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Investor Presentation
March 4, 2014
Key Meeting Points 1. Performance: Bayou City Capital Has Outperformed the S&P 500 by Over 3x Since
Strategy Inception (122 months).
2. Volatility as an Asset Class: Bayou City Capital Provides a Unique Addition to an Investment Portfolio with Significant Outperformance in a Variety of Market Scenarios.
3. Risk Management: A Vigilant Risk Mitigation Mindset, Constant Market Surveillance, and Active Futures Hedging Combine to Limit Downside Risk Exposure to Recurring Adverse Market Events.
4. Sound Business Structure: The Fund Has Hired Non-Affiliated, Third-Party Firms for Mid and Back-office Functions to Create Independence in Reporting and a Seamless Order of Operations.
5. User-Friendly Investment Terms: Limited Partners Enjoy Monthly Liquidity, Investment Transparency, and a Quarterly Hurdle Rate Before Incentive Fees.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
The Trading Strategy Overview
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
S&P 500 Option Overwriting Program (The “Trading Strategy”) The Bayou City Capital Fund was established in 2000 to explore an option-selling strategy using a variety of commodities. In 2004 Bayou City Capital exclusively used the S&P 500 for the Trading Strategy which is based upon two premises: 1) The overall directional trend of the equity market (S&P 500) is positive over the long-term. 2) Options on the S&P 500 are overvalued as the future volatility the options' prices imply is an overestimate, on average, of the market volatility that actually occurs. Under these premises, the Fund writes options on S&P 500 futures at the Chicago Mercantile Exchange (CME) in order to benefit from market appreciation and the passage of time. Market Opportunity • Since the inception of trading in 2004, the Trading Strategy has outperformed the equity markets,
generating 22.97% annualized returns vs. 7.14% in the S&P 500, more than a 3x multiple. • In an investing environment filled with uncertainty, the Trading Strategy provides portfolio diversification
with its monthly returns displaying a low correlation of .49 with the movements of the S&P 500.
Months
122
122
122
122
122
122
Correlation to
S&P 500
Sortino
Ratio
Bayou City Capital 22.97 43.61 34.46 1.47 22.92 0.49 0.49
Return (%) Std Dev (%)Downside
Risk (%)
Beta vs.
Market
Alpha vs.
Market (%)
Sharpe
Ratio
0.75
S&P 500 7.14 14.62 11.32 1.00 0.00 0.38 1.00 0.69
Barclay's U.S. Bond Index 4.66 3.38 2.44 0.01 4.66 0.91
Russell 1000 U.S. Large Cap Index 7.37 14.92 11.58 1.02 0.27
0.03
0.39 1.00 0.70
0.03 2.59
0.07DOW UBS Commodity Index 0.89 17.97 13.65 0.60 -2.14 -0.04 0.49
S&P Goldman Commodity Index 0.54 23.94 18.18 0.74 -2.31 -0.04 0.45
S&P 500 4.30 25.06 13.70 22.58 7.14
1 Month
Return (%)
1 Year
Return (%)
3 Year
Return (%)
5 Year
Return (%)
Return Since
Inception (%)
Bayou City Capital 7.58 39.25 27.77 44.89 22.97
$100,000 Invested on Jan. 1, 2004, is Worth $818,363 (est) on Feb. 28, 2014
Historical Performance
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
Return Table: Jan. 2004 – Feb. 2014 Compounded Annual Statistics
BCC
S&P 500
Option Primer
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
BCC
S&P 500
Put-Call Parity: Assuming same strike and expiration, synthetic options can be created through the underlying instrument (the S&P 500) and opposing option (call vs. put and vice versa). This algebraic relationships provides for efficient portfolio construction.
Long Underlying :
Covered Call :
Long Call : Underlying + Put = Call (U + P = C)
Long Put : Call - Underlying = Put (C – U = P)
Underlying = Call - Put (U = C - P)
Underlying - Call = - Put (U - C = - P)
Volatility Chart
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
BCC
S&P 500
Volatility Arbitrage
Taper Talk
Sequester
Debt-Ceiling
Fund Monthly Returns (# of Months) Jan. 2012- Present
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
New Risk Mindset
& Controls Positively
Skews Returns
When To Hedge a Short Option Position?
Active Hedging, Smaller Trades
Infrequent Hedging, Stopping Out
Strategy Refinements Last 3 Years: 1) Hedging Mindset: More active. Aim
big, miss small. 2) VIX Futures: One-day hedge during
market panics.
3) Position Close During Market Crashes: If needed after other adjustments, exit market.
These inputs limit the Strategy’s downside risk as well as increasing upside exposure in positive tail events.
Strategy Improvements
Option Characteristics: • Finite Time Span; Value Declines Over
Time as Option Approaches Expiration. BCC Focuses on Short-Dated Options.
• Option Value Changes Non-Linearly In
Respect to the S&P 500.
• Option Values Also Rise and Fall With the Emotion of the Market, i.e. the Demand for Insurance.
Assess US Futures, Data Released, Option Trading P&L Run Assess US Futures Reconcile Trades Set Stops If Needed Strategy Meeting and P&L
Europe Open (3:30 AM) US Open (8:30 AM) Futures Close (3:15 PM) Futures Open (5:00 PM) Overnight
A Day In The Life
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
BCC
S&P 500
Manage Fund Position (Futures)
Perpetual Vigilance An assumption of option pricing theory is that an underlying instrument has a “smooth” price movement, with no large gaps in between price changes. Option hedging is most efficient when this assumption holds, and the goal of the Fund is to capture this through constant market surveillance.
Risk Management Thesis Within an option-writing strategy, a hedge-first approach increases performance over time and limits drawdowns.
Overview of a Sound Trading Structure
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
Depicted below is a typical marketing and trading structure, including the primary areas of responsibility from the front, middle, and back offices. This recognizes appropriate segregation of duties and eliminates incompatible functions within a given area. The proper roles and responsibilities for each of the positions should be based on a comprehensive view of sound risk management principles.
Portfolio Construction
& Trading Trade Execution
Deal Validation
Daily Risk Monitoring
Risk Control
& Analysis
Customer Service
Month-end Close
Risk Monitoring Commercial / Trading Administration / Accounting
Financial Statements
Information & Trading Technology: OptionVue (Bob) GlobalRisk (Will) LiquidTrade (Fund)
Front Office Bayou City Capital, Houston
Middle Office Liquid Holdings, New York
Back Office Liccar & Co., Chicago
Cash Control
Criteria Limit/Range Duration Action
Short Outright Strikes- Both
Put/Call< 75 per $1,000,000 of net liquidity Ongoing
If outside limit at market close, Fund must cover positions to bring into
compliance at next market open
Margin Utilization < 60% Ongoing Fund Discretion
Margin Utilization 60% to 70% Ongoing Fund may not establish additional positions
Margin Utilization > 75% Ongoing At market open, cover positions by Fund discretion to bring < 70% margin limit
Delta Range -2 to 8 per $1,000,000 of net liquidity OngoingDelta, measured intra-day with internal models and with FCM risk reports as of
market close, must stay within range. Buy/sell futures to bring within limits.
Delta Target 3 to 5 per $1,000,000 of net liquidity Fund Discretion Fund Discretion
Gamma < -.50 contracts per $1,000,000 liquidity OngoingApproaching limit- no additional positions established. Cover lowest delta option
positions to bring within limit.
Vega < $25k per $1,000,000 net liquidity OngoingApproaching limit- no additional positions established. Buy puts 1-3 months until
expiration to bring within limit.
Cover OTM Options Option Price < $1.00 3 Days Max Before CoveringIf option < $1.00 for 3 days
then Fund must join the bid and lift within 3 days
Cover Synthetic ITM Options Option Price < $1.00 3 Days Max Before CoveringIf option < $1.00 for 3 days
then Fund must join the bid and lift within 3 days
S&P 500 - Risk OnInternal Metrics Show Favorable
Market ConditionsOngoing Fund Maintains Delta and Risk Targets While Implementing Strategy
S&P 500 - DefensiveInternal Metrics Show Market
Conditions WorseningOngoing
Warning - S&P 500 is in a Downtrend. Fund Lowers Delta Below Target Range
and Applies 40% or Less Margin
S&P 500 - Risk Off Internal Metrics Illustrate Market Panic Ongoing
Fund Begins Closing Positions and Ceases Trading for the Present Month and
One Additional Month. Fund Does Not Implement Strategy Until Market
Conditions Improve per Internal Metrics.
S&P 500 - Risk Off Internal Metrics Show Market Crash Ongoing
Fund Begins Closing Positions and Ceases Trading for the Present Month and
One Additional Month. Fund Does Not Implement Strategy Until Market
Conditions Improve per Internal Metrics.
Trading Signals and Risk/Greek Limits
Risk Compliance- LiquidMetrics
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
Future Goals
2014 To Do List: 1. Complete Mid-Office Risk Monitoring Function (In Progress with Liquid Holdings)
• Daily (real time) Trade & Risk Compliance • Refine and Improve as needed
2. Integrate Data across Front, Mid and Back Offices • Put data in “the cloud”
3. Hire Director of Marketing (In Process)
• Implement front-end customer database (Salesforce) • Establish national marketing network • Prepare for institutional investors
4. Establish Relationship(s) with additional Futures Commission Merchant(s)
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
Account Information Partnership Structure Series B limited partnership interests in Bayou City Capital are being offered to investors. The characteristics of a Series B limited partner are as follows: • The limited partner will pay Omni (the General Partner) an annual management fee of 2%, of which
1/12 will be paid monthly. • The limited partner pays a quarterly incentive fee to Omni of 20% of any profits that surpass 2% for that
quarter. • If an investor account is at a new high value at the end of a quarter, a high-water mark is set that must
be surpassed for any new incentive fees to incur. • The limited partner has advantageous Section 1256 tax treatment on futures gains; profits taxed at a
weighted 60% capital gains rate and 40% short-term gains rate. • The investor’s partnership interest allows monthly liquidity for further installments or redemptions. • Administration and audit fees are paid by the limited partnership.
• No Minimum Investment.
• Annual External Financial Audit– LaPorte, Houston, Texas.
• The strategy and structure allows scalability with no changes to operations.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS