Mama Said Knock You Out

For those of you who weren’t rocking to LL Cool J in 1995, his ‘comeback’ song famously begins with the line, “Don’t Call it a Comeback.”

Well, we bet Emil Van Essen, the quirky (in a good way) Canadian who runs the self named Emil Van Essen managed futures shop here in Chicago, may have been humming that first line (if not the entire song) throughout the month of July. You see, Van Essen managed to post estimated returns of 6.00% in July, his best month since May of 2011, a year the program returned 33.99%. Since that blowout year, it has been more of a struggle for Emil and his team, however; with losses of  -11.63% in 2012, -6.60% in 2013, and a weak first quarter of this year, down about -3.9% {past performance is not necessarily indicative of future results}.

Anyone falling for the trap of chasing performance likely wouldn’t be looking at Van Essen at all in 2014 given the past three years. Josh Brown at Reformed Broker just had a great piece on how fired managers actually outperform hired managers for institutional investors. But for those who like buying into drawdowns and looking for some value, Van Essen’s unique strategy is quite attractive after they put in a postive 2nd quarter followed by the impressive July numbers.  In deference to the song… it is a bit of a “comeback.”

The Van Essen strategy takes long and short positions on the futures  “curve”.  What’s a price “curve”?  Glad you asked. You see, futures markets are unique animals, quite different from their stock cousins. One unique item is that they have specific end dates and many different contracts of the same market; like Dec. ‘14 Crude Oil, Dec. ‘15 Crude Oil, and Dec. ‘16 Crude Oil and so forth. Those prices are either more expensive or cheaper than each other, creating a “curve” of prices; referred to as Backwardation and Contango depending on the shape.

Historically, crude oil has been the fund’s go to market so to speak, and the strategy profited from near term crude oil prices falling throughout the month as production levels rose domestically and abroad. But the bulk of gains in July was from trading lean hogs as near term hog prices fell much quicker than those in the back month, a classic relative value trade. Finally, coffee was another top performer as well with the further out months falling at a quicker pace. All in all it was a good month to be looking for (relative) value opportunities in commodities.

For more on the Emil Van Essen program as utilized by Attain’s Relative Value Fund, download our detailed report.

P.S — You might also enjoy the following video interview of Emil.

Finding the Next Dayton for Your Portfolio

As the Sweet 16 games get underway tonight, it’s the just about the time where we see who made their NCAA picks based on favorite mascot, who picked based off of favorite/disliked teams, and who tried to pick by statistics. There’s no other statistician out there that knows how to use his ability to appeal to the masses like, Five Thirty Eight’s, Nate Silver.

At the beginning of the tournament he came out with the probabilities of each team advancing to the next round (original stats here), and he would update the numbers as the tournament went on (current predications). At the beginning of the tournament, Dayton had a 24% chance of beating in state rival Ohio State rival, and if you’re familiar with Ohio sports culture, that was a very meaningful game, with the Dayton Daily News poking some deserved fun at those NFL players from Ohio St. who like to announce their school during Monday Night Football as ‘THE’ Ohio State:

The University of DaytonPhoto Courtesy: The Dayton Daily News

But Dayton’s chances got even smaller to advance to the Sweet 16, with only a 7% chance, according to Silver’s original stats. But Dayton must have been emboding the words of Dumb and Dumber’s famous quip, “So you’re saying there’s a chance.” In fact, Dayton did beat Syracuse in the 3rd round, and this is what happened.

President Dayton

Now, Dayton is slated to be the underdog for the third time in a row tonight – taking on #10 seed Stanford to see who advances to the Elite 8. Before the tournament started, Dayton’s chances at an Elite 8 run were 2.28%, and that now stands at a 50% chance! Surprising what a little success does for your odds.

So who do you usually pick for your portfolio – the Duke’s of the investment world, or the Dayton’s? Do you play it safe and go with the best record and highest seed? Or try and uncover talented teams which have flown under the radar but are ready for a big upset (we actually did a Managed Futures Bracket for those who want to find some underdogs).

Consider the following two charts of managed futures programs since their inception to December 2008:

The #1 Seed Man AHL:                                        The #11 Seed M6 Capital:

Man AHL InceptionM6 Capital

(Disclaimer: Past performance is not necessarily indicative of future results)

Who would you have picked for your investment bracket? The decade long track record, billions under management, 900%+ return, and brand name of the #1 seed? Or the three year track record, 40% return, millions under management #11 seed?  Most investors go with the ‘safe’ pick. But how have these two seeds performed in the ‘tournament’ over the past 5 years? AHL is down -15.09%, while M6 is up 28.91% {past performance is not necessarily indicative of future results}.  Only a very small fraction of investors chose the #11 seed over perennial favorite Man AHL back in 2008, but managed futures version of the march madness Cinderella didn’t listen to the hype or the investors voting with their checkbooks. They just kept practicing, kept working on their fundamentals, and got down to outperforming the orders of magnitude larger manager. David can beat Goliath every now and then.

So who’s an under the radar sleeper (investment) team right now, looking to pull off the upset over the next three to five years? We just happen to have a few good ideas on that, having studied the managed futures brackets day in and day out for the past 10 years. We think these five managers have just the right mix of seniors, ball handling, and coaching to upset the #1 seeds Winton, Transtrend, and the like…

Emil Van Essen

M6 

Covenant 

Integrated

Eco

 

Managed Futures Industry Ditches Polar Vortex for MFA

Every January – a who’s who of the managed futures space shows up down in Miami for the back to back MFA and Alphametrix Context conferences. We can’t imagine why they would decide to gather in Miami during January… but the continued Polar Vortex blasts likely has something to do with it.

MFA

Some members of the Attain team attended MFA’s “Network 2014” Conference, affectionately called simply = “MFA” by those in the industry; and we had the opportunity to catch up with longtime friends of Attain as well as some new faces as part of our ongoing commitment to research in the CTA space. We can’t possibly relay all that was seen and heard, but here’s a short list of managers we caught up with, and what they are up to recently:

2100 Xenon Group LLC – If you’re looking for a long/short fixed income program and way to play the rise in interest rates that surely must come one day (right?) – they are the list.  Over the past few difficult years for CTAs, their risk management process has really proved itself in minimizing their downside risk.  Currently nominated by CTA Intelligence as a candidate for “Best Financials Strategy” in 2013.

Acorn Global Investments Inc., — While the name is new, the person who founded the company is familiar to many in the industry, Jason Russell.  The Canadian investment firm was originally founded in 2004 under its previous name J. Russell Capital Management. Acorn systematically identifies (pattern recognition) and attempts to capture repeatable price movements in highly liquid markets 24 hours/day in currencies, metals, agriculture, energies, equities and bonds. While Acorn is not currently available in managed account format, it was nice to hear about his program.

Altis Global Futures Portfolio  – We’ve always liked Stephen Hedgecock and Natasha Reeve-Gray, two of the partners of Altis, and their commitment to ongoing research.  Their newest project is a beta replication strategy called the Altis Momentum Program, which targets 10% volatility and aims to provide a high correlation to trend following indices –  while charging no incentive fee.

Auctos Capital Management – Kevin Jamali has been a friend of Attain for many years, and as a fellow Chicagoan, we’ve been able to closely monitor his strategy through live trading accounts and on-site visits.  His multi-strategy system was able to avoid some of the losses suffered by some trend following programs from quick reversals in market trends in 2013 and he finished the year slightly positive.

Briarwood Capital Management – We have several accounts with briarwood and were happy to see them mostly (the 2nd half of the year could have been better) navigate the challenges that faced many trend followers in 2013.  They finished the year down by less than 1%, and this was one of only two losing years in their 12 year history (following an impressive 2012 performance of 10.53%).

Blue Diamond Non-Directional Fund – This is another program not currently available in the managed account format, but as part of our effort to stay up to date on interesting programs, we were happy to learn about this interesting program out of Switzerland which spread trades the VIX through a purely systematic strategy.  We will keep an eye on them to see if they ever decide to open up their program as a CTA.

Camomille LLP – They are not available in managed account but we will keep an eye on them.  Their strategy is systematic, which trades equities and energies and seeks to profit on market corrections/recoveries.

Covenant Capital Management– Attain Portfolio Advisors’ Trend Following Fund is managed by Covenant, so we know them inside/out – well enough to know they aren’t fazed by a small losing year, and that their longer term model (longer than most) will be back in phase soon.  The covenant/attain trend fund celebrates the anniversary of its 10 year track record this month.  While past performance is not necessarily indicative of future results, but we  hope to see the next ten years bring a similar total return (380%+).

- Desgraves – We heard quite a bit of buzz about this group out of Melbourne Australia, so we were very happy to have the opportunity to hear  first hand about their short term systematic strategy that they launched in December of 2012.  The strategy is always flat at the end of the day and they allocate less than 50% to financial futures. They finished 2013 up 11.48% and we’ll be keeping a close eye on them moving forward {past performance is not necessarily indicative of future results}.

Dominion Capital Management  – This is another short term strategy that Attain has come to know well over the years; Dominion’s Sapphire Program finished 2013 up 19.25% in one of the industry’s great comeback stories {past performance is not necessarily indicative of future results}. Faced with a 2 year stretch of drawdown between 2010 and 2012, they kept at the research and made adjustments to the program which bore fruit, proving it isn’t just about the model you have, it’s also about the models you can create moving forward.

Emil van Essen – It’s been a difficult period for Emil and the spread trading methods they utilize, but their passion for producing results remains unfazed as they continue to research improvements to their strategy. If you are a value based investor – getting in on the EVE program at these levels might look appealing… they are due for a comeback much like Dominion saw last year.

Mesirow Financial Commodities Management  – The news out of Tom Willis and Mesirow is the roll out of a new strategy that they will offer in addition to their discretionary program – to also be managed by Tom Willis.  The new program is a systematic intra-day short term fixed income focused strategy, which may see some exciting times ahead given the current interest rate environment.

Sunrise Capital Partners – While sunrise is certainly no newcomer to the CTA space, they have revamped their management team and launched a new program called the Sunrise Evolution Strategy, which finished 2013 up 21.72%{past performance is not necessarily indicative of future results}. Not too shabby!  The best part, managed accounts are available at the $500k level.

Vallen Advisors – Vallen Advisors has a short term systematic trading strategy designed by Robert Vallen, an industry veteran with deep CTA/trading and risk management experience with tenures at firms including Citicorp, GMAC, Blackstone alternative asset management, and FORT to name a few.  The strategy is research driven, utilizing parameter stress tests, analytics using daily price and volume data, and trend and counter trend elements.

 Want to talk more about any of these managers? Give us a call to go over our full due diligence notes and/or off the record thoughts and comments.

 

Managed Futures Spotlight: Emil van Essen

While we’re still hard at work fighting on behalf of clients whose assets are frozen with PFGBest, we’ve also been amazed at the pure resilience of the human spirit, with many clients calling in to ask us what comes next – what opportunities are available for those seeking managed futures exposure through a stable, law-abiding clearing firm? After all, the global economy is still inching towards a fiscal cliff dance with a Eurozone collapse, and non-correlated investments could be a very important portfolio addition to well-suited investors.

So, in spite of the turmoil, we found time to highlight a program that, in our opinion, stands out among the rest of the managed futures universe in a variety of ways. This was good news for us, as it can be difficult to write with any sort of gusto about the technical aspects of CTAs. Sure, one can break down the quantitative nuances between different trend following programs, and if you’re numbers nerds like us, you may find yourselves enraptured by how one twist on one metric can produce such unique results. For most people, though, the complex algorithms punctuated by Greek letters are of little consequence; they just want to understand why the program works without getting a degree in advanced mathematics first.

And then there are programs like the Emil van Essen Spread Trading Program (EvE). We spotlighted them a little over a year ago, and, typically, would not revisit the program in a newsletter for another couple of years, but developments in the program and company, combined with increased interest in a manager that has truly made a name for himself over the past several years, warranted some additional attention. Well, that, and they’re just a lot of fun to describe. To really understand why EvE is worthy of taking center stage again, you have to look at the big picture – from the manager’s background to the evolution of the trading to the goals they have on the horizon.

To see what we mean, check out the full breakdown here.

Intro To Spread Trading – The Common Spreads

While most people think of trend following when they think managed futures, the asset class has expanded to include a wider variety of strategies. One such strategy is spread trading, which is an attempt to turn a profit off of the difference between the prices of two contracts (not to be confused with spread betting, which is how UK traders are able to sell short). A trader can buy the spread (which means selling the cheaper contract and buying the more expensive contract) hoping that the gap between the two contracts will widen. Or, a trader can sell the spread (buy the cheaper contract and sell the more expensive contract) hoping that the gap between the contracts will narrow.

For instance, let’s say the May contract for corn is trading at $6.00, while the July contract is trading at $5.50. If you buy May and sell July (buying the spread), you will profit if the price difference expands. If you sell May and buy July (selling the spread), you will profit if the price difference narrows. The advantage of a spread trade is that the general direction of the market doesn’t matter to the trader; whether the markets traded are increasing or decreasing in value, all that matters is that the spread is growing or shrinking. While such a trade can be placed in a variety of manners, there are several traditional spreads that are used frequently across the industry:

  • The Calendar Spread – The above scenario is an example of a calendar spread, the most common type of spread trade in use. The idea here is to try to take advantage of the price differences for one month’s contract over another within the same market. This is also called an “intra-market” spread, to distinguish it from “inter-market” spreads that trade contracts in different markets.
  • The Inter-Exchange Spread – This strategy tries to profit from imbalances between similar commodities traded on different exchanges, such as Kansas City Wheat versus Chicago Wheat, or West Texas Intermediate Crude versus Brent Crude.
  • The Crack Spread – No, not related to the drug. The crack spread refers to a spread trade between crude oil and one of its byproducts, like heating oil or gasoline. Its name is derived from the idea of “cracking” the crude oil to get useable products out of it.
  • The Crush Spread – Similar to the Crack spread, this trade revolves around soybeans and their byproducts. Traders will buy or sell soybean futures and either soybean meal or oil.
  • The NOB Spread – Spread trading isn’t just for commodities, as the NOB spread tries to take advantage of the difference between 10-year Treasury notes and 30-year Treasury bonds (Notes Over Bonds).
  • The FAB Spread – Like the NOB spread, FAB trades involve bonds with different maturities, in this case seeking to capitalize on the difference between 5-year treasury bonds and longer-term bonds (Five Against Bonds).
  • The TED Spread – The TED spread  looks for profit in the difference in interest rates between three-month US T-bills and three-month Eurodollar deposits, which are time deposits in banks outside the US, but still denominated in US dollars.

Now the idea with these and more complex spreads is technically risk management – the hope is that losses on one side of the trade are offset by larger gains on the other side. Several CTAs we follow at Attain engage in spread trading such as Emil van Essen and Rosetta. However, there is always the risk that the spreads go in the opposite direction that you’d like them to… and in a big way. For this reason, though spread trading programs can benefit your portfolio, they won’t be right for everyone.

Managed Futures Finish February Up 0.85%

Another month has drawn to a close, and managed futures look to have shaken off the January blues with slight gains in the extended version of February.  Based on preliminary data from the Newedge CTA Index, we are estimating managed futures as an asset class finished February up 0.85%.

Looking at the breakdown by strategy type, it appears that traditional trend following type managers did the best behind an uptrend in nearly all risk-on markets.  Although, As we noted mid-month, this year has also been more “normal” in terms of market correlations and risk on/off days. Elsewhere, agriculture programs like Global Ag, NDX Shadrach, and Rosetta also posted strong numbers in February while popular spread trader Emil Van Essen was down for the month. Short term countertrend strategies were the worst performers as the upward trends remained persistent for most of the month with very little in the area of reversions to the mean.

The Evolution of EVE

We profiled the popular spread trader Emil Van Essen earlier this year in our newsletter; but, of course, the exciting stuff always happens after we highlight someone. And along those lines Emil van Essen (EVE) recently announced that they will begin trading intra-commodity spreads (spreads between markets, like buying Corn, selling Wheat) in the Emil van Essen Spread Trading Low Minimum program effective immediately. The popular spread trading program has traditionally focused on trading inter-commodity spreads (spreads between different contract months of the same commodity, like buying December Corn and selling March Corn), which look to take advantage of inefficiencies in pricing across contract months of the same commodity as well as the roll yield that comes from investors moving from once contract to another at expiration. This new strategy will allow EVE to take advantage of mispricing in markets that are highly correlated (Corn and Wheat) but still trade on their own metrics.

According to Emil’s long time top lieutenant Bryan Kiernan, the addition of intra-commodity spreads is the culmination of ongoing research into the firm’s existing spread models. Specifically, it is the result of a six-month long research project that showed adding intra-commodity spread exposure added diversification, lowered volatility, and increased rate of return in their models. (PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS)

EVE will be very conservative with initial trading allocations to this new component of their strategy, and will only apply 5% of client assets to intra-commodity trading. Slowly incorporating new ideas is always a good idea in our opinion, and we are happy to see EVE taking a more conservative approach in this regard. Margins are estimated to be 1% to 2% per spread, while portfolio margin use will remain similar to current levels with a soft cap around 20% of equity, which is also good news.

The downside is that intra-commodity spreads can be, by definition, riskier than their inter-commodity counterparts. There is always the possibility that a world event (drought, supply disruption) could have a larger impact on one market more than the other. Risk management is the key to success for any managed futures program and leads us to our key point; as long as EVE is able to manage the risk across the “intra” markets as well as they have with inter-commodity spreads, then adding the new markets is a good idea. However, one bad loss due to a disruption in the oil pipeline in the North Sea or a drought in Russia could upend years of hard work that has seen Emil van Essen steadily increase assets in the managed futures space.

Of course, Emil made his name by being one of the first managers to trade spreads in a managed futures program, so it is not surprising that he continues to look for new opportunities in the market. His pedigree speaks for itself and, in our opinion, deserves the benefit of the doubt. We look forward to watching this new evolution in the program play out.