When Volatility Doesn’t Equal Risk
Copyright 1997, 2003 by Dr. David Druz
The following is the transcript of an unpublished article that Dr. David Druz wrote for Managed Derivatives Magazine’s "How I Trade" column in 1997. Shortly after requesting the article, Managed Derivatives ceased operations so the article was never published. Though written some time ago, its points remain valid today.
As a preface to this article on "How I Trade" let me say that everything we do at Tactical is a team effort, investors included, so it is not accurate to talk about how "I" trade. Though our trading may seem to occur primarily as a result of my efforts, believe me, I am just a cog in the wheel. When you read "I" in this article then, it is because the editors prefer it to be written in the first person, not because I am individually responsible for Tactical’s results.
I think of Tactical Investment Management Corporation as a fund manager who happens to be its own trading advisor rather than as a trading advisor who happens to run some in-house funds. This is a great advantage because it automatically keeps me focused on maximizing our funds’ net returns to investors. This demands administrative efficiency and cost containment beyond pure trading performance. We work very hard to minimize our funds’ costs and to put our investors first.
Tactical’s investment time frame is quite long compared to most of the futures industry. I designed our funds to complement long-term mutual fund investments in stocks and bonds and have always recommended a minimum investment period of five to fifteen years! Our three original funds even had a moratorium on withdrawal of principal for the first five years to insure participation only by long-term investors. And investors in our subsequent funds have to correctly answer a question in the subscription process in which they demonstrate they understand their fund is designed to be held for five to fifteen years.
Naturally, not all investors have such long-term horizons. Nor are all investors able to tolerate the amount of near-term volatility we can have, which I’ll get to later. I personally screen all prospective investors to make sure everyone has appropriate expectations, a long-term view, and is prepared to sit tight no matter what happens short-term.
The result is that we all support each other and no one gives me a hard time in a drawdown. It becomes a team effort. In contrast, typical fund managers and trading advisors let most anyone invest and are always worried what their investors will do when the equity dips. Working only for investors with like-minded expectations gives us a fantastic psychological advantage.
We turn away money when we don’t feel right about a prospective investor. So it is fortunate I have never been too concerned about managing zillions of dollars or having a mega-income. My goal is to do the best possible job for our investors, not to be a big player. I spend the majority of my time thinking about trading and doing research which I feel directly benefits our investors, and only a small amount of time doing marketing which does not. I won’t tolerate loads on our funds, and I budget only small amounts for marketing services because one way or another, marketing cuts into investors’ profits.
My major in college was Electrical Engineering/Computer Science so it is not surprising I am a mathematical, systematic trader. I do my own research programming, system design, historical testing, and daily order generation so I don’t have any communications or security problems with programmers. Over the last 16 years I’ve tested thousands of ideas on Tactical’s huge database as well as actually trading for our funds since 1981 and have developed tremendous confidence in our trading approach and the principles on which it is based.
Since Tactical’s minimum investment period of five to fifteen years is longer than most futures funds, we have a very unique trading perspective. This time frame demands that our trading system be highly robust above all other considerations. It has to hold up over years and years. It has to be sturdy and it has to be stable.
It turns out that many such trading systems exist. They all share the attributes of having small parameter sets, holding positions for relatively long periods of time, and experiencing significant near-term volatility because they are never curve fit to any particular market situation. The beauty of a five to fifteen year investment period is that the near-term volatility in these systems becomes completely inconsequential in the long view, while their robustness shines forth. Tactical has the tremendous advantage of being able to trade from this family of stable systems which are impractical for traders with shorter time horizons and/or near-term volatility constraints.
Tactical is a team effort. Our investors come first. We keep their costs low. We invest their money solely for the long-haul. And we trade only time-tested, robust trading strategies in their best interest.