Estlander & Partners – The Oldest CTA firm in Scandinavia and one of the Longest Running CTA firms in the World. 

Thank you for listening to my conversation with its founder Martin Estlander.

In This Episode, You’ll Learn:

• How Martin got involved in the CTA Industry
• The Evolution of Estlander & Partners and Where They are Today
• Founding of an options trading business in Frankfurt in 1991
• About the inspiring time in which he was part of the Commodities Corp. team until 1998 when Goldman Sachs came in and bought CC
• About Jan Haraldsson’s Alpha Trend Program and how they recently opened the Program for external investors
• The recreational activities that support Martin’s trading philosophy. Skiing, Tennis, Sailing and Meditation
• An overview of the Main Programs Estlander & Partners run today – Alpha Trend, Freedom, Global Markets & Presto
• The business organization of a modern day CTA firm – What is “in-house” and what is outsourced
• How volatility is perceived in the Estlander & Partners portfolio
• The structure of the Alpha Trend Program and why it is designed to trade 74 different instruments and how they mix together
• How Alpha Trend’s pattern recognition differs from the traditional moving average crossover or price breakout
• Whether Alpha Trend is Intra-day, End-of-Day… or both
• What Alpha Trends’ models are designed to capture
• How Alpha Trend manages stop loss and stop profits when entering a new market
• Particularly important key performance drivers of Alpha Trend
• The human intervention required to run the Alpha Trend model
• How Martin Estlander defines risk
• Achilles Risk and how Alpha Trend manages for it

Resources & Links Mentioned in this Episode:

• Learn about Commodities Corporation, the company behind some of the all-time great traders

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Follow Estlander & Partners Linkedin.

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Niels

Welcome to another episode of "Top Traders Unplugged." Thanks so much for tuning in today. I really do appreciate it. On today's show I'm talking to Martin Estlander, the Founder and CEO of Estlander & Partners. As the oldest CTA firm in Scandinavia, Martin has seen a lot of changes in the past two decades, but has continued to innovate and expand his product offering to investors and, staying true to his origins and his values, has also won him international praise for his efforts.

For those of you who are new to the show, I just want to let you know that you can find all of the show notes, including a full transcript of today's episode on the toptradersunplugged.com website. Now, let's get started with part one of my conversation. I hope you will enjoy it.

Martin

Yes, that's right.

Niels

So, perhaps a good starting point for today's conversation would be for you to take us all the way back to the beginning. Tell us your story of how you got involved in the business in the first place, and take us through the evolution of Estlander & Partners to where you are today.

Martin

Alright, well I'll do my best. As you know that it's a long story, so there's many years to cover, but I'll try to make it short though.

Niels

Fantastic.

Martin

My good friend Kaj Rönnlund and myself, we started trading back in the '80s, in like '86 we started trading equities, and then we were just about to graduate from university and we figured it was very inspiring and gave a lot of energy, and we found it really, really interesting, and then decided to go one step further. So, we set up a firm to trade options as market makers in Stockholm. We did so, and it was a bit tough in the beginning because we didn't know anything about the options, but we learned some of it.

Niels

Interesting.

Martin

Niels

Sure.

Martin

That was a very exciting and inspiring time as well. I got to know a lot of interesting people and a lot of interesting traders and a lot of inspiration. Had a lot of fun and it was great being a little bit in the States as well, and seeing the US parts of the business. But at the time it was very unusual to be a European CTA, and I think people felt it was diversification to invest in a European CTA, basically, the same day as the American ones.

Niels

Yes.

Martin

Obviously the US was very dominant in the business at the time which, as you know, has shifted a little back to Europe - more and more to Europe, actually.

Niels

Sure.

Martin

Niels

Sure, sure, it's interesting that you mentioned the Commodities Corp. side of things, because of course people who know about the CTA industry, also know that a lot of the really great traders who, some of them are still around, certainly also had a stint of their early career with Commodities Corp., so that is obviously a fascinating part, because it's not something you would normally associate with a European, let alone maybe a Finnish company that your roots actually go back to that time as well.

Martin

Yeah, that's right, there were a lot, I guess Paul Tudor Jones, Louis Bacon and a lot of other guys that are still around.

Niels

Absolutely. Well-known names for sure. And the whole trading side, you mentioned that you started trading equities and so on and so forth. Was this something you knew all along, when you were studying and maybe finishing your late high school or early university, that the trading, that the financial world was where you wanted to take your own career?

Martin

No, not really. Actually, it was like living in the moment, I guess, and I found it very, very exciting. I guess it was, like many things in life, a coincidence. It was a bull market, and I guess we felt that we were actually quite good at this because we made some money and we could finance our studies, and it was only later that we realized the reason we made money was that it was a roaring bull market.

Niels

Like so many at the time...but...no...excellent. Obviously we are going to talk a lot about the business, (and) the programs, but I wanted to ask you, sort of, first off, in a little bit different direction, you know, no doubt that the running Estlander & Partners takes a lot of your time, but what do you do to relax? What do you do when you need to take time away from the business and the trading?

Martin

Oh, (laugh) that was a bit of a surprising question. I could easily talk an hour about that. I guess it's good to mix different things and to be able to relax. Obviously the family is very important, and I spend some time with that, but I like to do a lot of sports, so that takes up quite a bit of time. Now the sailing season has just started, so we are racing a bit now and preparing for two world championships latter on in the summer. I'm Skipper of a team which is actually representing Finland, as the national team of Finland in these two championships. During May and early June, sailing is a big piece of my spare time, and then again in August, and then during the winter it's more like skiing and playing tennis.

Then I, for relaxation, I also meditate daily, and I find a lot of inspiration and a lot of energy from really relaxing, and quieting down the mind. It's an extremely interesting sort of field of, I guess not science, but at least it interests me a lot, and there are many parallels between trading and the way the mind works, and I think the way we are designed, as human beings, with our emotions and our reactions, our instincts, etc. actually drives the markets in a way which makes it possible for a systematic strategies to make money. That also effects how we live in our daily lives, the same way that you can impose discipline upon your trading, you can also impose a certain amount of discipline as to how you deal with your stress and emotions, and how you view things and how you try to avoid over reacting to certain short term events, and draw downs and stressful business running, etc. That's me a little bit. I spend a lot of time thinking about these matters: the philosophy behind what's driving the markets and what's driving our human mind.

Niels

Fascinating Martin and I actually have heard that from a number of people that really combine their stressful working life with something very different, and looking much more inside themselves to get away, so to speak, from the more business oriented part of their life. Very good.

Martin

Whereas, our Freedom Fund, which is a more of a multi-strategy fund and includes Alpha Trend, but also includes other things such as short term trading, systematic macro, carry trading, and that makes it sort of a more broad strategy. So, Global Markets is a variation of these with a 50/50 division between systematic macro and quantitative trend trading, whereas Freedom is more like 75% quantitative trendbased trading and 25% systematic macro.

And then we launched a fund called Presto fairly recently, which is short term - up to three days holding period, and trading also on a global approach: all the 4 asset classes. So these are, basically, the offerings that we have today, and it seems like some investors prefer the more diverse sort of multi strategy approach, and we do have products that do all that strategy line more, offered here, in northern Europe, through distribution channels, through banks, through some pension funds. Whereas the Alpha Trend, the pure trend one, seems to be more appealing to investors that have other managers as well and are more seasoned CTA investors in the sense that they have many CTAs and they find that Alpha Trend is quite different from some of the other CTAs and hence provides good diversification in the CTA portfolio.

Niels

Sure, sure. Excellent. The next area I wanted just to touch upon briefly is how you decided, and how you've done over the years, in terms of organizing your business. Now-a days, clearly, technology has provided a number of options that you didn't have when you first started out, but if you look at the various sort of key areas, within your business, how have you organized that? What have you kept in house, so to speak, and what do you outsource today in running your business, if anything?

Martin

(laugh) We do outsource auditing the accounts. And, in terms of software, I guess the Bloomberg terminal is sort of our external software, but other than that everything is more or less an integral platform that we have designed over the years; I think it is 3rd generation of a fully integral platform that is run today. Everything from data collection, data cleaning, storing, and running the models, through communicating with the markets, through the brokers, re-consigning the trades, several times a day automatically, and then calculating NADs for the funds, we do that in parallel to the administrators, report to clients, and reconcile everything that is done.

Basically, the idea is that it's all a very integral process and we need to keep very good track of the operational risks: all the aspects of the business in terms of where we get the data, what type of data, where we have backups for the data, how we clean the data, how we have distance contingency plans, how we have a couple of offices so that we can run the business from the other locations should it be needed. I think technology is extremely helpful, and makes it much more efficient. But it's also not just opportunities, it's also challenges, of course, with increased speed of the markets, it's put new demands on execution, but also provided opportunities, so I think the way the business is executed anymore is something that has developed and has changed quite a bit over the last few years. But it's all for the good and it's, I guess, in the long run to the benefit of all of the market participants to execute faster.

Niels

Yeah. Before we go in and talk about the program itself, and talk about models and how you go about that, I wanted to start out by having, kind of a bird's-eye-view looking at the track record. And, what I mean by that is track records now-a-days probably have to be read with a little bit of background information. Meaning that firms that have been around for two, three decades, their trading, or their model has probably evolved over time, so what you see, when you look at a track record, may not exactly reflect how the program is configured today.

So, when you look at your own programs, and you look at their track record, would you say that they should be read in stages, meaning periods where you've had some significant upgrades, research, discoveries, or has it been more of a smooth evolution that hasn't really taken the programs away from its origin?

Martin

Yeah, well, I would certainly say that it's more of a smooth process, and it’s been more of a steady refinement, but I think reading the track record, the most important thing you would see from the track is the result of a process of research and running the business in a certain way, and points to a certain sort of expectation regarding future stability of the firm and the research process. I think that is what I would say is the most important part to read out of any track record, really.

And, when it comes to how the program has changed, I think certainly it's been improved, and improved how trades are filtered out of all the necessary trading: taking on new markets, new ways of executing the trades, new ways of selecting trades, and so on, entering and exiting. But the general theme of what we are trying to extract from the markets, that's really been very much the same over the year. So, I would really focus on that, if not, then reading the track record, the stability is one, and the second would be to compare the track to the different economic cycles, and to the different market environments, and see how it's been performing in different environments, and draw conclusions for the future based on that I guess. That's how I would rate a track record.

Niels

Martin

Niels

When you talk about volatility in that sense, are you looking across all sectors including commodities, or are you focusing more on the financial sectors of a CTA portfolio?

Martin

No, in particular, looking across all the assets, all the asset classes, and all the individual instruments, for that matter, so that the measure is really designed to really reflect the CTA portfolio.

Niels

Now, we're going to talk about the Alpha Trend program, and just staying with this theme a little bit longer in terms of the sectors and in terms of putting the performance into some kind of context, particularly in the last few years, it would seem to me, at least, that the people who have done well, because certainly some people have done well in the last few years, have been overweight, certain sectors, maybe particular bonds and equities and, despite as you say, volatility coming down, that doesn't mean that these strategies can't make money because clearly if you were long term and you were long equities, you would have done very well, so is that to imply that, when we look at the Alpha Trend program, that it is a more of a fully diversified program, and not overweighting any one particular area?

Martin

Yeah, well we're certainly aiming when designing a portfolio, to find the broadest possible diversification. And looking at the different asset classes, we know that the equities obviously, have an inter-correlation, which is fairly high, so all the four main asset classes equities would be the least diversified. Also the bond markets have a certain inter correlation, as to effects and the most diverse one is the commodities segment with energies, softs, meats, metals, precious metals, and the different energies, so it certainly offers the best diversification and hence it's also shown up in our portfolio as the biggest of the four sectors.

Now, needless to say, our equities, obviously have been, or the commodities have been the most difficult over the last few years, when looking at the volatility development, the one that I referred to before, the steepest fall has actually been in commodities, and it's the most extreme development in that segment, over these few years. But in the long run, you know, so many believe in that and provide straight diversification and we are not so much into timing, and not trying to time the portfolio back and forth, we're just trying to keep as robust, and as smooth and balanced an exposure to all sectors as we can. We think, you know, our research shows that over time it will pay off. Certainly this has been a challenging period now.

Niels

Well, tell me, in your own words, about the structure of the program and why you've designed it in this way? Talk a little bit about the number of markets you trade, and the number of models that are involved in the Alpha Trend program?

Martin

We trade seventy-four different single instruments, and we also trade combinations of instruments, which provide good diversification, something that we introduced to the portfolio since the financial crisis because of increasing correlation across markets. Fortunately, this is now coming down, which is also, together with the very low volatility level now, they're falling, correlation obviously it's a very positive sign, looking forward.

So, all-in-all we trade about 100 different underlines, including these combinations. The approach is very selective, so we're not in the market all the time, we're in the market maybe 3 to 4 times a year per instrument, and with an average holding period which is clearly shorter than CTAs in general: an average of 30 days. So we are in the market less than 50% of the time. So, a very selective approach, and going in with high conviction when we go in, and using a combination of statistical methods and pattern recognition, our methodology is to identify the opportunities when we trade and when we don't.

Niels

And can you, just to describe to the listeners, who may not be sort of fully as verse with these things as maybe you and I are, can you try and visualize what you mean by pattern recognition and how this might be different from maybe the traditional moving average, cross over, or price breakout?

Martin

Yeah, well I, you know, pattern recognition can mean a lot of things, but this has to be applied in both a quite long term, so that they identify what type of market structure is present. Is it a market that is currently in a larger trend upward or maybe it's a larger trend downwards, or sideways, or whatever. Maybe it's a market that's already reached a very extended state or maybe it's in a very consolidating state, and depending on what sort of state the market is, and what sort of structure the big pictures has, you then apply a more short term patterns to identify how the more short term price action goes together with the bigger picture. I mean, they both match, both the big picture, for instance speaks for good opportunities on the long side for a trade, and the shorter pattern also suggests that the investors are lining up for more support for long trade and if it ends, see the price take off from that pattern, then we would enter. The idea is just to try to identify how investors view the markets and how they, react to future price changes, but trying to assess the opportunities and probabilities for trading going forward.

Niels

Sure, and are you looking for some kind of momentum breakout in the direction that your overall filters suggest the trend is? Is that what you are looking for in the shorter term?

Martin

Well, actually, we're trying to identify the opportunities without relying on the momentum. But we do also use momentum. If we can't find a pattern, and there's a very strong momentum, we will also use that, but in the ideal situation we can enter before the momentum confirms the trade. So, we try to get into trades a lot earlier than most participants do. So, in the ideal situation we really enter like a very short time trader, we go in with a very short term pattern, and try to get in very early in the trades.

Niels

And is this sort of an end of day kind of approach, meaning that you only need to run the model once a day in order to identify these opportunities, or does it actually look for even price action inter-day?

Martin

Well, both actually. For the big picture: the big picture is analyzed on a daily basis, so it's run once a day, after the market closes. And then inter-day we sort of read the action for more short term information, and we actually try to react inter-day, when the opportunities arise and filter the trades on a minute by minute basis.

Niels

Okay, okay, and if you do get a signal to take on a new position, does that then get scaled in, or do you actually say no, we have a signal, let's take our full risk on at this point in time?

Martin

Well, again, execution is extremely important, so what we try to do is read the market action, on a minute my minute, or hour my hour basis, and then we try to get in based on what the opportunities are in the short term, but I guess, your question is perhaps more geared towards the sort of daily phasing in and phasing out. I would certainly say that when the opportunity is there we try to get in fairly quickly, maybe a day or a couple of days, so then hang on to the position. So, more binary, high conviction based, going in and building up the position quickly, rather than gradually phasing into position.

Niels

And how many, I don't know if this is the right definition, but how many models would you say you run in each market, if that's the right way to describe it?

Martin

We really consider it being one model, and run the same model across all instruments and all environments. Then we try to integrate all the different considerations into this one approach.

Niels

So it's building up conviction for each market and giving it some kind of score, to say we should now be 50% long, or we should be 75% long, is that how it works? Or is it we're either long, or we're neutral, or we're short?

Martin

We do scale it so, obviously also scale it with volatility, so our market volatility placing, if volatility is low we echo bigger positions, if volatility is higher the positions are smaller. We also scale it with risk management, with the overall risk in the portfolio, and I think that's an important piece of the model as well, and basically aiming at trying to get into when the world starts moving and the market starts moving then we try to get into action as quickly as possible, and with the earlier positions and those that have been taken on earlier, they are getting typically more priority and more risk, and in that sense bigger than those that come on very late, when the book is already quite exposed and we have a fair amount of risk in the books, our positions get...down prioritizing gets smaller.

Niels

So the risk budget is not really individually by market opportunity, the risk budget takes into account what you may already have going in other markets in the same sector, or in other markets generally speaking?

Martin

Yeah, it certainly looks at the book as a whole, and yes, balance is based on how much risk is on. We all view it from the risk perspective, when looking at things from a risk perspective we don't believe too much in diversification, unfortunately, when a really difficult situation occurs then correlations can quickly go to one, so there's little diversification benefits to be assumed, and hence there's little point we believe in splitting up risk per sectors. In the worst case scenario everything is just one big position, with highly correlated components, so that's the risk we need to focus on.

Niels

And do you, then, when you enter a new market, does the model allow you a stop loss every day, so to speak, or is it actually a change in the signal, or the conviction of the signal, that tends to reduce the position size and may even take the position out as a whole?

Martin

Well it certainly is both, I would say, this sort of continuous analysis and dynamic change of where we expect to get out of positions, but whenever we take on something we always have a stop in, so there is always a stop loss in each of the markets of where we have risk on. And that through stop also changes continuously as the market moves, and changes if the market move is fast in the direction of the position, then both the exit level and the stop level will sort of change with the move more quickly, and if the move is slower, then they will move slower.

Niels

Sure, sure, and do you use any kinds of stop profits, so to speak, or is it, like in the classical sense of trend following, that actually you need to let the positions run for as long as possible, and only if you get a big move against the trend you're in, you start lightening up, or getting out entirely?

Martin

Well that's certainly the dominating way of getting out of positions. However, if there's a very strong move in the direction of the trade, then there is a mechanism for taking some profits at those extremes as well.

Niels

What would you say, looking at the model...what do you feel is sort of the key performance drivers of the program as a whole in terms of, maybe its difference or its uniqueness? You mentioned that compared to maybe some of the other classical trend following programs out there, is there anything that you think of as being in particular, important in creating this difference when you look at how you designed the program? Whether it be the way you size your positions, whether it be your time horizon or your entry?

Martin

The program was not designed to be different, it was really designed to just reflect the trading style that we represent, and then that turned out to be a little bit different. Maybe it's different for...you mentioned us being up in Finland, away from London or New York, and maybe we think a bit differently being off the main bus on the street, I don't know, but we do it just the way we are comfortable with. It ought to be a little bit different, and I guess the points that I would highlight is the way we balance risk, as we discussed before.

Niels

Sure, and the general theme, that you mentioned, getting in early, getting in before the momentum the volatility starts to expand, does that allow you actually, in some ways, to put on a bigger position than maybe other manager at that stage because you are doing it at the time where volatility is low in that market?

Martin

Well, that could very well be the case, and I think, also just the fact that we are out of the market most of the time and we only trade in high conviction situations. That alone will lead pure mathematically to larger positions when we do get in, just to reach the same volatility level. So, yeah, we certainly get in with more size, relative to others, when we go in.

Niels

Sure. In terms of the actual trade implementation, how does that work, just from a purely practical point of view? You get your signal during the day, does that then automatically feed into some kind of execution model or part of the program, or how do you actually do your implementation?

Martin

Yeah, when the model says that it's OK, now we need to get long on gold, that information will then be passed on to the execution algorithm, which is sort of a separate algorithm, separate system, which will then have one trading session to get into the position, and we'll then, sort of analyze the short term action to optimize for the best possible price to get it. So, that lives its own little life during that particular trading session, to try to optimize for getting in. And again, it's a separate module, it's a separate sort of straight through processing and trading module that tries to optimize the price, and tries to be fast, and watches all the stocks and all the levels, and all the information that may trigger us to either be faster or more reactive or pull back a little bit.

Niels

So, in fact, there's no real human intervention, even in the execution side, everything has been pretty much automated.

Martin

That's right. There's always somebody overseeing everything, approving the trades before they go into the execution model, and overseeing, but is not calling any shots during the day, really.

Niels

Now, another topic I wanted to touch upon is risk management, and I wanted to start by asking you a little bit about how you define risk. What does risk really mean to you? And then how do you go about dealing with it and managing the risk in terms of whatever target you have?

Martin

Yeah, sure, I think the risk management approach that we run is sort of divided into...

Ending

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