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TTU83: Starting a Quant Firm from Scratch ft. Natasha Reeve-Gray of Altis Partners – 1of2
29th June 2015 • Top Traders Unplugged • Niels Kaastrup-Larsen
00:00:00 01:07:46

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Our next guest left a well known trading firm in London to start a quantitative trading firm with 3 other partners. There’s a lot to be learned from her insights on starting a business, building a culture, and making it through the obstacles along the way. Listen in for our discussions on the startup phase and the current trading model.


In This Episode, You’ll Learn:

  • How Natasha and her founding partners all worked at the same firm before breaking out on their own.
  • About her childhood growing up as an only child and what got her interested in finance.
  • How she got her first job in finance.
  • When she got hired by QCM.
  • How she met her founding partners.
  • How and why Natasha and her founding partners broke off from QCM.
  • How she set up her new firm with her partners.
  • How they each had a different area of the business that they focused on.
  • The big obstacles of the early days and knowing which people to talk to.
  • What the biggest learning curve was in terms of hiring the right people.
  • Why they built a 24-month buffer for their business that would let them stay in business if things went down.
  • Why the’ve gone to the cloud for their business.
  • The details of their core team.
  • What would require them to expand the team.
  • How Natasha explains their track record to investors and potential client.
  • About how they reacted to the period of 2011-2013.
  • The details of their trading program and what their philosophy is behind the program.


Resources & Links Mentioned in this Episode:

  • Learn more about the film Trading Places, that inspired Natasha to pursue futures trading.

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

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Welcome to Top Traders Unplugged, where my goal is to give you the clarity, confidence and courage you need to invest like or invest with one of the top traders in the world. It is the stories that you never get to hear set out as the most honest and transparent account that I can make of what goes on inside the minds of some of the best investors in the world. Today you're listening to episode 83. If this is your first episode you've heard, you might want to go back and listen to all the earlier conversations. Before we find out who’s on today’s show, I want to mention that today’s podcast episode is brought to you by the Eurex Exchange. If you go to their website, you can find out how volatility derivatives can help you manage your equity portfolio.


This is Natasha Reeve-Gray, Co-Founder of Altis Partners, and you are listening to Top Traders Unplugged.


Thanks for doing that, Natasha. By the way, if you want to read the full transcript of today’s episode, just visit the TOPTRADERSUNPLUGGED.COM website and sign up by clicking “I’m In” in the top right corner. It’s that simple. Now let’s get started with part one of my conversation. I hope you will enjoy it.

Natasha, thank you so much for being with us today. I really appreciate your time.


No problem Niels. It’s nice to be invited, Thank you.


Good. When I thought about our conversation today, I realized that your firm was a little bit different to many of my previous guests, and, in fact, many of the CTAs that I’m familiar with. The difference that I’m thinking about here is the fact that you and your founding partners all came from the same firm and other well known CTAs. To me at least it’s not so often that we hear about a team of people breaking up at a CTA firm to start their own business.

That seems more to be the case in banks and perhaps the large hedge funds. So I think it’ll be fascinating to learn about your journey and to basically find out more about one of the things that you’ve been focusing on and also in the sense that you built something which is slightly different in terms of the approach within the CTA space. Before we jump into all of that I just wanted to ask you a simple questions that I try to ask all my guests because I want to appreciate the many different answers there is to this question, and it basically goes something like this. If you meet someone that hasn’t met you before and they ask what you do, how do you explain what you do?


It’s a very simple question and quite a tricky answer. I suppose it very much depends on who it is that’s asking. I generally say, first of all, that I work within a firm that tries to make money from the markets in a disciplined and repeatable fashion. Normally at that point you can gauge whether they want to take it a step further.

I think it’s a very difficult thing, actually to explain sort of in an elevator pitch fashion what exactly that we do. I try to keep it very simple. Often it leads to explaining that while a computer is used to make these decisions, that actually a human has to come up with those ideas in the first place and that sort of helps them understand it a little better sometimes. So that’s my answer I’m afraid. Not a very interesting one, but that’s the one that I usually try and give.


I appreciate that. I think that many of the people that I’ve spoken to also have their own slight way of trying to explain something that seems easy but maybe not so easy to explain, actually.


You get a lot of people, actually, that don’t understand and that the computer thing just floors them. They find that impossible to understand.


That’s very true. We’re going to stay with you for a little bit longer. I want to hear about your story and how you got to where you are today. Perhaps, in order to put some extra color on, tell me a little bit about what you were like as a little kid, a young girl, growing up if you wouldn’t mind.


Well actually my mother is staying with me, so you could always ask her. What was I like as a child? I’ve never been asked that. I was an only child, and I was quite independent. I was probably bossy, and I suppose I was very creative. I loved art. My grandfather was an artist, so lots of picture drawing, lots of painting, and I also loved playing with matchbox cars.


Oh, that’s interesting.


Well yes, given that most people would think that, being a girl, normally that’s not the case. But yeah, I used to love parking them. I’m not sure what that tells you about me, but maybe a bit anal?


Could be, I don’t know. In terms of growing up and in school and the subjects that you were going through, was there anything there at an early age that made you interested in numbers and finance or anything?


No. You’re talking to probably the least likely person to have gone into this business. I did all the subjects, obviously in the UK; you have to. I really loved art and literature and English, and that was my real flair actually. Partly, sadly, in having kids myself, I see that it was partly driven by the teachers that I had, and those you sort of got on better with. You tended to just gravitate towards those subjects. So that was where I went. I ended up actually studying drama and art and history, of which I ended up doing just the drama and the art in the end.

So it was by pure fluke, in some respects, that I ended up in the industry. I was not very scientific, but I loved the film trading places, which you may recall. It’s a favorite of mine to this day. That combined with seeing the old live floor in London. I remember seeing on the news with the colorful jackets and just the madness, and those sorts of things really influence me and made me want to look into getting into the space, which I eventually did.


Sure, and of course being in the financial markets doesn’t mean that you have left the drama. We get all the drama every day when we look at what’s going on.


Yeah, that’s true, and you also have the egos. That’s for sure, there're a lot of similarities, actually. Some of the stuff I’m sure we’ll touch on today, certainly with managing a business. You need different skills.


Sure, so leaving university, was that straight into the city of London for you?


Yes, I actually I’m unusual in that I didn’t go to university I actually went straight into working. I sort of had this idea that my parents were all teachers. My grandparents were teachers, so I was sort of fed up with school and thought I could do it far better, being quite arrogant at that age I’m sure. I went straight into work, actually and managed to get myself a position in a firm in London and that’s where I started and that was futures and that was where it all started, actually. So yeah, a little bit different there.


Yeah, yeah, absolutely. What I’ve found from talking to a lot of our peers in this business is that there is no set way of how they got where they are. It’s so different and so individual, so I’m not surprised at all.


It’s lovely being with people that have had exceptionally different histories. I’m fascinated by the research process, and I learn so much and continue to learn from that side. In a way I wish I could have gone back and done things again, I’d have loved to have studied physics. You know, I didn’t so here I am.


Absolutely. We also need some non-physicists in our business.


Just a few.


Now, Natasha… So you started working in the city. Of course, as you and I well know, our small niche within the alternative investment business or hedge fund industry, whatever we call it, sort of the managed futures CTA side, that’s not very big, so how did you end up going in that direction, how did that come about?


So I was on a desk in a company in London, essentially I was a futures broker. One of my clients was actually Steven, whose one of my partners. He worked for Quality Capital Management, which is a firm that I think you were referring to at the beginning, QCM. That’s how I met him, which is again a complete luck – being in that place at that time.

That’s pretty much how I ended up at QCM. I actually went to meet them, and they had just started up and it was fantastic… Very near, actually, because I grew up in Surry in the UK, and they were very close. So my commute was even attractive than going from all the way from Surbiton to Tower Hill, which is an hour and a half every day. It cut that down. So it was a complete accident, actually. That’s how I got into that sort of space. Although being in futures, naturally, you obviously would talk to other CTAs or other individuals in that space.


Absolutely. What was your role at QCM? Maybe you could expand about how you met your founding partners of Altis, and how that evolved. It will be interesting to hear whether there was any sort of secret meetings in the corners as you moved on towards your own plan, or how it all happened.


Yeah, sure. I went to work at QCM as a trader, actually. So I gravitated to that stage, although being systematic it wasn’t the same or certainly not as hard as tough as some other trading environments. I loved it. It was great fun. It was a small business. It was growing. I think when I arrived it was around 8 million, so it was very small, and very collegiate. There weren’t many people but it was a nice little team of people.

I suppose everybody has a slightly different story because of the different angles. We weren’t actually all there at the same time. There was one of my partners, Alex, was there when I arrived and then he moved on and left.

Then Zbys joined, so it was sort of a bit more transitory than that. We all got on really. I think because we… It was very open architecture. It wasn’t like you were in silos, and there were individual rooms.

developed his system back in:

I think there’s a point at which you can work on someone else’s systems and add value, but there’s a point at which your own ideas, if they’re quite different, you either have to start think about integrating them, or you have to say look, am I going to leave this behind and do my own thing? I think for him it was that process.

Certainly Steven, who was compliance officer for the firm, had seen the track record because he had to regulatory wise, and it was good. It wasn’t run on a lot of money, but it looked great. I think the opportunity to do something… I’d love to tell you that we were by design, we’re fabulous, we’re great at what we do, we didn’t. I think we just thought, “You know what? It would be fun, and we could do it. We could do it together. We’re not working for someone else.” So we left.

I think we left at the end of:


I was just wondering whether you already, at that time, felt that you had an entrepreneurial gene or sort of wanted to go down that path? Obviously for many people that is a path they never venture down or towards.


Oh God I’d love them to find a gene like that, and isolate it and then just give it to all of us. No, I don’t think there was anything that I would have been able to recognize then. I think all of us are probably quite, I suppose we’re all quite entrepreneurial in our own way. I think it just happened that we were there together at the right time.

As I said to you, it was, in a way, the only reason why I’m talking to you today is because it’s been a success to some degree. Of course, people credit success with sort of a great brain and individual thinking and foresight. I don’t believe that that applies. I think if we’d been a miserable failure and you’d interviewed me anyway, you’d have been thinking how stupid we were to have done that.

I just think it’s just turned out well, and I’d love to say to you that there was something by design, but again, lots of luck. I think that’s true of any systems and performance – lots of luck. You just have to hope that what you’re doing is consistent and repeatable, and there’s a process, essentially, which I think you apply to the business side as well.


Sure, that’s very true. I want to stay a little bit further in terms of the journey and talk about the fact that setting up a small firm and building it into a very large institutional business, I think a lot of people listening today, have that dream of just doing exactly what you did, but they just don’t know how to do it. If you can think back to the time when you were doing all of this, how did you and your partners go about this process, this really, really important process in the beginning of your journey?


Yeah, it’s a great question. I think just to reflect for a second, I think it’s much harder today than when we did it. It’s the truth, and I think that’s because of all the regulatory process and cost really for setting up. I think the barriers for entry are much higher, and I get worried about that because it sort of stems the talent getting into the business.

You need competition. It’s a good thing for people, and it’s good to have diversity and for clients to be able to select from different products essentially. I think that what you have to start with is that you can have the best product in the world, but if you don’t build the business around it that’s also good to support that, you won’t get anywhere.

I think that was kind of the parts that we had accidentally on purpose in a sense that it was unusual to start with four founders. Each of us had a different view on things. So while I had a trading background, again I really enjoyed explaining what we did and still enjoy understanding what we do. It’s a learning curve the whole time with the research process.

So there was that side. Steven sort of had the operational and understanding the compliance side and the operations and being a great networker. Alex, technology, my goodness this is what he did all day long was essentially take systems and build them in banks and trading platforms, etc. Zbys, just a fantastic mind and a lovely bloke.

Often you don’t get incredible intelligence with sort of a really well-rounded character. I think all of those aspects made it. We each had a different area of the business that we focused on. That really helped, and I realize that some listeners would just not have that. It’s tough because you have to find them and do you pay them, or do you give equity? It’s a big discussion to have.

I think you start off basically doing everything in the business yourself. We did trade reconciliation. We used to share it. Each day one of us would do it. Zbys deliberately got really bad at doing it so that we would have to do it for him occasionally. So it was all those sorts of processes.

We built the trade management systems from day one. One thing that we did do differently from day one, which now people just take for granted is we had box to box trade delivery. So Alex had built this fantastic platform that actually spoke to the brokers in the houses that said Altis has new orders and they’d go in select the order from the thing and fill it back in the system, which, of course, it wasn’t done then.

We had a lot of lovely stuff that enabled us to kind of leverage the very little resources that we had. Of course, we got the computers to kind of do it. So we used technology where we could. I think that’s really important. It made the business more scalable much more quickly I think. We were able to put ourselves on to the task of growing it as opposed to just managing the business itself, if you all release the trade process itself.


Just trying to think back on these early days, I was just thinking do you remember what the main obstacle was? What did you find most difficult about the early days?


I think it was getting known and understanding who the right people were to talk to. I think people wasted a lot of time talking to the wrong people. So I think that was quite challenging, because of course what you do, if you have a blank sheet of paper, you have to start somewhere.

Often what we would have done would have been to attend a conference. Of course, you don’t know until a couple of times that you have met with someone whether or not it’s worth trying to pursue that opportunity. I think that was quite challenging.

I think we genuinely… What really helped was that we just were quite innocent and naive about all the obstacles. If I had known then, what we would have gone through, I’m not sure I would have had the gut for it. So in that way I don’t think regulation wise it was really easy. The application forms are simple. None of that stuff I suppose you would find having to supply because today we had an issue with.

I think getting to explain our product was just a learning curve, so we refined that as we went. Probably just getting to the people that we needed to get to. Of course when you’re small, people used to say to us, I’m sure it happens to everybody now, “Well, we’ll speak to you when you’re 50 million.” Then we’d go, OK and we’d go back when we were 51 million, and they’d go, “Well, now it’s 100 million, or you need two years track records.” Well, we got two years in one day, or there would be something else. I think that’s partly because people don’t like to say, “Actually, we don’t understand it or we don’t like it.” People tend to try and be kind rather than honest sometimes.


Do you remember how you got your first investor, or did you have a seed investment before you broke out?


Yeah, we did. We had a seed investor and in fact I think the money stayed for about three months and then went out. So we started, actually with 1.2 million, which quickly went back down to .2.

Then we were lucky enough, actually I should say, day three Citi Group became a managed account investor with us and the relationship there was actually somebody that I had known a long time ago and they connected us to and that was our first investor. They took a huge… When I look back now, they took a huge risk on us. They met us a couple of times and looked at what we did and went, that looks fantastic. I don’t know why.


Well, it really paid off for you.


It did, it did.


Was it difficult, and obviously I don’t know how quickly… I don’t have that information, but was it difficult to get to the 100 million mark which was really, I guess even back then, what would really put you on the map?


Yeah, it was. We also worked with a very good third party who was very useful and basically had done all the… because of his veterans status and his experience in the business, he really knew the right people to speak to and they trusted him, essentially, and that really helped us get new investors on board.

I think it was almost a case of very painful, slow, for a long, long time and then it was almost like a hockey stick, you get to a certain level and then it becomes a lot easier. Of course performance, contributes to that – those assets rising as well.

big then, and that was around:


Sure. Maybe a little bit of a philosophical question, if I may. Part of this process of striving towards a certain goal is that we all have to endure a certain amount of, for lack of a better word, suffering or pain, it seems. Has there been any sort of suffering in your journey? If so, how do you frame that? How do you frame that part of the journey?


I think it depends. There're different bits that are painful. The beginning is painful because you’re desperate to try and create a business. That’s sort of more of a frustration than desperation to some degree. I think the bits that were really painful – every drawdown I find painful. Of course, CTAs experience them a lot, and they can be quite sharp. Particularly we run a high volatility, so I always find that painful.

Whether I like it or not, if I look at the performance, which I do daily and it’s down, I don’t like it. I think we’re all similar in that regard. I think the other bit that’s painful is understanding that you need great people to really build a great team, and I think that sometimes you don’t recognize that in the right time or the right way. That’s certainly something that I think we could have done better.

In a sense, we’ve had some amazing people, but I think there’s a trade-off between wanting people and sort of growing them in your own image if you like. To try and home grow them, to actually bringing onboard people with the experience of managing people, which I think is a skill that actually a lot of people don’t have. It can be learned, but some people find that… And that is really difficult. For me that was probably the biggest learning curve, was that in terms of getting that right, which was painful. Then you have to realize that you’re actually not that good at that, or we have to learn to bet better, and that can be painful.


Yeah, I agree with that. Now as you and I know, the industry has certainly had, as a whole, some really challenging times and, in particular, the last few years has been challenging. I know that goes for you as well. Tell me, in sort of thinking back on your own experience, say in the last three or four years, managing difficult times, what have you learned, or maybe in reflection, what do you think you did well, and maybe what didn’t you do so well in doing those kinds of periods if we move a little bit closer to present time.


Yeah, sure I think that’s really important to get that across actually, because that could be helpful to people. I’d say, let’s start with what I think we did well. I think we already knew our product very well. We knew, and we were 100% focused on it, so we hadn’t diversified out of that. I think to some degree that’s good and bad.

I believe in doing that because I don’t want to be selling the same old cat food in different tins. We believe in concentrating, however, what that doesn’t give you is diversity of income. We knew that, we recognized that, and obviously in the business you know that a performance fee is just that. It’s a reward for performance and it’s almost like a bonus.

So we always managed that business under management fee. I thank that’s really important. We also know that during periods of poor performance money can flow out quickly indeed. In periods where we’ve had great performance, everybody else has had poor performance and money flows out.

So I think we’ve been lucky enough to experience that already, and we’d always sort of come from very humble beginnings. We would, putting through a milk expense. That’s the sort of thing we’d be down to the 30p, and sort of be analyzing the business, because we had to. We didn’t have… we weren’t rich people. We didn’t have rich friends, and we had to do it that way. So I think naturally we’d always managed it like that. I think that really helped.

We also built a buffer in the business. What I mean by that is we had 24 months of running capital in the business at any one time, and still do, which meant that if we went to zero for assets, essentially tomorrow, we could hand on heart, look our investors in the eye and say look, we can run as we are for the next two years regardless, and that’s our commitment essentially. I think that really gave people comfort, particularly through such a horrible drawdown, and we are still in one from the past three years, essentially.

It gave us the staying power with the clients and that was very, very good. I think also one thing we did which I think is really important. I don’t know how well we did it, but I think we tried to do it well, which was be very open and honest with the team. I mean be transparent about what was going one. That it was critical in the sense that it was a difficult time and the business was suffering, and the industry was suffering, and explain what that meant to them.

Sometimes it’s easier not to say to people actually, particularly when you’re working with them, and you want to protect people, but in a way I think that doesn’t help. So we did that, and also the same with clients.

I think not hiding anything and continuing to talk to them and explain what is going on and not be afraid to show that your assets have dropped, or your team has reduced in size. It might prolong their investment in you in the future, but the transparency and the commitment you show to explaining that I think has been very good. So that’s the stuff I think we did well, or better.

The stuff we didn’t do so well I think, and again this is reflecting, there’s nothing I think we could have done at the time. I think I’ve mentioned that we had a strong technology back then. We had it from the very beginning. I do think you have to watch, particularly in a business that is so driven that way, and with so many bright people who are developers and just amazing with all they do, is that the technology can become, or at least in our case, the tail that wags the dog to some degree, rather than the other way around.

What I mean by that is that in the end, because you build everything from scratch yourself in the beginning, and I’m talking about not just the investment system cause naturally that would be. I’m talking about back office systems. I’m talking about portfolio visualization. Everything was built by spoke, which is lovely because you get exactly what you want.

Of course, what ends up happening is you have to support all of that. Lots of people, lots of time, lots of resources. My advice would be to watch the world around you while that’s going on because it’s not that that’s wrong, and that’s certainly right and it was for us in the beginning, but I think that we didn’t take notice of companies that were sort of growing out of the industry, that CTA had created, if you like, the sort of systematic world where…

OK for example, the back office – there were businesses that just now do that. I know for one if somebody specializes in something they’re probably going to be pretty good at it. So we sort of didn’t take notice of that, and the only reason that we did was the drawdown. In some respects I’d love to say to you we’d have done it eventually, and we may have done, but of course we only get one history.

That was something we could have outsourced earlier, I think, and we did and it’s been a big benefit because of course what you do is you focus on stuff that counts for the clients, which is the resources like research and client service and stuff like that. That was something that we did, or that we corrected if you like.

We’ve been much more aware of outsourcing stuff that we don’t consider to be core or our clients don’t consider to be core, as long as you have done your duty parade, you have done your due diligence, and you’ve made sure that they are completely very incredibly good at what they do. That’s what I think we did, and we could have done better or sooner.

I think the other thing we didn’t do as well, I think we hired a lot of junior people. Again, I think I’ve talked about this just a little bit before. You want to grow them in your own image - home grow them. It’s fine, but you need the balance between people that can manage a team, or have a lot of experience in one area.

A little bit more worldly – live through a few market cycles. That sort of stuff we probably have a more parental approach, for want of a better term, with the team. I’m not sure that was as healthy as it could have been. What you want is an adult with adult conversation, not the other way around. I think delegating is tough because we’re so used to doing stuff ourselves. So all these sort of things I think we could have done better to be honest.


Just one more question on this topic before we move one, and it’s something, again going back to this thing where we as businesses have to manage difficulties and there are certain things that we are in control of. You could say that regardless of what the markets do, we are in control of how we respond, meaning our performance to some extent is reflecting on our own abilities.

hat we are not in control of.:


Yeah, it is and you can have, as I’m sure many firms do, a risk committee whose job is to try and anticipate or find risk in the business. That is something that has been very useful, actually. You can spend hours or days thinking all the terrible things that happen.

f the finance industry during:

So I think these… You’re always going to put in place stuff after they’ve happened to some degree.

The beauty of running any systematic program, which is designed, is incredibly diverse, and it’s a portfolio approach, is that we worry less about an individual event. If an individual event happens, that’s that dramatic then everyone is in trouble. It won’t just be us if you get my drift.

So it’s a difficult one to answer because I just think there’s always going to be something that comes along that you haven’t thought of and the best thing that you can do is make sure that you have great corporate covenants, good controls within, I think transparency is so important within the business and without, and yes you can plan for the inevitable but ultimately it will always swipe up the side.


Yeah, that’s true.

Now before we dive in and talk about the Global Futures Portfolio, I just want to ask you about something you touched upon already about how you organized yourself and what it looks like today and what you kept in-house and what you outsourced and where you are in terms of the infrastructure if you can share about that?


Yeah, sure, in terms of the infrastructure what we’ve also done, I mentioned about the outsourcing of the back office. We’ve also gone to the cloud, which has been a very great thing for us to do and actually it almost takes us back to our early roots, where we would be innovative with the technology that we had.

I think that’s a very good way of being able to access resources very quickly if you need, for example, the research process or you could just double up servers within the cloud and use them. Then if you don’t need them, you’ve not bought all the hardware. It’s very efficient. So we’ve done that. In terms of the team, essentially there’s a very small core team. There’s fifteen of us with four people in research, and that’s what we try to do.

I should mention to you we have reduced the team dramatically. I think at the peak we had 55 people, so we have been through a very… We did it very carefully, but it’s been very tough. What we’ve been able to do is, the areas that we’ve lost in have been things like trading operations. Everything is box to box, it always was with us, but not necessarily with the brokers, and, of course, that’s meant that you don’t necessarily need all the trading operation staff that you had.

I mentioned the technology. The fact that outsourcing the back office and also making, or not downgrading the systems within, but making them less often and more efficient and that meant less technology staff. If you have less staff, you don’t need HR.

There’s a natural sort of course that goes with that. So very sort of simple core team. As I said, we try to protect the research side as much as possible because that’s really the thing that generates the income in the long term.

The other thing that we did was that we commercialized the research process, because we had to. With less resource, you have to be very, very focused about what you do. I think before when we would ask lots of questions because essentially ideas are cheap. People have them all day long. We collect them. We capture them, but we’re not working on ten of them. We’re working on two things and actually that’s been a very amazing process because we probably delivered more with a slightly smaller team, which is a great win, I think.


Yeah, absolutely. Speaking of that, just out of curiosity, what will then require you to start expanding the team again? How can you see that you are going to add more people, or are you going to continue to just simply outsource, or are there certain things where you say, actually, if we double our AUM from here we probably will want to add extra people?


Yeah, I think it’s not black and white. It’s not a price point, should we say. I think certainly with growth of assets then naturally we would like to have more people within the research team more varied, a different skill set compliment. That sort of comes with the project as well. You can sort of see things on the horizon.

We have a research process, but we also share that with our clients on a quarterly basis, so we have a look back and a look forward process. We kind of know ahead of time what we’re doing, or at least what’s captured on the research list. So yes, there is an element of that.

I’d say to you that we’ve made a recent first hire for a while which was actually within the sales team. We didn’t have a sales team, actually in the last few years. So that’s been something that I think is important because we want to make sure… I think sales… I don’t like the term sales but whatever it is – the educational element of making sure that we stay remembered without being irritating. That’s something that we probably don’t need a massive amount of because we’re quite targeted in our approach.

It would depend upon the assets. The team, what we’ve really learned from this process is that we have a very scalable business without necessarily needing to add the amount of people. We don’t consider that the product that we run with the Global Futures Portfolio is something that would have 30 billion in it. In which case you really do need to have… It’s a whole different ball game, personally speaking.

I think we’re quite happy with the team size. I can imagine it growing to twenty, twenty-five, but not at this stage, and certainly not immediately over the next year, unless there was… I can’t think of an example really. Unless we were sort of wanting to work… very highly weighted, which is what we do in our research process, projects that we would want to be doing quite quickly with a number of resources.


One of the things that I detect from our earlier part of this conversation, Natasha, is that you speak very passionately about your partners. Very often in our business you hear about partnerships when they break up, not so much about partnerships that last a very long time, which you have done. What’s the secret to success in that area?


It’s like a marriage, and actually you spend more time with them than you do your own husband. I don’t know. It’s tough because you get to go through different periods and everybody has a life. You don’t all go through the same things at the same time, which helps. I think we’re all different. That also helps, in some respects, which has always been very democratic.

I think when you’re making money everything is successful. Actually that can be something that divides you. Because what happens is in the beginning you’re all very hungry and focused and then suddenly money gives you options. I think that can be a point where people don’t actually think of as being a stress point, and I think we’ve kind of been through that and survived that.

Actually, going through a bad time after that means you focus back down again, and you all want the business to work out and succeed and deliver the things that you promised your client. I think actually it is a journey, and I’d say to you that we’re not best of friends all of the time. We don’t see each other often outside of work. I think the dynamic works in the sense that we all work quite well together, and we all have our different views, different angles on the firm and that means that we’re not stepping on each other’s toes the whole time. It is a marriage, and not always a fantastic one.


As all marriages are at all times for sure. Let’s jump into the program. The first thing I want to talk about is really the track record. I don’t mean about the numbers. People can look those up, but I’m talking about how investors should read the track record, meaning that a lot of programs evolve over time and so when they look at a track record they think, “Wow, this is great!” But actually it may not be the same thing. So when you advise investors or talk to investors about your track record, how do you explain that?


So it’s a really interesting point because of course what you can’t do is show them what it would look like, and certainly we wouldn’t anyway, the simulated track record of what today’s program would look historically because that’s wrong too. The truth is, as you know, is that every time you enhance a program you would have had a slightly different history if that program that’s used that day had played out from the beginning.

I think the important thing is reading the numbers… Actually one of my investors said to me, which I thought was a really powerful point and not everybody will agree with this, but he said to me, “I never look at the numbers.” I found that quite interesting because most people look at the numbers. He was talking about investing and obviously looking at new managers, and I say, “Why?” And he said, “Well, as soon as I look at them I’m biased. I either want them, or I don’t want them. Immediately I’m biased. What I want to do before I even look at the numbers is I want to understand what they do and the performance drivers.”

That’s always stuck with me, actually, because I think we live in an industry where we say that we don’t chase returns, but ultimately a lot of people do. Last month’s performer is next month’s baby. I just think that that’s a fantastic way of approaching it, and that’s what we try, or we consider when we do talk to investors is what is it that we are trying to achieve? What does the product try… what are the performance drivers? How does that work? Of course, it’s rations of talking about this because it’s a journey for them as well in terms of understanding.

That’s how I would approach that. I would recommend people don’t look at performance and ask some really deep and interesting questions and find out. If you don’t feel like they’re telling you, ask a different way, because sometimes people aren’t great at telling people. The people who are in our business aren’t always the best presenters. That needs a lot of patience.


Yeah, yeah, so when you look at your own program for example and you think about the research that you’ve done and what lies behind all of this, the last fifteen years, do you think the program has performed as you would expect, or has there been some surprises along the way from a pure performance point of view?


Not surprises, because we knew… we have a volatile product, so we’re quite comfortable with that profile. I’d say that there are periods where you go, what I’d like to have done better. I think that’s the research process essentially. I think we’re continually trying to improve the quality of our returns and the consistency of our returns.

We’re also mindful of what our clients have bought. You have to make sure that the profile that you’re delivering is what they’ve actually bought into. So that’s sort of keeps you on the straight and narrow to some degree rather than suddenly changing everything and throwing the baby out with the bathwater.

anding project. We started in:

about something fantastic in:

As soon as you’ve had the number at the end of the year everybody goes, “Oh let’s all forget about last year and move on.” I think that started, I think certainly for Zbys, and for us, we asked, wouldn’t it be nice if, rather than having to reweight the program, which is what happens when you look at it every sort of five years or something, or not, depending whether you’re comfortable with it?

Wouldn’t it be nice if we had an approach that self-learned from its errors eventually and could slowly learn from the forecasting not being as accurate as it could be, depending on the indicators? That was sort of the original goal. That came from being frustrated that we didn’t do better in certain periods. It’s a long way of answering a question.


dustry as a whole, the period:


It’s a difficult one to ask a quant firm because it’s all about the data points. As humans, we look for pattern, and we try and explain what’s happened. I think it can be dangerous without… the more data you have, the better the quality assessment you can make.

It’s only now you look back and you can see that, if I talk about us, we had a tough time, I realize, but I think that our approach we were more medium to long term trend following and I think that if we’d had a much longer term system we wouldn’t have been flipped around as much and lost as much essentially I suppose. If we’d been larger, if we’d been predominantly larger and less concentrated in commodity markets, I think that too.

ery difficult to predict post-:

in a period particularly like:

You’ve got to make sure you’re all over that. We looked. I’d love the say we found something, we fixed it and solved the problem, but there wasn’t anything wrong with what we were doing, and we believe in what we were doing, it was just unfortunately did not suit the way we worked. That was a simple and harsh truth. Then you just have to go, “Oh my God, we’ve got to live with this and ride this out.”

Yes, it’s difficult because inevitably you want it to be better because what you have to do is not fit to the past. I think that’s something that is very difficult, and I think whether you like it or not, everyone has to some degree. That’s difficult to manage, essentially.


I think also, I think there is this tendency that obviously we know that investors prefer if they could give 1% every month, that would be better than getting the volatility that these types of strategies come with. At the end of the day, it is very difficult to expect that you take inherently volatile markets, you put them through a process and the volatility disappears and you end up with a positive return. That is really wishful thinking to some extent.

Let’s jump to the trading program and talk about it. Just from a 30,000-foot point of view, what are you trying to deliver and what’s your objective or philosophy behind the program?


OK, so 30,000 feet, yeah that’s a good place to look at this I think. We’re interested in the portfolio, not the individual parts. I should start off by saying the approach that we apply is one, and you’re going to probably balk and the use of this word, but a more holistic one.

When Zbys first built the system he made two distinct choices, essentially and they were a portfolio approach with minimal arbitrary constraints. So essentially a very holistic way of managing risk and resource allocation. The other was the investment objective which was to maximize the growth of a portfolio for the long term.

When you use those two… If you deploy those two choices, and then you build a system, what it leads you to do is make forecasts of markets and then what you end up doing is actually looking at the pressures and the forces on the portfolio as a whole – very much the interlinking between all of those instruments that you use.

It leads to some very nice sort of features. It’s very diverse. You talked about a whole load of very volatile markets, and the volatility goes to zero and the performance… People would love that to happen, but ultimately with diversity if you put things together that move differently then you will end up with a better quality of return.

So it’s really that approach which is perhaps a little bit different and different to perhaps the traditional CTA approach anyway. That’s what we’re trying to achieve really, is that portfolio is the optimal portfolio given all the new information that we’ve had from yesterday essentially, and obviously the years before.


In terms of characteristics, if I can put it like that, some people maybe design the program to perform in a particular environment. For example, when equities go down historically investors would love CTAs to do well, so you can skew your system design to maybe do that better. Are there any characteristics, in your system, that you try enhance or make more visible?


No. We have a generic approach to forecasting the markets, so there are some sector-specific stuff, but generally what we’re trying to do is put together a vast set of instruments and combine them in such a fashion that they will perform well together. So actually positions within the portfolio, it could be taken not necessarily for profitability, actually.

So no there’s not one thing that we particularly try to enhance if you like. We don’t target volatility, so that’s another sort of… I’m not a total differentiator. There are many people that don’t either, but it does sort of adjust according to the opportunity set.

So you get a very different, depending on the opportunities that we see, the system will adjust, essentially. There’s good and bad. We think it’s fantastic is the right way to approach it. There’s no right or wrong with building systems, I should mention.

I think it makes it more challenging trying to explain it or at least for an investor to live with it, particularly if you have an adaptive approach where it’s not just doing the same thing necessarily. It can use different techniques, essentially, and I think that makes it more challenging to explain actually.

I haven’t answered that very well actually.


That’s fine, again, this is a conversation, and I may not ask the right questions and you might answer in a different way, so don’t worry about it.


You’re very kind.


Now, you mentioned the word forecast which is really interesting to me because in I would probably say 99% of the people that I’ve met in our space, and who are systematic, maybe trend followers to a certain extent, they would not use the word forecasting very often because people say we’re not trying to predict anything.

We have no clue what’s going to happen tomorrow, so we just react to price history. So I’m sure there’s a reason why you used the word forecasting the way you do it. Can you explain what you mean by the word forecast?


Yeah, I can. I mentioned that we made two distinct choices in the beginning. If you use portfolio optimization they are distinct choices because they don’t have to be teamed up together, but it was the portfolio optimization, or the portfolio approach, as I mentioned before, and also the investment objective.

If you use optimization, you have to use forecast. You have to start forecasting distribution of price, in other words, uncertainty that the price path of risk, of correlation liquidity in transactions. All of those things influence the portfolio – the optimal portfolio.

What we do is we essentially have a three step process to the investment approach. Step one is the forecast. What we’re trying to do there, as I said, is over three time horizons into the future, so one day, five day, and twenty day, we’re trying to predict or build a price trajectory for that particular market.

We do that using a whole host of different sets of indicators, essentially, that are summed together. They’re all different techniques. So all the usual stuff. I should say to you it’s funny because a lot of CTAs, we talk a lot about what makes us different, and what we should admit is there’s an awful lot of similarity. You have a diffusion of ideas across the industry.

People move around in the same circles, we all read the same academic papers and millions spent and great minds applied, so there’s a lot of similarities. I suppose the techniques that we use will be very familiar to the listeners and to you as trend following momentum – what we call inter-market effects.

This includes pressures or relationships between stock/bond sectors, or the currency markets, backwardation & contago, basically a whole host of usual suspects and adaptive indicators a bunch of very simple indicators that are designed to self-learn. Again those sort of effects I just described and also seasonality will come out from that.

So that’s all very similar. It’s the way in which each manager sort of puts all those things together, if you like, which is what makes they different in our cities, the forecasting and using portfolio optimization.

What you end up with is a portfolio that is built understanding the relationships between everything essentially, which is very important for controlling risk. I mentioned I think before we don’t have… The whole approach that Zbys wanted was not to apply arbitrary constraints because at some point you have to make a decision about what that is.

How do you make that decision? In essence, what you do is you fit to the past. What we’re trying to do is remain sterile from that and try and do stuff that is as clean from that as much as possible. Inevitably that happens whether you like it or not with research.

Yeah, so the arbitrary constraints that we don’t apply there is one hard cap at 35% on the portfolio level but it allows the optimizer to search for the best portfolio of the best combination of all the inputs, all the markets, all the information, in order to position it for the future essentially.


Sure. Speaking about markets and inputs, how diverse is the portfolio. How many markets are you actually track in the futures portfolio?


So we have 147 exchange traded markets, and we also trade multiple maturities and we treat each one independently, or individually I should say. I don’t know the exact number, but let’s say maturity levels times 3 on those markets, let’s say it’s about 350 different, or in the investment universe it’s 350 different contracts that we’re actually looking at.


Sure. I’m curious to know whether there is something that you feel that you get from having such a… that’s a large number of markets actually; that’s a large number of instruments. Some people would say once you get above 50 markets you’re not getting a lot more diversification but, of course, some people have to because of size, trade a lot more to get capacity. We understand that. Is there anything that you feel strongly that you get from having such a diverse set of markets?


Yeah, I do. It’s a portfolio approach essentially. We talked a little bit about forecasting. What I should have said to you is that it’s highly erroneous. If I were able to predict the future, I probably wouldn’t be sitting here on the phone with you talking today.

There’s a lot of uncertainty. There’s a lot of error around that. By applying them across a very diverse set is what you do, you are able to have sort of a very small edge, and that’s what we’re trying to exploit here. We’re trying to be right with you 51% of the time and wrong 49% of the time. You can do that better with lots of information.


That makes sense. Now you mentioned the four different; I call it return generators. It’s not the right word, so you should correct me on that, but trend following overbought, oversold I think you mentioned you have then the inter-market relationship, and you mentioned seasonality. Are these also equally applied, meaning that they all could carry the same weight, or is there something where you say, actually we should still be a little tilted toward trend following?


That’s exactly what the adaptive approach does. You described them fine, by the way. I think that’s just a way of categorizing them in terms of effects, but they’re all just essentially indicators, technical indicators.

What adaptive process does is say, how good has this forecast been? So, for example, yesterday we had a forecast, or the day before yesterday we had a forecast from one of the indicators. What the system does is measure that against what actually happened and that produces and error and if the error is larger than that indicator over time will drop in weight and those that are obviously more accurate, because that’s what you want, will rise in weight.

It’s a very slow process, because if you do this process too quickly, you fit to the noise, and if you do it too slowly, you just don’t adapt at all. So yes, you’re right. They can have varying influence and what you see from that is you can see that when trend following is predominant, that’s kind of what we’ll be doing. And the other part is probably more… essentially it’s when the market has gone too far too fast.

So what you do is you see that kicking in. It helps you time the trend better in some respects, but it doesn’t always get it right. They all will have their varying influence. Particularly as I said depending on the weighting and how correct they’ve been predicting the future.


When you put all this together and you… One of the questions that a lot of people ask, and I’m not entirely sure how meaningful it is, but anyways a lot of people focus on, and they always say, “Oh, so what’s your average trade length?” Maybe it is important, I really don’t know, but so I’m going to ask you the same. When you put all of these together in terms of how long you, on average, are exposed to an opportunity what does that look like in a process like yours?


Yeah, we love that question… not. The average holding period is of the order of 40 days, but it’s really meaningless and that’s because we don’t speak the same language as perhaps others which is perhaps like an entry point and exit point, stop loss, we don’t have that. Really the evolution of a position it can be a number of days, it can be 200, it really very much depends on the strength of the forecast and the opportunity sets. The easy answer which I always give first is 40 days.


Sure, absolutely. Now, I’m going to try and ask a slight different question then, which I think could be more meaningful for people to find out and that is, when you look at these four themes, if I can use that word now about your methods, over time are there any of them that are more dominant in terms of return drivers?


Yes, absolutely. I mean it’s trend following, and certainly we apply the indicator sets can apply to look the trend over it’s basically a vast loads of different periods essentially. But yes, it’s predominantly driven. The past historical track record has been predominantly driven by trend following – at least 50% or 60%.


Ok, ok. Now you have another thing, and we’ve already talked a little bit about it. I wrote it down as a point I wanted to dive into a little bit more and that’s the whole thing about portfolio construction, which really is a very important point, but often gets maybe overlooked when people talk about simple and treat simple exits…


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