Jean-Jacques Chenier uses most of the same indicators as a systematic trend following manager that he did as a discretionary manager but has found that systematizing the approach added much neededdiscipline, allowing him to exploit the inefficiencies of the currency markets.
Chenier believes markets, in general, are less efficient than touted. He says most are shaped as bell curves with fat tails, especially currency markets, which have greater inefficiencies because many participants don’t trade it to make money but for other reasons. For example, he notes that central banks routinely lose money trading currencies.
“The Bank of Japan will intervene to push the yen lower…a commercial bank in Japan will repatriate yen assets overseas just to window dress its balance sheets for the end of the fiscal year,” Chenier says. These activities create liquidity but it is inefficient liquidity that can be exploited, he says.
Chenier, who heads up commodity trading advisor (CTA) Alternative Asset Management, cut his teeth trading soft commodities in the booming Paris markets of the 1970s, earning positive returns for his brokerage customers during a sugar squeeze. (The eventual price collapse following the squeeze led to a regulatory crackdown ending the booming Paris softs markets.) Chenier went on to hedge precious metal positions for a Spanish firm and eventually evolved toward foreign exchange trading.
By the end of the 1980s he knew he wanted to start a hedge fund but could not raise the money in Europe for his venture. So he moved to New York and started a discretionary global macro hedge fund with his own money. After a significant drawdown, he closed the fund and began developing his proprietary technical system, Trendoscil, while working as an associated person for various management firms.
Chenier’s launched his CTA in August 2001 and has had a good start with a 73.6% return in 2002, and a 15.17% return in 2003 through April. The largest drawdown was 20% in May, following September 11. The program trades the Australian dollar, euro, Swiss franc and Japanese yen.
His trading system incorporates the basic philosophy of ‘cutting losses short and letting profits run into mathematics. What he gained from that was risk control. “As a discretionary trader you are never sure that what you loved to buy at 100, you will not just adore when it falls to 70. So I thought that the best way to avoid this [tendency] – and no one is immune to it – is through a trading system,” Chenier says.
The temptation to add to a losing position – a cardinal no-no in trading – is a strong one particularly when the logic behind a trade still seems valid. “It never makes sense to add to a losing position. Even if it works 99 times out of a 100, it will not work at some point and you will be out of business,” Chenier says. He admits to adding to losing positions while trading discretionary funds and even having some success with it, but adds, “You always do it one too many times. It is better to miss a trade than to get in with too much risk.”
His medium- to long-term system incorporates trend following indicators with fast and slow oscillators to capture the trend while avoiding giving back profits when the trend fails. His use of oscillators allows him to be more selective and avoid drawdowns without adding strategies or varying his timeframe.
While other managers have avoided the large givebacks by using multiple strategies and multiple timeframes, Chenier takes a minimalist approach. “Short-term trading [even as a way to mitigate drawdowns within long-term systems] is a losing game. It increases your cost of transaction. Our system is completely out of the market about 25% of the time. We are very good at doing nothing and we are proud of it,” he says.
The system produces just as many losing trades as winners but the winners outpace the losers by 300%. He adds to winning positions when it breaks out of an envelope of 3% above the moving average. He has initial stops of 5% but no trailing stops. When the fast oscillator crosses below the slow one it is an indication that the move is losing its momentum.
The system averages only 350 roundturns per million under management. His method of avoiding givebacks has the benefit of reduced risk from margin and lower execution cost. It proved itself during the March reversal with a drawdown of only 5.74% after earning over 40% the previous four months, once again exploiting inefficiencies within the currency markets.
Copyright Futures Magazine Group Jul 2003
