In Conversation with Mike Harris

The president of Campbell & Company discusses the CTA space

Originally published in the November | December 2014 issue

Niels Kaastrup-Larsen in his podcast, Top Traders Unplugged, interviews some of the most successful hedge fund managers in the world. In episodes 39 and 40, he speaks with Mike Harris, president of Campbell & Company. Campbell is one of the oldest CTAs still active, with a 42-year track record. The second part of the interview will feature in the next issue.

Niels Kaastrup-Larsen: Mike, I think it's fair to say that many people who are involved in the hedge fund industry, and certainly people who are involved in the managed futures industry, are very familiar with Campbell & Company and your founder Keith Campbell, of course, who really, in my mind, pioneered this approach which we know today as the CTA or managed futures strategy. Before we get into the story of Campbell, I wanted to ask you a completely different question – a question that I sometimes struggle with, myself, in answering – and it, goes something like this: imagine that you're invited to a cocktail party with people that you don't know, and after a few minutes someone comes up to you and asks, "So Mike, tell me what you do?" How would you respond? How would you explain what you do?

Mike Harris: Well that's a great question, and it's one that I'm sure that we all get quite regularly. In fact, it's funny: I still have a hard time after all these years explaining to my own mother what I do. I think she still tells her friends at cocktail parties that I'm a stock broker and that probably is the reason why I get emails from relatives asking me what I think about Microsoft's earnings. When I'm faced with that question, I think the answer that I give them is that I'm Mike Harris, I'm the president of Campbell & Company, which is a systematic investment manager that happens to specialize in a very unique asset class called managed futures. At our core, like many investment strategies, what we're really focused on is using data to propel trades in a rule-based fashion. So instead of using the fundamentals and being a discretionary-type manager, we are using systems to help us trade the global markets in an active long/short fashion.

NKL: Absolutely. I want to stay with you for a little bit longer, so I want you to really go back and tell me your story. How you got into the business in the first place and perhaps what you were like as a kid, what were your interests, how was it growing up? Please feel free to back as far as you want.

MH: Unlike many the students, when I started in undergraduate studies I knew exactly what I wanted to pursue from my first day in college. I had a plan. I knew that I wanted to major in economics and Japanese because I thought that both of those would be disciplines that would help me pursue a career in the financial markets. It's funny that you mentioned childhood. I actually had my maternal grandfather who loved to invest, was always doing different things in the stock market and in fact bought me a stock when I was very young in Tops, which is a company that made baseball cardsbecause I used to collect them. He bought me that stock and every week when he would come to visit we would sit down with the Wall Street Journal, and we'd track the stocks. I'll never forget, six months into it I got my first dividend check, and I was pretty excited about that, and I never forget him explaining to me that I owned part of that company and as they made money they shared their profits with me and that's why I got that special check.

That really, for me, was where it all began and how I started to plan my academic career around pursuing a career on Wall Street and the financial markets. As it turned out, I think it's really interesting to mention that I'm one of probably the few people in our industry who literally have been a part of managed futures since the first day when I started on the street. I got a job with Dean Witter Reynolds in New Your City in the World Trade Center, working in their managed futures department and literally started, I believe, about two days after I graduated from undergraduate studies. From there, interestingly enough, we were an allocator, and we had money invested with Campbell & Company as well as John Henry and a number of other legendary CTAs, so my baptism was very early in the space.

I then, through doing due diligence on managers, caught that market bug that so many do, and realized that my calling was to be on a trading floor or trading desk. I went across the street to the World Financial Center to work for Refco and was working in a department that had allocated money to a number of CTAs and macro hedge funds. So I actually was covering many CTAs, including Campbell & Company, as a futures broker. Then a short time after that, as I saw the industry becoming more electronic and realized that my value as a broker was somewhat limited, I was drawn to the buy side and really wanted to know when I picked up the phone and it was a CTA calling wanting to buy 10-year futures, I was really taken by wondering what's happening systematically that's causing them to want to put that trade on right now.

As I looked to interview for jobs on the buy side, Campbell was one of the firms that I approached. Fortunately for me, they needed a European shift trader, and I joined Campbell & Company about 15 years ago in the year 2000. Then through my 15 years here, I progressed from the European trading desk to the currency 24-hour-day operation, then became deputy manager of the trading floor, became global head of trading for a number of years, and then two years ago, as we were going through our third succession plan, myself and Will Andrews – who's our CEO; he was our co-head of research – the two of us took over the firm. For the last two years, since 2012, I've been actively helping to manage Campbell & Company.

NKL: A great story, and, by the way, what a great gift that you received back then. That's inspiring.

MH: He was a special man. Thank you.

NKL: Absolutely. Your story is fascinating, but the story that I'd very much like to dive into with some level of detail is the story of Keith Campbell and the firm that he created back in 1972. Let me try and set the stage a little bit from my perspective. What fascinates me, when I think about managed futures, is really four big stories come to mind: the story of the Turtles, the story of AHL, the story of John W. Henry, and the story of Campbell. The Campbell story, which in fact is the longest of all of them, has not really been covered as much in recent years. So I'm really grateful for having the opportunity today to share this with our global audience and really would like you to take the stage here and tell us how the story unfolded 42 years ago, and what the evolution has been so far.

MH: Well I'm happy to do that and I think, just to address one of your points, one of the reasons that the story hasn't been told as much is that Campbell & Company, from our very beginnings, we've always been raised as a humble organization. We've tried to fly under the radar. At the end of the day, the people that matter the most are our clients, and we want to make sure that they are happy. It's not as much as far as making sure that the media and the general public is as happy. I really appreciate the fact that you have noticed the fact that we haven't been talked about as much and have given us this opportunity.

It is an interesting story regarding Keith, how he began. I've heard this story told many times, and it's honestly one of my favorites. Keith started in the financial markets out in California. He was a financial advisor/planner in working with clients and he, like many people, in the 1960s caught the bug for commodity futures. There was quite a bit of volatility in those markets, and it was something that he was really attracted to.

He started actually managing client portfolios in the futures markets in the late 1960s and interestingly enough, he had a client who was a PhD who worked at the Stanford Research Institute, and they started having conversations about how Keith was trading the futures market for this particular person's account, and he was explaining that he was following the charts. He was, in those days, using graph paper and a ruler, and this PhD was talking to him about this wild concept which was a computer – in fact, the mainframe computer at Palo Alto – and how he had access to this. So as they put their minds together, they thought about how they could take Keith's technical approach and create a rule-based system that the computer could effectively run on their behalf, and that's really where it all began. In fact, they started with the beginnings of a fund that we still offer and trade today, trading that portfolio in 1972 using this very basic system.

Then Keith Campbell made the decision strategically at that point to come back to Baltimore where he was raised, in 1973. He got his brother Kevin as well as Bill Clark, one of his cousins who later became one of our earlier heads of research and really put together Campbell & Company. That's where the name comes from, and got things started. As Campbell progressed over the years, one of the keys I think to Keith's success, and one of the things quite frankly that makes him different to many of the other CTAs, is that Keith himself is not a quant. He was not some sort of a scientist or somebody who is the brilliant mind behind it all. In fact, I'd say he was much more in the camp of a real innovative business leader.

One of his guiding principles was the Mastermind Principle. He believed that the power when you take two minds and put them together, you effectively create a third mind, almost an invisible mind, that then there's a multiplying effect putting all these smart people together. So he went out and began to hire very intelligent people – in some cases other PhDs – to really work together and create a research culture that then has grown over the years into what we now know as Campbell & Company.

I think it's interesting that after the first 20 years of Campbell's existence, even then, with all of this experience and being one of the biggest CTAs – certainly one of the oldest – Keith knew that he needed to hire somebody not just on the PhD side, but also on the business side. So he went out into the futures markets and he found Bruce Cleland, and a lot of people in the industry remember Bruce Cleland as somebody who was at the time running Rudolf Wolff, which was a very large futures brokerage operation up in New York. He was somebody that had been around the markets and really understood futures and the business, and Keith brought him down to Baltimore to run Campbell & Company as our president and CEO starting in 1993. So Keith then passed the torch on to Bruce for the next 20 years, and certainly Campbell had a lot of success from 1993 to 2012, and then in 2012, Bruce made his retirement. As I mentioned before, Will Andrews and I, after both having been at the firm over 15 years, took on the reigns as president and CEO.

NKL: I want now to give you the opportunity to maybe just highlight, from an overall point of view, what your product offering looks like today.

MH: Sure, so one of the things that we have done recently is really almost bifurcate the portfolio, and create almost a menu-based approach. What we've heard over the years, if you think back to 10, 20 years ago, investors were still educating themselves on the space. They would come to us and say, "please give me what you think is your best portfolio." We've come a long ways as an industry now. In fact, when I'm out there as the president of Campbell, meeting with a lot of institutional clients, I see many cases where they've hired their own PhDs, and many of these folks have maybe worked at a CTA or had their own CTA in the past, or have allocated to CTAs, and really understand all of the various alpha sources and drivers of returns.

So now what we find is that a lot of investors come to us and say, "We want what you believe to be your best portfolio," which is our flagship managed futures portfolio, but in other cases they may come to us and they're trying to build a fund of funds, or a group of managers, so they say, "We just want your trend following," or, "We just want your non-trend following models," or, "We just want your cash equities." Which for us is statistical arbitrage across the globe, so with that we have a trend-following portfolio, where investors can get access to just our trend systems.

We have what we call our Prism portfolio, which is just our non-trend following models and that's the same portfolio that's in the flagship vehicle. Then we have as a centre flagship fund, our managed futures portfolio. The mantra behind it is that it's enhanced trend following. It's 80% allocation to trend following and a 20% allocation to non-trend-following, or that Prism portfolio that we just spoke about. Lastly, we have our multi-strategy portfolio. Multi is what includes our equities stat arb, so there you have a 40% allocation trend following, a 40% allocation to non-trend, and then a 20% allocation to the equity stat arb. We believe that that is the most diverse offering that we can offer to institutional clients, but in many cases if they are looking for something with a higher degree of correlation to CTAs they're going to want our flagship managed futures portfolio, and then obviously if they want to bifurcate that and invest in just trend or non-trend we have vehicles for that as well.

NKL: Now, you've got a big organization, so I wanted to ask you to explain a little bit about how the organization is structured from an overall point of view.

MH: Sure. Well, our current assets under management are just over $4 billion. We have a staff of about 132 people here in Baltimore, and we do have a few sales people that live in various parts of the country and the world, but the lion's share of that 132 is in Baltimore. About 80 of that 132 are involved or touch the investment process every single day. I think what's important to mention as well is that when I think about diversity – and you just kind of brought this up as far as having the assets split amongst multiple products – but there's another layer of diversification via assets, and that's the types of clients that you have. If you have all of your clients in one type, they're all funds of funds, or they're all from one particular part of the world, or they're all retail, or they're all institutional; that in itself gives you some concentration risk.

I think one of the things that Keith Campbell did agreat job of, in the early days, was being one of the early movers in the private wealth distribution business. So we've been creating limited partnerships that retail investors who are accredited in the United States can invest in for many, many years, and that's taken the form of our business, really being about 50/50 split between institutional clients and private wealth clients.

What's nice about that is that they tend to move in and out of managed futures at different times and for different reasons, and that really, to be honest with you, probably gives us more diversification from an AUM standpoint than even diversification across various products on the institutional side. I say that because getting into the private wealth distribution business is not easy. I think one of the reasons that we've been successful is because of our size. Oftentimes people compare us to other CTAs who may have a slightly lower head count than 130 at $4 billion under management, but I often remind them that part of what makes us special is that private wealth piece. Without the 130 employees we would probably find it very difficult to do that level of retail distribution. I don't think it's an apples to apples comparison to look at a $4 billion CTA that only has institutional investors, if that makes sense.

NKL: It makes perfect sense; it's a very good point. So you say 80 of the 130 are involved in the investment process, but nowadays with the technology, with outsourcing opportunities, how do you view that? Do you outsource any of the things that you do, or do you really keep it in-house?

MH: That's a great question. So right now there's limited outsourcing when it comes to actual people, but where we are seeing some unique outsourcing opportunities would be in technology. This is really something that as a firm has been a real transition for us. When you think about it, 20 to 40 years ago there were no vendors on the technology side that could provide anything that we needed to do our business, and so another element to our higher headcount is that we have a very large technology team, because to be quite honest with you, we've had to build all of our systems going back in history. In the last five to 10 years we've seen that change dramatically, although many technology companies initially focused on what I'll call the "big" asset classes like cash equities and fixed income.

What we've seen recently is that they've started to migrate into what I'll call the hedge fund space. So they've embraced futures and options, OTC markets like cash currencies and swaps, and so with that we've now seen a whole host of products that we can use to help us be more efficient. At the end of the day, we're still going to need technology resources like software engineers, but I want those people focused on our intellectual property. I want them working with research to build better alpha sources, not working in the trading department to build a better blotter for the traders to use to route orders out to the marketplace. So that has really been our focus as of late: embracing outsourcing of technology in areas like accounting, operations, certainly the back office, and then the front office on the trading side.

NKL: Sure, absolutely. I don't know whether it's best to use the research team as an example, but what do you look for when you want to add people to your business or say your research team? What are the things that you look for in the people that you want to join the Campbell family?

MH: I think, if I could summarize it, we're looking for strong creative, critical thinkers. Where we get those people from, I think that's a bit of the secret sauce. I think that you're putting all of your eggs in one basket if you just go to other CTAs, or to the banks, and just bring people in who have an understanding of the financial markets. I think that you do want to have some of those people as part of your team, but we've always believed that there are some really interesting people that you can pull directly out of academia.

There are some folks that have a PhD say, but are working in another discipline – say physics or other disciplines within science. We've even had some success in hiring people that had maybe a medical background. I remember one particular gentleman who was working at the University of Chicago analyzing brain waves, and at the end of the day he said, well, how can you compare this to financial markets, and we said it's just a piece of data on a chart. Maybe the ways that you're looking at it from a medical standpoint are different to the way that we're looking at financial markets, and maybe there's something we can learn from that. There are a lot of interesting examples of people who have come from really unique backgrounds that help to add value to the overall team.

I think that that word team is really important because, going back to Keith and how he started the firm in the early days, that notion of he couldn't do it all by himself. He needed to bring the firm back to Baltimore, to enlist some of his family members, to create a team, and then using that Mastermind Principle to build out a team of very intelligent individuals. That's probably our number one focus: is the person a team player? There are a number of people in our industry who have a hard time sharing their work with others. They believe that if they came up with an idea, and they don't want to run around and tell everybody else about it. That's completely anti to what we believe here. We want people that are going to work in a team fashion, share their ideas, not be afraid to be criticized by others in the group, because we believe that's what makes the idea better, and at the end of the day that's what limits that key-man risk, so that Campbell & Company and its models can continue to live on into the future.

NKL: Yeah, I guess that's definitely very true. I wanted to jump to more of the trading-oriented side of our conversation, but before we get there, I want to talk about track record. I want to ask you about how people, or how investors – potential investors – should look at your track record? The reason I ask this is because we know that models evolve. We know that the trading models that Keith used in the 1970s are certainly not the models that are being used today, so this is also a little bit of an educational question and that is, how should investors approach looking at a manager with a long track record and make sense of it?

MH: It's a great question. We start by always telling people that we're happy to show you our 42-year track record, but almost one of the first things that we caution people against is be careful when you are looking at the 1970s, for many reasons. First off, Keith would be the first one to tell you that I believe one of his early portfolios was about 12 markets, and they were all commodities, and commodities during the 1970s, as we all know, during a period of aggressive inflation had some very, very big moves. So though we had some very spectacular returns back in the 1970s, we try to manage people's expectations by telling them it's a much larger, more diverse portfolio. Our group of strategies is much larger and more diverse than it was back then, with multiple styles and “look-backs” and trend following and non-trend following, so that's one of the first things that we always tell people.

I think when I tell people as far as looking at our track record, one of the things that I like people to focus on to be quite honest with you is the last three to five years, and that's for two very important reasons. The first is, let's face it, the last five years has been a very challenging one for CTAs, and I think Campbell & Company's done a great job of innovating and building and adding new strategies to the portfolio mix that have really helped us to outperform. I'm very proud of that, and so I certainly want people to focus on that because I think that that sets the bar quite high. In addition to that, we've made many enhancements to the portfolio since that 2007, 2008 period and I think that it's important to look at the portfolio because the way it is today it hasn't changed a whole lot in the last five years, but since that 2007, 2008 period, there were changes that were added in after that period of underperformance that have changed some of the dynamics of the portfolio. So I think if you really want to be laser-focused on how our portfolio is currently structured, focusing on the most recent period is probably the most applicable.

As I mentioned before, one of the first changes that we made on the back of the 2008 period was to change the investment objective. One of the reasons we underperformed was we had a much healthier balance between trend and non-trend in the portfolio, and though we were positive in 2008, we didn't have as high of a return profile as some of the other CTAs that were more focused on trend following. What we heard from investors was that's, in fact, what they were looking for – that bias to have a reasonable correlation to other CTAs. If other CTAs were going to have a lot of trend following in their mix, or in some cases 100% allocation to trend following, we knew that we had to have that bias as well.

So we set the research team off on an optimization project to come back and tell us what they thought would deliver what we call now enhanced trend following, and 80/20 was effectively what they arrived at. So that change was made post-2008, and we've stayed at that 80/20 allocation since that period. In addition to that we've added several new forms of trend following going back to when Keith started the firm in the 1970s: we focused on what I'll call market-based trend following, which is where you're following the underlying signal of each and every market in the portfolio, and effectively mapping a long or short position, to the strength of the uptrend or the downtrend. Now we've added what I'll call sector-based trend following as well as factor-based trend following.

Sector-based trend following is where you actually think about the intuitive economic movement of markets and what makes economic sense as far as grouping markets together, to lose some of the noise of individual market moves, and then effectively create an index around that grouping or markets and trade them as a basket. I think one of the most interesting things about sector-based trend following is that in an environment over the last few years where many CTAs complained about the rise in correlation between markets, which in a market-based sense effectively limited their opportunity set, a model like this did quite well, because as investors moved in and out of risky assets, as an example, instead of seeing trends in, say, WTI crude, or Brent or unleaded gasoline futures, you actually saw just investors moving into commodities like energies and moving out. It created sector trends that these models were able to follow, so I think that was one of the areas where we saw some outperformance.

The next one was the factor-based trend following. Now factor-based is similar to sector in that it's still trading baskets of markets. The difference here is instead of up-front deciding what the basket is going to look like, based on an intuitive economic sector, here you're actually using correlation to tell you: OK, instead of what markets are or should be trading together, what markets are actually trading together? So it's a similar approach, but going at it from a different angle, so to speak, and using that correlation matrix.

Next was really to enhance our “look-backs”, so as I mentioned, going back to the 1970s we started as a medium-term trend follower, which I would define kind of loosely as a one to three-month “look-back”, and as we did more and more research, we saw that maybe there was value in adding both shorter-term “look-backs” – one-month and in, and longer-term “look-backs” three months out to a year – though we still have held on to a core allocation of medium-term trend following because it has the best Sharpe ratio over the long term.

We really liked the diversification benefits of, say, the shorter-term models which help us in a trend reversal period to actively turn our portfolio quicker. We've intentionally lowered the allocation to short-term because you've always got to watch your trading costs, and in some environments you can get whipsawed, so it does have the lowest risk-adjusted return of the three “look-backs”. So we've under-allocated a bit there, but we like the value that it brings to the portfolio. Then, in some cases, what I'll call the anti-whipsaw, which is elongating your “look-backs” so that you're not seeing as much turnover that you need a very long mature trend reversal in order to get you out of your position. Certainly the longer-term models have done quite well in recent years in that in many cases, whether it was risk on risk off, or taper on taper off, if you were, say, long equities, you stayed long equities. Even though there may be a two-week or one-month reversal in stocks, it took so much more to get you out of your position, so you held on to it. I think that at our core we believe in diversification, so it wasn't about deciding which of these three “look-backs” was the best, but really introducing these two new “look-backs” in the short and long term to help compliment the medium-term models.

NKL: Yeah, well it sounds like you've been very busy on the research side in recent years. Would you say, not that it's that important, but would you say that the last five years is where you've just gone through some major improvements? Would you say that's probably been one of the busier periods in terms of research upgrades and evolution of the strategy?

MH: I think we've always been extremely active in the research process. As I mentioned before, in recommitting ourselves to research after that 1994, 1995 tough period, we've always believed in research, and it's always been an active process. I think that it's much more that we made more significant changes to the construction of the portfolio post the 2007, 2008 period, because we really had to respond, as you and I have discussed. We saw a significant outflow of assets. At our peak in 2006 we were at $13 billion, and just a year and a half ago, or two years ago, when I took the role, we had declined to $2.5 billion. So in seeing those types of outflows… now granted, I think we both can agree that some of that was just based on the financial crisis. We, like many people, had investors on the institutional side in particular that had significant liquidity issues, and one of the best selling points of commodity trading advisors is our liquidity. So as the joke goes, we were the ATM of the hedge fund industry, and everyone came to get liquidity and cash from us.

Now the other half of that story is that we underperformed our peers in those periods, in 2007 and 2008. If you're going to take the money from someone, maybe you take it from the worst performer during the period. I think that we haven't talked about 2007, but there the story was different. There it wasn't as much the balance between trend and non-trend. There in particular, as we talked about, Campbell's really a pioneer in adding FX carry strategies into a CTA portfolio back in the late 1990s, and it worked quite well for us.

In fact, many years between, say, 2003 and 2006 a lot of our outperformance came from FX carry. In 2007, as we saw the beginnings of the financial crisis and that high period of risk aversion, FX carry was one of the first things in many people's portfolios that was liquidated. So we did see some losses as a result of that, which led to some of that outperformance, and then propelled additional changes on the research side and in the portfolio. One of the things was that we moved away from naive carry, and said that we're not going to have a carry strategy in the portfolio unless it has an enhancement or an overlay or a modulator that will help it in some of these difficult periods of risk aversion. We also looked to build out our non-trend-following suite of models away from just carry and in carry not just in the asset class of currencies.

So we added cross-sector models, which take information from one asset class and use it to propel trades in others. The investment thesis there is that information, we believe, is disseminated at different points in time from one asset class to the other, so that there is information that can be gained, say, in equities that would allow you to trade currencies, and there are many examples. We also added in short-term mean reversing, where there we believe that short-term mean reversion can help in several cases, but most importantly after a long mature macro trend, oftentimes you see not only the reversal, but sometimes a period of choppy price action before you break out into a new up or down trend, and so having short-term mean reversion in your portfolio actually gives you a strategy that can specifically perform in that environment, which we all know as trend followers is usually the worst possible environment for a trending system. So continuing to build out that non-trend-following suite helped.

To be quite honest about short-term mean reversion, when I say short I think I do need to clarify that though these are the fastest models in our portfolio, they still only represent about a one to two-week “look-back”, so they're faster than a three-month, medium-term trend-following system, but we in no way have moved into the high-frequency intra-day trading-type world.

I will say from a CTA perspective it has made us more nimble. I think if you look at last summer as an example, when many of our peers had difficulty during that May through September period, after Ben Bernanke on 22 May said the "T" word (or taper) and the correlation between stocks and bonds broke down dramatically and many managers lost on both their longs in stocks as well as bonds, we saw specifically some of our faster strategies like short-term mean reversion very quickly covering our bond position, and within a matter of about two weeks we were effectively short bonds and had a hedge on over the summer months.

So we gave back a little bit of our gains for the year, but not these huge losses that we saw in other parts of the industry. To be fair, at the beginning of this year we underperformed a bit in the first quarter, because those same nimble strategies, when the equity markets corrected in January, reduced our risk, so that when stocks went back up to the highs in February we didn't have the same equity position that many of our peers had. I think at the end of the day, once again, it's about being correlated to the industry, but also being different so that we can justify our role in people's portfolios.

NKL: I couldn't agree more with what you have said. I think that's very important. I have a philosophical question from the things that you just brought up just now, and maybe it doesn't apply so much to you, because as you say, yes, you've gone longer-term in equities because that's been a good thing to do, but you've also maybe added some shorter-term models that kind of balance this out, but here's my concern: because I hear from many sides that many CTAs, if we call them that, have become more long-term because we know that that has been a goodway to enhance performance. Certainly in the equity sector, where we've been in a bull market for five years and with very small corrections, so being very long-term has been the right thing to do.

Here's my concern though: if everyone is becoming more long-term, and in particular if we're becoming more long-term in equities, are CTAs going to lose the value that they play in the portfolio of managers or institutional investors who actually want CTAs to make money when equities go down. Simply, are CTAs in general going to be too slow to react and are they all going to head for the exit at the same time given that? I know it's a bit of a philosophical question, and maybe you don't have a view on it, but I'm just a little bit concerned because I hear this from many sides about the time frame and in particular in equities.

MH: I think it's a very topical issue, and one that we hear a lot in the industry. A couple of comments: first off, as I mentioned, because we have added both short-term and longer-term “look-backs”, we've in a sense embraced both of those elements, but I think that when you still look at the portfolio as a whole, it still is going to have a very medium-term “look-back”, because the short term and the long term balance each other out. As I said, if anything, the shorter-term systems for us are nice because it helps us to cover our risk and maybe turn the aggregate position a bit faster than just a medium to long-term system, but because we have implicitly made that decision and see the value in adding in shorter-term models, I'm probably on the other side of that argument.

I do think that from a research perspective, one of the things that we're always focused on is looking at every change that we make to the portfolio and what impact it's going to have on our correlation or beta to the equity markets. To be quite honest, because I think to your point, there are a lot of investors out there who look at their managed futures or their trend following exposure as tail risk protection for traditional assets like stocks.

There's a reason that that term "crisis alpha" is used quite a bit in regards to describing commodity trading advisers. I agree that we would not as an industry want to lose that because I think that's a very valuable role that we play. In fact, it's funny that through this incredible uptrend that the Fed has created – if you're of that belief, or if you think that equities have been going up for other reasons – now as it turned out, if I think about the most recent correction, it actually happened in what I'd say a much more gradual way (though a few weeks ago it certainly felt a bit more violent).

But if you think about over the last few months, the markets came off the highs and in our case, the short and medium-term models had covered their long positions, the long-term models held to their long positions. So for us, we really just got flat the equity markets just in time for the abrupt downside moves to kick in. So as investors looked to our performance, they actually saw positive performance, in large part because of the movement of flight to quality into bonds and our long positions there.

As I look at the industry as a whole, we are seeing quite a bit of dispersion this month, as an example across CTAs. Maybe to your point that's because there were people that didn't get out of those long equity positions and struggled a bit as a result. I think it's going to take more time for us to really realize that, but at the end of the day I don't think it's a bad thing, necessarily, that managers in our space start to do things that are a bit unique and different, and try to differentiate themselves, because if everybody has a 95% correlation to the largest managers, or to the Barclay CTA Index, then it's going to be really hard for people to be able to pick and allocate to managers.

NKL: Given the fact that, as you rightly say, trading in 80 markets is certainly on the low side for sure compared to the size of your portfolio and compared to other managers, and the 25% allocation to commodities, what does that do, if you want to stick to this, what does that do to your optimal size, meaning growth? Where does that allow you to go and maybe you don't have a vision of being as big as some other managers, I don't know, talk to me about that.

MH: Sure. Well, it's a great question and one that we get frequently from our clients and our prospects. As we currently look at our existing portfolio, and if we look at the markets that we're trading and assume that liquidity doesn't change, we can run our current portfolio up to about $10 billion under management, so we've got $4 billion currently in the portfolio. It means we have a lot of upside for growth, but if we're going to keep the allocation to both commodities as well as some of those shorter-term strategies that I mentioned, we're going to have to cap the portfolio.

Now, a lot of things can change. Think about it: liquidity has come in quite a bit from the highs of 2008. If we were to see a return to a rising liquidity environment for fixed income, equities, currencies, and commodities, then that is going to change. As I said, just kind of looking at where we are right now, we have room for growth, but at this point in time we don't have visions of being a $20 or $30 billion-dollar manager. That said, we're always thinking about new products.

You mentioned earlier about diversifying yourself across different product sets. We've been trading cash equities and stat arb for a number of years. If interests were to come back into that space, that could be a portion of our business that would allow us to grow as a total firm AUM, but wouldn't impact effectively our CTA AUM. So there are a lot of different factors at play. We want to make sure that we can grow, but I think that being a multi-billion-dollar firm gives us a tremendous access to resources to create an institutional infrastructure that allows for redundancies and plenty of head count, legal and compliance: to be able to deal with all of the challenges that, as you mentioned, smaller CTAs struggle with today. We like being in that billion-dollar group, but at the same time I think that many institutional investors look at us as somebody who has growth potential, whereas maybe some of the larger managers, they do fear, how much bigger can they get before it degrades their returns? THFJ

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Top Traders Unplugged is a podcast created for the investor, trader or research analyst. As in the 'Market Wizard' books, each week in Top Traders Unplugged Niels Kaastrup-Larsen talks to a current successful hedge fund manager or commodity trading adviser who shares his or her experiences, successes, and failures.