And Now… Some Words From Winton’s David Harding by Attain Capital
Tonight kicks off a rigorous and what we hope to be exciting few days in Chicago with three different events; the first being the Pinnacle Awards. The hype surrounding this year’s awards is Winton’s CEO, David Harding, receiving the Pinnacle Achievement Award. We’re no stranger to writing about David Harding’s success story, but we’ve never gotten his thoughts and insights directly… until now. With Mr. Harding in Chicago for the event tonight, we had a chance to put some questions directly to him on the industry, how they trade, and so forth… enjoy:
Picture Courtesy: The UK Times
Attain: You’ve recently been quoted saying “don’t call us an F*^%$ CTA…”, yet Winton makes up approximately 8% of BarclayHedge’s reported $325 Billion in Managed Futures Industry AUM. How much, if any, of Winton’s $24.4 Billion in AUM should be counted as Managed Futures industry assets in your opinion? Just the Winton Futures Fund? And a quick follow-up, do you think Dalio’s Bridgewater should be included in the managed futures AUM number?
David Harding: Estimating the size of the Industry is something we discussed in a recent Research Brief, “The Growth of the CTA Industry” (available in our online Knowledge Centre). We do not consider ourselves to be just a CTA –the Winton Futures Fund has had a significant and increasing allocation to cash equity strategies over the past four years. The label is more the result of our history, where we started out and our regulators, the CFTC. Whilst it’s certainly true that a large part of what we do is still within the CTA-space, our approach to systematic investing based on scientific study applies to a far wider arena than just managed futures. Over the past few years we have developed a non hedge fund product, a long-only equity strategy , using the same scientific and financial mathematics disciplines. The treatment of Bridgewater has a significant impact on these estimates. BarclayHedge consider the whole of their $120Bn to be ‘CTA’ but we view a subset of this as more appropriate given the nature of the funds operated. This and a few other differences lead to our estimate of the Industry being closer to $250 Bn rather than $325Bn.
Attain: We’ve penned articles such as ‘Second Guessing the Wintons of the World’ which theorize that Winton is too big to access commodities like Cocoa or Corn in a meaningful way due to position limits and market impact…. Is that a true statement? And if so, what are the pros and cons as you see in having the bulk of Winton’s exposure to financials?
David Harding: Over the long term, we have pretty close to even risk allocations to the four major sectors – Fixed Income, Currencies, Commodities and Equities. In any given year the sector that comes out on top could be anyone of those sectors – they can all have a meaningful impact on Winton’s performance. We think that there are a series of common misconceptions regarding the capacity of Managed Futures, the first being that the liquidity in futures markets can be judged in isolation from the underlying markets from which they are derived. The second is that capacity is defined by open interest. At Winton we believe there are in fact two constraints – the size of your position and also the rate at which this position can be changed. It is the second one we think is most critical, and it relationship to market volume. The third misconception is the view that all trading volume is equal.
Attain: The recent industry performance has led some to say ‘Trend Following’ is dead… because of QE, because of risk on/risk off, because of HFT, and so on… what are views on whether ‘trend following is dead’, and what do you think the long term viability of trend following is?
David Harding: For the last few years, some managers and commentators have suggested that trend-following CTAs aren’t working due to government intervention. If by that they mean that there is no risk-free rate, then that is quite true. If we’re earning a risk-free rate of 5% and adding that to our returns, in the case of Winton, it wouldn’t mean we were any more skilful, but it would look better but add 5% to our returns over the last five years and they would look rather more respectable. They look by historic standards somewhat anaemic. However, I don’t know that there’s any strong evidence that a massive amount more government intervention has affected the nature of market dynamics in the last few years. Governments have always set interest rates; there’s always been intervention in the currency markets. I really don’t see the provable connection between some new era of government policy and a lower return from trend-following trading systems in particular. We do not see QE as an excuse but rather as a spur to innovate further. Which is a good opportunity for me to plug “The Historical Performance of Trend Following,” … a research paper that you can find on our website. It looks back over the last 20 years at the performance of fast, medium and slow trend-following strategies, and shows that the last five years have been a tough time for faster trend-following models. The Winton Futures Fund had a reasonable year last year. Not only did our slow trend-following systems pay off, but also non-trend-following systems have been a big help which, including our cash equity portfolio, obviously represented about half of the profits we made last year. The backbone of our method of investing is a scientific method, not a particular application of it. Trend-following momentum signals will continue to be a very large part of what Winton does for the indefinite future. But they are not the whole of what we do.
Attain: It’s well documented that you have a small army of PhDs and spend insane amounts of money on research, and the proof is in the pudding when it comes to your results. Most people assume that research surrounds new ways to capture market movements (fine tuning how the models decide when to go long or short a market and when to get out, etc.), but we’ve heard a good portion of the research actually involves the placement of the orders, not necessarily the orders themselves. What percentage of your ‘edge’ would you say comes from non-standard research into things like crossing orders to avoid transaction costs, using creative order types depending on the market structure, and so on? Can you give an example?
David Harding: You’re right, ‘Returns Forecasting’ is just one part of building a successful investment system. Portfolio Construction – how to combine and weight those systems (and how to alter those weights) is just as important, as too is Risk Forecasting. Without a proper understanding of the correlation and covariance of various systems and markets in your portfolio you cannot properly control and monitor the risks within the portfolio. Our goal is to provide the best risk-adjusted investment over the long-term and that means not having large losses along the way. Execution of orders is also a very active area of research since although we can never be sure about future performance of our systems, we can have a very good idea of how much they will cost to trade. So understanding how those costs arise, at the micro-level, means we can work to minimize them. One example of advances we have made in slippage research has been the ‘cross-fertilisation’ of knowledge between our understanding of slippage from futures market trades and from cash equity trades. This has enabled us to unify our futures and equities slippage models into one model that can be robustly applied to both and which benefits from the large amount of data we have. A case of 1+1 giving us more than 2.
Attain: Imitation is the sincerest form of flattery, and there is at least one fund we know of which is attempting to replicate the performance profile of large funds, including Winton, for less than 1% annually and no incentive fee. What are your views on the move towards low fee replication products and pushback against 20% incentive fees? Do you see the 2/20 structure going away?
David Harding: Since I started Winton in 1997, we have only charged 1/20, so it’s taken others 15 years to catch up! People will always be willing to pay more for a better product and we don’t see that changing. We looked at a large set of ‘CTA tracker’ type funds [we have a Research Brief on CTA trackers available for our clients] and found that they had been able to provide an investor with the ‘beta’ element of Managed Futures. But it is our view that there remains an ‘alpha’ in addition to this which is what we aim to provide via our extensive research efforts. Many of these CTA trackers invest using fixed strategies. In order to remain competitive a strategy needs to be continually examined, refined and improved.
Attain: One last question, If you could invest with one other CTA in the world, other than Winton or an AHL alum, who would it be.
David Harding: RIFF. Jim Simons and Renaissance have always shown me how it is possible to employ the scientific method to manage investments over the long term. But I do think Winton is better at one thing – marketing.
Attain: Thanks, David for taking the time to answer our questions, and congratulations on receiving the Managed Future Pinnacle Achievement Award. We’ll get this up on our blog shortly… which we have to ask, do you read the blog?
David Harding: Some of our researchers read it every day. The most interesting get highlighted on our internal blog – which is where I must confess, I read them.
There you have it, straight from the horse’s near billionaire’s mouth. Trend following is not dead, CTAs should be spending more time on how they execute their orders, and he reads our blog from time to time (we’re honored). At the end of the day, we still think smaller CTAs with more commodities exposure should deliver larger returns (albeit with larger volatility), but you can’t help but have a whole lot of respect for what David Harding has achieved in his career (and it doesn’t even seem half way done yet…) Maybe that’s why their giving him an award! We’re looking forward his acceptance speech tonight and wish Winton the best of success moving forward. After all, no matter how much Winton distances themselves from the managed futures moniker, a hugely successful Winton can only help the broader industry by rising awareness of investing via what David called “a scientific method”.