guy is exactly right. if it’s not difficult to understand, or something the consultant can sound important at a cocktail party discussing, they aren’t interested. what’s amazing to me is that when you drill down about what their precise objections are, 98% of the time, I identify them as idiots, purely ignorant, in that they have never read anything on the subject, or read anything in depth in terms of returns, style, rationale etc. it’s similar to the high brow types that always pontificate on a subject or person, based on someone or some news columnists’ (typically slanted) opinion… but when you ask what specifically they like or dislike, they can’t answer as they never do the primary research.

Adam, you have consistently demonstrated a lack of TF knowledge on this site. If I had to sum it up you think TFs are lucky monkeys and all of the London TFs have success due to a 100 PhDs on staff. That stuff is nonsense and you don’t know it. All you know is what people tell you. I think anyone who possesses those 2 views is failing their duties as well. Then again, it depends on what the duties even were to begin with!

You’ve taken my points out of context and I suppose you’ll have to ban me.

Glad to see this forum welcomes an open debate.

I agree with MC and the original post. I work for a TF and we consistently come up against ridiculous objections from consultants such as “it’s just a black box” or “clients don’t understand systematic trading”…surely it is their job to educate?! Still doesn’t stop them allocating billions towards strategies such as statistical arbitrage or “event driven”…..a term which I’ve never really understood, isn’t everything “event driven”?

“business management process”

nothing like business jargon to get your through the day.

Tom, unfortunately most market participants are sheep…they can handle volatility, on the upside…

I was at a client presentation in mid 2002 for a large equity/long only asset manager, who was a closet index tracker, an the presenter had a great powerpoint with all the “catch phrases” as to why clients should invest with his firm…

Then a potential client started asking about their CSCO position and how long they held it, the asset manager proudly stated for a few years…

The client then asked why they never sold a single share from 80 down to 18, and what happened to the people who placed money with them at CSCO/$70+ …talk about a half-baked explanation…even the insiders are sheep…

Not all investment consultants are the same and my view is that the consultant depicted in the story above is failing in his responsibilites to his client.

My firm (and a number of my clients) have large holdings in trend following funds. However, TFs don’t make up the entire asset pot for a number of good reasons.

I have tried to comment only where I have actual experience and I am not “parroting marketing materials”.

With respect to “business management” all this means is the ability of the trader to manage the demands of an institutional client and whether the appropriate people and systems are in place to ensure the smooth running of the operation.

Thanks

It is true that at present a trader may be able to run their systems correctly and report correctly BUT this can change if AUM increases rapidly.

Sometimes when a trader is successful they attract a lot of new clients and a large amount of money. This can put some strain on the overall IT structure and the time required to manage the existing client base (i.e. accounting, tax, reporting) which is entirely separate from the investment process.

There are examples were a “good trader” is distracted by the non-investment issues which appear to lead to a degredation of the overall investment performance.

The level of service required from an institutional client is often very different from an individual client. What I mean by this is that institutions often require regular meetings and more in-depth portfolio analysis. For example, most individual clients would not meet with the trader on a quarterly basis while a large institution probably would. This does not mean changing the process to suit the client it mearly means the non-investment demands are more time consuming.

I agree about Madoff – that was complete madness.

Find the idea that someone thinks 100 PhDs are doing something in a trend following shop all day related to entry/exit day to day trading — to be out to lunch. It’s almost a complete lack of understanding of what TF even is. Take for example, one TF recently spoke with. 30 year track record. Over 75M AUM. 3 people running show. If the PhDs are cleaning data, coding, managing the operational details of running billions, yeah, ok, no doubt. But the idea that some think trend following trading systems require these huge staffs and constant new research (what, do they change the system daily?) to be effective is just ignorant. There is no way around that in my mind…and I am a guy who has been influenced/educated behind the scenes by more than a few people — and those people to a man share my view — except perhaps the few who have marketing machines to impress the whales who want ‘stories’.

What’s the old Carl Sagan line?

Interviewer: “Didn’t [Sagan] want to believe?”
Druyan: “He didn’t want to believe. He wanted to know.”

Well, some in here just want to believe. That’s fine, but don’t expect me to respect your inability to know. Not being cocky or arrogant either. Would love to see some skeptics actually ‘know’, but anyone with a pulse can see some are just defending their turf to the bitter end. Great, go for it. Flat earth thinking ain’t new and many died in that state.

Coffee, coccoa, cotton, oil, and gas have all had nice runs recently. Anyone who comes to understand TF could have been on those according to what MC teaches. Golly the peso broke out today. Hmmm, should I look for the news story as to why or would it be good to just follow it?

Amazing thing Adam? You are only building more of a case of what I have been saying — know v. believe.

Proctor was a Turtle, BTW.

Thanks Ken.

I am a big fan of trend following and a lot of my firm’s clients are happy with their allocation to these funds!

Perhaps they think having Phds on staff may lead to volatility-less returns, like Jim Simons.

I’m glad to hear what you have to say about TFs Michael, especially the 3 man 75M shop.

The TF I work for is of similar size and it frustrates the hell out of me that other TFs with an inferior track record to ours are allocated to very heavily SIMPLY because the investors seem to take comfort from the 100PhD story. I meet so many allocators who claim to specialise in trend following yet none of them can really say why they just choose the big 3 or define how their models work

@AdamL…I would not be surprised that they trade 4 different breakout systems…

Please explain to me why you think it takes 5 Phds to trade 4 breakout systems?

Also explain what you think the 10s or 100s of Phds do at other TF shops all day?

AdamL, what is your definition of a robust trading system? And how do scores of Phds fit into your definition?

If anybody is interested you can check out the following link which is an advert for a research position at a large trend following fund:

http://www.statisticsjobs.org.uk/articles/20100908

I guess none of its surprising. TF goes decades with traders from all walks of life and backgrounds… and when institutional people finally get interested they have to drape it in the same mystery they drape everything else in. For some this exercise is a justification of their paycheck.

Larry you are a perfect example of the misinterpretation Im talking about. Show me where I or anyone else ever said a phd was required. Post the link.
It seems to me Adam is trying to give advice to help TFers get allocations, what’s wrong that?

I also asked you what you think the phds are doing but you didn’t answer it, but then you turn around and ask others the same question? Come on. Why don’t you tell us what you think the phds are doing? And don’t just parrot back the good responses of others. Again I find it very interesting that the one who was most bothered by the question, who wanted to essentially block it from the blog, doesn’t have a response…

Ken, I disagree. I have seen way too many comments from Adam about ever changing systems and the need for PhDs. I will grant you that Larry has sharp elbows, and I am not defending anyone here, but this PhD stuff is definitely being pushed. I think it is nonsense. In terms of what they are doing, my view of that is up there somewhere in the thread! Bottom line, the PhD conversation/acquisition spree is to sway investors cause TF by itself has no sex appeal to their way of thinking.

@Ken I think the Phds are probably playing some ping pong and ordering alot of take out…

the Phds are the bait on the institutional money hook…

read Dunn’s interview where he hasn’t changed his strategy much in 30 years…it isn’t really that complicated…

when you have statistical arb shops and guys like LTCM doing what they did, you need alot of rocket science…trend following by its definition isn’t rocket science…

this debate is old…Michael already told you guys how it was weeks ago..if anyone knows he knows…why do you guys actually think you know something he doesn’t, because you read a website or a brochure?

i agree, everyone is bright, and we can respectfully agree to disagree, and we are all traders…

but as you are the only one here who has written 2 books on the subject and spent time with Hite, Abraham, Dunn, Rogers, etc over the past 11 years or so, I’m not sure why guys want to debate this stuff with you, but that’s just me haha

I know we have discussed this before and sorry to sound like a broken record but…

1. Dunn implemented a “major program modification” in 2006. Michael said he had discussed this with Bill Dunn but (sadly) he didn’t share the details – perhaps he changed the ping pong table?

2. Ironically Bill Dunn has a PhD.

I doubt the PhDs at certain TFs are playing ping pong and ordering take away. Why would a serious academic give up on an interesting scientific career to play games? Maybe just for the cash…

These researchers are expensive – just ask yourself why would any trader waste his money on this stuff. Surely this can’t be just to impress investment consultants and gullible clients. My experience of these traders is that they are humble, diligent, honest and are seriously interested in getting the best results for their investors.

by the way, found this on wiki…

This is great …he alomost took out the world at LTCM, blew up again, and is on his 3rd fund…

investors = sheep

FROM WIKI:
“A year after LTCM’s collapse, in 1999, Meriwether founded JWM Partners LLC. The Greenwich, Connecticut hedge fund opened with $250 million under management in 1999 and by 2007 had approximately $3 billion.[1] The Financial crisis of 2007-2009 badly battered Meriwether’s firm. From September 2007 to February 2009, his main fund lost 44 percent. On July 8, 2009, Meriwether closed the fund. In a Bloomberg story on the closing of JWM Partners an investment adviser said that, “For many investors, John Meriwether is by now just another hedge-fund manager,” and that “LTCM’s infamy was a big story in 1998, but the events of 2008 might finally relegate LTCM and 1998 to footnote status.”[2]

[edit] JM AdvisorsMeriwether is opening his third hedge fund venture, named JM Advisors Management, also based in Greenwich, Connecticut, in 2010.[3] The fund is expected use similar strategies as both LTCM and JWM, namely highly leveraged “relative value arbitrage”.

In logic this is known as the inductive fallacy and occurs when there’s not enough data or cases to warrant a generalization, For example, a waitress complains, “That British chap left me a lousy tip. All British people are cheap!” She has made a generalization about tens of millions of people based on an experience with a few of them. A hasty generalization like hers takes this form:

1.A very small sample A is taken from population B.
2.Generalization C is made about population B based on sample A

I had no idea my original post would lead to so many responses.

Below is post #32 by Adam telling us unwashed what all these PhDs do all day. This is a bunch of noise. Does the company have a system in place? If so, it works or doesn’t work. His bullets sound an awful lot like “optimization”. Optimization has attracted more money that is then poorly managed then just about any other buzz word. The PhDs he referenced spend the bulk of their time writing “stuff” to flood clients/consultants.

The system buys here and sells there. Our track record is this. Our core belief is that markets, all, trend. We do not know when so we do not anticipate. When the trend begins up/down we jump in and the sell/cover is triggered when this happens. This gives us an edge on each trade. When the edge goes away we get stopped out for a small loss (predetermined), when the trend continues we ride it for all it is worth.

That sums it up. As for the bullets below, the Adams of the world eat it up. VERY little meat in the bullets below if you read it critically, but the gate keepers love it.

As for JW. Go back to Liars Poker, a classic in its time. They describe his trading accumen as a guy that took big bets, and then got more capital from partners to double up when the trade went against him. Question, what happens when you go independent and you don’t have more capital? LTCM is the classic example of PhDs and consultants in action. They were generating returns of 20-30% and refused to tell consultants what their models were or their leverage. I know they presented to me for my firm to become a client. All they told me was that they find relationships and when they diverge from the norm they bet big that they will revert to trend. I said every methodology runs into a rough patch and every relationship diverges from trend eventually. If you use heavy leverage with your system you go out of business when your system goes out of favor. They then told me about the PhDs etc. My response was that I’ll take my SDSU diploma on the opposite side of the trade when you hit the rough patch because you are highly highly levered. They asked me how I could infer they were overly levered, I reponded “it doesn’t take a PhD to realize that if you are not being candid about something there is usually a reason. Glad I didn’t invest with those geniuses. Long winded but thanks for the interesting discussion on the board.

These PhDs are often involved in the following:
- data acquisition and management (i.e. working with high volumes of data which requires specialist skills)
- Research into the actual mechanics of a particular futures contract (i.e. monitoring limit ups/down, liquidity and other risk factors)
- “Simulation” of new trading strategies (i.e. programming in C++, Python etc).
- Developing software for the automation of trading (not exactly straightforward if you are managing a lot of money).
- Researching capacity constraints (i.e. how much can we trade in XYZ contract before moving the market/being selected against by other traders)
- Transaction cost analysis (i.e. minimising slippage and other frictional costs)
- Research into high frequency trading
- Monitoring of correlations/volatility to ensure robust risk management
- Developing the risk management systems and monitoring tools.

And also Larry if you think that all there is to a good trading system is just a robust entry/exit then you are sadly mistaken. Yes, that is important but there is a whole lot more.

@ Ken and AdamL I just checked in to see that you guys are still at it…sorry I was actually reviewing some positions, etc, looking to improve my trading while you guys were still here debating the Phd thing…

This whole discussion on Phds helps you two trade better exactly how?…

@Ken

Phds are yesterdays news …I saw on Winton’s site they have specialists on staff in…

extragalactic astrophysics…

so this whole Phd debate is pointless as Phds are yesterdays news…its all about extragalatic analysis now…

now I think you see my point!
Jesse Livermore is probably rolling over right now…

I think you see my point!

Good traders don’t sit around “reviewing positions” all day. They trade systems, the system says buy, they buy. The system says sell, they sell. There’s nothing to review, they just execute.

Jim Simons said the important thing is to think scientfically. He also said that it’s not so much the specific skills they have (meaning the subject matter of their education) as it is the ability to think scientifically. If he hires a phd he knows he’s got a scientific thinker. That’s not to say you need a phd to think scientifically, you don’t, the Scientific Method is very clear and anybody can learn it. Astrophysicists, voice recognition experts, etc are hired because at the heart of those fields is the ability to extract a “signal” out of what seems to be a bunch of noise. Hmmm, sounds alot like building a trading system to me! Of course the casual, unfinformed person reading marketing materials will think “oh what do galaxies have to do with trading?!”. They don’t understand the deeper meaning behind it all, nor do they want to.

@TraderKen…I will rephrase for you so you don’t digress…

in a 10 word or less answer to the following question…

In your opinion, what is the most impotant aspect of a winning trading system?

Ken Larry — you guys both add value. Just don’t beat each other up too much!