From a young age Kevin Jamali, founder and co-principal of Auctos Capital Management, saw the best trading can offer as well as the worst. Even though he saw his father, who traded stocks on the side, go through the 1987 crash, the energy and challenge of trading still called to Jamali.
"I will never forget what my family went through and what can happen in a day. The fact that things can change so quickly has always stayed with me. That day helped give me a respect for markets and the importance of proper risk management" he says.
While his interest was piqued, Jamali did not embrace trading immediately. Initially, he went to college for business, but after visiting a friend’s brother who worked at the Chicago Board of Trade, he quit school and started looking for a way to get his foot in the trading door.
"In 1995 I started as a runner. At the time, I didn’t know anybody, so I went door-to-door passing out résumés. It was so important for me to get my foot in the door that I was willing to work for free for two or three weeks just to get the shot," he says.
Two years later, after being promoted to a floor clerk, Jamali began trading electronically overnight. "I traded overnight and clerked during the day, which resulted in very little sleep. I was so excited about what I was doing, that it didn’t matter," he says. Jamali was committed to being a successful trader. "This is going to happen," Jamali told himself. "Failure was not an option."
Jamali began trading in the five-year bond pit in 2000 and predominantly traded the yield curve until 2003 when he went upstairs and began trading the basis (cash vs. futures). He benefited from the more difficult environment as electronic trading eliminated some of the edge floor traders had. "I was never a scalper; the electronic trading transition had been difficult for a lot of traders."
In making the move away from the pits, Jamali was able to step back and assess his strengths and honestly identify his weaknesses. He knew spread trades, but also knew that strategy wasn’t very scalable. He also realized he didn’t know much about the business side of running a commodity trading advisor (CTA). "You could be the greatest trader on the planet and not have any of the skill sets to run a CTA. Running a CTA has many components to it," he says.
Jamali had seen several very successful floor traders fail in their attempt to manage money and knew he had to build a team with expertise in all aspects of a trading business. He surrounded himself with people whose skills complemented his own. He credits most of Auctos’ success to his research staff and system developers — Kim Ferizi, Ronald Nussbaum, Ali Neyestani and Abdol Esfahanian, Ph. D., who is the associate chair of the computer science department at Michigan State University.
Additionally, he recognized his need for partners with business experience. "I knew I didn’t have the expertise of running a business, but John Ruth (retired managing director and partner of Spear, Leeds & Kellogg) and the other senior management partners did," Jamali says.
Auctos, a deliberate misspelling of the Latin word "auctus," which means persistent growth, was launched in 2007, although Jamali and his team had been conducting research since 2006 (It was misspelled to avoid confusion with a German fund named Auctus). It launched with two long-term trend-following systems. In June 2009, Auctos incorporated pattern recognition and calendar spreads.
"Research is the key to what we do," Jamali says. "We always are looking for ways to improve our risk-adjusted returns."
Because the three strategies are uncorrelated themselves, they act as a second-tier defense against markets suddenly becoming correlated.
"While returns are important, our main focus is risk-adjusted returns; what is our maximum risk. Our systems project a maximum peak to valley drawdown of 15%," Jamali says. "The second thing is volatility. If you look at our returns since June 2009, you will see a much smoother return profile."
Auctos gives equal weighting to the three strategies and currently trades 40 futures markets and 30 spreads. With an average to margin equity ratio of 8%, Auctos has a solid risk/return ratio. It has seen persistent growth with total returns since inception of 45.44% and has had a return of 28.96% in the last 24 months. Currently, Auctos has $30 million under management.
Jamali has plans to further diversify Auctos’ trading, with the research team currently working to add intermarket spreads as a fourth trading strategy.
Jamali learned two valuable lessons watching his father during the 1987 crash: Know yourself, and know your risks. He has surrounded himself with a team that complements his strengths and is dedicated to researching ways to limit risk. With those attributes, Auctos may be an emerging CTA now, but it definitely has room to grow.
