This tricky backdrop underscores the careful risk management and close focus on capital preservation at Cranwood Capital Management, a futures hedge fund specialising in US Treasuries ‘butterfly’ trades, which is based in Rocky River, on the outskirts of Cleveland, Ohio. It may not be the most auspicious location, but the unconventional locale lets the firm operate with a reduced cost base compared to firms located in the US hedge fund corridor of New York/Greenwich.
“Our whole trading programme is alpha,” says Peter Powers, Cranwood’s chief executive officer and founder. “The tools behind our methodology are backed by a discretionary bias. If something looks too good to be true, it usually is. Long Term Capital Management was a huge reversion to mean strategy that blew up. The discretionary bias keeps us out of a knock-out blow. A machine that is taught to look at levels that are attractive can get caught out because they just keep getting more attractive as the spread moves.”
Like other trading-based strategies, Cranwood has grappled with the surges in volatility. The fund has a strong track record, though in the last quarter of 2008 and the first quarter of 2009, returns have edged lower. The chief reason is that Cranwood have cut daily risk budgets and sought to conserve capital.
“We have done a decent job of not getting wiped out,” says Powers. “I see things getting back to normal. As far as the current market environment is concerned, we are seeing volume coming back into the market. Bid/offers are growing. Eventually we are going to get back to the days of 20,000 (contracts) on the bid side and 20,000 on the offer. In short, a lot more depth in the market and it should also dampen volatility.”
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