From the November 2013 issue of Futures Magazine • Subscribe!

Hot new CTAs move beyond rough couple of years

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.”

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