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Eckhardt Trading Company

Fifty years of evolutionary trading

Eckhardt Trading Company (ETC) founder and Chief Research Scientist, Bill Eckhardt, is a founding father of the CTA industry, active since its birth in the 1970s. ETC’s unique strategy and process fuses Eckhardt’s hands-on trading experience with distinctive, and sometimes iconoclastic, academic and philosophical foundations – and rapidly evolving proprietary research.

ETC’s entirely technical, volatility trend-following and short-term trading strategy has a differentiated return pattern. ETC has not made a conscious effort to decouple from peers, as the firm does not pay attention to what competitors are doing. But ETC has produced a different return profile, seen markedly in the first two months of 2018. Having made c.9% in January, ETC’s flagship Evolution strategy only gave back c.3% in February, which was the second worst month ever for the SG trend-following index. “ETC’s shorter term trend, non-trend and countertrend models, helped to soften the blow of losses from its medium-term trend models,” says COO, Rob Sorrentino.

ETC was exclusively a volatility trend-follower until 2012. ETC’s correlation to trend-following indices is pretty stable at 0.6 to 0.65. “Correlation is of limited value however, as it measures only a common direction, and not the extent of the direction. Correlation masks substantial dispersion in returns,” says Sorrentino.

Longer lookbacks also show a performance pattern that is somewhat atypical for CTAs. Traditional trend-followers’ best years of the past ten were 2008 and 2014 whereas the best two for volatility trendfollower, ETC, were 2007 and 2010. Focusing on 2007 and 2008, ETC started to pick up on the expansion of volatility in 2007 moving into early 2008, and then played late 2008 very differently from many other CTAs that made most of their returns in the fourth quarter. ETC made the bulk of its profits in the first half, before dialling down exposure later in the year to an average margin of 4% and 350 round turns per million. The tendency for CTAs to perform well during “risk off” periods, such as late 2008, has contributed to the term “crisis alpha”. Data-hungry ETC are cautious about whether there is enough data to be confident about this recurring.

ETC’s perspectives and performance come from diverse sources.

Systematic trading with safety nets

The first 20 years of Eckhardt’s career were spent proprietary trading in Chicago. This experience inspired his lifetime’s work of creating his Science of Trading, which is the DNA behind the firm’s 27-year track record.

Eckhardt had been researching trading systems since his teenage years in high school. He and Richard Dennis developed the “Turtle Trader” programme that has spawned many successful CTAs; the two of them jointly received the 2016 Pinnacle Achievement Award, presented by CME Group.

Having started trading with discretion in the style of a trend-follower, Eckhardt set up a small account following a mechanical system, and found it consistently outperformed his discretionary trading, year in, year out – in mediocre years, and in banner years. “The system out-traded me, partly because my trade sizing was based on optimism, pessimism and recent mistakes. Trading mechanically protects against all of that so it is not so emotionally wracking,” he says.

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