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June 22, 2005
Managed Options: Kawaller Fund
The Kawaller Fund ranked among the top-10 managed options programs (CTAs) during the April '02 through March '05 period; such rankings are regularly compiled by the Barclay Group. The fund was also featured in the top-100 CTAs list, compiled by IASG (a site that provides data on hedge funds and managed futures), based on 60-month performance prior to April '05. The fund had a terrible run when it launched in July 1999, and its year-over-year performance is very volatile (+262% in '02, -23% in '04). But then again, the annualized 3-year & 5-year returns are in the 30-50% range!
Trading Philosophy:
The fund limits trading exclusively to buying options on futures contracts. The premise of the trading activity is that futures prices – particularly futures prices in fixed income markets – are notoriously poor predictors of prospective spot prices; this view is supported by a preponderance of academic evidence, and the long-term track record of the fund.
The Fund takes directional positions using only long options on futures contracts, where (a) the choice of puts or calls is determined in such a way as to benefit from the convergence of the spot and futures prices and (b) the time value of the option is smaller (in absolute value) than the spot/futures differential. This condition fosters the outcome that if the spot price remains unchanged over the life of the option, the option will appreciate in value. For a long option portfolio, any and all invested option premium can be lost.
Also, check out the excellent collection of finance articles on Kawaller's site, especially the "derivatives" section.
Program Details & Performance Statistics:
* IASG profile
* Min. investment = $25K, Fees: 2% mgmt fee, 10% incentive fee
* No. of winning months: 38
* No. of losing months: 33
* Maximum Drawdown: 57% (July-September 1999, immediately after inception!)
* Sharpe ratio: 0.6
* Correlation with S&P 500: -0.3
Here's a snapshot of the fund's returns, 3-year and 6-year periods::
Posted by galatime at June 22, 2005 01:18 PM