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RT12: You don't have to be good...but you have to be useful ft. Adam, Harding & Lueck of AHL – 2of3
25th August 2017 • Top Traders Unplugged • Niels Kaastrup-Larsen
00:00:00 00:42:34

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“That’s the challenge you face in systematic trading: it’s not to be really, really good, it’s not to be useful.” (Tweet)

Top Traders is bringing you Top Traders Round Table, a series of conversations with industry leaders on the subject of Managed Futures. On this special episode, my guests are the founders of AHL: Michael Adam who later co-founded Aspect Capital, David Harding also known as founder and CEO of Winton Capital and Marty Lueck also one of the co-founders of Aspect Capital.

We sat down in the famous Abbey Road Studios in London to talk about what AHL’s founders did after they created the company, what they’ve learned along the way about business and life, and how they view the current market climates.

In This Episode, You’ll Learn:

  • The future of a science-driven trading approach
  • What David’s vision was when he started Winton Capital
  • The beginnings of Aspect Capital
  • Why Winton moved away from traditional trend following
  • The challenges that equities and managed futures present for investors
  • Why David chose to lower volatility of his strategy
  • Michael’s experience with deep value investing
  • When it’s time to ask “do you want to be happy or rich?”
  • What caused Michael to leave the industry
  • How they have evolve using different data sources and new markets
  • The danger of “hindsight bias”
  • What disadvantages machine learning have presented
  • Why Marty views asset allocation as part of a trend following model
  • How they see our current financial climate

Connect with our guests:

Learn more about Michael Adam and Mike Marlin and The Melomaniacs

Learn more about David Harding and Winton Group

Learn more about Marty Lueck and Aspect Capital

“Markets are neural networks, they are hundreds of thousands of people motivated to make money.” – (Tweet)

Follow Niels on Twitter, LinkedIn, YouTube or via the TTU website.

IT’s TRUE 👀 – most CIO’s read 50+ books each year – get your FREE copy of the Ultimate Guide to the Best Investment Books ever written here.

And you can get a free copy of my latest book “The Many Flavors of Trend Following” here.

Learn more about the Trend Barometer here.

Send your questions to info@toptradersunplugged.com

And please share this episode with a like-minded friend and leave an honest rating & review on iTunes so more people can discover the podcast.

This episode was sponsored by CME Group.

Transcripts

Niels

Welcome back to Top Traders Round Table, a podcast series on managed futures brought to you by the CME group, where I continue my conversation with Michael Adam, David Harding, and Martin Lueck, also known as the original founders of AHL and later, Aspect Capital, and Winton Capital and who are, without a doubt, some of the most influential individuals within the managed futures industry.

Mike

In hindsight, I can see that the world moves a lot more slowly, actually, than I thought it would. I'm now a musician and amazingly record labels still exist. The music business is completely falling apart yet they cling on by their fingernails, so things have a much longer life and are much slower to decay than I thought at that stage in my life. I was completely wrong.

David

I definitely shared your paranoia about the future of what we'd done, but I had more faith that one could do further research and discover new things. I had more belief than I think you because I had more interest in markets. I definitely didn't think that trend following would work as long as it has, but I did think that there was a world of other opportunities. I felt that very strongly.

I'm not sure feeling it more strongly would have helped anymore, actually, because I think I turned out to be right in the sense that, the one I pick on is Ken Griffin at Citadel. He was doing convertibles which is a completely different world - nothing to do with trend following and so-on and so-forth, but a lot of money was made in the 90s out of convertibles. I'm not saying we could have been Renaissance, but we definitely could have developed Convertible Arbitrage.

Niels

Were you allowed to leave straight away when Man bought the remaining part? What were you thinking back then?

Mike

(Laughter) What were we thinking?

Niels

Yeah, in terms of your future plans, was there any of you that thought, "That's great, let's try and do something completely different." Obviously, later on in life that comes into your situation, Mike.

David

r) Rather like the Beatles in:

It's sad because the partnership was very, very creative. We can look back and wonder what might have been. It was undoubtedly a very creative partnership, but that's just the way it is. We wanted to do our own things. We own wanted our own solo careers..

Marty

I think the timing of it, when was it, '94 that Man bought out the minorities and then they IPOed and it felt like a fitting point. Actually, you left quite quickly.

Mike

I left immediately.

Marty

I hung around for about another year which felt painful because it felt like I was dismantling much of the overhead and the research team that the Man Group said, "What do we need all of these people for?" You had another research operation. We were kind of doing different things. There was no lock-up after that. I think there was a non-compete period after we left.

David

When Man bought 51% they did say, obviously, that they did this with the view of corporatizing AHL, which they did. It was a success for them, but it was a little painful for us as well because effectively they removed the entrepreneurs from their business, which was in the long term interest of the entrepreneurs and probably for the business as well, but it didn't feel like it was in our long term interest at that particular moment in time for any of us.

Marty

So, I don't think any of us felt encumbered by the relationship with Man. As I say, that transaction, for me, felt liberating. Then we moved on to do, shortly thereafter, you were the first with Winton. We started Aspect a year or so later. Mike, you were non-executive at the time and then joined the party later on.

Niels

I want to go to David first on this. What was your vision, for lack of a better word, when you did start Winton? What did you want to achieve with that?

David

Well, I gave you long a pause because I didn't have any good options after I finally left the Man Group. There were simply no good options. The objective I wanted to achieve was doing research in financial markets and for that, I needed a team of people to do it. I am not a computer programmer or a researcher myself. I direct operations, rather than do it. I suppose if I was a better person I would have gone off and taught myself programming and bought a computer, but I already had slightly grander ideas than that. What I could have done, I suppose, is teamed up with a bigger company and started larger scale, but in practice, I just teamed up with 1 1/2 friends and started at a very small scale, and Winton was very, very small scale for the first two or three years.

Niels

Yeah. What about you, Marty? When you started Aspect with Mike and a few others who were involved.

Marty

And Anthony Todd, and Eugene (Lambert)... For me, there was about a year and a half out of the industry, and Anthony Todd, who was an Oxford friend of Michael and mine was, by then, working for the Man Group and I credit him with catalyzing Aspect.

It was really a case of that lack of confidence that we had in feeling like how long would the miracle of AHL persist for. I think it was Anthony who played back to me saying, "This is a business. This is a business and it's also an underappreciated approach that institutions should be taking advantage of."

like September or October of:

David

s very low key in February of:

Niels

Your worst drawdown ever, actually, isn't it?

David

(Laugh) Yeah, yeah, not quite, but it was the worst month.

Niels

Worst monthly drawdown.

David

So that stage having a sort of disastrous end of AHL, from my point of view, and then a disastrous end with Man.

Marty

Somebody was trying to tell you something. (Laughter).

Niels

Now, rightly or wrongly my understanding of Winton and Aspect, in the early years, was that both firms had an emphasis on trend following within your strategies. From what I've observed, over the years, this seems still to be the case for you, Marty, at Aspect, but perhaps less so for you David. So let me come to you first on this one, David. If my observation is right, when did you begin to move away from the classical trend following approach, if I can call it that? Also, what was your motivation for doing so?

David

It's a question of degree. There's still a fair amount of trend following in what we do but when we were doing our research in the early 90s we did a literature review and looked at what else, what other opportunities there were and we scoured the literature. Time and time again we came across academic papers referring to what is now called carry - the phenomenon of carry. So we focused a lot of our research on that.

We developed a bunch of trading systems which used that and we even got as far as implementing those trading systems. They all went a bit wrong in the ERM - when Sterling exited the ERM. At that stage, we had quite a bureaucratic board process and it had become hard to take risks and so all those systems were taken out. The significance is that they went on and worked very, very well for the next 20 years - as well as trend following, actually.

e didn't use that until maybe:

e, that was long gone - after:

My own pitch is I just don't think the markets... There will never be no opportunities for people to do more research in science. Some people think that we're on the verge of a grand unified field theory of everything, and a grand unified field theory of efficient markets, and I just don't believe that. I know people who say, "Well, what it is then? What is the next big thing then?" Well, I don't know, that's why you have to do research.

Niels

Very true. You've stayed true to your roots to a large extent

Marty

To degrees, to degrees, Aspect was predicated on this trend following approach being an important utility that was begin overlooked by the investment community. It really did deserve a place in people's portfolios. The irony, I think (and this is all with the benefit of hindsight), the irony is that we spent a lot of time doing a lot of research in order to ameliorate some of the characteristics of trend following. Trend following can be quite a challenging utility, return profile, for investors to hold on to. Equities tend to go up, up, up, up, up and then kick you in the teeth and then recover and then go up, up, up. Managed futures have an opposite profile where they tend to make consecutive losses then have a very strong run that makes money. That's intrinsically quite challenging for investors to hold onto, but it's really valuable in the portfolio.

So, the irony was that a lot of the research we were doing was motivated by desire, if you will, to sugar coat the medicine. We put all these other features like carry, that David refers to, and other component pieces in small doses, as you didn't want to take away the characteristics of trend following. It was very much still focused on trend following as the core of the business.

These days we've gone on to do a range of other things because clients want a range of other solutions. I think the industry - we can talk about that - but I think the industry has matured, or the investors have matured that it's not (I don't know if David would agree with this observation) but it's not now as much a world of, "I'm the investment manager, let me tell you what's good for you," and just plonking the product on the table. I think it's much more of a consultative exercise where, within reason, investors know what's in their portfolio. They know what they're looking for, and firms like ours have the component pieces that can put together solutions or products that provide a lot of different utilities. So, it's no longer just one thing.

Niels

Sure. I can't help asking you if you think the decision to maybe stay true to trend following for at least awhile longer is kind of the reason that Winton has leaped the whole industry when it comes to size. It really is... There is a difference now.

I want to circle back to you David, on the question of size, actually. If my memory serves me right, and correct me if I'm wrong here, at some point you decide to lower the volatility of your program a bit. So, if that is correct, what was your thinking behind doing so? What was the benefit that it had for your business and for your clients?

David

th,:

Mike

You'll be called for margin.

David

I don't want to be down... I don't want my investors to ever be down 60% over an evening. That only happened one day in my life, but I don't ever want that to happen. So there's now what they fashionably call a "hard stop" on how much exposure I'm willing to put investors... I'm willing to undertake on behalf of investors. That's my way of dramatizing the fact I'm concerned about... I won't say the fat tails because that implies something that happens once a year. I'm talking about something that happens about once every 20 years.

Niels

Also, could you say that losing less when you do lose is the way you win in investing overall? Is there something to that?

Mike

This remains an area of interest for me but in a completely bizarrely... I'm still in the investment management business but in a completely different field - Deep Value Investing, which is also challenging for investors. Deep Value Investing consists of most of the time doing absolutely nothing, which most investors find extremely difficult. Investment managers find it even more difficult, I would point out.

So, last year the fund I think only did two trades, essentially, the entire year. That was it. So, I think the profile of what you do and the way it's perceived by investors, matching those two things together it remains...

I would slightly disagree with Marty. I think it's as psychologically difficult as it has always been for investors to do the things that they should do just because of human nature. If you take trend following or you take Deep Value Investing you could argue the reason they actually work is that they're so difficult to hold. They're so difficult to hold psychologically.

David

That's the contrarian view of investing. They have to be a contrarian to succeed.

Mike

So, managed futures and trend following are not the only contrarian investment approaches. I think that's the central challenge of maintaining a business around a contrarian approach in in investment management is how do you match that to the psychological challenge for your investors of holding what you're offering. It doesn't matter if intellectually they get that it's in their interest, truly, to diversify. Diversification is the hardest thing to do psychologically for an investor.

David:

Sometimes I say to people, "Do you want to be happy or rich?" In other words when you're out of step with social pressure you are unhappy, but that is the right thing to do.

Mike

Yes, it's very, very hard to do. So I think that remains a challenge.

David

So my next life the answer will be, "Happy." I'm joking, but maybe rich makes you happy. It's a tough road to hoe as Michael said.

Mike

There are all sorts of reasons why. So I got back involved with Aspect, and one of the key events for me that led me to the conclusion that I should definitively stop, is actually, at Aspect, we had a market neutral equity program which was very successful. It had the opposite profile. It had produced a mediocre return with really quite high probability and was going extremely well. Luckily we were scared enough of leverage not to have leveraged as much as some of our competitors.

I thought, we thought, that it was safe. It was so unlikely to be taken apart by our counterparts because in order to break the back of the strategy would require a whole bunch of closely correlated stocks to be driven apart to the extent that surely liquidity would come in on the other side. We were completely wrong, completely wrong. At a low liquidity point in equity markets our counterparties did a classic squeeze on market neutral funds and wiped all of them out, interestingly. Pretty much except...

Mike

That's pretty much the event that led me to think, "I've got to stop doing this." Yes, I feel we were lucky enough. I feel we found two or three things back in the day. I thought if that strategy can be taken apart then I'm no longer confident...

Marty

It was time to be happy...

Mike

It was time to get out and be happy, but it was not a happy experience to watch, that market neutral fund being taken apart by our counterparts. I shouldn't go into detail as to who those counterparts are, and I won't go into detail as to how we escaped by the skin of our teeth. Let's just say if I needed a reminder of the challenge of doing this it's mostly psychological, both for the people doing it and for the investors in it. I think it's a constant and remaining challenge and one I could really do without, frankly. (Laughter)

Niels

Maybe on a related question. Historically, at least, the role price of a market has been the only input in systematic models, certainly in the trend following space. The universe of markets have also been very well defined, being highly liquid, exchange traded, like futures on CME. Tell me, how have you evolved when it comes to the data you use and the markets you trade?

David

We trade a lot of equities and we use a lot of other data sources, basically.

Niels

What could they be?

David

You got me there. (Laughter)

Most of the risk is on endogenous variables like price, intra-relationships between markets, and various convolutions of price, sectors, and this sort of thing. Obviously, we have all the balance sheet data, all the fundamental data, all the weather data, there are all sorts of different types of data. We have a lot of experimental systems with small amounts of money on them. I expect we have one or two bigger allocations with key data inputs, but those I'm keeping to myself.

Niels

What about you Marty? Are you looking in new directions when it comes to data and markets? Maybe I can follow-up because that's my next point I want to ask, is about are you also moving off the exchange? What's the motivation for doing that and what are the risks you have to take into account if indeed you are?

Marty

Well, so the first question is data and the evolution of the trading programs. Of course, we have an appetite for new ideas, new influences on markets, new effects. As David says, "If we knew what the next big thing was we wouldn't tell you and it wouldn't be research."

I think there's a lot of hype these days with machine learning techniques and all this just explosion of new data sources that surely the answer is in there somewhere. If you just leave it to the folks at Google the answer will become immediately apparent. My view is it's a little bit harder than that. There's plenty of work to be done and there's plenty of opportunities. So, I'm not going to claim that we've got some fantastic new system that employs satellite data and engages recursive neural net and presto we know what's happening tomorrow and next week.

So, no, it is overhyped. On the other hand, it is there. That data exists and there's more information out there than there's ever been, ever. You need to work out how to assimilate, how to digest and how to use that stuff.

David

One of the things that experience has taught all of us is danger of hindsight bias or over fitting to data sets. You saw this recently in a rich data set, or maybe 5 or 6 years ago. This Google Trends is a huge and rich new data set, obviously, a vast amount of data using Google's algorithm which forecasts when there are going to be flu epidemics. It made the front page of all the newspapers. It made the BBC News.

This is somewhere between irritating and intimidating when your entire career has been based around time series analysis and you see these claims being made. Obviously what we think is, "I wonder if they've really tested that?" Of course, it fell apart. It didn't work at all. It didn't work at all, because of over fitting. There's an example of Google, a company which is renowned for its engineering ability, mining a rich new data source, getting a massive amount of publicity, and then it completely failed. That's not a mistake that...

Mike

I think all three of us have a healthy paranoia around operating in markets that comes from real experience of, when I gave the example of even in an area where I thought it was safe it turned out that it wasn't safe. If I needed a reminder that one's counterparts in markets are not one's friends then that was the sharp reminder. I think those things have always applied and will always apply. You can't research those away.

David

onfused about back in the pre-:

Mike

I think all three of us have been good and learned on that score. I don't think that that is going to change anytime soon and I think a lot of the apparently new emerging science in the space is naive with respect to that.

So the number of times all of us would have heard this: A fresh faced researcher comes in the most amazing systematic trading strategy, each trade has a 66% probability of being right and you literally can't lose money. The great thing is I'm going to be trading in the FX markets so it's infinitely liquid and there's absolutely no risk. Then the question I would always observe is, "So how much money can you manage?" Let's say the answer was, "Oh, we can easily manage $200,000,000," or whatever the answer would be. The reply would be, "Do you think it's worthwhile to the people with whom you trade to steal $200,000,000 from you?" To which the answer is, "Yes, I think it is."

With a 64% probability trading signal, that is exactly what they will do because that's their job, which is to remove anything with such a high edge that the signal flow itself is valuable. The markets are brilliant at doing that and that's good because it makes them more efficient. So, when looking for systematic trading strategies what you need to do is find something that is fantastically mediocre. Because it's not useful as an individual signal to your counterparts. That means computers are really bad at finding those things because it's a real self-discipline to understand that that's the challenge you face in systematic trading. It's not to be really, really good. It's not to be useful to markets.

Niels

It sounds to me like you're a little bit sceptical about your machine learning.

Mike

That's why it's a difficult discipline.

Marty

Sceptical is putting it too strongly. It's cautious. Interested....

Niels

Are any of you using machine learning today?

David

Not in the trades actually, but in research.

Niels

In research. OK.

Marty

In some of the peripheral areas, you know how we allocate to different markets, like David, not in divining what's going to happen tomorrow.

David

I think I could make a plausible claim without stretching it too much that we were using machine learning 30 years ago. The research work we were doing in the late 80s is describable as machine learning.

Machine learning is a sub discipline of statistics and data science, isn't it? Machine learning is neural networks, it's definitely deep neural nets. It's a branch of science and what we were doing is a subset of that branch of science. If you go into the machine learning courses at university, today, they have lots of stuff on neural networks and financial markets and this sort of thing. But there are lots of other algorithms you can use in machine learning.

Mike

I think it's really interesting what's happening with Google Translate in terms of neural networks and that's a perfect example of where neural networks are incredibly powerful. There are no truly catastrophic outcomes, on the mistranslation of a piece of text. Admittedly you could say what if it was actually used by a machine to then fly a plane into a... Yes, you know, you could invent one, but broadly speaking there are no catastrophic outcomes.

But if you apply the same logic to financial markets and don't take into account the fact that human beings and greed are involved. I neither mean greed is bad nor greed is good when I say that, but people are highly motivated to find a way to make money from their trading counterparts. In that world a machine that learns how to do something in a theoretical world and then does it in a practical world is almost certainly going to have its head handed to it on a plate. That's what markets are brilliant at.

Markets are actually neural networks. They are hundreds of thousands of people motivated to make money, deploying capital and taking risk with a view to playing a game against each other in which they hope to be on the winning side. That's a neural network. That's a neural network operated by human beings and that has proved, through history, to be unbelievably efficient... unbelievably efficient at taking money

David

The stock markets are vastly powerful.

Mike

Maybe Google can replicate that number of actors motivated, but the way around I would put it is the world's biggest neural networks are already the markets and they are unbelievably good at what they do, so beware.

Niels

Yeah, absolutely. Very fascinating.

Mike

Do you agree David? That's what they are. As a bunch of brains - that's neural. (Laughter) With competitive algorithm where the survivors get rewarded with more money and capital. Which is exactly what a neural network does, it's exactly how it works. Human beings, it turns out, have quite powerful brains.

Niels

Good. Well, let's jump to another topic that I think our listeners will learn a great deal from. It relates to the importance of asset allocation. I think Ray Dalio, who runs the largest hedge fund in the world, describes asset allocation as the secret to his success.

How would you describe it? Also, how would you explain the asset allocation process that is built into your investment strategies as well as the benefit that investors have by putting a portion of their investments into strategies employed by your firms? Marty, why don't we start with you on this one,

Marty

Goodness, I guess the starting place is that the way we think about asset allocation is more about creating opportunities. So there's no inherent prediction of which assets are going to be the hot areas. What we're trying to do is trade as many diversifying opportunities as we can in as broad a set of opportunities. If there were no liquidity constraints we'd trade everything we possibly could almost in equal quantities.

Then you have to take into account liquidity constraints and the correlation between those different instruments. Then, what the model does (this is one of the beauties of the trend following approach) is it systematically identifies the opportunity set and does the asset allocation for you, ostensibly. So, I don't view asset allocation, actually, as a separate component of the model. The model dynamically identifies opportunities and moves risk in and out of those opportunities.

Niels

Sure.

How would you describe it, David?

David

I agree with Dalio. What we do is asset allocation, our systems are long or short the world's major asset classes and they profit or lose thereby. The difference between Winton and Bridgewater is that Bridgewater, I think, is philosophically based on economics and econometrics. Whereas Winton - I can't speak for Aspect - but AHL and Winton, are more based on mathematics and statistics, I would say. We have never, I can say, had any economics in our models. That may be to our advantage or to our detriment, but I just mention that because that is the difference. Otherwise, we are an identical firm to Bridgewater in terms of we do asset allocation.

Niels

Yeah, absolutely.

Mike

It depends whether you see asset allocation as something that you do before you start trading or something that follows from the way that you trade. I think that's a real misunderstanding about, certainly in what AHL through the years have done, and I know that Aspect has done, which is as Marty says, asset allocation is a product of a systematic approach to trading as opposed as an input into it. The whole point is, you're taking as far as you can, an equal risk allocation to markets but you instantaneously look at where your capital is deployed, it shifts like the shifting sands. That's the point.

It's moving money around very, very efficiently in a very evenhanded way without needing an analyst to make some call that the next big thing is going to be whatever the next big thing is going to be. That's a product or output of systematic trading, not an input into it. I think confusing those two things is very challenging. So, allocating between different systematic trading strategies is an extremely delicate and difficult thing to get right.

Niels

Is there any point where diversification, which is as you mentioned, it's the only free lunch - at least that's what we're being told in finance - is there any point in time where diversification becomes de-worsification where you cannot add more markets or models and get an advantage out of it?

David

Well, there's a mathematical answer to that question. What you're looking for when you're building a highly profitable portfolio are things which have a positive expected return and low correlation with the other things in your portfolio. But you never know what something's expected return is. There's always an uncertainty associated with that expected return. That uncertainty may be greater than the expected return. The expected return, the forecast return might be1and the uncertainty might be 10. In other words, over 10 years you have no certainty there's a new thing tied to the portfolio that is necessarily is going to make money, even in the next 10 years.

So, where all the quantities you are estimating - the correlations, the expected returns, the uncertainties - there's a lot of uncertainty in building. In knowing whether a new thing added to your model. Whether you're putting it in with the right. If somebody tells you what the return properties of the new assets are, and the return properties of your portfolio, then there's only one answer. If the return is between 0 and 1 then that will always make your portfolio incrementally better. It doesn't mean you should always do it. I think, mathematically, that's probably true.

Niels

Sure. I want to shift gears and I want to address the low return period that our industry has been in - sort of a drought of 5 or 6 years in terms of returns. David, you've studied market history going back hundreds of years. Can I ask you whether you can put this kind of market environment that we're in, in historical perspective? What do you think is happening in the market in this area right now?

David

I think, as Mike said at the beginning, we were trading quite fast and we didn't think that the opportunity would persist for a particularly long time. It's proven remarkably persistent. But over the years, the faster trend following systems that we used to use are not profitable anymore. I never believe it to be static.

In my view, these trading systems do get worse with time. I don't believe that our forecast Sharpe ratio from trend following or forecast quality of trend following returns is (given by the last 30 years simulation) I believe it is worse than that, which is why I believe you have to innovate and you have to struggle to innovate. I think it's getting worse. I think that what we're seeing is consistent with it getting worse.

Mike

To tell a story from back in the day, it relates... I remember David saying, as soon as central banks had begun to target low inflation, I remember David saying, "That will be a disaster." For many years, it didn't seem to be a disaster. Interestingly, I think it was only two quarters ago the economists finally, 15 years later, agree with you, "Gosh, that was a mistake."

I also remember you selling a flat in Clapham because you could buy two carts of silver and have financed the third Crusade. (Laughter) So it's almost impossible to tell the difference between... We've entered a low inflation, low-interest rate, artificially low-interest rate period for how many years now?

David

10 years.

Mike

For ten years. History would suggest that the future won't judge this period kindly. That it has some very negative characteristics in terms of distribution of wealth, in terms of the motivation of those with capital to deploy it efficiently, its ability to elevate people from poverty removed because their debts inflate rather than deflate with inflation and it will end badly. The point is it will end.

There's another argument that says this is a temporary hiatus while the world learns again, for the nth time over, that this is a really bad idea - printing money and having zero interest rates. When it does it will end with a bang. When it ends with a bang it's going to end with some pretty steep inflation and trend following will make a lot of money, by which time there will be at least one client left who will be able to say, "I told you so."

David

Our ideas are consistent. I think consistent, I didn't necessarily say trend following is not going to work. By any means reduced its Sharpe ratio to zero. As Marty said earlier if you have three losing years and then one bonanza year you have a lower Sharpe ratio. In the old days, you wouldn't have kept clients if you had a losing year.

Mike

But then what were interest rates when we started? 14%, 15%, 16%?

Marty

I was going to make a slightly more upbeat perspective on that, lest our listeners go and sell everything, which is: number one, to David's point, about decay in the models that we trade, absolutely. The fortunate thing is, back to the early point, as scientists we all just started with the view that you could always do it better. You have to keep asking questions. You have to keep moving forward.

riods of performance. So post:

Niels

Sure.:

Marty

Then the final observation is, if you give up on this approach (I won't say, "God help you") I think using scientific, quantitative, systematic approach to investing is the way it should be done. Nobody is promising you a guaranteed 30% a year returns on the program, but taking this approach of continually researching, investigating, innovating, is probably the safest bet.

Mike

Also, if you were to ask the question of investors, "Do you believe that the current approach to economic management at the central banks and the current approach of the regulators to financial markets is sustainable, or not?" Most investors would say, "Not." I believe that the real challenge, and it has always been the challenge is how you make it plausible, possible, palatable for investors to do the right thing. It's not that they don't know what the right thing is. It's just very, very, difficult to do the right thing - very, very difficult. A period like this makes it more difficult.