Opportunity and the Control of Risk

Originally published in the Brandywine Asset Management Monthly Report.

Profit opportunities are not spread evenly over time. The key to successful trading is to capture profits when opportunities arise and to protect those profits when opportunities wane. This is illustrated by Brandywine’s historical performance.

The Brandywine Symphony program’s fundamentally-based (yet systematically-applied) trading strategies look for opportunities on a continuous basis. When the program launched in July 2011, many of Brandywine’s sentiment and event-based trading strategies recognized and captured opportunities that resulted from the stock market, currency and interest rate turmoil that dominated the second half of 2011. The result was a 6-month gain of +7.90% for Brandywine’s Symphony and +37.88% for the more aggressively-traded Brandywine Symphony Preferred Fund. This strong performance was especially beneficial to our investors due to the fact that both stock markets and other managed futures traders suffered losses over that same period.

Opportunities for Brandywine’s global trading strategies have been more limited during 2012. But Brandywine has responded well to this environment by preserving the profits earned during 2011. And not only has Brandywine preserved profits, but reduced volatility at the same time. This is exemplified by the fact that our average daily volatility over the past two months has fallen to just 2/3 of our longer-term average. This is also reflected in our decreased trading activity as our trading strategies wait for profit opportunities. (This is another characteristic that separates Brandywine from trend following managed futures traders, which tend to increase their trading frequency during losing periods, as their positions get “whip-sawed.”)

So where does that leave us now? One way to answer this question is to look at the historical tested performance of Brandywine’s Symphony program and estimate when the next set of profit opportunities are likely to appear. One way to measure this is to look at the average length of “quiet periods” such as the one we have been experiencing. Since 1999, the average quiet period has been 168 trading days. The current quiet period is in its 152nd day. While this doesn’t mean that we are on the brink of a new round of profits, it does put the current period in perspective.

A second way to view current opportunity is to compare Brandywine’s actual performance to its target performance. Brandywine’s Symphony program is targeting 12% annualized returns with an 8% annualized standard deviation. After performing above target from July 2011 through February of this year, the 3 month drawdown in March – May brought the performance to 7% below trendline. This is now in line with the 7.5% average of the 12 largest underperforming periods over the 12 year test period starting in 1999.

Brandywine’s aggressively-traded Symphony Preferred Fund targets returns and risk that are between 3x and 5x that of our standard Symphony program. As illustrated in the chart below, the Fund has performed below target since April. While we must state that PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE, research indicates that our current drawdown is once again entering the range in which to expect a rally.

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