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A Diverse Lineup

It's common for one commodity trading advisor to run a number of trading programs. Typically the returns from those programs are not identical, but stay close to each other. By contrast, our guest Yu-Dee Chang manages almost a dozen portfolios with radically different strategies. At least, that's the impression you get from the 2008 returns. Some portfolios had double-digit gains, others double-digit losses.

This wide range fits Mr. Chang's overall business model. His CTA firm, ACE Investment Strategists LLC, is allied with his futures brokerage, Chesapeake Investment Services Inc., which offers clients the diverse lineup.

His strategies differ not only from each other but also from trend-following CTAs. For instance, ACE Diversified Commodity Program made 48% in 2009, a year that was difficult for trend followers. This year ACE funds can be found in BarclayHedge top rankings. Total assets in its futures programs are around $180 million.

Mr. Chang explains these differences, his connections to China and what he expects in markets.

"We think of ourselves as many CTAs in one."

Opalesque Futures Intelligence: What's your Taiwan connection?

Yu-Dee Chang: My grandparents moved to Taiwan from China, so I have strong ties to China as well as to Taiwan. My financial career started with an import/export firm in Taiwan in the 1980s. Their clients were big retailers in the US like Walmart and Kmart, and they needed currency hedging. That's how I got involved with forex and from that moved to currency futures.

OFI: What is your approach to markets?

YDC: I went through a couple of cycles before finding the right approach. My basic philosophy is that fundamentals, like price/earnings ratios, matter and do dictate market direction, but over the long term. In the short term, the psychology of traders and investors and money flows are key. Those factors can be best captured via technical analysis. We follow the fundamentals to decide what we would like to buy or sell, but we use technical analysis to decide when to get in and out of a trade. That is one part. The second part is how to take advantage of an opportunity.

OFI: Would you give an example?

Let's say fundamentals point to the price of sugar going higher. Should I buy it today or wait for a possible short-term correction? I will keep an eye on sugar but use statistical and probability tools to guide me in and out of sugar. But that's just the first step. There are different ways to pursue a trade. You want to go long sugar; there are many ways to do that. You could buy sugar futures, buy call options on sugar futures, do a covered call on sugar futures, or sell puts. Which is the best way to go long sugar? I believe we have a big advantage in making these decisions.

OFI: Do you still trade currencies?

Currency futures account for about 20% of what we do. We have clients and contacts with investment firms in China as well as Taiwan and Singapore. I believe we have insight into Pacific Rim economies that tie in with currencies, giving us an advantage.

OFI: What is the strategy you use to decide what to trade?

We think of ourselves as many CTAs in one. We have different programs for different markets, including short-term trading and long-term trend-following. Altogether we have 11 strategies and follow almost all domestic futures markets. One program follows all commodity and financial futures markets, but trades only options. Another strategy, called dollar cost averaging, is for trading S&P 500 futures. This is one of our big programs. Our diversified commodity program trades financial and commodity futures but no stock indexes. Another popular program is called hybrid because it is very flexible and can use a variety of trading methods.

OFI: How did these strategies do in 2008?

We had a wide range of results because we took various approaches and some of them did not work in the unusual conditions of 2008 whereas others worked very well and made double-digit returns. Our worst hit program was the stock index trading program. The diversified program held up well.

OFI: How did the programs do in 2009?

Every single one of our programs made money in 2009. Even the worst-performing program had returns of over 30%! A major reason is that we benefit from volatility as long as it is not extreme. We were able to take advantage of all the market movements and control risk in 2009.

OFI: Have you changed your approach?

The lesson we learnt from 2008 is that we needed one additional piece of risk control. The programs that got hit were mostly stock index related. 2008 was not only a bad year but a chaotic year. We can make money in down markets but certain strategies just don't work in chaotic conditions. So if there is extreme volatility of the kind we encountered in 2008, we will liquidate all positions and go to cash in those portfolios until the chaos subsides.

OFI: You have both a brokerage and a CTA. How are they related?

Our brokerage, Chesapeake, has three lines of business-services for clients who want to open an account to trade futures, online discount trading and finding clients for our managed futures programs. The third business is a large part of the brokerage.

OFI: Do you work with other CTAs?

Yes we do, but not often. We rarely farm out money to other CTAs because we manage so many diverse programs. Only when we get a very substantial client do we put some of the money to another CTA, in order to further diversify the client's portfolio.

OFI: Does China figure in your plans for the future?

China just opened up equity index futures trading. Options are to follow. This is domestic only. If they open up their managed market we might use some of our strategies in that market. We are developing business relationships in China that could help us enter that market.

OFI: What do you see happening in the future?

In the 1990s all the action was in stocks. Since 2000, stocks have not done well and the action has shifted back to other markets like commodities and currencies. We think that trend will continue. I don't expect the stock market to crash or go back to its past lows but I doubt that it will provide the kind of returns that it did in the 1990s. Traditional stock and bond investments will always be part of portfolios but they will probably not have fantastic returns in the next three years, so people need to have alternatives. We believe volatility and swings will create a lot of opportunity in financial markets. Strategies that can take advantage of different kinds of price action, not necessarily trends, will benefit.