EMMA Program was up 8.8% in February.

We feasted on the February rout as any decent macro manager would do. After treading water for 9 months we were delighted to catch a bout of market volatility. But what is more significant is that this is more than a random spasm. There were some shifting fundamentals and sentiment that we believe will benefit our program, for example the newfound respect for volatility, the return of risk-on/risk-off, and renewed sensitivity to inflation/yield.
February was a perfect month to go for a little deep dive into our methodology and our risk philosophy. We are fans of Nassim Taleb so anyone who is familiar with his work would know that we never pick up dollar bills on a train track (e.g. selling volatility options) and that our performance is the natural result of consistent pursuit of an asymmetrical risk profile.
Our strategy has a lot of similarity to Texas Hold’em. It’s mostly about taking the risk of a series of small losses while waiting for the risk/reward asymmetry to show up. Obviously we would never go all-in under any circumstances but when the likelihood / consequence setup is right we dive in. We have too much intellectual honesty to claim that we foresaw the (timing of) market crash, but in reviewing our notes from late January we realized the risk/reward was heavily skewed to the downside and shorted Crude Oil because it was the weak link (as to why, that’s another story). When the carnage began we were too late to get in on the downside but were confident enough that the buy-the-dip mentality dies hard and this was not the “big one”. We initiated long positions on S&P after it tested 50D support along with some Palladium long, then followed up with some Gasoline long when we saw follow-through.

The result can be illustrated by this simple graph of our historical leverage (Margin/Equity Ratio) vs performance (VAMI). We went in heavy when the odds are in our favor. Our target leverage is around 5% but we almost doubled it during the turmoil. Note that leverage was leading performance, not the other way around.

For now the market is back to calmness. Trade tariff talks and Cohn’s resignation lately have ruffled a few feathers. Political chaos in DC continues and investors are back to projecting new highs for the year. We do believe that the underlying tone has changed. That rustle in the bushes was just the wind this time, but the next time the bushes rustle investors will react harder – we never know when it will be a real snake.
We published a piece on volatility and the outlook for commodities in February here. Email us if you are interested in our performance sheet.

Jeff Lee, CTA

Past performance is not necessarily indicative of future results.
There is a substantial risk of loss in futures and options trading.

Kronos Management, LLC
604-880-3931 |

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Kronos Management · 2929 N. Central Expressway, Suite 235 · Richardson, TX 75080 · USA

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