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.”
LEH Advisor: Selective diversification
Typically, commodity trading advisors either are diversified or stick to one market or market sector, but LEH Advisor LLC has a different approach — trading one market in four major market sectors. That is not all that is unique with Larry Hirshik’s short- to medium-term strategy.
Hirshik traded for various large institutions for two decades before going out on his own. He developed his Breakout Point strategy, which trades 30-year U.S. Treasury bonds, the euro currency, e-Mini Nasdaq 100 and silver, in 2009.
“I picked those markets because they are markets that trend well,” Hirshik says.
His selectivity may be a bonus as the few managers who fall into the medium- to-long-term trend-following camp that have been successful the last few years have done so by concentrating on a few markets and avoiding the chop of the risk-on/risk-off trading environment.
The Breakout Point strategy is short- to-medium-term and utilizes countertrend as well as trending elements as part of a technical approach.
Hirshik uses basic technical tools: MACD, Stochastics and SAR. But he does not apply them to the four markets he trades; instead, he applies them to two exchange-traded funds related to each of those markets. For example, for silver he will apply his technical models to the GLD and SLV ETF and come up with a signal.
“We run indicators on ETFs and those ETFs say buy, sell or do nothing, and then we take those trades in the futures markets,” Hirshik says. “I don’t run any technical indicators on futures. The futures is what I take the positions in; the ETFs tell me whether to take the position.”
Hirshik began trading for Manufacturers Hanover Bank after graduating from UCLA with an MBA in 1983. He would go on to trade for numerous bank desks managing bond portfolios.
“I was a manager on the trading desk so I was running these interest rate derivatives books; there was a lot of yield curve analysis and a lot of quantitative work,” he says. Once he went out on his own, he developed a quantitative approach to trade credit default swaps. But as the market grew more difficult, he shut the fund down, luckily before the huge volatility spikes in CDS leading to the credit crisis.
“We closed down CDS hedge fund in 2006. We were fortunate because it would have been messy…spreads between corporate bonds and CDS became huge. The spread blew out,” he says.
Working on order desks of large institutions helped in developing his current strategy. “[I] learned to be humble, learned to respect the market and learned how firm the market can be compared to your conviction,” Hirshik says.
It taught him the risk of overleveraging and gave him an appreciation of the safety of listed regulated markets. “You are at the whim of the people you have credit agreements with, and that is one of the pitfalls of the OTC market.”
His strategy, which has produced a compound annual return of 24.62% and is up 30.51% though August, only trades one contract in each market for every $100,000 invested, except for silver which trades one contract per $200,000.
Volume also plays a role in his signal. “We compare a moving average of volume with the current volume and if the current volume beats the moving average by a certain amount, it adds to the weight [of the signal],” he says.
Redleaf: Generations in the making
Redleaf Capital, LLC has been a registered CTA for just over a year, but founder and President H. Rogers Varner Jr. and his family have spent generations in trading, mainly agriculture, and especially in cotton.
“My background is in cotton,” Varner says. “We were a cotton family for generations. My dad was a merchant, my grandfather grew it and my great grandfathers grew it and fought Yankees over it. Our thing has always been cotton and I still gravitate toward it.”
Varner, based in Cleveland, Miss., launched an introducing brokerage business in 1987 with a focus on helping farmers, particularly cotton farmers, hedge their crop.
“The first thing [to do] is to protect your customers’ equity and at the same time try and expose [them] to risk and, to that end, I try and recognize two or three good trades a year and then try and get on the horse without getting bucked off,” Varner says.
Varner earned a master’s degree in engineering from Tulane University in New Orleans, and worked as an engineer for eight years before getting involved in trading. Despite that background, today he focuses on the fundamentals.
“When I got into this business I was used to the mathematics, so I gravitated toward analysis, and I learned to do some fundamental analysis from John Bondurant (see December 2004 Trader Profile),” Varner says.
Basically he selects a direction based on the fundamentals and uses technical analysis for timing of entries and exits. “You have to have a fundamental bias to a market,” he says. “If you don’t have that fundamental bias to the market, you are just going to blow with the wind and a lot of times these systems get chopped up in sideways markets.”
One of the key fundamental factors for Varner is to determine production costs. It goes to his family’s history in the cotton business and working with producers. “Once you have that, you have an idea with regard to supply as to whether or not the people in the world who mine it, farm it or produce it have an incentive or disincentive [to do so].”
From there he looks at the demand side.
Varner has spent his career working with small farmers, so when he launched his CTA he kept the minimum investment levels low so his hedging customers could participate. He utilizes mini contracts so customers can invest with him for as little as $25,000. His Fallback fundamental program, which launched January 2011, is up 29.01% through August and he has a compound annual return of 43.97%.
He trades a diversified group of commodity markets — even some financials — but he concentrates on ags with a 25% allocation to grains and a 25% allocation to softs (mostly cotton).
Varner uses options in his strategy because of his long-term outlook. “A lot of times with fundamental analysis you can be too early,” he says. With options you do not have to be as precise on the timing of a move to profit from it. “[The] first thing I do is buy options, and then I do some more work and see if the idea is worth going into futures, but [first]I go ahead and get something done in options and have some exposure to it,” Varner says. “Some of these big moves take a year or two. I am not a day trader — hopefully when I put a position on, it is good for a year to 18 months, and then I learn to protect and trade around it.”