Red River Capital -Volatility Advantage Strategy *QEP Only*
February 15, 2017
Red River Capital LLC is truly a niche CTA
There are very few trading firms out there that trade only the VIX. Though Red River’s Volatility Advantage Strategy QEP Only is discretionary, trades are guided by a model that attempts to predict proper prices for VIX futures. Trades are then placed when actual prices deviate from these theoretical prices. “When I got my MBA in Finance, they taught me that markets are efficient, and participants are rational,” stated Carl Rothenbacher, the company’s founder. “It’s amazing, though, that so often price movements are not efficient at all, and are full of the emotion of the moment, overreactions, and random noise. This is definitely true with the VIX. It is known as the fear index, after all.”
Red River Volatility Strategy
The strategy is short term, with the majority of trades closed out within one day. The strategy’s inception goes back to mid-2015 and the performance showed is proprietary. Red River Capital LLC began accepting clients in January 2017. Though relatively new, the strategy has managed to rack up some impressive returns, gaining 53.2% in 2015, and 64.4% in 2016. Of course, past performance is not necessarily indicative of future results. Monthly gains have been consistent, with only a single negative month. The worst peak-to-valley drawdown is -3.28% (Dec 2016 – Jan 2017).
The program, which is for QEP only, managed to maintain a low correlation of -0.052 with the S&P 500. “The biggest risk when trading the VIX is on the short side because the VIX will spike during a market correction,” Carl said. “So, we’re comfortable with a smaller position size when we’re short than when we’re long, and will sometimes offset a short position using long S&P puts as insurance.” The program also tries to keep risk in check by targeting a maximum margin to equity ratio of 30%. “I let margin to equity go much higher when I was just trading my own funds,” said Carl. “Now that the strategy is bringing on client money, 30% should be good going forward. That number keeps the strategy substantially intact while removing some risk at the margins, limiting how much the system scales into larger positions.”
Now Accepting Client Money
New CTAs can have trouble as they go from trading their own money to trading client money. Sometimes a strategy that works on a few hundred thousand dollars doesn’t work on millions of dollars. Carl believes the strategy will continue to be effective up to at least the $10 million range, based on the liquidity of the VIX futures, but may need to be modified to work beyond that. There are risks to investing with an emerging manager, but emerging CTAs definitely has potential as a source of alpha*.
Foremost Capital Management believes that Red River Capital LLC is a CTA worth watching. Give your broker a call and ask about Red River, you’ll be glad you did.
Alpha definition by Investopedia.
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Categories: CTA Spotlight