If you haven’t noticed… Winton Capital’s CEO David Harding is taking the press by storm this summer. We’d like to think that our interview with Harding a little over a month ago was the start of it all. Or perhaps it was Harding receiving the Managed Futures Pinnacle Achievement Award. Or the simple fact that Winton is big for a hedge fund, and absolutely enormous for a managed futures manager (even though they technically don’t classify themselves as a CTA). Either way, since our interview, they’ve been featured in a Pensions & Investments article, and now… Mr. Harding’s in the one-on-one interview on CNBC found below. (Unfortunately, this isn’t CNBC’s first attempt at interviewing Harding…the first one was a train wreck).
This time around, we must say, CNBC chose the right person to interview Harding as Julia Chatterley came prepared to ask the right questions.
Here’s our takeaways:
1. David Harding is witty
The first question Chatterley asks is how the strategy makes money, and Harding responds:
Harding: “I suppose that’s a very long wait to give a proper explanation… nearly 30 years.”
Come one David…it’s not that complex, you could have thrown her a bone here on the very first question.
2. Trend Following still needs an explanation
Harding: “You have a set of rules. Go with the flow… Buy Soybeans when they’re going up. We tested all these rules and as far as past data is concerned. They worked. They’re not supposed to work. Not according to the efficient market theory, which says the market has no predictable patterns in it.”
Using that simplistic explanation is a sufficient starter, but doesn’t accurately explain how a trend following CTA strategy really works (what happens when the trade doesn’t work, how much do your risk, how long do you hold the position, etc.) Chatterley was able to follow up this question asking how many models Winton runs, and Harding was able to clarify some.
Harding: “As you sort of point out, it’s about running a system on all the markets at the same time. That’s the key thing. There’s no point in running a system on one market. It’s success is too erratic. If it hasn’t worked after 10 years you wouldn’t carry on. You need to run it on a lot of markets at the same time. By the mid 90’s we were running it on several different time scales on all the futures markets in the world.”
3. Yet, People think Trend Following is Dead
It wouldn’t be an interview about Managed Futures without the question asking about the lack of performance over the past couple of years. The same broken record question will get the same broken record response from just about every CTA out there.
Harding: “The Trend following Business is marked out whenever it hasn’t made money for a bit… and people invent theories about why it never will again.”
The questions Chatterley rolls off next are almost predictable, and practically identical to the trend following concerns featured in our recent white paper “Why Advisors Aren’t Getting What They Want Out of Managed Futures.” She starts off asking the big question, especially for the very large Winton: Is there too much money in Trend Following, distorting trends?
Harding: “When a lot of money is invested in a strategy like this, then the forecast, then the financial return for that strategy declines. If you invest a lot of money in making compact cars… then the return on capital for making compact cars declines.”
And follows up with the more nuanced questions typically thrown around as excuses for managed futures under performance of late: Is Government intervention Stymieing the development of trends? Has Interest rates at 0%removed a historically profitable trend? Harding’s Answer is sort of a non answer on this, taking the 30,000 foot view instead of getting into specifics about how intervention has affected markets, essentially saying it’s not expected to make money all the time, and it’s naïve for investors to think such a think about any investment.
Harding: “I’ve been on record for saying [the accuracy] of our strategy is only about 51%.… over the next ten years is probably lower than what it has been over the previous 20. But even if it was very significantly lower, there would still be a case for allocating capital to that area.” “Some of my clients get a little frustrated because they’d like me to express a little more optimism. But I’m very modest. Our system is very modest about its ability to forecast markets. Our system doesn’t translate the unpredictable markets into something predictable.”
4. The more things change, the more they stay the same
When asked about how the program can survive across different market environments, or ‘regimes’; Harding says he feels people are a little too quick to wrap the word ‘regime’ or ‘paradigm’ around a period of time where their strategy is performing differently, and that as much as some things change, one very important part has remained the same.
Harding: “A remarkable thing has remained constant in the past 45 years. It’s the auto correlation of the markets. When you do a simulation of a trend following trading system over 25 markets over 50 years, you get a remarkable upward slope, which shouldn’t exist. I found it a thing of beauty even if I hadn’t made a fortune (which is a bit embarrassing). The dust and noise and heat, and light and human activity are reduced to an absolute predictable straight line, or have been reduced to a straight line when you apply a simple mathematical formula.”
5. Don’t be so quick to doubt “Trading Systems,” you’re in one
When asked about opening up his model to the trading of stocks and expanding his business, Harding recalls the lack of acceptance of a systematic approach and the ‘denigration’ of a ‘black box’ approach to the equity markets by recalling that the well-known S&P 500 is little more than a set of rules, a trading system as it is.
Harding: “The S&P 500 is a trading system. The S&P 500 is a set of rules for buying and selling stocks. And by the way… not a very good one!”
6. Managed Futures – Zero to Hero
While the investing world doesn’t necessarily classify Managed Futures as a hedge fund. It is still implied. Harding was quick to explain that before the crisis, Hedge Funds thought of CTA’s as the ugly step child. Once undiversified hedge funds started experiencing major losses, the Hedge Fund industry adopted Managed Futures as their best friends, when Managed Future performance was thriving. No word on whether Managed Futures is now being sent back into the closet.
7. Will Winton be there in the next Crisis Period?
Harding’s cryptic answer – maybe, but not necessarily. He doesn’t like being “tail insurance” for a portfolio, explaining that they will be long at times, and short at times, and while not correlated over the long-term, that doesn’t necessarily mean they will be negative correlated (as tail insurance would be) over any period of stock market declines. He sums it up in his unique way:
Harding: “If there is a giant stock market crash… I can tell you one thing for sure… We’ll either be short or long.”
We look forward to seeing more CNBC interviews with Managed Futures managers and especially some which aren’t already household names so large they can’t properly access some markets like grains.