Jean-Jacques Chenier uses most of the same indicatorsas a systematic trend following manager that he did as adiscretionary manager but has found that systematizing

the approach added much needed discipline, allowing him toexploit the inefficiencies of the currency markets.

Chenier believes markets, in general, are less efficient thantouted. He says most are shaped as bell curves with fat tails,especially currency markets, which have greater inefficienciesbecause many participants don’t trade it to make money but forother reasons. For example, he notes that central banks rou-tinely lose money trading currencies.

“The Bank of Japan will intervene to push the yen lower...acommercial bank in Japan will repatriate yen assets overseasjust to window dress its balance sheets for the end of the fiscalyear,” Chenier says. These activities create liquidity but it isinefficient liquidity that can be exploited, he says.

Chenier, who heads up commodity trading advisor (CTA)Alternative Asset Management, cut his teeth trading soft

commodities in the booming Paris markets of the 1970s, earn-ing positive returns for his brokerage customers during a sugarsqueeze. (The eventual price collapse following the squeezeled to a regulatory crackdown ending the booming Paris softsmarkets.) Chenier went on to hedge precious metal positionsfor a Spanish firm and eventually evolved toward foreignexchange trading.

By the end of the 1980s he knew he wanted to start a hedgefund but could not raise the money in Europe for his venture.

So he moved to New York and started a discretionary globalmacro hedge fund with his own money. After a significantdrawdown, he closed the fund and began developing his pro-prietary technical system, Trendoscil, while working as an asso-ciated person for various management firms.

Chenier’s launched his CTA in August 2001 and has had agood start with a 73.6% return in 2002, and a 15.17% return in2003 through April. The largest drawdown was 20% in May,following September 11. The program trades the Australiandollar, euro, Swiss franc and Japanese yen.

His trading system incorporates the basic philosophy of ‘cut-ting losses short and letting profits run into mathematics.What he gained from that was risk control. “As a discretionarytrader you are never sure that what you loved to buy at 100,you will not just adore when it falls to 70. So I thought that thebest way to avoid this [tendency] — and no one is immune toit — is through a trading system,” Chenier says.

The temptation to add to a losing position — a cardinal no-no in trading — is a strong one particularly when the logicbehind a trade still seems valid. “It never makes sense to add toa losing position. Even if it works 99 times out of a 100, it willnot work at some point and you will be out of business,”Chenier says. He admits to adding to losing positions whiletrading discretionary funds and even having some success withit, but adds, “You always do it one too many times. It is betterto miss a trade than to get in with too much risk.”

His medium- to long-term system incorporates trend follow-ing indicators with fast and slow oscillators to capture thetrend while avoiding giving back profits when the trend fails.His use of oscillators allows him to be more selective and avoiddrawdowns without adding strategies or varying his timeframe.

While other managers have avoided the large givebacks byusing multiple strategies and multiple timeframes, Cheniertakes a minimalist approach. “Short-term trading [even as away to mitigate drawdowns within long-term systems] is a los-ing game. It increases your cost of transaction. Our system iscompletely out of the market about 25% of the time. We arevery good at doing nothing and we are proud of it,” he says.

The system produces just as many losing trades as winnersbut the winners outpace the losers by 300%. He adds to win-ning positions when it breaks out of an envelope of 3% abovethe moving average. He has initial stops of 5% but no trailingstops. When the fast oscillator crosses below the slow one it isan indication that the move is losing its momentum.

The system averages only 350 roundturns per million undermanagement. His method of avoiding givebacks has the benefitof reduced risk from margin and lower execution cost. It proveditself during the March reversal with a drawdown of only 5.74%after earning over 40% the previous four months, once againexploiting inefficiencies within the currency markets.

B Y D A N I E L P . C O L L I N S

Reprinted from FUTURES July 2003 issue. Copyright 2003 by Futures Magazine Group, 833 W. Jackson Blvd., 7th Floor, Chicago, IL 60607

Trader Profile

Chenier: Systematizing what works