Buttonwood, LLC: Exploiting relationships in the energy complex

Dennis Weinmann had an interest in trading stocks from his childhood. However, his first introduction to markets was in college when he got a job at a commodity trading firm at the New York Mercantile Exchange (NYMEX).

Later he was offered a job with Drexel Burnham, but chose to return to the commodity firm at NYMEX. He fell in love with the floor and was hooked. “It seemed like a lot of people [were] making money and [having] a lot of fun,” Weinmann says. “I started out clerking in heating oil, gasoline and crude oil markets. The broker I [clerked] for was one of the largest crack [spread traders] out there.”

Weinmann was not only drawn to the fast action of the energy markets, but also the much more complex dynamics of the intermarket relationships among the energy complex, which would shape his trading career.

“When I graduated, I didn’t want to work on the floor anymore,” Weinmann said. Instead he took a job in the office establishing hedge programs for medium to large sized producers. By 1987, he was setting up hedging programs fulltime. In addition to gaining an understanding of money flow and hedging in the energy complex, Weinmann studied technical analysis in an attempt to find an exploitable edge in the markets.

By 1990, he decided to go out on his own and started futures brokerage Coquest Inc. along with John Vassallo, a work colleague with whom he shared a common vision.

In addition to hedging for commercial interests, Coquest would build a trading program based on their understanding of intermarket relationships in the energy complex and technical analysis. This was the foundation for the Buttonwood Trading Program.

“We had two models in our business plan. One was to clear and set up hedges for producers and end users and the second was to manage money," Weinmann says. “We learned that the vast majority of the people [that are] moving volume, have a need to. A lot of people [speculate, but] a large portion of the volume is done by people who have to do it. It’s the real side of [trading in] the industry as opposed to buying and selling to make money.”

While Weinmann learned lessons of order flow from his understanding of the needs of hedgers, he believes that it is best illustrated through a study of price. “We lean towards technical analysis,” says Weinmann s. “My trading isn’t very directional; it is more arbitrage and spread trading. Usually I am less concerned of where the market is going [as opposed to] where I can find value.”

He tends to find value in mis-pricings in energy spreads.

“If you had to put a label on [our strategy], it would be similar to stat arb, which is basically saying this is moving too far too fast, and outside of what we would consider fair value,” Weinmann says. “And we value [energy markets] vs. [related energy markets] in a pretty consistent fashion, and we try and take advantage of mis-pricings.”

His understanding of the price relationships among the various intra market and intermarket spreads in the energy complex allows him to see when those relationships fall out of line. Buttonwood trades calendar spreads, crack spreads, heating oil to gasoline and gas liquids vs. crude oil.

While the program is technical in nature, Buttonwood uses discretion. “The only thing discretion means to me is that I am not [blindly following computer-generated signals], Weinmann says. “There are trades we take because they match our criteria. Our criteria tends to be technical in nature. How we take those signals is what makes us discretionary.”

Weinmann likes to keep his hands on the wheel but does concentrate on fundamentals. “How do you know if you are wrong, if you are a fundamental trader [and] the market continually moves against you? We are aware of fundamentals but don’t make a lot of trading decisions based on them,” he says. “Price is the ultimate indicator of future price, so we study price. Yes, there are times when price can be wrong but in general, everything shows up in price and because of that we trade off of what price is doing.”

Their trades range from very short to very long term. “We have [trades] on from five minutes to four years out,” Weinmann says. “It depends on what we are looking at, how it is reacting, [how] it is meeting our [expectations]. If we put something on and it goes against us quickly, we have a tendency to get out quickly.”

The Buttonwood Program has produced solid returns since launching in the second half of 2014. While the program is not directional, it did take advantage of the massive sell-off in crude oil in 2014. “It is very conservative,” Weinmann says. “It is opportunistic: when the market is moving, we’re going to make more money, and when the market is not doing anything, we don’t trade. Sometimes doing nothing is the best trade.”

Buttonwood has produced an annualized return of 7.14% with a standard deviation of 5.78%. “People have the ability to leverage us up,” he says. “Our return-after-drawdown is relatively quick. What usually causes a drawdown for us is what gives us an opportunity to comeback.”

Energy production players and methods change, which can change market relationships. This provides opportunity for Buttonwood. “Lucky for us it is ever changing, and the more it changes the more opportunity we see. No matter how much it changes it tends to go back to some sort of value,” Weinmann says.

The key is to understand the relationships of the different energy products and know how they change over time. “Interrelationships change all the time but there is always a relative value between X, Y and Z,” he says. “We are always looking at those values and seeing what we consider to be relative value. It is an art form; that is why we are discretionary.”

It is also why Weinmann has provided consistent performance for both his hedging clients and investors.

“The above article was originally published by in April 2019. All rights reserved.”

This material is not intended to be investment advice, nor is it a solicitation of any offer to invest. Any such solicitation will be made by an offering memorandum. The information is for illustrative purposes only as it highlights recent market events. 3322-NHPAF-03192021

14 views0 comments