You can count on one hand the number of commodity trading advisor programs still trading that were established when District Capital Management (DCM) began its diversified program in 1978. The names are a who’s who of CTAs, but somehow Cathryn Hanger Namath is not a household name like the others.
The systematic long-term trend following program, like some of the more notable CTAs, has had its shares of ups and downs and is currently enjoying one of its better runs. DCM returned 63.48% in 2008, despite a 46% drawdown in July and August as most commodity markets reversed. The program has produced a compound annual return of 22.75% since its launch and a compound annual return of 26.99% since 2002, though it is down 4.5% for 2009 through April.
Cathryn has been there all along, starting out as secretary-treasurer in 1978, then becoming vice president in 1981, president in 1987 and president and CEO in 1994 after her father retired.
Her dad Kenneth Hanger was an investment advisor trading stocks and bonds in the 1950s and 1960s. In the late 1960s and early 1970s, he became interested in trading futures. In 1973, E.F. Hutton approached him about starting up a CTA. Hanger listened and launched one of the early CTAs. “At the time it was a very small group,” Namath says. “There were probably about eight of us.”
Namath says that it was an interesting time in the markets, as financial futures were just getting launched and DCM was an early player in trading currency and fixed income futures.
While DCM has maintained its core long-term trend following approach over the years (except for a brief period in 2000-01 when it traded short-term), Namath constantly has looked to make improvements. “We continually try and assess what we can do better,” Namath says.
One such change came after a bad year. “In 1993 we had a pretty bad drawdown,” Namath says, attributing it to using too much leverage and trading too many correlated markets. DCM added markets and scaled back leverage following 1993. Their margin-to-equity ratio at the time was above 30%, today it is 20% or lower.
While DCM trades 25 markets in its mostly systematic technical diversified program, it trades each market uniquely. Many of those differences are based on the dynamics of the cash and futures markets. “You have different commercial businesses using the cash market, so supply demand and the important characteristics of the cash market are different for each of the markets,” Namath says. “You are not going to have the same time parameters for the cattle farmer vs. a gold dealer. That is why we treat each market differently. There are a lot of different technical measures we will use [and] a lot of different things we will blend in.”
Not only does DCM trade each market differently, but it has up to 10 models for each market, depending on the trading environment. “We break it down to a bull market and a bear market, then we break down what kind of strategy we are going to apply,” Namath says. There are more detailed technical definitions they use to decide which model to apply to a market. “Is it at the beginning of a bear market or the middle? We classify it as a fast market or not a fast market,” Namath adds.
While the core strategy is trend following, some of their systems look for breakouts, and in rare cases, reversals. The slow model will try and catch markets prior to breakouts. “It many instances we are already in the market before it breaks out,” Namath says.
She adds that certain markets like crude oil and Treasury bonds have a tendency to reverse. “Not all markets have these V tops or V bottoms but sometimes they do. When it comes up it is a great trade,” she says.
The program uses a small amount of discretion to adjust stop levels for slippage and to alter allocation levels of markets if the program already has positions in correlated markets.
If there is anything harder than an emerging manager getting assets under management, it may be for an established manager that has fallen off of allocators’ radar screen to get attention. Namath is fighting that tendency and working to market the program, particularly overseas. DCM’s peak in money under management was $43 million all the way back in 1981 despite having one of its better performance periods over the last seven years. Today the program has $5.4 million under management.
Namath has triplets who will be heading off to college in the fall. She is not going to push them to carry on the business but would like to see one or all of them take over when she retires. Given its long-term track record, DCM should still be thriving if and when they are ready.