The Ins & Outs of Using Managed Futures

Diversification remains the Holy Grail when it comes to managing client portfolios. An ideal diversifier would provide low-volatility, largely positive returns and low or negative correlations with clients’ existing assets, since the goal is to achieve an improvement in the portfolio’s risk-adjusted returns.

A recent white paper from San Francisco-based Forward Management makes the case that managed futures can accomplish those goals. Their argument: the Barclay Commodity Trading Advisor (CTA) Index has produced long-term returns that match the S&P 500 Index and outperformed the Barclays Capital U.S. Aggregate Bond Index.

During the 1980-2011 period, the CTA Index was slightly less volatile than the S&P 500. Plus, it has also significantly lower one-month maximum losses, as shown in the following table:

Comparison of Monthly Returns by Asset Class: 1/1/1980 – 12/31/2011

	Annualized Return	Standard Deviation	Maximum Monthly Decline	Correlation to the S&P 500
Barclay CTA Index	11.16%	15.07%	-9.81%	0.01
S&P 500 Total Return Index	11.06%	15.62%	-21.54%	1.00
Barclays Capital S.S. Aggregate Bond Index	8.69%	5.69%	-5.92%	0.20

Source: Forward Investing

These results have attracted the attention of both investors and funds. Forward Investing notes that assets under management by CTAs grew from $10.9 billion at year-end 1990 to $37.9 billion by year-end 2000; that figure grew to $314 billion by year-end 2011.

Caveats are in order, of course. Unlike stock and bond indexes, the CTA Index is based on the results of a peer group of managers, not price changes in a set of securities. That means your clients can’t simply buy the CTA Index as they can a traditional securities index.

The white paper notes, “As a peer group index, the CTA Index reflects the results of a representative group of investment managers who employ diverse strategies within the managed futures category—not the performance of a certain group of securities. Thus, results vary widely among strategies, and investment managers’ degree of success is dependent on their individual strategies as well as on market conditions. Futures prices can be highly volatile, and individual strategies are likely to be substantially more volatile than the CTA Index as a whole.”

If you’re unfamiliar with managed futures funds’ strategies, the paper provides details on the main fundamental and systematic approaches to trading. 

Another challenge: Most CTAs are structured as limited partnerships, and investors must be accredited or Qualified Eligible Participants.

The emergence of managed futures mutual funds is improving access and reducing the cost of investors’ fees, as well. The white paper reports that as of May 31, 2012, 31 mutual funds had attracted $9 billion of assets under management.

Forward launched its own fund earlier this year, the Forward Managed Futures Strategy Fund (FUTRX).

According to the firm’s press release, the fund “is designed to generate positive returns in varied market environments while maintaining low correlations to major stock, bond and commodity indexes. The fund employs a systematic, trend-following approach that provides both long and short exposure to liquid futures contracts in four global asset classes-commodities, equities, bonds and currencies.”

The fund’s June 30, 2012 fact sheet states that the fund had $9.52 million of assets and a -6.32% return on investor-class shares.

Equities, Growth Assets Pull Back in Short Term

After Federal Reserve Chairman Ben Bernanke pledged to provide ongoing cheap money to financial markets, equities and growth assets surged upwards.  But with markets anticipating some sort of injection of liquidity, much of the move may have already been priced-in, pointing to the potential for a pullback in the short term.  Two charts highlight this quite well: the broad S&P500 Index and the course of the Canadian dollar. 

1. S&P500: Below we can see a potential reversal pattern two days ago. This chart shows that the market shot up to multi-year highs in early trade, but couldn't maintain its path, was met with selling interest, and then closed at the low of the day's trading range. This type of trading can indicate that demand in the short term has been met.

Source: SunGard MarketMap 2012

 

2. Canadian Dollar: On the same day, the Loonie exhibited almost identical trading action.  CADUSD shot up in early trade, almost hitting 1.0400 against the USD, only to meet with selling interest and finish at or near the day's lows, indicating that demand for CAD may have been met for the short term. 

Source: SunGard MarketMap 2012

 

Watch these two assets closely going forward, as they are both fair thermometers for the health of the global economy, and seem to suggest that we may have gotten a bit ahead of ourselves at this stage. 

 

 

 

 

 

Markets Stalled after Recent Run

Equity markets in Asia and Europe posted losses again this morning. Last week’s rally across equity and commodity markets seems to be taking a bit of a  breather at the moment as the focus of markets returns to structural problems in Europe, fiscal problems in the US, and waning global aggregate demand.

The ZEW  survey of German investor sentiment was the highlight of data from Europe this morning. In the short term, sentiment is at a two-year low; but looking forward, six-month sentiment actually rose from last month, coming in at -18.2. 

This morning the market saw more dark details of just how much more pain potentially remains before the debt crisis in Europe finds any sort of lasting solution. First, German Chancellor Angela Merkel commented that the long-term European Stability Mechanism (ESM) cannot be used to recapitalize banks without the establishment of a formal banking oversight committee, which would take at least another year to complete, and create delays in responding to requests for aid.

Second, a report was released stating that euro zone banks have not reduced the size of their of balance sheets as they had pledged to do last year. In fact, their balance sheets have grown by 7%, due in part to the cheap financing being offered by the European Central Bank.  The pledge to reduce the amount of assets held and increase capital was in response to fears over short-term funding requirements. That the central bank stepped up to meet that concern via unorthodox policies, rather than banks following through themselves, may be a cause for concern going forward.

North American data was light today, with the US releasing its current account reading for Q2, which came in at a deficit of $117 billion, a decrease from Q1's deficit of $136 billion.  Exports of goods, services, and investment income to foreigners outpaced the amounts imported. 

Alongside the current account, the US Treasury released July data for long-term securities purchases, which showed a net inflow of $67 billion into US capital markets for the month. This data did little to move markets, however, and equities remained lower while the USD stayed slightly stronger.

Thursday will bring a snapshot of global aggregate demand with the release of a slew of purchasing manufacturing indices from a number of major economies. Those from Europe are expected to indicate a contraction, while the US is expected to expand (ever so slightly).   

September 18, 2012: Overview

The USD is stronger this morning as markets digest the long-term implications of ongoing central bank support for the US and euro zone economies. Equities posted losses in Asian and European trade, and have opened lower in North America.

The EUR has weakened from its four-month highs but is holding above the 1.3000 mark against the USD. Oil is lower again today, sitting below $96.00 a barrel, and gold is up, testing the $1770-per-ounce level.  The Canadian dollar is flat from yesterday against its American counterpart, with USDCAD sitting in the mid-0.9700 area.

What's a Trade Gap? Loonie Keeps on Flying

This morning’s Trade Balance reports from both the US and Canada should be a reason for caution among CAD bulls.  The reports highlighted that two-way trade in both countries (imports and exports) slowed for the month of July, suggesting waning activity at home and abroad.

In Canada, the trade deficit came in wider than expected at CAD 2.3 billion for the month, the fourth consecutive reading in which imports have surpassed exports.  July’s data was particularly troubling, as both exports and imports fell, similarly driven by a drop in the volume of energy products traded.  Overall, exports fell 3.4% for the month, and imports fell 2.2%.

One would expect that an ongoing decline in demand for a country’s exports, especially energy products, would perhaps knock its currency down a few notches.  Not so the Canadian dollar: following the release it posted gains to a new 13-month high, hitting a low of 0.9710 so far this morning. 

It is becoming increasingly difficult to justify ongoing CAD strength.  Jobs growth is up just 1% on an annualized basis, and GDP has stalled at 1.8%, with inflation likewise nowhere to be seen.  This suggests that the CAD should be trading closer to par with the USD. But given that markets are driven by expectations of ongoing Fed easing, in contrast to a seemingly untenable tightening bias from the BoC, the market is happy to keep chasing the Loonie higher and higher. 

Markets Await Fed Announcement

With fundamental data pointing to waning global aggregate demand, markets are betting that central banks will provide the impetus to keep the recent rally in growth assets alive.  This line of thinking has proven sound over the past few months, as investors have cheered the decision taken by the European Central Bank to extend its bond-buying programmes, and fully expect the Fed to follow suit with additional stimulus this Thursday.  

Contributing to the positive mood today are reports that Wednesday’s ruling on the ESM by Germany’s Constitutional Court will not be delayed by recent lawsuits filed by regional German politicians.  The ruling is expected to be in favour of approving the ESM. However, the risk remains that approval will come with strict conditions aimed at ensuring that Germany’s balance sheet isn’t torn to shreds as it acts as guarantor for the weaker euro zone countries.  Such conditions threaten the current optimistic view of the European debt crisis. 

Elsewhere, Thursday’s Fed announcement is proving increasingly difficult to predict.  On the one hand, the Fed is not meeting its dual mandate of achieving full employment and containing inflation, which suggests that further stimulus may be warranted.  On the other hand, we can easily make the case that the lacklustre recovery in employment is not a cyclical problem that can be fixed by low interest rates; rather, it is a structural problem resulting from a disparity between skills and demand in the labour force.  Record low interest rates alone may not be enough to fix such a problem, and therefore the addition of further simulative measures may prove futile and actually hinder a sound resolution by sparking inflationary pressures in the future. 

But the market remains convinced otherwise at the moment, and is looking for more cheap money to keep the rally going, having fully priced-in such an outcome.  That said, Bernanke has proven that he is the most unconventional chairman in the Fed’s history yet, so even in the face of a looming presidential election and the diminishing returns of further stimulus, the market is expecting him to announce--at the very least--an extension of current policies. 

 

 

 

 

 

 

September 11, 2012: Overview

Equity markets are flat across the board this morning in anticipation of this week's highlights:  Wednesday’s German ruling on the European Stability Mechanism (ESM) and Thursday’s Fed announcement.  The USD is weaker against most of its counterparts this morning, and the Canadian dollar is once again outperforming across the board, hitting a 13-month high against its southern rival.  Oil is slightly higher in New York trade, currently sitting at 97.00/barrel.

 

 

 

 

Quantitative Wheezing

Friday's Non-Farm Payrolls report continues to roil the financial markets. Expectations had coalesced around a 125,000 net gain, but were dashed when only 96,000 positions were added and the previous two months’ gains were revised down by 41,000 in total.

At the Federal Open Market Committee's last meeting in early August, most members agreed that more stimulus would be required if a "substantial and sustainable strengthening" in the economy did not become evident.

Few would argue that this has transpired, making it likely (but not certain) that the central bank is poised to do something in an effort to stimulate activity.

So, traders are breaking champagne bottles over the bow of the QE3, betting that the Fed will launch it down the slipway after its meeting on Thursday.

The question now is what the vessel itself looks like.

Our educated guess is that Captain Bernanke and his mates will opt for an open-ended series of bond purchases. This would entail acquiring Treasury and mortgage-backed securities at an adjustable pace until the Committee determines that the economy has recovered to its satisfaction.

This has a number of strategic benefits.

By keeping the total size of the eventual programme undetermined, the bank will ward off traders who are inclined to bet against it. In giving officials the ability to wind purchases down, it allows them to react quickly in the event of a rise in inflation. And by essentially guaranteeing that purchases will continue until conditions improve, the bank will help to provide a sense of security to lenders and business owners who are considering investment plans in such an uncertain environment.
This analyst suspects that this will have a relatively muted impact in the real world, where the traditional transmission mechanism between interest rates and borrowing activity has seriously deteriorated in the last five years.

But the markets will unquestionably feel the effects. At the time of writing, the dollar is down, and commodity prices are up sharply, as investors forecast a dilution in the currency's value.
How durable will this be?

Perhaps for longer than we've become accustomed to. While a short-term trend reversal is likely to occur immediately following the announcement (sell on rumour, buy on news), we may see a more sustained period of dollar weakness driven by the open-ended nature of the Fed's commitment. By making the stimulus gradual and long-term, the bank may help to alleviate the "sugar rush" effect that has accompanied the last two rounds.

However, that will come to a screeching halt in the event that conditions elsewhere deteriorate. Low interest rates in the United States are wonderful while there are attractive opportunities elsewhere: traders can borrow in dollars and earn handsome rewards. But if China continues to slow and shred growth in the emerging economies, money will come home in a hurry.

And in a side note: If you thought the wailin' Germans were loud, wait until you hear the howling Republicans on Friday--buy some earplugs, and have a great week! 

Outraged Monetary Traditionalists

The euro area has been Draghi'd into the future--and German newspapers are certainly kicking and screaming.

The Bild called the European Central Bank's rescue plan a “Blank Cheque for Debtor States” and the front page of Die Welt said “Financial Markets Rejoice at the Death of the Bundesbank”.
The Süddeutsche Zeitung remarked that "Rescuing the euro at any price could be an economic disaster--that is the red line that must not be crossed. The other limit is the law: In a community based on law, the ends can never justify the means. A euro community that is based on constantly breaching treaties is built on a shaky foundation. On Thursday, the ECB unfortunately crossed both red lines....The crisis countries are not out of the woods yet. And that means that if the ECB provides them with unlimited help, then it is financing unsound states. It can only do so by printing ever more money. Ultimately, there will be the threat of bubbles, crises and inflation. It will benefit speculators, and the vast majority of citizens will have to foot the bill."

And from the Frankfurter Allgemeine Zeitung: "Draghi has made it clear that, from now on, the ECB will only buy bonds when a crisis-hit country asks for help from the euro rescue fund or agrees to other conditions. But that promise isn't new. The would-be saviors of the euro have been insisting on structural reforms for years. The recipients of aid make promises but often do not keep them. But what will the ECB do if, say, Italy does not carry out the labor market reforms it has promised? Is it going to start selling Italian bonds? It can't if it takes its own argument seriously, that monetary policy in the euro zone no longer functions properly.

"The leaders of southern euro-zone countries should be happy: they can continue to borrow at low interest rates and do not need to worry about finding investors. But the northern leaders are satisfied, too, because they can hide behind the ECB and do not need to face uncomfortable questions in, say, the Bundestag about all the additional risks that Germany is taking on. In the euro zone, there is no longer a distinction between monetary and fiscal policy."

This dichotomy between German dread and giddiness in the markets is dangerous. But perhaps more importantly, the yield-dampening effect of the ECB's programme may give peripheral-country governments more time to delay the reforms that are so badly needed.

If structural adjustments are not successfully implemented, the crisis could grow to afflict the entire euro area in the future. And by then, Germany's patience may have run out.

In other words, instead of giving peripheral countries the Beastie Boys' license to ill, the ECB may be providing them with James Bond's license to kill.

Thus, today's euphoria in the markets is quite likely to give way to a more sober assessment of the long-term risks in the coming days and weeks. One suspects that the euro will quickly reassume its role as a funding vehicle for the carry trade--and that market-entry opportunities will be created on both sides of the currency in the process.
  

Meet The CTA: Adkins Diversified Capital

             

In this issue, we talk with we talk with Scott Adkins of Adkins Diversified Capital a registered Commodity Trading Advisor.
 

To see the Adkins Diversified Capital performance sheet please log on to the IBTRADE Alternative Investment Database.

 

Name of Program:

Adkins Diversified Capital / Diversified Options Program

Name of Principal: Scott Adkins

NFA ID:0430634

Who are the principals with trading authority?

Scott Adkins

Can you provide details on the principal and/or managers' education, career and trading background?

Scott Adkins has a B.A. in History from Central College. Scott Adkins joined the Peregrine Financial Group (PFGBEST) team in May 2001 as a Customer Relations Manager. This position also gave Scott Adkins the knowledge of PFGBEST products as well as the tools needed to advance in the futures industry. In 2002 and 2003 he transitioned from Customer Relations Manager to a full-service broker, becoming an Associated Person in August 2002 and a Branch Office Manager in July 2003 of Wasendorf & Son Company, which was a Guaranteed Introducing Broker for PFGBEST. In January 2003 he registered as an Associated Person of PFGBEST and a branch office manager in July 2003. Scott Adkins ceased being an Associated Person and Branch Manager for Wasendorf in October 2007 when Wasendorf ceased operating as an introducing broker. Scott remains a registered Associated Person and Branch Office Manager of PFGBEST.

During his tenure as a broker Scott built a book of business working with retail clients from around the world advising them on the day-to-day activities of the markets. Joining the Wealth Management Team as a Senior Wealth Manager Scott brings his knowledge of the markets and risk management skills to bear working with clients on asset allocation and over-all market strategies as well as advising clients on Broker Assisted Strategies.
 

How do you divide your time and priorities between your CTA responsibilities and your Wealth Management Group duties?

With the trading strategy that I am following it comes down to time management and priorities. I have a schedule that I follow on a daily basis and the markets are always in front of me. The CTA responsibilities come first and foremost. However due to the nature of the style of trading I employ I am afforded time management flexibility, for example if I have trades on that are slowly decaying and things look good, I can devote more attention to my Wealth Management Group duties. The attention to detail of the trades and the structure of my daily schedule really help me balance the two sets of duties, however the CTA is my highest priority.

Which firm collates your performance numbers?              

Futures Accounting & Compliance

What is the minimum investment for your programs?

$30,000

Do you accept notional funding?

Yes, subject to approval of Adkins Diversified Capital.

What is your management and incentive fee structure?

Adkins Diversified Capital has no management fee. We have a 30% incentive fee.

What is your program's capacity?

Approximately $50 million.
 

When did you start trading this program?

March of 2009 / The Commodity Trading Advisor (CTA) registered in August 2nd 2011.

What type of accounts do you manage?

Mostly individual clients at this time. A few corporate accounts.

Can you give a brief description of your program?

Short Options Strangle Strategy attempting to diversify across different market sectors. This is a relatively non-directional strategy. We will make risk management adjustments as the net delta becomes too directionally bullish or bearish.

Do you have a systematic or discretionary approach to the market?

I use a systematic approach for trade selection but opt for a discretion approach to actual trade entry. Sometimes a computer-generated signal cannot adequately account for an atypical external risk event.
 

What is the average holding period for each trade?              

Our sweet spot for trades tends to be from 45 to around 85 days.
 

Do you trade options within your program? If yes, please describe the types of options traded and how options risk is monitored.

Yes we are an options selling strategy. Specifically short strangle strategies. We monitor the net delta of the position in an attempt to be relatively delta neutral. Too bullish or bearish we will make an adjustment. Adjustments may be adding puts or calls to bring the trade closer to neutral. We many buy back a put and sell a put further away from the market and also add a call, we may roll out the options to the next available options contract. And also in rare instances, we may use futures to hedge the position.
 

Are there any liquidity constraints in the markets you trade?

Yes we like to have the trades in markets with decent liquidity in the outlying options. Markets that we have traded are live cattle, bonds, notes, currencies, natural gas, crude, gold, corn, beans, wheat, E-mini S&P, sugar, et al.
 

In what types of market environments does your trading program do well and /or struggle?

We typically do well in markets that have a higher than normal Implied Volatility. We struggle to find trades that meet our guidelines when I.V. is low.
 

What is the standard range of margin to equity usage for the program?

We attempt to maintain around a 50% margin to equity ratio. If we are struggling that could be higher as we increase the size of trades or lower when we are underinvested.
 

How do you manage risk/reward and what metrics are employed?

We like to have a decent annualized return on trades. Usually if we are receiving anywhere from $800 to $400 in premium that meets our guidelines. The goal of the program is 20% for the year.
 

What are your investment goals?

The goal of the program is to return 20% for the year.

What makes your program unique and different from other managers in your sector?

I think our attention to detail and effort to diversify our trading among a number of different markets. We attempt to stay relatively delta neutral, and like to have non-correlated trades on if we can. I also think our attention to risk management and ability to make adjustments to trades sets us apart.

What is the one piece of advice that you would give to a new start-up Commodity Trading Advisor (CTA)?

Don't do it!!! No really I think if you are looking to start a Commodity Trading Advisor (CTA) you really need to fully test the strategy and look at it from the 10,000 foot level. Not every strategy is going to work well in all markets. You need to be aware that sometimes it is better to be under invested, than to be reaching for trades that may not necessarily work for your strategy. Stay true to your guidelines and yourself.
 

THERE IS A SUBSTANTIAL RISK OF LOSS IN TRADING COMMODITY FUTURES, OPTIONS AND OFF-EXCHANGE FOREIGN CURRENCY PRODUCTS. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

ECB Announcement, Finally!

For weeks, market commentators have been anticipating European Central Bank (ECB) Chairman Mario Draghi’s moment in the sun, which finally arrived this morning.


As expected, Draghi announced a new unlimited outright bond-buying programme aimed at bringing struggling peripheral euro zone government yields, particularly those of Spain and Italy, back down to Earth.


Making good on previous promises, Draghi noted that the programme would serve as a “fully effective backstop” for those governments whose bonds have come under pressure from “unfounded” fears in global markets about the stability of the euro. He went on to mention that, despite being publicly opposed by the German Bundesbank, the new programme is “strictly within” the ECB mandate.


The ECB will drop preferred creditor status for purchases made under this programme, a title that it held when Greece restructured its debt, thereby protecting itself from the write-down losses that private investors were forced to take.

The programme will be fully sterilized, meaning that all liquidity injected into financial markets by way of the purchase of bonds will also be taken out of the market elsewhere.


And crucially, to be eligible for the new programme, governments will first have to request European Financial Stability Fund (EFSF) support and meet its conditions and requirements. This could prove to be a tough pill to swallow for sovereign governments in need of support.


The programme will focus on buying shorter-term instruments, dated one-to-three years. Draghi did, however, note that it will also buy longer-term instruments in the secondary market that are near maturity. For example, the ECB would consider purchasing a ten-year bond with three years remaining until maturity.


Because of the attention this topic has received, and the fact that some details were leaked to markets yesterday, we are seeing a classic “Buy the rumour, sell the news” pattern unfold. In the aftermath of Draghi’s press conference, the euro has actually sold off against many currencies, including the Greenback, Sterling, Loonie, and Aussie.


The only two major currencies that the euro has outperformed since Draghi took the stage are the Japanese yen and the Swiss franc. The EURCHF movement is particularly interesting: For the first time since March, the pair pulled off the Swiss National Bank-enforced 1.2000 floor in a meaningful way, and seems to be holding on to those gains.

The Other Central Bank Announcement

The ECB wasn’t the only game in town overnight. The Bank of England (BoE) also had its regular scheduled rate announcement. As expected, the BOE stayed the course, leaving current interest rates and asset-purchasing programmes untouched.


The situation in Europe has global reach, but its impact in the UK is especially significant. Uncertainty on the other side of the English Channel has been a very real drag on the British export market given the tough austerity plans many mainland European governments have adopted. This has put many barriers in the way of the British economic recovery.


The current round of British QE is expected to wrap up in November of this year.  Given the precarious state of the UK economy, which never really fully recovered from global market shocks in 2008, many are looking for more stimulus to be added in November.


The minutes from August’s BoE meeting, released previously, showed that the topic of further QE was discussed, as was the subject of size and the details of how to administer it; though it must be noted that there is not unanimous agreement amongst committee members that adding to the QE programme is the way to go.


With this in mind, investors will be eyeing the minutes from this month’s meeting, which are not slated to be released until September 19th, for clues to what might happen after November.  

 

 

 

 

 

 

September 6, 2012: Overview

If you read financial commentary, you’ve probably been waiting for today for quite some time. The big news this morning is the European Central Bank’s new bond-buying programme—which, according to Bank Chairman Mario Draghi, will be the cure-all for the financial crisis in Europe.


Asian stocks were broadly stronger through their session in anticipation of the ECB announcement, and now that the cat is out or the bag, European shares are finishing the day strong, and North American markets have opened with some pep in their step. In the government bond market, yields are trading with a negative tone, most notably in Europe, where Spanish, Italian, and German ten-year notes have all seen yields fall noticeably since Draghi took the stage.

 

 

 

 

 

Meet the CTA – Global Ag, LLC

Meet the CTA – Global Ag, LLC

In this issue we talk to Greg Firtik of Global Ag, LLC, a registered CTA, NFA ID #404932.  To see the performance sheet for the Global Ag, LLC, please log on to our Managed Investments Database by IBTRADE.  http://cta.ibtrade.com/

Name of Program

Global Ag, LLC- NFA ID #404932.                                

Name of Principals

David Skudder

Name of Principal with Trading Authority

David Skudder

Q: Can you give a brief description of your program? Do you accept notional funding?

The program is a discretionary model based on fundamental views.  All trading decisions are made by David Skudder.  Primarily corn, beans, and wheat.  Notional funding will be considered for institutional clients.

Q: What is the average holding period for each trade?

The program is opportunistic and does not employ any day trading.  Holding periods for any one position is mid to longer term.

Q: The program generates an astonishingly big number of AUM, what is your goal for it this year?

We are looking at capacity of $450 million.  Our goal for 2012 is to be closed.  

Q: The worldwide network of contacts and a wide range of market inputs associated in your program are very impressive.  Are these the principal indicators directing the way you trade?

David’s years of experience, industry contacts, meteorologists, and research are the sources for trading decisions.

Q: The program performed particularly well in the starting year of 2010 and even broke a single month’s record of 26.39% in October. What factors contributed to this brilliant success?

David saw the moves very early in the cycle and traded accordingly.  He is not content with simply a directional play but also look at inefficiencies between markets and months.  This separates him from merely directional moves.

Q: We’ve noticed that the following year (2011) was an overall poorly performed year, which presented a negative figure there. Drawdowns frequently occurred in that year. Can you briefly describe why there was a comparatively large volatility at that time?

2011 was a directionless year.  David saw this developing very early and held a conference in Memphis where he invited some of the smartest industry professionals.  The conclusion from most was the same.  Tough year to trade overall.  Breaking even beat most of his peers.  Those years happen.

Q: In what types of market environments does your trading program do well and /or struggle?

See #6.  When markets have no direction and are up one day and down the next and the that trend continues over months.  No one makes money.  When you can see markets developing and events that causes shortages and demands David does a good job seeing where the market is going and can adjust quickly.

Q: How do you manage risk/reward and what metrics are employed?

As assets have grown David is much more conscience of drawdowns.  He looks at positions daily and if he does not feel comfortable he will adjust.  He does not want to fight out of a hole and as such attempts to not have double digit down months.  He does not use a tremendous amount of margin so he does not believe in fighting a market.

Q: What’s your opinion on current agricultural markets and how do you prepare against the volatility? Do you trade options within your program? If yes, please describe the types of options traded and how options risk is monitored. 

Shortage in beans and everyone planting corn.  David will use options to control risk and volatility.  If he sees something is cheap he may buy it and if too expensive he may sell it.  Also sometimes you like to have some options on in case a particular event occurs.  This year everyone was planting early .  We had some options on just in case we saw a freeze and crops got hurt.  Cheap to buy at the time but let us sleep at night.

Q: What are your investment goals for this year (i.e. annual returns on performance)? 

We are posting about a 14% return for April.  Still look like opportunities persist as production numbers unravel.   Weather may continue to be a factor in the US.  No specific goal.

Q: What makes your program unique and outstanding among managers in your sector? 

David Skudder makes our program unique.  I do not feel many others have the insight or communication networks that compare.  You have to have 15 conversations a day sometimes to pick up only item that important.  When that item is mentioned you have to be able to know it and act accordingly.

David was a cash grain trader and learned his trade well.  If you have a chance to visit our websites you will  note very good returns from our other trades.  Mark Ditsch was a cash soybean trader, Megan Bocken was a wheat analyst for year for a major research firm, and Dave Zelinksi of Opus has been providing the grain research reports for our group for years. We have a good team.

 

There is a substantial risk of loss in trading futures and options. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commoditie, IBTRADE, its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.cta.ibtrade.com

Bank of Canada Holds on Rates, Threatens Increase

Despite practically every other central bank in the developed world looking for ways to further loosen monetary policy, BoC Governor Mark Carney is preparing to increase interest rates. While holding rates steady at 1% this morning, Carney noted that economic expansion is increasing, and stated that he expects momentum to pick up through the end of the year, with inflation to reach target levels sometime in 2013—at which time, he stated, it would be appropriate to gradually withdraw some of the current monetary stimulus measures.


The Loonie is actually mildly weaker this morning as short-covering versus the Sterling and the Greenback, as well as a broad-based euro rally, has created downward pressure on the currency. Given that financial markets are collectively holding their breath until tomorrow’s ECB event, muted activity in currencies, the Loonie included, looks to be the modus operandi for the day. Look to recent historical ranges as a guide for immediate trading needs.

 

 

 

 

 

Currencies Largely Unchanged Despite Overnight Data

There was no shortage of data last night, any one piece of which, on a normal day, would be headline worthy. However, with tomorrow’s hotly anticipated ECB Press Conference, markets seem to be too preoccupied to pay much attention to anything else. 


Australia’s quarter-over-quarter GDP growth printed 0.6% last night, missing expectations of a slightly better result.  Last night’s number is a bit of a contrast to the last GDP report, which put economic expansion for the island nation at 1.4%. While the overnight number is only a single data point, given the instability in Europe and the USA, the cooling Chinese economy, and the potential impact on commodity prices, policymakers are sure to be nervous. This put the Australian unit on its back foot through the Asian trading session, primarily giving up ground to the Greenback, euro, and yen. The AUDUSD hit an eight-week low after breaching the 100-DMA near 1.0200, though rumours of stops in the 1.0150 area and speculation about the ECB seem to have stemmed the tide for the moment.


Turning to Europe, a host of Service PMI numbers were released, all of which were sub-50, indicating a state of contraction in the services industry. The common currency largely shrugged this off, with traders instead focusing on tomorrow’s ECB announcement. While it’s unlikely that the PMI results are likely to change Draghi’s mind about whatever he has planned for tomorrow’s press conference, they do add weight to the argument that it’s time for the ECB to step in.


And finally, Switzerland’s August CPI read flat.  While Swiss CPI has been erratic over the last couple of years, oscillating regularly between positive and negative results, this is the third month in a row that the country has exhibited deflationary pressure. This fact eases some of the pressure on the Swiss National Bank and validates their interventionist policies to stem the flight-to-safety rally in the EURCHF. The 20% rally in value that the Swiss franc experienced as the situation in the euro zone deteriorated could mean a major economic drag for the landlocked nation, due to its goods becoming relatively more expensive abroad. The floor at 1.2000 instituted earlier this year by the SNB seeks to stabilize the Swiss economy and prevent runaway deflation.  

 

 

 

 

September 5, 2012: Overview

Excitement over expectations that an ECB bond-buying programme will be announced tomorrow have reached a boiling point, pushing the euro to broadly outperform other currencies overnight as well as in early North American trade.


In equities, Asian indices were down as disappointing Australian data and China worries weighed, and European equities were mixed as weak PMI data squared-off against ECB expectations. Given activity in the last 18 hours, a classic “Buy the rumour, sell the news” pattern looks to be forming.

Meet the CTA – GrowthPoint Investment, LLC—Index Condor Program

Meet the CTA – GrowthPoint Investment, LLC—Index Condor Program

In this issue we talk to Nathan Lee Gantt of GrowthPoint Investment, a registered CTA, NFA ID #357618.
To see the performance sheet for the GrowthPoint Investment—Index Condor Program, please log on to our Managed Futures Database for IBTRADE.

Name of Program

GrowthPoint Investment, LLC- NFA ID #357618. 

Name of Principals

Nathan Lee Gantt

Name of Principal with Trading Authority

Nathan Lee Gantt

Q: Can you give a brief description of your program?

This is a premium selling strategy which is a combination of vertical credit spreads and butterfly spread.  It is a three-strike credit spread.

Q: What is the average holding period for each trade?

It Varies based on market conditions, but currently between 7-15 days.

Q: What is the capacity of your program at present? Do you intend to significantly raise this number this year?

We have easily traded as much as $10 million and expect we could trade as much as $100 million without difficulty.

Q: The chart of “VAMI vs. S&P 500” is pretty choppy, is there any intrinsic factor leading to this huge volatility?

Until the “flash crash” in May 2010, we managed our risk based on the distance between the market and our short strike.  We no longer use this technique.  Instead, we now manage our stops and risk based on profit/loss in the position.  We expect this to reduce the volatility and dramatically decrease the likelihood of such a large draw-down.

Q: How to discover or predict those targeted trades which have an expected annualized rate of return of 30% or greater?

We use a combination of trade delta, standard probability calculations, % return on cash, technical analysis and fundamentals to determine strike placement.

Q: We’ve noticed that 2010 was an overall poorly performed year, in which the program presented a large negative figure in the history records. Huge drawdown occurred in May. Can you briefly describe why there was a comparatively large volatility at that time?

This was caused by a single trade that was entered days before the flash crash.  Our new risk management strategy is expected to greatly reduce the possibility of this happening again.

Q: In what types of market environments does your trading program do well and /or struggle?

It does well in low volatility markets (such as 2004-2005) and can do well in high volatility environments (such as 2008) but environments where volatility frequently spikes – going from high to low, then back to high volatility proves more of a challenge.

Q: How to hedge the risk of index increasing or decreasing in value and moving into the money faster than positions can be liquidated?

Our positions are traded as a block and can be liquidated very quickly as most of the trading is done in the S&P options pit.

Q: What’s your opinion on current markets and how do you prepare against the volatility?

The markets are extremely choppy right now and are difficult to trade.  We attempt to offset this by making our trades as short as possible to decrease the market exposure to volatility spikes.

Q: What are your investment goals for this year (i.e. annual returns on performance)? 

In February, 2012, we once again began sell calls as well as puts. So, instead of a max of two trades per month, we can have four when you consider the call and the put side.  In addition, we started trading weekly options.  Due to our short trade duration, this allows us more flexibility getting trades on.  Based on these changes, we hope to earn over 20% this year.

Q: What are the specialties of your program?


Two things set our trading program apart.  First, our configuration of 3-strike spreads provides a hedge against the market moving against the position in the last week of the trade.  This gives us some protection that a typical vertical credit spread would not have.  Secondly, it benefits the brokers because of the high trade volume.  Each spread consists of 8 options (4 long/4 short).  We trade one spread per $16-20K.  We typically have 3-4 trades per month.  This yields an average of about 13,000 RT/Million/Year.   At $20/RT, this yields the broker a gross of 26%/year.


There is a substantial risk of loss in trading futures and options. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. IBTRADE, its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.

Markets Ready for Central Bank Onslaught

September is the month of the Central Banker.  We were ushered in on Friday by Ben Bernanke and his speech from Jackson Hole, in which he once again pledged to increase monetary stimulus should economic conditions warrant.  He also fired a firm shot over the bow of those doubting the effectiveness of his policy actions to date.  Bernanke believes that the persistently high unemployment rate in the US has little to do with structural changes within the economy (a mismatching between job openings and skills that must be addresses by fiscal policies) and everything to do with monetary conditions that he can affect, such as credit conditions and a subdued housing market.  Given that interest rates are at zero and he has already bought $2 Trillion worth of assets from the open market, one wonders what he can possibly do next to stimulate a stubbornly slow recovery.  The latest FED decision will be announced September 13.

Not to be out done, ECB Chairman, Mario Draghi, has been talking tough for weeks as to how he will save the euro zone from itself by doing “whatever it takes”.  The ECB meets this week and will announce its latest policy decision Thursday September, 6th.  Leading up to the meeting the market has received all sorts of rumours of possible action.  The latest version is that the ECB is looking into buying short-dated sovereign government bonds that expire within three years.  Now in strict terms, this is outside of the ECB’s mandate as it amounts to monetary financing of a sovereign country.  However, Draghi believes that such action would help to stabilize the euro, and since a stable euro is within his mandate such action would be warranted.

These two meetings will have significant impact on financial markets and currencies.  If policy makers do follow up on their tough-talk then look for the USD to lose a bit more value and for the EUR to continue its recent rise.

Source: Sungard MarketMap 2012

US ISM Index Falls; Euro Zone Credit Outlook Downgraded; RBA On Hold

The major economic data release of the day came from the US, as the ISM index of manufacturing output was released this morning.  The index fell to 49.6 for the month of August, indicating a contraction in activity for the month.  This received muted reaction from markets as equity markets traded slightly to the downside and the USD remained relatively flat versus it major counterparts.

The euro zone as a whole had its credit rating outlook downgraded this morning, as the impact of strong countries such as Germany and France put their balance sheets behind Spain, Italy and Greece continues to weigh upon the region.  Investors may become less willing to fund Germany and France at these low yields should they pledge to support the tattered balance sheets of the EU’s weakest nations, however the EUR largely ignores the news and continues to trade higher in the market on the hopes for central bank intervention.

The Royal Bank of Australia kept interest rates unchanged at 3.5% in their latest decision.  The central bank remains cautious in its outlook for global growth and the market anticipates that this view will likely mean a decreasing chance of near term hikes in the overnight rate, which is positive for a currency.  The AUD continued its recent decline and hit a low of 1.0220 versus the USD today.

Chart of the Week: Volatility Rises (CBOE VIX OPTIONS INDEX)

The chart below is the markets expectation of future stock market volatility as measured by the CBOE VIX INDEX.  Higher expectations for volatility are usually associated with USD strength as traders get out of riskier currencies and assets that may experience wild swings in valuation.  The index has clearly risen from recent 4-year lows and this should be an indication that markets are expecting larger moves across assets this month.   During such times the USD tends to have broad outperformance versus commodity linked currencies such as the AUD and CAD.   Talk to your account manager to discuss the tools available to protect your exposures.
  


Source: Sungard 2012