Copyright 2009 © Opalesque Ltd. All Rights Reserved.
September 29, 2009
FOUNDING FATHER Q&A
how a manager’s returns compare to therisks taken. We look deep into the track
record, not just at the prot numbers.
CTAs that are promising by our measuresare put through the qualitative review. Wemeet the principals, learn their history andunderstand how they make money. Welook at their operational capabilities andtalk with their customers.
OFI: How many managers havesurvived this screening process?
KS: We are currently using seven tradingadvisors, with whom we feel comfortable.A very large number of advisors arescreened out by our quantitativeanalysis of the track record. We look for
consistency in how much prot they can
produce relative to their ability to controlrisk. This is a very stringent screen. We likeour analytical approach because we havefound it to be a meaningful indicator of future success.
OFI: What other factors make youdecide not to proceed further with amanager?
KS: Many of those that get through ourquantitative screen don’t meet othercriteria. There are a whole range of issues. Key personnel may have left the
rm, which means that the track record
no longer indicates what the team cando. They may not have the operational
capability to handle an inux of additional
money. Some managers have compliance
or legal issues. Sometimes we nd they
use instruments we’re not comfortablewith. For instance, in early 2008 we founda CTA that otherwise looked very goodbut was trading swaps. We want tradinglimited to exchange traded futures andcurrency forwards, with no over-the-counter derivatives. Because of ourconcern with the swaps market, we didnot invest with that CTA. As it turned out,
the crisis that came later in 2008 justied
OFI: How would you assess anemerging manager?
KS: We do not invest with emergingCTAs because you can’t measure theirprobability of success. We want a reliable,proven track record.
OFI: Are you still invested with someof the managers you found 20 yearsago?
KS: You can’t stay with same CTAs—theychange, markets evolve. We’ve changedour whole portfolio completely over theyears. Not that we invest short term.We’ve used some CTAs for 10 or 12
years, others for ve years. But we do
switch managers. Some of them do notkeep up with markets or lose personnel.Other managers come up with moresophisticated systems.
OFI: Has you screening processchanged over time?
KS: Our search became more global andour analysis of track records became moresophisticated. These days we search allover the world. Of the seven advisors
we’re using, ve are overseas, two are
in the US. By contrast, seven or eightyears ago we were investing with only UStrading advisors. We’ve done research toimprove our selection process and overallwe’ve done very well for our investorsover the years.
OFI: What styles do you prefer?
KS: We have used a wide range of CTAsover time but found that the most reliableare systematic trend followers. So the bulkof our money is with trend followers.
OFI: Managed futures don’t seem to bedoing well this year. Have many CTAslost their edge?
KS: It is very short sighted to say, they’renot doing well this year, they’ve lost theiredge. It is normal to have down years.As a professional investor, you think interms of the long-term horizon, don’t
allow short-term results to inuence your
view. Overwhelmingly, the data showsthat managed futures adds to portfolioperformance and is one of the best
OFI: Isn’t short selling a good
KS: Historically, over the long term equitymarkets go up, so short sellers losemoney. But CTAs can go long & short, not just in stock markets but many markets.They can make money in bear or bullmarkets, whereas short sellers lose in bullmarkets.
OFI: What about trend followers’drawdowns?
KS: In my opinion people need tounderstand that systematic modelswork in the long run because long-termtrends do appear, usually when you leastexpect them. Good managers keep theirpowder dry, attempt not to lose too much
during difcult periods, then try and take
advantage of trends. Managed futuresis misunderstood by a large percentage
of the nancial community. It is seen as
riskier than it really is. Although futurestrading is speculative and volatile – justlike stocks can be – and not suitablefor everyone, used properly it is a riskreduction technique. 2008 showed thatit complements stocks and bonds in aportfolio. We’ve seen increased investorinterest.
OFI: What mistakes do investors make when investing in managed futures?
KS: You need someone with experience toscreen managers and watch the trading.To get in with the largest CTAs, in manycases you have to be a large investor.For instance, some CTAs require a $100million investment for a separate account.An individual investor may not haveaccess—which we provide.
“We have found that annual profit has nostatistical significance for predicting the future.”