Commodity Futures Trading

The term "hedge fund" goes back to only 1949. In 1949, pretty much all investment methodologies took only long positions. A reporter for Fortune mag, named Alfred Winslow Jones, broadcast an article indicating that financiers could achieve larger returns if hedging were implemented into an investment technique. This was the start of the Jones model of investing. To prove his theory, Jones launched an investment partnership incorporating two investment tools into the technique : short selling and leverage. The goal of these 2 secrets was to restrict risk and augment returns at the same time. Additionally, Jones established 2 important traits that are still part of the industry today. He used a motivation charge of twenty percent of profits and he kept the majority of his own private money in the fund. This made sure that his private goals and the goals of his speculators were in alignment.

Phenomenal results were got thru this hedged approach.

In the period from 1962 to 1966, Jones outperformed the top retirement fund by more than 85 percent, net of costs.

The success of Jones excited the interest of high asset value people in hedge funds. Not only did Jones attract the interest of high asset value people to hedge funds, but also many top money chiefs were drawn to hedge fund thanks to the unique charge structure. A twenty percent motivation charge made it straightforward for bosses to earn 10-20 times as much in compensation compared to long-only cash management services. Between 1966 and 1968, almost 140 new hedge funds were launched in consequence of the new dynamics of investing and handling money. Many of those funds nonetheless, didn't follow the Jones model of hedging risk.

Rather than hedging, only leverage was used to improve returns, ignoring the short-selling aspect that Jones employed. Employing a leveraged, long-only technique made these funds highly subject to the market recession that started in late 1968.

Some hedge funds dropped in price by over seventy percent inside two years. Large hedge fund losses because of the 1973-1974 bear market caused many speculators to turn away from hedge funds. For the subsequent a decade, few bosses could attract the mandatory capital to launch new partnerships. By 1984, there were only 68 funds in existence. In the latter 1980s, a little group of highly proficient hedge fund executives, including George Soros, Michael Steinhart, and Julian Robertson, gave hedge funds a revived credibility. Notwithstanding troublesome market conditions, these managers produced yearly returns of larger than fifty percent. Plenty of the worlds best money managers left the conventional prescribed and retail investment firms due to most likely higher costs and great adaptability with handling hedge fund products. By 1990, there were over 5 hundred hedge funds worldwide with assets of $38 bill. Hedge funds now represent one of the biggest segments of the alternative investments industry. Now , it's estimated that there may be more than six thousand hedge funds in existence with total cash under management higher than $1 trillion.

Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future performance.

Not long ago I was scanning a number of performance databases of alternative investment performances and noticed that nearly all the tracking services have some type of a “hot list”. These were typically a list of the best performing managers or trading software over a given period. The common time frames for calculating performance were usually 30 days, 90 days and a 12 months. These listings are of interest to many viewers since they are consistently reported by all the leading tracking services year after year. The question is this…Are those lists of any value?

It has long been my contention that such information is near meaningless. I have always felt that the best performing futures trading systems of the past were not very likely to be the best performing ones going forward. To test my theory, I accumulated data from several of the top performance reporting sites. What I wanted to see was the past year’s best performers to compare them to the best performers of the next year. The thought was to see if last year’s winners were a reliable forecaster of next year’s winners.

The results of comparing many years of previous performance to the future years of performance were as I expected. The data about which futures trading systems had performed the best was practically worthless. It, in no way, was predictive with regards to which strategies were going to do the best. What this suggests is that all those “Hot Lists” are possibly misleading. They can lure individuals into the notion that these are the best possible futures trading systems they can be investing in, when nothing can be further from the truth.

What this means is that finding good futures trading systems that are going to pay off is going to take work. It is not going to be as easy as discovering something that has done well and just presuming it will continue to do well. What we have observed is that often times the best moment to enter a program is After it has gone through a difficult spell!

Jack Schwager, writer and commodities industry icon, did an intriguing study in his extremely good book Managed Trading Myths and Truths. In it, he found that many successful systems have many losing clients! The reason is evident. Most winning systems produce a “stair stepping” pattern higher, a sequence of peaks and lows on the way up. What Schwager’s research study established was that many people would buy into that system on a high, right after a winning streak. Then, when the inevitable pullback or valley came they would sell out at a loss! So in spite of the systems long term winning track record, many clients lost money investing in it. In Schwager’s opinion, this was “the single biggest investor blunder”.

This was not to imply that individuals should invest in a losing futures trading system. Rather, they should separate choosing what is an excellent system from timing when to get into that system. Once again, the best time to get into a decent system is normally after it has gone through a rough period.

So the question becomes, how can investors find a ideal system if using past performance by itself is not effective enough?

We will explore the subject of finding suitable trading systems in part two of this series.

For more information click on the article links.

Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future performance.

Alternative investments are investments which are less commonplace than traditional, long holdings of just stocks and bonds that are widely traded. Frequently, alternative investments are available in the form of interests in pooled investment vehicles organized as limited partnerships through asset management companies. These interests are not registered with the SEC and are only available to accredited investors. These interests involve substantial investment risks; Alternative investment vehicles pursue investment strategies with widely ranging return and volatility characteristics. Alternative investment vehicles generally are more flexible in their investment approach through the use of short selling, derivatives and leverage. While this flexibility can improve risk/return characteristics, the leverage and use of derivatives may increase the overall risk.

An alternative investment is investment in non-traditional instruments such as hedge funds, real estate, commodities, and even in arts and wines. In most cases alternative investment management companies will pool together the funds of a number of clients and then plan the investment opportunity in various investment vehicles. The main advantage of pooling funds together is that since the amount of actual money becomes considerably large, the dynamics of the investment opportunity changes drastically in comparison to small amount being invested. This arrangement also allows for diversified portfolios to be developed for all clients in the investment pool.

Depending on the focus of the investment, alternative investments offer an avenue to success even in times of poor economic conditions where real interest rates are low and the stock markets are under performing given the economic climate. Investment vehicles such as hedge funds can actually benefit from negative economic cycles. Similarly, investments in private equity, art or other commodities can be very opportunity specific and somewhat shielded from extraneous factors in the environment.

Alternative investments are investments which are less commonplace than traditional, long holdings of just stocks and bonds that are widely traded. Frequently, alternative investments are available in the form of interests in pooled investment vehicles organized as limited partnerships. These interests are not registered with the SEC and are only available to accredited investors. These interests involve substantial investment risks; Alternative investment vehicles pursue investment strategies with widely ranging return and volatility characteristics. Alternative investment vehicles generally are more flexible in their investment approach through the use of short selling, derivatives and leverage. While this flexibility can improve risk/return characteristics, the leverage and use of derivatives may increase the overall risk.

A hedge fund is open only to a limited range of investors, and it is permitted by regulators to undertake a wider range of investment and trading activities. Each hedge fund is unique and follows its own strategy, depending of the kind of investors and the amount of money involved. It uses advanced investment strategies such as leveraged, long, short and derivative positions, in both domestic and international markets, for impressive gains at reduced risk. Hedge funds are generally set up as private investment partnerships and require a very large investment in the initial phase. Unlike mutual funds, hedge funds are unregulated as they cater to sophisticated and high profile investors. However, for an easier understanding, they can be considered as mutual funds for the super rich.

Alternative investments including hedge funds carry substantial risks and are not appropriate for all investors.

Managed Futures and Emerging Commodity Trading Advisors

 When considering alternative investments with hedge funds, one possibility that must be considered is the emerging Commodity Trading Advisor. An emerging Commodity Trading Advisor is one whose track record is less than five years long and has less than $100 million dollars under management. Although it is often most comfortable to invest with a Commodity Trading Advisor that possesses a long and successful track record and has hundreds of millions of dollars under management, there can be real benefits to investing with an emerging Commodity Trading Advisor.

Investing in managed futures with emerging Commodity Trading Advisors can have benefits such as better risk adjusted returns. This is attributable to the fact that emerging Commodity Trading Advisors are not weighed down by their size. Specifically, emerging Commodity Trading Advisors can move into and out of markets easier and are able to trade markets that are not liquid enough for large Commodity Trading Advisors. My research has clearly shown me that being able to trade more markets is a tremendous benefit. Large Commodity Trading Advisors find themselves confined to only trading markets such as financial instruments, energies and metals. They end up missing out on opportunities in many other traditional commodity sectors such as grains like soybeans, corn and wheat and foods such as coffee, sugar, cocoa, cattle, pork and fibers like cotton. Once again, missing out on these markets can come at a great price.  

An added benefit with emerging Commodity Trading Advisors includes smaller minimum account sizes. For example, Hoffman Asset Management Inc. will trade a diversified portfolio of over 70 markets with a minimum account size of only $125,000. This is in contrast to more established Commodity Trading Advisors; they usually have minimums of $1,000,000 or more..  

In summary, when investors combine the benefits of potentially better performance and smaller minimum account sizes they can see that managed futures with the emerging Commodity Trading Advisor can represent the ideal solution for many investors.  

Dean Hoffman Hoffman Asset Management

Commodity trading carries substantial risks and is not suitable for everyone. Past results are not necessarily indicative of future results

Tags: Hedge Funds, Alternative Investments

We have talked about the dangers of optimizing a trading system (forcing a trading system to conform to historical data), but, one of the subtler forms of optimization happens with portfolio selection. This happens when trading systems are only shown tested across a handful or a small number of markets (or sometimes just one market).

The problem is that what is usually done is that most all the available markets get tested, and then only those that performed the best get shown in the portfolio. This is an enormous mistake, because the markets that performed best historically are rarely the ones that continue to be the best. What traders end up with is something that only worked well historically.

To avoid this tendency, we believe that the most robust way to see a system test is across ALL the available markets. Some will argue that different markets should be traded different ways, and to that we say NONSENSE. Markets are always changing, and a market that traded like market XYZ today will trade like market ZYX tomorrow. Unless a trading system is robust enough to trade every market, it is likely a useless curve fit of the data.

For us in the commodities markets, we use roughly 80 markets. There are over 100 commodity contracts that trade, but we do limit the selection to those that are liquid enough (have enough trading volume) to trade.

Testing this way does cause one problem. The problem is that traders can be trading many markets in the same sector at a given time. Investors will need to have some sector risk control mechanisms in place. We like to be certain that the risk in a given sector does not exceed about 5% of the account equity.

If someone creates a system that can successfully trade nearly EVERY commodity market and uses the same rules for each market and gets tested over a long period, he may be on to something. Just remember, the next time someone shows the results of a backtest ask him “How many markets does this test include?” If the answer (for commodities) is less than about 70 or 80, then be suspicious that this may be curve fit results. Once again, curve fitting tends to produce systems that ONLY perform well historically.

We test all the systems we make available across nearly every tradeable commodity market. We could easily improve performance (historically) by only cherry picking the best markets, but we know this is misleading data.

For more information about DH Trading Systems feel free to contact us.

Dean HoffmanDH Trading Systems

Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future performance.

TAGS: Trading System, Trading Systems

To the new trading systems developer one of the most exciting things to play with is optimization. Optimization is using the power of the computer to look at every possible sequence of parameters and rules, and then using only those rules and or parameters that have worked the best. With enough computer crunching power, it is possible to find systems that perfectly “predicted” the past. We can run number crunching PC’s on automated routines and have them analyze billions of bits of data while we are sleeping! Many traders do this long enough and later “discover” the holy grail of trading systems. They jump into the markets with their new super predictive algorithms only to find they fall apart in real trading!

“What happened?” they ask. The answer is that what they created was likely a trading system that was a statistical coincidence (known as a “curve fit”). Curve fitting is where you force a system to conform to historical data. The problem is that the markets will behave much differently moving forward; therefore, a “perfect” trading system could be useless. For example, your computer finds the perfect dates historically to have bought and then sold the market. These dates are likely coincidental and have no future value, yet sometimes people will base a system on them. This is a clear example; however, most curve fits are some complex form of this basic concept.

Let’s look at another flawed example. Assume we wanted to optimize nickels that were most likely to land on heads. What we could do is flip millions of nickels and only select those that landed on heads. Then, we can take those remaining nickels and flip them again, once again only choosing those that land on heads. We could repeat this process over and over again each time only choosing those nickels that land on heads. At this point, we might conclude that we had narrowed down our nickels to only a small handful that were “optimized” to land on heads. We could then go out and wager large bets with those nickels putting all our money on heads. We would quickly make a fortune, right? WRONG!

We would quickly lose our money. Those nickels were not optimized for heads; they always had 50/50 odds. What might have confused some is that they thought they had found predictable nickels. All they found was a statistical coincidence.

Because there is so much data, and so much computing power available, these kinds of errors find their way into trading systems all the time. When developing a system it is imperative to avoid optimizing as much as possible. You need to find NON curve-fit, robust systems. There can be a place for some types of optimizing, but it must be handled correctly.

We design all our systems in a robust way that we feel avoids the optimization pitfalls of so many other systems.

Feel free to email or contact us with any questions or comments on this subject.

Dean HoffmanDH Trading Systems

Futures trading carries substantial risks and is not suitable for all investors. Past performance is not indicative of future performance.

TAGS: trading systems

A FREE 3 Video Series On Successful Futures Trading

Video #1 - Successful Entry and Exit Techniques

In this video we show you exact step-by-step trading system entry and exit techniques that are proven to work in almost any market. You can begin using these techniques right away.

Video #2 - Proper Money Management and Position Sizing

This video details the critical process of position sizing. Here you will see that it’s not enough to know WHEN to buy and sell, but equally important to know HOW MANY to buy and sell. We will give you exact position sizing formulas you can begin using today!

Video #3 – Winning Trader Psychology

This final video will outline proper trading psychology. In it, you will see how traders who have excellent entry and exit techniques and position sizing strategies can still fail if they don’t also have the proper trading psychology. We will outline one of the single biggest psychological traps and how you can not only avoid it, but also potentially profit from it!

Dean HoffmanDH Trading Systems

Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future performance.

TAGS: futures trading, trading system

Hello Investors,

It’s Dean Hoffman of DH Trading Systems and the Relativity Trading System.

Recently some smart people bought gold futures. And it’s paid off. Others have pocketed a bundle with oil futures. At the same time, some have stayed with typical agricultural futures like corn and soybeans and done fine.

The fact is even if you’ve done well in these markets you are probably still missing out many of the best futures trades. You see, often the most profitable trades can be in commodities you rarely hear about.

Like Malaysian palm oil, for instance. Palm oil is an extremely popular form of cooking oil for vast populations in Asia. But it’s also becoming popular as an alternative energy source. Think “Asian Ethanol.”

What about Japanese rubber? How did the Japanese get the rights to rubber in the commodities market - who knows.  But as cars multiply like electronic rabbits in China, rubber gets more valuable.

So why are you missing out on all these opportunities?

Because it takes a lot of cash to analyze the vast reaches of the futures market - and search for the best opportunities every day.  It’s why financial institutions willingly plunk down a minimum of a million dollars to open a futures trading account with professional managed futures trading firms.

So individuals have pretty much been left out in the cold.

Until now.

I’m bringing in some select individual investors into the exclusive world of institutional-level futures trading. . . . Without institutional account minimums!

That’s what my Relativity trading system enables us to do.  If you want to know how you can gain access to the Relativity Trading System - and Malaysian palm oil, Japanese  rubber, palladium, zinc, nickel, forex,  and a whole world of niche trades - trades that can be far more profitable than typical futures - here’s how you can do it.

Reply to this message with your telephone number and best times to call. I’ll write you to set up a free consultation.

I’ll tell you how my Relativity trading system along with money management services gives qualified individuals the ability to take advantage of the same kind of hedging and risk management strategies that institutions use.

Sincerely,Dean HoffmanPresident, DH Trading Systems

P.S. If you have a typical futures trading account you may be missing out on the best trades every day. Set up a consultation today to see how you can access institutional-level futures trading.

Commodity trading carries substantial risks and is not suitable for all investors. Past results are not necessarily indicative of future results.