The Diversified Commodity Long/Short Strategy uses the relationship between cash and futures prices (AKA Basis) to establish directional positions in the futures markets. This fully systematic strategy focuses on timing as well as magnitude of basis changes which allows for continuous risk management of open positions. The Program trades futures contracts in three market sectors: agriculture, metals, and energy. It combines commercial logic with quantitative algorithms using fundamental price data. It leverages the decades of experience of Robert J. O’Brien Jr. in the agriculture space. Our model was developed for an under exploited niche market sector.
The general philosophy of the Diversified Commodity L/S Program is pricing of grain, livestock, precious metals and energy futures are typically tied to what happens in the cash market. Price action in the futures markets can sometimes be distorted by speculative trading. The program operates under the theory that the price action of the cash market more accurately reflects the reality of supply and demand factors that ultimately determine derivative pricing. With this in mind, the Commodity L/S Program monitors and analyzes cash price vs futures price movements in order to generate trading signals.
This Program is a culmination of over 10 years of work and extensive research. It began with Robert J. O’Brien Jr.’s theory derived from years of experience working in Agricultural research and sales that significant change in the basis between the cash and the futures price of a specific commodity should be indicative of future price movement. This theory has been tested and evaluated by in house researchers as well as paid consultants. Our conclusions are that the theory bears out, and it does appear that basis change can be predictive of price movement of the futures product.
County Cork focuses on risk and money management. We therefore concluded that regardless of how it is done, all trading strategies must have a stop loss point. Forcing an entry signal to always act as an exit signal, as in the original program, can cause significant distortion when evaluating parameters. Forcing any trade to exit if it loses a set amount from entry is the key element of risk management in the new models.
• “Trade management” rules have also been applied.
• A breakeven “plus” stop.
• A time in trade stop
• Volatility management dovetails with risk management but has distinctive differences as well. Diversification works best when the allocation to an instrument is adjusted for volatility. Without this, the two or three most volatile instruments will swing the portfolio and minimize the contributions of the other instruments.
• We also theorized that having a methodology that can dynamically allocate risk based on performance of any given market/model pair is essential not only to minimizing drawdowns but also as a guard against overfitting the portfolio allocation.
• In allocating to all the model/market combinations, long term correlations of the components are evaluated to detect obvious over allocations of risk and adjusted accordingly.
Diversified Commodity Long Short Program at a Glance
- Program Type: Systematic
- Markets: Grains, Livestock, Precious Metals, Energies
- Minimum Initial Investment: $2,000,000
- Fee Structure: 1% Management fee, 20% Incentive fee
Proprietary Pro-Forma Returns From Inception (10/1/2018) to Present
Note: past performance is not indicative of future results
THE PERFORMANCE SET FORTH ABOVE IS FOR A PROPRIETARY ACCOUNT MAINTAINED BY A PRINCIPAL OF COUNTY CORK TRADED PURSUANT TO THE COMMODITY LONG AND SHORT MANAGED FUTURES PROGRAM, OR THE COMMODITY L/S PROGRAM. THE PERFORMANCE HAS BEEN PRO FORMA ADJUSTED FOR A 1% (ANNUALIZED) MONTHLY MANAGEMENT FEE AND A 20% QUARTERLY INCENTIVE FEE THAT WOULD HAVE BEEN CHARGED TO A CUSTOMER ACCOUNT PARTICIPATING IN THE DIVERSIFIED COMMODITY L/S PROGRAM. THE PERFORMANCE IS NET OF ACTUAL BROKERAGE COMMISSIONS AND TRANSACTION FEES CHARGED TO THE ACCOUNT, WITH PROFITS REINVESTED. PLEASE NOTE THAT ACTUAL CUSTOMER ACCOUNTS HAVE BEEN TRADED PURSUANT TO THE PROGRAM. COUNTY CORK HAS CHOSEN TO USE PERFORMANCE OF A PROPRIETARY ACCOUNT IN THIS PRESENTATION AS IT HAS CONTINUOUSLY OPERATED SINCE INCEPTION. (10/1/2018)
Robert J. O’Brien, Jr., Manager
Mr. O’Brien is one of County Cork’s trading principals and is responsible for development of the Diversified Commodity Long Short Program. Mr. O’Brien has been associated with R.J. O’Brien, a registered futures commission merchant (“FCM”), since 1970, and has served the company in a number of positions. From May, 2000, to July, 2007, Mr. O’Brien was an associated person and Vice Chairman of R.J. O’Brien & Associates, LLC (“RJO”), and he currently serves as a member of the Board of Directors. Mr. O’Brien holds a B.A. degree in Economics from the University of Notre Dame, and a J.D. degree from Loyola University, Chicago.