FTC equity strategy Gideon I: The new long-short approach at work

As promised, FTC's trend-following fund-of-funds strategy has survived the crisis months on the world markets since 2008 much better in comparison with conventional equity funds. Since February 2009, FTC has been applying an additional long-short overlay in Gideon I.

FTC Gideon I was created in January 2006. This was the first UCITS compliant mutual fund with an FTC trading system. The original strategy combined two different trend-following systems which generated trading signals in a universe of over 1,000 equity mutual funds. This strategy, which can have between zero and one hundred per cent long exposure, limits the risk of falling markets by dynamic man-agement of the investment level.
The original model survived the first trials in the equity market corrections in 2007, but we only saw how well it coped with even long and serious bear markets in 2008. In this catastrophic year, FTC Gideon I protected its investors very effectively. The fund’s losses (-5,5 %) were extremely moderate compared to the market (MSCI World in euro: -39 %).
Even so, FTC Research was looking for further possible improvements even before the 2008 crisis. There were two key goals: The first was to reduce volatility significantly below the stock market, without having to sacrifice profit. The second was to retain a chance of profit even in bear cycles.

The overlay: a friend from the futures world

Obviously, these two goals cannot be achieved with a pure long-only approach. Finally, the solution was found in FTC’s core competence field – systematic futures trading. FTC had already been using a short-term non-trend-following system specifically for stock index futures since 2008, and after extensive testing it proved an almost perfect partner for the original trend-following system employed in FTC Gideon I. The futures system has an average holding period of around three days and is uncorrelated with medium to long term trend followers. The system uses a combination of mean reversion and momentum signals and has been used as an overlay in FTC Gideon I since February 2009. In summer 2009 we took a second step, supplementing the overlay with another strategy from our futures funds. This tries to benefit from intraday movements in the most important US index futures, and is even more short term, with an average holding period of only 1.5 days.

Overlay as an element of risk control

The derivative overlay will continue to be developed and – possibly – expanded. The first few months in which the fund performance of FTC Gideon I reflected the combination of the original active fund-of-funds strategy and the new overlay were already impressive. These data are not representative yet, but they do show desired effects which we expect to continue in the future:
The correlation between the original fund-of-funds component and the overlay between February and August based on monthly performance was 0.08, in the uncorrelated target range, and each component delivered positive earnings. However, the fund’s performance in these seven months was only a trace higher (0.3 per-centage points) than that of the fund-of-funds component by itself. This is also within expectations, given that the derivative overlay is primarily designed as a risk brake rather than a performance turbocharger. To put it another way, its function is to make the entire product more intelligent, faster and more robust.

The catastrophic year 2008: While MSCI World Euro (red) lost c. 39 %, Gideon I protected its capital against a similar loss. Historical simulation shows that the overlay (blue) would actually have made a positive year possible.Sources: Bloomberg, FTC database

The overlay: a friend from the futures world

Obviously, these two goals cannot be achieved with a pure long-only approach. Finally, the solution was found in FTC’s core competence field – systematic futures trading. FTC had already been using a short-term non-trend-following system specifically for stock index futures since 2008, and after extensive testing it proved an almost perfect partner for the original trend-following system employed in FTC Gideon I. The futures system has an average holding period of around three days and is uncorrelated with medium to long term trend followers. The system uses a combination of mean reversion and momentum signals and has been used as an overlay in FTC Gideon I since February 2009. In summer 2009 we took a second step, supplementing the overlay with another strategy from our futures funds. This tries to benefit from intraday movements in the most important US index futures, and is even more short term, with an average holding period of only 1.5 days.

Overlay as an element of risk control

The derivative overlay will continue to be developed and – possibly – expanded. The first few months in which the fund performance of FTC Gideon I reflected the combination of the original active fund-of-funds strategy and the new overlay were already impressive. These data are not representative yet, but they do show desired effects which we expect to continue in the future:
The correlation between the original fund-of-funds component and the overlay between February and August based on monthly performance was 0.08, in the uncorrelated target range, and each component delivered positive earnings. However, the fund’s performance in these seven months was only a trace higher (0.3 per-centage points) than that of the fund-of-funds component by itself. This is also within expectations, given that the derivative overlay is primarily designed as a risk brake rather than a performance turbocharger. To put it another way, its function is to make the entire product more intelligent, faster and more robust.

Model calculation

The most interesting result of all the ex post tests with the overlay in FTC Gideon I came from the analysis of the catastrophic year 2008. In this environment, the trend-following fund-of-funds strategy identified hardly any investment opportunities – it was predominantly weakly invested or entirely out of the market, and most of the few buy signals there were proved to be losers. If we had been trading at least the first overlay component, the combined performance in 2008 would have been over 10 % according to our calculations . This result is naturally also the most annoying – firstly, because it is purely hypothetical, and secondly because the overlay was not ready for use yet at that time.

Seen on a long term basis we expect the new system composition in FTC Gideon I to produce a significant improvement in the risk-return profile of the fund. Specifically, the following (positive and negative) effects can be expected:

+ Performance similar to the stock market with further reduction in downside risk over the period
+ Even more significant market outperformance in bear cycles, with a chance of positive returns
+ Reduced vulnerability to losses in market cycles where trend-following strategies typically deliver poor results (e.g. prolonged sideways markets)
- Possible underperformance in time frames which are ideal for trend-following strategies (particularly prolonged rallies)

All things considered, FTC Gideon I presents itself even more attractive than ever to all investors seeking stock exposure but trying to avoid the risk of heavy market losses as far as possible.

Legal Disclaimer:
This is a market letter within the meaning of the 2007 Securities Supervision Act. Every investment involves risk. Prices can rise and also fall.
The information was compiled by FTC Capital GmbH with the greatest possible care from sources regarded as reliable. Nevertheless, FTC Capital GmbH does not accept any liability or give any warranty for the timeliness, accuracy, completeness or continuing availability of the information provided in the present document or sources of information.
FTC Capital GmbH reserves the right to change or supplement the information provided at any time.
The contents of the present document are for information only and are specifically neither an offer nor a recommendation to buy or sell. They do not replace individual investment or other advice. Any specific investment should be made after seeking personal advice.
FTC Futures Fund Classic, FTC Futures Fund Dynamic, FTC Commodity Fund Al-pha, FTC Gideon I and Global Fund Selection Growth may be offered publicly in Austria. FTC Gideon I may also be offered publicly in Germany. Units in the funds listed above may not be offered publicly in other countries.
Warning: information on prices of the funds listed here relates to the past. Figures for simulated trends in prices relate to simulation based on past price trends. Past price trends are not a reliable indicator of future results. Figures for price trends do not include issue fees. The FTC Futures Fund Dynamic is quoted in USD, and yields can accordingly rise or fall due to currency movements.
The current prospectuses published for the funds listed in the present document together with any changed or supplemented information are available without charge from FTC Capital GmbH.
The content and structure of the present document are copyrighted. Information or data, and specifically text, parts of text or graphic materia,l may not be duplicated or distributed without the prior permission of FTC Capital GmbH.

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