Anello Asset Management LLP : AAM Diversified Futures Program (Prop)

Summary

In 2000 Stuart Barron embarked on a project to discover whether or not it was possible to design a model capable of successfully trading the US stock market, specifically the Dow Jones Industrial Average. To begin with he looked at the daily open, high, low and closing prices for the Dow Jones Industrial Average from the year 2000 back to 1896. He then began an analysis of this data to determine if this market moved in the same fashion at the start of this century as it did over 100 years ago. It quickly became obvious that, indeed, it did.        This inevitably led to the following question: Do other markets – such as Crude Oil or Corn – behave in a similar fashion to a stock index? To answer this question Stuart decided to perform an intensive analysis into the way in which specific futures markets move. After collating the data – from the 1970’s onwards - on approximately nineteen different futures markets spanning Stock Indices, Bonds, Currencies and Commodities to see if there were any similarities in the way in which markets behave. The results clearly demonstrated that the price action in commodities was indeed similar to that of stock indices, and also to that of bonds and currencies. It was immediately apparent that due to these similarities it would be possible to devise a system that could be used to successfully trade any active and liquid futures market.   It is important to highlight that there is, however, one important difference. While all markets are traded in exactly the same fashion from the long side, the commodity markets prove an exception to the rule when trading the short side. Price history – by that we mean the 1970’s to 2004 – suggests that commodity markets tend to fall in price precipitously after an extended period of rising prices. This point has been confirmed by actual trading experience over the past five years. Because of this characteristic, the system has been designed to try to catch these sudden changes in trends.  

Investment Strategy

Once it was established how futures markets move, and the life expectancy of those moves (all trends eventually come to an end), it was necessary to determine the entry and exit points for long and short positions. The entry signal is designed to be purely price reactionary across all markets and a filter is used to increase the probability that the signal is successful. The exit signal is also price reactionary and is triggered after a market has moved by an amount that dramatically increases the probability that the trend is over. One must be aware that the exit signal strategy inevitably leads to a significant loss in open profits, but this is crucial to the system’s success in catching trends.

Risk Management

To satisfy the goal of rigorously controlling risk a stop-loss is applied to all positions without exception, and is calculated using an algorithm based upon the underlying volatility in a market. If the volatility is low, 1.75% of the portfolio is risked on a trade; if the volatility is high, 1.25%. As a guide to trading frequency and therefore the level of risk that can occur over a given period of time, the AAM Diversified Futures Strategy has generated, on average, 4.8 signals per month or 59 signals per annum. Once a position in a market has been initiated and starts to show a profit, the stop-loss is adjusted. Another algorithm is then used to determine the adjustment and a maximum of three adjustments per market is possible. This is not intended for the purpose of protecting profits but to reduce the risk of the position to the portfolio once a profit occurs. All positions are initiated the day following a signal. An order is left at a certain level above the market for a long position, and below the market for a short position. This is in order to keep slippage to a minimum, and to reduce the probability of a signal failing.