Andrew Abraham

andy-0101 My name in Andrew Abraham. I have been investing in commodities and managed futures since 1994. I adhere to the philosophy of trend following. Trend following stresses a disciplined approach to commodity/ futures trading. Successful trend following and commodity futures investing requires patience, discipline and actively managing the risk. What sets me apart from other traders is that I am not only concerned about the return on investment but how much risk I will have to tolerate to achieve my goals.

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If you are interested in contacting for speaking engagements. Please email me at Andrabr9@gmail.com or call 954 903 0638.

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Futures and commodity trading involve substantial risk. The evaluations of futures and commodities may fluctuate and as a result, clients may lose more than their original investment. In no event should the content of this website be construed as an express or an implied promise, guarantee or implication by, that you will profit, or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Information provided on this website is intended solely for informative purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible, where projections of future conditions are attempted.

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Managing the CTA Market

I want to share a great article from HFMWeek.

Below is the article
14/01/2010 Author: Michael S Fischer

Managing the CTA market
Following a tough year for commodity trading advisors, HFMWeek spoke to veteran CTA investor Harry Ploss about his success in managed futures, and why there is still money to be made from commodities.

Harry Ploss started investing in managed futures after the stock market crash of 1987, when he realised he needed to diversify from stocks. He bought into a fund that invested in legendary commodity trading advisor (CTA) Bill Dunn, and followed that with investments in more funds. In 1993, he started investing exclusively in separately managed accounts that were co-margined. He says he prefers individually managed accounts because of their transparency, liquidity and leverage. Today, he has managed futures accounts with three futures commission merchants (FCMs) for his personal and trust accounts.

Ploss favours managed futures because they provide a very good return. “It’s zero correlated with the stock market, so it’s a wonderful diversification,” he says. “But you have to manage the volatility. The Sharpe ratio of managed futures can be the same as for stocks, and the drawdown shorter. When you get into a bear market, you can be down for two or three years, whereas managed futures drawdowns tend to be a lot shorter. The Ulcer Index, which looks at the length of the drawdown times the depth, is a lot lower for managed futures than for the stock market.”
Today, most of Ploss’s investment portfolio comprises managed futures. It also holds a good number of mutual funds, he says. “I’m not an individual stock picker, nor an individual picker of futures markets. I pick advisors to make my decisions. I look for the best advisors I can find, and I diversify among them.”

Ploss says that 50% to 60% of his managed futures investments are in trend-followers because he finds trend following to be the most robust strategy. “Early in my career, with my mathematical background, I was obsessed with correlation and Sharpe ratio,” he says. “And then I realised that robustness was the most important thing. That is, what’s the chance that an advisor will do at least half as well in the future as he has done in the past? After that, Sharpe ratio and correlation were less important. In the end when you add a CTA, the most important thing is that they make money and that you can handle the risk of the portfolio going forward.”

He notes, however, that there tends to be at least a 50% correlation among trend-followers, so diversifying among them is imperative. “Diversification can be achieved by investing in a group of systems diversified over timeframe, over type of signal and over markets,” he says.

Ploss stays away from several strategies. One is option writing, despite wonderful performance records. He finds that option writers invariably blow up and no good way exists to evaluate their risk management. “Not that I haven’t tried it a few times, and not that I haven’t gotten burned a few times.” He also finds that S&P index traders tend to be unstable, and their past performance can fool investors.

He hasn’t had good luck with agricultural investing either. “Often the ag traders have one or two strategies, and after a while those just stop working,” he says. Ploss says that although some short-term traders perform well, if their focus is simply mean-reversion, they often blow up. “They have to have a balance between mean-reversion and breakout.”

Then there are the exotic strategies. “The most unusual strategy I saw was a guy who did spreads on natural gas options, and was running maybe 65% option premium and margin-to-equity,” says Ploss. “I thought that was a remarkably risky programme. I avoided investing with him because I felt I couldn’t evaluate or believe his comment that he had perfect arbitrage.”

Ploss’s skill and confidence in vetting CTAs and investing in managed futures come from his professional background and his long-standing experience. “I started with a very mathematical background, with physics and actuary,” he says. “While I was in actuary, I also did a lot of negotiating with insurance agents, and contracts, which helps in terms of drafting CTA contracts and negotiating with advisors. Then, of course, talking to so many people and hiring so many people and often being able to see the future of a CTA.”

In his experience, trading advisors’ future performance is much worse than their performance before they are hired. “A lot of people will compare pre-hire to post-hire returns and look at them as if they’re exactly the same,” he says. “But I don’t. I look at returns before first publication, and I call those ‘incubator returns’; and then returns between when I first saw them and when I hire them, and then returns after I hire them. I expect the returns after I hire them to be worse than the returns before I hire them, and especially worse than the incubator returns.”

Why? “If those incubator returns weren’t good, they would never have been published,” says Ploss. He almost always throws those out. He also ignores exceptional returns in the first six months of a CTA’s performance, as well as losses during the first six months. “Essentially, I weight recent returns much higher than distant ones. I’ve seen so many instances where you have wonderful returns for four years, and then what I call a ‘flattop’ – they haven’t made any money in the last six months. When I see a flattop, I just sit and watch because I assume that’s an early warning I’m not going to make any money with that advisor.”

Ploss finds interesting talent by scanning his quarterly databases and others that are continuously updated. Other investors also point him to new advisors. He then likes to see daily performance and monthly FCM statements. In addition, he says, “I like to see some statement of what their trading strategy is. There’s a lot of judgment as to what I like and don’t. I find that some traders have what I call ‘story shift.’ You get one perspective when you hire them, and then they wind up doing something else. At some point, when the story shifts too much, you just have to close the account.”

Ploss conducts qualitative due diligence mainly by intuition, unlike many of his counterparts who do extensive background checks. “One funny statement from a CTA will turn them completely off,” he says. “I have not been big on that. I don’t do criminal background checks.”

Ploss has seen a number of changes in the managed futures sector since he began investing directly. Before the advent of the euro, all the European currencies traded separately. “If you wanted to trade European futures, you needed to go to a European advisor,” he says. “Today, many American advisors have 24-hour desks and cover the European and Asian space pretty well. Truly, it’s easier to have a diversified portfolio with just American trading advisors today than it was in the 1990s.”

One key trend Ploss has observed is that the minimum investment to get into institutional accounts is increasing. “It used to be you could get in for $1m; now more and more accounts want $5m,” he says. “There are always more retail accounts that you can get into for $50,000 and $100,000, but you usually get a lower quality talent at that range, more instability. You used to be able to jump from one to the other, but that has gotten harder. As a result, more people are forced into funds that can’t bridge that gap.

Here is the link to the actual article.

AbrahamCTA.com


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