Best of TTU – Reminiscences of 3 Trend Followers

One of the great Investment books of all time is Reminiscences of a Stock Operator, which is the fictionalized biography of perhaps the most famous Financial Speculator of all time: Jesse Livermore. There is no doubt that even today, 100 years later, we can all learn from of the experiences of successful Investors.
In this Best of Top Traders Unplugged, which I have appropriately titled Reminiscences of 3 Trend Followers, Michael Adam, David Harding and Marty Lueck, also known as the founders of AHL, finally shed light on one of the best kept secrets of modern finance.  I sat down with them in Abbey Road Studios in London, on the 30-year anniversary of when they founded AHL.  The conversation turned out to be witty, inspiring, and far more entertaining than it had any right to be.  So, enjoy these truly unique takeaways from my conversation with Michael, David and Marty, and if you would like to listen to the conversation in full, just go to Top Traders Round Table Episode 11.
Sugarcoating The Medicine Of Trend Following
Niels: Now, rightly or wrongly my understanding of Winton and Aspect, in the early years, was that both firms had an emphasis on Trend Following within your strategies. From what I've observed, over the years, this seems still to be the case for you, Marty, at Aspect, but perhaps less so for you David. So let me come to you first on this one, David. If my observation is right, when did you begin to move away from the classical trend following approach, if I can call it that? Also, what was your motivation for doing so?
David: It's a question of degree. There's still a fair amount of Trend Following in what we do but when we were doing our research in the early 90s we did a literature review and looked at what else, what other opportunities there were and we scoured the literature. Time and time again we came across academic papers referring to what is now called carry - the phenomenon of carry.  So we focused a lot of our research on that.  We developed a bunch of trading systems which used that and we even got as far as implementing those trading systems. They all went a bit wrong in the ERM - when Sterling exited the ERM. At that stage, we had quite a bureaucratic board process and it had become hard to take risks and so all those systems were taken out. The significance is that they went on and worked very, very well for the next 20 years - as well as Trend Following, actually.
So, we didn't use that until maybe 2005 or 2006 or 2007 but it worked extremely well. There were other things that we were developing back then, which also worked, subsequently. They're not in the form that we were developing. There are some things that we developed back then which we still use today.
To really fully exploit the potential of this kind of research you have to move into equity markets and it took me a long, long, long time to develop all the infrastructure and expertise to deal with thousands of equities, databases, corporate actions, and so on and so forth. By the time we'd done that the easy money in Convertible Arb was long gone, that was long gone - after 2008 really, with a number of other strategies, the easy money was long gone.  My own pitch is I just don't think the markets... There will never be no opportunities for people to do more research in science. Some people think that we're on the verge of a grand unified field theory of everything, and a grand unified field theory of efficient markets, and I just don't believe that. I know people who say, "Well, what it is then? What is the next big thing then?" Well, I don't know, that's why you have to do research.

Niels: Very true. You've stayed true to your roots to a large extent
Marty: To degrees, to degrees, Aspect was predicated on this trend following approach being an important utility that was begin overlooked by the investment community.