Michael Covel

I had a face to face conversation today in New York City with one of the best trend followers out there (trading many hundreds of $ millions). Like I mentioned the other day with another interview, this too is a man who I had never met before nor was he mentioned in my first book Trend Following.

What did I learn in a big picture sense? This man was influenced by a host of factors, but ultimately he came to his understanding of producing above average returns through his own detailed research. He pointed out that when he first started 10 years back he had no idea who the best trend followers were. He came to his aha moment through a series of small steps ultimately leading to the big idea: How can I capture those big moves, that arrive at unpredictable times, over a broad array of markets? His answer, now demonstrated with a track record exceeding +20% a year, was trend following trading.

Yesterday I picked up the phone and called a top trend follower. His firm no longer reports their performance data, but they continue to trade billions making as much money as any one.

I had never talked with this man before and he was not in my first book Trend Following. Once his firm stopped reporting their performance data I forgot all about them — until yesterday.

This trader was at first uneasy talking with me. “How did you find me?” “Why are you calling?” But he had a good sense of humor, even though he quickly said that he did not want to be quoted on the record. We talked for 45 minutes.

His insights:

1.) He backed up the idea that many more Long Term Capital Management’s are ready to implode today. He said to look at the numbers of the arbitrage guys. He pointed out that for the last 4 years the arbitrage (”stat arb, convertible arb”) guys are using more and more leverage to generate less and less return (”too much gearing”). He added, “They think they have found the Key to Rebecca and they have not found anything.”

2.) He acknowledged that his billion dollar plus fund was on the other side of LTCM’s (Long Term Capital Management) losses in the zero sum game: “We were the other side…they were an accident waiting to happen…now 7 years later the risks for these types of traders are just as great.”

3.) Wall Street investment banks only want 35 year old traders. You get to be 50 and they don’t want you. What’s his point here? Wall Street ignores experience like Richard Donchian trading into his nineties. I know great trend followers ranging in age from 30 to 70. That’s his point.

4.) “When people’s emotions drive their decision making, systems traders have the luxury of being able to stick with it.”

I just finished a trip to meet with another great trend following trader who just happens to live and work nowhere near a major city. With a track record of 17 years (+20% a year), his performance alone is quite impressive, but his ability to do his “thing” on his terms is truly inspirational.

You have to also wonder about those people that attribute this man’s performance (and other trend follower’s performance) to “luck”. If you think a trader is lucky, but you have not taken the time to sit down and personally meet with him (doing all the needed quantitative and qualitative homework), you miss the point. Great traders are NOT lucky over time. Their “secret” is hard work. That is their enduring edge.

I am in the middle of an extensive set of informational interviews with some of the great traders of today. I just finished a meeting yesterday with the President of a trend following firm who manages over $3 billion dollars for clients. A very down to earth guy, his most direct advice was for people to focus on their plan and not stay preoccupied with others’ plans. He drove home the point that if you dare to be great, in whatever your chosen profession, standing outside the crowd is where the great rewards will be found. If you only want to work for the man, you can’t be the man.

I finished an interview today with a trend follower based in New York City. He has been at it for 30 years. His firm, like my recent Caribbean interview, also manages over $1 billion in client capital. In a wide-ranging conversation about trend following’s lack of acceptance in some quarters, he pointed out that for many people “investing with skill” is hard to understand. Trend following is a skill. You can learn that skill or you can hire a trader who has the skill. But either way skill does matter when you are aiming to beat market averages. More to come in the near future…

I recently finished an interview in the Caribbean with a top trader. He currently manages over $1 billion in client capital using strict mechanical models. His dedication to master his niche over many years (by no means an overnight success) should be an inspiration to all. More to follow in the coming months…

Just finished a trip to London. I interviewed three notables in the industry. One trader has a 15+ year track record and now manages over $1 billion USD trading as a trend follower. Before that number seems large (and it is) keep in mind that he was a one-man business but a few years ago. Another trader is relatively new to the public world and still runs a small and lean shop. He uses only the closing price each day and competes just fine with less data. Lastly, I spoke candidly with a professor who has written extensively on the subject of trend following trading. He agrees with me that to some degree many academics will have a hard time ever acknowledging the existence of trend following as it upsets the carefully crafted “efficient markets” foundation upon which they rest their reputations.