Abraham: Reinventing a legend
Salem Abraham launched his long-term trend following strategy in 1988 right out of college. He had a passion for trend following and systematic trading partially based on stories he read in Futures magazine.
His family owned a ranch in Canadian, Texas and was in the oil and gas business. His grandfather famously asked Salem regarding his dreams of trading, “Of all the ways to lose money, why did you pick the fastest?”
Abraham, however, did not lose. He earned more than 100% in his first full year and built one of the most successful long-term trend-following programs in the industry, with a compound annual return of 39.07% during its first seven years managing assets of more than $100 million.
A flat performance period beginning in the late 1990s, however, caused redemptions and forced Abraham to build back his CTA from nearly scratch, which he did. His program earned extremely strong returns from 2000 through 2004, but the industry was changing and if he wanted to tap into institutional allocations, he knew he had to adjust his approach. Allocators were not as interested in huge returns as smoother return streams and high Sharpe ratios, so in 2006 Abraham employed a multiple-strategy approach and dialed down his leverage.
He added short-term and counter trend strategies. “We did trend following for 17 years,” Abraham says, “The last nine years we traded more strategies; that broadened our diversification and reduced our volatility so our annual standard deviation was just under 10%.”
“We added short-term trend, some momentum strategies and a stock index program traded differently and we added a mean reversion strategy. When you blend those together it pulled down the overall volatility but it still allowed you to make a nice return like we saw in 2014,” he says.
Abraham’s core strategy earned 21.20% in 2014 — its X2 program, which still uses less leverage than the original, earned 48.53% — but when normalizing the standard deviation it outperformed nearly all the programs in the Barclay database in 2014.
“So, not only are we making money but making money in a smooth fashion. It’s nice to make money; it is better to make it smoothly,” Abraham adds.
“That was certainly a big change and it has been helpful. Unfortunately, the last five years we had crummy performance but from 2006-08 we averaged about 20% with volatility at 10 or 11, and in 2014 it all came together.”
The one thing that Abraham has remained consistent with for more than 25 years is his allocation to commodities. He has always maintained at least a 50% allocation to physical commodities, which accounted for even more of his profits in 2014.
“There were a lot of places to make money in 2014,” Abraham says. “Everyone talks about how the last quarter was great; it was, but the first three quarters were good too. Our returns were evenly distributed throughout the year. Two thirds of our money was made in commodity futures, that is one of the things that make us unique. The meat sector was the best, the big rally in cattle and hogs. Another great trade was long milk.”
Yet despite approximately $400 million under management, Abraham is still able to allocate trades to milk, which provides valuable non-correlation to the rest of the markets he trades.
“We milked the milk trade all year long,” Abraham jokes. “We have been trading it for five years. We pride ourselves on understanding these thin markets and knowing how to trade them and getting something done without getting beat up too much.”
It is something that Abraham has done well for years. His original and adjusted program never lost more than 11% in any year despite trading at a level capable of earning triple digits.
His new approach allows less drama. “We have done the research and the math; it is like a fund of funds. You blend strategies and get the average rate of return of all the strategies but you get much lower volatility,” he says. “Sometimes you get a sophisticated client who understands trend following and is fine with the volatility, but most people, even if they want you to be that piece of the puzzle, still have to explain to an investment committee why you were down 12% in a month.”
Abraham compares performance to weather in Texas. After a long drought things turned around in 2014 and he is looking for another profitable stretch.