This is the 23rd year Futures has profiled emerging commodity trading advisors (CTAs), and while every year is unique, we have seen a trend in recent years toward more short-term and option programs. This year we focus on three unique option programs. Perhaps this is the result of a difficult environment for trend-followers, but it also may be a realization that for emerging managers to be recognized, they must separate themselves from the pack and offer something unique.
It is always a tough road to launch a new trading business, and this year has been even more difficult because managers looking to get off the ground also had to cope with the failures of MF Global and Peregrine Financial Group.
When reviewing candidates, we look not only at recent performance, but also the manager’s general approach to trading, risk management and consistency in style.
Previous “Hot New CTAs” have gone on to great success and some have slipped into obscurity. This is not an endorsement but a review of new talent. We would like to thank all the managers who sent us their documentation. We will do this again next year, so let us know how you are doing.
Continue reading for more on each of our three Hot New CTAs…
Robert Charles: A legacy of excellence
Robert Teel took a long time to become an emerging CTA. He started out trading the Value Line Stock Index on the floor of the Kansas City Board of Trade (KCBT), had a successful legal career, helped launch a family office and more recently turned his years of proprietary trading into a promising new CTA.
Charles Feurzeig hired Teel away from the law firm he was working at in San Diego in 1991 to help run his real-estate business. The two became fast friends and Feurzeig encouraged Teel’s passion for trading first by having him run his private equity investments and eventually a family office.
Teel earned a law degree and MBA from the University of Kansas. He traded at the KCBT before moving to San Diego to launch his law career.
Teel’s proprietary trading record goes back to 1996 and it is a testament to trial and error. “As a prop trader, I made every mistake in the book,” he says.
Teel’s trading evolved toward options, but what started out as a pure premium collection strategy trading only S&P 500 options turned into a volatility arbitrage approach that trades a diversified group of markets in several sectors. He trades grains, metals, energies, bonds and the S&Ps only on rare occasions.
“I have grey hairs to match each volatile trading period,” Teel says, adding, “If I was just an S&P trader, I would not be sleeping very well at night, and I sleep well.”
Teel says that you could take a snapshot of his program at a moment in time and it will look like a pure premium collector, while at another moment in time its long option position value will exceed its short option exposure.
“It is really a function of market conditions,” he says.
Teel describes it as an arbitrage between statistical and implied volatility. “What is our secret sauce?” Teel asks rhetorically. “We try to be delta neutral, gamma neutral and theta positive, which is a bit of a trick. You can build that only on an ongoing basis; it is very hard to put a trade on that looks like that.”
He starts with a short options position and then uses long options or futures to capture equity if the conditions are right.
“I put myself into a position that hopefully I have a floor on my profit, and if I need that delta adjustment, I am going to pick up profits on the tails if it moves that far,” Teel says. “[Are my long options and futures] a hedge or profit? I don’t know. It is whatever I need to do to keep it delta neutral. A lot of the time that will result in a significant profit on the long position, the futures or the long options, but that is not [what] I targeted.”
In 2010 after his mentor and namesake for his program passed away, Teel decided to take the strategies that evolved over the years and open his own CTA. The program has not had a losing month since launching in September 2011 and has returned 39.32% in 12 months. While a drawdown will come, Teel targets a return-to-drawdown ratio of 5 to 1.
“Typically I am not buying volatility in the markets that are low, though I will buy it to hedge out the risk and to maintain delta neutral,” he says. “In fact, we are in a volatility contraction period and what works there are the Christmas trees, vertical spreads and one by twos.”
Since launching the CTA, Teel has sharpened his focus on the risk side but still has ambitious goals. “Our objective is 30% with a 6% drawdown,” he says, while acknowledging, “Our numbers right now are unsustainable.”
His proprietary record is even more impressive, so he feels there is no reason he can’t maintain that profit ratio, which he attributes to its rigorous nature. “I don’t think of it so much as unique as rigorous,” Teel adds.
Charley Feurzeig would be proud.
Continue to the next page for our next Hot New CTA…
Hyman: Exploiting statistical edges
Like many options-based strategies, OptHedge Advisors’ Diversified Futures and Options Program relies on premium collection for much of its profits, but as we are seeing more and more, it uses the vast array of option tools to optimize every trade regardless of where the profits come from.
Like several newer and innovative option programs, there is a value element that constantly looks to buy implied volatility low and sell implied volatility high.
Coby Hyman, founder and principal of OptHedge, began trading proprietary money in this discretionary option program in October 2008. It has produced an impressive compound annual return (CAR) of 30.82% with a worst drawdown of 4.08%. When you only look at returns once he added customers in September 2010, it remains impressive with a CAR of 20.81% and a worst drawdown of 2.31%.
Hyman had traded on his own for more than a decade before launching the program. He worked for two large hedge funds after earning a law degree from the University of Texas, and while the experience working with professional portfolio managers was valuable, he was never involved in trading operations.
“I was thrilled that I was doing so well in my personal account and wanted a career where I had more control over my schedule,” Hyman says.
His program looks for various option strategies with a statistical edge. All trades are entered as spreads, but they can be calendar spreads, ratio spreads or simple strangles.
“What I am looking for is a situation where options at certain strikes or in certain months that I am buying are cheaper from an implied volatility perspective than the ones that I am selling,” he says.
The program trades roughly 15 markets including grains, energies, metals, softs, currencies, bonds and stock indexes, but generally will have positions on in only five markets at one time.
“I constantly am looking at the volatility landscape to see if implied volatility is higher currently than it has been historically,” Hyman says. “But what I am also looking for is big skews. If there is an enormous skew where the deep out-of-the-money options are much more expensive than the at-the-money options, I consider a ratio spread because you are selling the expensive options in that landscape and buying the cheaper at-the-money options. You can manage the risk on that type of trade pretty tightly.”
But that is only one statistical edge he looks for. “I also am looking between months. A lot of times the near-month options will be trading at a higher implied volatility than the options further out.”
This summer he was able to exploit anomalies in premiums in the Sept./Dec. corn option spread.
“I [sold] an option in the near month that essentially paid for the option that I [bought] in the far month,” Hyman says. “The trade can benefit from time decay as well as the shrinking volatility differential over time as it gets closer to expiration.”
“Usually I am doing those calendar spreads fairly deep out-of-the-money. The goal is, as time goes by, to have the option that you are selling decay at a quicker rate than the option that you are buying,” he says. “If the option that you are selling expires worthless, the option that you are buying still likely will have value.”
Hyman also will enter strangles in more of a pure premium collection play. He says that his various strategies add an extra element of diversification to his program.
“I simultaneously have a ratio spread in one market, a calendar spread in another market and strangles in a couple of other markets, so my positions are not correlated with each other.”
That extra level of non-correlation has helped to produce an impressive risk return profile. The program has had only three down months, the worst, -4.08%, in May 2010 when the Flash Crash occurred. Looks like Hyman has found his statistical edge.
Continue to the next page for our next Hot New CTA…
Tang: Automating volatility arbitrage
Ziqiang (Chon) Tang, founder of Junzi Capital Engineering, has a résumé that screams quantitative trader. Tang worked as vice president of engineering for a provider of industrial automation solutions for a decade after earning a Master’s in Computer Science and Electrical Engineering from the Massachusetts Institute of Technology, and degrees in Computer Science and Electrical Engineering from UC Berkeley.
In 2009 he launched Sacramento, Cal.-based Junzi. “I would describe it as pattern recognition-based volatility arbitrage,” Tang says. “It is definitely not normal premium collection. If you were collecting premium, you don’t want a big move. Some of our worst days come when prices don’t go anywhere.”
Tang actually has two programs that work closely together, although one uses discretion and the other is completely systematic and automated. He starts out by selling strips of near-the-money options in a diverse group of markets in the energy, metals, grains, livestock and softs sectors that have an attractive level of implied volatility. He is looking for an exploitable gap between implied and realized volatility.
“Say crude oil is at $100. I will buy a bunch of calls all the way up to $110 and sell puts down to $90,” Tang says. Then he turns on his automated “glass box” strategy. “If crude goes to $101, I would buy a future to hedge calls,” he adds.
The automated system continues to do this as the market moves up and down.
“It is a very traditional delta hedging program,” Tang says. “Every futures contract that I trade and close, I will be closing for a loss.”
Tang says he is attempting to execute “delta hedging trades in a more intelligent way, in a more [robust] way and a quicker way than the rest of the market. By doing that more effectively than the rest of the market, I claim that profit. That is why it is truly an arbitrage.”
He usually will hold his short options to expiration and when they expire in-the-money, the automated system should have bought enough futures to cover all the in-the-money calls.
In fact, he often makes money on the long futures as well as all his puts in that scenario.
“There are some months where prices don’t go anywhere. The options side will show profits because there will be no hedges against them and they all expire worthless,” Tang says. “If crude goes to $120, the options side gets killed. Hopefully, if the strategy works the way we designed, the futures side has a nice big profit.”
As opposed to traditional options sellers, he does not want the risk of low probability price spikes. “I am very careful to sell options within one standard deviation of the current price because I don’t want exposure to extreme events,” Tangs says. “I don’t really like the optionality of options. I want to trade on volatility, not on option value.”
He says, “There are two things that will cause me to lose. One is a gap move: If my program can’t trade, I am in trouble. Number two is when realized volatility is very high.”
Because of this, his automated hedge strategy runs nearly 24 hours. He even has a technology team in China monitoring the health of the program overnight.
But at its core, Junzi is trading the difference between implied and historical volatility. “There will be some months where the profits come from the options side and there are some months where the profits come from the futures side. It is like a pairs trade,” Tang says. “I do need profits from the futures side. Figuring out the right balance is part of what makes it hard.”
It may be hard as well as complex, but so far Tang is succeeding with a CAR of 23.72% and a worst drawdown of 9.11% over three years.
Continue to the last page for an update on last year's Hot New CTAs…
HNCs a year later
As we noted in our introduction, it was a tough year for emerging commodity trading advisors (CTAs). This group tended to have more exposure to MF Global and Peregrine Financial Group than more seasoned and institutional CTAs and, given their size, were more sensitive to the disruptions these failures caused.
Bouchard Capital LLC
Bouchard finished 2011 up 4.82% and had a choppy start to 2012 but was mostly flat throughout the year. It ended up down 2.64% but had to close after the PFG bankruptcy as it held much of its customer and proprietary accounts with PFG.
Tanyard Creek Capital
When we spoke to Tanyard a year ago it was in the midst of a breakout, both in terms of performance and money under management. The livestock program continued its strong performance in 2012 and its assets have reached $55 million.
Adantia (Very aggressive program)
The Adantia very aggressive program finished 2011 strong; earning 43.92% for the year, but 2012 has been a different story as the program suffered through a sharp drawdown of 19.82% in May. However, its aggressive program is positive on the year and its other programs are only marginally lower.
Click on chart to enlarge.