SPLENDOR: Spreaders beyond bordersJournalism may not seem like the most obvious educational route for two aspiring traders, but for Tom Weiye Tang and Ruhong Huang it made perfect sense. The China-based duo were at the Shanghai International Studies University in the early 1990s when China was just developing a stock market and its modern futures market, and there were no majors in financial markets. “We chose journalism because it allows you to choose later on what you would be interested in, and it paid off,” Tang says. “We had to cover what was happening on campus and we [were able] to learn about it, especially on the commodity side.”
One of the things they liked about commodities was the ability to play either side of the market.
“We were fascinated [by futures] because it allowed both long and short positions. Theoretically you could establish spreads. But the problem at the time was that China only had three contracts: Soybeans, copper and wheat.”
Tang would go abroad to get a master’s at Stanford while Huang stayed in China working as a journalist and developing trading strategies. They already had established a philosophy on trading spreads, which would be the basis for their CTA and fund.
As well as working as a journalist and learning to trade the plentiful and liquid U.S. commodity markets after receiving his master’s, Tang worked at IBM Canada as a software developer before returning to China and establishing a trading business with Huang.
The two principals began trading a small number of managed accounts in 2004, and in 2007 Splendor Capital Management was launched to act as general partner for the Credence Oriental Limited Partnership, which trades calendar, geographic and intercommodity spreads. The strategy focuses on the commodity sector, but more recently added equity index and cash equity spreads traded from the same relative value perspective. Credence Oriental has produced a compound annual return of 34.33% since January 2008, with a worst drawdown of 9.18% and a Sharpe ratio of 3.0. The program returned 25.01% in 2011.
Being based in Shenzhen gives Splendor an edge in understanding the complex fundamentals of China. “The Chinese government makes some decisions that might not be market-oriented,” Tang says. “For example, in early 2011 fighting inflation was the main policy, so they put price caps on soy oil.”
The caps hurt crushers in China and the government subsidized them, but it set up a successful trade later in the year when the subsidies ended.
Splendor focuses on China’s commodity markets in executing its calendar spreads but trade on all of the major U.S. and European exchanges as well.
Further, the CTA makes markets for the mostly retail traders rolling their commodity hedges. “The retail investor has to roll earlier, so basically we are offering the liquidity to them and they are offering a premium; that is the theoretical basis for time spreads,” Tang says.
One of Splendor’s most profitable trades in 2011 was long CBOT soybeans and short CBOT wheat in the late spring when the spread rallied nearly $2. “Our supply and demand analysis foresaw the upward movement of the spread,” Tang says.
While the bean/wheat spread may be more typical, they will trade cross-exchange spreads, even putting on crush spreads with one leg at the CBOT and another at the Dalian Exchange. They also will spread the softs sector in the United States and Europe. They trade 30 combinations of spreads and will add more as their assets, currently at $34 million, grow. Based on its returns and the 2011 launch of a Cayman Island-based fund, Splendor can expect assets to grow.
While it may seem strange for commodity traders to branch into cash equities, Tang says they are simply applying the same relative value and spread techniques to a different asset class. “The strategies do not change, only the asset classes,” he adds.
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