It may seem strange that Esulep LLC was one of the Top Traders of 2013 earning only 10.52% in a directional strategy trading the S&P 500 but on a risk-adjusted basis it outperformed all comers.
Esulep Founder and Principal Matt Peluse says 2013 was not their best year, ironically that is attributable to the very strong environment in equities as Esulep has a correlation of -0.12 with the S&P total return index since its April 2008 launch.
“It doesn’t matter what we use at the end of the day, we can translate the [Esulep Permo Fund] philosophy to a broad range of markets,” Peluse says. “The S&P 500 just happens to be one of the most liquid markets in the world and it has the least volatility of any of the major indices.”
He defines that philosophy as very low risk and conservative, which is clear when you measure their performance against everyone else on a risk-adjusted basis. “We assume that every trade we put on is going to be wrong and go against us and be the worst trade in the world — that is just the way we are,” Peluse says. That philosophy has served his investors well with off-the-charts risk-adjusted return performance.
The strategy determines support and resistance levels and executes directional trades through options on the S&P 500. Peluse develops a 90-day market outlook and puts on hedges even before their actual directional trades. “We put on our hedges first and then our core positions. Everything is an option on an E-mini so if we want to go in a futures direction, we do an equivalent using options,” Peluse says. “It is rules-based investing. We have our analytics that develop our support and resistance levels; we then have the execution signals that tell us when to put on a position.”
He says the system asks, “Where are the support levels if we start going down, where are the resistance levels if it starts going up, those sorts of things.”
Every position is hedged. “The two hedging sub-strategies are inversely correlated to the core strategy so if we have bullish cores, we have bearish hedges,” Peluse says. “We have our hedge on beforehand; just like everyone buys car and house insurance before something happens.”
The program can be bullish, bearish or market neutral. “We are not trying to hit it out of the park every time. …it is just how we do it that makes us different from virtually everybody else.”
And their performance shows this as Esulep has produced a compound annual return of 13.24% with a worst drawdown of 12.73% and a Sharpe ratio of 2.12. Esulep tends to earn its strongest returns when the underlying S&P 500 struggles.
The core positions are held 30 days or less and the hedges tends to last 45 to 90 days. “Our hedges cover the core position for the current month and the next month,” Peluse says. “It is a take what the defense gives you [approach], if the trade is going to be five ticks then we are trying to get four or five ticks; if the trade is only two ticks we are not going to try and get five ticks. Everything is based on the markets and what the markets are telling us.”
They do not put on specific spreads but build them organically. “If there is an opportunity where a butterfly is the most optimal options position then that is what we will do. We have a butterfly on right now. If the market tells us that, then we will do it. If the market tells us to have a bull call spread or a bull put spread, then we will do it; it is all based on what the market tells us to do.”
Peluse started out as an equity index trader for a proprietary firm. A year later he began his own prop trading firm with a couple of other traders. By 2007 he had developed some systematic strategies and was looking to do something new. “I decided to expand the strategies I started the previous few years and expanded the time horizon; made it an investment under management model and reduced the risk dramatically.”
He went live in April 2008, perfect timing given his non-correlation with equities. “It was an exciting year,” Peluse says. “We want to have absolute return no matter what the market does. Our benchmark is zero. In 2008 we made [15.5% in nine months], in 2010 and 2011 we also had very good years.”
And in 2013 Esulep outperformed the S&P 500 once you normalize their standard deviations, and did it with a correlation to the S&P 500 of -0.43. That is an impressive combination and bodes well for the Chicago based manager.
About the Author
Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange. Dan joined Futures magazine in 2001, before the name change to Modern Trader, and in 2005 he was promoted to Managing Editor, responsible for overseeing all the content that went into Futures and futuresmag.com. Dan’s incisive reporting and no-holds barred commentary places him among the most recognized national media figures covering futures, derivative trading and alternative investments.