Kevin Jamali, is managing partner of commodity trading advisor (CTA) Auctos Capital Management, LLC, Jamali and his partners launched the firm in August of 2007. Jamali, who has been trading independently since September 1997, and exclusively trading electronically since March of 2003, spoke with JLN Managed Futures editor Ron Sebonia about how the industry has changed, how to start a CTA firm and which other firm Jamali thinks is getting it right.

Q: What drew you to the markets?

A: I think people who want to excel are drawn to trading. My dad used to trade the stock market, though not professionally; he was hurt badly in the 1987 market crash. I think that made me aware of the industry and trading, and gave me a little motivation. And when I was in college, I’d started young at 16, there was a guy I knew who traded at the Board (CBOT), and I’d gone to a few events with him and you’d see a lot of guys who were successful traders. The trading world was alluring, challenging. I wanted to test myself and prove that I could do it.

Q: Where’d you get your start?

A: I started by walking around to different offices at the CBOT for about two weeks, passing out resumes. I just wanted the opportunity to show people what I could do. So I ended up working at an FCM, for about $150.00 a week.

Q: The industry has changed a lot over the last 15 years. What made you move from the floor to trading off the floor?

A: I got my first opportunity to trade on Project A, during the night session. I’d work my regular job during from 7-2, and then trade overnight in the Treasury complex from midnight until 7. As time progressed, it became apparent that electronic trading was the future.

Q: How does being a floor trader first affect you being a commodity trading advisor now?

A: When I started a CTA, I knew that my background as a trader both on and off the floor was one component, but I also knew that wasn’t enough. So I put together a team of academics with math, computer programming engineering skills. Success as a floor trader has little to do with success managing money. You need a diversified team, all of the critical components. (Jamali’s research team members include: Abdol H. Esfahanian, PhD. and associate professor in the department of computer sciences at Michigan State University, and Kim Ferizi , Ron Steinberg, and Ali Neyestani.)

Q: What are the critical components of a well run CTA?

A: You need a dedicated full-time research and development team. You have to have a business plan. The best trader in the world won’t get anywhere as a CTA without a sound business plan. And you have to have financing. Bringing a CTA to market is a costly endeavor. It takes time to raise capital, you’ve got to build a solid track record, and you have to have staying power.

Q: So becoming a successful CTA is team driven enterprise?

A: Yes, but you do need skillful individuals. Your team has to have members with strong math, programming, or trading backgrounds. They have to be driven, and be able to think “outside of the box.” But the most important thing I look for is integrity. If your team members don’t have personal integrity and respect for each other any CTA will crumble. This is an industry where egos can get in the way and cause problems.

Q: What mistakes have you made in the process of creating a CTA?

A: As I look back, I think there could have been gains in efficiency. Of course we’ve improved on our research models too, constant improvement has got to be part of your business plan.

Q: If you were to take someone aside who was starting a CTA what would you tell them to be aware of?

A: I’d ask them what their assumptions were. Do you have a business plan? I see a lot of CTA’s starting with little or no infrastructure — two guys in an office with a track record based on their trading statements. They think that’s applicable to managing money, it’s just not. I’d ask them if they have the personnel in place? Who’s going to do your accounting? Who’s doing the legal work? Who’s going to do the back office? How much time do you have to commit to the CTA? Will you try to do it all?

It’s as much about managing money and solid operations as it is about trading. You can’t be a CTA if you don’t do both well. Numbers and trading success count, but so do operations.

Q: What’s your feeling for the current “hurdles” for getting a CTA going?

A: My sense is that you need three years track record, and $10- to $20 million dollars under management.

Q: What questions do you think potential investors should ask CTA’s?

A: Numbers count. You’ve got to ask: What’s your risk-adjusted return? How much risk are you taking on to achieve your returns? What’s your maximum draw-down? How long did it take you to recover from that draw-down? What’s your volatility? What are your risk parameters and how are they enforced? How many people are involved? Is just one person handling the back office? Are your returns and operations audited?

Then there’s the trading. What’s your methodology? What’s your research process look like? What are your assumptions about things like slippage?

What kind of tools are they using to put things together? Is the software developed in-house? Is their approach scalable? What markets are you trading?

Q: What makes Auctos unique? What’s your perspective on risk management?

A: We work diligently to rigorously test our models; we use 30+ year data time frames, stress tests, the “Monte Carlo Simulation.” We use a low margin-to-equity ratio. We risk very little equity per trade.

Q: What do you think investors should use as reliable yardsticks to choose between CTA’s?

A: All else being equal, it boils down to the people involved.

Q: Do CTA’s have an advantage over other types of alternative investments like hedge funds when it comes to transparency and liquidity?

A: Yes, CTA’s are more regulated. We exclusively use exchange traded instruments, we’ve got third parties holding the customer funds, we have greater transparency and we’re substantially more liquid.

I think institutional investors are reluctant to think about commodities because there’s a stigma. You say commodities and institutional investors automatically think of shooters, cowboys, and big risk takers. I think the industry has yet to overcome that image. The industry has to do a better job of educating professional investors regarding the benefits of engaging a CTA and how CTA’s can really do better when it comes to risk management and draw-downs. I always define Auctos as a CTA, despite the “sexiness” of being a hedge fund.

Q: What are the next challenges for Auctos?

A: Time is the big enemy. That’s why I think financing is so critical to your staying power, especially the first three years. It takes a while for a properly designed and well run CTA to become profitable. Marketing comes in to play too. If the money doesn’t come in, you’ll eventually have problems too.

Q: Who in the industry “gets it right?”

A: Transtrend is a group that I think is solid. Their risk-adjusted return is great, and they have low volatility.

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