28 Nov 2011
Cranwood Capital, a hedge fund that runs butterfly spread trades in US Treasury futures, has chalked up strong gains in 2011. What is noteworthy is that at a time of risk aversion, it has done so by ratcheting up risk substantially.
The Cranwood International Fund is up 15.9% in 2011 to the end of October. In August when the vast majority of hedge funds endured drawdowns the fund posted a 4.3% gain.
Cranwood continues to follow the same strategy of exploiting temporary price discrepancies on US Treasury yield curves. But is has increased the size of the trades. Whereas previously there was a maximum risk budget of 1% of fund assets per day, that has now been raised to 5% per day.
The increased risk put into trades was previously run as an employee and partners fund. It ran from 2005 and became a separately audited fund in 2008.
Cranwood traders, based in Rocky River, Ohio use a proprietary model identifying brief, transitory shifts based upon intraday imbalances.
These arbitrage techniques include the simultaneous sale and purchase of US Treasury futures contracts creating a spread among commonly traded Treasury notes and bonds. Cranwood’s traders monitor and trade the entirety of the 22 ½ hour trading day on the Chicago Board of Trade, maintaining strong risk measures to limit loss and delegate trading efficiently.
Each butterfly spread trade has three legs including a steepening and flattening aspect to it. As the yield curve changes it throws up arbitrage situations Cranwood looks to exploit.
Each day the firm’s proprietary software recalculates using the previous day’s settlement prices and gives the traders the opportune buying and selling levels of the various butterfly trades. If a spread gets to a certain level, a trade is put on in expectation that it will revert to a more normal relationship over the next several hours. The strategy goes into cash at the 15.00 EST contract settlement time every trading day.
The Cranwood International Fund is up 15.9% in 2011 to the end of October. In August when the vast majority of hedge funds endured drawdowns the fund posted a 4.3% gain.
“What I like to tell people is we have never waivered from our strategy,” says Peter Powers, Cranwood’s CEO and founder. “Our strategy works and the people invested with us are happy. Doing the right thing is paying off for us.”
Cranwood continues to follow the same strategy of exploiting temporary price discrepancies on US Treasury yield curves. But is has increased the size of the trades. Whereas previously there was a maximum risk budget of 1% of fund assets per day, that has now been raised to 5% per day.
The increased risk put into trades was previously run as an employee and partners fund. It ran from 2005 and became a separately audited fund in 2008.
Cranwood traders, based in Rocky River, Ohio use a proprietary model identifying brief, transitory shifts based upon intraday imbalances.
These arbitrage techniques include the simultaneous sale and purchase of US Treasury futures contracts creating a spread among commonly traded Treasury notes and bonds. Cranwood’s traders monitor and trade the entirety of the 22 ½ hour trading day on the Chicago Board of Trade, maintaining strong risk measures to limit loss and delegate trading efficiently.
Each butterfly spread trade has three legs including a steepening and flattening aspect to it. As the yield curve changes it throws up arbitrage situations Cranwood looks to exploit.
Each day the firm’s proprietary software recalculates using the previous day’s settlement prices and gives the traders the opportune buying and selling levels of the various butterfly trades. If a spread gets to a certain level, a trade is put on in expectation that it will revert to a more normal relationship over the next several hours. The strategy goes into cash at the 15.00 EST contract settlement time every trading day.
