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Comment on Jan-July 2010

(August 27, 2010)

January thru July 2010 was a major disappointment.  Performance was within the bounds of funding and drawdown for the portfolios; but that still leaves room for major disappointment.  Let me elaborate in terms of our largest and most aggressive portfolio, Big Boy, because that is what I trade personally and have most first hand knowledge.

We suggested $115,000 aggressive funding and $160,000 conservative funding.  Maximum initial margin for the portfolio was $80,000 and maximum maintenance margin was $60,000.  Because not all the systems have a position every night, and certainly not all the systems initiate a new position each day, we figured we could have a 50% drawdown before having to cut back any on trading.  Thus, we figured we could have about a $50,000-$60,000 drawdown without having to cut back on trading.  We funded high ($115k to $160k) for such a worst case drawdown, i.e., a drawdown of this magnitude occurring before there were any accumulated profits.  Having never experienced such a drawdown, I personally funded only $100k even.

Big Boy was configured to make about $30k per month based on historical markets and hypothetical performance.  In 2009, hypothetical performance met or exceeded this more often than not.  December was about right on the mark, and we came into 2010 with high expectations.  The first few days of January 2010 were good but then we went over a cliff and never recovered, but instead kept tumbling all the way into July.  My personal account touched a $40k drawdown in July.  Drawdown in subscriber accounts were even more I assume (about $10k or so I would guess), because I made over $10k on some Trend System trades in which the brokers didn’t get their required approvals from their customers in time to place into the trades.

What was the problem?  Diversification failed.  Most all of our markets went dry at the same time.  Unthinkable – but it happened.  If it happened once, it could happen again.  We have thus made major changes to our portfolios and level of aggressiveness.  

Looking at my personal account, about 75% of the drawdown was from poor system performance and about 25% from broker mistakes.  We have attempted to address both these issues as follows:

To simplify for brokers we have:

1. Decreased the number of portfolios from 9 to 5.
2. Decreased the number of systems within the portfolios from over 20 to 11.
3. Eliminated the need for special handling during the Thursday natural gas report.

To (hopefully, and expectedly) improve portfolio performance and decrease future drawdown magnitude:

1. Eliminated the 4 most aggressive portfolios, retaining only 5 of the 9 portfolios.  The large portfolios were great when markets were good, but too painful when markets were dry.
2. Completely rebalanced the remaining portfolios.  Previously, the portfolios over-weighted the best (liquidity and performance) markets and systems.  The rebalanced portfolios have only a taste of each market and system. 
3. In an effort to maintain diversification, systems were previously permitted to trade at lower, less promising volatility levels than now permitted in the rebalanced portfolios.  But, today still trying to maintain diversification, volatility cut off levels have been raised only minimally (but significantly) on some markets/systems and not at all on others.  We will do more if necessary.
4. No portfolio has exposure to short gold.  This hurts performance but protects against possible serious gold market losses should some catastrophic overnight event cause gold to gap skyward next day when a portfolio had a short gold position.
5. Only the Uranus has exposure to short crude oil, and then only to one e-mini contract.  Not trading the short side of crude oil hurts historical performance, but even one short oil e-mini could generate horrendous losses if OPEC oil exports were suddenly and unexpectedly shut off.  You may instruct your broker to not trade the Uranus short oil contract if you wish.  (I have been trading crude oil shorts but am next week stopping until I get my protective crude oil options in place.)
6. Even though stock index performance is now hot, the rebalanced portfolios have only limited exposure to stock index trading.  If you like to overweight to best performers, you may wish to subscribe to additional stock index versions.  But be aware that if some overnight event caused stocks to gap down badly next day, it could be expensive if you have too many long positions.  (I want more exposure without that gap down risk, so I made a ‘shorts only’ version of Russell ‘A’.)
7. I strongly recommend that no one subscribe to multiple portfolios unless they have already made significant cushion money on their first portfolio.  Perhaps the shock of the recent disappointing period has turned me too cautious, but I don’t want to worry about anyone having a drawdown of the magnitude we just had.  But, you will, sooner or later, have a five digit drawdown.  All it would take is for most everything to misfire simultaneously for only a few days – and it will.
8. At the close of each month, I will distribute a report showing the mark-to-market hypothetical performance for each portfolio and each component system, and a count of the trades for the month for each portfolio and each component system.  If your account performance is too low absolutely, or if your account performance is too low in comparison to hypothetical performance, then quit.  I have had plenty time to make any needed adjustments and so has your system assist brokerage firm.  (Note that there will always be unavoidable moderate difference between actual performance and hypothetical performance – actual contract rolling versus Trade Station rolling, hypothetical transaction cost will sometime be overstated and sometime understated, etc.)  Notify me right away should you quit and I will refund the unused portion of your subscription. 

Anyone who, at the end of July, is in a net drawdown because of my trading systems performance is welcome to trade any one of the revised portfolios for free until drawdown and fees paid to me have been recovered.  (But be aware that you could increase drawdown rather than recover drawdown.  I sure hope not – but anything can happen.)  We will do this on the honor system in that I do not know the status of subscriber accounts.  I have no problem with this – in 25 years of commodities trading, I have found my subscribers to overall (but not without exception) be a most honorable segment of population.  Do let me know if you do trade and get back to even.

Our website has been updated to show the revised portfolios and their associated hypothetical performance.  It has also been updated to show the hypothetical performance of individual systems used in the portfolios, using the revised volatility cut off levels.

Wayne Griffith