By Paul Rieger
In this month’s Manager’s Corner Update, we have Alturas Capital Management answer our “25 Questions Every Investor Should Ask”. Plus get the latest rankings from Barclay Hedge and sign up to receive our Managed Futures Kit.
Click here to access the CTA performance capsule
25 Questions Every Investor Should Ask
1.) What is the name of the program/programs and who are the listed Principals?
Alturas Capital Castle Fund (Commodity Pool) and Alturas Capital Managed Futures Program (CTA)
Ken McKean, Principal
Ben Rogers, Principal
2.) Can you provide us with some details of your corporate background?
Alturas Capital Management was formed and registered in September, 2011.
3.) Who are the Principals with trading authority?
Both Ben and Ken have trading authority.
4.) Can you provide details on the principal and/or managers’ education, career and trading background?
Ken has been applying a quantitative approach to trading the derivative markets for over thirty years. He started his career at O’Connor and Associates, managing an equity option book on both the Philadelphia and Pacific Stock Exchange. Ken also spearheaded O&A’s exploration into the capital and commodity marketplace as well as the convertible bond arena. From 1987 to 2002 Ken was an independent market maker on both the Chicago Board of Options Exchange and the Chicago Board of Trade specializing in the modeling and trading of special situations and risk arbitrage. His latest position was as President for Ketchum Trading, the trading arm of the Hull Family Foundation where he oversaw asset allocation and used stock index trading strategies to enhance portfolio returns and re-balance asset mix while mitigating overall exposure.
Ben has been in the investment management business for over ten years. Initially, he focused on tactical asset allocation for the Hull Family Foundation, developing algorithmic strategies to opportunistically adjust the equity exposure of their portfolio. Subsequently, Ben entered the high-frequency trading arena with Matlock Capital, eventually rising to Lead Financial Engineer & Co-Portfolio Manager for the company’s statistical arbitrage portfolio. He was responsible for design, development, and implementation of the business components of an automated trading system that operated on multiple exchanges in the markets for 300 U.S. equities. Following Matlock’s closure, Ben joined Sun Valley Gold, manager of a precious metals hedge fund, where he was solely responsible for research, development and implementation of an automated trading system focused on the Basic Materials sector.
5.) Which firm calculates your performance numbers?
Commodity Pool: Compliance Supervisors International Managed Accounts: Michael Coglianese CPA, PC
6.) What is the minimum investment for your program?
Commodity Pool: $100,000
Managed Accounts: $250,000
7.) Do you accept notional funding?
8.) What is your management and incentive fee structure?
9.) What is your program’s capacity?
Our research suggests that we could easily have an AUM of $100,000,000 without having a significant impact on the liquidity of the S&P 500 E-Mini Futures market.
10.) When did you start trading this program?
June 8, 2010.
11.) What type of accounts do you manage?
Qualified Eligible Persons only.
12.) Can you give a brief description of your program?
Alturas is a multi-factor algorithmic trading strategy that generates an edge in forecasting the one day change in the S&P 500 Index.
Each day, the strategy produces a buy, sell or neutral signal. The signal represents both direction and magnitude of the trade. For example, a buy signal with a 63% strength rating would result in a long position utilizing 63% of the leverage adjusted capital base. On average, the strategy is long the market 36%, short 20%, and neutral 44% of trading days. The average long position utilizes 68% of the capital base and short utilizes 58% Positions are adjusted (increased, reduced or closed) on a daily basis.
13.) Do you have a systematic or discretionary approach to the market and what are your program goals?
Our trading system is entirely systematic. The program goal is to increase risk-adjusted returns of our investors’ overall portfolio by generating consistent positive returns that are uncorrelated with traditional asset classes as well as alternative investment indexes.
14.) What is the average holding period for each trade?
One trading day from close to close
15.) Do you trade options within your program? If yes, please describe the types of options traded and how options risk is monitored.
16.) Are there any liquidity constraints in the markets you trade?
We trade exclusively in the S&P 500 E-Mini Futures, a highly liquid market.
17.) In what types of market environments does your trading program do well and /or struggle?
Our trading system thrives in market environments of consistent volatility. Since we generate an edge in forecasting the one-day change in the broad stock market, consistent high volatility is optimal.
The system struggles in the face of exogenous shocks that overwhelm the information contained in our forecast (e.g. Euro crisis, government shutdown).
18.) What is the standard range of margin to equity usage for the program and how long do you hold the average trade?
Maximum margin to equity is 10%. All trades are held for one trading day close to close, although we can maintain the same directional exposure but of varying magnitude for several days.
19.) How do you manage risk/reward and what metrics are employed?
Our algorithm, if it generates a trade, also generates a confidence level on which we base capital committed to the trade. Risk is further mitigated by the duration of the trade (one day) and by stops, which are automatically placed for each trade.
Our trading system embodies a risk/reward matrix which, over time, results in more winning trades than losing trades and an average profit on winning trades which is greater than the average loss on losing trades. While only 58% trades are profitable, the disproportionate profit of winning trades results in 68% of months and 100% of years being profitable.
20.) What are the optimal market conditions for your strategy?
As stated earlier, a market which has consistent high volatility is best, but any market with consistent volatility will produce an attractive risk adjusted return.
21.) Describe your worst drawdown to date, how did it happen and what actions have been taken (if any) to prevent similar drawdown’s?
Our worst drawdown from peak to valley was 13.9% which occurred in the fall of 2011 and was due to the European crisis. There were two factors that contributed to this drawdown: (1) event driven spikes in one day volatility and (2) the fact that, for this brief period of time, the events moving the S&P 500 were almost exclusively external rather than pertaining to market internals. We are conducting research into better managing exogenous shocks (i.e. reducing overnight exposure, tighter stops) but have not yet implemented any measures in response to this drawdown.
22.) What are your investment goals?
To generate consistent, positive returns that is uncorrelated with traditional asset classes as well as alternative investment indexes.
23.) What makes your program unique and different from other managers in your sector?
To our knowledge we are unique in our approach to generating consistent, positive, uncorrelated returns; our negative correlation with managed futures indexes corroborates this. Furthermore, our trading system is easily understood by even the most inexperienced investor (long/short/neutral the broad market) and is not capacity-constrained (trades the most liquid equity index available).
24.) Do you feel you have an edge if so what is it?
Alturas Capital invests exclusively based on a quantitative algorithm that generates a consistent statistical edge. We manage this edge, which over time wins more often and in greater magnitude than it loses, by maintaining a leverage level that will keep us “in the game” in periods of drawdown.
25.) What is the one piece of advice that you would give to a new start-up CTA?
To have a clearly stated strategy from the beginning and to keep third party audited records of the strategy’s performance from its inception.