Dean P. Hoffman
President of Hoffman Asset Management, Inc. and Strategic Trading Systems, Inc.
Program(s) Developed: Checkmate and Synergy Systems
Interview Date: May, 2006
Interviewed by John F. Gallwas, Founder of Striker Securities, Inc.
A follow-up to our July 2005 interview with Dean Hoffman, who is President of Strategic Trading Systems, Inc., a leading systems development company, as well as Hoffman Asset Management, Inc. (NFA # 345235), a professional management firm registered as a Commodity Trading Advisor ("CTA").
John Gallwas: In our last interview, when we discussed your almost 20 years experience with the futures markets and what lead you to become a successful system developer, you mentioned that you had formed a CTA firm which was limited to "high net worth individuals". However, recently you filed a disclosure document with the NFA offering to manage individual accounts, using your proprietary systems. What factors caused you to offer your managed services to the individual investor?
Dean Hoffman: Within the last year (approximately) I have implemented some new techniques into my personal trading that go above and beyond what can be done with my systems alone. I wanted a way to offer those additional methods to smaller investors. I felt that the added risk control overlays and dynamic portfolio selection would appeal to more conservative investors.
John Gallwas: How has your experience as a successful system developer been an asset in the development of your management program for individuals?
Dean Hoffman: There is no way I could have ever embarked on a mission to build a CTA business and manage money for others without many years of systems research and development under my belt. The experience, wisdom, methods and intuitions derived from all those years form the entire foundation of what I am offering.
John Gallwas: Given your role as a CTA managing individual trading accounts, what should our readers know about your management methodology of using multiple, non-correlated technical strategies, and what exactly sets this method apart from other trend- following approaches?
Dean Hoffman: I think what I have to offer is unique for the smaller managed account investor. Typically, to invest in a trend following CTA program an investor would have to put up $250,000 to $10,000,000 as an account minimum. Part of this is due to the success some of these managers have had (being able to demand those kinds of minimums) and much of it (in my opinion) is because it is exponentially more difficult to successfully manage a smaller account. For example, assume that on a new trade you don't want the initial risk to exceed 1.5% of account equity. This is quite easy on a million dollar account because you have $15,000 to maneuver with. Not only does this large account allow you to enter the trade in almost all cases, but just as important, it allows you to manage the open trade risk much more effectively. The reason I say that is because if you started out buying 5 contracts with $3,000 of risk each, and the market explodes in your favor, you can simply scale off a few positions to lock in some profit and reduce your open trade exposure.
It's far more difficult if you're starting from lets say $75,000. The reason is because now risking 1.5% on a new trade is only $1125. Many trades in trend following approaches will typically have risk above that amount. This means you would either have to skip most trades or risk at a much higher level. Also, even if you're lucky enough to get into the initial trade, what happens if that trade explodes in your favor and your trailing stop has not risen as fast as the market? Now you might be in a position where your initial 1.5% risk has risen to be 5% or 6% of your account (or substantially more). Furthermore, you can't simply scale off a few positions because you only have on one contract in the first place!
I feel what I am offering in my managed account effectively deals with this tremendous problem faced by smaller investors. I do my research on a $25,000 back-testing platform called Mechanica. In my opinion, its capabilities exceed any other development platform by many multiples. It has allowed me to build entire systems around the management of open positions, profits & losses and correlation issues. These open trade management issues are completely independent from the actual buy and sell signals. It's truly a quantum leap from my perspective.
John Gallwas: Part of your strategy is to trade a portfolio of futures markets worldwide. What are your criteria for selection of the markets to trade?
Dean Hoffman: Portfolio selection is a big part of what I do differently now. In the past, if you asked me "what 20 markets do you trade?" I could have given you a static list that never changed. However, if you asked me the same question today, the answer would change day-to-day. The reason for this is because I have created a "portfolio system" whose only job is to select markets to trade. It does not generate any buy or sell signals, it's simply a dynamic "permissioning" system to select potential markets to trade. The basic idea is that a certain system will work in a certain market environment, so why not seek out that market environment first. For example, if you have a system that works in high volatility markets then why waste time trading it in low volatility markets? Better to skip those markets for now unless and until they can return to high volatility status etc.
By using this dynamic portfolio selection process I have increased the number of market I monitor from about 15 to 95! However, I can keep the total number of open positions about the same as I previously did on a much smaller portfolio. What this means is that if a significant opportunity develops in an exotic (and liquid) market (like Japanese rubber or kerosene etc.) I can be there.
John Gallwas: Do you personally have funds under management in your CTA program?
Dean Hoffman: I have a personal account that I trade exactly the same way as my CTA program. Regulations prohibit me from using my personal account as the CTA's track record. However, I can show my personal account performance to somebody as supplemental proprietary performance (by request). I am currently getting these results into a pro-forma format that will show what the performance would have looked like after any management or incentive fees. Currently all I have is the performance and account statements of my actual account without those fees being deducted.
As time goes by I intend to continue to add more of my own funds to my trading. Based on what is out there, and how I see the future playing out, I think that what I am doing not only represents a great opportunity for qualified investors, but also for myself.
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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