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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MANAGED FUTURES DRAWDOWN, RECOVERY, AND RUN UP CYCLES

Below is an interesting article from Attain.

MANAGED FUTURES DRAWDOWN, RECOVERY, AND RUN UP CYCLES
October 4, 2010

With several multi-market systematic programs on Attain’s recommended list such as Clarke Capital Worldwide, Integrated, Robinson Langley, and APA Strategic Diversification program seeing nice gains in September – it brought into sharp relief for us just how cyclical the returns of such programs can be. Those same names were the darlings of 2008 and laggards of 2009. To now be in the spotlight again sure makes it seem like they are cycling in and out of favor with some regularity.
In general terms, the past 10 years have looked like this for multi-market systematic programs (formerly called trend followers): 2000-2003: Up, 2004-2005: Down, 2006-2008: Up, 2009-2010H1: Down, 2010H2-present: Up.
The cycle has seemed to be 2-3 years of nice returns, followed by a year to year and a half of flat to down performance, followed by another 2-3 years of gains, and so on. Is this cycle real? Or are we just forcing a ‘fit’ here where one doesn’t belong. And if there does seem to be some cycling between good and bad periods for these types of programs, what can be done to identify those periods before the fact… (doing so after the fact doesn’t help us ramp up or scale down these managers unfortunately).
To dive further into this; we looked into Clarke Capital Management’s Worldwide program as a proxy for multi-market systematic managed futures programs over the past 10 years.
The first chart shows each of their ‘major’ cycles over the last 10 years in chronological order (meaning there was a -17% DD period followed by a recovery which earned 26%, followed by a run up of another 79%, before the next major DD), along with how long they lasted. We defined the major cycles as: Major DD = drawdown of at least 6 months and over -10% from last equity high, Recovery = gain from DD low to new equity high, Run Up = move from new equity high to last equity high before new major DD.
Past Performance is Not Necessarily Indicative of Future Results

It is telling to us that each of the DD phases is longer than the recovery phases, and that fits with our experience for systematic, long volatility type managers who can make significant profits in a short period of time when there are outlier moves in the markets they follow (Wheat rising ~50% in 2 months recently for example).
It is interesting to note the contrast between the long volatility programs with their long drawdown/short recovery profile, and option selling programs with their short volatility profile which results in a short drawdown/long recovery type cycle. We ran the same analysis on the popular option selling FCI program, and found that their average drawdown period lasted just 3.5 months, while their average recovery lasted 9 months (or about 3 times the DD duration). Contrast that with Clarke Capital’s Worldwide program seeing an average DD duration of 19 months and average recovery of 7 months (about 1/3 of the DD time) and the differences between these two strategies really becomes clear.
Another way to look at the same data to get a better feel for how it cycles are to remove the magnitude of each period, and just look at the duration of each. The following shows the duration of each DD, Recovery, and Run Up period for the Clarke Capital Worldwide program over the past 10 years. This view really gives a nice picture of A. how long the DDs can be (a 14 month and 36 month DD) and B. how quick the recoveries (in yellow) can be. What also surprised us when seeing this view was how long the run up periods have been (that’s an argument for using a new equity high off a DD for an entry point for CTAs – but we’ll have to cover that in another newsletter).
Past Performance is Not Necessarily Indicative of Future Results

After running the stats above, our curiosity got the better of us and we wanted to see the same on one of the CTA indices. We chose the Dow Jones Credit Suisse Managed Futures index which goes back to January of 1994 to see if there was a similar look.
Past Performance is Not Necessarily Indicative of Future Results

The data going back to 1994 shows a similar cycle pattern, in our opinion, with 5 major DD periods, 5 recovery periods (including current recovery 1% from equity highs), and 4 run up periods. The average time between major DD lows was 42 months, or about 3.5 years; which fits in with the general cycle we mentioned above (2years of nice returns followed by a year and a half of flat to down).
What was slightly different in the overall index data was the recovery length. While the recoveries in 2000, 2002, and 2010 have been shorter than the drawdown preceding them (like we saw with our systematic manager proxy Clarke); the 1996 and 2005 recoveries were actually longer than the drawdowns they were recovering from. Some of this may be due to the index including more than just systematic multi-market programs that have a long volatility profile.
Market Volatility Cycles:
But, as we’re fond of saying – this all begs the question – Why and how do systematic multi-market managers cycle like this?
Without trying to oversimplify things too much, they cycle like this because the markets they follow cycle in and out of periods of trendiness and increased volatility – both of which tend to be good environments for managed futures.
We put the following chart showing the trendiness of Soybeans going back 60 years in our August of 2009 newsletter ‘What’s Ailing Managed Futures in 2009’, and it bears showing again here:
Past Performance is Not Necessarily Indicative of Future Results

The chart shows quite clearly that the Soybean market, for one, tends to have some fairly regular ‘boom and bust’ periods as far as trends are concerned (this has nothing to do with prices, just the movement of prices). The chart shows the 6 month ADX reading of Soybeans on a monthly chart going back to 1959 (50 years!). The ADX stands for the Average Directional Index, and it is a technical indicator which measures the so called trendiness of a market. When the indicator is sloping upwards, it indicates that market is in a trending mode, and when the indicator is sloping downwards, that indicates the trend is ending and/or choppy, sideways market conditions.
You can see from the chart that Soybeans tend to have about one to two major trending periods every four years, which again fits in with our observed experience of 2-3 years of good returns followed by a year and a half of flat to down.
But systematic managers these days don’t necessarily need long term trends (such as the 6mo ADX identifies) to be successful, some are just looking for increases in volatility in which to trade short two to three day moves or the like.
To measure how often increases in volatility show up across different markets, we looked at the rolling three month point gain or loss (we use point gain instead of percentage gain to alleviate issues caused by backadjusting data) for a snapshot of markets used by many systematic multi-market programs – Wheat, Corn, Soybeans, Euro Currency, and Copper.
We defined when a market was experiencing greater than normal volatility as those times when the 3 month gain or loss in point terms was above or below 1 standard deviation of the 60 month average 3 month point gain/loss, and then measured how long (in months) it took between such periods of greater than normal volatility.
Unfortunately, when looking at a graphic display of the rolling three month price gain/loss and when these volatility spikes have happened, most of the charts looked like the following in Soybeans. The first looks more like random noise than a cycling SIN curve, and there are up to 8 years between volatility spikes in the second chart. These charts unfortunately don’t show the type of cycle activity we would expect either from our experience or the circumstantial evidence given by the Soybean trending chart and Clarke Capital cycle periods.

But they aren’t called multi-market systematic traders for nothing… The programs we’re discussing are called multi-market because they look at multiple markets at the same time. So where there may be 8 years between a volatility spike in Soybeans, and perhaps a similar time in Bonds, for example; those spans may be offset by four years, making the time between volatility spikes which are beneficial to the portfolio as a whole just four years (sort of like how they split the Winter and Summer Olympics to occur every two years – even though each on its own occurs every four).
So when looking at our (admittedly small) snapshot of a full multi-market portfolio (Corn, Soybeans, Wheat, Copper, and Euro Currency) – what did we see? The results from that test fit with our earlier findings, with the average duration between volatility spikes on the markets we tested coming in at 34 months (right around that same 3-4 year time frame).
What are the takeaways?

For starters, plan on investing in a multi-market systematic program for at least four years. From what we have seen tracking such programs over the years, that is about as long as it takes for markets to fluctuate between contracting and expanding volatility (the latter being the good environment for these types of programs).
Secondly, be careful when adding to a program when at new equity highs. If it has just put in a new equity high after a drawdown period (representing the end of the recovery period) – that appears to be a good time. But if it is a new equity high several months into a new run up period – that appears to be tempting fate somewhat – as the odds of a new cycle occurring which pulls the program into drawdown increase with each month the program remains in the run up period.
And finally, don’t panic when a multi-market program is losing and has been for several months (12-36). They are long volatility programs which are set up in such a way as to ‘survive’ through those poor cycles by taking numerous but small losses, and then recoup those losses in a much shorter time frame (remember Clarke’s ratio of 7 months recovery to 19 in DD) when and if markets cycle back to periods of volatility spikes.
Jeff Malec

Abraham investment management

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

THE RISK OF LOSS IN TRADING FUTURES CAN BE SUBSTANTIAL.
YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH
TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION.
IMPORTANT RISK DISCLOSURE

Managed Futures Blog.
DISCLAIMER
Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.
The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.
The mention of asset class performance is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.) , and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices: such as survivorship and self reporting biases, and instant history.
Managed Futures Disclaimer:
Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.
Copyright © 2011 Attain Capital Management, licensed Managed Futures, Trading System & Commodity Brokers. All Rights Reserved. Reprinted with permission.

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