Cranwood Capital Management, LLC
Splendor Capital Management Ltd.
Stratford Capital Management, Inc.
Sadly, we spoke to a couple of managers who told customers their money would be safe if MF Global happened to go into bankruptcy, even after it was clear the firm was under stress.
How widespread was the MF Global carnage? We ventured as far as Shenzhen, China to find one of our 2011 Top Traders, but even that wasn’t far enough to avoid the fallout from MF Global. Splendor Capital Management’s exposure to MF Global was minimal but real, and the Chinese firm already has written off a small portion of their assets because of it.
All of our top traders had some exposure. Cranwood Capital Management operated a fund and traded through MF Global. Fortunately they have a low margin requirement and hold most of their funds in a separate account at UBS just for that reason. “Once we caught wind that MF Global was having problems, I wired out a good chunk of the money, leaving the bare minimum,” says Cranwood’s Pete Powers. Still the firm missed 25% of the trading days in the fourth quarter because of the MF Global situation.
Stratford’s Kevin Benoit was in the midst of his second superb year and was close to welcoming several new customers through MF Global accounts. Those accounts were not opened and may never open. While people talk about the funds still outstanding because of the crisis, measuring the total cost in terms of lost trading days, lost brokerage, lost incentive fees and spooked customers leaving the space will be impossible.
As for 2011, the Barclay CTA Index registered only its fifth negative year out of 32 and its worst overall at -3.00%. It was a bad year for trend-followers and, while every difficult year produces a few outlier trend-followers who do well, they were harder to find in 2011.
“It was a difficult trading market,” says BarclayHedge President Sol Waksman. “Take a look at how many times during the year, from one month to the next, you would have the stock market rallying, stock market crashing, rallying, crashing. Gold [saw] the same thing. The dollar [had] the same thing. One month
risk-on, one month risk-off, those are difficult environments for trend-followers.”
Troy Buckner, founder of NuWave Investment Management, says it has been a tough environment for three years because of a general weaker directional persistence. “It has been a weak few years and the strategies that survive best are the ones that tread water effectively until the directional persistence is back. Whether the markets are going up or down, at least they are going up or down with persistence,” Buckner says.
NuWave earned just over 7% in its medium-term pattern recognition program. Bucker does not define himself as a trend-follower, but they usually are exploiting the same moves, so he was happy to be in the plus column.
Even many of the short-term traders with strategies built to perform well in periods without sustained trends tended to struggle. The short-term traders that did well tended to be concentrated in niche sectors, trading stock indexes or currencies. It also helped to be discretionary. The Barclay Discretionary Traders Index was up 2.84%, while the Systematic Trades Index was down 3.77% and the Diversified Traders Index was down 5.61%.
“People who trade short-term diversified are very different,” says David Pere, whose short-term S&P strategy earned 65.91% in 2011. “For short-term traders trading 40 markets or so, they need all of them to be working over a period of time. Long-term trend-followers really can hit it hard with one sector,” Pere says, adding, “In the S&P it should have been a good year for anyone who trades against the trend.”
It was a choppy, volatile year, and those programs built to do well in that environment did so. “I do well when the markets are volatile; volatility helps me,” Benoit says, adding, “The other thing that helped me [in 2011] was not taking overnight trades.”
While it seems almost too obvious, the ability to book profits was key in 2011 because many sectors didn’t only display a lack of long-term trends, but reversed and chopped around on a daily basis. Holding a winning trade overnight held more risk than usual, especially with so much of the market volatility having to do with developments coming out of the Eurozone.
Fort L.P., one of Futures’ Top Traders of 2010, had a great year in both of its programs. While you might expect that their Global Contrarian program (up 28.69%) would do well in a bad year for trend-followers, its Global Diversified program, which is more trend-following in nature, had an even better year,
returning 39.92%.
Fort co-founder Sanjiv Kumar attributed their success to sticking to their systematic approach, keeping things simple and their focus in the financial sector, particularly bonds. Their best performing sector was bonds, particularly the short-term interest rates. “You had a lot of compression of yields and that was a big driver for us,” Kumar says.
While it was a difficult year highlighted by choppy markets, Treasury markets did trend. Bridgewater, the massive institutional manager with a high concentration in interest rates, earned more than 25% in its largest fund.
For Clarke Capital Management, it was a mixed bag with its multi-time-frame Global Basic program returning 12.01%, but most of its other mainly trend-following programs were up or down marginally. Its Worldwide program dropped 25%, largely because of the Bank of Japan’s intervention on the day MF Global declared bankruptcy. Clarke President Chad Butler says it was a difficult environment with choppy markets throughout the year.
One positive mentioned by managers is that the recent environment seems similar to the last poor stretch leading up to 2008. “As we look back over [several years], you have these lulls in opportunity every so often and it tends to imply an even more opportune outcome when it is over,” Buckner says. “We are apt to see some [very] good opportunities [in 2012]. There is a long vol opportunity; we just have to be patient. We are overdue.”
Continue to the next page for our profile on Cranwood Capital Management...
CRANWOOD: The butterfly effect
When you ask why his firm had such a good year in 2011, Cranwood Capital Management CEO Pete Powers says it simply was lack of a bad year. See, Powers has been trading butterfly spreads in the Treasury futures complex for more than a decade and the only truly bad stretch came in 2009 when the credit crisis dried up the liquidity. Even then his fund only dropped 1.78%.
“Liquidity dampens volatility to a tradable level for a strategy like mine. In 2009, the Citadels, the Bear Stearns, the Lehmans, all the interest rate desks shut down,” Powers says. “I don’t need volatility, I just need volume, enough to get in and out of the butterfly spread because we get flat every day at 3 p.m.”
The Ohio-based fund owns six seats on the Chicago Board of Trade (CBOT) to qualify for member rates for his highly active fixed income arbitrage strategy.
Powers learned the trade on the CBOT floor and perfected it in after-hours electronic markets, which allowed him to move back to Ohio and build an execution team made up of family and friends. The team of eight trades in shifts over the 23-hour market day.
Cranwood trades the two-year, five-year, 10-year Treasury note butterfly and the five-year, 10-year, 30-year Treasury bond butterfly with one trader executing one leg of the spread and another the other leg.
“We do them simultaneously,” Powers says. “One trader will be legging the NOB (buying 10-year and selling 30-year), at the same time I am selling the FYT (buying the 10-year, selling the five-year), so we are building the body of the butterfly together and we are always on the bids and offers trying to get an edge.”
The trade is not only market-neutral but also yield-curve-neutral. “If we are short 10s, we are long fives and 30s,” Powers says. “Basically, we are looking at discrepancies intraday in the relationship in those three maturities as they relate to each other. We don’t take any directional risk, and in theory we don’t take any steepening or flattening risk because each trade has both elements.”
The increased volume in the complex has led to greater opportunities as Cranwood earned 17.74% in 2011. That number comes with an annualized standard deviation below 10%, meaning they outperformed most managers on a risk-adjusted basis. “The risk profile that we present is by far our most attractive asset,” Powers says.
Good execution is key. “Obviously buying bids and selling offers is ideal, but more importantly we don’t do worse than bid, bid, bid; we are not going to give up an edge if we don’t have to.” The strategy is time and personnel intensive, so if they didn’t add value, it wouldn’t make much sense to have eight people executing. “We would probably look to automate, but automating the strategy has not proven to be fruitful because an automated system is going to sell the bids and buy the offers, giving up a chunk of the move,” Powers says. “Right now the team aspect, the assembly line approach, far outperform any type of automation.”
Surprisingly, the long-term zero-interest-rate-policy by the Fed has benefitted the program. “It is a lot easier to predict. [Price] stays in a band over a group of years,” Powers says regarding the effect of the zero-rate policy. “Volume takes off at any hint of an uptick in rates so the fact that volume is still strong and we are at these low rates gives me the confidence that things are only going to get better for this strategy.”
Rising volume and the need for more products is a good sign for Cranwood. “We are doing three auctions a week, two weeks out of every month. The volume is going to be astronomical over the next 10 years,” Powers says.
Not only is volume growing, but also the emergence of the Ultra Bond (30-year bond future with a longer minimum maturity) will add another facet as Cranwood plans to begin trading a 10-year, 30-year, Ultra butterfly in 2012. This should allow Cranwood, currently with $39 million under management, to spread its wings.
Continue to the next page for our profile on Splendor Capital Management...
SPLENDOR: Spreaders beyond borders
Journalism may not seem like the most obvious educational route for two aspiring traders, but for Tom Weiye Tang and Ruhong Huang it made perfect sense. The China-based duo were at the Shanghai International Studies University in the early 1990s when China was just developing a stock market and its modern futures market, and there were no majors in financial markets. “We chose journalism because it allows you to choose later on what you would be interested in, and it paid off,” Tang says. “We had to cover what was happening on campus and we [were able] to learn about it, especially on the commodity side.” One of the things they liked about commodities was the ability to play either side of the market.
“We were fascinated [by futures] because it allowed both long and short positions. Theoretically you could establish spreads. But the problem at the time was that China only had three contracts: Soybeans, copper and wheat.”
Tang would go abroad to get a master’s at Stanford while Huang stayed in China working as a journalist and developing trading strategies. They already had established a philosophy on trading spreads, which would be the basis for their CTA and fund.
As well as working as a journalist and learning to trade the plentiful and liquid U.S. commodity markets after receiving his master’s, Tang worked at IBM Canada as a software developer before returning to China and establishing a trading business with Huang.
The two principals began trading a small number of managed accounts in 2004, and in 2007 Splendor Capital Management was launched to act as general partner for the Credence Oriental Limited Partnership, which trades calendar, geographic and intercommodity spreads. The strategy focuses on the commodity sector, but more recently added equity index and cash equity spreads traded from the same relative value perspective. Credence Oriental has produced a compound annual return of 34.33% since January 2008, with a worst drawdown of 9.18% and a Sharpe ratio of 3.0. The program returned 25.01% in 2011.
Being based in Shenzhen gives Splendor an edge in understanding the complex fundamentals of China. “The Chinese government makes some decisions that might not be market-oriented,” Tang says. “For example, in early 2011 fighting inflation was the main policy, so they put price caps on soy oil.”
The caps hurt crushers in China and the government subsidized them, but it set up a successful trade later in the year when the subsidies ended.
Splendor focuses on China’s commodity markets in executing its calendar spreads but trade on all of the major U.S. and European exchanges as well.
Further, the CTA makes markets for the mostly retail traders rolling their commodity hedges. “The retail investor has to roll earlier, so basically we are offering the liquidity to them and they are offering a premium; that is the theoretical basis for time spreads,” Tang says.
One of Splendor’s most profitable trades in 2011 was long CBOT soybeans and short CBOT wheat in the late spring when the spread rallied nearly $2. “Our supply and demand analysis foresaw the upward movement of the spread,” Tang says.
While the bean/wheat spread may be more typical, they will trade cross-exchange spreads, even putting on crush spreads with one leg at the CBOT and another at the Dalian Exchange. They also will spread the softs sector in the United States and Europe. They trade 30 combinations of spreads and will add more as their assets, currently at $34 million, grow. Based on its returns and the 2011 launch of a Cayman Island-based fund, Splendor can expect assets to grow.
While it may seem strange for commodity traders to branch into cash equities, Tang says they are simply applying the same relative value and spread techniques to a different asset class. “The strategies do not change, only the asset classes,” he adds.
Continue to the next page for our profile on Stratford Capital Management...
STRATFORD: Leading by following the leader
After a tough start, Stratford Capital Management had it best year ever, earning 67.42% in 2011 by keying on the leading sectors and markets to predict the direction of the major equity indexes.
Stratford’s founder, Kevin Benoit, has managed money successfully for both institutions and his own advisory for two decades with a systematic approach, but in 2008 he launched a new and very different strategy.
Benoit’s short-term discretionary equity index program defines the sectors and, in some cases, individual equities that are leading index moves and trades the S&P 500, Nasdaq 100 and Dow futures based on that. If the major indexes have been following one sector and that sector breaks out, the index will follow and Stratford would be in before the move.
“I was able to identify what were the driving forces behind the market, which allowed me to get on the [up-]trends when they were going up, down-trends when they were going down and occasionally go against the trend when I saw [something] really out of whack,” Benoit says. “I may be looking at 10 sectors for every index, but then I look at the top 50 stocks in the index and at groupings of stock that may not be obvious.”
He weighs all these factors and determines what is most influencing the markets. “Lately, I have been watching semi[conductors], especially in the Nasdaq. It is better than Apple or Google even though the weightings are much higher on Apple and Google. The semiconductor sector has been moving the markets,” he says.
What Benoit does is not as easy as it sounds because what sectors the indexes follow change. “Sometimes things will stay the same for a long time and sometimes things will change rapidly. For instance, all year the most important sector was financials. Financials were not always the top sector in weighting in the index, but it was certainly the top sector that everybody was watching for direction,” he says.
When the program has difficulty it usually is because the leading sector changes, but he has a way to watch that as well. He follows the currencies to detect potential changes.
“It helps me determine my influence weighting on the groups of stocks,” Benoit says. “For instance, if the dollar is getting cheaper and oil is moving up, that means that the oil sector is going to be more important. I am not looking at the currency itself, I am looking at how it changes my rankings. If the dollar is getting much weaker or stronger then I know what sectors to pay attention to.”
In August, a month Stratford earned 59%, it was simple. “The battle over extending the debt limit led to extremely choppy markets. That was driving the market up and down every day with huge ranges. I made money every single day. ”
Choppy markets whipsawed long-term and short-term traders alike in 2011, but Benoit avoided this. “One day the market would go up and the next day it would go down, so people who were carrying overnight [positions] got whipped around a lot, but I didn’t because I wasn’t involved,” Benoit says.
His unique discretionary approach also allows him to avoid many of the traps for short-term traders. “I don’t get triggered by programs. When these high frequency traders come in and bomb the market, a lot of people using stops get their stops triggered by these guys. It is less likely to happen to me,” Benoit says. “It may even give me opportunities. If you see the market bombing down and the semis are still roaring to new highs, I am going to be a buyer into that.”
Benoit encourages customers to take profits out following strong performance periods like Stratford has produced over the last two years: 67.42% in 2011 and 58.42% in 2010. That makes the inevitable drawdown less painful and is one reason his assets under management are relatively low. That is bound to change after this year. He also cut his gearing by half in October, which helped keep a fourth quarter dip to a modest -5.22%.
