Cranwood Capital Management, LLC
Splendor Capital Management Ltd.
Stratford Capital Management, Inc.

All the best traders will tell you that the most important aspect of being a successful trader is strong risk management. But they are referring to market risk: Not having too much leverage, having defined exits, not being overly concentrated in one market and avoiding illiquid markets. One risk most managers have not worried about much is counterparty risk; in fact, they trade on regulated, centrally cleared markets specifically to avoid it. Many even promote the advantage of not having the risk of a fraudulent manager through offering managed accounts kept with the customer’s broker. Until recently, the idea that funds held in segregated accounts would be in peril was down on the risk scale.

Sadly, we spoke to a couple of managers who told customers their money would be safe if MF Global happened to go into bankruptcy, even after it was clear the firm was under stress.

How widespread was the MF Global carnage? We ventured as far as Shenzhen, China to find one of our 2011 Top Traders, but even that wasn’t far enough to avoid the fallout from MF Global. Splendor Capital Management’s exposure to MF Global was minimal but real, and the Chinese firm already has written off a small portion of their assets because of it.

All of our top traders had some exposure. Cranwood Capital Management operated a fund and traded through MF Global. Fortunately they have a low margin requirement and hold most of their funds in a separate account at UBS just for that reason. “Once we caught wind that MF Global was having problems, I wired out a good chunk of the money, leaving the bare minimum,” says Cranwood’s Pete Powers. Still the firm missed 25% of the trading days in the fourth quarter because of the MF Global situation.

Stratford’s Kevin Benoit was in the midst of his second superb year and was close to welcoming several new customers through MF Global accounts. Those accounts were not opened and may never open. While people talk about the funds still outstanding because of the crisis, measuring the total cost in terms of lost trading days, lost brokerage, lost incentive fees and spooked customers leaving the space will be impossible.

As for 2011, the Barclay CTA Index registered only its fifth negative year out of 32 and its worst overall at -3.00%. It was a bad year for trend-followers and, while every difficult year produces a few outlier trend-followers who do well, they were harder to find in 2011.

“It was a difficult trading market,” says BarclayHedge President Sol Waksman. “Take a look at how many times during the year, from one month to the next, you would have the stock market rallying, stock market crashing, rallying, crashing. Gold [saw] the same thing. The dollar [had] the same thing. One month
risk-on, one month risk-off, those are difficult environments for trend-followers.”

Troy Buckner, founder of NuWave Investment Management, says it has been a tough environment for three years because of a general weaker directional persistence. “It has been a weak few years and the strategies that survive best are the ones that tread water effectively until the directional persistence is back. Whether the markets are going up or down, at least they are going up or down with persistence,” Buckner says.

NuWave earned just over 7% in its medium-term pattern recognition program. Bucker does not define himself as a trend-follower, but they usually are exploiting the same moves, so he was happy to be in the plus column.