Sometimes a simple strategy can be the best strategy. At least that’s what Robert Kessler and Eric Hickman believe for Kessler Investment Advisors’ Cornerstone Absolute Return strategy. Confining themselves to the U.S. Treasury complex gives them something else — clarity.
“We really don’t have a problem telling people what we do,” Kessler says, adding that is not the norm in the space.
At its most basic level, Cornerstone takes Kessler’s more than 35 years of market experience and macro-level understandings and pairs it with Hickman’s mathematical background. The result is a systematic trading strategy that uses the Treasury complex to express an opinion on the larger economy. In their own words, “The strategy takes positions based on the investment managers’ systematically translated understanding of how macro and technical indicators predict movements in interest rates, both from an empirical and logical perspective.”
Kessler started trading in the equities business in 1967 when he was 25 years old. He did very well in the beginning, and then the markets humbled him. “If you’re lucky enough to be reasonably good at something, you end up thinking you’re not only good, but great. Then a couple of years later you learn the truth and lose a whole lot of money,” Kessler says.
He shifted his focus to Treasuries and in 1986 founded the Denver-based Kessler & Company Investments, Inc., a broker-dealer. He launched the advisory firm in 1994.
Hickman joined Kessler straight out of school after graduating from the University of Colorado with a degree in mathematics in 2001. Although he was hired initially to handle the firm’s information technology needs, he quickly found himself doing analysis and was tapped to build an index using leveraged Treasuries.
That index culminated in a long-only Treasury product that was sold to Goldman Sachs. The fund focused on buying the short end of the yield curve with some leverage to take advantage of the Federal Reserve lowering rates. Once the Fed funds rate was frozen at zero, it basically was the end of the trade and the fund.
From there, the duo wanted to take advantage of directional movements in the Treasury complex using a systematic approach. That transition began in 2005, and the Cornerstone Absolute Return strategy was launched in June 2007. The strategy focuses on exchange-traded futures products across the U.S. yield curve from two-year notes up to 30-year bonds.
The Cornerstone strategy returned 11.57% in that first partial year and 11.98% in 2008. They opened the strategy up to more investors when they added a commodity pool in August 2010. It is up 2.40% for 2012 through May and has annualized 9.10% return since inception. The strategy has accomplished this with pretty tight risk measures. It maintains a margin to equity ratio of 5% and a Sharpe ratio of 1.03.
Hickman says Kessler’s edge is because of their understanding of what is affecting Treasuries on a macro-level. “It’s knowing what does and doesn’t matter in the Treasury market. There is so much that does make a difference in [it] that you can get caught up in every little comment,” he says. “We boil everything down to its fundamental level.”
To that end, they use a proprietary economic indicator that uses 21 reports, such as payrolls, ISM and personal consumption, to determine if they should be long or short the market.
The result is a more methodical strategy with a longer time frame for many trades. “We’re not traders in the sense of looking at a screen all day and trying to beat someone to a trade; we’re traders in the sense that we want this position and we probably want this position for quite a while,” Hickman says. “We’re not trying to compete on an hourly or daily basis; we’re competing on a monthly or yearly basis.”
A key part of the trading philosophy at Kessler Investment Advisors is positioning. Hickman says that instead of focusing on when to put trades on, when to take them off and how long to keep them on, they focus on the position. “Today, I might have 13% of my trade; tomorrow I’ll have 15%. We vary it through a continuum,” he says.
Hickman handles much of the strategy’s day-to-day monitoring and trading and Kessler keeps it on track. “My role is to look at this every day and try and figure out anything that may be wrong with it,” Kessler says. “I know what’s right; I know we’re making money. So what? They key is what can go wrong?”
For Kessler and Hickman, the goal of Cornerstone is consistency in returns. It currently has about $31 million under management.
Albert Einstein once said, “Everything should be made as simple as possible, but not simpler.” At Cornerstone, they took that philosophy to heart and are proving you don’t need a complex strategy to be successful.
