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.