“It has been more important for us in 2014 to not lose money in certain markets than actually trying to perfectly capture new opportunities.” – Bastian Bolesta (Tweet)
Bastian Bolesta reviews 2014 and details the ups and downs of the year for his firm and the managed futures industry as a whole. In this episode, he discusses the start to the year that he wants to forget, the return of seemingly normal volatility, and the profitable 4th quarter.
Thanks for listening and please welcome Bastian Bolesta.
In This Episode, You’ll Learn:
- How the first half of 2014 was a continuation of 2013 for Deep Field Capital.
- How the “fellows” in their trading program evolved during the year.
- What markets contributed to their growth.
- What markets they lost in during 2014.
- The automated system they use to choose what markets they trade.
- How the markets started to behave in a more “normal” way in the second part of 2014.
- What his highlight was for the year.
“It’s not just a wonder box where every single month you will now make money as you did in 2014. And maybe as a manager you should not accept certain money.” – Bastian Bolesta (Tweet)
- Why to be careful of accepting assets that are chasing past performance.
Resources & Links Mentioned in this Episode:
This episode was sponsored by Swiss Financial Services:
Connect with Deep Field Capital:
Visit the Website: www.DeepFieldCapital.com
Call Deep Field Capital: +41 41 511 5588
E-Mail Deep Field Capital: firstname.lastname@example.org
Bastian: What we learned from that and what probably one can transfer to what the space, as a whole, should certainly do in the next days and weeks ahead, is to make sure that whoever's actually investing in the strategies now, really understands why strategies made money in 2014, why they potentially can make money in 2015, but really explain to investors what are the driving factors. That it's not just a wonder box were every single month and year you will now make money because it just happened in 2014.
This is Bastian Bolesta, Co-founder and CEO of Deep Field Capital in Zug, Switzerland, and you're listening to my year end review on Top Traders Unplugged!
Introduction: Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences their successes and their failures, imagine no more. Welcome to Top Traders Unplugged.The place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence, or investment career to the next level. Here's your host, veteran hedge fund manager, Niels Kaastrup-Larsen.
Niels: Welcome back Bastian, for this review of 2014 where we look at the big events from the point of view of your trading strategy. I want to explore both the ups and the downs as well as the big takeaway from what can only be described as a great year for systematic trading strategies in general. But as you and I know, just because you're systematic in your trading, it doesn't mean necessarily that your strategy deals with market events in a similar way. So let's jump right into it. Tell me about 2014 from your perspective. How did the year evolve for your firm and your strategy?
Bastian: Hi Niels, thanks very much for having us again! It's a good opportunity to look at this very, very exciting year. Particularly because it has been so different in the first half in comparison to the second one. Let's start with the more tricky part: And the first half, it was basically, from our perspective, how Singularity trades. You might remember it's a highly reactive trading program, trading hundreds of strategy combinations across these different asset classes, picking it on a monthly basis and an allocation process. So from this highly reactive perspective the first half of 2014 was a continuation of 2013 - Autumn 2013 to be more precise. And this has been a very tricky environment for us.
We were facing an environment where you saw a lot of markets moving in a sideways pattern and to a larger degree in very narrow range-bound trading as well. And the ranges became narrower and narrower. So that's actually when we built up our drawdown. We slowly let out over time, beginning in Autumn, and entering 2014 we saw some light here and there because some months offered a little bit more opportunities than the others, but all in all it was a really tricky environment. And then we were actually entering the second half of the year where markets started to leave these ranges.
We saw more volatility coming into the markets, providing us with more and more opportunities across the different asset classes. And the beautiful thing about it, once you had an opportunity in one instrument or one particular market, a couple of days later another market was actually moving in a certain pattern. And so we had alternating opportunities in the different markets, and saw a really strong recovery in the second half of the year. So it's a twofold perspective when looking at 2014. It has certainly been a rough environment in the beginning. And we learned a lot of important lessons on how to deal with a drawdown, how to communicate the environment you're facing and the consequences for the trading program. Convincing yourself that you're still on the right track, and then actually getting the positive feedback from the market - that you actually did exactly the right thing by staying straight on the road. And yeah, finishing the year was an all time high, recovery problem is back on the positive side. It's our fifth positive consecutive year, so it has been a very emotional roller coaster ride in 2014 I would say.
Niels: Yes, absolutely. And of course I do remember our conversation because it was one of the ones where there was probably more laughter than in any other episode due to the fact that we both were reminded of the Despicable Me movie. So if people don't know what we're talking about here, they should go back and listen to our conversation from a few months ago. Now, speaking about Despicable Me and the way you select trading models and the team, did you see a lot of people, or models I should say... and I forget the word, the way you described them... small fellows I think you called them. Did the team change a lot during the year? Because for people who don't know, you actually select a new team theoretically on a monthly basis. How did the team evolve?
Bastian: It's basically from a top-down perspective you see a quite even distribution of the different fellows in terms of, let's say short medium long term strategies. But as long as a certain market environment persists, it's likely that you see gradual shifts towards a certain direction. And the long-term fellows, for example, on the equity side, they became a little bit more concentrated than they used to be probably a year ago or something like that. But at the same time, while this might be something one can note and think about: what are the positive and negative consequences of that?
We saw in the second half of the year in October for example and in December, which was the perfect storm for us from a positive side, but a very difficult environment for many other players. The longer-term concentration having slightly more long-term fellows on the equity side than before didn't really hurt us. Because we could ride the roller coaster in October where we saw... correct me if I'm wrong, I think it was around 10% drop from the S&P and the S&P from mid September until mid October. And that basically meant for us if you look on the little fellows, what did they do? A lot of these long-term S&P strategy variations, they actually lost in the first half of October because they could not escape the drop in equity markets. But at the same time, the more reactive ones, the short term ones, they actually hopped right on the downward movement and started to make money quite fast.
The midterm ones, they are half-half I would say. Some of them actually lost money first, but then they could gain. Some others did not make any money in this particular first movement. And then when a lot of other programs were stopped out, and myself from a fundamental perspective, I thought, "Okay that's the beginning of the end" so to say. And now we will see a continuing drop in markets. That's when the market suddenly recovered. Very fast, you saw the turn around which actually resulted in the faster fellows making money again. Now the midterm ones as well... in the end because the S&P ended up being slightly up for the months, even the long term ones did not suffer but actually contributed slightly. And this is basically the perfect market environment where you can play the strengths of being diversified across different types of strategy variations and time frames and it doesn't really matter if you see a gradual shift in one direction or the other as long as you have enough opportunities across different asset classes.
Niels: Sure. I wanted to ask you a little bit... what about in terms of contribution for the year as a whole? Where did you see positive contribution versus negative contribution? And here I'm not so much thinking about the fellows, I'm more thinking about the markets in that regard.
Bastian: The interesting aspect when we did the analysis for the entire year, that actually equity markets showed quite a lot of contribution. Particularly in the months where we saw more volatility in the equity markets. I just referred to October and December has been another example case, where basically the entire S&P contribution in particular was pushed to the top rank of contributing in 2014. Then we see the energy markets as a second very important contribution. But interestingly not oil, but natural gas, which actually has dominated the last couple of months of the year. It was only put to third ranking, basically by oil in December, where oil was stronger. And this is somehow driven, of course, by the monthly allocation process where the strategy elements are selected, or the little fellows.
But it has also been a direct consequence of the introduction of our automated market selection process, which we started in May and then which was fully implemented in August. And I can still remember when we talked with our investors about it in October where crude had just been added... or actually it was Brent at the time. But Brent had just been added to the portfolio. A lot of people actually argued that from a fundamental perspective there was a strong movement in energies already. "The play was over, why did you start adding it now?" And basically our monthly allocation process selecting markets takes a certain while until it reacts to a certain movement, because you might remember it ranks these markets in a certain order and then allocates or selects strategies from these selected markets. So it actually every single month a market might be part of the allocation or not, and it's always in relation to the development of the other markets to its own development.
And oil just entered this potential to be allocated ranking in October. So basically this was already late for some people. Because they argued, "Well there has been a lot of movement going on already and you're too late, now it's a no-brainer to add it and probably it's already over." And fortunately this was wrong because it continued until the end of the year as everybody knows. And the program was confirmed and actually allocating additional strategy elements to the energy sector and benefited from that movement. So even the second half and these fallen energy markets further confirmed our research on the market selection process. And we're really happy that the overall thing turned out as it turned out.
Niels: Absolutely. Which market... where did you lose money in 2014?
Bastian: We lost in the Nikkei. Which was a pretty bad market in the beginning, and due to its overall weakness in comparison to the other markets it's actually currently not part of the allocation as well. We're currently at nine markets. You remember every month it's basically... there's a selection. We can have up to 23 and Nikkei is not part of it. So we could have made up part of this loss, so it's probably unfair in comparison if we say the Nikkei was weak, or the Euro/US dollar was weak as well. But the Euro/US dollar has not been part of the allocation for the last couple of months. So it could not make up for it for the loss it cost in the first part of the year. And this has been a very critical aspect as well.
You have to look at how your portfolio allocation takes place, if something is not good for a certain period of time. And it might be kicked out, and you just missed out on the recovery, which might take place in that particular market. But doing the analysis and actually seeing how the portfolio shifted towards more beneficial markets, overall it has been confirmed that this was much better than actually keeping the Euro/US dollar. It would have contributed positively for sure, but the other markets were much stronger contributors, and so it totally made sense in the end.
Niels: Sure, no I completely agree. And that's obviously part of your overall strategy, the way you allocate to markets. But on that subject so to speak, obviously we had a year with some big moves. You mentioned some of them, and you know, commodities for sure had some fairly large moves in certain sectors. But it doesn't necessarily mean that the trading models can capture these moves well, and you've already touched a little bit upon it. But I just want to ask you sort of more concrete... were there any markets, whether it be from the models point of view or whether it be from not being selected as a market, where you feel that maybe we should have done a little bit better?
Bastian: In terms of that missing opportunities left on the plate?
Niels: Yeah. Either from you know, models not being well suited for the moves... because as you know, to give you an example, I mean... some markets had some great moves, and for example people will normally think of equities being a good contributor - it was for you. But I also know many trend followers who didn't necessarily make a lot of money from equities. So this is what I mean that a market can have a good move but it doesn't necessarily mean that you capture it. So was there anything that stood out for you saying, "Well, you know, maybe we should have done a little bit better here because there were opportunities, we just didn't get them?"
Bastian: Yeah, it refers a little bit to what I just said earlier that the market selection process has been introduced as a fully automated piece in May/ August. And it has been part of our research for quite some time but has not been on the focus. So if we had worked there a bit faster or harder an early implementation would have saved us losses, particularly on the currency side. So I would approach your question more from not making losses than actually not capturing opportunities. Our program is so fast and diverse in terms of trend following strategies being active in these markets. It's less likely that you're not capturing something if it's really there. It's more the case that a market pattern or how the market moves is just not suitable for the way you're trading. And so the focus on not losing money gets a higher importance I would say.
And we're really happy with the overall development in search of research implementation. It has also told us that we have to have additional resource on that side, that we have the right ideas, and we should implement them faster. We just hired a new Chief Technology Officer, who will take care of the programming side, which will open up our resources and capacities on the research side. Where Heiko, the portfolio manager, let's say head of research basically, can now fully focus on that aspect. And this has already helped us tremendously in the last couple of months. So I would argue that it has been more important for us in 2014 to not lose money in certain markets than actually trying to perfectly capture new opportunities.
Niels: Sure, sure. I mean clearly the year was.. and you already mentioned that it was a year of two tales. The first three months for the index of systematic traders was quite tough, and then suddenly everything changed. And we had I think, eight out of the nine remaining months of the year was positive. And of course what people will remember 2014 for is probably some of the events that we saw. Obviously, the Ukraine crisis and Russia's involvement, and of course oil. Oil is on everybody's mind as we speak right now.
If you look at the models and you look at the selection process, how would you say... and I'm trying here to bridge the gap between describing events that often people think are negative for their portfolios, and they may well be if they're traditionally invested. But as you also know that in the alternative investment world where we can go both long and short, that doesn't necessarily have to be a negative. So can you describe and bridge the gap between how some of these events, or any other event that I haven't mentioned, how your strategy, your portfolio reacted to this in sort of a visual way?
Bastian: It somehow goes back to the environment of 2013 continuing into the early 2014, and now basically seeing some kind of change. People argue that now markets are behaving normal again. I don't know if this is normal or the new normal, and whatever is normal. But certainly we see more volatility. We see markets reacting more to the events you just described in contrast to what I would probably refer to as political intervention or politicians making some kind of comment and markets overreacting to it totally. With a lot of intraday volatility - very spiky, which causes a lot of fake-outs for programs like ours, and in the end nothing has happened. This is basically been the environment in late 2013 and also to a larger degree for the first half of 2014, and this has disappeared. And with the disappearance of these intraday events and overreactions to non-news, our larger daily losses have disappeared as well.
So that we have returned to a pattern which we're more used to from the times before. That you have economic data releases like non-farming payment data, or you have the Fed decision coming up. So there is certain volatility which is connected to an event as well, which infuses a lot of movement or more movement into the market. But the markets are doing nothing before that, and afterwards it's actually it's more a continuance of volatility of already seeing the days before that particular event.
Before that you saw these parallel shifts, nothing going on, a jump up or down, nothing going on. And if you're not already positively positioned for that particular movement, you lose out on the movement, and you might actually be wiped out afterward because there's no continuing movement or even correction. And as a highly reactive program you actually want to see the volatility before, during, and after such an event - might it be geopolitical or might it be on a rate decision or something like that. And we're seeing less a nervous, immediate reaction to such events, but actually more overall volatility. This is where you see you have more different opinions in the market, and they're not just fighting their battle on a particular day, on a particular news, but it's going on more on a continuous basis, which relates to a higher volatility environment.
Niels: So interesting enough, I think what you're saying is that despite some big events, the trends themselves became more stable, rather than being erratic as we saw maybe earlier on in the year.
Bastian: Yes, because I would say the drivers for the trends are different in comparison to the years before. It relates a little bit more. If you hear a certain piece of information, there's a certain news coming out and you see what's going on in the market, it somehow makes more sense I would say, in comparison to, let's say twelve months ago, or where you had the government shut down in the US, and nobody actually cared about any other news. The European Central Bank could actually say whatever they wanted to, and everybody was looking towards the US, which actually tried out the entire volatility in the market, and nothing was going on... which is really difficult for... in model or a program which actually loves volatility and fast movements.
Niels: Sure. If you look at 2014 as a year, what would be your highlight? What would you think back on as the highlight for the year?
Bastian: Definitely the end! Quarter four, the last quarter was just great. We somehow have the feeling that the overall development was moving towards our way of trading. So we got more confident after we saw our drawdown basically until April, and then in May an early slight recovery started. And the perfect thing for us was in August we started a new 2X [2 times leverage] share class in the fund for all the fund investors. Somehow making an argument, we believe that we were in an environment or a development where we saw positive times. It had more opportunities for our way of trading - this was in August. In September, we went up with our partner's money on 4X trading again. Before that, historically we have always been on FOREX but temporarily went up to 2.5X only in the very difficult times. And in September back to FOREX.
And we launched an equity program basically taking the Singularity trading philosophy, just applying it to the Euro stocks and S&P, so just equity exposure in October. And if you look at just these events were we somehow pinpointed... a certain point of time where we said, "From here going forward it will be different based on how we see markets and what the models are currently doing." And then it actually happened. So I would love to forget about the first half, or actually the first three quarters and just focus on the last quarter. Of course, the learning's of the time before has been really important for us, and we have already discussed it in our last interview, but it just has been perfect in the last couple of months.
We actually also made money when the space was making money at different months. We were up in October and December, the space made a lot of money in August, and September and November. So that helped us as well because it further stresses our idiosyncratic profile, so if you already have exposure, you don't mind to add us because there might be some additional benefits. So it has just been perfect. I could not wish for more. And I will not forget the first half, but somehow if I can, parts of it maybe.
Niels: Sure. No, I mean you already touched on some of the things that I wanted to ask you next about new changes. You know, you've already mentioned that. So I just want to add one question sort of out of the blue here, because you mentioned it. What did you see back in September that made you go, "This is it, we're going to offer a double leverage version, we're going to take our own money to 4X." Because, at the end of September, I would argue, if I look at sort of your returns and the industry returns, nothing really decisive had happened at that time. It wasn't that we already had seen massive returns coming in; they all came in Q4. So what made you, you know... from the timing point of view, what made you do it before Q4 or at the beginning of Q4?
Bastian: It's probably, if you look at the equity markets, the S&P, if I'm not mistaken, dived in September. So we actually saw volatility coming into the game. It has not been a large move, but it was definitely not just a continuation, and reminded us a little bit of what actually had happened in August. And August was a very beneficial... better than the months before. There were indications in the different markets that you saw a little bit more volatility coming into play, and markets leaving the narrow range bond trading. Still not large trends appearing, but at least leaving these ranges. And we felt very confident about the implementation of the market selection process. It has been done before, and we have traded it live since May. But the idea of actually identifying toxic diversification where basically markets are diversifying a portfolio, but their overall creating losses the way you're trading it, that you cannot compensate for with the rest of the portfolio. And if you save on this toxic diversification, that's actually more than half of the rent. The understanding and confirmation, we got from that implementation, helped us to say, "That will be different for sure. It will be different in the next couple of months. We don't need major changes in the market to be better than in the last couple of months because we addressed one of the shortcomings without changing our way of trading. It's just an automation of what we have been doing before, and it addresses some of the shortcomings." And that's probably it. And it was further confirmed then when in September we saw additional movement. October was I would say, the first real confirmation that the timing in terms of inception of the new share class and changing leverage on our principle assets has been the right timing.
Niels: Sure. Well, as they say, timing is everything. So you certainly proved that point in 2014. Let me ask you a slightly different question, and it goes something along the line that, you know, in 2014 will to some respect remind investors of 2008. Meaning CTA's doing much better than many other strategies, but it wasn't a disaster year for equities or anything like that. So it's certainly not the same, but it is the same when it comes to CTA's or systematic strategies, I would say massive outperformance of all other strategies. So what happened in 2009, and '10 was that we saw a big inflow into these strategies from a lot of different kinds of investors. But what we also saw was that subsequent to a couple of, you know, challenging years, let's call it that... most of these investors disappeared again. And I think you and I talked about that in our longer episode, that you also had some experience in that regard. So the question is, how do we avoid the 2015, or 2016 for that matter becoming a repeat of this period, where we see these massive influx and then massive redemptions in us as managers individually, but also the industry as a whole?
Bastian: That's a good question. Probably a question a lot of people are thinking about.
Niels: Well they should! I mean they should, because it wasn't exactly...
Bastian: I think a lot of these inflows in 2008, we haven't been open for external investors. We traded our own strategies at the time, but we did not deal with external investors at the time. So we did not suffer from that poison of investors chasing past performance. But we suffered from it a little bit later, we were up since inception in 2010, so that's basically our first consecutive positive year. So we had performance and people actually invested based on performance, and now we had our drawdown, of course, we lost investors as well.
So what we learned from that and what probably one can transfer to what the space as a whole should certainly do in the next days and weeks ahead is to make sure that whoever's actually investing in the strategies now, really understands why strategies made money in 2014. That they understand why they can potentially make money in 2015, but really explain to investors what are the driving factors -that it's not just a wonder box where every single month and year you will not make money because it just happened in 2014. And maybe as a manager you should not accept certain money as well if you don't want to just have an increase of assets for a certain period of time until your next drawdown, because you will always have weaker periods. Maybe they are a long time ahead of you, so it will take awhile, but I would be really careful about accepting assets who are just chasing past performance.
At the same time, having a strong year in 2014 for the entire space certainly helps all of us. Even when you were successful in being different, having made performance when the majority have not, or actually losing money at different times, making money at different times. But the space would not repeat the wrong promises of false perceptions... it actually did in the past 2008 environment. And that's actually what happened I think. It's not unsophisticated money; it's just money chasing performance and not necessarily taking the time to understand what a certain program is doing and what to expect from a certain program, a certain market environment.
I would not say that 2014 has been the perfect environment for the space. Some larger trends in a smaller number of markets and they not necessarily continue... we are now below fifty in crude and Brent. A lot of classical trend following programs made money with a short trade in energy. Yeah, I doubt that it will go to zero, so basically there is not as much left in terms of further development. And if you have a consolidation with sidewards moving markets and energies, you have to come up with a new idea. And investors have to understand that the programs captured a really good opportunity and they might capture falling equity markets. But in some cases it will take longer because a lot of these programs benefited from slowly rising equity markets as well. So it will take time until they actually turn around their positions and can go short. Because if they work with moving averages, it just takes time. So it's not even a direct protection against the portfolios, so people have to be careful and just drawing conclusions from what they experience in the last couple of months.
Niels: Sure, absolutely. I've only got one question left, which is a short one. But before I go there, is there anything just at the end that you want to bring up that I haven't touched upon that you think is important, just for people to consider as we sit in early 2015?
Bastian: No, I think we touched most of it. It will be a really exciting time, and I'm looking forward to all these interesting conversations ahead.
Niels: Yeah, absolutely! Well, my final question is just sort of one of those odd ones that has nothing to do with trading or anything like that. But I just want to ask you what you would like to wish for the coming year?
Bastian: It's always health. It's a really easy one. Health for all the people and particularly all people close to me of course, if I only have a limited amount of health wishing left. But if it's efficient for everybody, health is important. If you're healthy, you can do whatever you want to do. If you don't have performance, you can work hard to come up with a new idea. If you're losing money, you can work hard to make money again. If you're losing investors, you can work hard to make new investors. But if you're not healthy, and your friends and your family are not healthy, that's actually the worst thing. So that's the most important thing I would say. And all the other stuff comes from hard work and mingling with people.
Niels: No, I think that's a very thoughtful thing to bring up. Unfortunately today Bastian, our time is short. But for those who want to hear more from Bastian, please go to the earlier episode that I had with him on Top Traders Unplugged. I want to thank you again for being on the podcast and sharing your insights, I want to congratulate you and your team for another solid year as well, and I want to wish you and your firm the very best for the coming year, and I look forward to catching up with you later in 2015!
Bastian: Excellent, thank you very much for the time Niels! Thank you very much for having us!
Niels: You're welcome! All the best! Bye.
Ending: Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you, and to ensure our show continues to grow, please leave us an honest rating and review on iTunes. It only takes a minute, and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.
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Date posted: 16 Jan 2015no comments