Today I'm joined by 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:

• Rich’s first introduction to trend following
• Jerry’s early days in the Turtle program
• How Brian ended up as a Turtle
• The TRUTH about where the Turtle name came from
• The surprising way Rich came up with the idea for the Turtle group…NOT what you expect!
• Why Jerry did not answer the first call from Rich when applying for the program
• The preferred qualities of the Turtle recruits
• Why it was hard to predict which of the Turtles would succeed
• Why persistence is important in trend following
• The relevance of the Turtle group in the past and today
• If diversification among markets is always the best practice?
• The right balance of financial futures markets and commodity futures markets
• Why more investors haven’t embraced trend following…yet?

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Learn more about the Trend Barometer here.

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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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Copyright © 2023 – CMC AG – All Rights Reserved

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Niels

Welcome to another addition of Top Traders Round Table, a podcast series on managed futures. My name is Niels Kaastrup-Larsen. I am delighted to welcome you to today's conversation with industry leaders and pioneers in manage futures, which is brought to you by CME Group.

Now today is a very special episode, not just for me but for the whole managed futures industry. For the first time in a very long time we have brought together some real pioneers of systematic trading and trend following strategies, who you may say changed the way the world came to learn about this investment strategy through the countless articles and books that have been published about the experiment that became known as the Turtle Program.

I think that, until today, very little has been shared by the creator of this incredible success story in the world of finance. So, I'm very pleased and super excited to welcome Richard Dennis, who really doesn't need any introduction. For those of you who don't know, Rich is the creator of the Turtle Program and the original mentor to my other two guests here today. I'm also joined by Brian Proctor at Turtle and managing director of EMC Capital Advisors; and finally, one of my own mentors when I got started in the manage futures industry many years ago, namely Jerry Parker, another Turtle, Founder, and President of Chesapeake Capital.

Richard

That's a good question. Well, I'd been a floor trader for fourteen years, and had gone off floor about four or five years before the Turtle Program started. It was clear to me that it needed to trade more markets than one or two that you could run around within the pit. So, we started to trade from the office.

Niels

Sure, and the thing about... Trend following clearly became your style of trading, Rich. I'm curious to know what was your first introduction to trend following? Where you inspired by some of the earlier pioneers like Richard Donchian, Bill Dunn, or Keith Campbell, to name a few, or how did that get into your life?

Richard

Well, I'm not sure it was quite legal, but I started to trade when I was about seventeen. There were some books, but they were by people who are long gone, about trend following. I just started to do research, just by hand way back then.

Niels

Okay, okay.

So, you didn't come across any other people doing the same thing? Because this is something that I've heard from a lot of people that they were doing their own thing and then they really realized that other people were doing the same.

Richard

Right, I came to know the people you mentioned, well after I had started trading. Really, some of the people who talk about the Turtle Program, and that I didn't even know that they were commenting on it at the time.

Niels

Jerry

So I was in Richmond, Virginia and I was working for an accounting firm and going for my CPA certificate knowing full well that it was something that I didn't want to do for very long. So, as a hobby, I would read books about the stock market and watch Wall Street Week, and get the Marty Zweig newsletters.

So, Marty Zweig was sort of a trend follower type, and that was my first introduction to trend. Then I maybe read a book about futures, and I thought, "Oh, futures, that's good because the leverage has got to be okay. I can understand that and currencies, commodities, interest rates... I mean more diversification, being able to go short..." that made perfect sense to me. So, I thought, "Okay, I see how this thing works now, but are the large profits going to pay for the small losses?" So, I probably sat at my desk at this accounting firm and just started to see how fast one thousand dollars would compound at one hundred percent per year. So, I thought, "Yeah, this is going to be a lot of fun, this is really a great idea."

Then I did read an article about Rich; I think it was in Business Week. So, it was late, maybe August or September '83, when I saw the add in the Wall Street Journal. I thought this was just a totally legitimate situation. You know it seemed too good to be true, but I knew that this was something that I should apply for and wanted to do.

Niels

Yeah, do you know what the article about Rich was talking about? What fascinated you about the article, do you remember that?

Jerry

Probably just the amount of money that he had made or something like, speculating that. Trading, in general, I thought was certainly something I wanted to do. I don't know why or how it got into my head, but I thought this was... and then the technical part of it and looking at trends. So often now, and in the past twenty-five years, talking to clients or potential clients we feel like if we don't word it correct, they won't allocate money to us. We must convince them, show them, and maybe we're not educating them enough. I thought this was the greatest thing ever when I first started learning about it and didn't need anyone to convince me.

Niels

Yeah, yeah absolutely.

How about you Brian? I'm interested in finding out what your career was like and where it was heading, back then, and how you ended up in the second class of the Turtle Program, which started I think a year after Jerry?

Brian

I started working for Rich as a runner, a phone clerk, a back office, trade checker, pretty much whatever there was to do with regards to the trading operation. So, I got to see the first wave of Turtles come through and be very successful. When Rich and Bill were thinking about a second round, I had a conversation with Rich and he told me it'd probably be in my best interest to forgo my thoughts of making the way into the pit and trading (filling paper for principles of C & D), and kind of make the next step to the next level and learn how to trade off floor. So, I didn't have to go through the whole process that the first group of Turtles did - the interview process... I did look at all the questions, and it's fun to look back at those, but I had an entire that was a little bit different.

Niels

Sure, sure, no absolutely,

It's funny that all of you, or at least Rich and you Brian, mentioned this thing about "trading off the floor." Was that the way you thought about it back then rather than trend following? I mean did the term "trend following," was that even part of your vocabulary back then? Or was it just the fact that here's a method to trade without being in the pit?

Brian

Well I certainly heard about it, obviously, from Rich and the partners at C & D who had all started, I believe, on the floors and moved off floor to trade a diversified set of markets and take the opportunities to trade in markets that were moving and trending. Sometimes the grain markets would be rather dull and quiet, and there'd be other markets in New York that were more volatile and provided more opportunity. When I first started, it was obviously just getting to know the mechanisms of the floor and then obviously finding out there were other ways to be successful in the business.

Niels

Sure, no absolutely. I guess of course that your story Brian, also when talking about that we shouldn't forget about the founder of EMC, namely Liz Cheval, I think the only female Turtle as far as I recall, but who, of course, sadly passed away only a few years ago. How did you end up working with her? Meaning were you close with her even back then during the program itself?

Brian

Well, I think all of us got to know each other pretty well during the program, and there are still some pretty good friendships there. As far as keeping in touch with some of the Turtles, I do, and I did. Liz was one of them. I had just come back from trading for a hedge fund in New York and was temporarily working at Morgan Stanley where they had a managed futures fund offering with multiple CTA's of which Liz was part of it. I just reached out to her to talk about that particular group of CTA's that Morgan Stanley had put together and tell her that I was looking around for another opportunity and a few months later she called and said, "How would you like to work here?" So that's how that happened.

Niels

Sure.

Now today we'll cover several different topics around the Turtle story and what the whole debate about nurture versus nature means in the world of trading today. But I'm also hopeful that we will be able to put some of the myths to rest about the Turtle experience before we all forget what really took place back then. So, I want to come to you again, Rich, for my next question.

Now there has, over the last three decades, been so much talk about how this trading experiment was named: what the inspiration for the Turtle name really was. Some people say that it was related to you seeing a turtle farm in Singapore I think I heard, and another story I heard was it was related to a rock band called The Turtles that performed back then. Why don't you put us all out of suspense and share with us the true story about how the name came about.

Richard

I'm going to stick with the first story about the turtles in Singapore. That actually, that's how they got the name, it was kind of a misnomer but it sort of stuck. If I had a dollar for every plastic turtle that people have given me, I'd be indeed rich.

Niels

But also, talking about the name itself, and I wonder whether seeing the turtles in Singapore or something that happened years before you did the program, but I also wanted to talk about the inspiration for the idea behind creating the Turtle Program. Again, we hear so many stories relating to, one that seems to be very popular is that you and your partner back then, Bill Eckhardt, having seen the movie Trading Places with Dan Aykroyd and Eddie Murphy, where there was a bet made about how you could train anyone to be successful in trading.

Richard

That you're going to get a "Heavens NO!" on that one.

Niels

Oh well good! Excellent, excellent! Well, can you share with us how the whole idea behind the Turtle Program came about?

Richard

Sure, so one lazy Sunday afternoon I was hanging out with Johnny Walker Black, and I started to think about my own trading and realized that a lot of it was just sort of rules that were informal and that I noticed that other traders operated according to rules. Also, some of those rules were very bad, like a lot of traders at that time, their one rule was always buy soy beans.

Having thought about my trading and the rules, it seemed to me that, at that time, just to put a number on it, I thought that two-thirds of trading was following rules and maybe one-third was intuition - the dreaded flare that we talked about during the course and that. So, as the ice cubes melted, I started to make some notes about what I thought was true; what you could do to prove it. It could turn out to be one of those endless debates that never comes to any conclusion. It seemed to me that we could resolve the question by trying to train people and giving them rules and talking to them about intuition and things like that, and that was the genesis. And nobody told me it was a great idea, but nobody wanted to tell me it was stupid either, so we did it.

Niels

Sure, sure.

How long before the actual program started? Was this something that you reacted on very quickly and said, "Yeah, this is a great idea, let me do it." Or did it have to sink in for a while before you created the program?

Richard

It was only a couple of months before we put the things in motion, like advertisements in newspapers, that lead to starting in January of '84. So, not such a long period of time after I thought of it.

Niels

Fantastic! I think that's a great story, and thanks for finally putting the record straight on this point.

Now, Jerry, I want to bring you back at this point because you were obviously one of the first people who saw the famous ad that Richard mentioned in the Wall Street Journal. Now the process wasn't just about "apply here, and you're in." Tell us about the process that you had to go through to get selected.

Jerry

You know, one of the funny things about recollecting all of this is that everyone has a different recollection, and so that's a disclaimer I feel like I should make. So you get the test, you send your resume in, you get the test back - one hundred true or false, and some discussion questions that you have to answer in one sentence.

Richard

Well Jerry, don't be modest, I think you got all the questions right, which was... You were the only person who did. I suspected it was an open book test on your part, but...

Jerry

Yeah, I carried this test around with me to all the audits for weeks, and would work on it and show it to my friends and say, "What do you think?" And they'd say, "False," and I'd say, "Naw, I think that's true."

So, I held onto it for as long as I could. I sent it back in, and then I got a phone call. I was always looking at the Wall Street Journal and replying to ads, "Invest here and get a free book on how to trend follow," or something like that. So, I got this phone call, and I just thought it was somebody else, and so I sort of ignored the phone call. Then I got another phone call from Chicago, and I was like, "Oh maybe, crap that could be a phone call I should take."

So, I finally took the call and went for the interview. I went to Chicago, and my head was just full of these facts - it was all that cramming for an exam, which was totally ridiculous and unnecessary. I got up there for the interview, and yeah, I thought I did well, and I thought I'd done well on the test, and I thought I had shown some passion and desire, so it was a great situation.

Niels

Yeah, absolutely.

Now, Brian, you joined a year after Jerry. Tell me did you and your fellow Turtles have to go through the same process as Jerry did? Or had it changed from class one to class two?

Brian

I think it was pretty much the same. Rich could verify that.

Richard

Yes it was.

Brian

As I mentioned, I was already working for C & D, and for Rich for a couple of years prior to that. So, when the next, second batch, of Turtles came along I just had a conversation with Rich, and he suggested that it was a better career path for me not to go down to the floor but to be part of this. I took the same questions, obviously. I pretty much knew a lot of the answers before that because I had been working there and began to understand what the partners at C & D, how they thought about trading. So, for me, it wasn't the big formal process that I think most of my peers had to go through.

Niels

No, that makes sense.

Now, returning to you Rich, clearly, the application process was intended to give you a variety of applicants. I think those are very different backgrounds from my recollection. Share with us what you were looking for in this diverse group of people and were there any skill sets that they all had to have for you to select them?

Richard

Well there was no 'killer' aspect to it - that one thing you needed to know or not know. We formulated, in our heads, a few different things. We preferred people who hadn't been on the floor and traded, because that was kind of a detriment. It wasn't what they knew, it was what they knew for sure that just, "Was it right?" So that was one thing. Another thing is that we looked for people with statistical aptitude.

We wound up with a lot of Black Jack players, professional Black Jack players, who if nothing else knew odds, and we thought that was good. We did ask some questions to get to learn something about generalized intelligence. But I do have to say I'm not sure that we did a great job of selecting people, and we selected people and had various expectations how well they would do. Almost all of which were not true, which fits into another part of the story really. The more I think about it, the more I think the Turtle thing worked, and I think in general to trade at all and have it work you must be rule orientated. So, we took people who you would have said, "This person has no chance, and this person should be good," and we couldn't pinpoint it at all.

Niels

Interesting, very interesting.

Now speaking about that, and maybe we come back to you Jerry, you've got (as far as I understand) very little training so to speak. Tell us a little bit about that, but also tell me, when you were taught these rules initially, whether this made sense to you the first time you heard it or did it take awhile before it made perfect sense?

Jerry

Well, we got great training, sufficient, more than enough, so our training could not have been better. And on top of that we got a lot of time with Rich and Bill, and support - crazy support, which you don't get in the real world. So, what was the second part of your question?

Niels

No, I was just going to say, so you had this training which is it fair to say that it lasted two, three weeks?

Jerry

Right, it lasted two to three weeks. Oh, I know! We did take some time where we could go up and have lunch with Rich and trade with Rich. Some of those opportunities were very beneficial because I could ask certain questions and start understanding more of the philosophy and what was going on with the trades and how to think about the trades and the market's systems.

So, that was our Trader for a Day with Rich, which was very important. I've said on other podcasts that it's so important, this sort of support we had in an environment that maybe we'll never have again, where if you're doing the right thing, that's going to be the bottom line on your performance or your evaluation of your performance versus, "Please make me some money, and I don't really care how you do it."

In fact, these rules seem a little stifling. You should probably use more flair for instance, which is a typical client. I've said before (it's a bad analogy), but it's kind of like saying that if you print the rules then people can follow them or they'll know some good rules but, "You won't be a marine by reading a manual." I think that we became much better traders because of time spent with Rich and Bill, and the way they ran the program was simply far beyond just a set of rules.

Richard

I'd like to say this about the rules, in my old age I've come to believe that mediocre rules are better than good traders judgment. That's because one thing in this business that you need is persistence and it's almost impossible to be as persistent using judgment. Obviously, if you follow a system and do everything, you're being one hundred percent persistent. So, it's a part of rule orientation that's under appreciated.

Niels

Rich, once you had your group of Turtles, and they've been through their training, and I'm assuming that the second group got the same training more or less, did you allocate the same amount of money to all of them or did you base your allocation on how well they did, or how well they applied the rules that you just taught them? What did you reward?

Richard

Well, I believe that they all started with the same amount of money, but as things went on and we saw their performance and talked to them, then there was a lot of asymmetry in the allocations.

Niels

Okay, okay.

Richard

Well I don't remember ever talking about it while we were doing it, and that's one of the things that I have continued to do. I talk about it, but I don't want to talk about exactly - what it was that we were doing or anything like that. I could have lived with anonymity for the whole thing.

Niels

Yeah no, okay.

Richard

Well good luck with that one. The markets have changed a lot. What works is changing and is a bit of a problem, but what's more of a problem is the lack of volatility. Volatility seems to me to have trailed off over the years intermittently. You know, I'd rather have the volatility back. I mean that's a variable you can't control, but I think that it's more important than adjusting the system, although adjusting the system is important too.

Niels

Sure, sure, sure.

Brian

Well I would say the basic philosophy hasn't changed. You're continuing to do research, finding robust systems, and that means systems with the least amount of parameters that tell you how to initiate, liquidate, or stay out of a trade. We're always looking to build systems that are based on momentum or based on range dependent discrete time frames where you're confirming that a trend is in place. So, you're always looking to capture directional price movement. Obviously, managing risk is paramount, so you manage risk from the trade size, you limit it in the markets and sectors that you trade.

We have a risk management concept that overlays the portfolio that's based on marginal utility. So, we're harvesting profits along the way which is very different than what we did learn in the original Turtle trading programs. We're still doing the same things, just a little bit differently than we used to.

Niels

Sure, sure, sure.

Now, some people will claim that one of the secrets to success in trend following is diversification among markets that you put in your portfolio. So I'm interested in learning from you, whether you think that is true: that you should essentially trade as many markets as you possibly can? Or, if there are certain markets such as, I guess, maybe the VIX index, that just doesn't lend itself well to trend following?

What about you Jerry, what do you think on this one?

Jerry

Well I have traded as many markets as possible, and I think it's probably... Of course, there are a handful of markets like the VIX that I wouldn't trade... I guess, pretty much our strategy has been if it's liquid we'll trade it. So I do think that setting up the portfolio, the risk budget amongst the sectors and the markets. So, when you start adding more and more bond markets that are ninety percent correlated, you can trade them, there's no downside probably, but you want to not... Pay attention to your sector, your bond sector allocation for instance.

Niels

Yeah, yeah no absolutely.

Maybe Rich, I wanted to hear your opinion about this, and maybe your opinion has changed since back then to the way you look at it now? I don't know, but in your opinion in a trend following portfolio, what's the right balance between financial futures markets and commodity futures markets? And I'm assuming you don't have to worry about size, liquidity concerns as some very large CTA's have to do today. So if you could choose your optimal portfolio of markets, what would the balance be between these two?

Richard

Well, in fact, the liquidity so dominates the choice of trading that the balance just winds up being created by picking the liquid markets. When you get down to it, you're probably trading fifteen or twenty commodities and fifteen or twenty financials, and that's (at least to me) an accident of where the liquidity is. I mean if somehow the liquidity shifted it wouldn't bother me to be unbalanced.

The correlation in trades... it's not... I mean wheat and corn are maybe going to do the same thing, but you don't get all that much correlation, so having shifted from twenty commodities to fifteen and one up to twenty-five financials, I wouldn't worry too much about that.

Niels

Now it seems to me that it's been difficult to get support from many types of investors and other types of investment professionals, not to mention the financial press: that the type of diversification and trading philosophy that trend following offers, such as providing access to very different and uncorrelated markets, being able to go long and short, taking small losses and letting the winners run, etc, etc., that this approach is superior to just buying an index of stocks and keeping it until retirement. Why do you think, with all the evidence that we can show today, that still only a minority of investors have embraced trend following and made it a core part of their portfolio? And again I open that up to everyone; I'd love to hear all of your opinions.

Do you want to go first Brian on this one?Page Break

Brian

Sure. I would say that the return stream in general for trend following is much more difficult for institutional investors to stomach. Some of them have internal rules about how much volatility an investment can have, what kind of drawdown a certain investment can have. For the most part CTA's, trend following CTA's, surpass those thresholds. So, I think that's part of it.

I think another part is they consider us to be, for lack of a better word, a black box, which means they don't understand how we do what we do, to which I tell them, "We can show you and predict in which environments our trading style will perform well and which environments it won't. We can show you how we think about the markets and use statistics and probabilities in our favor."

To me, the real black box is the discretionary trader who you don't know what's going through his mind in any given market environment, or on any given day, that's the real black box. But I don't know; it's always been a mystery to us why more money hasn't flowed into the managed futures space.

Niels

What about you Rich, have you given this a lot of thought or do you have any thoughts about it?

Richard

Well I'll just say a couple of short things. I think that the performance of hedge funds relative to CTA's, if you go back ten years, was better and that the hedge funds hogged all the allocations. Now, of course, they've fallen on some hard times. So, maybe that's over with, but that detracts from allocation. Also, obviously, a stock market that goes and more than triples in eight years draws people's attention. So, those are fairly big things. Even if hedge funds go south, or stocks start not to go up, you would think that what you're talking about would be reversed, but it hasn't happened so far.

Niels

That's true.

What about you, Jerry, I know you've been outspoken about this?

Jerry

Yes, I think that it's fees and expenses, historical fees and expenses, volatility happens too much, Now, in the stock market of course... I read a lot of articles - I'm a heavy user of Google alerts. So, I read something this week that said that only inflows and hedge funds were with CTA's last year.

So, now I think it's another question of how large is your firm? Does your firm make me comfortable? How many PhD.s do you have? It's less about the markets and performance. There are a lot of assets coming to CTA's but only four or five.