Chesapeake Capital is a Systematic Trend Follower
Issue No. 237
The world according to J. Parker
Trader adapts system to stock trading for performance and client reasons
By Chuck Epstein
Chesapeake Capital is known as a systematic trend follower and one of the largest trading advisors in the industry with assets of about $1.5 billion.
It is also know that Jerry Parkers training as a certified public accountant and his work with trader Richard Dennis as one of the original turtles, have been major factors in his disciplined trading approach.
But what may not be as well-known are his views on adding equities to the portfolio. At the Futures Industry Conference in Chicago in October, Parker discussed this. Chesapeake has adapted its system to stock trading for both performance and client reasons. Parker says his trend detection technique work well with stocks, particularly outlier moves in stock that are in single industries.
Another reason he favors the increased use of equity trading is that it makes Chesapeake more acceptable to institutional customers. It could also make managed futures more attractive to the pension fund community.
Parker says he was slow to realize the importance of how equity performance can affect a managed futures portfolio. "We made a mistake at Chesapeake since we did not watch what stocks were doing. Thats why it is important for CTAs to design products that have a high correlation to stocks and bonds. We see correlation as a form of risk control, as well as providing a simple trend following system."
He adds that a frequent customer complaint is that managed futures are not keeping pace with stock market returns.
"If the industry is to grow, CTAs must add stocks to their portfolios to make the investment more mainstream," he says. This also includes paying attention to the clients perspective to determine where a managed account fits into the clients overall portfolio.
By following many markets, and catering to a more institutional audience, Chesapeake has also reexamined it use of leverage. Says Parker: "Chesapeakes choice of leverage has been adjusted to compete against other asset classes and to achieve a consistent rate of return so clients can be confident of what will happen." In an era of high leverage, Parker uses only two or three times leverage in his accounts.
To instill this confidence, Chesapeake provides transparency in its portfolios so clients will not be surprised about what markets are being traded, as well as potential returns.
Rule-based systematic trading
The recent demise of Long-Term Capital Management through its abuse of leverage and overly complicated strategies, accompanied by the stock markets poor performance in August was a triumph for systematic trading, Parker said.
While some other managers boast of their flexibility, Parker thrives on rule-based systematic trading.
Being disciplined has forced Chesapeake to examine important aspects of trading. The conclusion: Diversification, systematic risk control and the use of long-short strategies are superior to most other investments.
"Being in the markets with rules you can basically attest to is the only way to trade," says Parker. "We have a system in which we do not have to rely on our intellectual capabilities. One of the main reasons why what we do works in the markets is that no one can figure out what is happening."
To hedge against this knowledge deficiency, says Parker, his traders are in about 70 liquid markets worldwide on a daily basis because it is difficult to predict which ones are moving higher.
As to the actual method itself, Parker says the rules are simple: Watch for trends, and keep losses at a low level. The majority of any years performance comes from riding six to 10 major trends a year.
Take, for example, a crude oil trade the firm made in 1990, buying crude at $20 per barrel and seeing it rise to $40. When clients asked how he knew to buy crude, Parker replied that he bought oil as it started to move up.
Given Chesapeakes size and the degree of supervision needed to maintain discipline, says Parker, his firm is making a major push to attract clients into the firms funds rather than into individually managed accounts.
"This is attractive since it would reduce the complexity and our liability for human error," he says. It would also make funds more transparent to the clients.
This initiative has not been well received by clients. "We have seen tremendous resistance to this idea," says Parker. But he regrets that he did not have stronger relations with his clients to convince them to make the switch and to prevent them from leaving.
As a large global trader, Parker also acknowledges that position limits are a major problem, especially in the commodities markets. As a result, he hopes for an electronic exchange where someone tells him he can trade all the corn and beans he wants.