Au.Tra.Sy blog - Automated trading System » Fund Review

Trend Following Wizards – April 2010

Jez Liberty — Wed, 12 May 2010 09:30:09 +0000

Follow the Trend Following Wizards updates with the dedicated monthly feed. You can either access it via RSS or by subscribing by email

The recent turmoils developing in the markets will give us interesting times to monitor how the Trend Following Wizard performances fare. If 2008 is any indication, and if we return to large moves to the downside, some good times might be coming (although some early May figures appeared to be quite strong on the negative side – mostly because of reversal of trends).

For now, the average Wizards return for April is +1.82%.

Full results for April 2010 below:

Organisation / Fund	Return	YTD ^*	AUM ^**
Abraham Trading¹	-2.45%	-2.27%	$510M
Aspect Capital²	1.58%	3.95%	N/A
Chesapeake Capital³	3.69%	6.38%	$765M
Clarke Capital⁴	-5.40%	-11.72%	$19M
Drury Capital⁵	0.35%	-1.52%	$204M
Dunn Capital⁶	4.22%	11.06%	$229M
Eckhardt Trading⁷	2.56%	-5.11%	$316M
EMC Capital⁸	0.50%	-6.24%	$184M
Hawksbill Capital⁹	6.99%	11.38%	$57M
Hyman Beck & Co.¹⁰	-1.58%	-7.81%	$427M
JWH & Co.¹¹	1.16%	-1.35%	$26M
Man AHL Diversified¹²	1.80%	3.70%	$1,353M
Millburn Ridgefield¹³	6.53%	5.84%	$1,113M
Rabar Market Research¹⁴	1.99%	0.32%	$194M
Saxon Investment¹⁵	1.60%	2.35%	$13M
Superfund¹⁶	5.58%	11.61%	N/A
Transtrend¹⁷	1.82%	7.10%	$5,095M
Winton Capital¹⁸	1.74%	6.34%	$4,420M

Notes
^{* YTD: Year-To-Date performance.

** AUM: Assets Under Management.

1. Abraham Trading was founded by Salem Abraham, after he was introduced to Managed Futures and Trend Following by Jerry Parker. He is considered as a “second-generation” Turtle.

2. The four founders of Aspect (Eugene Lambert, Anthony Todd, Michael Adam and Martin Lueck) were significant members of one of the most succesful funds in managed futures – AHL (Adam, Harding and Lueck)

3. Chesapeake Capital was founded by Jerry Parker, a former Turtle.

4. Clarke Capital was founded by Michael Clarke in 1993.

5. Drury Capital, Inc., was founded in Illinois in 1992 by Mr. Bernard Drury.

6. Dunn Capital was founded by Bill Dunn.

7. Eckhardt Trading is the firm managed by William Eckhardt, who co-led the Turtle experiment with Richard Dennis

8. EMC Capital was founded by Liz Cheval, a former Turtle.

9. Hawksbill Capital was founded by Tom Shanks, a former Turtle.

10. Hyman Beck & Co. main principals are Alexander Hyman and Carl Beck.

11. JWH & Co. was founded by John W. Henry, Owner of the Boston Red Sox.

12. Originally ED & F Man. Became a succesful CTA under Larry Hite and went on to form part of The Man Group plc, which subsequently bought AHL to form the Man AHL: the systematic trading division of the Man group.

13. Millburn Ridgefield have been trading Trend Following models since the early 1970’s. As they report performance figures one month later, last month performance is not reported in this report and their YTD, AUM stats are from the month before.

14. Rabar Market Research is the company of Paul Rabar, a former Turtle.

15. Saxon Investment was founded by Howard Seidler, a former Turtle.

16. Superfund founder and CEO: Christian Baha.

17. Transtrend is a Trend follower CTA based in Netherlands

18. Winton Capital is a London-based CTA founded by Dave Harding (also co-founder of AHL).}

These are top of the range CTAs/Managed Futures funds in the Trend Following space.
Most of the traders behind these funds have been involved in the Turtle Trading experiment (2 excellent books on this topic: Complete Turtle Trader – featuring the actual turtle rules and The Way of the Turtle), featured in the legendary books by Jack Schwager: Market Wizards and New Market Wizards, or in Michael Covel’s dedicated Trend Following book.

Geometric Information Ratio

Jez Liberty — Mon, 26 Apr 2010 12:37:49 +0000

Following the previous post where we ranked CTA performance using the Geometric Information Ratio, a couple of readers have requested clarification/more information on it. So I thought a reference post dedicated to the Geometric Information Ratio might be a good idea.

This post contains a spreadsheet used to calculate the Geometric Information Ratio, and expanded information on how the classic Information Ratio fails to accurately do its job. We’ll also reiterate the rationale behind the new Geometric Information Ratio and the formula used to derive it.

Where the Information Ratio fails

The main issue with the classic calculation of the Information Ratio is its use of arithmetic returns and lack of leverage adjustment. This is best illustrated with a simplified example:

Consider 3 hypothetical managers:

Steady Sam: very reliable, she produces 0.3% month after month.
Volatile Viv, she aims for big moves, which she gets regularly in both directions by alternating 30% up months with 25% down months
Cautious Carla, Viv’s twin sister, uses the same strategy as her sister but knows she should play it safer with much less leverage: 6% up months followed by 5% down months

Meanwhile, the benchmark regularly alternates 0.5% and -0.3% months.

The formula for the Information Ratio being:

We can calculate the average excess return (alpha) for each manager: Sam gets tw months of 0.3% return while the benchmark returns 0.5% and -0.3% giving excess returns of -0.2% followed by +0.6%, foran average of 0.2%. With the same calculation, Viv scores 2.4% per month with Carla scoring 0.4%. The standard deviation figures for the excess returns are respectively 0.4%, 27.1% and 5.1%, which gives information ratios of:

Steady Sam IR = 0.5
Volatile Viv IR = 0.09
Cautious Carla = 0.08

Carla seems to underperform her twin sister, whereas Sam clearly outscores her 2 colleagues. However, looking at a compounded equity curve from the 3 managers give a different picture with Viv’s volatility pushing her into negative territory.

The Information Ratio calculation penalizes Carla for her lack of leverage, while falsely indicating that Viv produces excess return to the benchmark.
Applying the right amount of leverage to a strategy is part of the manager’s skill and should be part of the Information Ratio calculation.

The Geometric Information Ratio Rationale

The main departure from the classic Information Ratio calculation is the use of a measure of return which takes leverage into account. The geometric average return is such measure: excess leverage applied to a positive strategy will result in a negative geometric average return (unlike the arithmetic return).

We can imagine a strategy where the investor desires exposure to the manager’s alpha with no beta risk. To implement such strategy, the investor would take a hedged position in the manager’s fund. The hedge would consist of a short position in the benchmark, adjusted for the beta coefficient between the manager and the benchmark (if the fund has a beta of 0.5, the short position in the benchmark would be half the size of the long position in the fund).

After one period of such hedged position, the investor would collect both alpha and beta returns from the manager minus the return from the benchmark. Because of the beta adjustment, the beta return and benchmark return would cancel each other out. Rebalancing the positions to repeat the operation for each period would allow to gradually harvest and compound the manager’s alpha only.

The performance of such strategy is a good measure of the manager’s skill and the calculation of the Geometric Information Ratio will follow the same logic.

The Geometric Information Ratio Formula

Calculate the manager’s beta to the benchmark:
Normalise both sets of monthly returns using beta as a multiplier
Calculate monthly alphas as the difference between normalised returns:
Compound alpha and calculate its geometric mean (i.e. compounded growth rate):
Calculate the geometric standard deviation of the monthly alpha (variability of alpha, i.e. omega):
Divide alpha by omega to obtain the Geometric Information Ratio

Showing my geeky deviance, I enjoyed playing with phpMathPublisher, an online formula tool to express the full formula in simplified form – Rm and Rb being the respective manager and benchmark returns over n periods:

and in fully expanded form (also on the phpMathPublisher tool):

More useful to you is probably this spreadsheet which implements the calculation for an arbitrary CTA (TransTrend) and a benchmark (Conquest Capital Group MFS fund).

More Performance Metrics and CTA Ranking Information

The Geometric Information Ratio is one way to look at the value added by a manager, improving the concept of the classic Information Ratio. There are, of course, other ways to evaluate a manager or investment’s performance.

A large amount of litterature has actually been written on performance measurement and how best to evaluate and rank managers. For those readers wanting to investigate this topic more in depth, here is what I could find on my bookshelf, related to this topic:

Managed Futures by Jack Schwager
Commodity Trading Advisors: Risk, Performance Analysis, and Selection
Evaluating Hedge Fund and CTA Performance: Data Envelopment Analysis Approach

I read half of Schwager’s book, which is an interesting discussion on various performance ratios, but have not done more than leafing through the 2 other ones (more maths-oriented) yet.

Also these 2 papers discussing the more ubiquitous Sharpe ratio are an interesting read:

How to game your Sharpe Ratio
Sharpening Sharpe Ratios

Which CTAs REALLY provide alpha (and HOW do you calculate it)?

Jez Liberty — Thu, 22 Apr 2010 15:33:42 +0000

Alpha by Leo Reynolds

The idea of having a true benchmark for Trend Following (a.k.a. Managed Futures/CTAs), independent from the performance of the existing funds, could shake up the industry and have serious implications (increased competition and fees reduction resulting from commoditization of Trend Following).

The Beta of Managed Futures paper (PDF) by Conquest Group and their claim to an independent, mechanical Trend Following benchmark got me going. I decided to use it as a benchmark for the Trend Following Wizards we track here every month. The comparison calculations (using innovative metrics) can be found at the end of this article.

If CTAs mostly produce beta and a bit of alpha, they should really charge their fees accordingly, i.e. a flat management fee for the beta and a performance fee based on the alpha they produce – instead of a performance fee on the overall performance of the fund. But how do you calculate alpha?

Information Ratio: mis-information?

There are several ways to measure alpa and the Information ratio is a popular one. The concept behind the Information Ratio (IR) is interesting as it aims to measure the alpha (excess return) provided by the fund compared to the benchmark. It also takes into account the tracking error of the fund (volatility of the excess return).

As such the IR can be expressed as follows:

However, there is a (common to many CAPM models/tools) flaw in this ratio calculation: it uses the arithmetic mean return rather than the geometric one. This difference could give a positive IR to a fund producing negative alpha and vice-versa. To convince yourself, consider a hypothetic manager producing +15% alpha followed by -14% alpha at regular intervals. Calculate both average returns: the arithmetic one, +0.5% and the geometric one, -1.1%. How is this for painting a different alpha picture!

Another way to calculate Alpha

Alpha is the true value added by a manager, regardless of the underlying market/benchmark.

If investors simply want to get exposure to the alpha from a specific manager, they could simply “buy the manager” and short the benchmark (with constant rebalancing). Once taking into account the manager’s beta to the benchmark (to derive respective long and short positions), all that is left to the investor is the alpha produced by the manager (with zero market/beta risk).

Taking this logic into account, below is an alternative way of calculating a (modified) Information Ratio to give a more accurate picture of the true alpha as per the logic mentioned just above:

Calculate the manager’s beta to the benchmark:
Normalise both sets of monthly returns using beta as a multiplier
Calculate monthly alphas as the difference between normalised returns:
Compound alpha and calculate its geometric mean (i.e. compounded growth rate):
Calculate the geometric standard deviation of the monthly alpha (variability of alpha, i.e. omega):
Divide alpha by omega to obtain this new Information Ratio (let’s call it Geometric IR)

Trend Following Wizards ranking

Below is the calculation of the standard and modified/geometric Information Ratios for the Trend Following Wizards, for which we could find historical performance – as well as other information such as alpha, beta and correlation (using Pearson product-moment coefficient) to the benchmark. To give some background, total performance and standard deviation of returns over the full period have been added as well.

For this exercise, the Conquest Group Managed Futures Select fund was used as a Trend Following benchmark (as this is what it aims to produce), with the period covered being Jun-04 to Mar-10 (full history of the benchmark). All fund performances below are considered net of fees.

Fund	Rtn.^a	SD^b	IR^c	Beta^d	Corr.^e	Alpha (yr)^f	GIR^g
Abraham Trading¹	53.86%	5.01%	0.00	0.53	0.47	3.12%	0.06
Chesapeake Capital²	44.60%	5.34%	-0.01	0.66	0.55	0.99%	0.02
Clarke Capital³	48.55%	7.90%	0.01	0.30	0.17	4.34%	0.05
Dunn Capital⁴	59.38%	9.01%	0.04	1.21	0.60	-1.07%	-0.01
Eckhardt Trading⁵	61.34%	3.53%	0.00	0.35	0.43	5.43%	0.14
EMC Capital⁶	76.00%	5.18%	0.05	0.83	0.71	3.20%	0.07
Hawksbill Capital⁷	88.80%	9.47%	0.08	1.21	0.57	1.76%	0.02
Hyman Beck & Co.⁸	82.06%	4.92%	0.06	0.71	0.64	4.66%	0.10
JWH & Co.⁹	1.34%	8.03%	-0.07	1.21	0.67	-8.51%	-0.12
Man AHL Diversified¹⁰	65.85%	3.71%	0.02	0.59	0.71	3.91%	0.12
Millburn Ridgefield¹¹	60.85%	3.95%	0.01	0.53	0.60	3.84%	0.10
Rabar Market Research¹²	55.87%	4.20%	0.00	0.51	0.54	3.49%	0.08
Saxon Investment¹³	57.15%	3.12%	-0.01	0.32	0.45	5.20%	0.15
Superfund¹⁴	21.84%	6.53%	-0.05	0.83	0.57	-3.17%	-0.05
Transtrend¹⁵	57.89%	2.27%	-0.02	0.30	0.58	5.47%	0.24
Winton Capital¹⁶	116.63%	3.70%	0.12	0.48	0.58	9.72%	0.25

Notes:
^{a. Total Compounded Return since 2004

b. Standard Deviation of monthly returns since 2004

c. Classic Information Ratio

d. Beta of the manager to the benchmark

e. Correlation (Pearson)

f. Annualized Alpha

g. Modified/Geometric Information Ratio

1. Abraham Trading was founded by Salem Abraham, after he was introduced to Managed Futures and Trend Following by Jerry Parker. He is considered as a “second-generation” Turtle.

2. Chesapeake Capital was founded by Jerry Parker, a former Turtle.

3. Clarke Capital was founded by Michael Clarke in 1993.

4. Dunn Capital was founded by Bill Dunn.

5. Eckhardt Trading is the firm managed by William Eckhardt, who co-led the Turtle experiment with Richard Dennis

6. EMC Capital was founded by Liz Cheval, a former Turtle.

7. Hawksbill Capital was founded by Tom Shanks, a former Turtle.

8. Hyman Beck & Co. main principals are Alexander Hyman and Carl Beck.

9. JWH & Co. was founded by John W. Henry, Owner of the Boston Red Sox.

10. Originally ED & F Man. Became a succesful CTA under Larry Hite and went on to form part of The Man Group plc, which subsequently bought AHL to form the Man AHL: the systematic trading division of the Man group.

11. Millburn Ridgefield have been trading Trend Following models since the early 1970’s. As they report performance figures one month later, last month performance is not reported in this report and their YTD, AUM stats are from the month before.

12. Rabar Market Research is the company of Paul Rabar, a former Turtle.

13. Saxon Investment was founded by Howard Seidler, a former Turtle.

14. Superfund founder and CEO: Christian Baha.

15. Transtrend is a Trend follower CTA based in Netherlands

16. Winton Capital is a London-based CTA founded by Dave Harding (also co-founder of AHL).}

Note that the negative values of Information Ratio are usually not really relevant.

The Pearson coefficient measures gravitate around 0.60, which shows some degree of correlation to the benchmark – maybe not as strong as initially hinted by the Conquest paper. Obviously, the higher the correlation numbers, the more support for the thesis of a possible Trend Following benchmark.

Interestingly, the two versions of the Information Ratio show some discrepancies (expected as per earlier explanations) with a few funds switching from negative IR to positive geometric IR (and vice-versa). Most notable is the case of Transtrend, which goes from negative IR (-0.02) to the second-best geometric IR (0.24). Comparing all individual results, it seems that the geometric Information Ratio is a much better measure of alpha.

It can appear strange that some funds underperforming the benchmark still appear to produce alpha (example of Chesapeake Capital: return of 44.60% vs 56.95% for the benchmark). This is due to the methodology of the calculation, which assumes constant rebalancing between the benchmark and the fund to capture and compound each period’s alpha.

Finally, it is worth noting that despite (much) higher fees for the Trend Following Wizards (compared to Conquest Group MFS fund acting as the benchmark), most of them still exhibit alpha/excess return.

Below are the numbers for the benchmark and its corresponding leveraged version (3x) from Conquest:

Fund	Return	StdDev	IR	Beta	Correl.	Alpha (yr)	GIR
Conquest Group MFS	56.95%	4.44%	0.17^*	1	1	0%	0
Conquest Group MFS 3x	85.14%	13.93%	0.10	3.12	0.996	-7.04%	-0.46

Some of these numbers are self-evident (ie correlation, beta of the benchmark to itself); but of interest is the fact that the 3x option produces negative alpha at the rate of over 7% per year while keeping a very strong correlation to the standard fund/benchmark (not so surprising given the previous discussion on leverage). Meanwhile, the classic IR still indicates positive alpha…

^* Note another aberration from the classic IR calculation. It is theoritically not possible to calculate the IR of a benchmark with itself (results in a 0 into 0 division). However, the IR of ALL straight beta multiplications of the benchmark (with correlation = 1) are identical (just a by-product of the linearity of mean and standard deviation). Constructing a virtual benchmark with a beta very close to 1 (ie 1.00001) and a correlation of 1 to the real benchmark allows for calculating both IR (standard and geometric), while, for all intents and purposes, the virtual benchmark can be considered equal to the real benchmark. It would result, from the classic IR calculation, that the benchmark actually produces alpha to itself (IR>0)! The geometric IR correctly computes to 0.

Another Tool in the Box

We can see that the Trend Following Wizards ranking using the Geometric Information Ratio gives a different insight to their raw performance numbers.

Hopefully, you find this Geometric Information Ratio useful to compare several funds, instruments or even your own strategies relative to a common benchmark. In any case, it is worth noting the importance of understanding how any performance metrics work. Following blindly the results from the classic Information Ratio might result in incorrect conclusions.

Trend Following Wizards – March 2010

Jez Liberty — Wed, 14 Apr 2010 12:36:42 +0000

Follow the Trend Following Wizards updates with the dedicated monthly feed. You can either access it via RSS or by subscribing by email

A bit of a happier month for Trend Followers with an average gain of 3.7% and even a double-digit return for Superfund (enhanced return/leveraged fund). Once again, the results are in line with the findings of our Trend Following benchmark (which had an average gain of 2.2% for March).

The YTD results are right on the 0% mark.

Full results for March 2010 below:

Organisation / Fund	Return	YTD ^*	AUM ^**
Abraham Trading¹	1.38%	0.15%	$510M
Aspect Capital²	2.91%	2.34%	N/A
Chesapeake Capital³	6.44%	2.63%	$730M
Clarke Capital⁴	-3.84%	-6.68%	$21M
Drury Capital⁵	6.10%	-1.88%	$191M
Dunn Capital⁶	9.74%	6.56%	$207M
Eckhardt Trading⁷	0.51%	-7.49%	$313M
EMC Capital⁸	6.10%	-6.52%	$185M
Hawksbill Capital⁹	-1.23%	4.13%	$54M
Hyman Beck & Co.¹⁰	-1.05%	-6.35%	$433M
JWH & Co.¹¹	-1.27%	-2.61%	$26M
Man AHL Diversified¹²	5.00%	1.80%	$1,352M
Millburn Ridgefield¹³	1.62%	-0.67%	$1,060M
Rabar Market Research¹⁴	5.91%	-1.59%	$200M
Saxon Investment¹⁵	1.17%	0.74%	$13M
Superfund¹⁶	14.13%	5.71%	N/A
Transtrend¹⁷	8.18%	5.18%	$4,855M
Winton Capital¹⁸	4.93%	4.54%	$4,300M

Betafication of Alpha: towards a Commoditization of Trend Following?

Jez Liberty — Mon, 29 Mar 2010 11:06:47 +0000

Above is a diagram by Andy Lo, illustrating how alpha morphs into beta over time, as the initial strategy becomes more common/popular. Could the phenomenon affect Trend Following? And could the 2/20 fee structure charged by CTAs now be inappropriate?

This Beta of Managed Futures paper (PDF) from the Conquest Group hints that Yes, the original alpha provided by Trend Followers has taken the path down the beta-fication route.
Further along these lines the paper claims that Trend Following Managers sell Beta disguised in Alpha clothes:

CTAs: Alpha or Expensive Beta?

Returns can be broken down into alpha (excess returns due to skill), beta and the risk free rate.
Beta is ubiquitous and easily replicable and therefore cheap, while alpha is rare, hard to replicate and therefore expensive. It makes sense to pay a premium for alpha, but there is no need to do so to access beta, as it is available from multiple, competing sources. CTAs purport to provide alpha and justify their fees on that basis. It is clear, however, that there is a good deal of beta in the returns of many alternative investments, which raises the possibility that alternative investments are providing beta but charging alpha prices for it.

The Benchmark

In order to measure the baseline for Trend Following (and derive each CTA’s beta to it), the first step is to establish the benchmark and measure its performance.

Instead of taking an index of Trend Following CTAs, the authors build an index representing investing like a CTA. They do this by implementing a simple mechanical Trend Following system (Donchian reversal system) that covers multiple timeframes (20: from 5-day to 200-day) and a wide range of diversified markets (55 markets with exposure to all asset classes and geographical locations). The system also implements volatility-based position sizing and sector allocations (reflecting average allocation from a sample group of long-term Trend Following managers – possibly a flaw in the benchmark construction as it does not make it completely independent from the CTAs).

Correlating the benchmark to CTA indices

After applying fees, slippage and interest, the returns of the benchmark were compared to the returns of well-known CTA indices (S&P Managed Future Index, CSFB Tremont Managed Futures Index, etc.). The correlation between the benchmarks and these indices range from 0.75 to 0.9 indicating that the benchmark seems to do its job of… well, providing a benchmark for Trend Following.

Measuring CTA alpha

The next step is to calculate each CTA’s beta and alpha to the benchmark. The correlations are still fairly high (between 60% and 90%) and most CTA exhibit negative alpha over the testing period. For example, Rabar and Millburn’s calculated alpha since 1990 is around -2,000%.

Fourteen of the twenty largest CTAs failed to demonstrate alpha to the Conquest Managed Futures Beta benchmark from their inception until December 31, 2004. Six of these CTAs did demonstrate alpha over this period. Alpha, of course, [...] represents merely unexplained variation which can represent either skill, random fluctuation or some combination of the two.

CTAs: Trend Following Wizards or Not?

It is not explicitly stated from the paper but it is safe to assume that the results from CTAs are net of fees. It is arguable which performance to use for comparison (before-fees or net-of-fees). It would be interesting to see a comparison of CTA returns with the benchmark on a before-fees basis.

Since most CTAs charge (much) more than a 1% fee, a before-fees performance comparison should prove more to their advantage. One could speculate that most would actually display some alpha to this benchmark.

2/20 Fee Structure obsolete for CTAs?

If CTAs can display before-fees over-performance to the benchmark despite their net-of-fees under-performance, it simply points to CTAs over-charging for their fund management services and that they must evolve to adapt to the new market environment. In order to become more competitive (from a pricing point of view) and stay attractive to investors, CTAs must keep producing net-of-fees alpha to the benchmark. This can either be done by:

lowering fees
improve their returns

Option 1 is surely the easier way, but understandably less desirable for CTAs – nobody said free competition was good for everybody (that’s probably why we have all the current interventionism and protectionism in global markets!). But as more competition arises, they will have to – in a Darwinian fashion- adapt to this betafication of alpha or die out.

A probably fair approach would be to differentiate the beta performance from the alpha performance of the fund and charge fees accordingly. Possibly a combination of a flat fee to cover costs of the beta-tracking strategy (similar to a passive management fund) and a variable fee to charge the true “value-add” from the fund (i.e. alpha). The latter fee could be based on the Information Ratio using the Trend Following benchmark.

Obviously, this is based on the assumption that there can be a widely-accepted and valid benchmark for Trend Following (including variables such as slippage, roll yield, asset selection and allocation, etc.); or each fund could possibly designate their own benchmark for this calculation – to be agreed with investors.

Other Implications

There are a few good points to take away, as an investor:

First, it shows that Trend Following Wizards‘ returns are reproducible with simple strategies. As discussed earlier, saving fees for yourself can give you a big headstart.

Second, for those not inclined to build their own system, there should be more products and funds available charging a much more competitive fee – when the launch of a Trend Following ETF?

However, this could also be bad news for Trend Following in general: if there is only a finite amount of alpha/profit available in the markets for Trend Following, and if the Trend Following space becomes more crowded there will be less opportunities for each player.

This is also in line with another Darwinian market theory, from Andy Lo: the Adaptive Market Theory (AMH), whose papers are an interesting read. The AMH theory tries to reconcile the Efficient Market Hypothesis (EMH) with its numerous flaws, as described by behavioral investing theory. The main premise of the AMH theory is that markets’ target and ideal model is the EMH model. However inefficiences (profit opportunities) arise from behavioral biases and as a result markets oscillate towards/away from the EMH model. The level of inefficiency in a market is related to that market’s “ecology” – with more competition bringing on more efficiency.
Could too much Trend Following kill Trend Following?…

Wizard Bill Dunn Video Interview

Jez Liberty — Wed, 24 Mar 2010 10:25:52 +0000

Bill Dunn is one of the earliest Trend Following Wizard that we track on this website. He started in 1974 and is famous for having trading the “same” model ever since.

He now manages $183M in his WMA program – from his website:

DUNN’s WMA is a 100% systematic long-term trend-following program which began trading
in November 1984. WMA utilizes DUNN’s original trend following algorithm developed in
1974, encompassing a portfolio of financial, energy, metal and agricultural futures markets.

Dunn WMA program performance since inception

In his “other life” Dunn is chairman of the Reason foundation, a non-profit think tank who also publishes Reason magazine: Free Minds and Free Markets. Their ideas are mostly libertarian – which seems to be a common theme among some Trend Followers: maybe a case of talking their books (or is it the other way around)?

Below are 2 videos of a Dunn interview by Michael Martin from the MartinKronikle.

The first video starts with a discussion of the Reason foundation and Dunn’s political views of the markets and regulation. At around 7:00 he starts discussing how he started the fund and how they changed the composition of the portfolio for fear of liquidity issues.
Check that eyebrow action on the intro:

Dunn also discusses the difficulties of dealing with emotions while following the system.

The second video is a continuation of the interview where Dunn provides his advice on somebody wanting to get into Trend Following (starting at around 7:00)

A peek in “Wizard” Eckhardt’s office…

Trend Following Wizards – February 2010

Jez Liberty — Mon, 15 Mar 2010 10:05:28 +0000

Follow the Trend Following Wizards updates with the dedicated monthly feed. You can either access it via RSS or by subscribing by email

Quite a diversified set of results this month for the wizards with a median and average return around +0.5%. YTD performance still in the red at an a median/average around -3%. This is in line with the results from the State of Trend Following current benchmark.

Full results for February 2010 below:

Organisation / Fund	Return	YTD ^*	AUM ^**
Abraham Trading¹	-0.36%	-1.22%	$503M
Aspect Capital²	1.58%	-0.56%	N/A
Chesapeake Capital³	2.48%	-3.57%	$700M
Clarke Capital⁴	-3.84%	2.95%	$23M
Drury Capital⁵	-1.01%	-7.22%	$172M
Dunn Capital⁶	3.97%	-2.90%	$183M
Eckhardt Trading⁷	-1.13%	-7.97%	$363M
EMC Capital⁸	-1.10%	-11.98%	$178M
Hawksbill Capital⁹	4.44%	5.56%	$54M
Hyman Beck & Co.¹⁰	-3.01%	-5.35%	$438M
JWH & Co.¹¹	0.61%	-1.48%	$26M
Man AHL Diversified¹²	-1.00%	-3.00%	$1,318M
Millburn Ridgefield¹³	-2.28%	-2.28%	$1,070M
Rabar Market Research¹⁴	1.03%	-7.02%	$199M
Saxon Investment¹⁵	0.54%	-0.43%	$13M
Superfund¹⁶	2.66%	-7.39%	N/A
Transtrend¹⁷	1.18%	-2.77%	$4,370M
Winton Capital¹⁸	2.34%	-0.36%	$4,100M

Trend Following Wizards – January 2010

Jez Liberty — Wed, 10 Feb 2010 12:23:16 +0000

- - - Note: Starting this month, I have created a dedicated feed solely for the Trend Following Wizards monthly updates. You can either access it via RSS or by subscribing by email. - - -

Not a good start of the year for Trend Followers – starting 2010 in the same way as 2009 closed: by very negative performances.

Well, Trend Following is not about winning every month. I guess if we experience some “shaky” markets in a remake of 2008 (which seem to start materialising – think about Greece, the Equities markets crumpling again), we might see most of these funds rise and shine. Time to get working on this Trend Following strategy!

Organisation / Fund	Return	YTD ^*	AUM ^**
Abraham Trading¹	-0.87%	-0.87%	$518M
Aspect Capital²	-2.10%	-2.10%	N/A
Chesapeake Capital³	-5.89%	-5.89%	$678M
Clarke Capital⁴	0.92%	0.92%	$23M
Drury Capital⁵	-6.27%	-6.27%	$157M
Dunn Capital⁶	-6.61%	-6.61%	$164M
Eckhardt Trading⁷	-6.98%	-6.98%	$395M
EMC Capital⁸	-11.00%	-11.00%	$182M
Hawksbill Capital⁹	1.19%	1.19%	$52M
Hyman Beck & Co.¹⁰	-2.69%	-2.69%	$449M
JWH & Co.¹¹	-2.13%	-2.13%	$26M
Man AHL Diversified¹²	-2.10%	-2.10%	$1,366M
Millburn Ridgefield¹³	-1.19%	-2.04%	$643M
Rabar Market Research¹⁴	-7.93%	-7.93%	$200M
Saxon Investment¹⁵	-0.96%	-0.96%	$13M
Superfund¹⁶	-9.79%	-9.79%	N/A
Transtrend¹⁷	-3.90%	-3.90%	$4,493M
Winton Capital¹⁸	-2.60%	-2.60%	$4,010M

Trend Following Wizards – December 09

Jez Liberty — Mon, 18 Jan 2010 11:50:14 +0000

Not a good year for Trend Followers! Closing December with a performance of -4.37% on average, most funds we follow “saw red” in 2009 (-7.3% on average). Well, this is part of the game: you have to risk (and lose) some to make some…
Even the “mammoth” funds that are Man or Transtrend finished the year in double digits negative territory.

With no further ado, here is the last Trend Following Wizards update for 2009:

Organisation / Fund	Return	YTD ^*	AUM ^**
Abraham Trading¹	-3.98%	-5.56%	$473M
Aspect Capital²	-3.54%	-9.11%	N/A
Chesapeake Capital³	2.83%	0.41%	$1,046M
Clarke Capital⁴	-11.04%	-29.78%	$18M
Drury Capital⁵	0.08%	9.05%	$151M
Dunn Capital⁶	-5.84%	-0.58%	$220M
Eckhardt Trading⁷	-5.95%	-4.80%	$445M
EMC Capital⁸	-2.00%	-14.29%	$212M
Hawksbill Capital⁹	-14.50%	-15.32%	$51M
Hyman Beck & Co.¹⁰	-1.30%	3.96%	$462M
JWH & Co.¹¹	-6.60%	-17.28%	$18M
Man AHL Diversified¹²	-6.30%	-16.40%	$1,414M
Millburn Ridgefield¹³	-2.02%	-7.37%	$1,137M
Rabar Market Research¹⁴	-0.48%	6.93%	$222M
Saxon Investment¹⁵	-0.18%	10.37%	$11M
Superfund¹⁶	-8.31%	-24.46%	N/A
Transtrend¹⁷	-4.79%	-11.28%	$4,768M
Winton Capital¹⁸	-2.45%	-4.63%	N/A

Notes
^{* YTD: Year-To-Date performance.

** AUM: Assets Under Management.

1. Abraham Trading was founded by Salem Abraham, a former Turtle.

2. The four founders of Aspect (Eugene Lambert, Anthony Todd, Michael Adam and Martin Lueck) were significant members of one of the most succesful funds in managed futures – AHL (Adam, Harding and Lueck)

3. Chesapeake Capital was founded by Jerry Parker, a former Turtle.

4. Clarke Capital was founded by Michael Clarke in 1993.

5. Drury Capital, Inc., was founded in Illinois in 1992 by Mr. Bernard Drury.

6. Dunn Capital was founded by Bill Dunn.

7. Eckhardt Trading is the firm managed by William Eckhardt, who co-led the Turtle experiment with Richard Dennis

8. EMC Capital was founded by Liz Cheval, a former Turtle.

9. Hawksbill Capital was founded by Tom Shanks, a former Turtle.

10. Hyman Beck & Co. main principals are Alexander Hyman and Carl Beck.

11. JWH & Co. was founded by John W. Henry, Owner of the Boston Red Sox.

12. Originally ED & F Man. Became a succesful CTA under Larry Hite and went on to form part of The Man Group plc, which subsequently bought AHL to form the Man AHL: the systematic trading division of the Man group.

13. Millburn Ridgefield have been trading Trend Following models since the early 1970’s. Millburn Ridgefield Principals: Harvey Beker, George E. Crapple, Mark Fitzsimmons, Barry Alan Goodman, Kenneth P. Pearlman and Grant Norman Smith.

14. Rabar Market Research is the company of Paul Rabar, a former Turtle.

15. Saxon Investment was founded by Howard Seidler, a former Turtle.

16. Superfund founder and CEO: Christian Baha.

17. Transtrend is a Trend follower CTA based in Netherlands

18. Winton Capital is a London-based CTA founded by Dave Harding (also co-founder of AHL).}

Trend Following Wizards – November 09

Jez Liberty — Tue, 15 Dec 2009 12:34:36 +0000

Excellent month for Trend Following Wizards: all are in the black with a 6.75% monthly gain on average!
It has been two months in a row that the Trend Following wizards exhibit very strong correlated results, which tends to reinforce the opinion that all trend following CTAs are not so different – except in terms of leverage.

Here are the results for November for the Trend Following Wizards that are being tracked (you can always find the latest update on the Trend Following Wizards page). Feel free to add your suggestions for addition of new ones in the comments or by email.

Organisation / Fund	Return	YTD ^*	AUM ^**
Abraham Trading¹	1.50%	-1.70%	$494M
Aspect Capital²	5.84%	-5.78%	$N/AM
Chesapeake Capital³	4.15%	-2.36%	$865M
Clarke Capital⁴	13.46%	-21.07%	$22M
Drury Capital⁵	6.48%	8.95%	$159M
Dunn Capital⁶	11.00%	5.59%	$240M
Eckhardt Trading⁷	6.83%	1.30%	$473M
EMC Capital⁸	3.83%	-13.53%	$217M
Hawksbill Capital⁹	21.13%	-0.78%	$60M
Hyman Beck & Co.¹⁰	2.54%	5.40%	$468M
JWH & Co.¹¹	4.72%	-11.58%	$20M
Man AHL Diversified¹²	2.10%	-10.80%	$1,537M
Millburn Ridgefield¹³	N/A	-12.80%	$1,084M
Rabar Market Research¹⁴	7.09%	7.51%	$229M
Saxon Investment¹⁵	2.35%	10.57%	$13M
Superfund¹⁶	14.99%	-17.62%	$N/AM
Transtrend¹⁷	2.11%	-6.81%	$5,070M
Winton Capital¹⁸	5.12%	-2.23%	$N/AM