In case you missed it, David Harding of Winton Capital was on Fast Money recently. It’s not often that you see managed futures center stage in financial mainstream media, and doubtful anymore than a handful of the tens (if not hundreds) of thousands of investors who have money with Winton through a pension, endowment, mutual fund, etc. even know he’s the guy in charge of a part of their retirement checks. It isn’t often we get to hear from Harding, so here it is:
Given that the video provided several hours of banter for our office, we thought we’d spare you the novel and break it down to 6 takeaways:
1. The anchors/producers of Fast Money dropped the ball on this one. CNBC – you’ve got the most successful CTA manager in the world standing in front of you, and you’re going to waste his time by not understanding a thing about what he does or is famous for? Asking him how much Apple stock he has, what he thinks of the problems in Europe, China, etc. completely loses sight of what he’s built his fortune doing. This exchange sums it up, in our minds:
Harding: We’re not good at forecasting, that’s why it’s difficult when people say, you know, “Give us a tip.” As our tips are individually useless; collectively, they are useful.
Translation: I don’t do forecasts.
Anchor: Let’s put the computers aside for a moment and use your own sort of wisdom. What do you see right now in the markets, the global markets, with the concerns we have over in Europe, growth concerns over in China, and our economic concerns here in the states?
Translation: Give us a forecast.
Harding: Well, I would say I’ve learned a few things in my career about my abilities, and one of the things I am not able to do is forecast what is going to happen in the future in the world economy or in the future of markets, and we don’t try to do so.
Translation: I just told you, I don’t do forecasts.
2. Winton may have been made famous by trend following and trading futures, but it’s a legacy they have no problem bucking. Harding, in the interview, admits to venturing into individual stock trading and venturing far outside the bounds of the original program. In fact, he admits at the beginning of the piece to owning about 2000 stocks in the ‘fund’ (we’re assuming that isn’t the managed futures fund), and says: “…the last five years, we’ve been applying ourselves to stocks, and we’re trying to rebrand ourselves as financial mathematicians.”
3. Harding acknowledged the deleveraging that his programs have gone through over time. If you’re not familiar with managed futures, maybe this doesn’t make sense, or maybe you equate the leverage conversation with things like Jon Corzine’s risky bets, but leverage in the managed futures world isn’t about borrowing money to amp up returns. Leverage in managed futures is about risking more on a per trade basis (i.e. – doing more contracts). The issue with this is that an investor can fall in love with a program’s early history returns on a higher risk basis, yet now be in store for lower returns (at lower risk per trade levels) as the manager’s delever (either by design to protect their huge AUM levels or as a result of becoming more sophisticated with their risk models). Now, for the more conservative investor, this may be a good thing, but for those relying on past performance to guide their investing decisions, this is a good example of why past performance is not necessarily indicative of future results. The chart below shows the 12 month rolling average of the absolute value of Winton’s monthly returns. That downward slope? That’s a pretty good visualization of how deleveraging can change a program, and brings up that old question of whether or not bigger is always better.
DISCLAIMER: PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
4. While some CTAs are wary of sharing some of their positions and past moves in the public spotlight, Harding has no problem broadcasting his moves.
- “We’re long both stocks and bonds at the moment, we’re long oil, we’re short some of the metals, [we’re] mixed [in] commodities.” (along with most trend followers)
- They were exiting shorts in October of 2008 (not many trend followers we doing that).
- They were short from the beginning of 2008 (most trend followers got short mid-year).
- “we trade futures all over the world, and it’s basically stocks, bonds, and currencies, and not mostly commodities” (emphasis ours – different than most trend followers)
5. David Harding is just amusing to hear speak.
- We love how the British (or is it just Harding?) talk about their positions: “we’re long of this… we’re long of that”. In the US, we’re just long.
- Only David Harding (and maybe Ray Dalio or Paulson) could say with a deadpan expression: “I would be uncomfortable trying to sell 10,000 S&Ps in a day.”
- “No human would be stupid enough to go long Oil at $30 in 2004 or whatever it was, but our computers were stupid enough to do that.”
6. We want to see CNBC do more interviews with managed futures folks… including some prep for the interview so they ask questions that make sense. Pretty please?