The Money Making Advantages of Being a Systematic Trader | with Chris Cruden

imagine spending an hour with the world's greatest traders imagine learning from their experiences their successes and their failures imagine no more welcome to top traders unplugged the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level before we begin today's conversation remember to keep two things in mind all the discussion will have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions here's your host veteran hedge fund manager niels castro Larson [Music] you're listening to top traders unplucked thanks so much for tuning in today I know how valuable your time is so I'm grateful for you spending some of it here with me I also want to thank you for sharing the podcast with your friends and colleagues it really does help me expand the reach of the podcast so more people can learn from the amazing stories of my guests on today's show I'm talking to Chris Cruden founder and CEO of inch Capital Management Chris has a long career working for some of the leading firms within the alternative investment business such as Dean Witter back in the 80s and HL in the early 90s and he has crossed paths with many of the legends of our industry but perhaps the biggest influence in terms of mentorship came from the years where he worked with Bob Tammy so who helped Chris aligned himself with trading and how he defines himself having said that Chris shares with me that all of the important things he needed to learn about trading he actually learned in the army when Chris decided to start his own company he chose currencies as his investment universe which helps him stand out in a crowded world with diversified managers all in all a wealth of experiences shared by a true veteran for those of you who are new to the show let me just say that you can find all of the show notes including a full transcript of today's episode on the top traders on plot comm website now let's get started with part 1 of my conversation I hope you will enjoy it Chris thank you so much for being with us today I really appreciate you taking the time my pleasure now you've been around for quite a while if I may say in the managed futures industry and at different times you work for what I would consider leaders in different areas and let me explain that for instance I think of Dean Witter back in the day where the wire houses were a dominant force in identifying and helping some of those managers who later became legends in this part of the hedge fund universe to get started to get their initial investors on board and where some of the people working for Dean Witter themselves went on to become legends in their own right Kent Robin comes to mind for example and then you also spent some time at AHL which we know today has been the source of inspiration and talent for so many European managers who in some way have overtaken the u.s. managers in the last ten years or so and working for these two well-known firms that only takes you up to 1993 so I think there's quite a lot of interesting things that we can explore today and I really look forward to hearing you sharing all of these previous experience and and bring us up to date but I'm also intrigued about this fact that you've spent the last 20 years focusing on currency markets which has been a prominent asset class at times but in my view it hasn't been so prominent or maybe I should say it's been a bit under the radar for CTAs in the past few years where they have chosen maybe more diversified strategies so lots of things to discuss Chris but before we get to that point I really like you to take us all the way back to the beginning and and tell us how you ended up choosing this path in in in your life well delicately put that I've been in the business a long time by the way that's very polite actually I started off as a British Army officer I went to Sandhurst I was commissioned into the Gordon Highlanders as the team commander and when I left the British Army I went to what was then Rhodesia and if you were follow a career path that such as I had as a very young man set out as what they euphemistically call a a contract officer the worst possible thing happened and that was peace was declared and so I found myself and the country renamed as in Bob Wian I myself in a South Africa without a job but with a regimental tie so I knocked on the door of her of a bank that was called Sai fruits life which trust now part of Nedbank and they gave me a job as a gold analyst okay it's a Scottish gent there Aldo mr. MacTaggert and I said to him well that's very kind of you and he said not at all for a young Scottish boy like yourself we're happy to do it and I said but I don't know anything about gold and he said well the only thing you need to know about gold is the price it sells on the market the price that it costs to get it out of the ground and the difference between the two numbers can he do that they said yes when he said well now your gold analyst and so besides was used to do much of its business through Dean Witter Reynolds and after a couple of years might made friends with some people who from Dean Witter used to come over and they said come to him see us if you ever in the state so I did and they hired me and Dean Witter under aid a man called Ken tropen at a now Graham capital he was a visionary of his time had started up the Dean Witter managed futures department now in those days there were really weren't hedge funds in any sense right our sort of trading was was managed futures you never heard of hedge funds at all it was all CTAs and Dean Witter was very very successful in fact I think we did one of the largest new offerings it was something like 250 million it was oversubscribed by more than two times and in fact I think we handed back more money than we raised which is which is not a problem that many people have these days after the crash in 80 eight I found myself back in London and was introduced to a man from Singer Friedlander in those days then the firm was called like many of these firms they've been consumed by a bigger foot Bank but sing a freeing land he said I haven't a clue what you do but I know some young guys who seem to do a similar thing and that was Michael Marty and David you know they HL and so I joined them and at the time I think we just moved to German Street in Mayfair and of course everybody would told us that oh you've to absolute ruin your business you've cut your own throat you've hung yourself nobody is going to go and visit you in in Mayfair and now of course we see that they were wrong about that as well and we had five million dollars and I think that number actually dropped shortly after I joined I like to think the two are not related but they dropped and we went on and raised more money and then did the first transaction with man I think in 1990 which was very successful in 93 I found myself back in New York and joined with a man called Robert M to me so who was very much a guiding light for me and a great mentor for me and we were of the opinion this sounds really bizarre but will of the opinion that markets take on the characteristics of the participants and because there were so many people becoming registered as CTAs that the markets would become crowded easily spooked over-leveraged in other words bad places to be we we looked for a market that did not have those characteristics and the one that did not have those characteristics was the interbank for an exchange market why well because it was a professionals market it was literally interbank and so we launched our program which in those days was called kintyre mmm-hmm all of our programs even to this day at inch we always give our programs the Scottish place name and cantar within a very short period of time had attracted more money and was farm more successful than the main part of to me so business which was diversified commodity trading and it grew and grew and grew and it was a very successful program very different in many ways to what we do now currency program now is called kintel our kid was launched in 2000 but the idea is basically it was basically the same systematic trend following tell me just let's just before would jump here let's go back to the time when you joined age I'm curious here how much because we know today that a child became so important you could say in the European history of managed futures at that time what did you and and the founders of Ahl what did they know about what was happening in the states at that time and and and the managed futures industry because of course this is kind of about the same time as the turtle project finishes yet that doesn't seem to be a lot of sort of knowledge initially as far as I understand the story of what the HL founders were doing initially and what was happening on in Chicago at the same time well in those days we basically traded London market so they 7 to 12 markets when I first joined at what we would describe is pretty much it sort of relatively speaking net nosebleed leverage we modeled ourselves very much on mint right min mint were the the heroes yeah for us and we did believe that we added more and more markets gain more and more diversification and became more and more systematized our mint then we would replicate some of their success and that that turned out to be true ok interesting and yeah so anyway I was I was interrupting you but but please continue with your with your story and and what happened following you know your introduction with good to me so well with to me so I had previously noticed even when I was with Dean Witter in the early to mid 80s that that the large offering we did and we had that we had to what were called the cornerstone funds we had three funds in varying leverages plus cornerstone for right which was a currency product even in those days the the successful CTAs were or tended to be systematic trend followers hmm the the idea of the the hot handed trader was never really something that appealed to me and my observation even from the from the very early days in those days we had John Henry there was a a Oh management Dinesh Desai sort of ancient history names but they were in the main systematic in their approach and so the idea of AHL they might appeal to me because the AHL was and endeavored to become more systematic and that's something that very much attracted me to HR hmm and same with them to me so i met to me so in london because he was there a keen opera fan so he used to come over when we used to meet and and and share that interest but it he was an extraordinarily systematic trader and a systematic man and i thought that was it very very attractive and sensible something solid that i could understand and and why maybe you should ask what happened at the time at age hill that meant when you started working with to me so you were focusing on currencies early on as i mentioned that the belief was that were shared right by Bob to me so myself was that the game was becoming too crowded hmm and so we looked for another game that was not crowded and that was currencies entirely by directional pianist Bob to me so did say at the time the great thing about currency markets is they're so big that we can't screw them up mm-hm whereas if you look at the history of managed futures when it bursts its way into a new more get such as L&E which is basically a producers and consumers with a very small speculative interest when the quote-unquote funds discover that they tend to upset the balance of it and it becomes a less she was a reliable market from our point of view yeah not necessary from the participants point of view but from our point of view those who are when the scale where the speculative part becomes too big it becomes sort of a out of equilibrium hmm you know it's just interesting because I remember back in the day you know you've seen 1993 are there abouts I mean managed futures were still around a ten billion dollar industry so it wasn't a sort of in a um huge but I I do accept that many many times it's been said that you know CTAs or any any strategy is becoming too big for themselves so I agree that that that that notion can certainly drive you to take you know go in a different direction and I think that's true it's true now with with with hedge funds I mean you have to question I mean how many how many hedge fund managers does the world need and could we can buy with fewer my guess is we probably could I don't know it's not a subject she brought up with the bail but I'd point out at to me so we were very successful in terms of returns asset raising it was a very very successful program at that time at no time did we have a price feed in the office and when signals were generated 7:00 a.m. New York time Carol the lady in the office would then called Prue who were our main broker at that time in London and speak to somebody called Syd yeah and asked him for the mid-range prices Syd would give us the mid-range prices and then the trades would be done and he'd fax back the fills and basically we were done for the day and so when you have that sort of memory of how these things can be done and be so successful when I hear conversations later on in life about high frequency trading and technology and nanosecond but trading systems and this that and the other at it makes me feel it either extremely old or or extremely sensible that we never got involved when that sort of thing where the margins for success apparently defined as being very very small indeed hmm I mean I think it's an interesting subject and maybe we can I can tap into your memory a little bit about that before we move on you say that tamizha was very successful at the time Gigi can you put words and why what make you so successful what did you do differently or what did you do just generally that people were trying to do I think in us in our way we had a I'm tempted to say or some other people would say arrogance about us that due to the leadership of Bob to me so we were driven very much by quality of life and Bob was a very successful and balanced individual it always seemed to me and I would contrast him with some of the frantic almost foaming at the mouth grab eNOS of some managers that I meet now and I guess that came out in the way that we presented ourselves as I say some people saw it as a as a positive vibe modern term but but other people saw it as arrogance but we were happy with what we did and how we did it we didn't have any aspiration to take an awful lot more clients or an awful lot more money on and remember in those days because the internet didn't exist there was an infrastructure limit to the amount of accounts or bought in those days bank desks that we could actually trade through and at one time we were dealing with 12 14 or so in this day and age of course it's no problem at all but back then it was but Bob specifically was was very clear on who he did want to do business with and who he did not want to do business with and I suppose to some extent we had inch today we still have that that certain view I mean for at the moment which doesn't have any marketing and everybody has erred in your marketing I mean if you ask what our biggest single failure is I would say well my biggest single failure is that we is that we are are hopeless at marketing and that got that dates back to the to me say days where we weren't a marketing operation where a manager of money not a management of people sure you talked about Bob to me so as a great mentor and I think mentors have clearly become what they have been very important for certain management I mean I talk when I did my conversation with Jerry Parker and he obviously talks about his experience through the turtle program and and the mentorship that he had early on from Richard Dennis what was the most important thing that you think Bob Tamizh who told you to show up always show up and you win by showing up hmm because most people are unable to meet that minimum requirement for whatever reason one of which might be they were over geared and simply have to leave the table hmm showing up is very important Bob's best friend was it is Larry height from market Wizards one and Larry height was some very often in our office in in New York Larry Hyatt was also a truly great individual yeah and it was but entirely systematic these thieves not people who didn't represent their greatness by pretending that they knew tomorrow's prices sure and what because I seem to remember that there were some joint ventures being formed maybe even with with Heights group and man so tell me about what happened when you were after a few years with will to me so well I think all we did a joint venture with man or well with them with Stanley Fink in who is another superb individual of a giant of the industry as indeed was Larry can't say enough good things about him but we did a joint venture and in effect they took over the the marketing and all other aspects of of the kintyre program and the reason that they did it was at the time our currency program was substantially better than a hls currency program and if you're representing yourself as a um a diversified commodity program with X billion dollars under management well in effect you're really not you're trading an awful lot of indices an awful lot of interest rates and an awful lot of currencies and relatively speaking not much pork bellies so if you've got one of those main legs that is a little bit wobbly you've got a big problem and so they were on the lookout for a program that was better than than or demonstrably better than than the one that they were using for currencies at that time and I think we we filled that gap and so Bob and I basically parted company been you know I think I was much older than me despite what you say there are people older than me and so um I came back to the UK and started a new program and a new company which was inch has relocated it to Switzerland in 2004 and physically moved here in 2006 2007 mm-hmm I am now of course sort of running inch is a big part of your life today I'm sure but I'm just curious before we sort of dive too deep into other sort of more business related things what else do you spend your time doing other only on the sort of a leisure side I like to play golf and I'll and I like buy cars and I travel quite a lot to the UK and around the UK but mostly Scotland close tighter to Scotland from a business point of view I spend most of my time getting in the way of the research department mm-hm and generally annoyed people here in the office not so long ago I had a medical issue and it both gratified me and depressed me to see that I wasn't missed at all and that the business ran perfectly well and some would argue with a lot of positive for evidence that it round a lot better without me sewer and I'm being systematic traders and the reality is we are going to do what the system says we are going to do there's a good and bad about that the good thing is we don't have to worry terribly much we can sleep perfectly well at night the bad thing is he doesn't make us terribly interesting people the world if you watch the NBC or something like that they have the Talking Heads they're sort of pinstripe suited soothsayers and that sort of thing who are intimating either subtly or not subtly that they have some insight as tomorrow's prices we of course have no insight as tomorrow's prices so there's a there's a limit to how much we can entice people with with what we can intimate basically basically it is what it is and that's that I did mention earlier we're not terribly good at marketing and now you're here on a perfectly worked example of it what we will follow the system with them with discipline and patience and low leverage and to go back to poke to me so this will enable us to show up again tomorrow yeah yeah obviously we have many sort of topics specific topics that I want to touch base on I'd like to if I can in an elegant way phrase a more broad question to begin with and that is when you decide to seek mastery in a particular craft like building a successful as management business you can almost call it kind of a quest that you embark on and for some people this quest is to bring purpose in their life for example but your quest over so many years what you think has been sort of the what has been the aim or the goal that you've been seeking in that you know long career well first of all I'd say about inch at the moment the fact that inch is I suppose it exists or is as big or as successful as it is at the moment is almost entirely accidental when I first came over to Switzerland in 2006 it wasn't really the intention to go back into business it went really wasn't I mean a yes I took an office and yes I got a secretary and and and that sort of thing but it really wasn't the intention it just so happens that we've been fortunate and people have have found us and that the the the business has grown so on in answer to your question on the one hand there's no there's nothing that that drives the establishment and the growth of inch forward at least not from from from me nowadays I would say well I look at some of the people I've worked with Michael mitre David are the people hotel are the firm's who passed through or I've known who are at HL or wherever and I see that the success they've had and in we I have not had that success and the reason for that is we're not perhaps as driven as they are to become large we're not as good at running a business perhaps as they are was said he was very good at good at marketing perhaps having said that our numbers are better in terms of performance so you know we've got one out of three right but from our point of view is probably the most important one so when living back to Bob to miss again it we're not unhappy with where we are in a way I would say wouldn't it be nicer if we had just half as much as aspect or three times as much as Winton but we haven't we are where we are and we're happy where we are and and this to me is is obviously what's quite interesting because as you write the point out and obviously I've seen your numbers so I do agree with you they they look great this is what's interesting because to me and that's partly why I do what I do with these podcasts and that is to shed light on people where or at least to encourage investors to maybe find the courage to go and think a little bit outside the norm and to take a chance so to speak on a manager who's not mainstream and not top 10 in size and let's you know help each other to get away from the fact that nowadays most allocations are based on on size rather than maybe skill or something else but anyways that's that's just some of my own motivation but but I agree with you and right the first thing I wanted to ask about and in a sense it maybe ties a little bit back to what you just said now about sort of organizations and some organizations have become you know very institutional and become very good at that and what about yourself what have you focused on in building your organization and what does it look like today in lagana here we have eight people we have three on research with my partner Jeff Baker who's been enormous ly helpful and influential in the building of the business not only on the trading side but on the business side bono Schneider who is an extraordinary clever young lady on research Philip Babbage who's just joined us in London we have Raval D who started off as I think his master's in is in aeronautical engineering or some such thing from Oklahoma so I guess he's the baddest closest we have to a real rocket scientist but no term they say oh I like young people I like young people who've never worked anywhere else and I don't want anybody turning to me and say yes but this is the way we used to do it at Merrill mm-hm because I'm not interested in how you used to do it at Merrill mm-hm the young people have good ideas I like people who manage themselves as I mentioned with the managers of money not managers of people if I noticed that your grandmother has died three times and you need to go to her funeral three times in a year then that's probably going to attract my attention but otherwise I let people get on with with what they want to do the army term would be two delegations the keys of command and I think that that's that's probably true and now those other cliches my door is always open and all this other nonsense but I don't think we've had two people leave us in the last seven years both of them involuntary it was said to do with the they haven't returned to the home country having completed their studies and visa situation here in Switzerland and we've had one person that I didn't really ask to leave it became obvious that they should leave as is often the case so our turnover ISM is extremely low and I think people are a happy here I must say we probably ruin them from working for anybody else because we are not hierarchical in any sense why do you need two offices crews when I go to London I I need somewhere to go because it rains and sometimes I need to be indoors we have a very very good young man corps Ivaldi and gwon in in london who worked for us here in in in switzerland and because he is Indonesian he was not permitted to stay here and I didn't want to lose them so it does no harm for us to have a representative office in London and I couldn't find anybody about her at all then to ask her about it to her to operate it and that's what he does okay now the next thing I want to talk about I call it track record but what I really mean by that is obviously your program has been running for for quite a while and with managers especially I guess in the systemic space you know programs models approaches risk management whatever it might be changes over time so before we sort of dive into the strategy maybe just from a pure track record point of view if someone asked you how should I read your track record what should I focus on has there been some major changes upgrades innovations whatever we call it that I should be aware of because in my personal experience I think people often look at track records and think that they should expect the same going forward and I would caution about that because as we all know you know people programs change and so to some extent I would almost argue that it's better to look if you can get it on a managers back-tested version of the current configuration to see you know what the program is really doing today but that's very hard information to to get hold of so that's why I'm interested in in the whole track record issue just to bring light on that how should how should investors look at your track record if they asked you well that's not a good an awfully big question that's why I should say that we present our numbers in two different ways the first one is without the deduction of any fees it's it's a sort of a straight alpha number and without leverage so it's one-to-one and there's no credit for interest that can be important some people say we should add interest but that would make us look a bit better said what you're looking at when you look at the one-to-one is pure alpha the other way we show it is again without credit of interest but net of two-and-twenty and at three times leverage three times leverages as high as we go mm-hmm the reason being is we like to think that we're going to be staying in business and three to one leverage basically gives us the same standard deviation as the S&P 500 my but substantially high returns so that's why we as a ballpark we that's that that's as high as we go [Music] our program hasn't effectively changed in any sense at all over the years it is systemic trend following we started off with ten markets it's always the majors we don't do emerging markets we added a couple of Swissy crosses in I think 2008 and then about two years ago we added euro care and your Australia so now we trade sixteen it it should be seven times seven twenty one crosses but in actual fact due to obvious reasons we only trade sixteen of them in our business there are four main drivers for up for a currency system basically only we can dance around it a bit and dress it up a bit but there are basically four main systems one of which is the interest rate differential what is now called the earth the carry trade there is momentum breakout there is some form of volatility trading and there's some sort of purchasing parity type programs those those the basic of the four bricks excuse me um for our kind of system is built in the main on interest rate differential and breakout so you will quickly see that over the last four or five years that the money that we've made has not been made from carry trade because with interest rates where they are there's not a lot to be done there so any money we've made has come from interest rate differential so when this goes back to your another part of your question when you look at the the full length of somebody's track record analysis fourteen half years now you look at what was possible generally speaking this is thumbnail thought but general is being what was possible now if and what is possible what do you get for rolling t-bills the risk-free rate what do you get for doing nothing it's the risk-free rate okay now at the beginning of this century we can say that the risk-free rate was let's say four or five percent something like that so if I made five times the risk-free rate your returns twenty five percent hmm today if I make five times the risk-free rate your returns are what two-and-a-half percent yeah but basically that that there there is some equivalency in how you can compare those things so you you as an investor you have to look at a sort of a literally a macro view for this particular asset class what was doable what is reasonably doable what was a reasonable expectation if you look at the stock market for example it's doubled over the last X number of years well that's reasonable now if your manager has done twice as well as that I guess you'd say looking backwards not forwards but backwards that's pretty good if you've done half as well of that you'd say actually that's not too good is it hmm in our business what has been reasonable from currencies over the last four or five years has not been a particularly exciting number but that doesn't mean it won't be because you invest for tomorrow not for yesterday that's something else you mentioned in earlier I think in our business that is say that the hedge fund if that's what we are managed futures business if that's what we are and there's a lot of group he ISM hmm investors like to be seen to be with it with the new hot handed guy sure so people crash to earth and pretty quickly in this business occasionally and take the investors with them we've seen that time after time after time we call her that the faster gunslinger syndrome hmm I mean if I if I tell you for example last year we were up 20% it at 20% I met a guy last month he was up 20% just that month and you'd say well okay but I don't know how many times I've been pushed out of the way by a faster gunslinger turned the corner and areas face down in the street and guess what there's off another fast against coming up again mmm there's always one but they tend not to have very long careers so looking at the program today and and as you mentioned is it fair to if we're gonna try and visualize it that for the four things that you mentioned that that's what a pro currency program can do that as long as you know roughly would you say that those fall and and I'm sort of asking out of ignorance here but are those four categories you mentioned the carry momentum volatility and purchasing power are they individually able to produce the same level of return but at different times of course yes yes now what I would say is that over time by far and away the most successful of the four has been the interest rate differential carry trade next would be the breakout then probably at various times volatility and it there's a danger here of course for investors because currency managers that have done well over the last couple of years you can almost say well you've done well but you haven't done it on a carry trade basis have you and you probably haven't done it on a breakout or momentum tight basis either so you're doing something else what's left so you're doing some sort of volatility trade okay that's fine but is that going to be the environment that is going to present itself tomorrow so and and a lot of managers they do continually change their system and that's fine they do it for two reasons one because they think they're going to improve return returns by changing their system and secondly more dangerously is because they sense that this new approach is the approach that from a marketing point of view is more likely to attract fresh assets so you'll see people describe themselves as vol traders hmm why because they read in the Wall Street Journal that people are writing checks to vault traders are they really might have I don't know it's kind of like when the C key calling themselves H ones because nobody likes CTAs that's right I was heard me say just now edge fun I didn't over miss ETA as a currency man yeah we have always been basically the redheaded stepchild of both industries mmm do we don't trade futures therefore we're not managed futures I suppose hedge fund that there's a bit of a misnomer anyway cuz there's nothing to hedge so you tell me to me it's a label it doesn't really matter but I suppose for allocators you've got a tick box isn't but you on one form as opposed to another form it is important this but not to me you mentioned the word environment just before and I think that's an important thing I'd like to dive into a little bit before we move on to maybe the strategy itself and how you go about it but I think it is important for investors to understand in which environment should they expect a strategy to work and as you clearly mentioned you know for your strategy the last couple of years Kerry would have been very difficult to to work with due to what the central banks have been doing but try and explain to me what the environment has actually been like for a currency program in the last say five years from when we've really had intervention if we can use it that word from from authorities because we know that traditional trend-following have been difficult but how do you then put it into perspective of say your strategy in in one area of the diversified universe how do you see the environment and and and how it's changed and what might change it again well from our point of view the environment has not been favorable having said that come next to our peers we've done extremely well some of them FX concepts for example and there are many many others have had horrific and fatal periods for some of them we haven't we've done pretty well but having said the hatches because we've done well that doesn't really mean that it's been ideal because it has been anything but ideal with volatility as low as it is it's been very very difficult but as I say we we we come in we show up every day and we do what we do and we've done okay we have not changed our system we do anticipate a return of volatility that is very very positive for us and for other trend followers if they're genuine trend followers that that should be a very good thing for currency managers I would say that having been in this sort of periodic previously I would say 90 to 93 followed by 94 would be a similar period of time we say in our business of volatility doesn't rise it jumps and a lot of people in our business I suspect who have changed their systems may well get caught out by that jump hmm they will change their system to to fit with the arrived as they see it now just in time for the environment to change quick question here you've been around and you as you mentioned you can go back at previous times and say you know 92 93 94 look similar and if you just stay with what you do and so on and so forth things will you know go back and and and and and models will start producing returns again to levels that you would expect now we hear often and we certain hurt in the last reason times that this time it's different so I would like to ask you if you can explain why these things actually aren't different and why things tend to return to the norm regardless of the fact that certainly the things that the authorities have done this time clearly they are different they are using new techniques and new things but you seem to be on the you know the belief that that's not going to last forever and the markets will return to how they always behave where does that belief come from although the tools that they're using now are I suppose you could say our new I don't think anyone would think that what they're doing is sustainable that is say they cannot continue to do it and indeed if you look at the Fed they're not they're cutting back on QE and this that and the other eye currency markets are different to most markets or to any other market I could say because they are completely bi-directional which makes them ideal markets for who are the popular press phrase would be sort of currency wars or competitive devaluations or competitive rate rises or whatever it is and because of the tools that have been used not in spite of but because of the tools that have been used I can easily see that not only will the environment of current looking forward become more favorable it'll become very much more favorable and very quickly I just don't know when that very quickly will start and it may well have already started I don't know hmm but just just again just to to to for the benefit of the listeners here why do you say that it's gonna be even more favorable what is it in in that statement that that you know that you feel the markets and and let's say currency markets which obviously is your expertise what is it about them that it kind of you know it's kind of you know a kind of a cycle isn't it that we're you know if you stretch the rubber band too too much then you're gonna have an even bigger move when it comes back and is that what you see in currencies that they can do whatever they want for a period of time but once they you know let go things are gonna be even better and we're gonna have you know above normal returns for a period of time now we've had some supper returns for a while well first I say that the potential for substantial high returns is it exists whether or not we inch will be able to participate in a successful I don't know I could know that representation but what the action of the authorities has done is they have certainly put us in territory not only for us but also for them they have also from us all of them my observation be that the toolkits is-is-is is a little bit bear that we say another way they're sort of running out of ammunition hmm that generally speaking another sort of broad observation would be the central bank intervention itself in the currency markets at least hasn't been particularly successful when you take a step back and look at it you see the Australian the Japanese interventions recently this is not something that they could they can slow it down and they can sort of reverse a move for a short period of time but once they've actually intervened then the the the the trend that was established before the intervention resumes and and on it goes so I don't think central banks are to the market least of all the currency markets as as scary as they as they were it way back in the 90s for example mmm and less so now given the the the extraordinary interventions and I mean sort of a tools that they if they've they've used that have I think in increased the risk of exactly what they they hope to avoid mmm I want to go and talk about you know the the program itself Cantillo and and one would like you to to describe how you've structured it in and and and so on so forth but before we go there I wanted to ask you if there is a particular objective with the program now obviously one objective could be it could be just to say well you know we want to make money every year but there could also be other objectives for example there could be certain periods of time where you want to make money or be more certain that you make money is there any objective in your design of the program that you've tried to achieve not the answer that is now the system is in fact designed to produce absolute returns so after many many years we've been able to do that and from that we've been able to make a number of observations for example it has a very strong positive benefit to an equity portfolio our positive months seem to happen at a time when the equity markets have negative months and on it go so the benefit of including our particular program and I assume other similar programs in a portfolio that is otherwise predominated by equities is quite pronounced right now that's something that wasn't it wasn't designed to do that it just has why do you think that is because it's not sort of made it's not sort of a natural conclusion I would have drawn and if you just trade one asset class that that would actually have a particular correlation to another asset class in particular when we're dealing with currencies way as you said you're dealing with every time we have a currency pair we're dealing with two different countries so to speak and and and and and their economies it would have been easier for me to assume if you were trading equities themselves and you just have some models that will react very quickly when markets started to fall why do you think your your correlation have been as it is I really don't have a direct answer to that I really don't know in fact what I just said is an observation of an observation it wasn't created to do that it just it just has and it's of a it's a very stark benefit it has two equity portfolio I would say that one of the reasons might be is that currency markets are first and foremost markets of capital flow hmm so I guess if people are selling stocks they're putting it in a currency and people are buying new businesses or selling businesses or investing or divesting on a sort of a much larger scale and simply buying you know widget PLC or something like that so perhaps that's got something to do with it but in any event and whatever the reason it is a pronounced fact you mentioned that you were trading sort of the g7 currencies and you're obviously pairing them up and but the currency markets have kind of changed in the last twenty years certainly with the introduction of the Euro and and and and and and other things how has liquidity I'm just curious yeah I mean how have you observed liquidity in the foreign exchange markets in recent times people talk about equity volumes could have you know being at the lowest level for many many years and so on and so forth but what does the interbank market in currencies look like nowadays we only trade the majors so we don't trade any of the em so-called emerging or submerging currencies we just basically trade the the main current is crossed against each other so it's seven times seven twenty one as I mentioned we trade 16 of those there is and we can we trade very infrequently relatively speaking our winning trades are held on average for about 1618 days or so and our losing trades are held for six days on average and that's been the case over the full period of the track record so liquidity and transparency are amongst the most important attributes that any market can have and in fact I remember Dean Witter a hundred years ago they would always I think it was a list of seven characteristics that a market must have in order to become considered investable I've forgotten what four of them were but the first three were a liquidity transparency well I never forgotten what the third one is well but the point is that the currency markets are blessed yeah with liquidity and transparency to a far far far greater degree than equity or fixed income workers do you trade futures or do trade the interbank market and the reason I ask is that with the recent crisis we know that banks became much more suspicious of each other let's put it that way and and maybe didn't you know trust lines and dealing facilities with each other how did you experience that or what have you experienced with this well we just trade spot looks so for our bar business couldn't be more simple and straightforward although I suppose you could say it is a derivative business it's um it is a pretty childproof derivative business compared to some so we haven't experienced any issues at all in that regard so tell me about if you if you would can um take me through the the program the structure the sort of overall look and feel of it and and how you and sort of divide it into maybe different types of models and and and their function so to speak okay well I mentioned the of the four types of ever forget volatility and forget purchasing power in the main most currency programs like ours are made up of interest rate differential and momentum breakout ours is about 70/30 favoring interest rate differential it is a matrix mm-hmm one of the things I think we probably do that's slightly different is that we don't regard the crosses as as currencies per se if I say to you for example dollar yen you're immediately going to start thinking about Japanese exports and Abe Adamic sand all of this that and the other well of course the computers don't see that they just see a row of numbers that have or have not changing relationships with each other in terms of volatilities or correlations or whatever mmm so what we have is 16 rows of numbers and we try not to think about the computers do not think about them in terms of being countries if you will they're just rows of numbers yeah when we put on a trade and our systems is entirely probability based and the reason is based on probability is because we are not predictive in any sense we have no idea what tomorrow's prices are going to be I wish we did if we did we wouldn't be having this conversation right but we don't and so at the time of instigation all trades are risk equivalent and the reason they are is Kevon is precisely as I've said if we knew that this trade was better than that trade we wouldn't make that trade we just make twice as many of this trade but we don't know so all trades are risk equivalent at time of instigation what will take us out of a trade is an increase in volatility both on the upside and the downside high volatility tends to terminate a trend low volatility tends to initiate a trend generally speaking and so that's the way our system were so if we look at some of the positions at the moment we see that we are long to risk units of dollar yen we went long on the first of September at 104 to 93 and it's currently 109 to 26 so that's been a successful trade for us we have a losing trade we are long one risk unit of euro CAD at 140 182 and it's currently 141 52 so that's that's a losing trade each of these trades have their own trailing stop which is based on time and volatility which hopefully keeps us out of out of trouble when volatility in that particular trade does pick up as I mentioned high volatility tends to terminate a trend low volatility tends to initiate a trend we are extremely low geared it ranges from 1 to 1 2 3 to 1 and the reason for that is that you you know you'll always make David Harding used to say it @hl you always make money in this business if you don't go broke first what is going to make you go broke leverage sure so if you intend to be in a position to show up again tomorrow you've got to keep your place at the table and that means you don't lose all of your money no matter how certain the trade looks we trade entirely systematically entirely disciplined because and I think most people can identify with this whether they tend to use the information on notice their choice but our observation would be people lose money for two main reasons the first is emotion hope greed and fear bad inputs for a trading strategy and the second is ego if you get something right you might bet a little more now you know something get two things right suddenly you're a genius and here on CNBC and now you're going to increase your gearing and you're truly truly dangerous person so if you can remove emotion and ego through a set of rules which is what we do then you've already got an advantage over other investors at least that's the way we see it we don't claim that we have any predictive or special insight tory's we leave that to others is it the same models that trade all 16 crosses now interesting enough the the Tanisha program was it unbelievably enough in those days we traded forwards and we trade traded them 28 different term crosses with one algorithm it was a one-size-fits-all algorithm unbelievable but that's that's what we did Cantillo is a lot more sophisticated the each of the 16 crosses has its own algorithm people these days get terribly excited about the word algorithm and think you're a really clever chap because you would algorithm but an algorithm is simply a set of rules you know that you're a new if you have a set of rules you either follow them in which case you have a set of rules or you don't follow them in which case you don't have a set of rules yeah we do follow our rules so we make no representation to anybody other than the fact that we will follow the rules that we've set out mm-hmm so is that to be understood that that there's kind of one and I let's just call it a a am model so a set of rules becomes a model so there's just one model for each currency pair that's right well that the model itself is made up of another different component parts right but it's like anything else it's like a machine or a car the more moving parts you have mmm the greater the probability that word again the probability of breakdown so you can and I think in our industry generally there's a there's a sort of a love affair with perceived cleverness which is not personally not equated but it's certainly not terribly helpful I think we are in love with cleverness when simplicity should be um found to be more attractive I hid my view no no I completely agree but tell me what what could be the difference between two models then you know in in the sense that once you start deviating away from you know trading one model across all markets you you always have the the notch in question about you know optimization and so on and so forth how how what what would be the difference if you sort of this should visualize it between you know the algorithm you use for one currencies across and and the next one I thought the parameters will be set differently so for example the there be a couple of instances for example the parameter for that measures or defines volatility right for one Cross would be different to another cross and thatis or builds to the the risk equivalency of the of the of the price streams if you if you fall right so the principle in a sense is the same meaning that you're looking for some kind of break out and as the main methodology in the absolute case yeah absolutely and they are remarkably simple I think people would be either surprised or appalled at how simple the the rules actually are and they're encoded in in in in computer speak because it's more efficient for us to do this but you certainly with kintyre that to me so program you could literally write it out and work it out by hand if you had the interest in the time Cantillo slightly more complex that but not much hmm because you come into a point where and I speak on a lot of panels and meet a lot of people and they tell me how terribly clever their system is and to which I always say could you write it down on a single sheet of paper for me because I'm not terribly terribly bright well no no it's you don't understand well anytime anybody tells you that you don't understand it means you probably do yeah and what it means is that they've convinced themselves that they're very very clever indeed we don't we haven't we're very simple indeed we describe ourselves as not it was a sort of a not the genius but the the idiot savant we don't know very much about anything but what we do know we really do know I feel I have to do to to deviate a little bit here and ask you a question because I think it's so important to understand and that is what do you think the larger managers with you know the 50 or 100 PhDs what do you think it is that they do actually because performance wise sometimes not always but sometimes it's very very difficult to tell the difference between a firm that has you know 50 PhDs and the firm that has one PhD or non PG what do you think that actually they do other than creating more capacity I do understand that that can be a big part of research is to find out how do we execute 10 billion then I understand but what else do you think that they achieve with all this research the answer that is I don't really know there are one or two very very good examples of firms that are extremely well run a business point of view from a research point of view from a training and execution point of view who you would say is a level of genius NER brim full of PhDs you know I would speak of winton your example you would think of should we say some others which which I won't name who has sort of wannabe world Winton's who whose might come out of the blocks looking like geniuses but see stumble and fall on their face and just look a bit silly from all the enseña intellectual nonsense that they've um spewed forth and why I don't know you'd have to ask them I really don't know the cleverness it you see the to me sir would say allow how it would say this is an extremely easy business mm-hmm there's nothing to this business because it keeps scoring dollars and you get a printout every night mm-hmm are you up were you down the black number red number plus sign minor side this is not hard mmm now you might have all sorts of reasons as to why the number isn't as big or as there's a - number whatever but it doesn't change the number and it's the same with prices for that matter use use hear people talk about price of the stocks or whatever it is well yeah that's all very well and good you might have a think the price is wrong and you often hear people say that the price is wrong well we have a view on that you might think the price is wrong hmm and you might be right it might be higher although it does matter fact the matter is it doesn't change the price sure and you know what do these ph d--'s do I don't know maybe they argue with the price I wanted to go back and ask you about your models because you mentioned the fact that you're a trend follower but you also mentioned the fact that volatility and increase in volatility and I want to make sure I understand it correctly can increase in volatility completely cause an exit of that model or is it a reduction of position size and the reason I ask that is because if we know of course that trend following as a general rule means that the trend actually has changed before you get out so you kind of you know so I just wanted to see whether there was a bit of a twist here on when you could talk about trend following and that in fact it's it's trend following but you know it's kind of a wither with a chance or at least - to actually get out during the trend because of changes in volatility rather than a price change yeah the volatility will is generally speaking what takes us out one of the problems we've had a for the last yeah I suppose 11 10 10 11 months Isabella - it's been solo hmm it's resulted in us being in all 16 trades all the time right now the average holding period for a losing trade has remained the same it's six days hmm but the holding period for a winning trade has dropped from 1618 days and down to about six days as well so that's the sort of the statistical definition of the trend followers nightmare which is getting whipsawed yeah now over this last month we've noticed that we are now getting taken out of some of these trades this is brilliant this is excellent because now for example instead of having 16 trades on we have twelve trades on hmm this shows to us that volatility is slowly returning hmm and this is an environment in which is more acceptable and more amenable to our type of system I can't speak on for other people who describe themselves to trend-following but for certainly from our point of view this is a positive development I'm sure so so just to confirm so each of this thing of the 16 markets own and and therefore are crosses and therefore models they work completely independently so all 16 could be involved or so if it's to do with the euros there is no overriding exposure limit on that in in essence okay no because each way each each price stream currency is price stream has its own characteristics which vary for time for time and that cost well it has his own stop at the stop as I mentioned is based upon volatility so the volatility of euro yen is entirely different to the volatility of euro dollar for example I mean you've looked at obviously many different indicators over time I'm sure and I'm just curious and in general I mean again if we were going to go into help so the the listeners and and and and maybe the people who are who are inspiring to become you know a manager of funds at some point in their career are there any indicators that you feel are more thanks for listening to top traders unplugged if you feel you learned something of value from today's episode the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released we have some amazing guests lined up for you and to insure our show continues to grow please leave us an honest rating and review on iTunes it only takes a minute and it's the best way to show us you love the podcast we'll see you next time on top traders unplugged [Music]

Channel: Top Traders Unplugged

Views: 2,280

Rating: 5 out of 5

Keywords: Chris Cruden, Insch Capital Management, systematic trading, trading, risk, top traders unplugged, investing, top investors, how to invest, investment strategies, top trading, top traders, money, investing interviews, successful traders, how to be a top trader, best traders, hedgefund, better trading, how to trade, analytics, managed futures, future of investing, investing strategies, investing 2018, investment advice, investment challenges, investing podcast

Id: y8KEMNPJ9qY

Length: 70min 35sec (4235 seconds)

Published: Sat Apr 15 2017