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Opalesque Futures Intelligence

Founders Q&A: Agriculture specialist Brooks Brown discusses how agricultural markets work and explains his distinctive niche strategy Agriculture specialist Brooks Brown discusses how agricultural markets work and explains his distinctive niche strategy

Wednesday, August 18, 2010

Agriculture Specialist Steers Stable Course

Agricultural markets' distinctive features were highlighted this month by dramatic price movements in wheat and barley following Russia's announcement of an export ban on grains. Historically, futures were rooted in agriculture but the sector now accounts for a small part of commodity trading advisors' portfolios. We wanted to present an expert on agricultural markets, which can provide diversified returns.

Brooks Brown, principal of Cypress Capital Management, has been in the industry some 14 years. He trades only grains, livestock, softs and the spreads in these markets. He's been a CTA since 2008, but his track record is longer and remarkable for low yearly volatility. In 2007 and 2008, annual returns were around 22%. In 2009 and 2010, unlike many CTAs Cypress did not lose money. This year's return was 2.2% as of July.

Mr. Brown gives his perspective on agricultural markets and discusses his distinctive niche.



"With my strategy, I can take advantage of the trends created by the big traders."

Opalesque Futures Intelligence: How did you become an agriculture expert?
Brooks Brown: My career started in 1996 at the euro/dollar options pit at the Chicago Mercantile Exchange, but then I moved to grains at the Chicago Board of Trade. In 1998, I joined an agricultural trading company here in Memphis, McVean Trading and Investments. I was initially an analyst in the soybean oil and lean hog markets. Over time I gravitated to technical analysis and became head technical analyst and trader. I learned a lot from Charlie McVean and the late Martin Hilby.

OFI: What's your strategy?
BB: Through experience on both the fundamental and technical sides I realized that trading from a technical standpoint suits me psychologically and is a successful strategy as well. My objective is to identify price action within an underlying trend, using proprietary indicators as supporting evidence. I try to capitalize on breakouts from certain patterns on the chart while watching the underlying trend.

OFI: Are you a trend follower?
BB: I am not a classic, systematic trend follower. My approach is to try to determine the underlying trend and use momentum to capitalize on a piece of that trend. I don't follow long-term trends but look to take advantage of the middle section of a trend-where I will put on trades that last from a couple of weeks to five or six weeks. At times I see opportunity in the turn of a trend but mostly focus on the middle section. With a discretionary strategy, I can pick and choose the trades based on risk

OFI: Are you a fundamental trader?
BB: I'm neither a trend follower nor a fundamental trader. I would describe myself simply as a technical trader. At times my returns track trend followers since most trades are aligned in the direction of the underlying trend, but at other times I track fundamental traders since a bit of fundamental thinking is incorporated into most trades. I think that all of these facets work together to create a unique, hybrid niche.

OFI: Have agricultural markets changed?
BB: Agricultural commodity markets changed in the past 20 years. Into the mid-1990s hedgers and fundamental traders dominated. Then big, more technically driven funds entered these markets and their trading started to move prices. The fundamentals no longer explained near-term price movements. The amount of money coming into these markets made it much harder to stick with a long-term fundamental opinion. You may be right in the long term, but may not be solvent long enough to see the trade to fruition. With my strategy, I can take advantage of the trends created by the big traders.

OFI: Does that mean you don't trade on something like the Russian ban on wheat exports?
BB: I don't specifically trade on the fundamentals of such events but may capitalize on the resulting price action. This time around I was not in wheat because I was heavily loaded in the other grains, in particular corn and the soybean complex. But the wheat move helped other grains rally, so I did benefit.

OFI: Why would you be in corn but not in wheat?
BB: I am dealing with a pretty small universe, just agricultural commodities. I don't want to be long the whole spectrum of these because they tend to move together at times, especially when you're looking at the grains. If I am interested in several of these often correlated markets, I will use spreads and fundamentals to determine where to concentrate my positions.

OFI: How good is the liquidity in these markets?
BB: The markets I trade have plenty of liquidity. I never trade certain smaller markets like oats, pork bellies and rice. You simply can't function with any size in those markets. I trade only in the markets that allow me to execute without slippage or other liquidity problems. I would love to add other ag commodities to the portfolio for diversification but will not trade in any market that would be too illiquid as my assets grow.

OFI: How much can your assets grow?
BB: Up to $200 million, I estimate. This will never become a billion-dollar strategy, nor do I have any desire for that. Meanwhile, there is no reason for me to create high returns that will be impossible in these markets with more assets. You see some emerging managers taking excess risk to make huge returns, but those are unachievable as assets grow. I trade as if I'm already at maximum assets and don't do anything now that I can't do at the maximum asset level.

OFI: Are agricultural markets risky?
BB: The risk depends on your methodology and how you manage risk. I am systematic in risk management and pre-determine when I will get out of the market before getting into a trade. Sure, you can create plenty of risk in these markets, but I target stable, solid returns by adhering strictly to my trading and risk management rules. In addition, my strategy has very low margin-to-equity, which inherently keeps down risk.

OFI: What happened in 2009?
BB: It was a tough year to be a new CTA. My return was low, just about flat. But at least it was positive! This year also started very choppy but in recent months I've caught a few good moves and it looks like things are clearing a little in the agricultural markets. Last year, I think commodity markets were rocked by cross currents-new CTA's were coming in, piles of index money was moving both ways, and some hot money was moving from commodity markets into equities.

OFI: Are there other CTAs in Memphis, Tennessee?
BB: We're a pretty big little trading city! Outside of Chicago and New York, Memphis has significant commodity trading. It was the center of cotton trading for most of the 20th century. In fact, my office is in the old Cotton Exchange building. Some famous traders have come from here-I went to the same high school as Paul Tudor Jones.



 
This article was published in Opalesque Futures Intelligence.
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