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Winton Capital Management
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The investment objective of the Winton Capital Management's Diversified Program is to achieve long-term capital appreciation through compound growth. This goal is achieved by pursuing a diversified trading scheme that does not necessarily rely upon favorable conditions in any particular market, or on market direction.
The Diversified Program employs what is traditionally known as a “systematic” approach to trading financial instruments. In this context, the term “systematic” implies that the vast majority of the trading decisions are executed, without discretion, either electronically or by a team responsible for the placement of orders, based upon the instructions generated by the Winton Computer Trading System. The majority of trades in the Diversified Program are in fact executed electronically. The Diversified Program blends short-term trading with long-term trend following, using multiple time frames in addition to multiple models. As its name implies, the Diversified Program allocates for maximum diversification. A sophisticated system of risk management is evident in all aspects of the program.
The Winton Computer Trading System is a proprietary, computer-based system best described as the “output” of a complex schema of numerous computer programs and subprograms developed by Winton’s research team. The Trading System is maintained and managed by Winton’s Production Team, the team responsible for encoding and running the computer programs and sub-programs.
The Diversified Program can be thought of as more “technical” than “fundamental” in nature. The term “technical analysis” is generally used to refer to analysis based on data intrinsic to a market, such as price and volume. It is often contrasted with “fundamental analysis” that relies upon analysis of factors external to a market, such as crop conditions, the weather or supply and demand One feature of a trend-following system is that it attempts to take advantage of the observable tendency of the markets to trend, and to tend to make exaggerated movements in both upward and downward directions. These exaggerated movements can be thought of as resulting from the influence of crowd psychology, or the herd instinct, amongst market participants.
The Winton Computer Trading System instructs and adapts the Diversified Program’s trading exposures automatically and continuously. As is to be expected with any research-driven trading system, the Winton Computer Trading System is dynamic. It is subject to modification over time as new relationships are discovered. This research may result in the development of additional computer models or revisions to existing models.
Occasionally, external, unforeseen or dramatic events may impact the markets. These exceptional market events by their very nature are often difficult to predict and have uncertain consequences. Examples of such exceptional market events include loss of market liquidity, the threat of counterparty risk as presented in the credit default swap debacle of 2008, the closure of an exchange (as occurred after the terrorist attacks of September 2001), the introduction of the Euro, the closure of the tin contract in 1984, the suspension of the Hong Kong Futures Exchange in 1987 and the suspension of trading in the Malaysian Ringgit in 1997.
At present, the Diversified Program has no pre-set capacity limit. This is not to suggest Winton Capital Management’s lack of concern about capacity; indeed, it is an issue of great importance to Winton’s research team and significant resource is dedicated to understanding factors that impact upon it. Winton Capital Management believes that its ability to manage capacity is, to a degree, related to the success of its ongoing research initiatives in this area. For example, part of Winton Capital Management’s research is focused on the studying of the mechanics of open interest in order to better understand liquidity in global futures markets, looking beyond Winton at the industry as a whole. Winton may, in its absolute discretion and at any time, impose or modify the capacity limits of the Diversified Program.
The Diversified Program tracks approximately 100 diversified, highly liquid financial instruments. At any point in time, it may be holding long or short positions or hold no position at all in each of the markets it follows. The Diversified Program’s portfolio may consist mainly of positions in the following futures markets: stock indices; bonds; short-term interest rates; currencies; precious metals; base metals; crops; livestock; and energies. In addition, the Diversified Program may trade in certain OTC instruments, such as, but not limited to, forward contracts on foreign exchange and interest rates and swaps. All OTC FX or currency instruments are off-exchange foreign currency transactions and Winton Capital Management does not engage in retail forex transactions. In addition, the Diversified Program may also trade in government securities such as bonds and other similar instruments, listed cash equities and CFDs. Through its research initiatives, Winton Capital Management is constantly looking for new opportunities to add eligible markets to the portfolio, thus further increasing the portfolio’s diversification.
The Diversified Program strives to maintain a diversified portfolio because holding positions in a variety of unrelated markets has been shown, over time, to decrease system volatility. Research has demonstrated that use of a sophisticated and systematic schema for placing orders in a wide array of markets increases the possibility that an overall profit may be realized after a sufficient period of time. Whilst Winton Capital Management intends to seek to diversify the portfolio as it deems appropriate and consistent with the investment objective of the Diversified Program, the extent of diversification of the portfolio may change from time to time. If the portfolio is concentrated in a small number of investments, the portfolio will be subject to a greater level of volatility.
The management of risk is an integral part of the Winton Computer Trading System. Return and risk are two sides of the same coin. It is impossible to achieve a given level of return without accepting a certain amount of risk. Winton Capital Management's focus within risk management is on targeting, measuring and managing risk. Owing to the leverage inherent in futures trading, position sizes are set according to Winton Capital Management’s expectation of the risk that such positions will provide rather than the amount of capital required to fund such positions. In the experience of Winton Capital Management’s management, efforts to preserve capital have a greater effect on rate of return than does the identification of profitable trading opportunities. The following serve as examples, but do not begin to describe the many efforts Winton makes to attempt to limit risk. However, there is no assurance that any of these efforts will succeed in lessening the possibility or size of a loss.
Each day, the Winton Computer Trading System sets volatility parameters (known as the “instantaneous forecast standard deviation”) for each position held in the portfolio. The purpose of these parameters is to estimate the likely size of a market shift (whether up or down), in much the same way as the futures exchanges estimate the likely market shift when deciding how to set the initial margin for a future or the daily price limits for a market.
The primary determinant of the daily volatility parameters is the amount of leverage or level of gearing used by the Diversified Program. The leverage or gearing may be measured in terms of the Diversified Program’s margin-to-equity ratio. This ratio is calculated by dividing the amount of margin posted with the futures commission merchant by the value of the portfolio. The Diversified Program’s long-term annualized volatility target is currently approximately 10% (please note that if applied to a managed account, a fully-funded managed account is assumed). However, it should be noted that the Diversified Program’s instantaneous forecast standard deviation (defined as the instantaneous risk Winton expects within the 24 hours following that particular instant) may vary outside these limits. In order to target a given level of long-term risk the instantaneous risk is allowed to fluctuate within a range around the long term risk target. In order to achieve the long-term risk target the correlation between different markets is estimated by the Diversified Program, and is employed in the calculation of the overall level of gearing which is reset on a daily basis.
Slippage refers to the difference between the market price at the time an order is placed to purchase or sell a contract and the actual price paid to make the purchase or sale. One of the main causes of slippage is attempting to fill an order that is too large to be absorbed easily by the market. Winton Capital Management monitors slippage primarily to make prompt adjustment in position size and thereby avoid having to give up potential profits.
Winton Capital Management conducts frequent stress testing of its models utilizing proprietary simulation software which attempts to measure risk from several perspectives.
The trading methods applied by Winton Capital Management in its Diversified Program are proprietary, complex and confidential. As a result, the explanation above is of necessity general in nature and not intended to be exhaustive. Winton Capital Management plans to continue the research and development of its trading methodology and, therefore, retains the right to revise any methods or strategy, including the technical trading factors used, the financial instruments traded and/or the money management principles applied. Such ongoing revisions, unless deemed material, will not be made known to clients.
trading strategy and account management principles described
here are factors upon which Winton may base its trading decisions.
Accordingly, no assurance is given that all of these factors
will be considered with respect to every trade or recommendation
made on behalf of the Diversified Program or that consideration
of any of these factors in a particular situation will lessen
a client’s risk of loss or increase the potential for
Capital Management will select the type of order to be used
in executing client trades and may use any type of order permitted
by the exchange on which the order is placed or accepted by
a counterparty where the order is executed over the counter.
Winton Capital Management may place individual orders for each
account or a block order for all accounts in which the same
financial instrument is being cleared through the same Futures
Commission Merchant (“FCM”) or broker-dealer. When
using a block order, Winton Capital Management will allocate
trades to accounts using a proprietary algorithm. The aim of
this algorithm is to achieve an average price for transactions
as close as mathematically possible to the mean for each account.
This takes the form of an optimization process where the objective
is to minimize the variation in the average allocated price
for each account. On occasion, it may direct the FCM or broker-dealer
for the accounts to apply its own neutral order allocation system
to assign trades. Partial fills are allocated in proportion
to account size.
Winton Capital Management was founded by David Winton Harding, Martin Hunt and Osman Murgian and started trading in October 1997. David Winton Harding is one of the pioneers of trend-following systematic trading in Europe. Whilst at Winton Capital Management, David Winton Harding has been registered with the CFTC as an Associated Person and listed as a Principal of Winton Capital Management and has been an Associate Member of NFA since January 1998.
David Winton Harding was born in Oxford in 1961 and graduated from Cambridge University with a First Class Honors degree in Natural Sciences specializing in Theoretical Physics. In September 1982, he joined stockbroker Wood MacKenzie as a graduate trainee and became involved with futures trading just as the London International Financial Futures Exchange opened. A year later, in September 1983, he left Wood MacKenzie and moved to Johnson Matthey & Wallace, a commodity futures broker, where he was involved in gilt trading and sales. When that company closed due to the failure of its parent company, in November 1984 David Winton Harding left it and joined Sabre Fund Management, one of the UK’s first Commodity Trading Advisors where he was an Associate Member of NFA from April 1986 until July 1988 and registered as an Associated Person from May 1986 until July 1988. In his new position, for the first time, David Winton Harding was able to apply his scientific training to develop techniques for trading a wide variety of futures markets.
The descriptions above are from the manager’s disclosure document.
THE RISK OF LOSS IN TRADING FUTURES AND
OPTIONS CAN BE SUBSTANTIAL. PAST RESULTS
ARE NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS. THIS MATERIAL HAS BEEN PREPARED
BY A SALES OR TRADING EMPLOYEE OR AGENT
OF ALTAVRA AND IS, OR IS IN THE NATURE
OF A SOLICITATION. THIS MATERIAL IS NOT
A RESEARCH REPORT PREPARED BY AN ALTAVRA
RESEARCH DEPARTMENT. YOU AGREE THAT YOU
ARE AN EXPERIENCED USER OF THE FINANCIAL
MARKETS, CAPABLE OF MAKING INDEPENDENT
TRADING DECISIONS, AND AGREE THAT YOU
ARE NOT, AND WILL NOT RELY SOLELY ON
THIS DOCUMENT IN MAKING TRADING
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