The Hedgeweek Interview: Continuous research is the key: David Harding, Managing Director, Winton Capital Management
Now in its seventh year, London-based Winton has delivered consistently positive annual returns and an average annual performance of 21%. Founder David Harding outlines the factors behind Winton's success.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
Prior to founding Winton in 1997, Harding was a co-founder in 1987 of Adam, Harding & Lueck, which became one of the largest independent trading advisors in the world, before being absorbed by the Man Group.
HW: How is Winton structured?
DH: We are a closely held company. There are three shareholders in Winton: I own 73%, Martin Hunt (Head of Operations) and a wealthy investor own the rest.
The company consists of around 30 people split almost equally into three major areas: Marketing, Research and Trading & Operations.
HW: What is Winton's area of expertise?
DH: We specialise in trading global futures and forwards contracts using a statistically-based trading system.
The traders work around the clock on a shift system, either giving orders to brokers or putting orders into the electronic markets and collecting the data. They do that once or twice a day in each market, so they are not trading on a minute-by-minute basis.
They feed data back to the research team, half of which are statisticians and the other half are programmers who create the sophisticated trading models we use. These models take at least six months, and sometimes longer, to create.
We are a heavily research-oriented organisation, based on the principle that superior knowledge holds the key to consistent success in the markets.
Our investment style is dynamic and statistical - our trading system is based on mathematical algorithms derived from sophisticated statistical analysis of the markets, supported and implemented by programmers using proprietary technologies.
In essence, we follow a programme I have been running for the past 17 years, which consists of trading a large basket of trend-following strategies of multiple frequencies on all the world's liquid futures markets.
HW: What were the factors behind the success of the Winton Diversified Programme in 2003?
DH: Our performance of 28% in the Winton Diversified Programme in 2003 compares well with the 3% achieved by the S&P500 over the same period, and assets under management moved for the first time into the USD 400 million region.
We attribute our performance to the diversified nature of the portfolio, which includes commodity as well as financial futures, and to our continuing research on market behaviour.
2003 was a good year, and there are two ways of looking at it. One is the conventional macro view, with the big decline in dollar, the rises in base metals prices and US interest rates remaining low.
The other way of looking at it, which I prefer, is that we do very well when political factors are ascendant over economic factors, and I feel this is the case right now - political clashes tend to be played out in somewhat uncontrolled moves in the markets which benefit people like us.
When economic factors are in the ascendant, Central Banks tend to get together and coordinate themselves, limiting opportunities for us.
HW: What is the investment process at Winton?
DH: There are three legs to our investment process:
1) Maximum diversification: The diversification is that we trade all the futures markets around the world on the long and short side. To be long on British stocks is one out of 200 investment choices we can make at any given time. This gives us a certain advantage at certain times over traditional managers who are very limited in their range of investment choices.
2) Complete discipline: All of our research is done statistically in advance and then encoded in computer programmes. These programmes are then run by experienced and efficient administrators and so we know exactly what we will do in response to every conceivable market movement,
3) Total Rationality: Our investment decisions are based entirely on scientific evidence - we don't bet on things for which we no have scientific evidence.
HW: Are institutional investors prepared to take more risk for higher returns?
DH: Sadly, the institutional investors and the consultants who service them are doomed forever to make the same mistakes, they all want results with zero risk.
Futures fund management, and hedge fund management in general, is not a traditional asset management business - it is a risk management business. An investor should be hiring us to take risk on their behalf, and we will take exactly the level of risk that they ask for. For example, if an investor has USD 10 million and asks us to produce annual variance of 1 per cent on that, we will do it and we will get it exactly right. In contrast, returns are not predictable!
It's a challenge to educate institutional investors as to the nature of what we do, but it's a challenge the industry has to take up if we want to win institutional business.
A great deal of Winton's assets under management come directly from investment banks who are experienced in investing on behalf of their clients, so we have fewer hurdles in convincing our investors to allocate to us.
HW: How does Winton differentiate itself from the rest of the managed futures market?
DH: We are often compared to Aspect Capital (in which Adam and Lueck are involved) and to our old company AHL, which is now owned by Man Group.
The fact is we are all running statistical programmes and we are all doing well, but Winton's passion for research distinguishes us from the rest. I have been passionate about trading based upon statistical research for my whole career - which betrays a certain consistency - and I have built a very specialised research team with this emphasis on the science of decision-making in conditions of uncertainty.
HW: What is your outlook for the managed futures industry?
DH: Well, it has taken everyone in the industry by surprise in that it has grown bigger and more successful than anyone anticipated. It may be the apogee of its fortunes but I am beginning to believe quite seriously that the business is becoming 'corporatised', as we can see with companies such as Man, Campbell, Graham and Aspect, all of which have become large and successful companies, they are not small boutiques any more, this is a trend which is likely to continue.
HW: Will we see any new products from Winton this year?
DH: Yes, and these products will take us into new territory. Structured products for the retail market are the bread and butter of the managed futures business and we are looking to launch our first structured retail product later this year.
In essence, we are investing part of the money we raised from our successful performance over the last two years into creating products that we can distribute ourselves to raise money.
We are setting up a product distribution business, for which we have already hired a variety of sales people. We have also done a partnership with a London-based consultancy called Orchid, which is headed by Orchid's Managing Director John Burridge. John and his team are advising on the structuring and distribution of the product.
It's a surprisingly difficult business because you need size to raise the minimum amount required for an offering of say USD 20 million. You also need size to pay the upfront distribution commission of USD 1 million to independent intermediaries to raise this amount, and to get a capital guarantee from a recognised bank.
For me it was previously a step too far but we now have the size and resources to launch our first retail structured product, which will probably be called the Winton Guaranteed Product. It will launch in late April and close in June this year.
We have a range of banks willing to offer us the various services we need, such as capital guarantees and commission payments, and we will distribute the product worldwide through independent intermediaries.
We will be perfectly happy raising USD 20-30 million with this product and if it is successful we may well conduct further launches and begin to build a business around retail structured products.
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