Copyright 2009 © Opalesque Ltd. All Rights Reserved.
June 16, 2009
FOUNDING FATHER Q&A
a world class operation in everyrespect, whether in trade execution orinfrastructure, and an ongoing researcheffort to improve what they do. Also,we seek managers with trading stylesthat have some unique feature. It doesnot do us any good if a CTA has a 90%correlation to other CTAs. That adds novalue to our portfolio.
OFI: That must be difcult with trend
followers. Don’t they mostly follow thesame trends?
EJ: We do not rely on trend followersalone. We include as much diversity as wecan nd. There is a lot of diversity amongCTAs. Some traders hold positions forno more than a few minutes, others holdfor weeks. You have traders that focuson a single market, you have those thattrade every market around the world.There are traders that rely on patternsin the markets and traders that rely onmathematical analysis of economic turningpoints.
OFI: How come all these differentapproaches are practiced in futuresmarkets?
EJ: Futures markets are the canvas uponwhich the traders apply their skills. Theyuse futures because these have desirablecharacteristics. Futures markets are non-directional, extremely efcient and veryliquid. If you have a sense of how to pullreturn out of markets, you will gravitateto futures because the instruments allowsyou to express that skill.
OFI: Do global macro and managedfutures belong in the same assetbucket?
EJ: If you line up global macro managersthat trade exclusively in futures versusglobal macro managers that trade otherinstruments as well, you nd that theyare not very correlated. Global macroas expressed in the CTA world hassignicant differences from global macroas expressed in hedge funds. For instance,in the hedge fund version people usuallypick two to four macro themes that theyput into play using an array of instrumentsand hold for a long time. By contrast,CTAs with a global macro style tend tohave a larger range of themes and holdpositions with a much looser hand—theyrun very dynamic trade books comparedto macro hedge funds.
OFI: Is asset growth the enemy of return?
EJ: It is not necessarily the case thatsmaller funds do better. It depends onthe trading style. Yes, someone whotrades in a very short time frame can’tmanage as much as someone with alonger time frame. That said, two of thelargest futures managers, Transtrendand Winton, continue to perform well.It has more to do with the style andinfrastructure of the manager than theassets under management. We have nohard rules about the size of the assets aCTA manages.
OFI: What do you try to avoid?
EJ: We don’t want managers that takea lot of risk relative to their return, takevolatility risk or don’t show discipline.There are managers who make fabulousreturns by taking inappropriate risks.Frankly, that describes a signicant partof the hedge fund world. You’ll see hedgefunds that make money for 48 monthsrunning and then collapse because theytook too much credit risk. Our mandateis to avoid those risks and try to generatereturns in a different way.
OFI: What do investors want now?
EJ: Investor interest in CTAs waxed andwaned in the past. I think 2009 will bringa paradigm change, for two reasons. One,the diversication benet of CTAs, a pointmade repeatedly in academic studies,showed up in full force last year and isnow being accepted by people who usedto resist the idea. Two, people are startingto distinguish CTAs from hedge fundsand allocate separately. CTAs have alwaysbeen lumped together with hedge funds.Investors are now starting to say theywant so much exposure to the hedge fundspace and so much exposure to the CTAspace. In my 20 years in the business, thisis a signicant change. People are nallystarting to take notice of futures!
OFI: What keeps you up at night?
EJ: I sleep pretty soundly these days.In 2008 the volatility of our compositeportfolio was the lowest in our history.Frankly, I’m more concerned about eventsin places like Pakistan or North Koreathan I am about our portfolio. Can youimagine the impact of a nuclear explosionin Saudi Arabia? There are any number of possible events that would rock markets,including futures markets. Even withthose geopolitical risks, I would muchrather have a broadly diversied futuresportfolio than own stocks and bonds or belocked into one currency. Futures marketsas a system are more stable than stockmarkets, as we saw on Black Monday1987 and in the recent crisis. Now theUS government is trying to move moreinstruments to futures exchanges. I havecondence in the integrity of the futuresmarket.
“People are starting to distinguish CTAsfrom hedge funds and allocate separately.CTAs have always been lumped togetherwith hedge funds.”