Dear Investor,
We hope that this message finds you all well as we wrap up the first quarter in 2011. There is so much to report on this past month that we do not know how we will be able to make this update short, but we will try our best to. This is a very important update, in particular on the brokerage front which pertains to everyone so we encourage all existing and potential investors to read through this in its entirety.
March was one of the craziest months we have witnessed in a long time both in terms of volatility and unprecedented events. Without getting into too much technical detail right here, this past month we witnessed an Aussie/Kiwi 20 year high, Swiss SNB interventions, then to make matters worse there had been the massive earthquake followed by a tsunami in Japan. As we mentioned mid-month, our heart and deepest sympathy goes out to all the people, and many of our clients who are in Japan Japan
We encourage both our current and prospective clients to read through our update in its entirety so that everyone is up-to-date on our latest developments. As always we report the good, bad, and the ugly, we don’t hold back on anything, and we pride ourselves in explaining things as openly and honestly and clearly as we can to our clients.
Our returns for the month of March at all of our brokers are as follows…
| | Brokers | |||
| SYSTEM | INOVATRADE | SPAREN FX | OFM | |
| Precision FX | -4.95% | -6.11% | - | |
| Chrome FX | 12.67% | -18.10% | - | |
| McLaren FX | 10.12% | 10.05% | - | |
| Vega FX | 0.23% | - | - | |
| March Average | 4.52% | -4.72% | - | |
* Account Discrepancies – Once again, please remember that if your returns for a given month do not match our posted returns take note that our numbers are from the 1st of each calendar month, to the last trading day of the calendar month. If you have invested in the middle of the month, your numbers may not match ours and could vary significantly. In addition to this, if we have open trades at month-end, we calculate our return on the current balance that day at midnight server time, NOT the floating equity. So open trades which have not realized their PnLs yet will be carried into the next month.
* Please keep in mind that we are now trading some of our systems at multiple different brokers. We will always have discrepancies between different brokers no matter who they are. For certain systems we have also noticed small discrepancies between larger investor’s accounts (100K+) and smaller investor’s accounts (<5K). This often has to do with the broker’s min position sizes and how smaller trades are distributed with the allocation software in our MAM/PAMM. Please take note that while our returns are calculated from 1st of each calendar month to the last trading day of the month, at Inovatrade brokerage our commission period (the period in which high water mark performance fees are calculated on), is from NFP to NFP. NFP is the non-farm payroll and is the first Friday of each month.
Our complete Performance Tables have also been updated with the following statistics of interest (now broken down by brokerages) on this following page: http://cayoflow.com/performance.html
MONTH-END TRADING RECAP
1. Precision FX – PFX, our “bread and butter” system had a losing month this month. We hate it when this happens to this system the most, but it is inevitable that it will encounter losses from time to time. This is the reality of the FX market. It is coming off a good 10 month stretch of continuous profits, so these down months are bound to strike from time to time. Overall we are satisfied with how it handled the losses, and managed the risk. The drawdown is nothing we cannot stomach for the gains this normally pumps out. We will spare our readers the drawn out details of what caused the draw downs this month as we updated our investors in this system directly as we encountered them last month. Historically speaking March and April have always been the toughest periods for PFX. We are unsure the exact reason why, and it has always been a bit of a mystery. We think it could be the transition from winter to summer, or the DST hour shift, as our scalping is very “time dependant”. But in the same breath, our system is very different now, and we did witness a perfect storm last month, and markets are very very different now than they were 1 year ago. So it is hard to predict when our down months will hit and when we will get into a nice long profitable run. One thing is for sure though, and that is that we will be trading this strategy for a long time. It will weather any storms it is faced with when it needs to, and will get into some nice winning stretches as well. It is very robust! The broker discrepancy on this system was not so drastic last month thankfully. It is off to a slow start this month in April, but we expect to see it gain some traction as we get into the month and we will strategically dial things up slowly since we are still on a somewhat low risk mode from last month.
2. Chrome FX – CFX had one of the craziest months in a long time at one of our brokerages (Sparen FX). We have a huge discrepancy between brokers here this month. We have a very nice profit at Inova, and a large drawdown at Sparen. This is very frustrating to see since it is the exact same system trading at both brokers. But we had a rare unprecedented event this month which caused the discrepancy (and unfortunately not much we can do about it), and this system really felt the nuclear melt down more than any during March.
This was a very unfortunate situation this month. Typically the scalping component of Chrome has stop losses no higher than 38 pips. It averages slightly when positions lose ground quickly, and the original stop losses are then dynamically adjusted. When Japan
Our full team (over 6 of us) receives a text message automatically whenever we get a platform error like this, but by the time we got to our server, the market had already moved over 200 pips past our SL (which should not have been over 38 pips) in less than just a few minutes. We went into damage control and managed the trades manually. This was very frustrating for us. We had argued with Sparen back and forth about a reimbursement for this, and normally they do without question when at fault, but they have been firm on this one, that it was out of their hands, and when things like that happen they are not accountable as it is a rare occurrence and was ultimately a result of their LPs and software limitations etc.. This could have been a good month at Sparen otherwise if it were not for this event. Luckily at Inovatrade we did not encounter this problem and all SLs were honored. Again, this is a very rare occurrence for something like this to happen. And we are reminded that our broker does not have to ever honor our SLs due to technical problems. We need to try our best to be prepared for such scenarios when market events like this occur and make sure we have back up plans in place and contingency plans for when technical problems do strike. While this loss was a hard pill to swallow when we had a nice double digit profit at our other broker, we realize that it could have been much worse if we did not have our back up alert system in place. Needless to say our high water marks are adjusted at Sparen for Chrome, and there will be some making up to be done there. Thankfully none of our other systems at Sparen were caught in this bottle neck.
3. McLaren FX – McLaren FX had a fantastic month with a nice late finish and continues to be a solid performer into April. The sleeping giant awakens! This system has banked nearly 20% in the past 2 weeks alone! Ironically this system seems to perform best when our scalpers are struggling, and makes for a very nice diversification split. Many clients mention to us how sometimes boring this strategy is when compared to our scalpers, but most investors understand that it’s the results that matter! Not the activity. This system seems to be in reverse correlation to our scalpers, and we can never stress enough that our clients should be diversified across all of our systems. In fact, we are going to explore the option to make one PAM with all of our systems trading it at once so the diversification is automatic. But until then it is up to each client to diversify their funds on their own across all of our systems. We have found historically that this system does better after the DST shift in time settings as well. McLaren is leading the pack as we enter into April, and we hope this trend will continue throughout the month. The best news however is that we have new and revised and optimized settings for this system just around the corner, as well as a new set of sub-strategies in the works! All of which look very promising at this point. We only see this strategy improving over time, and the lead developer behind this is truly on top of his game and both a professional trader and programmer in every aspect. We are proud to have this strategy as part of our portfolio of forex systems.
4. Vega FX – Vega FX had a rather monotonous month without any huge gains or losses. Since February was Vega’s first losing month in over 1 year, we wanted to play it safe moving into March until we saw that market conditions were improving for this particular strategy. So we did the responsible thing and kept risk quite low throughout the month. It ended the month in positive ground, just slightly over break even. Since then we have witnessed the strategy gain some ground back into its normal routine, and we will strategically increase risk when we feel it’s safe to and with mutual agreement from the developer. It has also been a good performer into the early days of April and we are looking forward to a good remainder of the month.
INFORMATION AND NEW DEVELOPMENTS
1. Broker Discrepancies and Other Broker Issues (VERY IMPORTANT) – Perhaps some of our biggest news this month is on the broker front.
Sparen FX: We have received word this past month that our oldest and longest running brokerage Sparen FX is going to be closing down their retail operations, and working solely with an institutional business model. This was a big decision on their part, and this is going to affect approximately 70-80% of our current clients trading at this brokerage. Existing retail accounts will eventually be closed down and refunded. As there is too much to get into during this update, we will address all current SparenFX account holders collectively later this week with regards to the processes and expectations during the closure. Sparen will also be addressing clients as well. We are working on structuring a very nice transition plan to transfer clients to our other existing and new brokerage firms and we will work with all clients individually to ensure there is a very smooth transition process in place. We will be trading as normally up until this transpires, and nothing will change until then. We will have a grace period to complete things so there is not a mad rush. Again we will address Sparen account holders later this week directly with further details as there will be some paper work eventually needed to be completed to get the process in order.
Inovatrade: Not much to report here. Things are working great as usual. Support continues to improve. Their platform is working flawlessly, and we have a very promising future with this broker. For clients wishing to top up their accounts, please take note that the banking information for them has recently changed. They are no longer using Suntrust bank as their deposit bank and have moved on to using various European banks for accepting deposits. Please inquire with them before sending funds in to ensure you have the latest wire instructions which include Commerzbank and UBS as options. This will be an option for Sparen account holders to eventually move to.
OneFinancialMarkets: After a very long testing period, we have finally decided on a new broker to begin our partnership with, and the firm that passed our test is One Financial Markets. They are a very large financial firm based out of the UK USA
2. Possible Change to Performance Fee Periods - Some of our clients have written us previously suggesting a change in our performance fee periods from monthly to quarterly. As we mentioned in our last update we are always open to such suggestions from our investors and encourage this kind of feedback. We have looked at this very seriously and we may soon implement such an option for investors to switch this period to quarterly as apposed to monthly as early as the start Q3. This is not firm yet, but could be coming down the tube quite soon and we expect to have more details in place as we get further long with preparing for it.
3. Managed FX Longevity – Some of our clients have written into us this month about their experience with another managed FX firm who had a complete margin call of their accounts. Many who had in turn asked us if this was possible with us? While we would like to stand by the true time tested quote that “anything is possible”, we would feel safe to say that although anything is possible, something like this would be very very rare. Not only do we trade with hard stops, and inner fixed stops, but our strategies in general have safety features and good risk and money management built right into their core roots. Should worst case scenarios happen like what we have witnessed this month with Chrome at Sparen FX (a brokerage technical problem) we have safety check points in place to respond and send everything into damage control to minimize any wounds from worsening. As we know there are many moving parts in the FX business, from PAM accounts and MAM accounts to trade platforms and broker politics. Back up plans, safety nets, and adaptability are the only ways to survive over time. Without responsible trading, and our safety protocols in place we would have been margined a long time ago like many other firms we know have. Our key focus is on longevity above all else, and we truly want to be one of the very few FX firms with a long and extended history of managing 3rd party funds. We (in Forex in particular) are very few and far between.
A colleague of ours sent us an interesting article this month on “the truth about hedge funds”. It was a very interesting read about how short lived many of them are. In fact it stated that more than 3000 hedge funds have opened and then closed shop in the past 5 years alone! We find this quite astonishing. And after reading the article, we found many similarities to the managed forex industry.
FX Managers also come and go. Like HFs, the managers often take big gambles. If it pays off, they make big money. If it flops, they close up shop and move on. “Heads they win, tails they flip again”. There is a lot of “churn” in the managed FX industry just like the hedge fund industry as depicted in the article. But this seems to be a very common story that we are unfortunately somewhat familiar with seeing ourselves in the past. One day a fund is taking big bets with borrowed money. The next a crisis strikes, markets go ballistic, accounts get margined, and the fund managers disappear. Of course for every few bad ones there are some good ones as well. The key to spotting them is to look for the ones who make it a priority to protect capital, and focus on long-term gain, instead of shooting the lights out each month.
We are doing everything in our power to ensure we are not, and will never be a “fly by night” firm, or a margin call firm. Clients who have been invested with us in the long term, and who follow our advice to diversify amongst all of our systems should do very well in the long term. Having realistic expectations (understanding that forex is NOT a get rich quick scheme – in fact it is the polar opposite), diversifying your assets, and understanding that we may need to weather a few storms in today’s crazy market environment is paramount to long term success, and the key to managed fx longevity in our collective opinion. We had many inquires about this this month so wanted to address it.
SUMMARY AND GOALS
Most of our biggest news this month was on the brokerage front. As you can see there are many changes taking place, some which will require further follow up with investors, and others which involve new relationships at new brokerages. We are constantly seeking out the best trade environment to provide us with the best technical conditions and the best custodianship for our clients. On the trading front, as some of our systems may from time to time go through periods/cycles where they struggle with market conditions, the diversified approach always keeps the “boat afloat”. We don’t claim to know it all, but this has proven itself to be the best time-tested method to mitigate the risk of overall loss. The majority of our clients are well diversified with us, but to those who are not we highly encourage this. As stated earlier, our primary focus is on longevity above all us, and the steady and gradual growth of our equity has been best achieved through proper non-correlated diversification.
We are looking forward to heading into a profitable month ahead of us in April. We will also be starting our Q1 quarterly audit process next week too. As always we will do our best to communicate with our investor base whether in the form of monthly updates, or on a “per needed” basis as we go through the month on any issues which may present themselves. Please visit our website and blog (http://cayoflow.blogspot.com/) for frequent updates and newsletters (note: we are always adding new content to our website) and do not hesitate to contact us at any time should you have any inquires or concerns you would like to discuss with us. We are always here for our clients.
Thank you to all our current investors for your trust once again in trading with us.
Warm Regards,
The CayoFlow Team
