On this episode my guests are Richard Dennis, creator of the Turtle program, Brian Proctor, managing director of EMC Capital Advices, and Jerry Parker, founder and president of Chesapeake Capital, for a rare conversation about the inner workings of the Turtle program, told for the first time by Richard himself.

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In This Episode, You’ll Learn:

• The good and bad of targeting volatility
• How Jerry and Brian used the rules they learned through the Turtle experience
• Why the Turtle program was just “another piece of risk” Rich took on his book
• Jerry’s experience during and after the program
• Brian’s two biggest takeaways from the Turtle program
• If proper trading can be a real business?
• What Rich would do differently in 2017
• The state of trend following today
• If being a good trader is enough to run a successful business?
• About other passions of the Turtles outside of trend following and trading
• Rich’s secret “career” in baseball
• If Rich has found any counter-trend strategies that work
• Jerry’s views on changing and adapting too much
• What academia thought of trend following 40 years ago

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Learn more about Richard Dennis and the Turtle program

Learn more about Brian Proctor and EMC Capital Advisors

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Jerry

I read something this week that said that only inflows and hedge funds were with CTAs last year. Now I think it's another question of how large is your firm? Does your firm make me comfortable? How many PhDs do you have? It's less about the markets and performance, and it's more about the... There are lots of assets coming into CTAs, but only four or five.

Niels

Hmmm, yeah.

To that point, I would agree. My previous conversation for Top Traders Round Table was indeed with three of the largest consultants in the world, and they certainly discussed those topics as to what drives the allocations today. There were some surprising answers actually. So, for the listener, please do go and check those episodes out.

I want to stay with one of the things that, I think you, Brian, mentioned about the volatility. One of the changes that I've seen occur since the days of the Turtle Program is that now-a-days many of the highly successful CTAs, in terms of size, have adopted a constant targeting of specific levels of volatilities: some people go for 10% vol, 15% vol products, or if you really want bang-for-your-buckyou can get a 20% vol target product. I wanted to ask you, Rich, first: what do you think about this development, and should volatility be targeted in your opinion?

Richard

Well, I'm far from managing any money for people, so it might be not so relevant, but I've never quite understood the problem with volatility. Maybe there are some problems associated with that, but people can modify the volatility themselves, just put less money in if that's what they're worried about. I don't know anything about the specifics of how managers are targeted or things now though.

Niels

Sure. But back then... and I guess this is a question for you, Jerry and Brian. So, back then when you started your own businesses after finishing the Turtle Program did you even think about volatility targeting or were you just basically taking whatever volatility that the design of the strategy gave you?

Jerry

So, I'm intense on this subject. I think that, in some ways, I have changed the least amongst the Turtles. But, longer term is maybe a very material change. So, I think that our approach has maintained the overall philosophy except that it's just longer term. So, I have no interest in the voltargeting. I just don't understand it. It is something that I think clients kind of want and I know better than going down that route - doing things the clients want and I just think it's just a more sophisticated way of taking profits before the trend reverses. I do think that if your daily return is 5% +/- on average, that's too much volatility.

Niels

Sure, sure. Brian, do you have any strong thoughts about this? Otherwise, I'm happy to continue with another question.

Brian

Niels

OK.

I want to stay with you, Jerry, for a little bit, but also put something into context that Rich mentioned about the markets. So, I guess back-in-the-day, again from my own experience and recollection, there seem to have been some really extreme trends, at times. In recent years we've probably had fewer of those, as Rich pointed out, and also a contraction of volatility for sure. So, performance, as we've discussed, has been under a little bit of pressure for many managers.

In my conversations or episodes of podcasts of more than 100 so far with some of the most successful systematic traders and investors, there's a clear consensus that between where you enter a trade and where you exit a trade and how much risk you should allocate the exit is usually mentioned as the most important of the three, and I guess you could argue that maybe one of the weaknesses of trend following, if it's not done well, is that you give back a lot of the open profit when the trend comes to an end and it starts reversing.

So my question to you, Jerry, first is that back-in-the-day if you were already long in a market (you're still learning this sort of methodology), you had substantial profits, and perhaps some news came out that just made the market go parabolic for a few hours and then suddenly collapse later on in the day, did you ever consider back then or even discuss with some of your fellow Turtles or even perhaps with Rich as well whether this was a sign that the trend was coming to an end and it was time to lighten up a bit. If so, could this be made into fixed rules, or sometimes did you have to use a bit of discretion in those periods?

Jerry

I had lots of bad thoughts that I didn't act on. When I was trading for Rich I was very... Eventually I got to the point where I could follow the rules, and I was very intense on following those rules and doing the types of entrances and exits that we were taught to do. Once you get out on your own, I remember doing my first trade where, I don't know what I did but it was maybe not by the book, and I was like, "Oh my, this is kind of crazy because I haven't done this before." I started hearing about all of these great ideas with a sample size of 10 that people were introducing to their systems, so I pretty much was able to stay away from that. There were just a few things that I just had in my head that I had asked Rich or that were really big in the class and sample size was one. Discretionary trading was something to be avoided and just stick with your exits.

Niels

Yeah. Well, what about you, Brian? Did you find it difficult at times initially to just be 100% disciplined and stay with that when clearly these emotions, when you see things like that happening in the market it gets a bit tense? Or, was it also, for you, very much just follow the system from day one?

Brian

Well, the great thing about the Turtle Program was it gave us the opportunity to learn how to trade. So, maybe I was a little naive, but it just took all the psychological pressure away, we weren't risking our own money, all you had to do is follow the rules. So, I would say that during the Turtle Program it was very easy to do what you were supposed to do.

You had some of the brightest guys and pioneers in our business telling us, "This works, just do it." When we did do it, we saw that it worked. Not to say that it wasn't painful watching profitable trades turn into losses. Certainly, when we went off on our own and started managing money, it's very hard to be, as Rich said before, consistent. You must consistently do the right thing which, when you go through long losing periods is difficult, and you're inclined to think that, "Maybe we should make some changes, so I don't have to go through this again." It was harder when we had to go off on our own.

Niels

Yeah, of course.

I want to shift gears and discuss your reflections when you think back on the Turtle Program. Let me start with you, Rich, again. Do you have any regrets doing the Turtle Program, now, some 30 years later?

Richard

Well no, I don't have any regrets besides that I'm not happy with some of the people who put some stuff online and made money off it who had nothing to do with it. But no, I think it worked out well for everyone.

Niels

Yeah.

Did you, back then, have expectations that you... I don't know how to phrase it, but maybe I could just ask, did it meet your expectations on all fronts or were there certain parts of it that surprised you? You mentioned earlier today about certain people you thought were going to do well and didn't, and vice versa. Is there anything else, in terms of your expectations of it, that surprised you, or weren't met or exceeded significantly?

Richard

Well, if you make enough trades everything seems like a trade and doing this was just another piece of risk that we chose to take on. So, you make a trade, and you don't really have great expectations for it or great fear. It's just one of many things that you are going to do. This was a very large trade if you think of it that way. Like with my other trades, I didn't really have numerical targets or anything like that in mind.

Niels

What about you, Brian and Jerry, what are the key takeaways from the whole Turtle experience when you think back on those years?

Brian

Go ahead, Jerry.

Jerry

Hmmm, the takeaways? I think I learned a lot and it was just a magical time. Those were four great years. I had no expectation of future business. I think we all would have been incredibly happy to continue managing money for Rich for the rest of our lives and that would have been a good idea.

I think that some of the other guys that we competed against at other CTAs, in my opinion, probably did not have nearly the training and support that we had and yet they have large businesses. A lot of these guys went out together and worked together so I think that was maybe an opportunity that we missed - most of us going out on our own. So I really wish, in some kind of crazy way, that we had the best training, the best experience, the best four years that anyone could ever hope for, but I don't know that I personally...

I went to a good business school, even though it doesn't really look like it. Maybe part of my problem was that... I suggested a question for Rich because I've asked this question many times to myself (maybe it's a bad question) but, is proper trading a real business? To some degree, I've tried to trade properly and not pay attention to clients as much as maybe I should have and not vol-targeted and not taken profits and not made it a better experience. I think to some degree that was one of the Turtle characteristics that clients and others are going to lead you down the bad path so stick with your system. Stick with what you believe to be true, but maybe a little more compromise would have made me have a larger business.

Niels

What about you, Brian?

Brian

I would say that the most important concepts and things that always resonated with me were that you just have to have really strict risk management, don't overtrade, take lots of losing trades, don't get out of your winning trades until the trend is confirmed that it's over.

I think risk management was rule/key concept number one. Then, concept number two was: keep looking at new systems, blending different values together, different timeframes, to see if you can come up with something better than you already have. So, we've invested a lot of money in our research infrastructure, and we're always searching for the next best, great systems. I think those were the two concepts that I took away from the Turtle program were system development and risk management.

Niels

Richard

Well, I wouldn't teach the same thing and, to tell you the truth, I don't know exactly what I would teach because it's just harder to do objectively now. Maybe it will get easy again, but people have asked me that question, and I don't have a good answer for them. I don't even know if it would work again, to tell you the truth. These exogenous variables that have kind of truncated trends - they're a problem. There's no doubt about it.

Niels

Sure, sure.

As Jerry mentioned in one of his responses, he and many of the Turtles would have loved to just stay trading for you. Did you ever consider that, just to keep it going forever? Or was it always in your mind something that you would do for a period just to prove your point, or not?

Richard

I got to the point, when we closed the Turtle Program or shortly after I retired for the first time. I'm like one of those rock people who gives eighteen "Final Tours." That was the first time, and I just needed to stop and reassess things, and I decided to go whole-hog into that halt. That was the only reason I closed it, really.

Niels

Yeah, yeah.

Jerry and Brian, Rich mentioned before that, obviously, there are things that have made things for trend following more difficult today. I'm sure you've been asked this question many times by clients. Do you have any thoughts about this low return period that trend following has been through in the last couple of years? Is this just part of trend following? Or is there something else going on here that may be more sustained as we look into the future?

Richard

I would say, being cautiously optimistic, that we may have seen the bottoms in zero to negative interest rates, although that may not be the case. It certainly has been more difficult recently with Central Bank intervention and government policies that have dried up the liquidity in a lot of markets. They are, I think, designed to make it difficult for professional money managers out there. But that being said, there are periods where, no matter what the powers-that-be decide, you're still going to see the price of crude oil go from $100 to $30 a barrel, or other commodity markets that they can't control. So, it's always a matter of being involved and taking trades and trying to identify when those next trends are coming. If they don't come in the financial sector, then having a 40% or 50% allocation to commodity markets might provide the opportunities where the other markets aren't working.

Niels

Sure.

Any thoughts from you, Jerry?

Jerry

I think the markets are not trending, and they're so diversified, and the only thing trending is stocks. That's been a problem. I wouldn't necessarily call it system failure, but it's just a lack of trends. I do think there are a few things that trouble me with the main one being the vol targeting that larger CTAs are committed to.

When we get the trends are we going to get the crashes? We see those too frequently.

Niels

Yeah, yeah.

I want to stay with you, Jerry, for a second. You mentioned earlier about whether you had been too true to the Turtle rules and that had prevented you from building a bigger business. I wouldn't say even building because you did. I would maybe say maintaining a bigger business. I want to ask you a related question to that because I think a lot of traders out there who are very, very good traders would like to know. My question is, if you want to build a big business around a successful trading strategy, is it the strategy that might prevent you from doing that, or is it in fact, that maybe traders (and don't get me wrong here), maybe traders should stay with trading and you need to bring in business people to run the business? Just because you're a great trader doesn't necessarily mean you're a brilliant business person. It may be a bit controversial to ask you that, I don't know.

Jerry

I read some articles about some of the larger firms and the first investor that they got was someone who invested in the business: to build out this infrastructure, create a proper structure, to have a firm that's going to raise a lot of assets and concentrate on sales alpha as much as trading alpha.

Niels

Hmmm, yeah.

Richard

Well I try, in a way, not to know those sorts of things. I guess at the end of the day I know that. I'm proud of that. But I just don't think self-congratulation is pretty. So, I tend to try to avoid it like the plague.

Niels

Right, sure.

Maybe on a slightly different question - if you were 20 years old today, would you go back to trading? Is trading the one thing for you, or what else would you like to do?

Richard

No one will make me President, so I guess I'll just keep trading. (laughter)

I don't know. Stranger people than me have. If you know what I mean. (laughter)

Niels

I think we all do.

What about you, Jerry and Brian? If you were 20 years old today and maybe you hadn't seen an ad in the Wall Street Journal, was trading something that you think you would have pursued, or were there any other passions that you might have ended up pursuing instead?

I guess you did Brian? You did something else, didn't you, as well?

Brian

Well, I got a law degree and practiced for a boutique - litigation firm in Chicago. They were good enough to hire me to work part-time. So I would come in after the trading day was done - probably two o'clock in the afternoon and work for, maybe five days a week, three or four hours. So, I got to see what that was about. I think that's a realistic possibility. If I was... and what I'm advising my younger children now is probably to look at engineering or something like that because that seems where the future is going.

The trading industry has obviously been a great opportunity, and it's interesting, and it's always changing, so I have no regrets.

Niels

Sure, sure.

Now I want to ask you, Rich, a completely different question. This comes from one of your other students in the program - someone who was curious about this. The question is, back then, if you ever considered buying the Chicago Cubs in the early '80s and have the Turtles apply Sabermetrics research to gain an advantage in the game of baseball?

Richard

That's a great idea whose time hadn't arrived by then. You know I've owned a small part of the White Sox baseball team for almost 40 years.

Niels

No, I didn't know that. OK.

Richard

It's a very small part. It's always been a very small part, and I'm all in on Sabermetrics, and it's interesting - the whole computers and statistics. The speed of computers has totally changed everything and in that sport for the more intelligent, really.

But buying the Cubs? I've seen too many people coming out of the park after the game not entirely compos mentis I think is the word. So, no I didn't think about marrying the two.

Niels

Yeah, OK.

As we come to the end of our conversation I wanted to ask all of you if you would like to bring up anything with each other? Perhaps you, Jerry and Brian, would have a question for your mentor and vice versa, is there anything that you, Rich, would like to ask Brian and Jerry (so I'm not the only one asking all the questions today)?

Brian

I would ask Rich: I had heard that you had developed several counter trend trading models, maybe 10, 15 years ago. I just was curious if you found anything in that realm that has worked and that you continue to use?

Richard

I would say almost nothing, you might find something that works, but it would trade so infrequently that I'm not sure it's worth the effort to track it. I had a thought, and it was a decent system, but it almost never happened. It basically was simple, if the price of anything got down to 10N, then you should buy it because that was so out of wack that you could take a counter trend position, but that might happen two or three times a year - not enough.

Brian

On the other end, say something is so overvalued that it would be a sell?

Richard

Ah, you're never going to get away with that. (laughter).

I think, was it John Maynard Keynes who said, "The market can stay irrational longer than you can stay solvent."

Brian

That's right.

Niels

What about you, Jerry, do you have a question for Rich as well?

Jerry

I can't think of anything. I'm drawing a blank going through my notes

Niels

What about you, Rich? What about a question for two of your Turtles?

Richard

Well, let me make a comment. I really don't have a question, and it will be, like most of my thoughts, simplicity itself. You probably still believe that the trend is your friend when really the rules are your guardian angel. I'm not sure which one I would rank as the first, most important principle. I think it's pretty much a dead heat.

Niels

Hmmm, interesting.

Brian

I would say that I wanted to make a comment earlier that it's shocking how much research we've done over the years, and maybe some of the nuances for entering trades or for exiting trades we were able to code them and actually make a systematic approach, but it's shocking how little of the research we've actually implemented. We've obviously implemented some that, in hindsight, I wish we hadn't of implemented.

The cost of doing research is just changing and, in some regards, it's just another derivative of not following your rules. I've been really bad at that over the years - zigging when I should have just stayed the same, not even zigging when I should have zagged. I should have not changed anything. I think that's a good lesson supporting the reason that the rules are so important. They're important, and there are many ways of not following them.

Now let's get back to my pet peeve with this vol targeting. Back when I used to violate the system, get out of a coffee trade too early. I remember doing that once. I knew it was wrong, and I knew I shouldn't do it, and it did not prove to be a good idea, but now we're much more sophisticated in programming that bad idea so somehow, it's OK now because it's been programmed. Systematic discretion, countertrend philosophy is programmed right in, so I think it felt very comfortable with an approach that felt very like how I used to trade. It doesn't have some of these bad elements in it.

Niels

Yeah, it's interesting that you mentioned that. In a sense, I guess what you're saying is that you shouldn't change too much, and another word for that would be adapt too much. It's interesting because I saw this quote in a paper on trend following from one of the very large European CTAs talking about the Turtle story quite a lot.

Niels

They end up by saying, and I quote, " stories can be powerful, but the reality is that there has never existed a simple technical trading rule that can be applied year after year consistently generating profit, nor a secret rule only known by a few insiders, nor a publicly available rule acclaimed by academics, and we're convinced that such a rule will never exist. The world continuously changes. Markets continuously change, and any investment strategy that does not adapt to these changes will experience diminishing performance. This is one of the few rules that has not changed."

So, your experience, Jerry, is that you shouldn't change too much, but I guess you would agree that the rules that you were taught back then, in the Turtle Program, despite what these people are saying, still works and are still very valid.

Jerry

Well I think that with the short-term trend following it does not work. I think there's a sweet spot that works well, and it has worked for a long, long time, and it's not just curve fitted, or cherry picked for the past five or ten years. To some degree that could be a description of trend following in general - relationships and correlations, they change. Markets change fundamentally and my trend following entries and exits... As the world changes, environments and economics change it fits right in and captures those trends beautifully. So, that I would sort of agree with, but I think I agree with you. Probably what they meant is somehow, is that the markets are changing on a past four or five-year basis. There are more sample sized requirements that are just optimized to the recent data. I have a feeling that's not a good idea but, I do think that's what clients like. So, I'm not sure how much marketing that is. There was a lot of Turtle jealousy and envy in that piece - I may have sent you that piece.

Niels

Yes you did.

Jerry

There's a lot of stuff going on in that. I'll send it to Rich and Brian.

Niels

Sure, sure, absolutely. Any final thoughts from you, Rich and Brian?

Richard

Let me just say what you read is over stated a lot. When I started trading 40 plus years ago, the academia was sure that prices were random. I talked to these people, and their arguments were strange - to ignore the obvious. Now if you lose half the correlation of a trend following system or a trend following expectation your trading, after costs, might get ground down hard but that's not an academic argument about trends and things changing. I believe that more that, more than most of the people that we trained, things are changing. The thing you've read there I've found to be... I'll go with vastly overstated.

Brian

I would just say that every five or every ten years you're in a hedge fund conference somewhere and the question that always comes up, "Is trend following dead?" It's usually right after those conferences that we have good performance. So, we're going to continue doing what we do because it does work and even though it's been a difficult number of years, here, we're still confident that it's going to perform well going forward.

Niels

I think on that note let's wrap up this historic conversation about the Turtle story. Rich, Brian, and Jerry I can't thank you enough, really, for doing this special episode of the podcast with me today. I really appreciate your openness during our conversation.

To all our listeners around the world let me finish by saying that I hope you're able to take a lot from today's conversation with you as you continue your own investment journey. If you did, please share these episodes with your friends and colleagues and send us a comment to let us know what topics you want us to bring up in the upcoming conversations with industry leaders in managed futures, From me, Niels Kaastrup-Larsen, and our exclusive sponsor CME Group, thanks for listening and I look forward to being back with you on the next episode of Top Traders Round Table. In the meantime, go check out all the amazing free resources that you can find on CMEgroup.com as well as TopTradersRoundTable.com.