Honoring the Turtles

It’s time to give the CME’s Pinnacle Awards surrounding the annual MFA conference a golf clap for finally recognizing someone the rest of the industry is happy to honor with a lifetime achievement award. Their choice of David Harding in 2014 was an obvious one, even if he doesn’t consider himself a Managed Futures man anymore (and he was nice enough to do an interview with our Alternatives Blog).  The 2015 choice of AQR’s Cliff Asness left more than a few people snickering in the crowd – after all, this was one of the people most responsible for compressing fees and moving large allocations out of the traditional managed futures space into the liquid alts space.

This year, they’re honoring two greats: William Eckhardt & Richard Dennis, known to everyone in the industry as the creators of the turtle traders. It’s a story that involves a bet, a Wall St Journal Ad, and a rigorous learning curve, and is one of the great stories at the heart of the Managed Futures story. It brings you back to a time when your life could change by answering a simple ad in a newspaper, and one we highlight in our whitepaper: “The History of Managed Futures” Here’s an excerpt from that whitepaper – so we can honor their story before the rest of the industry honors their work. Enjoy!

“It all started with a disagreement and a wager. Dennis, who had reportedly made a fortune trading in the futures markets by his early 30s, believed there was nothing special about how he traded. He thought that anyone could learn his trading techniques and make money just as he had. His partner, William Eckhardt, had a different opinion. He believed that people like Dennis possessed some inborn skill or intelligence that made them more capable than the average person. In his view, successful trading necessitates that certain innate advantage, and no amount of instruction could instill it into someone who was lacking. And so, the bet was born. (And if that sounds like a certain trading movie you’ve seen before, there’s a good reason). The pair placed an innocuous ad in the Wall Street Journal in both 1983 and 1984, offering an opportunity that seemed too good to be true. Dennis would teach a select few his proprietary trading method and provide them with capital to trade. A famed trader spilling his secrets was astonishing enough, but in another unusual twist, the ad noted the pair’s willingness to take applications from anyone, including those with no prior experience in trading. It was truly an open door, and for good reason. Dennis feared that filling the turtle’s ranks with traders and MBAs would mean too many students with bad habits to break. And it might not even prove his point, since bringing in talented traders wouldn’t prove that his techniques could be taught to anyone. Dennis wanted a wide cross-section, so the ad remained incredibly broad. And so the applications came pouring in.

Through odd tests and intense interviews, they winnowed the field down to an inaugural class of just 14 students. The deal was simple: Dennis would keep 85% of any profits that the turtles made trading his money, and they would keep the other 15%. In return, the turtles were not allowed to trade for anyone else, and they were bound by stringent confidentiality agreements. And even though Eckhardt was on the nay saying side of the bet, he took a central role in teaching the turtles their trading methods. Still, the lessons were hardly comprehensive – the turtles spent just two weeks getting a crash course in Dennis’ trading method before being given $1 million apiece and set loose on the markets. The Turtle Trading Method So what were they taught? It was the basics of trend following, but their lessons were as much about the philosophy of trading as a mechanical blueprint for making trades. Dennis emphasized the importance of price movement above all else – he scoffed at traders who pored over news or crop reports looking for an edge. For Dennis and the turtles, price was the only information that mattered. Lessons also focused extensively on risk management and avoiding emotional behavior. The turtles were taught that losses must be cut short – to become attached to a trade is to court disaster. Conversely, profits should be allowed to run until the trend came to an end. It was the basic outline of the philosophy that virtually all trend followers adhere to today (the long volatility profile which exchanges small but frequent losses for rare but much larger gains), but in the early 1980s, it was somewhat revolutionary – proving quite successful for the turtles. According to Covel, the Turtles were able to produce excellent returns, and Eckhardt was forced to concede that Dennis had been right – you could teach ordinary people the skills necessary to be successful traders. He’d lost the bet, but the stakes had never been the point (nor, indeed, could anyone say whether the bet had defined any stakes to begin with). They had in many ways laid the foundation for the adoption of systematic trend following amongst traders and asset managers.

And what have they done with the knowledge and skills imparted to them in that famous experiment? The answer, for the most part, is they have continued to apply that knowledge – with the members of what we’ll call an expanded Turtle List in the managed futures business controlling close to $1.2 Billion in assets.”

To learn more about Dennis and Richard and the turtle traders and the rest of the history of Managed Futures, clicked here to download our whitepaper – the History of Managed Futures.