“The CTA community, as an asset class, is one of those that you might not want to bet on, but it would be wrong to bet against.” – Chris Cruden (Tweet)
Our next Year-in-Review conversation comes from a manager who considers 2014 to have been a disappointing year for his firm. As a trend follower in the currency markets, Chris has unique insights into what shaped 2014 and how the next couple of years look for his industry. He also shares the importance of having discipline and sticking to your systematic models, which builds investor confidence.
Thanks for listening and please welcome our guest Chris Cruden.
In This Episode, You’ll Learn:
- Why the year was a disappointment for Insch Capital.
- As a currency trader, how he differs from firms that trade different markets.
- How the carry trade has all but disappeared.
- How he reacted to world events in his business.
- Why he is very proud that Insch stayed the course over 2014.
“Trading the way we do takes a great deal of discipline.” – Chris Cruden (Tweet)
- What he thinks of the emerging currencies.
- How his investors felt about 2014.
- Why he is hopeful for more divergence in the years to come.
- How Chris will try and avoid a repeat of the 2008-2009 inflow of capital to the industry.
Resources & Links Mentioned in this Episode:
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: firstname.lastname@example.org
Follow Chris Cruden on Linkedin
Chris: One of the things we would pat ourselves on the back for is to continue to do what we represent we're going to do. And that's very, very, very hard. It's actually quite draining in many ways, to come in and see a down day after a down day or admittedly a small down day. But the accumulative effect, it can be hard. We can pat ourselves on the back because we did have what it takes to continue.
Hello, this is Christopher Cruden from Insch Capital Management, based in Lugano, Switzerland. I'm the CEO of the company, and you're about to hear my end of year review on Top Trader's Unplugged!
Introduction: 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. Here's your host, veteran hedge fund manager, Niels Kaastrup-Larsen.
Niels: Welcome back Chris, for this review of 2014 where we look at the big events from the point of view of your trading strategies. I want to explore both the ups and the downs, as well as the big take always from what can only be described as a great year for systematic trading strategies in general. But as we know, just because you're systematic in your trading, it doesn't mean necessarily that your strategy deals with the market events in a similar way. But I want to just jump right into it Chris, so tell me a little bit about 2014 from your perspective. How did the year evolve for your firm and for your strategies?
Chris: Well for the strategy and for the currency program it was undoubtedly a disappointment. It was our second losing year in 14 years. And given the fact that we've been so accustomed to making money, that came as a bit of a surprise to us. January 2014, I think, was the main culprit. Now what the exact reason for that is I don't know. But in that month, we lost 2.41% on geared basis. Nothing really dramatic happened to us for the rest of the year, but we did end the year down a total of 3.16%. Which by our measure, is as I say, a disappointment.
Niels: Sure, no, absolutely. I mean obviously you're specialized in one sector, unlike many other CTA strategies. But when you look inside the various crosses you trade or the various currencies you trade, which ones stood out as the biggest contributors, both on the positive side and on the negative side?
Chris: The way our system is calibrated is very interesting. And that is to say that there aren't any great heroes, and there aren't any great villains generally speaking. And if there were, we'd be concerned about that. What we find is small... other than January, small remorseless losses on a monthly basis, which become very, very tiresome indeed. So there's not one big bad guy, and not one good guy. But given the fact that we had held up... you say it's a good year for systematic traders, and it was, 2014... the preceding couple of years had not been good at all, but it was okay for us. We had held up remarkably well considering what we do and how we do it, and some of our peers held up less well. It's fair to say we would describe 2014 as the year in which the crown slipped.
Niels: Sure, but I mean you're absolutely right, and this is the whole point about diversification. I mean, certain strategies thrive in certain environments and so on and so forth. I completely agree with that. Given the fact that you call it a slight disappointment, I wanted to just ask you a little bit about... and maybe you can remind the listeners in any event, in terms of maybe the underlying strategies inside the program: You know, trend following could be one, but there may be others. Which ones...or was there anything you felt, "we could have done this a little bit better?" Do you look at the year like that or is that not really the way to look at it when you look inside?
Chris: Yeah, looking back is not a particularly profitable activity, it's... what should we have done? Well we should have faded the system at twice the gearing and it would be up 18%, but we didn't. So unfortunately we are where we are. We are where we are, in the main to answer your question specifically, because although it had been a condition that existed for a number of recent years, low volatility finally affected even us in the currency market. As I say, we held up well previously, but low volatility finally did for us. Now, if you look at the four basic inputs for a systematic system... and there are others, but let's just use some basic definitions. You have purchasing power; that doesn't really work. Vol works sometimes, and other times you get stretch it out dead. And then there is trend/momentum, types, try to break out system... something like that. And there is the carry trade which used to be called the interest rate differential.
The carry trade is, for us, and I assume for most other people who do what we do the way that we do it, is the major contributor. Interest rate differential is obviously, and clearly, and demonstrably been the main driver of currency management returns over the years. With interest rates at basically zero or thereabouts, central banks keeping it that way in a sort of combined and coordinated manner, the carry trade has all but disappeared. Now that, for people like us, or for us specifically was problematic last year; for others in the preceding years, and it finally caught up with us in 2014. But we're sort of looking at our program with two major inputs: what we would call momentum or trend, and the carry. Carry doesn't exist, so we've been hopping along for a couple of years now. As have most other people in our business who do things our way.
Niels: Sure. Given the fact that we obviously saw some volatility expansion in the currencies towards the end of the year, we certainly saw some trends coming in at the end of the year. Did you still see... now it may have been swamped by other things, but did you still see an expected return from your trend based models and volatility models, perhaps?
Chris: Yeah, well you're absolutely right. It was quite encouraging towards the end of the year. September, for example, was a very good month for us. In that January was down 2.41%, September was up 1.21%, and again December was a pretty positive month as well. So there was a lot of encouragement to be taken. And indeed this year has started off very positively as well, and with a bit of good fortune and a following wind, we can hold on to what we've made so far in January 2015.
Niels: Sure, absolutely. Now one of the things that I think many of the listeners will remember the year from is really some of the events that we saw: you know, Ukraine, Russia, and of course the oil collapse. And of course, not trading commodities specifically in the program still, these events have some impact on the currency sector. If you were going to put a few words on how you could say you reacted, or how these events either specifically for the strategy evolved or just generally how. Because I think the problem is, many people when they hear these stories or hear in the news about events like Russia and oil, very often it has a negative impact because traditional investment strategies may have been hurt by these events. But that doesn't necessarily happen in the alternative space where we operate. So, are you able to put a few words on the year and such when you look at the events that we all remember?
Chris: Yeah, that's a couple of things. Obviously the interest rate situation is something I've mentioned. That is unfavorable to us but hasn't dramatically changed during 2014 from the start to finish. So, that hasn't been a major factor; it is not something we could use as an excuse if you will. The energy... energy has been very interesting to us in that those commodity based currencies. Specifically Canada and to some extent Australia as well, have shown movements that in the environment, all things being equal if it hadn't been an energy situation, those moves might have not taken place. But we're not in any sense predictive.
What we know is what we don't know. And the future is one of the things we don't know. So when we look at what might happen we're sort of the scaredy-cat guys. We're not out there making big bets, so our leverage is very low. So people often talk to people like us or people who do things the way we do and say, "Yes, well what if? What if such and such event happens?" As if we and our type are the only people who are exposed to that sort of risk. Well, the reality is that we're all exposed to that sort of risk. None of us can tell the future, no matter what we might imply.
So the betting small, remaining with low leverage is a good way to mitigate that risk. We are trend followers; we're not event players. If you told me that Bundesbank was going to do something or the ECB was going to do something else, then that would be interesting information. But I have to confess, I wouldn't exactly know what to do with that information, nor would I know when to stop doing that information. I assume you wouldn't call me and tell me that either. So we do what we do in a highly disciplined and systematic way. And the statistical evidence is that, over time, we make a substantial return for our investors and don't expose them to particularly substantial risk given the rate of returns that have historically been offered.
Niels: Sure, sure. Now you know, being at sort of year end, and often that's the time we both in business and in life, we sit down, and we reflect on the good and the bad and the experiences we've had during the year. What is your highlight from 2014? Now I know again you said, you know, it was disappointing from a performance point of view, and it was the second losing year out of fourteen, so I think we need to put that into perspective. But given that it was the second losing year, and you've had few of them before, did you learn anything from this? I mean to me, this would be a year where you could perhaps actually learn something new about the strategy?
Chris: Trading the way we do takes a great deal of discipline. If you've got a trading system and you follow the trading system, then that's one thing. You've got a trading system, and continually change it. Then you have to question, or investors should question whether you've got a system at all. One of the things we would pat ourselves on the back for, here, is to continue to do what we represent we're going to do. And that's very, very, very hard. It's actually quite draining in many ways to come in and see a down day after a down day, or admittedly the small down days. But the cumulative effect, it can be hard. We can pat ourselves on the back because we did have what it takes to continue. Because what was happening was within the envelope of what we could expect. Not what we want, but what we expect.
Now my guess is, and I don't know that this is the case, but my guess is... because I don't know what other people do... but if you style yourself as a systematic trend follower in currencies, and most people in currencies tend to do that. If you did well, or particularly well in 2014, or in that matter since 2010, I for one would question first of all if you are, in fact, a systematic trend follower, because there haven't been many coins on the railroad track to pick up. So if you have made a lot of money I'd say, "Well okay, I know what you're doing but it's not the same as we do, and I, in fact, do know what we do."
The other thing is for investors, and this is quite difficult and dangerous I suppose, is that people... managers sometimes lose confidence in themselves... or because of their high gearing, or high losses, or expectation, or inability to raise money based on the last couple of months, couple of years performance... they change their system. And as I said, if you change your system, investors are perfectly within their rights to ask if you've got a system at all. As I say, if there's one thing we can be, sort of through gritted teeth, happy about it is that we did stay the course. And it begins to look certainly from September through to close of play on Friday that we're beginning to see the rewards for that, which makes us measurable to investors because, you know, are you doing what you say you do and what you've done in the past? Otherwise I'm just looking at some gobbledygook numbers.
Niels: Yeah, no, I mean you bring up a good point Chris. And I think it is an interesting conundrum because it is the fact that a lot of investors, they don't want change because they... as you say, they want to know what they bought. But at the same time they require research and innovation to take place, and those two things are not necessarily compatible. And you know if you have a big research team, you know obviously if they find something, you would expect to implement it. Now I think, of course, the explanation, the dialog, and all of those things are then crucial. But it does mean that... and this is why I ask that question in our normal conversation, and that is... How should we read a track record? It is very difficult.
Chris: It is very difficult. One of the things we do, and we've had success with this, because we don't do marketing per say, or what marketing we do we tend to do extraordinarily badly. But what we do, is if people have an interest, is we'll run one of these demo accounts on fourth or whatever gearing they want to see, so they can actually see. This is quite important, I think especially for currency managers because people do, as you say, have the perception that we're standing up shouting at each other in trading rooms with lots of telephones and all of that sort of thing. And that is a far cry from what actually takes place, at least the way we, and the way most others I assume do it. So if they can actually see what the trades are, what size they are, what risk is actually being taken, that is a comforter. And I don't know, but I would imagine other people do that too. But it is something that I think especially in bad times calms the investor.
Niels: I want to deviate a little bit from my script here. Because you're an expert in currencies, I have a question for you. The Ruble - I know you don't trade it as far as I'm aware. But you obviously are I'm sure, familiar with what happened last year and the weakness of the Ruble. But you know, I use it as an example for something that could well happen in other currencies. I mean The Ruble is not necessarily a small currency, it certainly relates to a big country. So I think it could be relevant.
Now what I heard coming into the end of last year was some very unfortunate things for currency managers who traded The Ruble. Because some market participants, some banks, or brokers that they trade with suddenly stopped providing... trading... what do you say... market making or whatever we call it in The Ruble. And essentially these guys were forced to close out positions at the worst possible time. How do, when you deal with currencies that are not necessarily traded on exchange where you could have big moves like we saw last year. How should investors and how do you as a manager take that kind of risk into account?
Chris: Well for us we stay well clear of it. It's just not a game we're remotely interested. Now having said that it's true that over the, I can now say decades, we've done a substantial amount of research into the so-called emerging or submerging currencies, depending on how you want to style them. And we have... this is one of our failures, been unable to come up with a sufficiently robust strategy that can be systematically and continuously applied that would produce acceptable risk-return profile in those currencies. Now I'm not saying other people can't do it, and they're highly successful, and I hope they are. But overshadowing what our research has come up with... I remember when I first came into this business, which was shortly after Queen Victoria died, they used to teach us seven things that you have to know about how to exist in a market. The first one is liquidity, transparency, and the third was market integrity. I confess I've forgotten the other four, but those were the top three. Well, liquidity and transparency... they're not there when you need them most in those sorts of currencies. And if you didn't know that before and have had to learn the hard way with other people's money, well, I'm sorry. That probably wasn't a smart thing to do because this is basic stuff, this isn't hard. Market integrity, I don't know, Russia's a country that defaulted, what, in '98? People queue up to throw more money at it. It's a basically command controlled economy. It's not the sort of place I'd want to go.
Niels: Sure. No, no, I take your point, and it is very important. Now just tell me a little bit about 2014 from... and I know you say you don't market yourself, which is true but not true on the other had I think, because you do explain what you do very well in my opinion. But tell me about the conversations that you might have had during the year with investors or potential investors, given generally I think people, who invest with your strategy, are probably also invested in the more, say, traditional CTA space... which had a very substantial year in 2014. Do you sense that the conversations with clients or potential clients, did that change during the year because of that?
Chris: Yes. To the extent that, our clients, because they tend to have been for us for a very long period of time and they understand because they are in the main currency investors rather than fund to funds who've got all sorts of different things going on. They are specialists in the same extent that we ourselves are, so they understand what's going on. Other investors and potential investors, and allocators I suppose is what we're talking about here. I discern, have become more and more shrill and slightly more desperate, and that's understandable, because the equity markets are... I'm not an equity specialist, so I wouldn't say, but it looks awfully tall from here. And trees grow very tall but they don't reach the sky, and this one's getting up in the clouds I think. And I think most people realize that. The fixed income markets, the bond markets... again, I'm not a fixed income specialist but it seems to me that writing a buy ticket for bonds is like writing a suicide note, and I just don't think that's a good idea.
So they're desperately looking for things, and when they talk to us, what they're looking for, like all investors... kind of like retail investors in a way... is they're looking for some guy that has special insight. Some guy that knows something, some guy who's got the hot hand, and that's not us. We lead off with that! That's not us. But I have found that they are becoming ever more sort of graspy or desperate... Is that too strong a word? I don't know. But because they've done so well in fixed income every generation, bond managers make money. Fair from sake, despite themselves they tend to. But the reason, that they do, has nothing to do with them. Equity managers have been given an enormous boost by the central banks, and QE and that sort of thing. But what do they do for their next trick? I don't know. And I think investors now realize that, and they're becoming slight... not panicked perhaps, but... where's our next thing? And they don't know enough about alternative investments because they haven't had to. It's been fixed income and equities for the past five years. So now it's all a bit sudden, but now they're getting a bit toppy and maybe a bit more concerned, and I think that's palpable.
Niels: Sure. No, I mean speaking about that person who has "insight" and the special one. I mean often these people appear in the mainstream media. And I don't mean this in a negative way towards the person I'm going to mention now because he, I believe, has a very solid foundation in this... and that is Mohamed El-Erian. Because I noticed that he was on the CNBC a couple of weeks ago, and he basically said something like this: "If I could sum up the world in one word, it would be divergence." Now, you and I know that a lot of hedge fund strategies which are very popular and have been very popular... they thrive in a convergent environment. Not necessarily a divergent environment. Because convergence I think, or in this case divergence is not just about the markets. It's also politically; it's also from what the central banks are doing. So given the fact that you trade currency, so you see this coming in different directions, I just want to ask you, what do you think it means for... or what potentially could it mean for the investment world and especially the alternative investment world if Mohamed El-Erian is right about this? That actually the world is becoming so divergent for the first time in a long time?
Chris: Well this is a good and clever question. It sort of loops back to what we said at the very outset. One of the great drivers for our business, and as I said we're not unique so other people who do the similar sort of thing to us, has been the carry trade. Which, of course, is a form of divergence, writ large. So that sort of divergence, if he's right, would be, one would assume, good for what we do and people like us do. How it would work for other people, I'm not entirely sure. I could see that it wouldn't be hugely positive for say, long-short strategies. I don't think there's going to be a divergence in fixed income. I think that's just down. For me... I didn't see the interview, but based on what you've described he said, I would say that could and should be positive for people like us.
Niels: Sure. But I guess, certainly in my own personal opinion what I think that it does mean is that a lot of investors in the hedge fund, alternative investment area need to perhaps rethink their allocation, which is currently, as Morton Stanley came out saying about certainly the allocation to CTA's must be very, very small at the moment. Because only 2% expected that it would be the best strategy to be in, in 2014, and clearly 98% were wrong. So in my mind at least, it must mean there are some potential allocations that need to change direction.
Chris: I very much agree with that. These big firms who basically, they pay the light bill with their trading desk in equities, fixed income, and various other things. I love to hear their views on CTA's. I suppose to some extent we would be regarded as a CTA. And I noticed that in terms of allocations and the recommendations they make to their clients, they are always the typical day late, dollar short, in the wrong place type investors. The CTA community, which is where I suppose I started off a long time ago, as an asset class if it's an asset class, and some probably still don't regard it as such, it's one of those that you might not want to bet on, but it would be wrong to bet against. And that's I think the story for 2014. It was the story after when the financial crisis began. And the dexterity of commodity trading advisers and the instruments they use, is not to be underestimated at all.
Niels: Sure, now on that note, and I'm almost done for our short conversation today. But I just want to home in on what you just mentioned there. Clearly after the financial crisis, 2009, 2010 maybe even, we saw big inflows to the CTA space or the systematic strategies, let's call them that, because of a great 2008 and everybody realizing that hedge funds maybe weren't so hedged. Now, I have a feeling that 2015 and maybe 2016 we could see a similar thing happening. Where we see a lot of assets coming back into this space because of performance. But we learned that the assets that came in after the last crisis were not sustainable. They basically disappeared almost as quickly as they came in when they realized that maybe they didn't quite understand the strategy or maybe it was a bit disappointing. So how do we as an industry and how do you as a manager, how do we avoid a repeat of the same very unstable AUM in and out that we saw a couple of years ago?
Chris: I think we have to style ourselves in a coherent, sober, sensible way. Again, there's a lot of people who believe that the CTA community for example, sort of wild guys from Chicago who scream and yell; and then you've got the other end - they're just a room full of PHD's who've never even seen a soybean. And somewhere in-between that, we've got to style ourselves as a... the ultimate, of course, is Winton and AHL to an extent, and people like that have done ferociously well at being taken seriously. And one of the problems that you have with our kind of industry is that the cost of entry is about zero.
So if it is discovered that allocations are being made to CTA's, you're going to witness a giddying rise in the number of CTA registrations. Because why wouldn't you take a punt with somebody else's money and keep 20% of whatever's made? And you'll see that, I think, from the big firms. In the past, it's been little guys, two or three guys get together with a computer program and say, "Yeah, we can trade." Whatever it is, some futures program. But you may well see it, this time, from the larger firms without naming names, the larger mutual fund type firms. And the reason for that is that they also know that the game is up with traditional buy and hold long only fixed income and equity strategies. And they are paid on assets under management just like we are, and as a percentage, our payment for assets under management tends to be higher. They are nothing, if not marketing organizations.
The fact that the first thing, that they will tell you about themselves, is how much money they have under management. Well, that speaks to primarily in my view at least, the efficiency and the expertise of the marketing department. Not necessarily of the investment management department. So if they turn their marketing onto products such as ours, or as they will sell them "alternative investments," then they will inevitably raise a lot of money. There is a danger to that. Not only because good people who've been doing this for a long time with some real understanding may well get squeezed out. But also because, as I mentioned before I think, markets take on the personalities of the participants. And if this, yet again another "wave of money" from big firms arrives in the markets, that could have a disruptive effect. And these people are not, I would maintain, expert. They are not experienced no matter what they may say. You can't take a guy off the equity derivatives desk and say, "Jon today you're a CTA, go to it boys!"
If that happens, I think that could be a bad thing for our industry. And the other bad thing for it of course, is that it would place pressure on fees. And fees are something that we generally as an industry try not to talk about. But when these big boys come in, the first thing, they're going to do because of the economies, is so scale, is put pressure on fees. And that will have a detrimental effect on smaller managers who can't stay in business with small amounts of assets if they're flaying off to the bigger firms. And so in other words, they'll buy a business which I guess is fair enough. But only if they're offering the same high level of experience and expertise. Which just a personal view, I would question that they're able to do.
Niels: Sure, no, I think you're right. And I think, also, I guess it probably will translate into a lot of these beater replication type, we can do trend following for nothing type of strategies.
Chris: Yeah, you already seeing it. I remember somebody saying years ago if Mercedes make a very fine car, which we all assume that they do, that's a wonderful thing. And Mercedes will sell a lot of those cars. But it doesn't necessarily imply that there's an intended increase in the number of qualified Mercedes mechanics. So sooner or later you're going to be seeing some very fine shiny cars broken down at the side of the road. And this is not only specific to our business, it's specific to all businesses. It's called supply and demand.
Niels: Absolutely. I'm almost done for today, but before we leave it, I just want to ask you if there's anything that you want to bring up, anything that you want to add from sort of the 2014 looking into 2015 that you think would be useful to just touch upon?
Chris: Yes, I do believe there's going to be an increase in volatility. I do believe that the dam will break. I do believe that for us and for others who do what we do and indeed the alternative industry, specifically the CTA industry in general, this will be a very positive thing. And if investors can concentrate and learn how to truly interpret a track record and what are the underlying activities beneath that track record, they will profit quite handsomely from 2015.
Niels: Sure. Final question Chris, and you know that I always come up with something a little bit weird at the end, so I'm going to try with this one, and it's very simple actually. If there was something you could wish for, for the New Year, what would that be?
Chris: What would I wish for? I would wish for the return of the carry trade.
Niels: Nice and simple, right? Anyway, unfortunately, Chris, our time is up today for this very short conversation. I do want to thank you again for being on the podcast, for sharing your insights. I wish you and your family and your firm the very best for the coming year, and I look forward to catching up later on in 2015!
Chris: Niels it's always a pleasure to speak to you and to speak to your listeners, and I do appreciate the opportunity. Thank you very much!
Niels: Wonderful, take care!
Chris: Bye bye.
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: 15 Jan 2015no comments