Crabel: Long-term profits from short-term trading

Toby Crabel played professional tennis after studying finance at Florida Technological University, but was not making a steady income from it. In addition to competing on the circuit he was teaching tennis in the mid-1970s when he met cattle trader Tim Brennan. 

Crabel asked Brennan if he could get him a job on the floor while he was between tournaments. “I preferred it over tennis,” Crabel says. “There was a lot more opportunity in the trading business than in tennis at the time.”

Brennan, a principal at RB&H Financial Services, became a mentor for Crabel. “After a couple of months, I showed Tim some stuff that I was doing and he hired me as his technical analyst. I was able to do work I really liked and get paid for it,” Crabel says. “I ended up getting a raise and an account to trade. It was the start of my track record.”

Crabel went on to manage capital in RB&H’s customer business in the early 1980s. He also began writing a market letter that provided short-term technical trading tips that he would sell to floor traders.  The letter was a huge success and Crabel expanded it and published a collection of his best models in a 1989 book, “Day Trading with Short Term Price Patterns and Opening Range Breakouts.”

The book became his entry into the quantitative trading area. It got him noticed and a few years later he went to work with well-known quant Victor Niederhoffer.  

“He was a scientist when it came to ferreting out market patterns,” Crabel says of Niederhoffer. “As you can tell from his famous spills, he didn’t apply it to portfolio management as well as he could have. He wasn’t a risk manager but he found alpha, and he would take advantage of that in a very aggressive way.”

Crabel learned a lot from Niederhoffer, both what to do and not do. “I looked at it and thought, I don’t want that kind of risk on a per-trade basis, but if I can find alpha from research and spread it out over as many markets as possible that are liquid enough to trade, I would have a method of diversifying and decreasing risk and having more consistent returns.”

In 1992 he launched Crabel Capital Management with that goal in mind. “We haven’t had the spectacular upside one could have with more intense positions in a single market, but we have had consistent returns and the clients prefer that,” says Crabel. 

The one thing that has separated Crabel from many other managed futures veterans is his short-term focus. “My mentality was developed around the exchanges and having been on the floor briefly,” he says. “If you had profits the mentality was to take it, so I built that into the method.”

At the time, commodity trading advisors were dominated by long-term trend followers so this gave Crabel a unique niche. “Clients were looking for different types of trading other than pure trend following. They wanted to see uncorrelated trades,” he says. “I understand [trend following] but I thought there was a lot more going on in the markets than long-term trends.”

His strategies were less volatile than the long-term trend followers, targeting around 25%, but managed to outperform that benchmark, particularly in Crabel’s first decade of trading. The Crabel Diversified Futures program has produced a compound annual return of 16.91% since 1992 with a 0.83 Sharpe ratio and virtually no correlation with either the S&P 500 or the BarclayHedge CTA Index. 

Crabel trades hundreds of short-term systematic strategies, which he continues to add to. “At the beginning, we had 14 strategies: seven were mean reversion and seven were momentum that [held positions 24 hours],” he says. 

While short-term trading increases execution cost and slippage risk, there are advantages. “Trend followers have to be in the market in a direction [all the time]; we have periods where we are not in any markets, and therefore we are avoiding risk,” he says.

“For the client management business, trend following is much easier because of cost. When you get into short-term trading, the frequency of our trades are 5X to 10X more than trend followers. Take Winton, they manage
$25 billion, and in a typical program they trade 2,000 contracts a year [per million]; we will trade 16,000 to 20,000 contracts a year [per million] on $2.5 billion. They have 10X more capital but we trade 10X more than they do,” Crabel says. “Doing that in principle takes risk off of the table because when you are getting in and out of the market you are reducing risk, if you can execute. The whole thing is dependent on execution.”

Non-correlation is also a big deal. “You’ve got to have trades that don’t overlap and aren’t correlated with each other,” he says. It is also important to be non-correlated to other managers, particularly trend followers. It is key to the value added in his short-term approach, and hard to maintain. “Right around five days (holding period) you end up correlating to trades that hold for five months because you are trying to capture the same phenomena,” he says.

After 25 years managing money things don’t get easier, even for the 2017 Managed Futures Pinnacle Achievement winner (see “2017 Pinnacle winners,” above). “It has been harder and harder to make money using the same things we started with in the mid-90s. It seems like there was more froth, more opportunities for traders like us. It has deteriorated so you have to continue to evolve,” Crabel says. “If we hadn’t improved our execution over the last six or seven years, we would not be making any money at all. That tells you everything.” 

He attributes that to more professional traders competing for the same edge and the fact that even folks who in the past paid little attention to tick by tick execution — such as longer term traders and hedgers— are working every trade. “There is no reason why Cargill shouldn’t execute their soybean and corn hedges in a judicious way,” he says. “Trend followers are thinking about it [and] high frequency traders depend on it.”

Computerized and high-frequency trading has made finding an edge more difficult and everyone more cognizant of execution. “It is like a tennis match, the better they are able to hit their forehand, volley or serve, the better they are to outwit you strategically, the harder it is to beat them.”

While still a traditional CTA, Crabel offers their strategies in a 40-Act fund format. Less than 10% of its $2.5 billion in assets come through a 40-Act wrapper, but Crabel expects that to grow. “It makes sense; it’s more and more of a viable product. For the trend follower in particular it is a great idea because [it reduces cost] and stabilizes the business.”

Crabel continues to work on new strategies. “I don’t think I’m done. I’ve got ideas on what a trading firm can do and be. I haven’t quite met the goals I set out for myself, so you’ll have me to kick around a lot longer.”