Winton is one of the largest, most successful alternative investment managers in the world, and a leader in financial mathematics and empirical scientific research into financial markets. Winton was founded by David Harding in 1997 with an absolute commitment to employing advanced mathematical, statistical and computational techniques to develop systematic, quantitative, trading strategies for global futures and equity markets, a belief which still remains at its very core. Its unique company culture has fostered a first-class environment where innovative ideas can flourish and robust research is highly rewarded.
The company currently employs over 300 people, including 140 scientific researchers with PhDs and Masters Degrees, at specialist campuses in London, Oxford, Zurich and Hong Kong. Winton currently manages assets in excess of $25 billion for institutional clients including pension funds, endowments, sovereign wealth funds and investment banks.
Eurekahedge: Winton Capital Management has an illustrious track record in the industry and has seen strong asset allocations to its global CTA/managed futures fund over the years. What had you originally envisioned for the company when setting it up 16 years ago and how, in your opinion, has it evolved since then? Could you also shed some light on the secret behind the firm’s longevity and how, in particular, has it managed to retain its appeal over the years.
When I set up Winton my dream was to become a billion dollar CTA. That took quite a few years to achieve but now we have surpassed that target substantially. The business has grown more than I could ever have anticipated. Our success has been achieved due to a mixture of luck, application, rigorous intellectual integrity (not fooling oneself!) and a patient dedication to research.
EH: The investment process at Winton Capital Management places a high degree of emphasis upon rigorous scientific analysis, discipline in approach and diversification of strategies. Given a market increasingly driven by news flows, do you think this systematic approach will continue to generate superior returns?
You are right, there is a balance to be struck by successful systematic managers between innovation and discipline, or between flexibility and dogmatism, depending on how you view it. Winton’s Board and governance processes are as well prepared as possible to take responsibility for the funds clients entrust to our care under all circumstances (And you can be sure that we think about and plan for some pretty extreme ones).
EH: Managers following systematic trading strategies are often torn between discipline and persistence in sticking to tested and proven systems, and evolution and innovation in adapting to changing market conditions and new market insights. How does your fund strike a balance between the two especially given its long track record? How would your strategy react to a new and unexpected extreme event that could have unforeseen effects on the fund’s performance?
As the events of the past few years have shown extreme events, whether financial or natural, are far from uncommon. Surprises have always happened in history and we have tried to design a trading system that can withstand such surprises. We do regular back tests to see how our current positions would have fared during past crises and how we would cope. History as Mark Twain said does not repeat itself but it rhymes.
EH: Over the last couple of years, CTA/managed futures funds have underperformed rival strategies in the hedge fund industry, with the Eurekahedge CTA/Managed Futures Hedge Fund Index returning 3.46% over the last three years. A number of trend following CTAs blamed active central bank intervention in the markets as the main culprit for this lacklustre performance. What is your take on this? And more importantly, how did Winton manage to defy these headwinds and outperform its rivals?
I am not a big fan of the QE explanation for poor performance by CTAs. It is true that QE has made risk free rates close to zero and that CTA track records, which are usually supplemented by interest, are having to make do without. But as for “normal market dynamics being interfered with” which is what some try to imply, I think it is a convenient excuse. There has always been government intervention in markets. Winton has taken moderate risk, we have targeted a lower volatility than most of our competitors since 2008 (the Winton Futures Fund targets a 10% volatility much lower than most of our peers which means we may do relatively better in periods of mediocre performance), avoided the most crowded trades and continued to innovate.
Whilst people may use QE as a convenient reason for their poor performance recently, Winton’s trend following systems made money last year, as did our cash equity portfolio (25% of the risk in the WFF is now on trading cash equities) and some of our non-trend following strategies. We do not see QE as an excuse but rather as a spur to innovate further. We believe we are different. We hope our focus on research makes us more likely to outperform our peers over the long term, but do not believe this means we will outperform them every year.
EH: Winton Capital Management runs multiple strategies concurrently in a wide variety of markets. How do your proprietary models generate their investment signals? Is manager discretion an important component of your asset allocation strategy?
The first part of the question is rather general. The same as everyone else’s, I guess! Our computers are fed lots of data and they produce orders which are directed into the markets almost 24 hours a day. In terms of ‘manager discretion’ the Winton Investment System is obviously designed by humans and is in a state of continual evolution. The main process driving this is our monthly investment management committee, chaired by our CIO, Matthew Beddall, which I always attend and play an active role in.
EH: CTA/managed futures funds are managing asset pools that are larger than ever before. Do you feel there is a crowding out effect given a number CTAs are running similar statistical strategies? How has this herding impacted your trading style and to what extent do your models utilise game theory concepts when sifting through investment opportunities? Do you feel the CTA/managed futures hedge fund strategy has more room for growth?
For example some of our scientists recently wrote a research paper looking at the efficacy of fast, medium and slow trend following from the mid 1980’s to-date. That paper, “The Historical Performance of Trend Following” can be found on our website. In general we found trend following systems to be effective in forecasting future price movements, but we observed a significant and persistent decline in the forecasting ability of those with the fastest turnover. While we have not yet speculated about the causes of the decline in performance, many might note that it coincides with a rise in assets under management in the CTA industry.
Only firms that are able to innovate through research and successfully commercialise their innovations will succeed in the long term. I founded Winton with that belief and 15 years and one financial crisis later nothing has changed that belief.
EH: Could you share with our readers a rough breakdown of your asset allocation across geographies? How do you distribute your portfolio to achieve maximum diversification benefits?
Well I cannot give you any very detailed breakdown but your readers would not be surprised to learn that the US is the region with the greatest risk weight in our portfolio, followed by Europe, then Asia. This is purely a function of liquidity. Portfolio construction is a complex field but obviously we direct our system towards areas where we perceive the highest opportunity and the lowest risk.
EH: We understand that your fund originally operated with a higher leverage, with volatility targeted at double that of what it currently is now. What is the rationale behind lowering the volatility target?
We have lowered our risk target as the years have passed because we have become increasingly sensitive to the dangers of leverage. LTCM, Amaranth, Goldman Global Alpha, not to mention the entire banking system have been destroyed, or nearly so, by excess leverage. If you are not highly leveraged you cannot be wiped out by a nasty surprise. We plan on staying in this business for the long term.
EH: A key part of your risk management involves abandoning traditional risk metrics that use a normal distribution and favouring your own sophisticated proprietary risk measurement techniques that are more sensitive to tail risk. Could you share with our readers more about your risk measures and how they contribute to better risk management?
Risk measures based on normal, parametric, distribution of returns have played a big part in financial mathematics in recent years. Perhaps that is why so many financial institutions have got into trouble! Risk is absolutely not a one dimensional concept; there is no unique quantitative definition of risk. Many naive market participants think they know what ‘the risk’ is. We have developed lots of different ways you assess risk quantitatively and we balance them all in a complex fashion.
EH: There has been a trend of more hedge funds adopting the 40 Act fund structure in the US to attract retail and conservative institutional investors, who were previously unable access their strategies. Do you see any opportunities for Winton Capital Management in this domain?
We have participated in 40 Acts as one among several advisors but not as a sole advisor to our own or anyone else’s fund. We continue to keep the space under review to see if there is anything of value we can offer there.
EH: Hedge funds have witnessed strong asset allocations in 2013. How has your fund fared in this regards and what investor classes (e.g. family offices, pension funds, HNWI, etc.) have been the most active in terms of capital allocations?
We have generally been flat to experiencing mild outflows as we are caught up in the CTA disappointment trend. This conceals the fact that we are seeing decent inflows from institutions (pensions and endowments) offset by outflows from retail funds.
EH: Lastly, thank you for your valuable insights and on a final note, please share with our readers your expectations on the global economy’s transition to a post-QE world. With interest rates expected to rise above their artificially depressed levels, what kind of adjustments do you foresee taking place in the currency, bonds and commodities markets and what opportunities or challenges will they unleash for trend following funds?
All my career I have been battling against the prevailing economic orthodoxy that markets are efficient. Winton is not about building economic theories to predict where economies and hence markets are going under different scenarios – we have always been about looking at the data, developing trading strategies based on what we learn from that data and letting the results speak for themselves. Our aim is to create a small edge in predicting how markets might behave, based on how they have behaved in the past.
I certainly have not got a crystal ball but governments around the world have had to ‘print’ a lot of money to prevent a debt deflation induced depression. That will probably lead lots of assets to be redenominated at higher nominal prices in the years to come and that might create good conditions for trend followers and CTAs. It is going to be tough staying in the game in the meantime whether you are a CTA or a client! But that is what we are paid for.