Hamer Trading appears to be a basic, solid, diversified, long-term trend-following commodity trading advisor (CTA). A program you think would have garnered more assets until you realize that it is one of those overlooked trend-followers that allocators avoid, despite strong returns, as they invest with established managers and then look for alternatives to trend following. That is until you see its 2011 performance. Hamer earned 24.97% in a year that saw most CTAs struggle, particularly those classified as long-term trend-followers.
When you dig a little deeper, things get even more complicated. See, Jim Hamer, principal of the firm, initiated some short-term and countertrend elements in the early 2000s after getting tired of being told by various allocators that they don’t need any more exposure to trend-following. “I went to a [Managed Funds Association] conference and was told by an allocator that he would be interested after I had $5 million under management and a five-year track record, unless I was a trend-follower, in which case he would probably not be interested at all,” Hamer says.
Hamer was disappointed because his program had performed well: 25.63% in its first full year in 2000 and 20.42% in 2001, a generally poor period for trend-followers. “We consistently had made money,” he says, but based on what he heard, he decided to make changes, “working in short-term and countertrend systems from 2001 to 2007.”
The funny thing is that it was these elements that underperformed, particularly in 2004-06, a tough stretch for CTAs and the only three negative years in the 13-year history of Hamer’s program. “We still had long-term trend-following as a part of the program but it wasn’t the majority of the program. We lost money in ’05 and ’06 and began reviewing things. The only thing that held up over time was the long-term trend-following,” Hamer says.
Near the end of 2007, Hamer jettisoned the other stuff and improved on the long-term trend system. From 2008 on, the program produced a compound annual return of 24.61% with a worst drawdown of 13.41%. A period that included two of the five negative years for the Barclay CTA Index, 2011 was the worst.
“We got rid of all the short-term and intermediate stuff and began focusing 100% on long-term trend-following in ’08 —granted ’08 was like a perfect storm — but we did great.”
Hamer became interested in trading while at West Virginia University and working at the family lumber business. He had some initial success and began looking at futures to exploit the greater leverage. After blowing up, he knew he had to learn more and decided to go to Chicago and lease a seat at the Chicago Mercantile Exchange. “The losing got me interested in studying. After a huge loss in 1987, I got serious about trying to learn the proper methods,” Hamer says.
He didn’t take to floor trading and wasn’t making any money, so he went back to West Virginia and continued researching with a focus on systematic trading. He was drawn to the work of Ed Seykota after reading about his methods in “Market Wizards,” the book on successful traders.
Hamer began corresponding with Seykota, who later would take Hamer under his wing. “He agreed to mentor me and I moved out to Incline village (outside of Lake Tahoe) and lived with him for two months in 1997.”
“He didn’t show me how he traded,” Hamer says. “I had some ideas about trading systems. I had some ideas about what I thought a trend-following system should look like and he wanted to be sure that: A) I was backtesting it properly, and B) how I [was] allocating the risk. We focused more on that.”
From those lessons, Hamer launched his diversified long-term trend-following CTA in 1999. The program is not the same today, though the underlying philosophy is. It trades 31 markets in seven sectors and keeps a close eye on risk. Initially, each trade risks only 0.3% of the overall account. He enters in three steps. “Each time the market has to give us a confirming signal that the trend is still in place before we add the second or third piece,” Hamer says. “It is a breakout system. Our stops are pretty wide initially; our average trade is 100 days. We are very patient to not tighten up those stops until we make a multiple of our initial risk.”
This is similar to Seykota’s approach that risks very little initial capital but will add to winners and give them room to grow.
Diversification is important. “I don’t know when the next trend is going to develop, but I want to have exposure to it,” Hamer says. In 2011 it was the interest rate sector and softs, but every year is different.
A big part of Seykota’s philosophy has to do with psychology and making sure the system you develop matches your personality. When it doesn’t, traders tend to sabotage themselves. Hamer is comfortable with his long-term trend-following approach and after proving his methodology has unique attributes, some allocators are taking a second look and finding their own comfort level.