Intraday swings and global economic uncertainty have made the markets extremely hard to predict for traders relying on fundamentals. But for hedge funds like Everett Capital Management, a Sausalito, Calif.-based investment adviser, technical trend following across multiple asset classes has been a winning strategy. Head trader Todd Hurlbut explains how he trades off of technical patterns, what algorithms and dark pools he uses, and why he's not worried about high-frequency trading.
Describe Everett Capital Management.
Hurlbut: We're a hedge fund/alternative asset manager. The firm is registered as an investment adviser in the state of California. It is also registered as a commodity pool operator (CPO) with the NFA. I began the firm in December 2006 with capital raised from family members and former clients from Smith Barney. Recently, I added one new client -- a proprietary trading firm -- and I also advise another long-only portfolio. We currently have roughly $20 million in assets under management.
What types of products do you trade?
Hurlbut: I trade cash equities, commodities, financial futures and some FX. For international equities, I mainly use American Depository Receipts listed on U.S. exchanges. I use the DAX, FTSE, Hang Sang and Nikkei stock index futures. And I trade the S&P intraday.
How would you describe your investment style?
Hurlbut: I focus on technical-trend-following investment strategies in global markets across individual stocks, commodities, futures and FX. It's a pretty simplistic trend-following strategy -- you're looking to capture price trends across these different asset classes, using relative strength, volatility breakouts and pattern recognition. We achieved 31.54 percent returns for the past 12 trailing months, through September 2011.
What is the structure of your trading department?
Hurlbut: I am the sole trader. My partner focuses on business development. But as assets grow, I would like to hire someone who has a similar philosophy and approach to mine.
What technology do you use to trade?
Hurlbut: I primarily use UNX as an execution management system on the stock side. I also have Bloomberg EMSX linked up as a backup. And I like CQG for futures, as I can program my own alerts into it.
How do you manage risk?
Hurlbut: I manage risk by monitoring and controlling portfolio volatility. I began using Nirvana Solutions about five months ago, as it allows me to have a total portfolio view for the different accounts that I manage. I'm able to create customized views of the risk, as different securities bring volatility to the portfolio. For all the positions I have, I have a hard stop that I monitor and use to compute open portfolio risk on a dollar and portfolio percentage basis. I can compute the volatility of the position as it's changing -- as it's going my way or not going my way. Then I can see how much my portfolio is at risk on that one stock. And I can see how much I'm willing to give back in profits if I were to give it room to run further.
What percentage of your volume is electronic?
Hurlbut: 100 percent of volume is executed electronically.
What types of algorithms do you use?
Hurlbut: As of now I just use the broker algorithms from Goldman Sachs and Fidelity. I'd like to, at some point, explore some of my own custom programming and hire a programmer. The algorithms I use are based on price momentum, such as Fidelity's Recoil. And I use Goldman's One Click -- it's a smart algorithm that exits to the different underlying algos that Goldman has based on the different urgency levels set on the trade.
I don't use the algos for futures, however, just for equities. For futures I use charts to place the trade myself.
Have you ever developed your own algorithms?
Hurlbut: I created a custom position-sizing algo that UNX programmed into its EMS. I use the algo to normalize position sizes across asset classes and size positions based on volatility.
Do you use dark pools?
Hurlbut: I use them daily. I mainly use dark pools from Liquidnet, Fidelity and Goldman Sachs. I use Goldman's dark algorithms, and Fidelity has some dark sweep algorithms that I use, particularly for smaller and mid-cap stocks that aren't as liquid. About 25 percent of my trades are executed in dark pools.
Has your dark algo usage evolved at all?
Hurlbut: I've gradually increased it. I use dark algos primarily when there is some urgency to what I'm doing, particularly in the small- and mid-cap names. I've started parsing out the trades where a portion gets executed immediately with an aggressive algo, then a portion over the course of the day, choosing an algo such as a VWAP; and sometimes, if it's a smaller cap, I often go to the dark pool instead of the algorithms.
How do you rate your brokers and allocate order flow?
Hurlbut: I don't rate the brokers on an ongoing basis but rather place the orders where I've had the most success in the past.
Are you concerned about high-frequency trading?
Hurlbut: I don't think it's an issue. If anything, it's probably adding liquidity. From what I see -- the patterns I look at -- nothing's changed. There's more volatility for sure, but I think it's just where we are in the market cycle.
Is low latency important to your trading strategies?
Hurlbut: I want to be fast, but I don't have to worry about speed to the extent of someone who is trying to capture small moves.
What is your holding period?
Hurlbut: On the futures side, I hold positions anywhere from intraday to a couple of weeks. On the equity side, I try to be longer-term and hold positions for weeks or months. However, I'm always trading around all the positions I hold if there are opportunities to do so. One advantage of using futures in the short term is beneficial tax treatment over stocks.
Have you adjusted your trading strategy during the recession?
Hurlbut: In the past few months I've shortened up trade duration a bit because the volatility is so great and you can quickly give back profits. I haven't made a deliberate decision to scale back -- I've just noticed the algo (that UNX programmed into its EMS on my behalf) forces me to take smaller positions, as overall market volatility has dramatically increased.
How are you dealing with the Eurozone crisis?
Hurlbut: Global equity markets have sustained severe technical damage and are unlikely to recover in the near term. At this time, less than 10 percent of U.S. listed equities are above their 200-day moving averages. I suspect equities will break down further and short-selling opportunities will be the best place to achieve gains going forward. As evidence mounts that the global economy is slowing, commodities should also provide opportunities on the short side. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio