Real Secret Behind Trend Following Martin Lueck Top Traders Unplugged

TITLE: The Real Secret behind Trend Following and How it Works | with Martin Lueck CHANNEL: Top Traders Unplugged DATE: 2017-06-17 ---TRANSCRIPT--- imagine spending an hour with the world’s greatest Traders imagine learning from their experiences their successes and their failures imagine no more welcome to top Traders unplugged the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the Next Level before we begin today’s conversation remember to keep two things in mind all the discussion we’ll have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance also understand that there’s a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions here’s your host veteran hedge fund manager Neils costr Larson [Music] you’re listening to top Traders unpluged where I continue my conversation with Marty Leck co-founder and director of research of aspect capital disintermediation of the interbank market do you remember that yes so you know as it be you know as it became more democratized and everyone had access to the same price feeds well you know the the the the the bank trading desks had to you know had to make a living and um and spent time understanding our models so back to the um sure uh back to you know the early point about being being picked off but um so uh what that told us was that we just had too much of a market impact we were too visible to the markets so around that period there there was a uh same same effects we were capturing Neils but in a different way that meant that our entry and exit to the markets was much much smoother and effectively invisible so since then you know huge development and huge focus on execution to make it uh uh to really alcate what we’re doing to dribble our trades into the markets in in random uh pieces at at random delays um and really you know try and exploit the market volatility rather than forcing our business to get done um as quickly as possible sure interesting um and so so sorry you you then so so that that was a sort of starting place to describe what what aspect what the Diversified program looks like today um in in talking about the grand sweep of how the the program has evolved you know it has remained predominantly uh medium-term Trend following that is what we are committed to delivering to our clients so you know you go through a a challenging period for Trend following the Temptation is to introduce or or other models or to change the weights um either to reflect what would have worked or to reflect what you think will work that we don’t we don’t think that’s our place uh it is for some other firms because they they’ve sold themselves as you know multistat or or whatever it is but our place is to deliver quality uh medium-term Trend following uh returns to our institutional and and and now broader client base sure um the 80% of the portfolio is focused on those Trend following models we trade uh over 150 markets and multiple contracts in many of them uh so it’s probably around 200 instrument 180 or 200 instruments um and 20% of the risk Neils is in a a range of uh we we talk about modulating factors or or complementary models that are designed to um if you will take some of the rough edges off of off of trend following or or take advantage of orthogonal or diversifying effects that we believe have a similar level of persistance or traction as the momentum component right so not really mean reversion or counter Trend or is it more on the exit side or that that it helps you um get out a bit quicker or get in a bit earlier that these models help you um actually I’d sort of think about it slightly differently there so although I may have misled You by using a term like modulating that what that what that doesn’t mean is that they are all you know focused on what the trend models are doing and therefore speeding them up or slowing them down or or making them more more sensitive or in now they’re they’re effectively capturing other factors now it may be that some of those factors are related to the trend fall so they may it may for example be relative momentum between instruments in your in your Trend following um portion which clearly is a diversifying effect but um they will have the effect of of of of capturing diversifying factors in you where either you’ve got you’ve got different information sources whether it’s uh whether it’s a carry effect right in in FX or in fixed income or or or in equities um you know you can look at at features and different dynamics of of the uh uh of the term structure um you can look at as I say relative momentum pieces you can look at um mean reverting or other market dynamics typically faster strategies um but I we don’t choose to look at them as you know as sort of is This getting us out of our trending position factor I I should also stress that uh that that we continue to evolve and improve and and um hammer away at the uh at the trend following piece and and and I’m often asked that in due diligence questionnaire you know you’ve been doing this for 30 years I would have thought you’d have figured it out by now um and uh and there’s always more there’s always more that you can do and it’s and it’s fascinating yes absolutely how um how do you weight the portfolio in Broad terms between financial markets and commodity markets because that’s always sort of being brought up when you uh when you compare smaller managers to larger managers yeah um well not surprisingly you know uh our our starting point is a very agnostic Outlook so we we absolutely uh defy or isue the the worldview that says you know you can you can look at what’s happened historically and predict what’s what’s going to uh happen in the near future obviously with the bro that that is essentially what you know the behavioral aspect of of trend following is based on but your ability to infer that well because I’ve had a good run in bonds means that they’re going to continue to perform uh so I’m going to go over overweight in bonds that’s that’s not something we ascribe to so it’s very you know we are seeking the most agnostic portfolio construction we can and therefore if I had no you know liquidity or correlation constraints I would trade um you know an an even spread of of sectors Nails um so my starting place is is uh broad diversification across we we talk about seven sectors um internally and then I will modulate or I’ve used that word too often but I will I will um you know Flex that um that agnostic diversification with appropriate consideration for the long-term structural correlation between markets um and also cognizant of the liquidity characteristics of the market so um and and that’s something that we review on a regular basis and and and the port folio allocation structure slightly you know flexes very gently around different liquidity characteristics so we have both you know obviously there are hard limits that the exchange will um impose on on you in many markets that you can’t be bigger than position X but we also uh impose our own um much more conservative constraints about how much uh of the average daily volume or the open interest we’re prepared to be and how much we’re prepared to be in you know in in taale events um and the all of that feeds into a a process that um regularly and systematically determines what um what the allocation will look like do you have a lot of scope for growth when you look at the markets you trade the balance of the portfolio as it is today uh and the you know uh constraints that you just mentioned I mean does it still allow you to to grow substantially from from here without having to change that side of thing so to speak absolutely um you know there is there is considerable capacity in the program um and uh I you know and we’re very careful about it I don’t I don’t say that willy-nilly because as those flexes happen in in the program we we look to understand what different features you know how that’s changing the the um correlation structure and and and the um you know any potential impact it has on the markets um and that you know that gives us a great deal of comfort there is a large you know there’s there’s significant capacity but it also Neils gives us you know a clear point at which we know we need to be careful so it’s not like yeah just keep going until something goes wrong it’s it’s well given these conservative constraints when we hit this particular point then we need to be very careful but so so uh you know number what comes out of that is number one you need to be cognizant of not just your own size but also what’s going on in the market so you know you could stand still and the markets could dry up so you need you need to be aware of that number one let me um ask you a slightly different question um and that’s a little bit about as you say you know you need to be aware of what the market can handle I assume that you trade uh foreign exchange and not and not just foreign exchange via Futures y we we trade them both but predominantly uh interbank yeah sure and um given what what happened in 20089 where certainly liquidity in those markets seem to um uh change dramatically uh let’s put it that way um and and what’s going on in in in the financial industry as a whole today um the concerns that we have perhaps with some of the things happening in the banking sector and what the central banks are doing and and and the fact that it’s really opaque in terms of what is inside a bank um are you are you concerned about um liquidity drying up again should we enter into a new phase of of of the crisis and and have you have you learned something to deal with that Sudden Change in liquidity in in a market Okay so I mean there there are two parts that one is the sort of ambient liquidity um of the markets and our ability to respond to you know changes in those if we see the spread uh expanding or you know or we see a period of unfavorable um behavior in our in our execution alos um how we respond to that I’ll come back to that in a second the other I don’t know whether you were alluding to this was you know in in the crisis of of 2008 there were you know literally there were Bank lines being frozen yes you know so um what I mean again I I this at at least we’re cognizant before 2008 that you know a a prudent uh managed account holder will have sort of backup relationships so uh and and certainly we had backup Prime bureaucrat relationships so everything we do you know and again that’s sort of I think truism now for for most of the institutional money management firms is you’ve got multiple Clearing Houses you’ve got multiple prime Brokers and if you can persuade your clients to go through the pain of setting up the multiple relationships and you can go through the additional burden of keeping them alive it just means you have that degree of flexibility that if heaven forbid um but it did happen you know heaven forbid your lines dry up with prime broker a that you you can move those uh positions and carry on trading at Prime broker B so absolutely you know I think we were we were well placed to survive that cleanly in 2008 but you know but we’ve continued to strengthen that feature of the business that operational robustness um and and I think that uh you know the regulators and the and the due diligence um folks that have come in have have seen you know that that was was probably a model of of of how to do it um in in terms of the market dynamics um well you know you’ve sort of highlighted one of the most challenging markets to get true numbers on on what liquidity Dynamics are but there we have um so i’ make two observations the first is the point I wanted to make earlier in addition to um to being clear about what our capacity is with a given set of markets we continue to Monitor and include new markets so by you know over the past few years we’ve introduced a range of non-deliverable forward currencies which expands the universe of opportunity it also expands the um you know the the uh the the um complexity of monitoring their liquidity um their liquidity profiles um but I think that the most important feature in what we do so most of our of our strategy trading you know sort of 96% of it is is uh box to box it’s electronic execution but it’s monitored 24 hours a day by the um by the very experienced trading team and they have you know there certain circuit breakers or thresholds or or canaries in Coal Mines if you will that um indicate where we see sporadic um you know changes in liquidity profiles shall we say um and if we see those the portfolio construction will um will adapt sure sure I wanted to ask a slightly different question which is something that um I’m not entirely sure how to how to best phrase it but but let me try and explain um so on one part I think many people think of trend following as okay but you you you get your signal to buy or to sell and then you follow along for for the right and and and you have some kind of a position size algorithm but when I listen to to what you’re explaining um I think what you’re actually saying more is that since you have smoothed out this process and I’m not looking at it as a black and white concept um it it probably the position size is more maybe a reflection of the strength of the signal because the more um confirmation you get the bigger you will build your position and so on and so forth um but in my mind I think a lot of the secret to success of trend following is not so much actually where where we buy and where we sell are we a day late or a day early a lot of it is really the the the risk management and thereby the position sizing itself that that’s a big part of the secret source to the success or uh the robustness of trend following H how do we view that I I I I think you’re you’re absolutely right there there’s you know it’s what we do is a holistic challenge you can you can you can get overly focused on the you know an an individual uh Trend following model at an individual time scale but it’s the combination of all of the pieces put together and the combination of all of the markets put together and how you risk manage the whole that determines obviously your your end performance I’d make two observations the first is that the positions that we hold are yes a function of signal strength and conviction sure but that as you would expect would be modulated by what you perceive as the risk of of the market so for a given signal strength if I see the volatility of a market uh which is a cipher for risk if you will uh if you see that say double I will effectively have my position to maintain the same risk for that given signal strength point one point two is that you know it’s not an inexorable line the stronger the the trend the bigger position I’ll put on because as you can imagine NE that way lies Madness so there’s a you know knowing effectively when to back off and perhaps when to be a provider of liquidity to the markets rather than a uh a you know a consumer of liquidity that’s another delicate um feature of of of what we do yeah so in effect um just to make clear to the listeners you’re not actually using a stop-loss per se because it comes automatically as the strength of the signal changes your position changes along with it that that’s exactly right so it’s a it’s a gradually uh modulating signal um and the other thing that I I really like about what it is we do and obviously we spent time researching super fast you know intraday models and da d d and and and there’s there’s utility in those and some people do them very well but one of the things I like to stress for an Institutional Investor um is the intuitive qualities of medium-term trend following and the way what I mean by that Neils is that you know if you read the financial times or the Wall Street Journal or or you know your local financial newspaper and you follow roughly what’s going on in global markets then you will have a good intuitive sense of the positions that we hold So that obviously you know the the the detail and the complexity of exactly the position size that we hold which as you’ve said is a function of signal strength volatility um you know where you are in the development of of of that Trend portfolio construction risk management are you up against any exposure constraints all of those Fe pieces holistic challenge very complex but by and large if you stand back just a short way and look at the EB and flow at the the Dynamics of how that portfolio is moving from day to day it’s very intuitive and you will you you can broadly as an Institutional Investor understand why Trend following portfolio makes and loses money when it does which has always actually puzzled me because people often criticize um you know what we do from saying that it’s complex it’s difficult to understand and I’m just puzzled about this because it’s really not that difficult to to understand that when something goes up you buy because you think it’s going higher and if it goes down you sell because you think it’s going lower compared to you know uh a fixed income Arbitrage or or whatever they call uh these strategies um yet people seem to love those strategies more maybe we have time to talk about that more from the philosophical point of view later on um I wanted to ask you just a final point maybe uh about the program itself um and that is and and and and going back to research a little bit here how much research do you actually need need to do to overcome or to improve efficient execution so to speak is is that a big part of research when you get to your size to to make sure you you can continue to grow and and and and have efficient execution yes um well so as as a research team we uh you know we look at the problem of of continuing to evolve and develop the program we we we break it down into the you know the core diversifi sorry the core Trend following sure components the um diversifying uh modulating strategies the portfolio construction and risk management piece and then execution and and by and large there is always someone working on something in in each of those areas um and you know over the sweep of time we will have periods of of more concentration in one area than in in other so uh so it’s a bit of an EB and flow so about four years ago we embarked on the on the transition to a holy uh box to box so you know if you look at the sweep of of uh evolution of of execution back in the good old days of of where we would trade binary in big in big clips and we and we had to get it down to an open outcry Market well our our execution research in those days Neils was to go to Chicago and meet the biggest and baddest floor Brokers and You’ you’d hire them because they they got to the front of the pack um uh and then you know so over time markets have become more electronic and we’ve that that’s uh that’s played into you know the the technology Le Leed firms uh and then actually taking the leap to a predominantly box tobox world or or be it you know monitored carefully um that has been an enormous commitment of research effort and and investment sure um it requires an ongoing monitoring I I I would stress that you know what we don’t do hft so it’s not we’re not going head-to-head with sort of an hft firm where the AL where you’re swapping out alos every few minutes or every few hours um we have a a suite of uh execution algorithms which are generally fit for purpose we uh ensure that they are correctly parameterized for the liquidity you know for the character you know markets change their characteristics what’s the sort of resting uh bit offer spread what are the the the typical clip sizes that people are are are making available those are um characteristics of markets that we need to review and reparameterize on on a regular basis and obviously monitor if they’re changing more rapidly than we’d expect so it’s an ongoing monitoring effort um I think because we’re not slamming the markets with um with you know very fast models um you know our execution alos are are predominantly looking to make us I’d love to say invisible but certainly to obfuscate what we do and and to capture if you will a patient premium we’re not in a hurry to get our business done but but uh it’s an ongoing effort yeah absolutely risk management and not that I want to because I think we we’ve talked a lot about that already but I I had a a sort of a general question and that is how do you define risk meaning there are so many different risk measures people talk about value at risk margin to equity position size you know uh risk to stop whatever it might be but there is is there is there something that you’ve come across which you feel very comfortable with looking at when you look at risk what what that means to to you and to your portfolio well I I’ll go slightly at at a tangent so so you know I I think that I I I’ve banged on earlier about how uh important we think the risk management challenges in in terms of how you put the component pieces together and then ensuring that you don’t get uh transfixed by VAR measures making sure that you have other measures of risk I think that’s been an important uh piece of the of the puzzle for us and and stood Us in good stead um in this period of extremely low volatility where you run the risk that uh you know if you’re just looking at VAR you can blow up and up and up and up a position and then if if volatility returns to the market you can get a very unpleasant surprise yeah um so you know yes yes we look at those Suite of issues and yes we’re obviously uh very focused on operational risk having had um you know the institutional piece very much is the you know fundamental DNA of aspect the the other thing that I think is interesting about you know how we’ve approached risk is if I if I talk about model risk right for a moment that’s interesting yes um and because I I think this is this is great and again it’s part of the journey that you know this was never written in a textbook anywhere um as I say I couldn’t spell risk in the the in the early days of of AHL um and um and for a while you know we’d say you know the the um uh the Consultants would come in and they say so who’s the director of research and you know Michael Adam or I would stick up our hands and then they’d say and who’s the director of of risk and we’d also stick up our hands and and they’d sort of say well that doesn’t work so um the the point here is that you know we’ve talked earlier about encouraging a a Collegiate and a collaborative and Innovative research effort and that’s what we’ve done and I think I think we do it we do it quite well but but it’s having the right checks and balances and we try to create an atmosphere that’s sort of like um an academic peer review group so we have a just a super risk team you know every one of them is is just as smart and and just as experienced as any of the researchers and it’s and it’s their job to shred if they can um the best research that comes out of out of the research team so there’s a very formal risk review process both of every component that comes out every new yeah component idea that comes out of the research team whether it’s an evolution or an improvement to the trend following piece or a new modulating strategy or an amendment to the execution alos or the portfolio construction methodology each one of those will get looked at in isolation and taken apart either with uh you know some out of sample data some synthetic data uh some examination of the hypothesis or the failure cases that you know they absolutely um stress the components and then Neils uh you know we we typically aim for three releases a year they look at the holistic release right so you may have a you know I may have a a couple of tweaks uh evolutionary improvements to the trend following I may have something new going on in the modulating piece I may have another but they get they get aggregated into a new program release and the risk team will have reviewed every component but then they also review the Dynamics of the overall you know how all of the pieces work together and I think that that is a crucially important um piece of the problem which again may get under underrecognized yeah definitely definitely do you think correlations today is a meaningful thing to look at so to speak um or are we just uh living in a world where markets get more and more correlated uh certainly within sectors but maybe even across sectors I I I absolutely think it’s a crucial um thing that we look at both for for opportunity set um in what we do and also for the the risk management challenge um I think that it es and flows and we’ve been through a period of of as you say you know what what has felt like um a secular increase in um in C relation to the to the sort of um you know you question why am I doing this sort of 2012 where the risk on risk off everything just you know you you you began to think it was somebody was had singled you out for absolutely uh to be taken apart but um so I I I think it’s it’s an important part of what we do I I think right now we’re seeing uh correlations begin in you know just the the signs that the opportunity set is broadening um I I so I don’t give up on the um on the prospect of having uh diversification I I think absolutely the world is now a a much more diverse set of opportunities than it was you know 18 months or two years ago NE sure sure now we’ve talked about the risk management side and of course part of uh what we have to accept in in in running these strategies is is draw downs and uh I wanted to spend just a few uh minutes uh on that one of the things that investors seem to struggle with uh if I can put it like that is the emotions that draw Downs um you know bring with them you’ve been around as you you mentioned you’ve seen it before how do we best help investors understand that um a draw down in a strategy like yours is not necessarily the same as some kind of open-ended risk where it’s just going to continue to go down and down and down again um because of course we we are dealing with issues that uh are related to how the human mind is is working and and and we have these biases inside us uh but how do we best um give them comfort in times of draw down and and helps them take some of the emotional stress uh out and and I guess I asked this Marty because we see so often that investors and we’ve just seen it recently I believe uh again sort of uh and I think sort of most people uh will will know what I’m talking about but a lot of money have left uh the ca strategy at the at the worst possible time so yeah and and I always um you know I love to refer to I I don’t know whether you’re familiar with Peter Lynch who was just sort of a legendary um fund manager at at at Fidelity and I once saw a piece of analysis that um looked at how much money individual investors had actually made with Peter and and it was it was a tragedy because you know as his performance would uh you know Leap Forward that’s when the money is sloshed in and then it would have a draw down and that’s when the money’s sloshed out so if you aggregated those chunks of money that typically bought at the highs and sold at the lows um it was nowhere like the performance that the the the chap had generated so I I I don’t you know when you’ve got a an upset client you probably don’t start the conversation with with with that observation but it’s a it’s one observation the the you know the next observation I make is that you know again provided the client has bought into to manage futures for the right reason you know and and you you you know what I’m saying here is that is that if it’s just been if it’s just popped out the top of you know the only thing that made you money in 2008 and you just say well I’ll have some of that yeah without understanding its role as a diversifying constituent you know that will move risk to capture the prevalent opportunities be they rising or falling markets on a well Diversified basis you know if you um you know if they have understood that it is in their portfolio to provide diversification from the equities piece and the bond piece and and what other whatever other assets they have in the portfolio then what goes with that is that you know but if by definition you’ve put this thing in your portfolio because it’s uncorrelated then you know when you have periods that um equities are plummeting and your managed Futures is making money well then we’re we’re okay aren’t we Neils we’re heroes but if you turn that around and Equity markets are booming and manag Futures is losing money well you’re an idiot yet but that goes with the turf of of I mean obviously I’m not trying to present it as anti-correlated with with um with equities because we know it isn’t um but uh but that low level of correlation does mean that it will behave differently from the stuff that is on certainly on the front page of of of the Ft or or the Wall Street Journal um and there it’s so it there’s a level of idiosyncratic risk so first of all you have to make sure that your cents are comfortable with that idiosyncratic risk and they look at it in the context of their portfolio rather than just transfixing on the line item second thing is everything goes through a draw down whether it’s whether it’s manage futures or the equity markets and boy when they hit a draw down they they really do it well don’t they they make our draw Downs look um look small um and any other strategy so to to lose confidence in in momentum investing or Trend following is you know um you know what smarter folks than I have written TOs and got phds and even Nobel prizes on talking about you you know that that you know no one factor NE is going to work all the time sure but a well- constructed portfolio that exposes you to you know Equity risk premium um to carry from time to time to to Value investing to to um yes I mean gosh um you know those value investors around the time of the of the tech bubble you know they were they were getting it in the in the neck but if you saw a um uh you know if you saw a a a value investor uh suddenly changed their spots and and um be become persuaded that it was you know I’m I’ve given up on my value investing approach and I’m going to become a momentum Trader you’d probably run for the hills so uh so all of those are good reasons to support you know sticking with the strategy that you have invested in and the utility that it provides to your portfolio and again in my view that’s also a little bit of a reminder to the manager community that investors have bought us because we provide a utility to them you don’t want to go surprising them um and and and suddenly looking like a a carry St sure no I I completely agree Marty I mean I think again as you right say it’s not just about uh investors necessarily not understanding um the concepts in full it’s also about how we as managers have tried to explain it uh over the years and maybe we haven’t done a good job in doing that and I personally find that um maybe we’ve spent too much time focusing on explaining um how we do things and and what we do rather than actually focusing on why we do it and I think that again if you can get people to buy into uh why you do what you do and and and and you know your beliefs so to speak um it becomes a different and a much more um much much more easier uh or an easier conversation so to speak so I think that’s true um I wanted to ask you just one more question on um on sort of the the the draw down side and and and maybe it’s a very short answer for you but I don’t know but we we try to eliminate risk as much as we can we try to manage risk as as much as we can but is there anything that’s left in the back of your mind when you go to sleep at night and where you say I don’t really want to wake up tomorrow and this has happened meaning is there anything where you simply just accept that this kind of risk I can’t eliminate so is there anything that kind of keep could keep you up at at night so to speak that’s one of those questions where the more you think about it the Le the less sleep you get so a risk risk management I think is about finding the right balance on the one hand we are paid to take risk needs um but on the other hand you don’t want to take foolish risks that that could be avoided so starting at the really extreme end you know we the the world we live in is a is a fee place at the moment and um you know we’ve all lived through various you know whether they’re terrorist attacks or hurricanes or or or tsunamis which can knock out your ability to trade and and that that seems so um you know when you put it like that it’s well it’s It’s Only Money um as compared with the loss of life and and and the significance of these effects but um we do need to think about it’s something to be aware of what what would you do in in the event that a certain exchange um is is is incapacitated I guess in you know in a in an electronic world that is somewhat less of an issue than on the open outcry floors but but still you know one’s inability to to trade a market just has to be the um uh one one of the the most uncontrollable events that you can um can deal with and then you sort of work your way in from there uh we’ve talked about having multiple prime brokerage and and uh clearing lines it’s making sure that you you know we obviously have a fiduciary responsibility to our clients to make sure that their money is is as safe as we can possibly ensure that it is and that it doesn’t get stuck if there’s some kind of financial or again geopolitical um event uh and then I I think then really the risk management challenge is just to never being complacent you know you you’ve talked about the psychological challenges there’s clearly there are psychological challenges for the investors that it’s our job to uh as you say to to help them understand and to to work our way through in a spirit of partnership um um but there are also psychological challenges as as a manager and boy um you should just expect always to see something new yeah not true I wanted to ask you uh also it’s a little bit I guess a little bit about risk but it’s it’s completely different question I want to tap into your um to your mindset if I could put it like that way because um you know you start off um many many years ago um with 25,000 and then later on 100,000 and and so as an entrepreneur um your mindset is of course okay let’s do it we we’re going to take certain levels of risk and as you said you over optimized you did all sorts of things but you didn’t have any fear that okay if it if it doesn’t work it doesn’t work um the consequences if I can put it that way were not uh so Grand at that time and then suddenly years later you’re super successful I mean you’ve got billions of dollars under management you’ve got 120 people uh to feed every month how does that impact the mindset and the risk uh willingness so to speak uh of of of of of you um does does that automatically lead to becoming more risk averse in a sense it it probably does Neils I think it’s it’s part of part of the journey and and uh you know also part of I guess growing up because you know the the um you know early AHL brockham AHL was as you as you just there was no road map for for what we were doing and we just you know one day at a time and um if it had all blown up well it wasn’t a good idea in the first place would have gone off and done something else so then you find yourself in the in the position where you are managing billions of dollars of other people you know it it’s it is important it is pension fund money it’s people’s savings it’s you know it’s people’s hopes and dreams and and as you say 120 people who 120 fantastic people and and um you know um so my view actually maybe I have a I put it down actually to teamwork right so this is you know because I’ve sort of alluded to the fact that my my business career is not predicated on my genius because there isn’t much of that it’s on you know on being fortunate enough to work with some really talented people and so you in many ways I think what I’ve tried to do is almost to keep a a childlike uh enthusiasm and energy and Outlook so it’s somewhere between childlike and scientific there’s always new information there are always New Opportunities there are always reasons to be cheerful and and and that’s that’s my mindset but I think the maturation process that’s happened to us as a business is that I trust uh and surround myself with people that really can you know that nail this down way better than I can you know so I I think what I’m saying is that I haven’t taken it upon myself to be all things to all men um to all investors I I think that it’s it’s a combination of sort of you need the ying and the Yang you need the people that are still entrepreneurial and coming up with wacky ideas and then you need that thorough diligent um process driven risk management re constant review constant you know could we do this better and and and that’s in our DNA but but I like to think that we still have some of the um you know the youthful enthusiasm that hasn’t gone away sure absolutely I mean speaking of Youth uh Marti um succession plan is that something that’s ever been brought up when you sit down and you talk to your partners and say what are we are we doing this in 20 years or are we actually starting to think about like you know Don Capital like Sunrise Capital people who’ve been around for also 30 40 years and who have put in place succession planning is that something you already think about well we do but it doesn’t you know there isn’t a secret file Mark succession plan that that you know is is like the D-Day Landings um because we’ve you know I talked earlier about that transition that you go through where you know you may think you know too much and then you have to trust the people around you um I think we’ve we’ve done that so I am surrounded by you know a senior management team and in you know indeed great depth in the business of people that are really talented really experienced um and so succession planning is really not an issue you know and and a lot of people own a own a stake in the business I think that Anthony and I in particular do this because we enjoy doing it yeah and you know and and that was so AHL was a happy accident we sort of BU bumbled into it and all you know it all worked out very well aspect was very much an explicit sitting down and saying you know this is the vision that we’re trying to create let let’s go and do it so you know however many years later 25 years later you know the democratization of the managed Futures industry well we’re well on that path Neils I think that that’s been that’s been super I I I very much want to get us through the recovery of of the strategy from from the challenging times that that it’s gone through and reaffirm its place in the if you will investors model portfolio um and and and sing its Praises um but you know there are plenty of people here that do do can do what I do way better than I do it and um uh so you know it will mean me traveling less eventually but I don’t think there’s going to be a day where I just hang up my um sure hang up my uh passport and um and and don’t do this anymore no um I’ve got a couple more questions before I go to the last section which is ort of the more General and fun stuff but um you talk about the vision so to speak um what’s the biggest challenge that you see in that future Evolution or or right where we are right now what do you think is the biggest challenge that you face challenge and opportunity I think every every business and you know every individual you know growth and evolution is not a linear process is it you sort of you know you think you’re on a Ledge you think you’re in an equilibrium condition and then something comes along and and the world shifts and I think it’s it’s being able to adapt to those shifts and seeing the opportunities rather than just the threats um and I think what’s going on is that you know this extended period of challenging performance has rattled many investors uh and it’s also you know it’s it speaks to the continuing evolution of the fund management industry in general and what do I mean by that well you look at you look at go back once upon a time if you wanted to invest in US equities you probably had to find a us you know deep value manager anday pay them a you know a handsome you know fee to manage your money and and and the world evolves and you know figure out well hang on um I can get most of what this person did for me um if I just get a you know an S&P tracker which cost me a few basis points so you do that with with a lot of your portfolio and then you find some real skill that adds some extra components and you’re willing to pay for it I think that’s what we’re seeing we’re seeing an evolution in our space and in other um and in other hedge fund or alternative strategies so you know there’s there’s fee pressure there’s pressure to deliver pure Factor if you will um and you know we can all say oh dear it’s not what it used to be fee yields are not what they used to be it’s just it’s a terrible thing and you know hope this performance returns so we can all crank our fees back up I I view it is you know it’s it’s a Natural Evolution and um uh you know a opportunity also concomitant with that is that um you know once upon a time if you wanted to as as everyone should have wanted to get into manage Futures and have them in their portfolio goodness me we made it hard as an industry you know the the the products you needed to sign you sign over your firstborn and your um you know the RIS disclosure statements and and be prepared to pay just wild fees for this stuff um and it’s it’s becoming much more available so when I talk about democratization when I talk about a place in the model port P folios of Pension funds and of you know Mom and Pops that’s that’s that’s where I want it to be um so yes yeah there are challenges fees performance draw Downs all of the things that we dwell on but it’s also a fantastic set of opportunities absolutely do you I mean it’s no secret that um a small percentage of the um hedge funds and managed Futures industry manages a very very large portion of the assets I don’t know the exact number but if I say that 10% of the managers manage 90% of the assets is probably not that far away is there a risk in in that that so many of the smaller firms uh struggle and and essentially are being forced out yes yes absolutely there there’s a risk um and I I I’m very interested in those traders in those models you know I don’t want that that Talent base to go to waste sure but Neils it is a you know it is a darwinian process so um I think if if I put my crystal ball uh or put you know look into my crystal ball I think what’s going to happen is you know performance will return sure I think I I don’t know when don’t take that as a guarantee but as performance returns for what we do and people’s appetite for it improves then some of the smaller folks who have just not had a chance recently in a very difficult environment are going to have a chance I think some of these seed uh seeding funds and um some of the fund to funds managers that make a point of of investing in the in the in the smaller folks um are are going to have a run and then you will I won’t say a change of the Guard because I’m not going anywhere and I’m sure David isn’t going anywhere um but you will see some other other people develop um substantial businesses and and I think that’s fine again yeah yeah so so this isn’t about me trying to Bar you know raise the barriers to entry and make sure that nobody else can get in here but no no absolutely not and I don’t think that that actually the managers themselves seek that I think it’s more the investors who tend to focus too much on on in my opinion maybe the size rather than what’s in behind but let me let me finish up this section with just a couple of U uh different uh questions completely I I try to remember to ask my guests what they would like to ask the next guest that I speak to to get kind of a a a Trader’s uh insight to what would be really interesting to hear but with you I’d like to do something slightly different okay and that is to say what would you like to ask my next guest and what if that guest was David Harding o well David we we usually run through a random set of um of topics whenever we whenever we meet and speak and and he’s he’s highly entertain I think given um you know what we see from the outside of of of Winton I I would love to um to get his perspective on um you know does he see the managed Futures industry um continuing in uh you know as a self-standing entity or is it is it going to be subsumed into you know some kind of mainstream Mega asset management uh business so is it you know is is is Winton heading the you know is Winton aqr Bridgewater you know are these the uh the the the mega firms of the future sure the Googles and the Facebooks of of our industry or or is there still space um and and does he support and would he still um think of himself as as uh a managed futures um manager yeah um final question on this section and that is really I mean you um you mentioned before that you obviously are part of uh many many due diligence meetings phone calls questionnaires and so on and so forth um but I wanted to ask what do you think is the question that investors forget to ask or fail to ask when they do their due diligence today what should they be asking you um I don’t have a sound bite of the one question that they’re always missing but I I think it’s a lot of the areas that we’ve covered it’s making sure that that that that they get that both they appreciate and that the manager they’re speaking with appreciates that it’s a holistic Endeavor so I when I speak to fledgling managers or people that we’re talking to and and as you allude to it’s a difficult environment out there so we do speak to a lot of of folks that that have run some money you know if if the person is just banging on about their entry points and exit points and um you know the stochastic models and the d d d yeah that’s that’s important but it’s by no means the whole story so it’s making sure that the um the manager can articulate how they many of the questions you’ve asked me ne how do you how do you put the pieces together how do you think about uh the risk management how do you and how do you think about evolving this what’s wrong what what’s what do you like least about your program at the moment and what are you doing about it because um you know I think it’s the the ability to evolve the program that is um is crucial and that’s what SE separates the you know the the longstanding firms from from uh the the untested sure sure and um moving to the last uh section Mar um I wanted to ask you a little bit about what you feel it takes to become a great Trader great fund manager but in more in the context as to because I’m sure a lot of our listeners are are listening also with the hope and aspiration to one day be the next aspect uh but uh is there any advice that you can give to to new or smaller managers for that matter that they can learn from that you’ve lessons that you’ve learned over the years that have kind of helped you um you know get through different times or evolve well I I I think you know my starting place is is is just it it’s obviously a very broad church and and my particular style is different say from David’s is different from a discretionary macro manager or a discretionary um CTA um so I guess sort of first nugget is is be true to yourself because if you are if you are just a passionate um discretionary Trader then hone those skills rather than um you know constraining yourself unnecessarily and by by by the belief that it has to be systematic I don’t know I’m not sure that was or or or actually conversely the other way around um because I look at someone like me and I I am way more of a scientist Neils than I am a traitor and and therefore I’ve we have tried to capture in the model you know how we how we would rationally respond to uh to events to um how the portfolio evolves which isn’t to mean that you know which isn’t to mean that we don’t supervise it and watch it all the time but my point here is that if you build a model and say well that’s good enough for normal running and when you know when the VAR explodes or the correlation explodes in the portfolio I’ll have to step in and make a discretionary call downg gearing or cutting out a a SE a position or sector or something like that so if if you if somebody says to you I’m 95% of the time systematic and I you know I’ve got a discretionary overlay no Neil you are 100% discretionary and you and you will be unable to get the confidence about about the uh you know the the Integrity of of the models that you developed and the and the the usefulness of any back tests that you do so last point I’m sorry you I keep banging on but you know when I talk about that risk review process being both at a component level and then also aggregated across the um uh the whole release that’s really crucial because what you’re what we’re doing in that exercise is basically going back through time and and challenging ourselves to say could we have run that program because if you if you you know you can have all this is a brilliant fantastic new model and I’ll just bung them all together and if and if in um you know if in if in 94 or um you know in 2005 or 2009 it would have concentrated the um the portfolio into a place where you just couldn’t have hung on to that size position and you would have you know you would have intervened as a manager or your client would have called you up and said what the heck are you doing then then that then you can’t you can’t launch that program you’ve got to build in an appropriate constraint or you’ve got to modify the ad mixture so that it doesn’t doesn’t do that under those circumstances does that make sense it it makes it makes a lot of sense and I think actually you said some very something very early on in this answer that I think is is is really really crucial because no doubt you know there’s so many firms uh that aspires to be like an aspect or aspires to be like a winon because we believe that this is what investors want us to be and therefore we should be like them at the same time nobody is going to buy a firm that essentially are just trying to be a look alike of something else because then they can just buy the real thing so to speak so we also try to be different and differentiate ourselves and I think what people sometimes forget and that is that the only thing that really differentiates one manager to another that’s the manager themselves so be true to yourself I think is such great advice because that’s really what it comes down to I would say so too yeah what do I want to finish off with with um because we could go on for a long time and I really I’m really enjoying this um is there any book that you would recommend people to read if they want to um un or something a book maybe that has been and and maybe I’m not referring to your physics books back at Oxford but maybe just something that has over over your career made a big impact in you and and something you would recommend people what do I think well I I I you know harp back to the days of um Michael Adams father sirel handing us a book of technical trading um models you know that was very formative I have I’ve always I’ve always credited Jack schwager sure with it but I’m not sure that it was schwager’s book but but you know let so I would I would refer to that as a good um primer sure and and also more recently I I’ve had the the pleasure of meeting meeting anti- man and I think um that he’s just done a super job of sort of surveying the um the space so you know in in the spirit of learn everything you can and and then focus on on where your passion is I’m I’m a big so I I sort of read um you know I like the you know Short history of of of Britain or or I think there’s a one book called um brid’s head abbreviated so just sort of preed versions of the great novels life is way too short and there isn’t time to to read everything that I’d love to read so similarly with some of these you know like atie’s book um it’s it’s a you know an absolute classic to give you an overview of many of quantitative uh investing techniques sure if you Marty could go back and meet your younger self is there anything you would tell yourself to do differently um based on all your experience that you have now um Lots [Laughter] Neils um but you know no big thing because it’s it’s you know you you you can’t have that um you can’t have that wisdom until you’ve got the scars that that that go with it sure um I think probably you know recognizing the value of of uh Team ship uh you know Collegiate um you know reli on one another um you know if I could have done that a few years earlier that probably would have been good if I could have recognized the importance of of of chemistry and and um you know how important it is that you just are comfortable with with the people that you you’re working with that would that would be another thing to learn um would I have done something completely different I I doubt it this this has been this has been a heck of a journey yeah absolutely final almost final question Marty is there a fun fact that you can share that about yourself that people who might even know you um don’t know about you oh very very little fun um it could be a talent a hidden talent it could be anything I don’t know um I have heard many different answers to this question uh let me put it like that and there is no wrong or right no you know my my friend would all roll their eyebrows and particularly my kids because um so the the little anecdote I’ll I’ll I’ll I’ll end on is I talked about you know my eager days as a skier and mountain climber so in fact my the romance with my wife began um on a climbing Expedition up Mount Kenya and um so to celebrate that on our 10th wedding anniversary I surprised the family and uh took everyone you know so we had four little by and took them all down to Kenya for a surprise vacation and on the plane down there um so this is pre uh pre 911 a a Nutter got in the cockpit and took control of the jumbo jet and we basically went to Free Fall fell out fell out of the sky and it was it was all quite dramatic and um and very traumatic um and and we landed and uh and and got on with our lives but it was sort of a a singular singular Watershed so you know my children always go oh don’t don’t tell the don’t tell the airplane Story down so i’ been tried and tested by British Airways and I understand that as part of the uh as part of the training program now for cabin staff the the film of of that uh of that flight is is part of their training wow fantastic now I asked you earlier today about what investors are not asking you to you know about important questions so I also need to be um you know testing my my own efforts so I want to ask you if there’s anything you feel that I’ve missed something that you want to add um to ensure that I’ve done Justice to you the AHL story The aspect story anything and and and obviously at the same time um thanking you for helping democratize things by sharing all of this Neils I I think you’re doing a a you know I I’m doing my part and you’re doing yours through these through these podcasts so so thank you um I think that I I mean I’ve become convinced over the years that the role of systematic trading is you know is key is core to a well-balanced portfolio I don’t actually think there’s magic to it so you know that I this could just be shooting myself in the foot but I think this is less about the genius of the trader than about the uh repeatability robustness thoroughness and and uh extensibility of the approach so I think that um you know whereas manage Futures like so many other hedge fund or alternative Industries has grown out of the flamboyance and the uniqueness and the the flare of individuals I think that the future is you know it takes you’ve got to have those but it it it does play more to a um you know to a model portfolio view of the world that you you know that you need this and you need other strategies and whether you get them all from one shop that doesn’t seem like a sustainable Outlook does it but you know whether you get all of the pieces of your portfolio from um one shop or whether you get them from numerous different shops which I espouse because I think people should sure uh concentrate um you know I think that’s that’s the way it’s going um and and that’s what I’ve tried to do and and that’s where where aspect has positioned itself um so less about the the cult of personality and more about the cult of of robustness and and reliability and and evolutionary Improvement definitely now before we finish Marty what what’s the best place for people to reach out to learn more about aspect Capital um we do have a a very nice website aspect capital.com I think or or email uh aspect Capital client services at aspect Capital fantastic yeah and I’ll make sure that of course all of these details are uh also showing up in the show notes page on top Traders on PL so that people can definitely connect and learn a lot more so all I have left to say Marty is this has been a pleasure this has been an immense privilege and honor to have you on and I have enjoyed it uh thoroughly and I I look forward to connecting again and and uh hearing about the great work that you do uh at aspect Neil it it it’s been my pleasure um and and we can wake up that that lady at the dinner table now that that that we’re done um and and I look forward to uh to seeing you soon absolutely thank you so much Marty take care all the best Cheers thanks for listening to top Traders unplugged if you feel you learned something of value from today’s episode the best way to stay updated is to go on over to iTunes and subscribe to the show so that you’ll be sure to get all the new episodes as they’re released we have some amazing guests lined up for you and to ensure our show continues to grow please leave us an honest rating and review on iTunes it only takes a minute and it’s the best way to show us you love the podcast we’ll see you next 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