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TTU108: Big Opportunities in Exotic Markets? ft. Doug Greenig of Florin Court Capital – 1of2
15th November 2018 • Top Traders Unplugged • Niels Kaastrup-Larsen
00:00:00 00:39:36

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“My background really is in fixed income quant and macro and I have a pretty good grounding in discretionary trading, but I’ve been moving in a more systematic direction for a number of years.” (Tweet)

Today on Top Traders Unplugged, I’m joined by my cohost Moritz Seibert to speak with Doug Greenig, the Founder, CEO, and CIO at Florin Court Capital. Doug’s early experiences in economics at Princeton and UC Berkeley helped kick off his career in finance, and his work at BARRA in Berkeley started his eventual dive into the CTA space. Trading in exotic markets has helped Doug and his firm capitalize on unique opportunities and fully utilize the systematic trading model. Listen in to today’s episode to learn how Doug got started in systematic trading and exotic markets, how he built his team at Florin Court, and how he has utilized exotic markets to their fullest potential.

In This Episode, You’ll Learn:

  • How Doug got started in finance
  • Why Doug got into the CTA space
  • How systematic trading intrigued Doug more than discretionary trading
  • The inspiration behind the name Florin Court Capital
“The discipline of following the models and following the process [in systematic trading] is invaluable.” (Tweet)
  • Who influenced Doug in his financial career
  • What Doug learned from working with Fischer Black  (co-inventor of the Black-Scholes model)
  • How Doug found such an experienced team in the early days of Florin Court Capital
  • The exotic markets that Doug is trading
“I try to learn from as many people as I can, and some people have a lot to offer.” (Tweet)
  • What makes these exotic markets easier, or better to trade
  • Where to find the right balance of exotic versus traditional markets
  • What gives an asset more or less momentum, and why crypto is so special in this regard
  • How Doug selects his markets, and his long-term strategy for maintaining that collection
“I would rather have real economic players with different motives on the other side, than to be facing off against other CTA’s with slightly different frequencies and other systematic shops.” (Tweet)
  • Why Florin Court Capital has stayed out of trading spot crypto
  • How to adapt the different markets to the standard models

“Systematic trading has a number of advantages over discretionary trading. It forces you to figure out ahead of time what you believe and what you’re going to do in a given set of market circumstances.” (Tweet)

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Hey everyone, and welcome back to another edition of Top Traders Unplugged where today my co-host Moritz Siebert and I are joined by Doug Greenig, whose the founder, CEO and CIO at Florin Court Capital, a CTA that is backed by Swedish platform giant Brummer & Partners. Now, Doug, thanks so much for coming on the podcast with Moritz and me today. We really appreciate you spending some time with us today and we're very excited about our conversation.

Now, you have an interesting background and a unique start to your business so why don't we start there. Tell us about your journey and how that has lead you to the founding of Florin Court Capital.


I'm happy to do so and I'm glad to be here. So, my story is this, I studied economics as an undergraduate at Princeton and went on to get my PhD in pure mathematics at the University of California, Berkeley. My career in finance really began at that time.

I worked at Barra, in Berkeley California, with a number of people who have gone on to great things: Ron Kahn, Peter Muller. I was doing work as a quant in the equity space. After that I went to Goldman Sachs, Fischer Black hired me. I went first into fixed income research, and then I went on the bond arbitrage desk at Goldman Sachs, in New York.

So, I had a grounding in quantitatively oriented discretionary trading in fixed income and in macro. I was in that job a number years and then went on to Greenwich Capital where I first ran the proprietary trading desk, I should say one of the two proprietary trading desks, and then went on to run mortgage trading and derivatives and a number of other things at the firm.

So, my background, really, is in fixed income quant and macro and I have a pretty good grounding in discretionary trading from all of this. But, I'd been moving in a more systematic direction for a number of years. When I went to Fortress Investments, I went there to do systematic macro with a team of people. Then, after Fortress, I came to work at Man Group, where I had been hired to be the head of risk for AHL. Following that I got additional responsibilities for the portfolio management group. So, it was at AHL where I really dug into the CTA space and deepened my understanding of systematic strategies.


That's a fascinating story, actually, if I can just stay a little bit with it. Your transition from discretionary to systematic, I'm curious, because I think a lot of people think about the advantages of one over the other. What has been your experience? What convinced you that maybe the systematic approach was where you wanted to focus your future?


Well, systematic trading has a number of advantages over discretionary trading. It forces you to figure out, ahead of time, what you believe and what you're going to do in a given set of market circumstances. Discretionary traders, in a way, have models. The models are in their heads. They have rules. They have ways of looking at the world and, in some cases, you can take that, put it down on paper, test the hypothesis and refine it.

So, there's a kind of empirical/scientific process involved with systematic trading that is really quite compelling. You are really forced to state what you believe, why you believe it, and apply that, and test it. Then, when it comes time to do the actual trading, again, that discipline of following the models, following the process, is invaluable. It really is invaluable. In addition, you can apply it to a very large number of markets at the same time.

A good discretionary trader really can't look at too many different things and have a decent feel for them, whereas, once you've figured out the approach you're going to take systematically, and you've tested it in a variety of places, you can apply it very broadly if appropriate. So, there's a tremendous strength to that process of testing ideas, applying them broadly and then implementing the whole thing with absolute discipline.


Sure, I couldn't agree more. Just out of curiosity, at the time when you started or you decided to start your own firm, Florin Court, where does that name stem from? Is that your location?


Well, when I first arrived in London I really wanted to get to know the city better and so on the weekends I would take city tours - not the ones for tourists, but walking tours for people who want to get to know specific neighborhoods and places and get off of the beaten track a little bit. I remember I took a tour of the neighborhood Clerkenwell, which is just up, and just a bit north of the city. I was fascinated by the neighborhood. It was a very, very cool neighborhood. It reminded me a little bit, in some respects, of downtown New York.

In Clerkenwell there's a beautiful square called Charterhouse Square, and a lot of people don't know about it, but it's one of the most atmospheric places in London. Part of the square is a fourteenth-century monastery that is largely intact and has an amazing history. It's a really interesting place.

uilding, built in, I believe,:

It turns out that that building, Florin Court, is one of the great art deco landmarks of London. It is the residence in the fictional TV series Hercule Poirot, the detective, and just a lovely place to live. So, I moved in there and had this beautiful view of Charterhouse Square, and I could walk to work at my former employer. So, it was just a delightful place to live. That's where the name comes from.


Sure, wonderful, beautiful story. Thanks for sharing. Now, you mentioned a couple of names that you've worked with in the past like Peter Muller, and Fischer Black. People probably know Fischer Black better than they know Mr. Muller but I was just curious, along with this journey, were there any people (not necessarily these two gentlemen but any other ones) that had a big influence on you, in your career at all, or a mentor, or anything like that?


Oh, sure, I could name a number of people who have influenced me. I try to learn from as many people as I can and some people have a lot to offer. It was really a privilege to work with some of the greats in the business. I've been in the business a long time and I've been lucky to be, and fortunate to be in really good places and working with some very colorful figures.

Jacob Goldfield, at Goldman Sachs, for example, was one of the great traders and he approached markets in a sort of Socratic way. If you offered a proposition and said I think such and such will happen, or I think X is related to Y, he would start questioning you, very, very skeptically. He is a person with a very incisive mind and would never hesitate to challenge your assumptions. So, I think I learned a great deal from him.

I worked closely with Adam Levinson, at Fortress, and I think he now has a fund out in Singapore, Graticule, and I think he's one of the greatest macro traders I've ever known, both broad and deep. I love the way he thinks about things, so I learned a great deal from him. Of course, I learned a tremendous amount in the quant work that I've done, over the years, Fischer Black was an inspiration, and more recently, in my employment at AHL, I worked with a number of super talented individuals.


I want to stay with the early days of Florin Court Capital a bit longer and talk about some of the bigger decisions that you had to deal with such as putting the team together and also finding the backing to get started. Can you talk to us about how that all came about?


Sure, sure. So, as I mentioned earlier, I spent a number of fantastic years at Greenwich Capital Markets running a prop trading desk, then running mortgage trading and other businesses there. It was a fantastic firm with, man for man, about the best trading team I have ever seen and I loved working there. It was a fantastic place.

I think it was the summer of:

Now, that was seventeen years ago. So, after I left AHL, in due course, and I was thinking about what I'd like to do, one possibility was having a conversation with Brummer. So, they knew me already, so I engaged them in a conversation. I talked with others as well. With Brummer it's a very easy fit because Brummer does a first-class business in a first-class way. They're really good people and straightforward to deal with. They have been in the business of building hedge funds for a long time. They know a good team when they see one, and so things developed naturally and very, very nicely.

So, I talked to them about the idea of doing a different kind of CTA, a new kind of CTA, with an emphasis on alternative markets - the more exotic markets that most CTAs don't touch. Typical CTAs trade one hundred standard developed market futures and FX forwards, that sort of thing. But there are literally hundreds of markets that they don't touch. To me that is low hanging fruit. So, I discussed with Brummer the idea of doing a CTA around markets like that as well as trading different kinds of models in other markets. So, I was very, very pleased when they expressed interest in the enterprise.


Sure, sure. Well, having a backing like Brummer, clearly, I imagine, makes things a lot easier, but you still have to find good people to start off your business. How did you manage to put together such an experienced team from day one?


Well, of course I had worked with a lot of people at AHL, which is a terrific organization to be sure. But at that particular point in time there was a management change at AHL, and some people got the jobs they wanted and some people did not. There was a little bit of tumult with some people leaving and other people coming.

So, a number of the people, whom I liked the best, actually just became available or were already available just because of the flow in my former organization. So, I had an opportunity to bring onboard Tony Vinitsky who had already gone to Oxford to get his MBA. Tony is so important to what we do I can't overemphasize it, because we trade operationally complex markets - that's our reason d'être.

We will trade markets that require work in order to trade: maybe they're over the counter, maybe there are other complexities involved. Tony had been the head of investment operations at AHL and that's what Tony lives for. He loves it. So, I was able to offer him the role of COO and take full [benefit] of Oxford.

Completely, independently, one of my favorite guys, David Denison who's a terrific, terrific guy, he was leaving [AHL] already. He had already left. He had been the head of the FX sector. What makes David special is that he has a pretty deep experience in equities. He had worked at the Putron Fund Management, back in the day. He was obviously very experienced with momentum trading and CTA stuff. He's a terrific statistician. He's a very strong figure, but he will roll up his sleeves and write code.

So, he's a very, very productive guy and I thought he would make a wonderful number two, and so he has.

Then Matt Stevenson, he had gone off to do other things much earlier, and I thought Matt was such a fabulous product specialist. He explains the momentum story and exotic markets and so many other things so well. I thought he would be really terrific to head up our product management, and so on. So, I was able to pick up people that would really have been my first choices anyway because they were already available.


Yeah, absolutely.


That's great, Doug. Maybe we can stay in those exotic markets for awhile. Most listeners may have heard of Spot Power or Steel Rebar, or some of these smaller commodity markets. Maybe, piquing their interest, can you just give us an overview of maybe some of the real exotic markets which you trade?


Well certainly, if you first look at the power markets, you don't want just to be involved with Phelix and Nord Pool, although most CTAs aren't. There are the peripheral power markets throughout Europe, there's the U.S., so there's a lot to do in power.

Then there are all the inputs to power as well as carbon emissions at the other end. So, there's a lot of stuff to trade in power. In addition, you can also create some synthetic assets by looking at combinations of things. You can look at the dark spread; you can look at the spark spread, there's plenty to look at. That's where you're comparing electricity with an input to its production.

If you're talking about interest rate swaps, you have more than one point on the curve, typically, in dozens of countries around the world. So, you're talking about Asia, Latin America, and Eastern Europe. You can be involved in markets like Turkey. We did extremely well in August from the developing crisis in Turkey, which has been going on for some time but accelerated.

Then, when you're talking about exotic commodities... An exotic commodity... I want to correct a miss-impression that may be out there in the market. You don't go to the Chicago Mercantile Exchange and circle some illiquid thing, or the Chicago Board of Trade, that kind of thing, and circle some illiquid but standard sort of thing like lumber, or butter, or something. That's not interesting.

What's more interesting is trading something that is really unrelated. It may even have decent liquidity, like onshore Chinese commodities. Now, again, it requires a lot of work to get access to that. But, Tony and the team have put in the work, and we trade about three dozen onshore Chinese commodities at this point: eggs, glass, Steel Rebar. There are commodity markets around the world like South African wheat.

So, when you're looking at a portfolio that has French electricity; that has credit default swaps, Columbian interest rates, eggs and glass in China, cryptocurrency (we have exposure to both: bitcoin and ether). We were one of first, or one of the very, very first CTAs to have that even before the futures. We try to push the envelope, but push it safely. Again, we want to make sure all the pieces are in place so that everything is done properly from beginning to end, and that takes work. That's a very large part of what we do.

One approach to our business is to keep tweaking your models every three months or six months or one month and just try to keep improving the backtest. But it really hasn't been shown that that produces better out of sample performance. I'm not convinced. Another approach is to take tried and true models, but keep adding new diversifying markets by doing the operational work required to add them. That's the game we're in.


So, you're using traditional trend following models and you're applying those to those exotic markets, do you think there's one key reason why trend following works better on those markets? Is it because at the other end of your trade you may have a commercial as opposed to another hedge fund trading the S&P 500? What are the key differences there, in your experiences, that make those exotic markets easier or better to trade?


Well, the first thing, where I can argue very safely and soundly, is that the portfolio is better diversified. It just is. You can look at a standard CTA portfolio involving fifty to one hundred developed markets, and look at the returns generated by momentum systems on those markets and ask, "How many bets are you making?" You would use principal components analysis or another similar method to get at the diversification of that portfolio.

You can do the same thing for our portfolio which has, approaching two hundred and fifty, macro markets, and then cash equities as well - well over a thousand of those. When you do that analysis you see that the portfolio that we have has been, historically, two to three times better diversified. Again, there are different ways to measure it, but I will simply say that it is significantly better diversified.

For example, you could ask, "What are the number of principal components needed to explain seventy percent of the variance of the returns from the systems on these markets?" Generally, with our exotic portfolio, you're talking about needing something like twelve, thirteen independent bets, most of the time. Whereas, with a standard CTA portfolio, it's a much, much smaller number. So, diversification is one reason it works better.

that, historically, say from:

If you look at the other extreme and say, "OK, I'm looking for sharpes of great than a half on an individual market." Well, less than twenty percent of the standard markets have done that over that period, Whereas, close to thirty percent (if I include sharpes above one) it's going to be about forty some percent of the markets have delivered that. So, there are fewer bad markets, in terms of the kind of choppiness that produces poor returns, and many more excellent markets, or individual markets that are delivering sharpes of a half or higher.


Or could it just be that from:


Well, first off, there's no questions that the intervention of Central Banks, in the developed markets, dampened the trends and did not allow the trends to extend themselves, particularly to the downside. That's certainly true.

I don't think that the answer is liquidity because if you bucket markets by liquidity and then look at trend performance in, for example, the developed markets (because there are plenty illiquid developed markets in my bet), I don't think you see very much, in terms of a relationship, like a higher sharpe ratio with lower liquidity. There isn't a consistent relationship there.

I think another factor might be that I would rather have real economic players with different motives, real hedgers on the other side, than to be facing off against other CTAs with slightly different frequencies and other systematic shops. In most of the markets that we trade systematic players are not a big part of the flow, they're just not.

So, who are the other players involved? They could be short-term speculators, but in many cases they're hedgers. We know, for example, how the utilities in Europe and so on hedge electricity prices as well as their input costs. So, I think that's a factor. If you look at markets and say, "OK, I'm going to bucket them by the amount of CTA participation in the market." I think you will find a rough relationship, a rough one, indicating that markets where it's not just CTAs trading with each other, are markets where momentum performs better.

Again, these relationships are noisy. I think the factor you mentioned, Central Bank intervention in the developed economies, that played a role. I think that the point that I'm making about hedgers being a bigger part of the picture in some of the alternative markets, I think that's right too.


Does a market like, say, Kansas wheat or sugar still have a place in your portfolio? Or do you say, "No, those are too standard. No, we're only doing one hundred percent pure exotics?"


Well, it doesn't really have a place now. The only place where some of the developed markets will creep in is in the bucket of synthetic assets, because we can sometimes create, from a combination of other individual markets, a synthetic market that has different properties from its individual constituents.


Could you give us an example of that?


Oh, a simple example of that is trading the yield curve slope. That would be an example of a synthetic market. I mentioned some earlier: the dark spread, the spark spread. So, spread markets are synthetic markets, but actually you can do triples and quadruples, and various combinations to achieve things. So, you'll see some of the developed markets showing up in places in our synthetic assets. But, that's a relatively small part of our portfolio and we're not trading them in a purely directional sense. We're trading the synthetic assets directionally, but not the individual component.


Sure, you mentioned that you were trading, or I think you mentioned around two hundred-fifty markets or so. It certainly seems like your research is, really, how do we add another market rather than how do we tweak the model? So, how big a universe, how much more is there for you to add to your playground, so to speak, in terms of profits?


Well, we have a really nice pipeline of new things to add. There are so many things, but our goal is to continue to expand in a kind of organic way to add more, and more diversifying assets to the portfolio. It's not like we said that we have these two hundred, or whatever, and we're done, no, no, no.

When we have this conversation in a couple of years, I think some of the two-hundred-fifty will be gone. Maybe they've been commoditized a bit, and there will be a hundred and fifty new ones in there. Think about all of the over-the-counter markets that are tradable in so many different things. All of them are potential candidates, one by one. Some are more obvious than others.

In addition there are new commodity markets that, again, we only, in the last year, have we been able to trade Chinese commodities. Let's see what the future holds for commodities in India and other places. We're going to be hunting down additional over-the-counter markets, additional commodities markets, cryptocurrencies which is an entirely new asset class and you want to be involved absolutely in that asset class. That doesn't require that you have a view that bitcoin is great or bitcoin sucks, actually, either way trading momentum on it can be a very, very sensible thing. In some ways crypto is almost the perfect asset for momentum since there really isn't a clear notion of fundamental value.


Are you trading with futures there?


We do trade the futures and other derivatives. The worst asset for momentum is probably something where the fundamental value is completely obvious, and then only in increments of information of some kind will cause a step function like move in its value. The perfect thing is something where sentiment matters a great deal, and where fundamental value may actually depend, in some ways, on the price action. You know, bitcoin steadily grinds up there will be more and more interest, more and more acceptance and who knows where it goes, and vice versa.


How do you determine whether a new market adds value? How do you determine whether it's different enough to warrant a place in your portfolio? I can imagine with all of those markets that you already have, at some point it will be hard to, I'm guessing, add additional diversification.


Oh, you bet, that's a really great point. Of course it's harder. At this point the program is so mature that every change that you make is an increment - an incremental improvement. But making a series of incremental improvements and maybe moving your sharpe ratio over a period of time, moving it up by point one, in expectation of course, that's an achievement you want to do it.

So, the first thing is just common sense. You look at the market and then you ask, "Is it really adding something new, directionally, to the program?" In some cases adding a market adds nothing, really. The market is so correlated with other things that you're trading. In other cases it really is a different thing. The next thing, as I alluded to in answering so far, is that you look at the correlations as well as the occurrence of tail events. I'm not only interested in the correlations on quiet days, I'm interested in correlations in the big moves as well. So, you basically look at that.

In general we will have a bias in favor of adding things unless it is pretty clear that there isn't much value in it. Things that have been correlated empirically, but intellectually are not necessarily the same the thing, they can become uncorrelated and decouple. Take a look at the way that U.S. interest rates have decoupled from Europe. It's quite remarkable.


Yeah, that's a good point.


Could we just go back to the cryptos for just a little bit. You can trade the bitcoin futures, you can trade bitcoin spot, you can trade ethereum spot, if you trade them spot how does your custodian handle that? Where do you keep those coins?


Precisely for this reason we did not get involved in spot trading of crypto. But there are other ways to get exposure, even before the futures.


So the futures, the bitcoin futures?


Yes, right now trading bitcoin futures is a perfectly acceptable way of trading the main risk factor in crypto. In a sense all crypto should be measured with a beta relative to bitcoin. Bitcoin is the benchmark for crypto, but ethereum is an interesting product.


Just out of curiosity, since these markets are so different, can you apply the same trend following model to all of them or do you have to adapt a little bit to the area or the sector or the type of markets that you trade?


Well, here's where you do the adaptation, first off you do adapting based on liquidity. You cannot trade at the same frequency in a costly, illiquid market as you can in a highly liquid market. Some of our exotic markets are pretty liquid. Some of them are much less liquid. So, the speed of trading will reflect that.

Another place where things enter in, where market differences matter, is where you set volatility floors. Any responsibly organized CTA program will do volatility scaling. We all know what that is. But then the question becomes what happens when short-term vol drops really low? Do you keep scaling up the position or do you have some floor minimum volatility, some barrier, if you will, to prevent leverage from getting too high?

For markets that have a lot of kurtosis, kurtosis being the fatness of the tail that is not explained by a second moment by the volatility, you may put the volatility floor higher or have different position limits and risk limits for the sector. Now, what we're doing, because we're trading so many different assets, our risk is divided up very, very well across a broad spectrum of positions. None of our positions will have the risk concentration that you would have in a, call it a fifty or seventy-five market standard CTA program. So, we have these modest amounts of risk in all of these different assets, from Chinese commodities to emerging market interest rates to electricity.

So, in answer to your question, the models are very similar. By the way, that is also true in standard CTA programs, whether they're trading fifty or seventy-five markets, they will typically use pretty similar models right across the board with a few adjustments. In the markets some people throw in some carry, they adjust trading speed, but you don't want to be tweaking models for individual markets...


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