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Portfolio > Portfolio Construction

Chung Capital

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BUFFALO GROVE, Ill. (–After spending seven years exclusively running managed futures programs, Chung Capital Management decided to dip its toes in hedge fund waters.

“We’re systematic trendfollowers, but the trading systems and models we build can be applied to equities as well as futures,” said Vincent Chung, firm principal. “We have been researching and testing our models for years to include equities, but it was only recently that we put it to work.”

The new equity portfolio was constructed in managed account form for a single high-net-worth client. The equity portfolio makes trades based on technical signals generated by Chung’s market models, which were originally created based on research for the managed futures side. The original models have been in development since 1991.

“It’s not a true hedge fund in the sense that it is not always market neutral or equally weighted on the long and short side–but it could be,” Mr. Chung said. “And, obviously, the approach is technical rather than fundamental.”

The equity strategy is not available in a pooled-fund format, although it might be in the not-so-distant future, Mr. Chung said. The commodities trading adviser said that his research might also be applied to trading single-stock futures at some point.

“When it comes to single-stock futures, we’ll just have to how much liquidity there is,” Mr. Chung said. “The equity strategy we have is trading actual stocks. And as a pure business decision, I think stocks might attract more interest from investors than another futures program.”

Like many CTAs, Mr. Chung says he is frustrated that the voracious appetite that investors have these days for alternatives seems to be keenly targeted at hedge funds rather than managed futures programs, both of which generally are designed to generate non-correlated returns.

“I’m firmly committed to managed futures because it’s a great diversifier. And with portfolio diversification it’s one of the best free lunches you can get,” Mr. Chung said. “But I’m not sure the most investors realize that.”

Mr. Chung said his frustration with managed futures investors is such that he recently has avoided taking in new capital. “My emphasis has been in running proprietary money along with that of a few friends and family investors,” he said. “One of the problems you have with programs is hot money chasing returns. You can almost predict from peak to valley when certain investors are going to come in an out (of the program). The redemptions are always at the wrong time, which can wind up hurting returns.”

“If you are running a more proprietary portfolio, there are other advantages too. You can run it the way it want,” Mr. Chung said. In my case, I’ve upped leverage, which is something I couldn’t do before. “It’s hard to go to an investor and say hey this program is going to have volatility as such that there will be drawdowns of 70% but the upside potential is 200%. They might never accept that, but I could running a program for myself or a small group of investors.”


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