Fri, 10/03/2006 - 07:00
Ex-Trout Trading researcher Aaron Schindler spoke to Hedgeweek about the strategic thinking behind his Schindler Fund.
After learning to trade the futures markets from Monroe Trout, Aaron Schindler ventured on his own with the creation of the Schindler Fund. A 204% return in the four years since inception indicates he learned his lessons well. As a former physicist, actuary, and researcher for Trout Trading, Schindler brings a systematic and quantitative approach to futures trading.
HW: What is the background to the fund?
AS: The Schindler Fund was launched on September 10th, 2001, the day before the terrorist attacks. We went long the Nasdaq 100 Futures that afternoon and the next morning had an unexpected test of our risk management plan. We recovered from that initial loss during the last couple weeks of that September and have gone on to be profitable ever since.
I am the founder of the managing company, Schindler Trading, and the fund has assets of USD 2.4 million.
HW: How and where do you distribute the fund? What is your current and targeted client base?
AS: With a low USD 20,000 minimum investment we are making the fund accessible to both retail and institutional investors. Investments are made directly through Schindler Trading and the fund is open to investors from all countries. Interested qualified investors are invited to visit www.schindlertrading.com for more information.
HW: What is the investment process of your fund?
AS: In the Schindler Fund we trade only futures and options on futures. This gives us good liquidity and allows us to offer the possibility of monthly additions and redemptions to our investors without any lockup. It also results in preferred 60/40 tax treatment for US taxpayers and none of the unrealized capital gains issues that funds trading equities have.
We are currently trading 11 strategies. We trade the S&P 500, Nasdaq, Russell 2000, Dax, Eurostoxx, and Nikkei equity markets, the US Treasury Note and German Bund interest rates, the Euro/Dollar exchange rate, and gold and oil. Most of our strategies are short term with a 1-3 day holding period. We use a combination of trend-following, sentiment, and intermarket indicators.
Our strategies are entirely systematic and, in fact, the computer automatically executes most of our trades. The computer watches for trade triggers around the clock and executes trades on electronic exchanges whenever it sees a chance for likely profit.
HW: How do you generate ideas for your fund?
AS: Before we trade a strategy it goes through rigorous backtesting. We divide our backtesting data into insample and out of sample datasets and develop strategies using the insample data. Only when we have the strategy finalized and ready-to-go do we test it on the out of sample data as a final check to be sure we aren't curve fitting. If the strategy tests profitably on the out of sample data with conservative transaction cost assumptions, then, and only then, will we trade it.
We've gotten strategy ideas from many sources -- other traders, magazines, books, economic theories, newspaper articles, etc. Unfortunately 98% of the indicators we test turn out to be worthless. It is a rare and wonderful day when we find an indicator that withstands rigorous statistical backtesting. Lately we've been having the most success with intermarket indicators -- trading one commodity based on what is happening in another market or index.
HW: What is your approach to managing risk?
AS: We target a standard deviation of monthly returns of 8%. This means that with a 2% positive expected return per month, 95% of the time our monthly return should lie between -14% and +18%. For an annual return the corresponding range is -28% to +83%.
Our strategies go both long and short in their respective markets and are actually out of the market without a position a majority of the time. Only when we see a statistically significant chance of profit do we take a position and put our dollars at risk.
HW: How/against what do you benchmark the performance of your fund?
AS: The Schindler Fund is uncorrelated with all asset classes and every other hedge fund we have compared it with. This means a small allocation to the Schindler Fund can actually reduce an investor's portfolio volatility while improving returns. The Schindler Fund is an absolute return fund and any positive return translates directly into positive alpha for our investors.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
AS: Our annualized annual return has been a solid 32%. The annual returns have ranged from +2% to +97%. Through the third week of February we are already up over 20% for 2006 and off to a great year. These results are entirely within our risk parameters and we are happy to have made a lot of money for our investors.
We continue to research new strategies and look for opportunities in new markets, but other than incremental strategy additions or updates we do not foresee any style changes.
HW: What opportunities are you looking at right now?
AS: Our current research is in the area of intermarket relationships and how they can be used to forecast exchange rates. We hope to add one or more additional currency futures to the markets we trade in the next year.
HW: What events do you expect to see in your sector in the year ahead?
AS: A continuing development in the futures markets is the evolution from open outcry, pit trading to electronic exchanges. We are wholeheartedly in favor of this transformation as we get better execution prices and have lower transaction costs in the electronic exchanges. If the CBOT agricultural products and more of the NYMEX energies go electronic, the transaction costs may come down enough to make these markets tradable for short-term strategies like ours.
HW: How will these changes/future events impact on your own portfolio?
AS: Every dollar we save in lower commissions and better trade execution translates directly to the bottom line for our investors. As transaction costs come down it makes our current strategies more profitable and makes additional markets attractive enough to begin trading them. Over the past year we've added gold and oil strategies as these markets became more electronic and we hope to add additional markets in the future.
HW: What differentiates you from other managers in your sector?
AS: Our non-correlation with other hedge funds and managed futures funds clearly show that we are doing something different. Many managed futures funds are long term trend followers and one is as good as another. Schindler Trading is different. We have a short holding period and are focused on a small set of strategies. An investor can get true diversification even just within the managed futures space by including the Schindler Fund.
HW: Do you have any plans for similar/other product launches in the near future?
AS: We are putting all our best ideas into the Schindler Fund and will continue to do so.
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