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The MrTopStep Interview: David Bedford, Crescent Bay Capital

Danny Riley

After a few minutes with Big Bob I knew he had something on his mind. We talked about mutual friends and how great it was that the kids were graduating together, but I knew he had something he wanted to ask me. The first thing he said was “You work on the Merc floor, eh?” I told him I had worked in the grains, bonds and S&Ps throughout my career. He told me he knew a lot of guys from the floor and then went on to ask what he really wanted to know. He had his retirement account at Lehman Brothers and the stocks he bought on the advice of his broker was down 50%. That the Lehman broker had called a few days ago with some new stocks for Bob to buy. What did I think? I was quick to answer, "Bob, before you buy any more stocks you need to ask your broker what you're supposed to do with the stocks you own that are down 50%.” Big Bob looked in my eyes and said “You're right.” He got out and took his losses and Lehman went out of business a few years later. RIP Bob.

There are many way to invest in the markets. You can learn to trade for yourself, invest in mutual funds, hedge funds, investment pools. You can even use a broker to buy and sell for you. That is not what I would recommend, though. Before you learn to trade futures and options on your own, you should know that only 5% actually make any money doing it. Your other choice: hire a professional. Over the last few years investors have been flocking to Commodity Trading Advisors (CTAs). If you were too scared to invest in the stock market and feel you missed the boat, there are a variety of CTAs to help you trade and invest. According to Investopedia the definition of a Commodity Trading Advisor is:

An individual or firm who provides individualized advice regarding the buying and selling of futures contracts or options on futures, or certain foreign exchange contracts. The Commodity Trading Advisor (CTA) registration is required by the National Futures Association, the self-regulatory organization for the industry. A CTA acts much like a financial advisor, except that the CTA designation is specific to providing advice relating to commodities trading. http://www.investopedia.com/terms/c/cta.asp


Today’s story is not about my late friend Bob Probert. Today’s story is about picking a good CTA to help you invest and about CTA David Bedford and his firm Crescent Bay Capital, a firm we have known since 2003. http://crescentbaycapital.com/

David, when did you first start trading?
I began trading stocks in 1998 using technical indicators. I read everything I could get my hands on and attended many high-priced seminars. What was interesting is that the strategies just didn’t work with any consistency. When I began trading I was also working as a research associate at prominent biomaterials laboratory in San Francisco. Due to my background, I was naturally drawn to taking a quant approach to analyzing data. My first project involved manually analyzing 20 years of S&P futures tick data looking for multi-day patterns using a laptop and Excel. Friends and family were beginning to think I had lost it. After 3 years of developing and trading an exhaustive number of strategies I was only able to achieve mediocre success.

A pivotal moment came when I read an article that evaluated the 4 largest options markets on the CME and concluded that 86% of all options expired worthless. With this newfound information I began developing option strategies that produced better results than any of my previous work. I’ve focused on options strategies ever since.

What was your goal?
My primary goal was consistency in returns. Yes, every trader experiences drawdowns, but a strategy that has a high percentage of winning months is psychologically easier to trade than a strategy with a low percentage. It’s also easier on your investors. For example, most “trend following” programs may only have 30% winning months, so drawdowns can last a very long time. Most options-based programs have 70% or more winning months.

What type of clients are best suited to invest in a CTA?
I believe experienced investors who understand the reasons for adding non-correlated investments to their portfolio are the best fit. A “Managed Futures” investment can be looked at as adding “ballast” to a portfolio. When the traditional stock and bonds are not performing well, the “managed futures” component can provide stability and reduce the overall portfolio volatility. It’s the model that the smart endowment money has used for years.

Your minimum for the fund is $25,000, but do you have larger investors?
The majority of client investments are six figures. We keep one of our programs at $25,000 to allow smaller investors to still participate.

Can you please talk about your trading programs?
Premium Stock Index Program (PSIP):
    Sells Puts and Calls on S&P500 Futures, 8.4% average annual return. 7+ year track record. $25k
Balanced Volatility Program (BVP):
    Put and Call Diagonal Spreads on S&P 500 Futures, 7.5% average annual return. 5+ year track record. $50k
Balanced Overlay Program (BOP):
    New program that layers multiple Diagonal Spreads on S&P500 Futures. $100k
Diversified LV Program (DLVP):
    New program. Credit spreads on S&P 500, Gold, and Oil Futures. $50k

The markets have been tough. Where do you think the stock market is headed over the next year?
I believe that we are very close to the top of the current bull cycle - we will have an initial drop of approx. 5%, then a slow continuous decline into the end of the year. The initial shock will happen this summer.

What are some of the things you think investors should beware of? Pitfalls?
If new to CTA investing I would caution an investor [in] allocating too much of their portfolio -- again, 20% is a good guideline. Also, I would suggest the investor evaluate their risk appetite and understand that there is a very good likelihood they will experience a drawdown similar to the CTA’s historical max. [Can] they really weather the storm? Experienced investors actually make additional allocations during these times.

In summary, I would like to say that investing with a CTA is a great way for an investor to participate in today’s competitive markets and gain access to some of the best trading strategies available. Also, don’t think that the higher minimum programs have better performance. It’s been shown that smaller CTAs have better returns during their “emerging” years.

Thank you for the opportunity to answer some of your questions and please let your readers know they are welcome to call or email our office so we can answer any specific questions or provide more information on our programs.


Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.


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DISCLAIMER: The information and data in the above report were obtained from sources considered reliable. Opinions, market data, and recommendations are subject to change at any time. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any commodities or securities. MrTopStep, its officers, directors and its contributors may, in the normal course of business, have position(s) which may or may not agree with the opinions expressed in this report {jathumbnailoff}