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These graphs highlight the point exactly, that there a trend followers who
use sophisticated trend following techniques and good money management, and
there are others who use ideas that are really not that smart. Some Fund
companies employ brilliant talented people, other's don't. It doesn't take
a brain surgeon to work out which is which. When markets trend strongly,
your method MUST be catching the moves or something is fundamentally wrong
with your model. If the markets go choppy, then it comes down to how
sophisticated your idea's at reducing the drawdown. There are a HUGE number
of CTA's that have made a lot of money the past couple of years. By
definition, it MUST be because they were following trends on some level, as
the markets are having massive moves. To allow a model to experience a
drawdown for 2 years when markets are trending strongly, goes not to the
system, but to the designers. If you are not making money inline with the
trending markets after 1,3,6 and 13 month periods, then you should be
constantly asking WHY? Is it bad entries? Is it bad stop placement? Bad
allocation to different markets? Errors? Bad coding? Frankly, it should be
dead easy to answer each of those questions. The real hard part of course is
rectifying it to generate the results we desire.
-----Original Message-----
From: Mark Johnson [mailto:janitor@xxxxxxxxxxxx]
Sent: Tuesday, 15 April 2008 12:26 PM
To: omega-list@xxxxxxxxxx
Subject: Re: Gary's friend lost money for 2 years, quit trendfollowing
About a friend, Gary Fritz wrote:
GF> He felt that the commodity markets were "too big"
GF> for any number of systematic trendfollowers to
GF> swamp out the trending behaviors of the commodity
GF> markets.
GF>
GF> But he shut down his system this winter, because it's
GF> been in a drawdown for 2 years and showed no sign of
GF> recovering. I don't think he's alone. It's been
GF> my understanding that portfolio trading of trend-
GF> following systems in commodities has not been working
GF> too well for the last few years. I haven't seen recent
GF> data but I believe large trend-followers like John
GF> Henry have taken some wicked drawdowns.
I am sorry your friend lost money. If it is any comfort
to him, he is not alone. Plenty of other traders lost
money at the same time, and a sizeable number of the
losers were trend followers.
There are lots of CTA money managers who publicly state
that they are trend followers. Several of them have
lost a whole lot of money recently. Publicly and
embarrassingly. Perhaps the most infamous example is
John W. Henry, owner of the Boston Red Sox professional
baseball team. JWH had a lot of success for a lot of
years, but has taken big losses recently, as Gary
mentioned.
I went to one of the CTA tracking websites (IASG.com),
registered myself as a new user, and pulled down the
recent track record of some famous CTAs that publicly
state they are trend followers. The equity curves of
their track records are included in this image file:
<http://img229.imageshack.us/img229/5138/tfmgrsjs0.png>
http://tinyurl.com/6fy9wy
Since I know from years of experience that attachments
don't make it into the Omega List Digests (or onto
the Purebytes archives of the O-List), I put the image
file on a free image upload/download server. Click to
view, right click and "Save Target As" to download onto
your computer. When it's on your desktop, right-click
and select "Open with Windows Picture and Fax Viewer"
so that you can zoom in, pan, scroll, and so forth.
Sorry for the cluttered graphs, that's the website
and their "added value". The CTA's trading results,
after deducting all management fees and profit allocations
(i.e. both halves of the Two-And-Twenty compensation),
are shown as a heavy black line. The rest of the crud
just clutters the graph but I don't know how to make
it go away.
Shown are
John W. Henry DUNN Capital
EMC Capital Transtrend BV
Winton Capital
JWH and DUNN are two famous long-time trend follower
CTA's, both have been in business more than twenty
years. Both have done terribly in the past couple
years.
EMC is Elizabeth M. Cheval, one of the original
Turtles (taught to trade by Richard Dennis and
William Eckhardt in the first Turtle class). Her
trend following results seem to be just as good in
the recent past, as in the distant past.
Transtrend is a trend following CTA that many people
believe is second-best in the world at trend following.
Their avowed strategy is globally diversified trend
following. Transtrend's results seem not to have
suffered of late.
Winton Capital Management is a CTA that most people
thing is best TF in the world, at the moment. Winton
is a trend follower (Google their founder: David
Harding, to read more) that bends over backwards
to call attention to the risk side of the equation:
when making directional bets on commodity futures,
reward is inevitably linked to risk. Winton's
recent trend following results seem to be quite
pleasing, and investors are flocking to Winton's
door.
So, with these graphs in hand, I would offer Gary's
friend my sincere regrets that he lost money and
gave up. I would show him that other, bigger,
well-established, highly respected trend followers
got badly injured at the same time, and hope that
this knowledge would console him. I would also
point out to him that some trend followers survived
and even thrived during the same period.
Best wishes to all,
Mark Johnson
9:26 AM
9:26 AM
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