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.