I became a CTA in part because Jon Matte did not want to charge fees to his clients that he felt he did not deserve. Jon was running Defender Capital Management and had taken the management fee off his managed futures program because a change in the markets caused his system to not trade as actively as it should have.
Defender had a 30-year bond futures trading program he launched in 1999 and was one of the most successful CTA trading programs I had tracked for the last three years as of July 2001. I was a broker at The Price Futures Group and and registered with Price Asset Management. I had signed Defender to a marketing agreement and helped him reach $5 million in assets under management.
However, in September of 2001 the world changed. Jon was out of the markets when the planes hit the towers in New York, but he was impacted nonetheless. One big client, with $2 million in an account, took his money out to meet margin calls for programs hit with losses from those terrible days.
More importantly, at the end of October 2001, the U.S. Treasury announced they would no longer issue 30-year bonds. The futures and the cash markets lost their traditional connection and the volatility increased in the 30-year bond futures enough to keep Defender’s bond program mostly sidelined for months on end. When Jon did trade in 2001, he mostly lost money.
Ultimately Jon decided to stop charging the management fees on the bond programs accounts while he was sitting on the sidelines for nearly a year. He probably walked away from $60,000 a year in management fees or so. Luckily for Jon he had made a lot of money from the 20% he earned on profits on the trading from 1999 to 2001.
However, Jon had also put into place an expensive accounting system to manage his back office operations. And he hired a marketing/administrative staffer to help him with the little things involved in running a CTA.
Ultimately, Jon had too high of expenses and not enough revenue to sustain the company even though he had switched from bonds to Eurodollars and added Sugar and Canadian Dollar futures. What finally killed Jon’s managed futures business was his divorce.
Today, Jon is happily remarried and lives in Norway with his wife Enid. They are celebrating 10 years together in a couple of weeks.
When I approached Jon in 2003 about a deal I was working on with a brokerage client to set up a CTA partnership with the client, Jon offered to sell me his CTA business. I took the deal.
I decided I just wanted to trade Jon’s system for a handful of clients on my books as a broker and establish that I could trade Jon’s system as well as he could. I registered John J. Lothian & Company, Inc. as a CTA and began trading in 2004.
I told the clients who signed on with me I would not charge the management fee, just as Jon had not. I told them I assumed the same drawdown that Jon and Defender had been in when they stopped trading.
The only way I was to make money until I got the accounts to new equity highs was by earning the commissions on the accounts as the broker of record. But, I was trading Jon’s rules-based behavioral system.
I did not really promote the managed futures program too much. I would mention it from time to time in this newsletter, I would register with some of the reporting services, but that was about it.
I raised a couple of new accounts from friends and associates. But that was it.
Just when I had the 3 year track record I had sought and believed I could market, Jon approached me about a job. He had been working in various fields from making online corporate movies to selling yachts. He wanted back in the futures business and wanted to work for me.
We had always planned to get the CTA business up to the point where I could afford to hire him. However, I only had $500K or so under management and it would take a lot more quickly to afford Jon.
This is when I came up with the idea for MarketsWiki and hired Jon to help me build it. He is the co-founder of MarketsWiki.
I continued to trade Jon’s programs. Now he was always online with me and during 2008 both programs, Maple Sugar and Big Ed, made money (see the disclosure document).
I ultimately continued to trade the programs until early 2011. Maple Sugar was the better of the two programs as Big ED lost money in 2010 and 2011 as interest rates went towards zero and stayed there.
I stopped trading in 2011 for a bunch of reasons, including a stagnant interest rate market and because I was busily traveling around promoting a new product, MarketsReformWiki. I was also in the process of switching to a newly created LLC instead of John J. Lothian & Company, Inc. to separate it from my growing media business. That is when I saw the fiscal cliff approaching and stayed on the sidelines.
Luckily for me, though not my brokerage clients, I was not managing money soon after the fiscal cliff when MF Global declared bankruptcy. My brokerage clients, including those still on the books at MF Global and the Price Group, got caught up in the bankruptcy.
John J. Lothian & Company, Inc. stopped being a CTA in July of 2011 and John J. Lothian Managed Futures LLC was newly registered, but had no money under management.
I missed having the stain of MF Global’s bankruptcy on my disclosure document. How many CTAs had money at MFG and now and for eternity have to disclose that fact?
MFG delayed my plans to get back into the CTA business and manage money. In the meantime, my growing media business has continued to be a blessing and an impediment.
I came up with a marketing plan for the CTA, but can’t execute it as things stand right now. Thus, I am starting all over. Tomorrow I will tell you how.