Acquiring the Skill Set
What kinds of experience and skills are necessary to run a commodity trading
advisor with diversified models? Kevin Jamali, manager of Auctos Capital, talks
about what's involved in moving from floor trading to managing money. Auctos
opened to investors in November 2007. Last year it returned 3.9%, beating CTA
indexes by a significant margin.
OFI: What was your background when you launched Auctos?
Kevin Jamali: I had a lot of trading experience. I had started as a floor
clerk at the Chicago Board of Trade in 1995 and eventually moved to trading the
yield curve on an electronic platform. Electronic trading was in its infancy
then. In 2005 I started to develop the system that became the basis of Auctos,
but I knew very well that my success on the floor and as an independent trader
was not enough when it came to managing money.
OFI: Why is independent trading experience insufficient?
KJ: You see many good traders who tried to launch a fund and failed.
Trading on your own is a long way from managing money. Other skill sets are
essential. To begin with, when you manage money you need a strategy that is
scalable. When I traded independently, that did not matter. At the time I
focused on only four or five markets. To make it scalable, it helps to diversify
to different, liquid markets, which means you need people familiar with other
OFI: Did you change your trading style?
KJ: I used to be a discretionary trader-I'd go by the feel of the pits or
the screen. By contrast, the fund's strategy is all systematic. You need higher
level computer knowledge to develop and run a system.
OFI: How did you deal with this issue?
KJ: Early on I brought in other people and formed a team to do research.
We developed the models as a collaborative effort. The team comes from diverse
backgrounds, including systematic trading and computer science. One of those who
joined me, Abdol Esfahanian, has a Ph.D. and is the associate chair at the
computer science department at Michigan State University. He is our consultant
for computing infrastructure and software development.
OFI: Why did you need people with other trading experience?
KJ: This is not just a programming project to mine data, though
programming is a key component. We develop trading ideas and back test them. The
testing platform was developed in-house as well.
OFI: What is the strategy?
KJ: We have a multi-strategy program. One-third of the trading is trend
following, another third is pattern recognition and the rest is trading on
calendar spreads. This gives us numerous entry and exit points to the market.
OFI: Is the team still together?
KJ: Yes, we have a dedicated research team. This is rare among smaller
firms. We're always looking for ways to improve our strategies. To keep
competitive in this industry you have to come up with new ideas and test them.
We started with two systems but in June 2009 added another six. Since then we've
seen reduced volatility, with much smoother returns.
OFI: What's the advantage of having multiple strategies?
KJ: The beauty of it is that the three sub-strategies have very low
correlation to each other. Diversification helps us avoid extreme volatility,
which is one of our main goals. When we design a strategy, we take the risk
factor and design around it. We target a 10% annual standard deviation.
OFI: Has the diversification worked?
KJ: Last year is a classic example. Our program was up 4%. Our
trend-following strategy lost money but the pattern recognition and spread
models saved us. This year again we are up and outperforming CTA indexes, which
are down. It is a tough environment for trend followers and it helps a lot to
have strategies that work in different ways.
OFI: How did the other strategies make money in 2009?
KJ: Pattern recognition scans for volatility and price patterns within a
trend. It has a shorter term hold period than the trend following model, so it
was able to catch price movements in 2009 markets. Also, some of the calendar
spreads behaved completely differently, were uncorrelated to markets at large.
We captured some price movements in patterns in spreads.
OFI: Are there other skills needed to make a CTA work?
KJ: One of the main things people overlook is the business side of the
operation, tasks like managing people. Managing a fund means running a business.
You can be a phenomenal trader with a great system, but not understand how to
run a business. In addition to technical and trading experience, you need
business skills. I brought in people with business backgrounds to help with
OFI: What does Auctos mean?
KJ: We searched for a unique name for the firm. Auctus with a "u"is Latin
for persistent growth, which is appropriate for us. But there was a company in
Germany with that name. So we changed the "u"to an "o". Nobody else has this