Dear Investor,
We hope that this message finds you all well as we enter into the month of July. This past June was again mixed with some good and some bad, and also some important news. But before we get into any of that, we need to address the trades made on the Vega FX account during last two days at OFM brokerage for all those currently invested or those following and tracking our trading. Our clients will have witnessed a +100% return from Sunday night to Monday evening. While this was a pleasant surprise, please take note that the returns were not supposed to be that prominent. Those of you at Inovatrade did not realize this same return, but realized the 10% return in the same period, as should have been realized at OFM brokerage. We just finished our updated strategy on Vega FX last Friday, which is now completely “broker friendly”. This went into effect on Sunday night. Now, at the same time we also had our new custom trade copier completely finished for us last week as well. This discrepancy was the result of us incorrectly setting up the coefficient in the trade copier between brokers. Therefore OFM received 10x the position sizes as it should have on two very high profit trades. We noticed this right away from our text alerts, but also because our brokerage notified us as well. The trades went into positive territory quickly, and we managed the trades manually, moving our SLs to break even and letting the trades ride out. The result was a very hefty profit at OFM (100%) and a very good profit at Inovatrade (10%). Since then we have banked another 10% on top of this. But we revived many emails about this large gain at OFM, so decided to address you all here before you write into us about it. Rest assured, the copier coefficients have been setup properly now, and if this trade did go into negative due to our negligence we would have credited the account out of pocket. So OFM Vega clients have a nice little boost for the month, but please understand this is not something you will regularly see on the accounts going forward (100% in two days) as we do not want to run the system that aggressively. We have more details on the trade copier and Vega updates below.
The disappointing news for June was that it was our second negative average month in a row. This is a record for us where our diversification strategy resulted in a negative average month two months in a row back to back. This has been one of the toughest markets we have witnessed in a very long time, if not one of the toughest to date. McLaren gave back a large portion of its profits this year, and the other systems struggled to some degree to gain some ground. We had some issues with a few trades and our brokers, and also some plain 'ol bad luck, but in the end the numbers are all that matter. The top analysts in the USA have been hit the hardest, and the real smart ones sat out on the sidelines for the past two months. We have witnessed a complete deterioration of technical’s in the markets during the past 2 months, which is a first for us for this duration of time. Markets seem to be getting a little bit more back to normal now thankfully. But it is the summer months, and we still feel that there are a lot of tensions brewing up in the Euro zone and in the US, which we will address more below.
As always, 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. 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 June are as follows…
| SYSTEM | INOVA | OFM | Broker Average | |
| Precision FX | -2.35% | -5.65% | -4.00% | |
| McLaren FX | -18.86% | -18.04% | -18.45% | |
| Vega FX | -10.55% | -2.01% | -6.28% | |
| June Average | -10.59% | -8.57% | -9.58% |
* 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 more than one broker. 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 or rounded 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, our performance fee 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 (broken down by brokerages) on this following page: http://cayoflow.com/performance.html
MONTH-END TRADING RECAP
1. Precision FX – PFX, even with its most recent upgrades had a tough month last month. We cannot be too hard on it, as it performed the way it should have. Much of the losses were due to the eurusd pair causing all kinds of problems for the system. We were fairly heavy on that one pair, and even though the entire system is diversified, it is important to be diversified between pairs and time frames too, not just strategies. Things are looking much better for it so far this month in terms of getting back on track, and we are looking forward to a more profitable second half to 2011 than the first half has been which has been an up and down story lately.
2. Chrome FX – CFX has been merged into the VFX program last month. It never fails that the old Chrome strategies were the most profitable this month. Hindsight is always 20/20 here, and this will be our last month posting about this system since it has now been merged into a final build of the Vega FX program.
3. Vega FX – VFX had a tough month in June for the same reasons as all the systems did. However, it is very important to note that the most powerful module of Vega FX has not been trading on the accounts for some time now. It was not permitted to run properly by both of our brokers, due to the technical nature in which it got into and out of trades. We have been working very hard on this since our broker asked us to turn off that component, and make it broker friendly. We have since completed this, and have a complete standardization on this between our brokers now. This is without a doubt our most exciting accomplishment this year. Rather than get into how we think this is going to be the greatest thing since sliced bread, we will let it prove itself over time. It has a very unique risk/reward and profitable ratio. This additional module has approximately 40% winners and 60% losers on average. But the winners are far larger than the losers. This equates to some incredible growth over time. This R:R is pretty much the polar opposite of our scalpers, which have very high win rates (high accuracy), small TPs, and large SLs. To put it mildly, we are going to be quite disappointed if we do not hit a double digit most months with this now. Rather than have this trade on eurusd only we cut down the risk and diversified it across more pairs including some jpy pairs. Vega investors - put your seat belts on!
4. McLaren FX – MFX our longer term swing system had its toughest month this year in June, again from the same reasons that were causing most people problems in the markets. Any type of pattern recognition, rule/math based trading, and technical analysis was virtually thrown out the window during the months of May and June. Yes there were brief periods where it was somewhat reliable, but overall it has been a mess. Fundamental analysts came out on top the last few months. McLaren which is one of our simplest and most old school long term strategies pretty much hit its threshold in losing trades this month. It trades on a much higher timeframe than our other systems, and was not able to gain any footing in the longer term pull backs in large trending movements that the markets usually exhibit. Things are also looking better for this system so far this month as well and potential changes are just around the corner with this one. We needed to focus most of our efforts on Vega until it was completed. McLaren is next in line.
INFORMATION AND NEW DEVELOPMENTS
1. Markets – In general the past two months have proven not only a deterioration of technicals, but also a worsening outlook for the global economy which is weighing heavily on risk assets. Both the US markets and the Euro zone are jittery after an extremely volatile end of QE2 in which both regions’ escalating debt crisis has been peaking and constantly at centre stage.
While the US debt crisis is in an entirely different league of its own altogether, the majority of the volatility last month came from Greece and the Euro zone in general. There have been some measures drawn up in June, but we do not see this as anywhere near the end to the volatility or a solution for Greece. Simply put, it's impossible to see how loans on top of more loans are going to create a long-term solution for Greece. Instead, the odds are rising quickly that Greece will need to do what Argentina did a decade ago – default on it’s debt. Right about now, there are many Greek citizens that would likely welcome that move, although the banks would not at all, which has been causing much of the market pressure.
The jury is still out on whether most of the mistrustful governments can agree on the fine print for a Greek debt reduction program that could help with economic recovery, or if doing so is just going to literally double costs to the tax payers there, and just prolong an inevitable default. All we know is that we hope it goes clearly one way or the other and doesn’t just keep meandering on like this for months and months on end, as it has been wreaking havoc on the forex markets. That being said we do believe that the worst of it is over in terms of volatility (knock on wood). As always we are paying extra attention to this, and it is probably the most notorious time that we have paid such close attention to market fundamentals as apposed to just the technicals.
2. Brokers – We don’t have much to report on the broker front besides the regular complaining we normally do about them in general, so we will spare you all from that for once. For the most part things have been working as they should with our brokers. It has just been the markets that have been uncooperative. We did notice some glitches at OFM this past month which were addressed and handled by OFM for the most part. Inovatrade has been working great, and their service has improved greatly with some re-organization taking place there over the past month.
On the Sparen retail exit front, obviously this has taken longer than they have anticipated. We spoke with the director Mark Rice last week about this, and he is anticipating having all of our clients completely wrapped up in approx 3 weeks from now. Again, they have always been slow, so this is not much of a shock to us, but we will be keeping tabs on the exit process to ensure it gets underway and that all of our clients are taken care of. Our MAMs are apparently the last on the list. Many of you have written us about being asked for additional KYC (know your client) disclosure information by their accounting/compliance team. If asked, please provide the necessary information when requested to help speed things along for everyone. Some of our clients who have been with us for over 3 years there did not even need a piece of ID at that time to open the accounts. They just had to give the ID number (this included us too). They have tightened compliance quite a bit and need information for every account holder on file before they can clear the accounts, so yes this is legit if requested and please provide the documentation asked of you.
3. Cayo Live Manual Trader – We had a live manual trader we were working closely with to bring to the table for those who preferred a fully discretionary trader over the auto systems. We admit for the first time in a long while (with the way the markets were behaving) we were seeing the positives of discretionary trading over systematic trading and considered offering his services to our clients as a place to diversify. However, this past month, he ended up breaking his own rules and lost 40% of our live test account. This was very shocking to see with 1 year + of a great track record averaging approx 8% per month. This was disappointing, but not surprising. Our experience working with manual traders has not been that positive. While there are many good ones out there, most are emotional (get tired, stressed, and worried), most break their own rules, and in general it’s very difficult to work with them on a long-term basis. We are sticking to what we do best, and really do believe our hard work is going to pay off, and the recent market conditions have been a bit of a blessing in disguise to motivate us to work around improving things.
4. Monthly to Quarterly Performance Fee Periods and Commission Reduction – While we had this quarterly plan pretty much nailed in stone, after much discussion with our programmers and developers over the past few weeks, they preferred to keep this on a monthly schedule, at least until the end of the year. They have been doing an immense amount of programming and testing and research and development especially during this past month and a half, and would prefer to keep some performance related cash flow flowing each month to help in offsetting some of these costs. As it stands now our performance fee high water marks are pretty much on a quarterly basis anyways, but we hope that that is set to change. We will move these updates and commentaries to a quarterly schedule (or keep them brief each month), but performance fees shall remain on a monthly schedule at least for the remainder of the year. We have some catching up to do with the high water marks so that will keep us busy and motivated in the short term. In terms of the transactional commissions, we have just signed our reduction change agreements with one brokerage last week, and will with the other this week. The first reduction right now will be $10 per million, and we have commitment for a further reduction over time as well.
SUMMARY AND GOALS
This has been an unprecedented occurrence for us, whereby our diversified strategy of multiple systems had a negative monthly average two months in a row. This has been a major blow for us. But in the same breath it is giving us a mega dose of motivation. One thing is for certain, and that is that no one works harder on improving their trading systems than we do! We may not hit home runs every month, but we are working our tails off to ensure we are improving on things where they are needed and to ensure we have some home runs ahead of us. This is our true passion and we have made some major major breakthroughs with the Vega system this past week after many many weeks of working on it and testing it, and we believe we have something very special and we are going to let it show itself off on its own with the numbers since nothing else really matters.
We are always working on tweaking and perfecting things as much as we can. We have an enormous amount of contacts, support, programmers, traders and partners all making up our team and we are truly blessed to have such a good group close to us. While these past two months have been quite frustrating for us, we understand the realities of this business (we can’t win ‘em all). But we accept it for what it is, and put our heads down and continue to keep on improving as best as we can so that we will be here for a long time and will continue to make our clients and partners and ourselves profits. As we have mentioned in our previous updates, some of our systems may from time to time go through periods/cycles where they struggle with market conditions like we are seeing now. This will not be the last time that we will have to contend with periods of poor performance, but by keeping our risk in check our drawdowns will not be devastating and we will always be able to get back in positive action as we are seeing so far this month.
We are looking forward to heading into a profitable July. 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.
Warm Regards,
The CayoFlow Team
