This is the 24th year Futures has profiled emerging commodity trading advisors (CTAs), and while every year is unique, in 2013 agriculture-focused and niche managers have done well. It is no surprise because it has been another difficult year for long-term trend following. Ag-based managers tend to be more fundamental and discretionary, which has allowed them to avoid the difficulty of the risk-on/risk-off nature of markets in recent years.
It also makes sense for emerging managers to try to distinguish themselves because even in a good trending environment, it is difficult for emerging trend-followers to be recognized. It’s good to be unique.
It is always a tough road to launch a new trading business, and this year once again has been difficult because of the fallout of MF Global and Peregrine Financial Group and the resulting additional regulatory burdens.
When reviewing candidates, we look not only at recent performance, but also the manager’s general approach to trading, risk management, consistency in style and fee structure.
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.
Leapmach Capital: Taking care of risk
Matt Chuang says what separates the Leapmach Capital Management Delta Neutral Short-Term Strategy from the scores of other option writing strategies is its strong emphasis on risk management.
While that claim is hardly unique, Leapmach, which Chuang founded in 2011 after working in the trading industry for seven years, does many things differently. First, it is diversified, trading all the major sectors instead of concentrating on stock indexes. And Chuang approaches each sector differently, utilizing both fundamental and technical analysis in his mostly systematic approach.
“Technical and fundamental analyses are equally important to my trading strategy,” Chuang says. “Based on the product traded, I may weigh on one more than the other. For example, I would pay more attention to fundamentals in equity indexes whereas in gold, technical analysis may be more meaningful.”
He evaluates each market and sector separately based on volume and volatility. “[Because] risk management is my utmost priority, I like to be as diversified as possible,” Chuang says, “I use a variation of one core strategy on each sector because they all have different intrinsic characteristics. Trading multiple markets offers me more [seats] at the table, so if one or a few markets’ volume and volatility dry up, I could still be active in other markets.”
Although the strategy is based on premium collection, he takes both long and short options positions; and while his long options are usually a hedge, there are times they also may drive returns. “I am long options mostly for hedging purposes,” he says. “I understand by entering [spreads], there is a trade-off in returns, but I reduce certain market risks. My long-to-short position ratios vary from time-to-time and product-to-product depending on current and prospective market conditions. Only at the times when the markets become extremely volatile and directional [do] long options generate profits.”
Chuang earned a master’s degree in electrical engineering from the University of Illinois, but a roommate involved in trading helped him change his career path. After graduating in 2005, his roommate advised him to go into trading, so he turned down a more lucrative position and took a job with, at the time, a start-up proprietary trading firm.
“I tried trading for a while and never went back [to engineering],” Chuang says.
Most positions are initiated with spreads based on where Chuang expects a market to move over a specific period of time. “For every trade I make, I always make sure within a certain time period I expect the market to move within a certain price range, and that is how I initiate a trade,” Chuang says. “Before I make any trade, I make sure the time window I am looking at is good for my client and then I decide [where] the price range for the underlying futures contract will move in that time period.”
Leapmach maintains offices in Chicago and Hong Kong. Chuang splits his time between Chicago and Asia where he has other business interests. He was raised in Taiwan before moving with his family to Canada and then to Chicago after college.
His strong emphasis on risk management has been tested through some volatile markets. Leapmach has produced a compound annual return of 15.29% since its January 2011 launch with a worst drawdown of 1.02%.
Leapmach’s trades can last from a few days to several months, and Chuang is constantly monitoring and adjusting them. “We all know options writers’ worst nightmares are extreme directional price movements,” Chuang says. “Having the ability to monitor margins and risks real-time has prevented me from suffering huge losses in these adverse events.”
In that respect, Chuang has managed to take the worst fears of options writing and profit from them.“I believe that there are more money making opportunities when markets are in a berserk mode, so there is nothing wrong [with hitting] the reset button even if that means losing money and start[ing] fresh.”