What’s wrong with people? Why do we love to see blood and guts, an accident on the side of the road, and John Paulson’s hedge fund losing money? For whatever reason, people love to see a train wreck. We got 100 times more views on our post ‘The trade that killed Dighton Capital” than we did on posts talking about programs who are doing well in this environment.
But while recent volatility may have been detrimental for traders like Dighton and FCI, it bears repeating that it has been largely beneficial for others. Those have mostly been so called ‘traditional’ systematic multi-market managed futures programs which are long volatility programs through some sort of trend following approach; but there have been a few other types of programs which have earned their stripes during this volatility spike.
One such CTA is Roe Capital, whose Monticello program is estimated to be up 8%, while the Jefferson program is up 7% [Disclaimer: Past performance is not necessarily indicative of future results]. This is a big result for them, after enduring losses in 6 out of 7 months to start the year and on a new max drawdown. A large loss during this volatility spike would likely have spelled the end for Roe Capital (and sold a lot of newspapers), but we’re happy to report a different ending for this story.
We profiled Roe back in 2010, and the mechanics remain the same. Both the Roe Capital Monticello Spreads Program and the Roe Capital Jefferson Index Program focus exclusively on US stock index futures markets. We got in touch with the manager, John Roe, to get his take on it, and to explain why and how the program has excelled during this volatility spike (when past performance showed them as more of a low volatility performer):
There are several positions that have been working for us this month, most notably the positions that relate to buying short term weakness and selling short term strength. Part of our trading model uses a run analysis to sell strength in a structural bear market, i.e. rallies that appear in the midst of panic sell-offs. Then when the market resumes it downward spiral, given enough weakness, we reverse our position by buying into that weakness and targeting a return to prices which occurred in the previous day’s trading range. Our risk on this trade is low relative to our profit target, which expands and contracts with the trading range.”
The beauty of this trade is that we reverse long only after a profitable short trade, only during the day session, and at twice the position size of the original short. So we add additional risk only after taking profits and during a time frame when our stops are defined and actively working in the market. This position filter permits us to reduce our leveraged exposure to the market overnight and increase it during the day when we have an active, tighter stop and a wider profit target. But where the trade really succeeds is that it seeks to take on more risk only after it profits; that cushion allows us to take advantage of the volatility, while limiting the potential of getting hurt by it. And when we win on both the short and the double long, it’s a home run.
That may be a little too technical for some, but it offers unique insight into how the Roe program works. Essentially, it loves periods like last week when we saw the market down 600, up 400, down 300, and so on. That sort of back and forth action fits right in with what their models are trying to do, and usually comes in a period of declining volatility. But when that sort of back and forth happens amidst expanding volatility where the daily ranges are bigger – Roe isn’t hurt by the rising volatility, but helped by it.
Roe’s got a little while to go before getting back to equity highs (making this a good time to consider adding the program), and those losses surrounding the Japanese earthquake worry us some; but it was high time we said goodbye to the blood and guts on the front page, and tried to profile a feel good story (even if it doesn’t sell well).