels of diversification and then applying rigorous scientific and statistical measures. He has 16 systems, four strategies and two timeframes to trade 70 markets. This has allowed him to produce solid returns — 27.81% in his global diversified program in 2010, a compound annual return of 19.28% since 2004 and 1.08 Sharpe ratio.

“Our first diversification is going to be the number of markets we trade. Then we want to trade as many different styles as possible because we know that nothing works all of the time. We also want to be diversified by timeframe,” Vaca says.

In building multiple styles, Vaca took the approach of an allocator. He allocates equally to his pattern recognition, momentum, trend-following and countertrend styles. Within each of those four styles, there is a short-term component and a medium-term component.

Vaca’s strategies are independent of each other. Many managers use momentum as part of their trend-following approach, but Vaca sees it as a distinct style that can be as much countertrend as trending. “Pretty much anybody can spot a trend, visually you can see it,” Vaca says. “Momentum on its own has value; you don’t need a trend to indicate a momentum trade. Sometimes the momentum is trend-following and sometimes the momentum is countertrend.”


All 16 systems are independent and equally weighted. “What the countertrend component is doing is looking at the long-term trend and waiting for a broad enough deviation from the trend, with a little bit of a reversal. Think about a trend with a hook hanging at the end,” Vaca says, “we are looking for that hook.”

His pattern recognition model is independent of trend, momentum and countertrend. “Pattern recognition is looking for a specific, quantified price pattern in the data. When that price pattern emerges, there is no additional requirement other than that this pattern [has] emerged,” he says.

“It is crucial to have different styles otherwise you are stuck with one. When that one is not working, then you are [out or in a losing trade].”

He takes every signal, even if they have opposing positions. Sometimes they all will be in one direction, even trend and countertrend. While Vaca always will have an absolute stop for every position, his risk management is more complex and, as with everything, scientific.

He has a probability overlay he applies to all his trades that is independent of the signals. “It is a pure quantitative, statistically-driven algorithm. Any given day it asks the question, ‘What is the probability the market, let’s say gold, will go up over the next X number of days?’ We profile [gold] for current volatility, momentum and price action,” Vaca says. They end up with a probability number for each market. From that, they determine whether they will lighten up a position or add to it. If it is a current signal, it sets the size of that position.

The filter improves the risk/reward of the program. Vaca acknowledges that at times the probability filter will keep him out of some successful trades, but says, “We are not trying to make a killing on any one trade in any one market on any given day. We know the probability filter will increase risk-adjusted returns over the long term.”

Vaca applies this scientific approach to everything he does. That approach has proven itself, particularly in 2010.

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