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Developer/CTA Interview
Jay Feuerstein
President, Xenon Capital Management LLC (NFA 307932)
Program(s) Developed: Interest Rate Trading Strategy
Interview Date: March, 2007
Interviewed by Frank Pusateri ? President, Adirondack Portfolio Management, Inc.
Xenon (?Xenon?) Capital Management LLC is a Chicago-based registered Commodity Trading Advisor offering qualified investors two trading programs, both of which use a systematic trading methodology that includes trend following, mean reversion and event-driven components. One program trades a diversified portfolio while the other trades interest rates only. The firm and its pool Xenon Partners LP have been granted exemption status under the CFTC?s rule 4.7 and as a result are only available for ?Qualified Eligible Participants?.

Jay Feuerstein, Xenon?s President graduated from the University of Chicago in 1980 with an MBA, and has long been an active participant in the financial services industry. He is a well known author, with publications in Corporate Finance Review, Treasury Risk Management, The Journal of Futures Markets, and Intermarkets Magazine, as well as the MFA Reporter. Over the years he has lectured at industry and investor conferences on risk management and economic theory. Most recently he was a Managing Director/Principal in the Chicago office of Bear Sterns & Co., working with clients in hedge fund, mutual fund, insurance and pension areas.

Frank Pusateri, the interviewer, has been a managed futures consultant and industry leader for over 30 years. He is the president of Adirondack Portfolio Management Inc., a consulting firm that specializes in managed futures.
Frank Pusateri: Why after a successful career in the brokerage industry did you decide to become a CTA?

Jay Feuerstein: I put the blame squarely on my partner, Steve Schnur, who was a young trader at the time. Steve, a sponge for knowledge and trained in statistics at the University of Chicago, was curious about my trading ideas. One day, he asked me if I could codify my trading rules so that he could back-test them. I did, and the results of Steve's back-test were better than either of us had expected. I was at a major brokerage firm at the time, and I showed these results to my superiors. They gave me permission to trade my own money according to my trading rules. During the next two years, my returns, though volatile, amounted to 25 percent a year. I shared these results and the logic behind them with some friends of mine on the trading side, and they, in turn showed the work to a client. They followed my performance for another 10 months, and finally the client offered to seed my CTA with a $1 million account. Although, I had to leave my comfortable job, I made the move to become a CTA in a "New York minute? and I never looked back. The challenge, accountability and honesty of the futures trading profession had captured me, and will likely have me in its grip for the rest of my life. This is the culmination of my life's work.

Frank Pusateri: One of your programs specializes in trading interest rates only. Why did you decide to trade an interest rate only program?

Jay Feuerstein: I have been mainly a fixed income trader since 1981, so I am most experienced with that particular market. Some of my trading rules for these markets I have been using for nearly three decades. For example, my measurement of market divergence is designed to tell when trades have the highest risk and this indicator is as valuable today as it was the first day I used it.

Frank Pusateri: How does your approach to trading differ when trading only one market sector?

Jay Feuerstein: The risk in trading one market sector lies in the fact that all of the positions are highly correlated, such that a "shock" to the market will cause the entire portfolio to go the wrong way. To overcome this I make sure to trade across multiple time frames and use multiple strategies. This way, the portfolio is rarely at maximum leverage. Also, my intra-day model is designed to profit from "events," because it only makes money when the market moves outside of its normal daily range. So, with all of these models scaling in and out, the portfolio is less likely to suffer outsized shocks.

Frank Pusateri: How do you approach risk control when trading only one market sector?

Jay Feuerstein: I approach risk control the same way whether I am in one market sector or 50. The goal is to make sure to hit my target-annualized volatility through the placement of stops and position sizes. My use of stops is self-explanatory. The resizing is more complex. I do this by resizing my positions daily according to the volatility in every market I trade. If the 10-year bond has above-trend volatility relative to the rest of the portfolio, I make it smaller; if volatility there decreases, I make it bigger. I do this for every instrument in the portfolio. When the portfolio as a whole has more volatility, I will make it smaller, too. I will also increase its size when overall portfolio volatility is low. Also, I limit the size of the positions I will take regardless of what the volatility would suggest. That way, I limit the potential risk because I know that futures portfolio returns are ?fat-tailed?, and I account for this in my risk management.

Frank Pusateri: How often do you anticipate major moves in the interest markets?

Jay Feuerstein: I expect the interest rate markets to have at least two major moves per year. This is more than most other markets because of the nature of interest rates, which are the instruments of Fed policy and therefore more likely to move due to Fed intervention. I also keep in mind that the interest rate markets are not homogenous; they in fact are made up of different subsets of instruments that do not necessarily have major moves in the same direction at the same time.

Frank Pusateri: How do you identify the trading methodologies you research?

Jay Feuerstein: I look at the gaps in my portfolio's performance. Then I match possible solutions to my philosophy of what will make money over time. In other words, when the portfolio has a difficult period, I usually know why. The question is whether the new idea is robust enough to make those periods better over time. In order to be robust, the model must be repeatable in many situations. It must be simple so those situations are likely to recur. It must also be logical so that I can understand why it might work.

Frank Pusateri: Do you use any trading techniques that are not trend-following?

Jay Feuerstein: I have five trading models, and three of them have nothing to do with trend-following. The convexity model is one of those, for example. It anticipates intra-day hedging needs in the fixed income market and attempts to profit from them. The holding period is just two hours. The reversal model is another model that is not trend-following. It actually attempts to predict short-term reversals from a trend. And the yield curve model is a systematic, global macro approach to trading the Treasury yield curve. It certainly is different from the traditional CTA trend-following strategy.

The preceding information has been supplied by the interviewee for information purposes only. It is not guaranteed to be accurate by either Adirondack Portfolio Management, Inc. or Striker Securities, Inc. and does not constitute a solicitation of any kind. For further information, including a disclosure document, on Xenon Capital Management, please email Jay Feuerstein at jay@xenoncap.con or contact Dan Neenan at 800-669-8838/312-987-0043
This interview is for informational purposes only and is not intended to be a solicitation of any kind. Trade only with risk capital. The risk of trading can be substantial and each investor and/or trader must consider whether trading systems are a suitable investment.
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