Managed Futures Database, Resource & Tools

CTA Interview: Davide Accomazzo of Cervino Capital Management

Today’s CTA interview is with Davide Accomazzo of Cervino Capital Management. He and partner Mack Frankfurter manage both the Diversified Options Strategy 1X and Diversified Options Strategy 2X programs. Both programs are futures option programs with 1x having an average 3 year annual returns of 7.27%. These numbers are quite impressive considering the high volatility the markets experienced and the fact that a majority of options selling programs have failed. The 1x program has been up every year since inception.


Stefano Carissimo
Managing Dir.

AR: Hi Davide. First let me start by saying what a pleasure it is to interview a fellow Italian who like myself has spent some time living in Italy and now resides in wonderful California.

Let's get started. How and when did you get involved in futures trading?

DA: Hi, first of all, thanks for the attention to our program and the warm intro! I started working on options models when I was in business school and that experiment got me a job as a convertible bond trader at Jefferies with their International Equity Linked desk. So I have been gravitating towards derivatives since the beginning of my career.

AR: Did you have a mentor or are you self-taught?

DA: As I mentioned before my training at business school and with Jefferies was really a pivotal moment in the learning curve process.

AR: For our members who are not familiar with your program, can you please summarize your programs history and general strategy?

DA: We are diversified option traders and we aim to provide absolute types of return with low standard deviation. The source of our return is a mixture of capturing the excess premium between implied volatility and realized volatility—the beta of options if you will—and superior market timing or alpha. Options are a three dimensional game and therefore we believe they offer better opportunities for sophisticated money management.

AR: The Diversified Options Strategy 1X is 30% systematic and 70% percent discretionary. Please explain the role of both? Is the systematic portion responsible for risk management?

DA: Those percentages are an indication, and yes, risk management is a much more systematic part of the process. Our risk management goes through a series of filters which makes the decision making process very strict as it should be. In the end, especially when trading derivatives, risk management is 90% of the game.

AR: Your program trades not only equity indexes but also fixed income, currencies and precious metals. How do you determine what to trade when and at what percentage of the portfolio?

DA: S&P 500 options are the bulk of our positions due to liquidity and information flow; the other markets are traded on an opportunistic basis.

AR. To say the markets are volatile is an understatement. Many options selling programs have closed or simply exploded in the past year. How do you think your program differs then most options selling programs?

DA: We like to consider ourselves option traders, whereas most option CTAs proved over the past year to be mainly just option writers. It seems to me the majority of my competition was focused playing the Bell curve which is a recipe for disaster—Long-Term Capital Management being an example. Also I think many underestimated the capacity issue this strategy carries.

AR: Capital preservation is key to any programs success or failure. How do you control risk and volatility?

DA: I teach Portfolio Management at the Graziadio Business School at Pepperdine University and I always tell my students that if they were to remember only one thing out of the course it would be risk management! We control risk first by diversification of markets, strategies and size. Then we constantly monitor fundamental and technical inputs. If our original thesis changes as we are in a trade, we will modify our positions accordingly. The last step is represented by absolute levels of losses we are willing to take on any given position.

AR: Reviewing your online performance, I see your max peak to valley drawdown was -5.93% with your biggest loss in Oct 2008 of -5.48%. Oct was a bad month but so was March 2009 yet March losses were only -0.78% and YTD the1X program is up 2.12%. How did you manage risk differently in March 09 then Oct 08?

DA: In October you had volatility literally tripling and hitting never achieved before highs. That spike represented the systemic risk the world was facing. Our approach allows us to generally manage increases in volatility, but the October event represented a much bigger issue. Between September 2008 and October 2008 implied volatility as measured by the VIX increased from 20 to over 80, which was an unprecedented level. Before that the VIX had topped out around 45 during the Long-Term Capital Management situation, 9/11 and the bottom of the 2002-2003 bear market.

On the other hand, during March 2009 implied volatility stayed within a range of between 40 and 52. Accordingly it was a more manageable situation from a risk management perspective. The more difficult aspect of March 2009 is the V bottom and tactically adjusting positions in response to evolving market conditions which are now more bullish. Panic selling has been replaced by panic buying. But looking forward we think the fundamentals of the economy are going to remain muted and the most likely scenario is for the market to go sideways, which are the type of conditions we think our program will perform best.

AR: Do you have any advice for aspiring CTA’s or private traders? What would you say is the most important aspect of developing and maintaining a trading system?

DA: As has been said of war, trading involves long periods of boredom punctuated by moments of sheer terror. To aspiring CTAs and the private traders, my advice is to make sure you really understand the nature of your returns. Determine what amount of risk you’re willing to take in order to achieve a rate-of-return objective. Futures involves leverage—making a 50% return is not impressive if the strategy can also result in 50% drawdowns. Bottom line, trading is a business and a trading program is the product. Make sure you are well capitalized and that operations are running smoothly. Traders should be focused on trading, not administrating the business. For me, having a business partner who manages that aspect of our CTA has been a big positive for my trading. And of course, discipline is the code word for anyone engaged in trading as well as everyone who runs a money management business.

AR: In one sentence, what does it take to truly be a great successful system trader?

DA: Regardless of trading style, it is necessary to understand the nature of your returns.

AR: To conclude, what do you like to do in your spare time to take your mind off trading?

DA: I played competitive tennis in my younger days and was a teaching pro to help me get through business school—so tennis is still a big love affair for me! And, of course, living in California near the beach, I also like to surf. But in winter it switches to skiing!

AR: This concludes our Spotlight interview. Thank you.