We sometimes have clients who are attracted to managed futures by the various CTA indices, or have seen a program with 10 months of history and no losing months and want some of that performance for their own account.

Before letting them invest in managed futures, we usually take these investors to our website and show them the track record of Clarke Capital’s Worldwide program. See this, we say. This is what you should expect. This is what managed futures looks like.

Today’s managed futures spotlight is on an old stalwart of the managed futures industry, Clarke Capital Management. Clarke Capital was founded by Mr. Michael Clarke back in 1993 when managed futures and system trading were still in their infant stages. Since then, Mr. Clarke built CCM into a world class managed futures company, which it continues to be today. Now, after 18 years, Clarke Capital is ready for another chapter as Chad Butler comes on board as President.

Who is the Manager:

Michael J. Clarke, the manager behind Clarke Capital Management (CCM), is a bit of an institution in the managed futures space. With nearly 30 years of experience, Michael has seen his fair shares of ups and downs. From the first-hand witnessing of the 1987 crash to delving into the world of programming, his experience is as deep as it is wide.

Though his initial experience in derivatives was based in the options world, in 1989, he chose to break away and dive into the world of model development. After four arduous years of toil and sweat, he finally felt comfortable enough with his models to trade client money with them. His perfectionist tendencies paid off, as assets under management for Michael and Clarke Capital rocketed to $396 million by 2004.

For years, Michael immersed himself in his trade, coming up for air only to indulge in some tennis, poker or to enjoy the company of his lovely wife and twins. However, as Clarke Capital has continued to expand, changes have taken hold- especially over the past year. Michael continues to guide the firm’s strategic vision and core values as CEO, but day-to-day affairs have come under the purview of President Chad Butler in conjunction with the purchase of Clarke Capital by a Chicago based family office in 2010.

Chad is someone who is best described as a colorful character. A family man with a degree in biology whose resume boasts names like Walt Disney and whose passions include organic produce and breeding championship alpacas, he may not seem like the managed futures type at first glance. Don’t let his infectious laugh fool you, though- this man is managed futures through and through.

Mr. Butler began trading futures on his own in the 90’s, and by 1999, his passion for trading prompted him to develop a small CTA and brokerage of his own. When PFG Best offered him the opportunity to move to Chicago and aid in their marketing, he jumped at it, where he was able to enhance his skills in the world of marketing, programming and business development. From that moment on, there was no turning back. His journey in the world of futures trading took him from PFG Best to MF Global brokerage services, to RJO Futures sales to his current home at Clarke Capital. Almost instantly, Chad realized that he had found his professional home and a kindred spirit in Michael Clarke.

As he puts it, “The fit was right.”

Looking at the position Clarke Capital finds itself in today, we have to agree.

All other key personnel at Clarke remain intact, including Jim Anderson, who has over 20 years of experience in operations, with 9 as Michael Clarke’s right hand man. Dave Wesolowicz heads up compliance and has 30 years of industry experience. Finally, Terry Kennedy and Andy Owens head up programming with combined experience of 35 years. Mr. Clarke is especially proud that his company has had zero employee turnover since the inception of CCM.

How Does the Program Work:

Clarke Capital Management’s programs are a sort of microcosm of the managed futures industry, acting like traditional trend followers at times, and the newer shorter term trades at other times. This is likely because the base of all of their programs is a systematic multi-market strategy specializing in medium to long-term trend following.

The Clarke programs are designed to identify a trend as early as possible, get in line with that trend, and then ride that trend as long as possible. Sounds easy when boiled down to one sentence, but Clarke has found it infinitely more complex over the past 18 years.

Mr. Clarke and his programming team have developed all of the trading models used by the Clarke programs in house, with the original 10 models developed in the early 90’s after being in the development stage for 3 years before CCM was launched in 1993. Today, there are approximately 130 trading models in the Clarke Capital portfolio.

Clarke Capital has 7 different programs available for investment, with assets under management across all programs exceeding $130mm at the end of the first quarter of 2011. The programs share much of the same base logic, but differ in the number of models they use and market they trade. A breakdown of how the various programs differ is listed in the table below:

We list Clarke Worldwide in the first column, because it is one of the most popular programs, is considered the flagship program, and was ranked #2 in themost recent edition of Attain Capital Semi-Annual Top 15 CTA List (which we’re hopeful isn’t to blame for its drawdown since then…)

Worldwide is Mr. Clarke’s original program, and perhaps if you gave him truth serum, his favorite of all the Clarke programs. Worldwide has one of the longest track records in the managed futures industry, and according to Mr. Clarke,  the program’s success can be attributed to the model development process as well as the proprietary fuzzy logic filter that is used to confirm system signals across all CCM models and programs. This filter is designed to measure trend strength across multiple time frames and analyzes market patterns over an 800-day look back period. The process identifies optimal market conditions and grants or denies permission to the model to take trade signals. In other words, the fuzzy logic filter is a pattern recognition model that confirms if market trends are strong enough for investment.

One interesting nugget on the Clarke Worldwide program is that it was originally launched as Clarke Domestic Diversified in 1993. In 1996, Mr. Clarke decided to add foreign markets for greater diversification and changed the name of the program to Clarke Worldwide to reflect this. However, he did not simply stop trading Domestic Diversified as he promised to continue offering this strategy to all clients who did not want to make the switch. Domestic Diversified continued trading until the late 90’s and performance is available for any Attain clients who request it.

As we have mentioned many times in this space over the years, risk management is the hallmark of any good trader, and in CCM’s case, they take care to ensure all of their models use a multiple “stop” approach including a hard dollar stop, trailing stop, and volatility stop. All stops work in the market on an intra-day basis, although they are based on end of day data. [Disclaimer: stops cannot guarantee an order is filled at the desired price] Other interesting risk management tools used include volatility filters that are embedded in the models, robust processing that indentifies outlier trade signals (bad data), and an automatic double check by the software to ensure all models have run properly each day (no doubt after coming in one morning many years ago and learning that they should have been making money on some trade for weeks, but missed the signal).

Other popular programs at CCM include the smaller minimum Clarke Global Basic and Clarke Global Magnum programs, which were primarily designed for smaller clients and have a much narrower focus on trade selection. Volatility and outsized price moves are the enemy of these programs, as they will skip many signals, and can get whipsawed more easily.

The other two programs on the Attain recommended investment list are Millennium and Jupiter. These programs require a higher investment level ($1 million and $3 million respectively) due to the higher number of positions taken. The advantage these two programs have in comparison to other CCM models is that they take signals across multiple time frames and inherently have an extra layer of diversification.

Finally, the Orion and FX-Plus programs get the “most overlooked” award at CCM. According to Mr. Butler, Orion is the most conservative of all the Clarke programs (if you can call a 29% drawdown conservative!) and is designed for investors who are looking for a more consistent approach to trend following. FX-Plus is a unique program that invests only in financials, currencies, and stock index futures. Considering the recent market environment, the FX-Plus program might have the most near term potential out of all the CCM programs.

Attain Comments:

At first blush, it may be hard for the average CTA investor to understand why we like Clarke. They may look at the max drawdown (and rightfully so) and say that this program has too much risk for the return. They would mainly be right, but our counter to that is a twist on the old trading adage – it’s not where you get out, but where you get in.

We are the first to admit that Clarke has had (and will in the future) some substantial drawdown periods, but we look at those not as a sign of danger, but a sign of opportunity. We analyzed the cycling back and forth of Clarke Worldwide in a newsletter last year, seeing them cycle back and forth between run up, recovery, and drawdown periods in the past with some frequency (usually about 3 year cycles).

If we accept that the Clarke is a volatile investment which cycles back and forth between run up, drawdown, and recovery periods, and accept that an investment isn’t defined just by its track record, but instead by where you, the investor, actually get involved with the program, then there is a lot to like about Clarke – with its penchant for serving up opportunities to get into the program at discounted levels and history of bouncing off those levels [past performance is not necessarily indicative of future results]. In fact, we just recommended getting in during this drawdown in a recent blog post.

In addition, with a track record stretching back to 1993, we like to counter that while there may be some warts on the Clarke track record – at least you can see them. Most other managed futures programs have only been around a fraction of the time Clarke has, meaning their warts just might not be visible yet. For us, there is some comfort in being able to see all of the bad spots. We have seen the drawdowns- the tough years in 2009, 2006, 2005, and 2001- and know that there will be more struggles to come in the future. But to us, that is a more complete picture than someone who hasn’t been around as long.

We also like Clarke because of the fuzzy logic filter mentioned above. This is a unique tool that no other trend follower (to our knowledge) is using. The ability to measure trends and compare them to what has happened in the past is an ingenious concept and one of the reasons CCM has been around for such a long time.

What’s not to like? Well the aforementioned volatility and drawdowns for one. But as discussed above, if you don’t like the drawdowns, wait until they have been hit, and then get in.

The only real point of concern we have with Clarke is the feasibility of the smaller $100k Global programs heading into the future. Both Global Basic and Global Magnum are mired in tough drawdowns and the recovery is going to be long and slow if market volatility remains high, as these programs are designed to skip trades when markets are really moving. We met with Michael Clarke in New York at the CTA Expo and he assured us that the Global programs are doing exactly what they are designed to do… as frustrating as that might be.

Clarke also does a few things which are a little out of the norm for CTAs. One, he doesn’t compound your capital for you and increase positions as equity increases or decreases, instead relying on the investor to provide instructions on when to increase or decrease treading levels. This has likely saved him in the past, as trend followers are notorious for building up profits, then putting on a greater number of contracts on new signals at the higher equity levels, only to see the trend environment go into a tough period right when more contracts were added, resulting in losses greater than the profits built up, despite the program as a whole not suffering as much. But it is worth noting that your capital would not have the compounding effect over his 15 plus years without intervention on behalf of the investor.

Finally, as we mentioned at the beginning, there is new ownership at Clarke and a new management team involved at CCM as they have brought on Mr. Chad Butler as President to help manage the day-to-day operations of the company. Mr. Butler would like to ensure investors that Mr. Clarke is still very much involved in CCM and that he has been privileged to join such an experience group of traders and programmers.

Not one to just take their word when client funds are at stake, we had Mr. Butler down in our office for a visit just last week. We are happy to report that we left that meeting knowing that Clarke is in good hands with Chad, and our opinion of Clarke (especially when in a drawdown) have not changed.

[Past performance is not necessarily indicative of future results]

To read more Managed Futures research pieces, visit Attain’s Managed Futures Newsletter archive. Click Here.

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.

This entry was posted on Tuesday, May 24th, 2011 at 10:50 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.