By Mark Melin
"Managed futures is a name that doesn't provide education to investors," noted Jerry Parker of trend follower Chesapeake Capital, speaking to a private audience of investors in New York City on March 6.
Speaking out on a hot topic, Mr. Parker addressed a core issue in that the name "managed futures" does not adequately provide clarity to the investment nor provide clues as to how performance is generated.
"I'm amazed at how appreciative people are when we don't try to mystify the investment," he said in a post speech interview. "CTAs should explain to investors in a fashion that explains exactly what they should expect."
In the case of trend following, Chesapeake should experience positive market environments during periods when market trends, or "price persistence," is a present market environment. "When the markets we trade experience trends, we tend to make money; when the investment is not trending we will not make money," he said, noting that 2012 was the trend follower's worst year, down 17.81%, the worst performance in a 30 year history.
Long term trend followers such as Chesapeake, which have average hold periods north of one year, buy and sell commodities and financial futures in 100 markets. Investors in such long term programs might expect volatility to occur during periods of non-directional market environments. "Volatility in a positive trade (upside deviation) is entirely tolerated in this system," noted Mr. Parker. CTAs with a long hold period often have a wide berth on the downside, particularly once a trade becomes profitable investors might expect the CTA to let the trade run. "Once a trade becomes profitable, we let the (upside) volatility run."
"It's become popular in the industry to take small losses on a trade," he said. "That's the wrong approach." Mr. Parker noted the difficulty, "the hard work," is in remaining in a volatile but profitable trade.
A debate has raged in the managed futures industry regarding the ineffectiveness of the Sharpe Ratio to measure investment risk in managed futures. The statistical measure should treat upside volatility to a different degree than downside volatility. "We've been in very profitable trades that are highly volatile to the upside, he said.
Typically long term trend followers such as Chesapeake Capital can be expected to have a large win size with win percentage not as a statistically significant variable for consideration. "When you have a non normal distribution with profitable outlier trades that dominate the portfolio, applying normal statistical measurements on top of that is probably incorrect," he said.
What has always stood out about the CTA's strategy is their use of single stock futures to replicate trend following in the equities. "It's works for our current clients to have segregated accounts at an FCM to not open an equity account. On the long side we trade 100 single-stock futures.
Mr. Parker had frank thoughts on brokerage fees and industry issues. To view this and additional performance details regarding Chesapeake, log in to the web site.
It wasn't CTAs it wasn't trend following. It was managed futures which was something that was in their best interests. It's important have a product and service that people can understand they know what they're getting. To a large degree with missed the boat; we stayed third mysteriousness; were very complex were so smart you can understand what we do. (This is the wrong path). There is a benefit in client knowing what to expect.
The you single stock futures. It's easy for our current client to have accounts at and FCM to not have to open an equity account. On the long side we trade 100 single-stock futures.
Whenever managed futures as mentioned it's done so in terms of how it diversifies a portfolio.
I'm amazed at how appreciative people are when we don't try to mystified it and him and we explain exactly what clients should expect. When were to have trends Chesapeake should make money. When the investment is trending working to make money when the investment is not trending we will make money.
There is a benefit in clients having comfort in knowing what to expect in an investment.
Just started Equinox Chesapeake mutual fund. Sometimes describing the strategy to less sophisticated investors is difficult. We should have promoted the name "trend following" and not "managed futures." If we were trend following centered we would've had a diversified program stock program.
We should've created a program with training wheels on it - stocks only so that people could understand what they were invested. All the carnage that happened in 2008 was unnecessary.
It depends if you want your client to understand the very basic level what you do. You don't need to tell your client's the secret sauce.
Were going to allow the pension fund or hedge fund to put our strategy in with other strategies to create their own diversified portfolio. If the fund of fund job to put together the plaintiff strategies the CTAs job.
This whole idea of reducing drawdowns and smoothing the volatility curve has gone just a little crazy.
What we are charged to is what is difficult. 50% of what we add to the equation is doing what is hard and uncomfortable, those are the decisions we need to make.
Taking small losses has become easy.
Taking small losses is not as difficult as it used to be two people with heart now is sticking with the trade and that trend once becomes a little volatile. Now there's a tendency in the CTA industry to reduce position size when volatility increases. I think this is wrong I think trying to reduce volatility at the expense of the trade. Once a trade becomes profitable it's volatility and you let it run. We've been in some very profitable trades that are volatile to the upside. When you have a non normal distribution with profitable outlier trade the dominate the portfolio applying normal statistical measurements on top of that is probably incorrect. I understand the reason assets as part of the game. You also need to know what the strategy is in the style that you trade. You need to get the comfort in their that the manager is doing what the investor thought they were supposed to be doing.
If not managed futures it's whatever you're doing. Managed futures is a term that's not giving education to anyone. Once at Four Seasons Hotel. Had their worst year ever last year.