As one of the world’s largest futures databases, we begin talking to traders often at the earliest stages of their evolution up to billions of dollars in assets. But not all beginnings are equal, as some achieve early success and others never find it at all. Part of our challenge is trying to determine which ones provide the best opportunities to our investors.

One might think that this is a simple process.  A few favorite search methodologies on our site include Sharpe ratio, returns, or minimum investment amount. Each of these can be a good way to filter but ultimately each is limited in their efficacy.  Most importantly they ignore the “inside story” for many of the programs.  Often managers are even better than they appear but sometimes they look great but should be avoided at all costs.

Let’s review some of the pros and cons of typical investor searches.

The Sharpe ratio was invented to help identify the best risk-adjusted returns. The simple idea is that if two investments yield the same return but one does it with less movement and more consistency it is a better investment.  There are a couple limitations to this, one is that upside movement can also be punished.  What if a program only made money (a lot of it) when the equity market was down but was otherwise choppy?  It could certainly find a place in a portfolio but could exhibit a low Sharpe.  The other failing is that some investment styles lend themselves to high Sharpe ratios but mask tail risk.  Option writing is the primary example of this as range bound market conditions can persist for long periods yielding a very smooth and consistent return profile.  When markets crash, these programs can lose substantially over a brief period.

Returns and minimum investment amount are two of the simplest factor to look at when evaluating trading talent.  After all who doesn’t want high returns at a level you can afford to enter? Futures contracts have leverage built into them though so if two managers have the exact same return profile but one achieves it using half the margin they have done so much more efficiently.

See the chart below that shows the exact same program with different leverage applied.  An investor with $400k might skip over the “too conservative” profile even though they might like the $100k version. A manager with a 100% return might have taken reckless chances and gotten very lucky or simply taken advantage of unique market circumstances and managed the trade well.  Understanding how managers use margin in conjunction with their risk taking can open up many possibilities that a simple search will not uncover.

 

Aggressive Normal Conservative Trade level $100k $200k $400k Average margin 40% 20% 10% Return 60% 30% 15% Drawdown 20% 10% 5% Leverage 4x 2x 1x

 

The last and biggest limitation of searches in my opinion is a lack of understanding of the history and development of a strategy.  Many beginning or experienced traders start their program with different goals that evolve over time.  A proprietary trader might be trading money for himself and a couple aggressive friends who tell him to “swing for the fences” as they are allocating risk capital.  This might result in concentrated bets with high margin usage.  If it succeeds, they could make a couple hundred percent with 30% up and down months.  At that point, they may decide to register with the NFA and adjust to a marketable product that targets 20% annualized returns and 5% down months.  Others, make major changes to markets traded, systems, or risk overlays.  Many of these track records get skipped in searches because they are disjointed or have “wild” months that might have more risk than a customer would like.  But they aren’t the same programs anymore.

Below is a brief list of managers that are often overlooked on our site for reasons listed.

Adalpha Asset Management
Long track record that is steady year to year but displays a lower Sharpe than newer programs.  New research and development added systems to improve performance and potentially reduce risk steadily year to year.  Averages 4% margin to equity which is very efficient usage.

Covenant Hedged Equity
Returns look overly aggressive based on specific market conditions that occurred in 2020. It is designed to be a more efficient equity replacement as it runs at 1.8X leverage so $100k would replace $180k of equity exposure.

Quality Capital
Added a tactical overlay designed for shorter term trading to smooth out returns. Very popular program struggled with the asset allocation model after a long and successful run prior to this introduction.

Blue Bar Futures
Shifted his technical trading experience to livestock after beginning track record focused on the S&P.  Program adjusted significantly for outside customers at lower targeted risk levels.

Orgone
Proprietary traders managed money for a few family and friends before opening to a wider audience and reducing margin by 5x.

Four Seasons Hawkeye
Margin to equity averages below 3% or $25k on a $500k minimum with a peak around 8%.  Return on cash used to hold positions is among the highest across all programs.

Working with someone from our industry to understand these nuances is helpful to get the portfolio that fits your needs and perhaps gets you in the one you skipped over. Please reach out to me to learn more about how to get the most from our site or with questions about our managers.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE RISK
OF LOSS IN TRADING COMMODITY INTERESTS CAN BE SUBSTANTIAL. YOU SHOULD
THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN
LIGHT OF YOUR FINANCIAL CONDITION. THE HIGH DEGREE OF LEVERAGE THAT IS
OFTEN OBTAINABLE IN COMMODITY INTEREST TRADING CAN WORK AGAINST YOU AS WELL
AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS.
IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL
CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE
ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING
PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS.