Eckhardt Trading Company equity curve

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alp
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Eckhardt Trading Company equity curve

Post by alp » Thu Mar 13, 2008 6:17 pm

As I infer from William Eckhardt interviews (and views) he is indeed a true, systematic (or mathematic) trend follower. However I wonder how he can come up with a rather smooth uptrending equity curve such as that of Eckhardt Trading Company Standard: http://www.iasg.com/tabid/56/default.aspx?programid=56

Certainly a highly diversified portfolio does help, but even so I don't think one can come up with such a smooth equity curve with a pure trend following approach. What's the deal? Any ideas?
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Post by sluggo » Thu Mar 13, 2008 9:23 pm

Download the monthly data in ascii and plot it (e.g. using excel) on a log scale. IASG reporting software plots on a linear scale which many people (who seek geometric capital growth) find misleading. After viewing the log scale plot are you still thrilled?

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Post by AFJ Garner » Fri Mar 14, 2008 7:54 am

As can be seen, the Co-Turtlemaster's track record in recent years looks a little less exciting in this format as in also evidenced of course by looking at the yearly returns themselves. I'm not sure I'd classify an annualised standard deviation of monthly returns of 40% and a maximum DD of 29 % as super smooth either.

Whilst Mr Eckhardt is no doubt a man of intelligence and does indeed have a long and respectable track record, it is faintly amusing what being written up in a best selling book can do for one’s reputation. I refer to Jack Schwager’s amusing tome of course.

Also interesting to note that another renowned superstar from the Wizard books doesn’t seem to trade at all any more – he gives seminars and dispenses psychological counselling.
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Post by AFJ Garner » Fri Mar 14, 2008 7:56 am

Bother - how do I make the image/attachment less wide so as not to muck up the screen formatting?

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Post by Austrian » Fri Mar 14, 2008 10:25 am

......but the curve is after deducting 2% management fee and 25 % incentive :P

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Post by sluggo » Fri Mar 14, 2008 10:33 am

AFJ Garner wrote:Bother - how do I make the image/attachment less wide so as not to muck up the screen formatting?
I've found two ways. #1 is brute force: launch an image manipulation program like photoshop or Gimp or paintshop pro and choose Resize. #2 When you're in Excel with the chart page open, "File/Print" to "Microsoft Office Document Image Writer" with "print to file" selected. When you open this file, Microsoft Office Image Manager will let you zoom in and out on the image and then it will let you produce an output image file with whatever resolution (dots per inch) you wish, not just 92 dpi screen resolution as you get with screen image capture utilities.

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Post by AFJ Garner » Fri Mar 14, 2008 12:27 pm

Many thanks

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Post by nodoodahs » Fri Mar 14, 2008 12:42 pm

Re: Eckhardt's funds

http://www.iasg.com/tabid/56/default.aspx?programid=56

His five-year compounded of +13.9% is very comparable to his ten-year of +12.4%. He hasn't had a losing year in the last eight. However, this is not as good as the much earlier returns, as in the first 11 years producing a +41.3%, and the lifetime of the fund producing a cumulative +26.9% return.

If you manually calculate the standard deviation of returns for just the past ten years, it's about a *third* of the number reported for the fund's lifetime. If you manually calculate the standard deviation for the first 11 years, it's a *third HIGHER* than the 40% number quoted.

His biggest drawdown in a year starting with "20" was 11.05% in 2004. Of the seven drawdowns the fund had, which exceeded 20%, all seven occurred in 1995 or prior.

I would venture that the stabilization of, and diminishing of, his returns is a function of assets under management. We're really talking about two separate funds, not a diminution of management skill.

While I don't get hot and toasty about the idea of returns in the 10-13% area with max drawdown of 11%, that's what Eckhardt's record has been over the last decade, and he's done it managing $300-$500 million in assets, no poor accomplishment.

Re: Wizards who don't trade

If you're talking about Van Tharpe, he wasn't trading for a living, and had stopped trading altogether, at the time the Market Wizards book featuring him was written.

Re: Publicity and reputation

But of course! I'm reminded of George Carlin, who once said, "I have as much authority as the Pope. I just don’t have as many people who believe it." Plenty of good managers who aren't publicized, and vice versa.

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Post by alp » Fri Mar 14, 2008 1:10 pm

sluggo wrote:Download the monthly data in ascii and plot it (e.g. using excel) on a log scale. IASG reporting software plots on a linear scale which many people (who seek geometric capital growth) find misleading. After viewing the log scale plot are you still thrilled?
nodoodahs wrote:I would venture that the stabilization of, and diminishing of, his returns is a function of assets under management. We're really talking about two separate funds, not a diminution of management skill.
I agree with nodoodahs. He could have adjusted his strategy so as to work rather conservatively with institutional funds.

What do you think of:

Rotella: http://www.iasg.com/tabid/56/default.aspx?programid=268 and Transtrend: http://www.iasg.com/tabid/56/default.aspx?programid=115?

Do you know of any managers who outperform Eckhardt's track record? Do you think he can achieve those returns with a pure trend following strategy?

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Post by nodoodahs » Fri Mar 14, 2008 1:20 pm

Both of the examples you give seem, at first glance, to suffer from the same issue - greatly increased AUM making the returns smaller in absolute terms, and much less volatile. Of course, for the manager, it's a blessing, since it's easier to increase income from management fees than it is to increase returns on one's own money in the fund.

Give some good thought to what you mean by "outperform."

Metric?
Consideration of risk and volatility?
Constraints of assets under management?
Over what timeframe?

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Post by alp » Fri Mar 14, 2008 1:41 pm

nodoodahs wrote:Give some good thought to what you mean by "outperform."

Metric?
Consideration of risk and volatility?
Constraints of assets under management?
Over what timeframe?
Don't you think there is a great rate of mortality in the funds industry? So I suppose that a guy who's been in the business over the past 15 years or so is a good candidate for comparisons, considering absolute returns, risk and volatility.

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Post by nodoodahs » Fri Mar 14, 2008 1:49 pm

Well, we can make some gross comparisons on simple metrics like cumulative annualized growth rates, and trust that since we're doing them on managers with long tenures, we have adequate controls on risk.

I just thought it would nice to recognize that our comparisons are gross and simple, if we do that. I also thought it would be nice to give some expression to what we want, OUTSIDE of pure return, and we definitely need a timeframe parameter to evaluate the returns over. Etc.

There's also an "agency problem" when trading other people's money. It's easier to get a second chance - sometimes even DESIRABLE to fail and play for a second chance - when it's someone else's money, as opposed to only playing with your own money.

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Post by alp » Fri Mar 14, 2008 1:57 pm

nodoodahs wrote:Well, we can make some gross comparisons on simple metrics like cumulative annualized growth rates, and trust that since we're doing them on managers with long tenures, we have adequate controls on risk.

I just thought it would nice to recognize that our comparisons are gross and simple, if we do that. I also thought it would be nice to give some expression to what we want, OUTSIDE of pure return, and we definitely need a timeframe parameter to evaluate the returns over. Etc.

There's also an "agency problem" when trading other people's money. It's easier to get a second chance - sometimes even DESIRABLE to fail and play for a second chance - when it's someone else's money, as opposed to only playing with your own money.
I understand what you mean and I acknowlege such comparisons are gross and simple.

Could you elaborate more on what you mean by "agency problem", such as sometimes being even desirable to fail and play for a second chance?

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Post by nodoodahs » Fri Mar 14, 2008 2:14 pm

Imagine I have a fund that gets 2% per annum +20% of profits in fees, with the 20% subject to a high-water mark (HWM). The HWM means that if I lost money for some investors in 2007, I have to get those investors back to breakeven before I can count any money I make in 2008 as profits subject to the +20% fee. Of course, for new money coming into the fund, their HWM is where they came in at, so the losses before they enter don't count.

So if my fund was in a drawdown, and couldn't attract new capital, the odds of getting a profit above the HWM diminish drastically. The traders at my fund know they have a poor chance of getting any bonus, so they're incented to leave my fund and go to other funds.

Now I have, as fund manager, only two options to make a good payday. I can swing for the fences and take outrageous chances, knowing that if I make good I make bonus, and if I blow up, it's someone else's money. Or, I can close down the fund voluntarily and start a new fund, where all the money is at a fresh HWM.

Can you imagine that the fund manager or trader might trade differently, knowing it's someone else's money? Not saying it WILL happen that way, but that there's an incentive for it to.

So the "agency problem" is that the agent (fund manager) has a different set of financial incentives than the investor does.

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Post by alp » Fri Mar 14, 2008 4:57 pm

Thanks nodoodahs for the clear explanation. But then, don't you think in this case the trader is forced to go underground? I think most investors want to know whom they are committing their money to.

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Post by AFJ Garner » Sat Mar 15, 2008 2:43 am

No, I was not referring to Tharp.

And yes, many managers seem to start off with a bang and then sacrifice higher returns for lower volatility.

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Post by nodoodahs » Sat Mar 15, 2008 5:20 am

@ alp: This is actually a very common dynamic with hedge funds of all stripes, including those playing in the energy futures space - I had a conversation last month with an acquaintance who works for a firm in this predicament.

@ AJFGarner: I think the limitations of deploying higher AUM force the transition to new strategies that have both lesser returns and lesser volatility.

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Post by paloma » Sun Mar 16, 2008 12:28 am

AFG Garner,

Im guessing your talking about Seykota. I wonder what makes you think he is not trading anymore? Do you keep up to date with his FAQ?

Sebastian

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Post by alp » Fri Mar 21, 2008 2:40 pm

nodoodahs wrote:Both of the examples you give seem, at first glance, to suffer from the same issue - greatly increased AUM making the returns smaller in absolute terms, and much less volatile. Of course, for the manager, it's a blessing, since it's easier to increase income from management fees than it is to increase returns on one's own money in the fund.
Could you elaborate more on greatly increased AUM making the returns smaller in absolute terms, and less volatile? Do you think that greater AUM forces the manager to change strategy? In which ways?

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Post by nodoodahs » Mon Mar 24, 2008 9:10 am

alp wrote:
nodoodahs wrote:Both of the examples you give seem, at first glance, to suffer from the same issue - greatly increased AUM making the returns smaller in absolute terms, and much less volatile. Of course, for the manager, it's a blessing, since it's easier to increase income from management fees than it is to increase returns on one's own money in the fund.
Could you elaborate more on greatly increased AUM making the returns smaller in absolute terms, and less volatile? Do you think that greater AUM forces the manager to change strategy? In which ways?
More AUM means more dollars per position; even in liquid futures markets, larger orders can be front-run, can move the markets, and will have more slippage. That slippage may force a trader to change timeframes. In the less-liquid markets, it is possible that the positions are too big to be safe, and the trader must forgo those markets in their strategy.

[edit to add: or vastly more positions, meaning that the best opportunities (the ones taken first) are diluted by the next-best opportunites (the ones taken later), meaning that the strategy's profit impact is diluted, and the effect of the increased diversification is also lower volatility.]

The same is true in the stock market, bond market, and other traded markets – the strategy that works for a $100K account may not be executable at $100M (and vice versa), and generally speaking, the strategies suitable for larger accounts are less volatile and have lower maximum gains per annum.

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