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Opalesque Futures Intelligence
Opalesque Futures Intelligence

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Published by: Opalesque Publications on Mar 30, 2012
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Copyright 2009 © Opalesque Ltd. All Rights Reserved.
The World Is Small
One of the pleasures in talking with people in hedge funds andmanaged futures is that you get a feeling for diverse places even if youcan’t go there. While working on this issue of OFI from New York, Ienjoyed chats with people on different sides of the planet.Bill Dunn in Stuart, Florida, discussed alligators and snakes in theEverglades National Park. It was a fascinating discussion, like hisremarks on long-term trend following in
Founding Father Q&A.TonyGannon in Dublin, Ireland, had gorgeous pictures from that city—they’re so lovely we had to include one with hisInsider Talk.This is truly a global industry. The markets are global, the investors areglobal and the managers are global. One investor was saying that Dubai
remains vibrant despite the nancial crisis. Another investor was talking
about how the recession affects his neck of the woods in Connecticut.By the way, investors are interested in futures and macro strategies, asthe surveys we summarize inNews Briefsshow.Despite all the railing against globalization, it has to be a good thing inthe long haul that money, skills and wisdom converge from all over theworld. Wisdom is the word when reading a paper by Professor Harry Katfrom City University in London—excerpts are inFutures Lab. Ditto withPractitioner Viewpointfrom Alan Rohrbach, who hails from Chicago, agreat city whether windy or calm, icy or hot.
Chidem Kurdas
In This Issue
Founding Father Q&A
Bill Dunn, a managed futures pioneer,discusses the ins and outs of long-term trend following. As a manager with severaldecades of experience, he brings an almostunique perspective ................................... 2
Futures Lab
Professor Harry Kat demonstrates thatcombining managed futures and hedgefunds is a match made in heaven! ............. 4
Insider Talk 
How do you assess managers with differentinvestment styles when investing inmanaged futures? Tony Gannon, a futuresveteran and chief executive of AbbeyCapital, explains the key points. The firminvests $1.7 billion in managed futures andforeign exchange ...................................... 7
Practitioner Viewpoint
Alan Rohrbach of Rohr International Inc.argues that trend analysis offers advantagesfor understanding markets in the super correction we’re living through ................ 10
News Briefs
What investors say about managed futuresallocations; the Dubai Mercantile Exchange;Altegris, and more ...................................14
Top Ten
Attain Capital’s three-year ratings ............15
May 5, 2009
Copyright 2009 © Opalesque Ltd. All Rights Reserved.
May 5, 2009
The Marathon Runner
When people talk about managed futures pioneers, they almost always mentionBill Dunn. He’s been running his models for almost 35 years. In that sense, he’a long-term survivor. He is also along-term trend follower. Herehe discusses the strategy from theperspective of someone who’worked on it for several decades.Dunn Capital Management now has a number of trading programs,including one that is very short term—a pattern recognitionsystem called Mosaic. If you look at the composite return that goes back to the 1970s, you’re struck by 
three things. The rst is how well 
Dunn has performed over what must be one of the longest track records in CTA and hedge fund history.Dunn’s compound annual returnis more than 19%. The S&P 500 total return for the same period is 11%. Had you invested $1,000 with
Mr. Dunn as he started his rm in
1974 and stayed with him, today  your investment would be $426thousand. By comparison, $1,000 in the S&P 500 compounded to$37 thousand during that time.The second noticeable feature is that there is almost no correlationbetween Dunn’s returns and the stock index and what littlecorrelation that exists is negative.Last year, as stock markets crashed,a Dunn pool that allocates to seventrading programs returned 127%.The third notable attribute is that the Dunn programs have steepdrawdowns along the way. True,at other times the S&P 500 has drawdowns of similar magnitude.But the thought occurs that it may be tough for clients tostay put when they confront the drawdowns, even though inretrospect they’d be better off not redeeming. The manager’s take onthis issue is below.Mr. Dunn has a PhD in theoretical physics and early in his career held academic positions and developed and tested systems for the US military.
Bill Dunn
Copyright 2009 © Opalesque Ltd. All Rights Reserved.
May 5, 2009
Opalesque Futures Intelligence: Has yourstrategy changed over the years?Bill Dunn: Our strategy has not changed sincewe started in 1974. We’ve developed a numberof trading systems and programs, but the basicstrategy of when to buy and sell and how muchto trade has not changed.OFI: But haven’t there been major developmentsin 35 years?BD: There are more markets to trade now. Backthen there were only about a dozen tradablefutures, now there are over 50. In 1974 we didnot have currency, interest rate or stock indexfutures, hard as it is to believe. Those marketscoming into existence is all for the better. Asmarkets were created, we’ve worked on how tostructure the portfolio, so that has changed.OFI: How do you know that the strategy will workin a new market? BD: I never know the future, I can only knowthe past. But I test the past. If the new marketsbehave like past markets, then there’s no reasonto think you can’t trade the same way. We’realways happy to see new markets. The more themerrier.OFI: Please describe your basic strategy.BD: The strategy is long-term trend following.Typically the winning trades last several months.Losing trades are often closed out in a fewweeks.OFI: Do you change the models when marketschange, as they did last year, or when there arenew rules and regulations?BD: Change is a constant in markets. We do nottinker with the model when the environmentchanges. We’re always looking for change, totake advantage of it. There was a lot of change inthe past year, so that meant lots of opportunity.The impact of any rule change will show up in theway prices behave and the models will pick thatup.OFI: What have you learnt from your experience?BD: We’ve got better at risk management. We’vealways tried to control risk but over the yearswe’ve become better at it.OFI: Do you interfere with the models whenunexpected events occur?BD: My opinion or for that matter anyone’sopinion as to what will happen tomorrowdoes not count in our trading programs. Onlythe tested models matter. We can modify themodels, but they’re back tested and have toprove themselves before we’ll implement them.We don’t tell the system what to do; the markettells us what to do every day using only pricedata.OFI: What’s a good environment for yourstrategy?BD: We make money when there is a reasonablenumber of trends – whether prices go up ordown – that last for several months. By contrast,
markets that just bounce around give us difculty
and losses. In 2008 there were large upward
trends in the rst half of the year, for instance oil
and grains, and strong downtrends in the secondhalf of the year. It was the best performance yearin our entire history. I’m sorry we all have to paythe price for those trends, but they were great totrade.OFI: What happens when there are no trends?BD: If there are very few trends long-term trendfollowing does not make money. But we neverknow how long that situation will last and whentrends will develop. None of these situations arepredictable. I can’t predict what will happen and Idon’t think anyone else can either.
OFI: When do your models have difculties?
BD: When markets are volatile but don’t goanywhere in particular, many systems are fooledinto thinking there’s a breakout of a trend whenreally it is just a breakup! Trendless choppymarkets are bad for us. But you’ll have problemswith any system some time or another. There’s noperfect system.OFI: Aren’t trend following returns too volatilefor many investors?BD: What keeps people away from managedfutures is principally ignorance. True, managedfutures returns are volatile, but as we recentlysaw, so are other markets. Our returns have astrong upward trend over the years, but thereare wriggles along the way. People who can’taccept a drawdown should wait for the nexthigh and then take their money out! But most of our clients ride out the long term and get veryattractive returns.
True,managedfuturesreturns arevolatile,but as werecently saw,so are othermarkets.

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