Shownotes
On this special episode, my guests are the founders of AHL: Michael Adam who later co-founded Aspect Capital, David Harding also known as founder and CEO of Winton Capital and Marty Lueck also one of the co-founders of Aspect Capital.
We sat down in the famous Abbey Road Studios in London to talk about how they developed their investing strategies, some of the most surprising decisions they ever made, and what kind of legacy they would like to leave behind.
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In This Episode, You’ll Learn:
- What Mike, David & Marty had to un-learn in order to improve their strategies
- Why David believes education can crush creativity
- How some “new” optimization methods hurts investors
- What David and Marty least like about their current strategies
- What they plan on doing when they no longer run their firms
- How David approaches succession planning
- The most important investment principles the guests would leave for their children
- Why only a small amount of investors still keep managed futures as a core allocation
- The most important decisions they ever made
- Which decisions had the most surprising results
- If the media will ever understand what managed futures actually are
- The legacy that AHL left in the world of investing
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Learn more about Michael Adam and Mike Marlin and The Melomaniacs
Learn more about David Harding and Winton Group
Learn more about Marty Lueck and Aspect Capital
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Transcripts
Niels
Welcome back to Top Traders Round Table, a podcast series on managed futures brought to you by the CME group, where I continue my conversation with Michael Adam, David Harding, and Martin Lueck, also known as the original founders of AHL and later, Aspect Capital, and Winton Capital and who are, without a doubt, some of the most influential individuals within the managed futures industry.
David
I can't help being reminded of your father who, when we were starting early out, in the early to mid-'80s, he was terribly disillusioned with the stock market, wasn't he?
Mike
Yes.
David
He was utterly disillusioned. That was his view. He took me aside and said, "I think there needs to be something better, and that's what you guys can develop - something better." What he didn't know was that it was the early years of a new bull market which was to go on for 15 years. I was no more bullish than he was at the time. He was very pessimistic because that comment was shaped by being in the aftermath of 15 years - the market didn't go up from '68 to'82 - so 14 years of sideways. That's what conditioned his recent investing experience.
Niels
Absolutely. I think it was once said that, "The biggest room of all is the room for improvement." By this I mean, when I look at your achievements, I see a continuing hunger for learning. What about the flip side, you touched upon it earlier today about unlearning. Are there certain things you've found really important to unlearn in order to continue to improve your strategies? Were there things that you thought were really good only to realize that they were in fact flawed and much riskier than you thought?
Mike
That's probably a different view amongst the three of us. I remember, in the early days, David had an office where what he would do, he was surrounded by data, there literally was this much. His desk used to be a complete chaotic mess full of cuttings from the Wall Street Journal and bits of paper and notes. My desk was always completely clean. I thought that that was because I was more organized and focused than David, and he used to say to me, "Empty desk, empty mind."
I've always believed that one of the biggest challenges in systematic trading is not remembering what you know it's having the discipline to forget what you know because applying what you know to the next thing that you do is a very powerful hidden form of optimization. I think that building into research processes the organized capacity and insistence that people forget. Also, recruiting people who never worked in the field before, always, always, feeding people who aren't polluted by knowing stuff is really, really, important.
On the other hand it's very hard to develop systemic trading if you don't have a real feel for the way that markets work, so there's this constant battle, I think, between what insights you have, what wisdom you have on the one hand, and yet have the abilities to forget the specifics. I don't have an answer to that. I think it is extremely hard to do.
David
Yeah, I think what you said is spot on. Also, with the other people we've recruited, the struggle has been to get them to forget the efficient market theory. You need clever people with good mathematics and computer science. Typically you get them because they've passed degrees and took exams and so on and so forth. They've often been taught the efficient market theory which is a beguiling theory because the mathematics is appealing and difficult so it's something they can master. Then having mastered that they believe it to be true, most of them - most people having mastered something difficult.
I think education can crush creativity. It's interesting that Steve Jobs didn't actually get a degree, isn't it? He went off and did a smorgasbord of courses including, famously, calligraphy. I think, sadly, over educated people probably can know too much to be creative. Having said that, to be creative in a field obviously, you need to know about that field and have a lot of education. So that is the paradox Mike was referring to.
Marty
Back in the day, I think that the lesson that we learned early, quickly, and has stood us well, I think David you referred to the tendency to over optimize. I think we had some brilliant forays into the world of over optimization. We could make those simulations go from bottom left to top right like a rocket ship. (Laughter) Funnily enough, when you start trading it, the inflection point was so remarkable. So I think that was a lesson. We unlearned our desire to optimize pretty quickly.
David
What I find annoying... We're all being craggy old men. What I find annoying is I frequently see big companies putting out simulations that are over optimized in the same way that our simulations were over optimized 30 years ago. Big companies will put those things out and they will sell them to investors and that's sanctioned by the authorities. What used to be banned, which is marketing simulated track records, has now, apparently, become legal - you just call it an index. It's frustrating.
Mike
It is. Looking at the various moves that regulators have made in response to various crises. They shouldn't be annoying, but they are. When you watch regulators doing things where you can say, "Now that's really, really, stupid." They just willfully do it and it has exactly the result you predict. It is annoying.
Actually, the good news is that the world is apparently pretty good at forgetting given that it keeps making the same mistake again, and again, and again. So, in a way maybe we're better at forgetting than we think and maybe that isn't a bad thing in the end.
Niels
Sure.
Marty, if you look at your own strategy and maybe David as well, what do you least like about it? What are the things that you would like to improve?
Marty
Gosh, interesting questions, Niels. The pat answer is, always be paranoid and always be paranoid about every part of it. You've heard me bang on about this before, is that any of these systematic methods or systematic investment strategies is only as weak as its weakest part. So you can't say, "Well, I'm looking for this fantastic new machine learning system that is always right, on tomorrow's trade"; A, as we just covered, you're unlikely to find that and you don't believe it if you do; and, B, how you put all those models together, how you risk manage it, how you execute it is crucial to having an overall efficacious system.
I'm not going to pinpoint one area of it that today I think is flawed. I think the whole thing is always in need of constant care and attention. We spent an awful lot of time and money on improving the execution of what we do and I think we got that to a really great place and I think that there's more that we can do. I think that the exchanges and instruments have moved on pace and we need to continue to invest and maybe turn the crosshairs more in that direction for awhile, but no single area, Niels. Everything needs to be improved.
Niels
Your thoughts, David?
David
Well, I least like the bits where we go down, and I best like the bits where we go up. I'd like to go up more of the time and down less of the time. Everything about my corporate strategy and that of Winton is designed to achieve that aim. It sounds a bit trite, but I'd repeat what Marty said which is that we are doing everything to try and make things better all the time, but it's a tough business.
Mike
I always thought that the major improvement we could have made in the business was to have no clients or employees. (Laughter)
Marty
So that's what you've done Mike.
Mike
That's what I've done! (Laughter) And it really, really works.
Niels
(Laughter) Good.
Well, let's leave this subject and go on to something completely different as we slowly start bringing our conversation to an end. All of you are relatively young and in good health, but one day, a decision about what's going to happen to the firms you've built has to be made. Is this something that you already think about and maybe have already decided upon?
Marty
Absolutely something that we think about.
Niels
I ask because some firms in the US, that we've known, that's been around for a long time, they have kind of done this succession already. It is coming, I guess.
Marty
What do you know that we don't, Niels? (Laugh) Yes, of course, one thinks about it. We talked about AHL earlier. I feel proud to be a part of having created a business which has gone on after A. H and L are no longer involved in it. I feel the same way about... I hope Aspect will live long after I have nothing to do with it. It will probably thrive. I can't tell you that this is the individual that's going to take over for me. I think that the businesses that we've built are substantial and that they have some really great people in them. I'm not supposed to say this, but I think if I'm not there no one will notice. (Laughter)
Mike
Well I tend to agree with that one. (Laughter)
Niels
What about you David?
David
I'm afraid I've got a bit of a pat answer which is that our board routinely considers succession planning as part of its normal governance process. The only thing that I would add is that succession planning doesn't mean my successor. At every level in the company, you have to consider if you can replace every person. Succession planning is a part of management philosophy, I have realized. When we used to talk about it I used to think that they were trying to get rid me, but I've moved past that. Of course, if you've got succession planning for everyone else in the company you've kind of got it for you by implication. It is an important discipline even if you're not actually planning to retire, which I'm not.
Mike
One of the great benefits of having a systematic approach is that it's not just a systematic approach because there's a piece of computer code that enshrines when you buy or sell something on a particular day at a particular time. If you look at the inside of a systematic trading business, it's also systematically organized in terms of the roles and responsibilities and who does what.
So of all the businesses in which succession is less of an issue, asset management and systematic trading is the easiest to imagine that it can have a life beyond the original founders because the reason the systematic trading business is successful is not just because of the unrivalled genius of the founder, but it's the ability of the founder to organize a business that has a way of doing things that is indeed systematic in terms of the roles and responsibilities, the processes that will be replicable going forward. I think that's true of Aspect, it's true of Winton. I think succession is almost built into being systematic.Page Break
Niels
Sure, absolutely.
If you couldn't leave any of your money to your children, but only a set of investment principals, what would they be?
I'll start with you, David, if you don't mind.
David
Well, I think you need to have an objective for what you're trying to achieve. If you're trying to help them look after their money and steward it and get more wealth, even if what they choose to do with that wealth - to give it away ultimately like Warren Buffet and Bill Gates. The main principle I'd direct them to is compound interest combined with Kelly's criteria.
Kelly's criteria is the answer to what you asked about earlier in terms of what's the ultimate level of leverage to operate at. If you leverage too highly, and you go down 100, as I alluded to, then your compound rate of interest will be zero. But you always get a bit more return by leveraging a bit more, so that leverage may be through the companies you invest in. In Warren Buffett's case, it's by deploying the balance sheet of Geico.
He famously doesn't borrow lots of money. I certainly wouldn't advocate borrowing lots of money to leverage up your returns, but you invest in leveraged businesses - so there's some leverage inherent in your portfolio. Compound interest is the 8th wonder of the world. At one point you can play on the calculator with the button, 1 point naught x to the y, 1 point naught x to the power of y.
Mike
Einstein said quantum physics, he got that, he could even contemplate the existence of God, but compound interest - No, he didn't get.
Niels
Anything to add, Marty?
Marty
I'd add the pat answer, diversification. I've certainly lived by a diversified portfolio of investments.
Mike
I think I'd say focus on what you do and not what you get. That would apply to anything in life including how you invest.
Niels
Sure, sure.
Now, with all the evidence that the managed futures industry (if we call it that) can show today, only a minority of investors still embrace this as a core part of their portfolio. Why do you think that is?
Marty
I think that there are two parts to it. I'm just launching into this. I'm sure you'll have the real answer. First of all, I think what's interesting over the arc of the 30 years, that we've been talking about today, is when we started talking about employing computers to analyze and invest in financial markets most people thought we were smoking something. Scroll forward to today and it's increasingly accepted and expected. You even have this concept of Quant-mental where discretionary traders are trading models that are informed by quantitative analysis. Go figure.
But the first thing is that it's still a learning curve. People are getting more comfortable with quantitative investment as they get more comfortable with some of the ideas behind it. When it was rocket science, when it was a black box I'm not surprised they couldn't trust it. They trusted it after it had gone up. They didn't trust it when it had gone down. That's the first thing. Answer number two comes back to the point that I made about the utility of it. Certainly, if you're talking about managed futures, I think managed futures predominately is the trend following space. An important diversifying utility, but it's hard to hold. That's the challenge.
Niels
What do you think, David?
David
Yeah, I agree with Marty. Managed futures is complicated and I don't even think that it's desirable for all of the investors in the world. Managed futures is pretty complicated. It doesn't have an infinite capacity. If everybody in the world decided to put as much money as we wanted them to in there wouldn't any capacity. So it will reach its own limits of growth and you can see the struggle with that now..
Niels
Sure, sure.
I'm going to shift gears and ask about your reflections when we think back over the last 30 years since you founded AHL. Within your long and successful careers, what would you say has been the most important decisions you've made and also what's been the decision that's yielded the most surprising result?
Mike
Wow. What's been the most important decision? The most important decision, for me, was when I went on holiday for a week and my father fired David and Marty. (Laughter) On my twenty-fifth birthday was the decision that I made in anger and without thought to pick up the computer which had the software on it and walk out with my father's words ringing in my ears that he would disinherit me to keep walking out of the door.
So it was the decision made in no time that completely changed the outcome of my life. So, it wasn't thoughtful. It was impetuous. It turned out to be a great decision, however it didn't feel great at the time. I would say that was the most important single decision in business that I've made.
Marty
And with probably the most surprising results.
Mike
Yeah, and it is the one with the most surprising result also. Yes.
Niels
What about you, Marty?
Marty:
I thought that was great, Mike.
I sort of felt when the Man Group bought us out that that was the end of that experiment for me and I would move on to some new industry, so for me an important decision was actually doing Aspect and realizing... AHL, in a large part, was a happy accident. We were uncovering things all of the way and I think there was this sense of how long can this levitation continue for and then there was a bit of the realization that actually it may not be a miraculous levitation, but that this is something useful, both for me personally, and for the investment community.
So that was an important decision to do it, if I say, "Do it again." Of course we had a different utility, we had some different decisions that we made at the start of the business as I'm sure you did when you started Winton. You didn't want to make some of the mistakes that we had made along the line in AHL. So that would be my offering.
Niels
What about you, David?
David
Well, the media... Their current preoccupation, until very recently, was with us being robots, wasn't it? So that was intended to be derogatory - the idea of us being robots. Suddenly robots are in fashion because of this machine learning, artificial intelligence craze, so suddenly having been slightly dissed by the mainstream media for being robots, and quants, and systems, I now find, rather improbably we're fashionable which is funny, because, as you say, we're not doing particularly well now. When we were doing well that was a subject of great scepticism.
There was a survey done by the managed futures industry which demonstrated that hedge fund managers are a particularly disliked and untrusted category of individual. This is considered by the managed futures industry to be a great source of anxiety - that we needed a come-back with a lot of positive publicity.
One of my colleagues pointed out, when we look closer at the rankings, comparatively, hedge fund managers scored very low down, but they scored the same as film stars and professional athletes who are also widely distrusted and disliked. That made me feel a whole lot better because if someone said people were going to look at you like film stars or athletes then you say, "Well that's not so bad, is it?" People have an ambivalent relationship with people who have achieved a lot, or succeeded, or made a lot of money. I guess that adds into the media's coverage of hedge fund managers and robot fund managers.
Marty
Again, maybe I'm reading too much into it, but talking about the 30 year arc that went into that decision that Mike spoke about of parting company with his father to the inception of AHL and where we are today. We've been part of, and an integral part of, the growth of an industry. What was a quaint, as you described David, on the trestle table, somewhere in Orlando, industry.
If you generalize that managed futures, or I think what David and I do, has evolved into - the quantitative investment management space, it's big, it's important, and it's a crucial part of investors' portfolios and it's not going away. It's very important, but it's no panacea. I think continued research, continued skepticism and discipline on the statistics. David made a very good point about it's ironic that over optimized systems and models and indices - there's plenty of them around - quite an irony after all this time.
Niels
What about you, Mike?
Mike
I still think it's a permanent cultural challenge and I don't think that challenge has changed. I vividly remember being asked by a client, "So which way is gold going?" I said, "I don't know." (When I was CIO at Aspect) So the next question was are you long or short? To which I cheekily said, "Yes." (Laughter)
So, luckily we did have a computer to hand to give the answer. I said, "But, let me have a look." And I said, "Oh, we're long." So, they said, "Does that mean that gold is going to go up?" And I said, "Not really. It means almost nothing." So the counter cultural aspects of managed futures is not going to change which is it rests on something that human beings are very, very uncomfortable with which is it operates right at the margins of statistical significance. Each individual decision is spectacularly unreliable and almost useless in terms of any day to day decision making. It just runs counter to the way that human beings want the world to be, which is that it's orderly, that it's high probability - if you do A you get B with a high degree of certainty. So, I think that's always been the struggle with what we do. I think that it will always remain the struggle.
David
The majority of people are relatively uncomfortable with math and they're very comfortable with stories - narratives.
Mike
Yes, so they're very uncomfortable with understanding that actually a huge chunk of all of our lives is deeply uncertain, extremely unpredictable, and that means it's always going to be a challenge. That's fine. That also means that's one of the reasons why people get very well paid for doing it because it's not the systems are complicated it's that it's extremely hard to keep doing it in the face of that uncertainty. That's why the people that do it and do it well tend to end up being very highly rewarded for doing it.
Niels
Sure, sure, sure, sure.
As we come to the end of our conversation here, I just want to ask all of you if you would like to bring up anything with each other. Something that you want to ask, maybe David, about or vice versa, anything you want to bring up?
Mike
Well, I think that we reconciled the things that caused all of the traumas in our relationship many, many years ago, and actually remarkably quickly after the events that followed them. So from my perspective, absolutely not. I feel completely relaxed with Marty and with David and the way things have worked out for all three of us. That's my perspective.
David
Yeah, likewise.
Marty
I'd just like to ask you when we can a date in the diary for dinner? (Laughter)
Mike
The question I would have if we do that is who's paying? (Laughter) I think I'm actually very proud of the fact that through all that time of massive change where we challenged a whole bunch of things and we fought tooth and nail with each other over those issues because we really cared about them and with our counterparts - with the Man Group to drive change. As far as I'm aware, no one involved in any of those processes - I think everybody looks back on that time and says, "Bloody hell! That was productive!" That was amazing. So, I'm not aware of any bad feelings.
Niels
No, no. I think it leads me nicely into my final, final, question and that is what is the legacy that you want people to think of when they think of AHL?
Mike
I would love it to be... because there's always this sort of sense in the world that everything has already been invented and there's nothing more to be done, and there's no opportunity or possibility, or something different. When we started out in AHL we absolutely challenged the orthodoxy and did something that we were told repeatedly by people who were far more experienced and knew far more than we did that not only was it not going to work but it couldn't work. I would like the thing that people should take from that going forward is that the future is history that has not yet been written.
There's always opportunity for someone to come in and say, "Hold on a minute. Here's something that no one has ever thought of before." It doesn't need to be complex and it doesn't need to be mathematically challenging. It can just be that someone just comes in from stage left and says, "What about this?" I'd like it to be an encouragement to challenge the orthodoxy and ignore your elders and those who consider themselves wiser - so basically, I'm saying ignore everything I say. (Laughter)
David
Well, I think it's testament that the efficient market theory can be quite a bad model and that there's auto-correlation in markets and that has very significant public policy implications, which I'm not sure the economics profession has absorbed.
Mike
The Economist has gone through a series, like a recovering alcoholic, over the years as one after the other it has trashed its own history. I only take the Economist so I can wait for them to, one by one, knock down their shibboleths. There's been a great thing about the world being anti-expert and how can we ignore economists? Well, in my view, the definition of an expert is someone who just occasionally is right. Of course, economists aren't experts. All the evidence points to that. I do hold some grudges!
Niels
Marty, what do you think about the legacy?
Marty
It's a great opportunity to get together with you both and I think, again, that unwittingly we were at the leading edge of something that became a big industry - with David, what you've done at Winton, and what Man Group have gone on to do, and Aspect, and many other members of the diaspora. Of course, we'd like to say it was all down to our genius, but that movement has created an investment management industry that employs hundreds if not thousands of people, that does really useful things for people's savings and pension funds, that backs deep science in universities around the country and around the world. That's part of the early legacy of AHL.Page Break
Niels
Excellent.
On that note let's wrap up this historic and fascinating conversation recorded live at the Abbey Road Studios in London, in celebration of the 30 year anniversary of the awesome story of AHL.
Mike, David, and Marty, I can't thank you enough for doing this historic and epic podcast with me today. I really appreciate your openness during our conversation.
To all of our listeners around the world let me finish by saying that I hope you got a lot of value from today's conversation. If you did, please share these episodes with your friends and colleagues and send us a comment to let us know what topics you want us to bring up in the upcoming conversations with the industry leaders in managed futures.
From me, Niels Kaastrup-Larsen, and our exclusive sponsor CME Group, thanks for listening and I look forward to being back with you on the next episode of Top Traders Round Table and in the meantime, go check out all of the amazing free resources that you find on CMEgroup.com as well as TopTradersRoundTable.com.
