If you haven’t heard yet… Billionaire Boston Red Sox owner John Henry got his start in the commodities industry, and more specifically – the niche hedge fund segment known as managed futures. He’s never been shy about a magazine cover, or cameo in MoneyBall, and despite his being out of the ‘commodities’ business for a while now, he’s on a recent cover of Bloomberg Business once again linking the Red Sox with commodities.
We’re not sure why he’s picking at his ear… or how in the world he got journalist Joushua Green to do a piece on him (maybe something to do with Green being an “infrequent columnist” for the Boston Globe, which Henry just so happened to buy last year). Or why there isn’t much mention of the fact he closed down his commodities fund in 2012. But whatever the reasons, the article shed some light on the early history of what has become an industry with hundreds of billions under management:
“In the late 1970s, futures speculating was the arcane province of a small group of short-term traders who operated mainly on instinct. Henry’s algorithms were built to identify long-term trades based on historical price patterns. This put him in the vanguard of an even smaller group of traders who pursued an investment strategy called trend following. Trend following developed in the ’60s and ’70s out of the efforts of Richard Donchian, who founded the first managed futures fund. Donchian thought price movements of stocks and commodities were often too optimistic or pessimistic because they reflected the emotions of the people trading them. Trend followers sought to profit from this insight, often using a runup in price as an entry signal: They’d buy when other traders got nervous and started bailing out, then wait for a breakout.”
The article goes on to surmise that it was Henry’s background in the systematic trading of commodities that put him in the perfect position to thrive in the baseball crazed city.
“One of the things that was interesting about his model as a commodities trader was that it protected you from emotion, so you would make decisions that made sense. Often in sports, you become attached to something emotionally.”
In a nutshell: The Red Sox got on base more often than any other team in baseball, saw a ton of pitches, rarely swung, and crushed the balls they did swing at, especially fastballs. Napoli was all these tendencies rolled into one. The team’s defensive efficiency also improved, thanks particularly to Victorino and Drew. All of this came together in the World Series, when the Red Sox wore down St. Louis Cardinals pitchers, led by Ortiz, who hit .688 and won Most Valuable Player honors. Lucchino recalls with a laugh. “He couldn’t understand it. But it’s a function of plate discipline. You force guys to throw curveballs, you take a lot of pitches, they fall behind in the count, then they have to throw you fastballs.”
Baseball terms may just be the best way to describe managed futures and global macro type investments which are ‘long volatility’ plays. Managed futures is about getting on base (being in many markets at the same time), waiting for the pitches (living through the drawdowns), until Ortiz hits the grand slam (capture big outlier moves).
Now if only the Cubs and Theo Epstein could follow suit.