Protec Energy is a fundamental relative value CTA who has generated consistent performance through a variety of difficult market environments for managed futures trend followers – 47% in 2010; 63% in 2011; 11% in 2012 and 17% year to date. (Returns reported are from a direct managed account falling under NFA reporting guidelines which means performance is reported net of all fees and expenses.)
Protec is a niche CTA trading long volatility option spreads in energy markets – crude, gas and diesel. The CTA’s public track record as an NFA registered CTA only dates back to 2010, but the CTA has a much longer track record trading as a hedger in the physical distribution markets. Thus, when this CTA ranking is considered in the algorithmic P (A|B) Analysis, they receive a penalty for a short track record, highlighting the need for qualitative due diligence to accent the algorithmic CTA rankings.
Co-Founder Todd Garner has over 25 years experience in physical energy markets, 14 of which have been operating Protec Fuel Management, an energy procurement distribution firm. Prior to Portec Mr. Garner held senior positions at the Williams Companies in Tulsa, Oklahoma, including Vice President of Risk Management. Mr. Garner’s trading partner, Andrew Greenberg, was a floor trader at the NYMEX where he was manager of ConAgra’s crude oil and refined products operations.
This fundamental experience plays significantly into Protec’s trading strategy. “When people see things that don’t make sense in the energy markets, that presents opportunity,” noted Mr. Garner.
Protec utilizes a “reversion to the mean” options trading strategy. Using fundamental analysis, Garner and Greenberg determine a fair value pricing model for physical crude oil, gasoline and diesel fuel. When markets dislocate from Protec’s definition of fair market value, they place a trade in anticipation of the market reverting to the mean, returning to their fair value analysis.
Protect executes their directional trades using options spreads so as to limit risk on each trade. Typically a trade is long volatility, buying the closer to the money option and selling the further from the option. While this strategy can limit upside, risk is limited to. “We generally like to risk no more than 5% of our total equity at any one time,” Garner said. In fact the CTA’s worst monthly drawdown was 5.02% in September of 2012. The CTA is considered a low delta strategy due to the options spread execution. Had the CTA employed the same directional technique with futures contracts the rate of change – and related volatility and drawdown statistics – might be expected higher.
Many of Protec trades are seasonal. The CTA has generally been long the energy complex from July to September due to winter seasonality, hurricane season, refining turnarounds and the farm harvesting season, which utilizes a fair amount of fuel.
The CTA’s time horizon is typically 30 to 90 days with some trades lasting six months. With just over $80 million under management, the firm typically executes their trades on the energy trading desks of major firms such as Shell. “We don’t like to show our cards to the trading floor,” Garner said.
Market environments in which the CTA is expected to find difficulty would be flat, sideways markets. Conversely, markets where volatility exists, and dislocations occur, this can present opportunity but can be a slippery slope, Garner notes.