“Markets exist to teach humility – and they are really really good at that.” – Chris Cruden (Tweet)
In Part 2 of our conversation with the CEO of Insch Capital Management, we talk about how the firm’s trading models work and how they were built. We discuss how Insch deals with drawdowns, increased regulation, and marketing. This is a truly in-depth episode into the mind of a hedge fund Founder and the inner workings of an Alternative investment firm.
Welcome to the second part of our conversation with Chris Cruden.
In This Episode, You’ll Learn:
- Indicators that are more robust than others.
“The only input that our system takes is price, so we really don’t look at any indicators per se.” – Chris Cruden (Tweet)
- Chris’ views on stop losses.
- How his firm deals with risk and how he uses Index Risk.
- How correlations play a part in his models.
“A good day for us is when we don’t make any trades, because that means that what we’ve got on is working.” – Chris Cruden (Tweet)
- About risk equivalency.
- how he deals with drawdowns.
- Why a sense of humor is important in this business, especially during drawdowns.
- How investors don’t share the same confidence in the model as managers and how managers can better share that confidence.
“We trade the way we trade because of what we don’t know not because of what we suspect we know.” – Chris Cruden (Tweet)
- How simple his system really is.
- Why you must have discipline. Many trend followers are making all-time highs but many people have announced the death of trend following time and time again.
“Our system is an encoding of old trader’s clichés in many ways and these clichés have been seen to be proven very true.” – Chris Cruden (Tweet)
- What the “black swan” event and the “gray swan” event would be for Chris’ business.
- The two kinds of research that his firm does.
“Of all of our system’s trades, about 60% of them are losing trades.” – Chris Cruden (Tweet)
- Why his team looks at emerging currencies in their research even though they do not trade them.
- What he is looking for in terms of red flags during his research that suggest models need to be tweaked.
- How he tries to stand out from the crowd in order to attract investors.
“Marketing is something we have done really really badly.” – Chris Cruden (Tweet)
- Why he is based in Lugano, Switzerland.
- What Chris would ask David Harding if he was doing the interviewing instead of being interviewed.
- What investors forget to ask him.
- Why it’s a good idea to ask if you can try a dummy account with a new investment manager to see how it works.
- How he deals with the difficulties of regulation.
Resources & Links Mentioned in this Episode:
- Chris suggests the book: Market Wizards: Interviews with Top Traders
- He also suggests: Trend Following: How to Make Millions in Up or Down Markets
This episode was sponsored by Swiss Financial Services:
Connect with Insch Capital Management:
Visit the Website: www.InschInvest.com
Call Insch Capital Management: +41 (0) 91 921 0168
E-Mail Insch Capital Management: email@example.com
Follow Chris Cruden on Linkedin
“I learned almost everything I need to know about this business and trading in the army.” – Chris Cruden (Tweet)
Niels: You're listening to Top Traders Unplugged, episode number 036, where I continue my conversation with Chris Cruden, Founder and Insch Capital Management. This episode is sponsored by Swiss Financial Services.
Welcome back to Top Traders Unplugged. Where the best traders in the world come to share their experiences, their successes, and their failures. Let's rejoin the conversation with your host, veteran hedge fund manager Niels Kaastrup-Larsen.
Niels: ...You've looked at obviously many different indicators over time I'm sure. I'm just curious, in general, if we are going to help the listeners and maybe the people who are aspiring to become a manager of funds at some point in their career, are there any indicators that you feel are more robust than others?
Chris: The only input we take for our system is price. We really don't look at indicators per se, other than the ones I previously mentioned: volatility and whatever measure you're using for momentum or breakout or all that sort of thing. Indicators... I wouldn't even describe anything that we do as being an indicator per se. It either is or it isn't.
Niels: When you get your signal, do you go all in, in one go, or do you scale in, or scale out?
Chris: No. First of all, if it's an existing account, an account that's already up and running - in other words fully invested at the prescribed leverage, we would describe them in terms of units of risk, so our system can be flat. In other words, it can have no position. Currently, we have four flat positions. It can be long one risk unit, long two risk units, or short one risk unit, or short two risk units, and that's it.
Niels: In terms of the... I guess that's a little bit into the risk management side. Can you maybe visualize about how much, or maybe I should even say how little risk you actually take when you get these... a risk unit, how much risk does that actually represent?
Chris: Not very much, I think the maximum is something like .3 of 1% of the available capital per trade.
Chris: We don't think, this trade is an absolute winner, let's really load up on it. That's not what we do, and the reason for that is as previously given, we simply don't know. So you can make us cry, you might even make us bleed, but you're not going to kill us.
Niels: Sure...what about stop losses, what's your view on that?
Chris: We don't have stop losses in the market, and there's an historical reason for that. We do, of course, have stop losses, and it is spots; it's never been an issue. They're not particularly tight because we only trade once a day, and we don't trade every day, so we're not looking for that one or two pips that some sorts of systems are apparently seeking. So, where there is some sort of wiggle room, our stops are based on time and volatility. That's what takes us out. We know what they are but in the olden days, when we used to call Sid on the desk in London, Sid would want to know where your stop is, and that's because in the olden days his job was to know whether you were a buyer or a seller and if possible to trip your stops. So as a consequence and as part of building a system we don't put stops in because then you have people who see them and we take the view that there's no benefit in leaving any kind of footprint in the market and that would include telling somebody where your stops are.
Niels: When you say you use time in your stops, do you mean that you have pure time stops, or is it just the fact that time is a component in the way that you calculate the stops?
Chris: It's a component, it's not a calendar time or an hourly time, or a daily time, or anything like that.
Niels: I think a lot of people a lot of investors and people looking at this industry, I think they focus a lot on the buy and the sell as being really the crux of the matter and this is how we make our money and so on, and so forth. But I think a lot of practitioners would say that probably a very important factor in what we do is the position sizing itself, which is obviously part of the risk management. What's your view? Is position sizing part of the secret sauce to your success?
Chris: We look at the trades in a slightly different way. If you're talking about working the order, is that what you're...?
Niels: No, I'm talking about the position sizing meaning that as you rightly say, you incorporate volatility, you incorporate certain other things and that means at certain times, I would imagine, you can take on a large nominal position with a tight stop; or you can have a smaller nominal position with a bit looser stop and that position sizing is elastic, so to speak, actually becomes very important in the generation of returns over time. I guess in the old days you would probably...maybe you remember this as well, that some managers would simply just buy ten contracts every single time with no respect to what the environment was. I think probably some of these managers got killed along the way, but now-a-days it's a little bit more sophisticated than that. I don't know whether, in your model, that that's a big component of your return and your risk management, or maybe it is, in your case, more the point of entry and exit?
Chris: For us, the position size is a function of the account size and the leverage and because we trade spot. I can see in some markets, equities, for example, you would have a definite limit on how much you could buy or sell at any one time. In the market that we trade that's really not a factor for us. Therefore, it's not a huge part or indeed any part of the algorithm.
Niels: Sure, sure, and the trade implementation itself is that... you run your systems once and day, or is it intra-day, or how does it actually work?
Chris: Actually we trade once a day, and that's at London 1PM, which is the deepest, most liquid time for FX. We could run it in real time, or we could run it two or three times a day, but we just don't. We haven't found through testing that it makes any enormous difference one way or the other. A good day for us, for example, is when we don't make any trades, because that means that what we've got on is working.
Niels: Sure, sure. I want to shift gears on you and talk about risk management. How do you define risk?
Chris: How do I define risk?
Niels: What kind of risk measures do you look at, what's important for you when you look at risk? Some people look at value at risk; some people look at how much can I lose if everything goes wrong right this minute and my stops are triggered. What's the important number in your view?
Chris: We use a number which is an index risk which is a calculation of what would we make or lose if we hit all of our stops simultaneously? It's entirely... it's not real because you can't hit all of your stops simultaneously. It's not possible in a system like ours, but let's just say that if you hit all of your stops simultaneously, how much would you make or lose. That's a number that we do look at. Our problem with our kind of system is not a catastrophic loss. That's simply something that really isn't going to happen to us. What is likely to happen to us is that we get an accumulation of small losses over an extended period of time because we're risking so little on each trade even at three times gearing. It's hard for us to get hurt terribly, but never the less we still like to know on a daily basis or on a real-time basis what our total risk to stop is if we would hit it, notwithstanding the fact that it's actually not possible. We know that not only in terms of percentage of the portfolio, we know it in terms of the percentage of the specific trade and also in the number of pips. For example I could tell you our Aussie/yen position which is short two risk units at the moment, we're up a total of 167.6 pips which basically works out to about 1.749% of what we "bet" on that particular cross, and our risk to stop is a positive 67.45, so if the price came against us about 67 pips we would still have made 1% on the money that we'd risked on that particular cross - just over 1%. That's the way we look at it. Having said that, the question might arise, well what if you saw a truly horrific number, what would you do? You've got fire alarms, so what do you do if you don't just smell smoke, you see flames? The answer to that is, first of all, it's never happened. It would have to be an error within the program because it's not possible for us to accumulate that kind of portfolio risk.
Niels: If I was going to ask you, on a daily basis what range you would expect the loss to stop to be, sort of on average, long term, what kind of number would you expect to see when you look at your report every day, and say yeah, we can lose 5%, or we can lose 7% or we can lose 15%, I don't know, what is the acceptable risk levels that you look at?
Chris: I can tell you this, between a gain...and this is at three times gearing... between a gain of 1.25% and a loss of 1.25%, 98% of our portfolio days fall within that band. At the extremities, it is very much positive, and they far outweigh the extremity on the loss side. So if you contrast that, for example, with the S&P 500, using the same 1.25 gain, 1.25 loss, the S&P 500 is about 74% of its days fall within that band. Therefore, you would say that it is far more volatile than our program and indeed it is.
Niels: Now again, a question out of ignorance I guess, and that's to do with correlation. Many diversified managers look at correlation as an important component in terms of the diversification of the portfolio. When you operate within one asset class, if we call it that, how does correlation, if at all, play in your design of your strategy or risk management for that matter?
Chris: In terms of correlation with other asset classes?
Niels: No, in terms of the internal correlation, because obviously again we're still dealing with seven different currencies, but we're just mixing them up here. I wonder whether the correlation in between these seven different currencies play any part, really, in your risk management or your research and your design?
Chris: They do indeed. In fact they play a big part because, if you cast your mind back into the world that existed before the Euro, we used to trade at Tamiso 28 different crosses, if you will, but we only traded Deutsche mark for Europe. We traded pound, obviously, but we didn't trade guilder, we didn't trade lira, we didn't trade anything and the reason for that is at the very time that you needed, or wanted diversification what you actually had was one position effectively high correlated with the Deutsche mark. It's seven times as large as you wanted it to be. As a proxy for Europe, we only traded the Deutsche mark. Correlation is very important to us because correlation is something that can change very quickly and with a little bit of experience you see that it's something that generally comes along at the least helpful time, so you find that you thought you had seven positions and it turns out you've got one position seven times as large, and that's not good. So correlation, even in the price stream - the 16 price streams that we trade, is an important consideration.
Niels: How do you deal with that other than having a stop for each of the... I mean is there any other way you can deal with that unknown?
Chris: We do with the risk equivalency because we don't know. I think that Larry Hite was in Market Wizards One, years and years ago, and he was asked, or he said to Jack Schwager, he said, I've never made a bad trade. Of course everybody sort of leaped upon that and said what an arrogant son-of-a-gun he was, which Larry wasn't, or isn't an arrogant son-of-a-gun, but what he was saying is all trades are the same. No trade is good, no trade is bad, some might go on to be a winner, some might be losers, but they're all basically the same at the time of instigation, so too with us. So we try to equalize everything because we trade the way we trade because of what we don't know, not because of what we suspect we know.
Niels: Yeah, absolutely. I want to shift to another topic which is drawdowns, and most managers, especially in the CTA space, they actually spend most of their time in a drawdown of some sort, and I'm not so sure that's necessarily the case for you, but it is a big part of the story, and I think it probably also is a big part of what people pay for is for the manager to be that filter and deal with the emotional roller coaster that it is to be in a drawdown. I'd love for you to share some of your experience in terms of how you deal with drawdowns. I know you have a lot of emphasis on being able to show up and therefore clearly trying to be in deep drawdowns is part of that, but how do you deal with that in general and the periods when you go through your own drawdowns?
Chris: You mean as an individual person?
Niels: Yeah, and in a sense, yes because obviously that's what's reflected also in your strategy.
Chris: As a real life human being with, admittedly, low levels of empathy, I would say that it's hard, but when you go into work every single day, and there's remorseless losses: you lost 10 basis point today; you're up 5 tomorrow, you lost 15 the next day, and on, and on, and on it goes. You would have to be inhuman or sub-human not to have an effect. This is the testing period that markets don't just test systems; markets test people and people make the mistake that markets are here for our entertainment or our enrichment. They're not, markets exist to teach humility, and they're really, really good at that...really good at that! But this is where you've got to just have the confidence to show up and keep spirits up and soldier on. That's what you do. What else are you going to do?
Niels: Do you have any personal rituals, if I can use that word that you do to take your mind off of that? Some people we know, people that I've been speaking to, they use meditation; they use other certain things just to help them get clarity and get some of the emotions. I know you use computers to take the emotions out, but we can't take them out completely, but is there anything that you do to help yourself?
Chris: Not myself, what I like to think that I do is for our younger people who have not seen this before, I like to think that I am able to show some calmness and an injection of good humor. I think a sense of humor is sort of important in this business, and it's often lost. That's what I try and do. If I focus on that, then it automatically takes care of whatever concerns I might have simultaneously.
Niels: What do you learn from the drawdown periods? I think it's common in most industries that the difficult times are often the times where we learn the most. What has been your experience, not necessarily just from the time with Kintillo, but maybe also historically, what have you learned from the difficult times and the drawdowns?
Chris: What I learned... let me answer this question this way... I learned almost everything I need to know about this business and trading in the Army. I learned the importance of discipline. I learned not to panic, and I learned a more than healthy disregard for hierarchies. So when a drawdown happens, as I said earlier, it's there to teach us humility, which we can all, from time to time benefit from. It's like running a marathon, it might hurt for a couple of hours, but it does end. I don't know when it will end, but it will end, and I have complete and total confidence in that. There is not a sliver of doubt in my mind that our system earns positive return over time.
Niels: That confidence, Chris, is often a confidence that investors don't share because they very often pull out of a manager right at or very close to the bottom of their drawdown. How do we, as managers, how do we transfer some of that confidence? What are the things that we need to become better at in order to give investors that confidence do you think?
Chris: I think, and what we try to do here, is we show that we have not lost our discipline or our shape. We are not panicked by what is going on. We are aware of what is going on, but we have made a commitment and a representation to take certain action every day in the same way, and that's what we do. Investors, notoriously buy at the high and sell at the low. That's an issue for them. That's them losing discipline. That's them losing panic. That's them having a mandate that requires them to take action, or for whatever reason. I don't know. From our point of view, we will absolutely keep the faith and, as I mentioned earlier I think, you'll find people who may...four years ago I'd have described them as systematic trend followers, now currently being describing themselves as volatility traders in currencies. Why? Well, because clearly the world perceives that systematic trend following isn't working, but the volatility guys are getting allocations so I might as well call myself a volatility guy and they may indeed, even, have made changes to their system, their approach, their program, whatever at precisely the wrong time. That's not what we do.
In the first flush of youth, many, many, many years ago we would say, or I would have said, everybody should have all of their money in the currency markets because look at how well we do. As I have aged and matured somewhat, I would say that's probably not the case. There is a time to be more exposed to certain assets than at other times. As long as the asset is liquid and transparent, then you should have some exposure to it, I'm sure. As we said earlier, in terms of liquidity and transparency, there's very little that beats the currency markets. I'm not responsible; I can't help what actions other people take. I'm only responsible for what actions I take, and we follow the system.
Niels: Now that confidence and, in a sense if I asked you if you ever doubted your system, you certainly I'm sure would say no in terms of recent times, but I remember from my conversation with Jerry Parker that Richard Dennis taught them to learn to love their system and essentially that's what I think you're saying that you love your system. You love all the characteristics of it - the ups and the down, and so on, and so forth. I'm curious, at what part in your career, how long did it take for you to realize or to come to that conclusion that you can have 100% confidence in this kind of approach? What triggered that, where you today can say I have no doubt that we're going to be making money going forward? Because that's not something that you get from day one when you start in this business, I'm almost pretty sure of.
Chris: Yeah, I think our system, as it exists is, and I mentioned earlier how simple the system really is. In a way it's an encoding of old traders clichés in many ways, and these clichés, from the day that I entered this business, have been seen time and time again to be proved very generally very true - not always, but very generally, very true. So even when we started the new system, or indeed the Kintyre system at Tamiso, we knew that the basis upon which it was built was true. For example, I mentioned earlier to you the winning holding periods versus losing holding periods. Losing holding periods are 6 days, winning I think 16, 18 days, whatever it is. What is that? Well, that is cut loses run profits. That's what it is. We all know that that's what works. So we look at a vast amount of statistical data on the system. For example, our system, some people might find this horrific, some people might not, but our system basically makes, of all of its trades, about 60% or so of them are losing trades, about 40% (well done) are winning trades. But when we win, we win about $2.12/$2.20 depending on how we are doing, $2.22 more than the dollar that we lose 60% of the time. That is our statistical edge. It doesn't happen on every single trade, but over the fullness of time that's what happens. It's always happened. If you and I were to sit down and say, well let's design the world's greatest trading program, something with say a win/loss ratio not of 60/40, losers over winners, but how about 50/50? If we could do that, 50/50 with a 3 to 1 payout, we would have all the money in the world. I don't mean a lot of money, I mean all the money in the world. Sadly, we haven't been able to do that. What we have done is 60/40 with a $2.12 over a dollar, and that's statistically from an investment point of view a sufficiently high enough edge to make our system one of the best performing currency systems in the world. That's all; it's not because we get anything particularly right, it's just the way the numbers fall.
Niels: Of course what you described there is, of course, the essence of the trend following, and we can go back and we can demonstrate track records from Bill Dunn, Campbell, Chesapeake, whoever they are, and they're still around, they've been doing this for 30, some of them even 40 years and as far as I'm aware a lot of these people right now, as we speak and coming up to October of 2014, they're making all-time highs. Yet, the death of trend following has been written so many times and in fact, in recent times. I want to take the opportunity when I speak to someone like yourself, who has been around for a long time, and I probably asked this question of many of my guests because I want to try and help explain or explore why is it, do you think, that investors find it so difficult to accept this proof, these facts, these are not story, these are not marketing hypes, these are proven statistics, proven numbers that are far beyond, in terms of robustness and certainly longevity when you compare it with almost any other investment strategy? Why do you think it is so difficult for them to believe in them? Because I think that's what they don't do since they're all sitting on the sideline cutting CTA exposures, or certainly not putting money into that area?
Chris: I think we've kind of skirted around it before but never actually said it, so it's a well-asked question. The fact of the matter is, they themselves lack the primary characteristics that makes trend followers successful, and that is discipline. They lack discipline. They are unable to, for whatever reason, hold or keep the faith that they bail at exactly the wrong time, and that's not going to change for these people. There's nothing that you or I could say that is going to prevent them from doing that, and there's all sorts of reasons. There's job protection; there's all sorts of reasons that they have to do this. That's the way it is. I think that it's unfortunate, for them. For me, I don't care if they do or they don't. That's their choice, but it is unfortunate, and they'll all come flooding back in, and what you find is, of course, people will see a sudden flow of money towards, in this case trend followers. They'll describe themselves as trend followers. They may or may not be, there will be one or two disasters of blowups and the bruised battered and bleeding will stagger off and say, "I'll never go near those trend followers again," and the game goes on.
Niels: Sure, sure, interesting, appreciate that. I have one more question about drawdowns and risk management. We all try to eliminate as much risk as we can, or control it to certain acceptable levels in any event. As we know, not all risks can be modeled and can be programmed. Is there anything that keeps you awake at night? Some kind of risk that you know is out there, but there's just nothing that you can do about it that you might worry about from time to time, maybe not every night?
Chris: One of the fortunate things about currencies is that, we have the black swan, which is an event that can happen at any time and who knows what. There is of course the 50/50 chance that we could be on the right side of that for whatever, such is the benefit of the bi-directional markets of currencies, and also due to the liquidity that we can soon get on the right side of it. So that sort of black swan doesn't worry me at all. I really can't envisage one having been through all sorts of things: the Asian crisis when Malaysia closed the payout window at the casino on the Ringgit, and all this sort of stuff. No, sort of been there and done that - got that T-shirt that's fine. The gray swan, that is an event that everybody knows is going to happen, but they have to keep going until it does happen...the stock market for example. You would say the stock market decline of 10%, 20%, 30%, 40%, 50%, which it's done twice already this century. Will that happen again? I don't know, but if it does, people will say, "Aha! I knew that was going to happen," so we would describe that as a gray swan. For us, again, due to the particular asset class we trade and specifically versus stocks as I said, that would actually be a happy day for us. So, do I sleep well at night. The answer is yes.
Niels: Sure, sure. Now research, on a more positive note I guess, research is something which is kind of interesting because many investors want a manager to continue to innovate and do research yet most people don't want you to change, so it's a little bit of a contradictory objective there. How do you view research, and how do you go about doing your own research?
Chris: We have two kinds of research that we do. The first is sort of general research, which are things that interest us, which are areas that we sort of poke our nose into to see if this is a good thing or a bad thing - an observation if you will on equities or fixed income or the S&B holdings of Euro, whatever it is, that sort of thing. That is something that interests us, and it might or might not have a bearing subsequently on the markets that will affect currency prices, so that's one. The other area, of course, is specific research pertaining to the system itself. So when I say we don't change the system, we haven't, we have added other price streams. We started off with 10; we now have 16. We continue looking at others. We look and toy with, but never include in the portfolio, emerging currencies, and other ways of trading these sorts of things, and we research that sort of thing. We keep very, very, very close statistical measures of what the system is actually doing. We see it as a living breathing organism, because in a way it is. It's a matrix that sort of changes every single day, or with every single tick, so our daily research to a large extend is focused on that. It's like running a nuclear plant, for example; you've got to keep a close eye on it, and we do. So there's two different kinds of research that we involve ourselves in.
Niels: Sure, sure, you say you look at these emerging market currencies, but yet you don't trade them, but do I sense something of an open door saying we may one day include them, or we're not going to include them we'll just look at them?
Chris: Well, we look at them to scratch our heads and say, why does anybody trade them? As I mentioned, the main input for our system is price. The reason for price is we can measure price. Price is the price. You either like it or you don't like it, it doesn't matter; it doesn't change the price. If you can't measure it, you can't manage it. That would be a basic view of our business, I suppose, not just the trading system. With so-called emerging currencies, you have other kinds of risks: political risks being one of them and various other things. We can't measure those. I'm not saying they can't be measured; I'm just saying that we can't measure them. So we're not going to do anything that we can't measure. Maybe other people can, and maybe emerging markets all shoot up, and you make a ton of money because you're more geared than the guy next to you. But the fact that they've shot up has really nothing to do with you. You didn't make them shoot up. You were just along for the ride, and when they shoot back down again, what are you going to do then? That's the sort of history of investment management in many ways. People who were in the right place at the right time, emerging markets, emerging currencies, I feel pretty much the same way. I wouldn't feel comfortable knowing that if you smell fire in the theatre, you want to be sitting next to an exit, and I don't know where the exits are in those things. And what I do know is the exits are pretty narrow as opposed to the G7 currencies, and so I don't want to be sitting in that theatre.
Niels: Sure, fair enough. A question that I often get from the listeners, actually, and something that they have a deep interest in, and that's very simple actually, when you do research and when you look at your models, what might trigger some kind of a yellow, or a red flag in suggesting that maybe this model is not working as it should and it requires a tweak, or maybe it requires more than a tweak. What are you looking for?
Chris: That's an interesting question. In order to gain your badge of inclusion in the portfolio, the currency stream itself has to pass a number or a battery of tests in terms of its liquidity, and this, that and the other. Once it's in, and we don't put them in straight away, obviously, they are paper traded in parallel for an excruciating long period of time and then they're tests with house money and... because real money trading is very different. Paper trading is really different to client trading, so it takes a long time for us to put something in and very often, by the time we get around to doing it, we've seen that this is in fact is not what we want to do. So we have a lot of false starts, a lot of false starts, more than you can possibly imagine false starts. We're just not 100% confident, and, therefore, we don't.
Tamiso used to describe the portfolio of currencies as like having a sports team and they've all got their Super Bowl rings on, and they've all won the World Series, and they've all got their pictures with the FA Cup and whatever it is, and that's great, but you think well, that guy is not playing terribly well. Maybe I should drop him and bring in this other new player, and then just as you're thinking that that is in fact what you're going to do, the existing player goes on and scores seven goals, or hits nine home runs, or whatever it is. It's the same in our portfolio of sports play out currencies. A good example of this is the Australian dollar. I have no idea how many times we've come close to firing the Australian dollar, and then, all of a sudden, he's a superstar. As I mentioned at the outset, we do with what we do, the way we do it, because of what we don't know, not what we'd like to think we know, or what we suspect we might know. It is what it is.
Niels: Right, right, I want to jump to the next topic which is a little bit about the business side of your firm. I think both you and I know that many people, if not most people in our business do very similar things, but some, as you've alluded to before, some are better a dressing it up and attracting investors. How do you try to stand out from the crowd, so to speak, in order to attract your investors?
Chris: From about 2000 to 2006 we sort of dropped out completely. We didn't make any effort at all. From about 2007, 2008 we noticed that we were substantially better than some of our peers, and so we've made a number of forays into marketing, all of which have been disaster. If we've had on occasions one or two people working directly for us. We've had third party marketers. We've done all sorts of things, but the problem with it is, is entirely me. The reason we failed at that aspect is because of me because I lack confidence in somebody else making representations about us in order to get a paycheck. That's basically what it comes down to, because I'm the person that has to live with that representation, not them. Marketing has always been a disaster. It's one of the things we've done really, really badly. How do we distinguish ourselves otherwise, well we try to produce the best numbers that we can, and we tend to outlive our competitors, so maybe it's a naive belief...probably is a naive belief, but over time people have in fact noticed that. We don't have big golf tournaments, and we don't fly people around for parties, and we don't host conferences and all that sort of stuff because, as I mentioned at the very outset, doing things the way we do things, we don't in fact think of ourselves as being particularly intrinsically interesting people. What they really want to know, what they really want you to tell them is tomorrow's prices, and we don't know tomorrow's prices.
Niels: Sure, sure, and what about the flip side of that? Meaning, OK, maybe you haven't done much in terms of attracting new investors pro-actively maybe, they have found you, but through a difficult period, generally in the industry, even client retention has become a difficult thing for many managers. We've seen billion dollar managers be cut to 50 million dollar managers without being specific, but what's been your experience in that?
Chris: We've had a particularly loyal client base, some of which pre-date Insch, and so they know, over the fullness of time, and they have a realistic expectation of what can and cannot be done in this business, in our asset class, and so we haven't had a lot of difficulty with that. We don't have any retail clients, for example, and the clients that we do have tend to be profession banks/real foreign exchange practitioners themselves, so that's been a big advantage to us. We don't have to explain to them why we trade currencies at the outset. So their level of understanding has been very high because they know us very well and so we've probably, I don't know how other people have done, but we've probably done better than most in terms of retention.
Niels: You've also chosen to be, if I can put Lugano in that space, being a little bit outside in terms of location, a little bit outside the big busy parts of the financial centers although you have a representation office in London, but certainly from where the main part of the business is operated from, Lugano. Why Lugano and what does it give you that makes you choose to be there?
Chris: When my wife and I first decided that we would be moving to Switzerland, the obvious place to go was Geneva, but I don't particularly like Geneva, as a city. Maybe I shouldn't say that, but I don't. I don't like Zurich, and we happen to be sitting in Lugano in Piazza della Riforma, here, and my wife said to me, well this is a lovely place, why don't we just stay here? So we did. But in those days it wasn't the intention to build the business again. So what drew us to Lugano was quality of life. We have all of the lovely weather. We have the passion of the Italians, but guess what, the place is run by the Swiss. This is brilliant, absolutely brilliant, and so we're very happy here, and the reality is we could be anywhere. We could be on Park Avenue, Park Lane, or in Lugano. It doesn't make any difference as to how we would run the business. It's just that the quality of life here is, in my view, very pleasant indeed.
Niels: Absolutely, it's lovely. I've got a couple of more questions that I want to talk to you about before I go to the last section. Let's try this one, because I think it's interesting to also find out what you believe are the important questions and therefore, I wanted to ask you if you could ask a question of the next guest on Top Traders Unplugged, so I have two questions here, what would you ask them? If I could add the caveat, for example, and say what if that next guest was David Harding, what would you ask him specifically?
Chris: I guess if it was David Harding I would ask him for some advice. (laugh) David is, I think a specifically phenomenal individual, of all of the people that I've known in this business, he is the one person who has, and I'm sure you're familiar with his career, he has sort of made lightning strike more than once. I mentioned earlier that some people just happened to be in the right place at the right time, well it's true you're better off being the idiot in the right place than a genius in the wrong place, I know that. Very few people can make lighting strike twice or more; he has. He's pretty much unique. He's... genius is a word that's often thrown around willy-nilly in this business, but he would I think get a tick in the box from most people for that, as opposed to somebody who is just merely brilliant and passing through. That description does not fit David. If I was to ask David Harding any question, I would say, David, do you have any good advice for me. That would be David. Other people I'm not entirely sure, because without knowing specifically who they are, I wouldn't know, which is why the David Harding thing caught me on the hot, but it's a good question. I tell you one thing, that was told me some time ago, and this is the sort of thing, the talking heads on CNBC - free advice is always accurately priced: it's worthless.
Niels: Let me put it this way, and without revealing too much, my next guest is one of the founders of AHL. I can't reveal who it is.
Chris: Let me think. That could be really, really hard. (laugh)
Niels: Another question that I have for you and that is of course that through all of your career you've been through hundreds if not more of due diligence questionnaires, meetings, phone calls, whatever they are, but I want to ask you what is the thing that these investors (potential investors) whom you are talking to, what's the one question that they forget to ask, or they don't know to ask you?
Chris: That is a really good question. I tell you one of the things that we do which we've had quite a lot of success with for those to whom we've proposed it, is that if an investment group, if all things being equal, and it's a realistic probability, and they do in fact have assets to allocate or whatever, we will run in effect a dummy account for them and that removes their fear, I think to some extent, of algorithmic trading which they all think is going to be some sort of Hal meltdown, or some enormous leverage. So over a period of weeks or months even, they can actually see the trades. So a question that they might ask is can I try it first? The answer, that's why we do these dummy accounts, we don't do it for everybody Ad infinitum, but we will do it for a period of time so you can see what it is you're going to be investing in. By doing that it builds their confidence. They can see on their desk, in their trading room, or whatever, exactly what we're doing on a daily basis.
Niels: How long would you run an account like that?
Chris: The longest we've done is about six months or so.
Niels: How was the reaction by the investors when they realized they would have made a lot of money had it not been a test account?
Chris: (laugh) In our particular case that did happen. It doesn't always happen because I'm not necessarily saying, "Aha! You see, you're fools, you should have written a check, and now you didn't and now you're poorer than you would have been otherwise." That's not the idea. The idea is just to show them how it works, what are they going to be seeing, what likely risk are they going to be... you know our margin of utilization for example is around about 2%. Compare that to a CTA of futures. It's tiny, tiny, small bear stuff.
Niels: I fully understand why you're doing it. I think it's a great idea. I've never thought about it that way, but the reason I asked you the last question is of course these people are also human beings and therefore we know that their emotions, and the greed and the fear and all of these things will play in, I just wonder what the reaction will be from people who obviously either they would have said after six months I saved 5% because you lost 5%, or they say, "Oh damn! I missed the 15% move," so I was just curious whether you'd seen some funny reactions over the years.
Now the last section, Chris is really something I just call general and fun. It's a little bit of everything, where I just dive into your experience and also trying to maybe get a different side that maybe you don't show in your normal DDQ, so to speak. I wanted to ask you, the entrepreneurial gene... you've been doing this for awhile, but has it always been there? Was that a big part of your quest, if I can put it like that, to say one day I'm going to run my own shop? Was it more coincidental that you ended up in this situation?
Chris: I wouldn't describe it as coincidental, more accidental in my particular place. I am very fortunate because I happen to have been associated with people who are incredibly talented in every aspect of the business, even at a very, very young age - AHL. These are truly gifted individuals in their way, and that has been proven by longevity and results. It's indisputable. Other people who have passed through AHL as alumni, in my view, it sort of dwarfs whatever achievements may have been made by, for example, the Turtles. AHL was an extraordinary phenomenon. I was very fortunate, or some would say unfortunate to be with Bob Tamiso, because Bob had certain views, many of which I took onboard absolutely 100%, and some of them have been very helpful, and some of them have been less helpful in term of my regard for people and various parts of the industry. It wasn't really my intention. As a consequence, I never really thought, "gosh I can to this better if I was by myself I could do this too." That was never really what drove me on or made me want to start up. I do this because I love it. I can't think of what else I would do. If I didn't do this, it would worry me. In fact I used to have, this sounds silly, but back in the... around the time of the Asian crisis we were very successful and had lots of money and all this sort of stuff and it used to disturb me, and I would have dreams that I had lost all my money because somebody told me on the golf course that what I should be doing is opening a string of dry cleaners, or something like that. I don't know the first thing about dry cleaners, but it struck me as a really good idea, so that's what I did, and I lost all of my money. The way to avoid that is to continue doing what I do know something about which is this. That's why I'm still here; I guess. As Tamiso would say, it's how we define ourselves.
Niels: Exactly, absolutely. Is there any book that you've come across through all these years that has made a particular impression on you and that you would recommend either to people who want to become a manager or people who want to become an entrepreneur, people who want to invest in these strategies, something where you say, yeah, this is something that they should spend some time and read, is there anything that springs to mind?
Chris: The obvious one I suppose would be the Market Wizards One, Jack Schwager. That's for traders. If you want to be a trader; traders are different to an investment management sophisticated company that we have now. I suppose the Covel book, Trend Following and that sort of book are always interesting. A lot of them are sort of war stories type books and glorification, glamorization of people, but they're interesting stories.
Niels: Why do you think if I may just interrupt here, why do you think these stories are so important. What is it that they do for someone like yourself, and what you think it would do for others for them to read them?
Chris: I think that you can draw certain conclusions... parallels and conclusions between yourself and somebody else, and what they say about themselves is always very interesting. Some people try to convince you they're a big hitter; or some people try and convince you, as we said, that they know tomorrow's prices; that they're highly PhD driven and the world's most brilliant person; and all this sort of stuff. Well, maybe they are, and maybe they aren't, but you can sort of compare and contrast with what some of these trader stories actually say about them as individuals, which is interesting. There are stresses and strains in this sort of business which you alluded to with your questioning earlier, that do in fact, or can in fact take their toll, and the question is how do you handle that, can you handle that? Some people can't handle success.
Years and years ago there was a cartoon in the New Yorker that Bob and I used to have framed in our offices in New York, and it was of two hobos, two tramps surrounded by gin bottles and whisky bottles and open pizza boxes sitting in a back alley somewhere, unshaven and unkempt, and the caption read, one saying to the other, "You know the irony is I really could have handled success." Some people can't handle success, and that's where your ego thing steps in and becomes an impediment to, or changes your personality. People build an international headquarters; they get a second wife; they do all sorts of stuff, and that changes people, and, generally speaking, not for the better. You see it in corporations as well. You could say that there's a very big company with three letters beginning with M that has changed itself, and for the better? I don't know. Time will tell.
Niels: Time will tell indeed. Speaking about failures, you mentioned earlier what you perceived as being your biggest failure. I think, if my memory serves me right, you were sort of referring to marketing or lack of it maybe, tell me a little bit more about that and what has it taught you in a sense, or how are you going to deal with that?
Chris: I don't think I'm ever going to deal with it successfully, and I've come to that sad conclusion. As I mentioned, in this business you're only as good as the representation that you make, and I'm perfectly happy to make representations, which is virtually none. All we're going to do is do what the system says. I'm not comfortable about other people making representations about me, or about what we do here and I just can't let go of that, so I wish I could.
Niels: So it's a control thing.
Chris: Our Chairman is a man called David Anderson. He used to be the Chairman of Man, when I first met him at AHL years, and years, and years ago and he recently just absolutely stunned me, completely floored me, when he said you're a control freak. You know, I never considered that, but I guess I am. In terms of the research and the trading, and this, that, and the other I have no issue with the people who we have, but for some reason handing over the representation part of my business is not something I am at all comfortable with, and I don't think I ever will be, and it's cost us tens of millions. There we are, isn't that sad?
Niels: We're all different. That's what makes you unique, isn't it?
Chris: Yeah. (laugh) For better or for worse.
Niels: For better or for worse. Generally speaking, Chris, what's the most difficult now-a-days that you have to deal with as a hedge fund manager or CTA do you think?
Chris: Well, the obvious, and probably accurate answer is regulation, of which I am not a committed fan I would have to say. My observation would be that this business has never been more regulated, more expensively regulated or more incompetently regulated than it is now. I see it getting worse, not better. When I entered into this business, in the early 1980s we had sort of... we would talk about financial disasters, we had Continental Illinois perhaps, then we had the Savings and Loans, then in the UK we had Barlow Clowes and then Barings, God forbid. Barings was $800 million - that's a rounding error these days. At each and every turn and twist. Niels: It's a fine almost.
Chris: (laugh) It is, it's half of a fine. You'd be clicking your heels if you were JP Morgan and got an $800 million fine. These days, every turn and twist, there's more, and more regulation. It's just got worse, and worse, and worse. There's a direct correlation, talk about correlations, between the amount of regulation and the size of financial crisis, and it's there for all to see.
Niels: Which means the next few years will be interesting to follow, no doubt. Now, a couple of question left and then I will let you go. Can you tell me a fun fact...I know you told me a story earlier today which actually was a bit fun but it was before we pressed the record button, but I don't know whether that's the one you want to share, but anyway, can you tell me a fun fact about yourself that even people who know you well may not know about you?
Chris: I don't know if it's a fun fact, but most people assume that I'm brim full of confidence, but that is, in fact, not the case. I'm probably reasonably adept at covering it up, but I do get... in terms of giving speeches or this sort of thing for example, I'm very nervous, which I don't think is the view that most people have of me.
Niels: No, absolutely not, but I think that's the human part of all of us isn't it, that... you know I think it's been said, and maybe it's part based on research that that is, apart from dying, our biggest fear is to go on stage and give a speech.
Chris: I love doing it. I'm always invited to do it, and for whatever reason, I guess it's because they never know what I am going to say. I might say... I don't have a corporate line to follow.
Niels: Maybe their more worried than you are then.
Chris: Well, I hope so. (laugh)
Niels: (laugh) Great stuff. Anyway, my last question. We talked earlier today about that investors might not be asking you the right questions, and they fail to ask you certain questions, so I have to be tough on myself as well, and that is, was there anything that I missed today? Something that I should have asked that I didn't ask, just to make sure that I've done justice to you and to Insch?
Chris: Well, I don't think so. I'm astounded, impressed, and to some extent appalled at the depth of the questions and the knowledge behind them. If there are I wouldn't tell you because I wouldn't wish it on your next guess, especially if they're from AHL. No, I wouldn't make it any harder on them.
Niels: Great, excellent. Well, before we finish, do you mind telling our listeners where they can best reach out to you and to learn more about Insch Capital Management?
Chris: Sure, our website is www.inschinvest.com. We're based here in Lugano and all the details and indeed almost all of the materials that we have that would be on initial interest to a potential investor are available for download on the website and we are delighted to show investors through a web presentation precisely how the system works, which I think is fairly unusual, and unique. Most people try to put some sort of mystique to it, but for us we'll show you precisely how it works, and I think that's something we're very proud of, so we're happy to do it.
Niels: That's great. Yeah, I did notice that your website was pretty detailed and of course, I will be also making links on the show notes page for these episodes with all of your contact information so that investors themselves can reach out to you and hopefully learn a lot more.
So all I have to say on a day when I know you're a keen golfer Chris, on a day and this will reveal that we're doing this on a Sunday afternoon, but on a day where the Ryder Cup is taking place, I have to give you extra credit and say thank you ever so much for taking the time out to speak with me. It's been a great pleasure. I thoroughly enjoyed it, and I appreciate the transparency and the honesty in your answers and I look forward to staying in touch and to, hopefully, connecting again and hear how things are working out down in Lugano.
Chris: Thank you so much. I thoroughly enjoyed it, far more than I thought I was going to, to such an extent that I don't even miss the Ryder Cup. Thank you very much indeed.
Niels: You’re welcome. Take care, Chris and all the best.
Ending: 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 ensure 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.
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Date posted: 02 Oct 2014no comments