And so far it has paid off as MSR has produced a 13.28% annualized return since launching proprietary trading in September 2009 while risking only 2% of the portfolio at any one time. That number improves to more than 25% after initiating risk management improvements after January 2010. But Rulle understands that his track record is very short.
The program Rulle came up with split trades into two camps — reversal and momentum trades. Actually, he has more than 500 models he trades, 75% of which fall on the reversal side.
His quantitative approach first determines if any of the 10 liquid financial and energy markets he covers is in reversal or momentum mode. He refers to this as the "model models." It then would apply one of the 360 reversal or 140 momentum models. Trades last between one and four days.
He doesn’t use stops per se, but rather has an intraday model that can offset any position or add to it for the remainder of that day.
This came in handy when we spoke to Rulle on March 9, as the intraday model flattened MSR’s long position in crude oil on a day the spiking market corrected $1.87. "When the market opens tonight, we will reestablish the underlying model," he says.
The intraday model works as a risk management tool but also has been profitable on its own. "On a stand-alone basis, it is profitable. [Even] if it wasn’t, we would like it because of its correlation benefits and its risk management benefits. I feel much more comfortable when I know that I am going to get out of a position if a market is going to [become extremely volatile]," he says. "I want to catch the big move when it is in our favor and get out of the way when it is not."
Rulle was in charge of hiring traders for Graham and was always weary of those with short track records, but believes he is onto something.
"The nature of the relationship between the multiple sets of distributions mathematically determines whether a market — at least after the fact — was in momentum mode or was in reversal mode," he says. "The trick is: How do you do that before the fact? We believe that we have found certain trigger events that can do that on a probabilistic basis."
He adds, "After the fact, we all can do it. The hard part is if you can do it before the fact, and we believe that we have found a way."
If he hasn’t yet, chances are he will. One thing is for sure, after three decades of working on the business and management side of markets, Rulle is enjoying being a trader.
"We are having fun; we will have more fun when we persuade people that what we are doing is reasonable and makes sense," he adds.