How is my SMA account being traded?
Granite Capital utilizes what are called “block trades” to trade Client accounts. What this means is that Granite utilizes a single “Master” account to model, place and manage the trades, and whatever happens within this Master account gets proportionally distributed across all Client accounts.
The objective is to replicate proportional positions and performance in Client accounts to match those in Granite's Master account.
Will the performance of my individual account match exactly to the Master account?
In most cases, performance will not match exactly, but overall, the performance should be relatively close. The reason the performance may not match exactly is due to a variety of factors, many of which are detailed below.
As we continue, it is important to understand that Granite is trading three different complex option strategies that involve laddering/campaigning capital in and out on a continual basis. This process involves hundreds of independent positions and multiple orders and adjustments each week. While Granite’s Trading Software Program is easily able to execute the trade plan with precision accuracy, it's essential to recognize that discrepancies are an inherent and unavoidable aspect when trading complex options strategies within separately managed accounts. These discrepancies are not a result of trading errors or inadequate oversight; rather, they stem from the inherent complexities associated with managing such strategies within individual accounts.
While it's inevitable to encounter slight performance differences between Client accounts and the Master account, our aim is to mitigate those variations to less than 1.5% by the end of the year. In simpler terms, if Granite's Master account attains a 20% return over the year, the objective is to ensure that Client accounts achieve returns between 18.5% and 21.5%.
Factors that may cause performance discrepancies between Client accounts and the Master account.
Account Sizing
Granite trades 3 different strategies, the 488, the 139/Orca and the CWB. Granite uses a minimum planned capital amount of $25,000 for each trade. What this means is that we split up the capital in Client accounts into $25,000 allocations, and for each $25,000 allocation, we can apply that capital to a specific strategy.
For example, if a Client has $75,000 in their account, we would apply $25,000 to the 488 strategy, $25,000 to the 139/Orca strategy and $25,000 to the CWB strategy (for a total of $75,000 invested).
This same concept applies to the Master account as well. Let’s say the Master account has $300,000 to invest. In this case, there are a total of (12) $25,000 allocations, so we would apply (4) allocations (or $100,000) to the 488 strategy and (4) allocations ($100,000) to the 139/Orca and (4) allocations ($100,000) to the CWB strategy.
Here’s where things get a little more complicated when cloning the Client account to the Master account.
Let’s say the Master account has $300,000 to invest and the Client account has $325,000 to invest. In this scenario, as you can see in the diagram below, the Master account receives (12) $25,000 allocations that are distributed equally among the 3 strategies, but the $325,000 Client account receives (13) $25,000 allocations. So, the Client account receives (5) allocations to the 488 strategy, whereas the Master account only receives (4) allocations.
In this situation, since the Client account has more capital allocated to the 488 strategy than the Master account does, if the 488 strategy were to perform better or worse than the other 2 strategies, the performance of the Client account will differ slightly from the Master account.
Discrepancies caused by account sizing can be more pronounced with smaller sized Client accounts because each $25,000 allocation has more impact on the total account size. This is why we prefer not to trade accounts less than $300,000, because these discrepancies (good or bad) have the ability to become larger and the overall account performance may not meet Client expectations.
Another thing to note is that our Trading Software Program also rotates which strategy receives these “extra” allocations in Client accounts. Generally, our Software Program applies any “extra” allocations to the better performing strategies first (i.e. the strategy that has been recently performing better than the other two).
Fees
Fees for Client accounts are deducted on a quarterly basis, while fees for the Master account are accounted for on a monthly schedule. As a result, clients can anticipate relatively lower performance in their January, April, July, and October performance reports as compared the Master account.
Treasury Interest
Treasury positions are added to Client accounts whenever Granite’s Software Trading Program identifies surplus cash available for this purpose. Since treasury purchases are not determined by the Master account, treasury positions (i.e. the actual CUSIP entered) may or may not align with the Master account. Consequently, the interest earned on these treasury positions may not credit the account at the same time as the Master account, introducing the potential for minor discrepancies between Client performance and the Master account on a monthly basis. Overall, this should all balance out by year end, but on an intra-year basis, these dynamics may contribute to minor discrepancies.
Deposits and Withdrawals
The deposits and withdrawals of capital in Client accounts has the potential to create significant disparities between Client performance and the Master account. Due to the manner in which Granite gradually incorporates new capital, these transactions may take several weeks to fully integrate into the program. The prolonged timeline for these transactions to be fully implemented can lead to notable short-term performance differences between Client accounts and the Master account.
Another factor with deposits and withdrawals relates to the performance AFTER the transaction.
Let's first consider a scenario where we open a brand-new account, and that account begins the year with $100,000. Let’s than say by year's end, the account balance stands at $200,000 (and no new deposits or withdrawals were made). This would reflect a $100,000 gain and a 100% inception-to-date return (account began with $100,000 and ended with $200,000).
Now let’s say on this first anniversary of the account’s opening, we deposit an additional $1,000,000 into the account. Now the account balance = $1,200,000 ($200,000 already in the account + $1,000,000 deposit).
At this point we have a $1,200,000 balance in the account, with $100,000 of that coming from our previous gains.
Question: What is our inception-to-date performance?
Is it $1,200,000 / $100,000 gain = 8.33% ... OR ... is our inception-to-date performance still 100%?
The answer is 100%. The original $100,000 of capital that was invested has returned 100% whereas the new $1,000,000 investment hasn’t had a chance to influence the returns yet.
The proper way to calculate inception-to-date returns is to use a formula called the money-weighted rate of return. The money-weighted rate of return factors in the size and timing of deposits and/or withdrawals.
This is how Bridge calculates the returns shown on client reports.
Please keep this in mind when viewing the performance reports in Bridge.
If your inception-to-date performance doesn’t seem right within Bridge, please keep the money-weighted rate of return in mind...this may help explain the value.
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Below is another, more detailed, example:
Let's first consider a scenario where an account begins the year with $100,000 and no additional deposits are made. Let’s then assume that after six months, this account has increased by 10%, reaching $110,000. If this account were to experience an additional 10% gain in the latter half of the year, that would result in an increase of +$11,000.
Consequently, by the year's end, the account balance would stand at $121,000, reflecting a +21% year-to-date gain (account began with $100,000 and ended with $121,000).
Now, consider the scenario where an account begins the year with $100,000 and after six months, the account has increased by 10%, reaching $110,000. At this point, another $100,000 is deposited into the account, resulting in the account balance rising to $210,000.
Now, let’s say that the account experienced a 10% gain in the last six months of the year, meaning the $210,000 account would have seen an additional gain of +$21,000, resulting in a balance of $231,000.
A typical way we may view this is that we made +$31,000, or +15.5% for the year (we deposited $200,000 and ended with $231,000).
But this +15.5% is technically not correct, because we have to account for the money-weighted rate of return.
The money-weighted rate of return factors in the size and timing of deposits and/or withdrawals. For example, the initial $100,000 was invested for the entire year, whereas the additional $100,000 was only invested for 6 months. So each contribution earned/lost a different rate of return.
The money-weighted rate of return for the above example equates to a gain of +12.87%.
This is how Bridge calculates the returns shown on client reports.
So, the account without an intra-year deposit experienced a gain of +21% for the year, whereas the account with the additional deposit only gained +12.8%, due to the timing and size of the deposit. This illustrates how the timing and magnitude of deposits or withdrawals can substantially influence annualized performance metrics.
We understand the money-weighted rate of return calculation can be a bit difficult to understand. For more detailed information, please see this link:
Money-Weighted Rate of Return: Definition, Formula, and Example
Allocation Calculations
Every time Granite initiates a new ladder/campaign trade, its Trading Software Program assesses each Client account and determines the proper allocation to apply. This process can result in the discrepancies of prior trades affecting the allocations of new trades.
For example, consider an existing trade, denoted as trade #1, which was initiated last month. A few weeks after the opening of trade #1, the Client received an interest payment for a treasury position, but the Master account does not own the same treasury position, and consequently, did not receive a corresponding interest payment.
Now fast forward to today and it's time to initiate the next campaign trade, denoted as trade #2. When Granite’s Trading Software Program assigns allocations for this new trade, the Client account will receive a slightly larger allocation to this campaign than it did to the last campaign (because there is more capital to invest within the Client account), whereas the Master account will receive the same allocation that it did in trade #1.
This means the Client account is trading more capital in trade #2 than in trade #1, while the Master account is trading the same amount of capital for both trades.
Upon the conclusion of both trade #1 and trade #2, the performance of the Client account will be slightly different than the Master account because the accounts traded varying proportions of capital in each respective trade.
These are normal discrepancies that are expected to happen.
Now let’s take this a step further.
Using this same example... Let’s say trade #2 takes an unusually long time to complete... and it’s now time for us to enter into trade #3. Because a greater portion of the Client's capital is tied up in trade #2 compared to the Master account, the Master account will have more capital available for investment in trade #3 than the Client account. Consequently, trade #3 now introduces a discrepancy between the Client account and the Master Account. This illustrates how even minor discrepancies can have a cascading effect over time, influencing subsequent trades and overall performance.
Bottom Line
While discrepancies are an inherent and unavoidable reality when trading complex options strategies within separately managed accounts, it is important to recognize that all accounts are executed using identical strategies, adhering to the exact same trade plan and exact same rules as the Master account. In the long run, performance disparities between the Master and Client accounts are expected to closely average out. It is also important to note that performance differences between the Master and Client accounts have just as much chance to create better returns than worse, so discrepancies are not always a “bad” thing.
Since there will be slight variations in performance between Client accounts and the Master account, we strongly encourage everyone to regularly log into BridgeFT and review their individual account performance. The reports available within BridgeFT are very comprehensive and detailed, offering excellent insight into overall performance. This approach allows clients to stay informed about the nuances in their account performance and ensures transparency and clarity regarding the specific details of their investment activities.
This link can be used to access BridgeFT: https://atlas.bridgeft.com/login
Additionally, it's important to highlight that Granite's Account Monitoring Software operates in real-time, continuously tracking all Client accounts. If the performance of any specific Client account deviates significantly from the Master account, the software promptly notifies us. In such instances, a thorough review of the Client account is conducted to ensure that all aspects are proceeding as anticipated and to address any potential issues or discrepancies. This real-time monitoring serves as a proactive measure to maintain alignment between the performance of individual Client accounts and the Master account.
Also, if you ever have any questions regarding performance, or how your account is being traded, please feel free to reach out to us anytime. We are always more than happy to discuss anything you would like.
