Marathon Capital Firm Disclosure

Marathon believes its systematic trading approach is structured and well defined. The signal generator utilizes a number of independent trading systems. These systems analyze market movements and internal market and price configuration. Each system differs primarily in its sensitivity to price action. The primary objective of each trading system is to profit from major and sustained Futures Interest price trends. More than one system may be used to generate trading decisions for a market. The systems and parameters utilized are similar for similar markets. The computer-generated signals are implemented with discipline and in an unemotional manner. Notwithstanding the above, Marathon may, in its discretion, override system signals under certain market circumstances. In an attempt to limit losses, each system-generated position maintains a stop-loss point. This point is predetermined daily by a proprietary computer model. Daily exposure for each separate market position is normally confined to less than 2% of equity, but may range from less than 1% to as much as 5% (or more) of beginning month equity on an intraday or overnight basis. Losses may, however, exceed these amounts. Portfolio volatility is also monitored daily. Because of diversification, portfolio volatility is normally less than 1% of equity but may range to as much as 3% (or more) of beginning month equity. Accounts are frequently rebalanced. During periods of declining equity, this rebalancing attempts to ensure that account exposure is maintained properly so as to not accelerate the decline further. Conversely, during periods of asset appreciation the number of contracts traded will be increased maintaining the exposure level and increasing the chance for accelerating gains. Marathon believes that preservation of capital during unfavorable markets is one of the keys to successful money management. Marathon’s proprietary portfolio risk filter is designed to identify certain conditions that have historically proven ideal for both increasing and decreasing portfolio exposure. This risk management approach incorporates multiple systems. Volatility is one of the primary components in determining when to increase and decrease portfolio exposure. Average volatility is monitored in a variety of time periods daily, weekly and monthly. The risk management model is systematic and operates independent of the signal generator. Its parameters, however, are based on empirical data generated by the signal generator. The independent risk management system is designed to attempt to maximize profits when markets appear to have the potential to experience favorable moves by increasing portfolio exposure and reducing exposure when conditions change.

What This Disclosure Reveals About Sound Systematic Trading

Marathon’s disclosure is one of the more detailed CTA disclosures available, and it repays careful reading. Several features stand out as particularly instructive for anyone evaluating or building a systematic trend following approach.

The first is the acknowledgment of discretionary override: “Marathon may, in its discretion, override system signals under certain market circumstances.” This is a standard disclosure requirement for registered CTAs. The important question for any systematic manager is how frequently that discretion is actually exercised and under what conditions. A system that is overridden frequently is not a systematic approach. It is a discretionary approach with a systematic veneer. The value of the disclosure requirement is that it forces acknowledgment of the gap between the idealized mechanical system and the human reality of managing it.

The second notable feature is the dual-layer architecture: an independent risk management system operating separately from the signal generator. The signal generator determines entry and exit signals. The risk management system determines how much exposure to carry across the portfolio based on current volatility conditions. This separation means risk can be adjusted without changing the underlying trading signals. When volatility increases, exposure decreases. When conditions appear favorable, exposure increases. The signal and the sizing are two separate decisions, each with their own systematic rules.

The rebalancing mechanism during declining equity periods is particularly important. During drawdowns, the system reduces contract count to maintain defined exposure levels rather than holding fixed positions that represent an increasing percentage of a shrinking account. This prevents the drawdown from accelerating its own decline, which is the mechanism that destroys accounts that do not rebalance: the fixed position becomes a larger and larger fraction of declining equity, amplifying each subsequent loss.

The positive mirror image, increasing contracts during equity appreciation to maintain exposure levels and accelerate gains, is the compounding mechanism. A fixed number of contracts represents a declining percentage of a growing account. Rebalancing upward maintains the percentage constant, so the account grows proportionally to the position rather than having the position become increasingly marginal relative to total equity. This is the asymmetry that allows systematic trend following to compound effectively over time: losses are contained by reducing exposure during drawdowns, and gains are amplified by increasing exposure during appreciation.

The statement that preservation of capital during unfavorable markets is one of the keys to successful money management is the most important sentence in the disclosure. It acknowledges directly that the goal during drawdown periods is not to recover quickly but to survive intact so that the approach can be applied during the favorable periods that produce the returns. A manager who does not preserve capital during unfavorable periods may not be in business when the favorable periods arrive.

Frequently Asked Questions

What is Marathon Capital’s primary trading objective?

To profit from major and sustained futures and interest rate price trends using multiple independent systematic trading systems. Each system differs in its sensitivity to price action, and more than one system may generate signals for the same market simultaneously. Signals are implemented with discipline and in an unemotional manner.

How does Marathon Capital manage position risk?

Through a predefined stop-loss point for each position, determined daily by a proprietary computer model. Daily exposure for individual market positions is normally confined to less than 2% of equity. Portfolio volatility is monitored daily, with diversification typically keeping portfolio volatility below 1% of equity. Accounts are rebalanced frequently to maintain appropriate exposure levels as equity changes.

Why does Marathon operate its risk management system independently of its signal generator?

So that portfolio exposure can be adjusted based on current market conditions without changing the underlying entry and exit signals. The risk management system determines how much exposure to carry. The signal system determines when to enter and exit. Keeping them separate allows each to be optimized for its specific function and prevents changes in market volatility from distorting the signal logic or changes in signal conditions from affecting the risk management framework.

What is the significance of rebalancing during declining equity periods?

It prevents the drawdown from accelerating its own decline. If position sizes are fixed and equity declines, the fixed positions represent an increasing fraction of total equity, amplifying each subsequent loss. By reducing contract count as equity declines to maintain the same percentage exposure, Marathon prevents the feedback loop between declining equity and increasing relative position size that can convert manageable drawdowns into catastrophic ones.

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