David Harding: Trend Following Trader

David Harding and Michael Covel
David Harding and Michael Covel

David Harding, CEO of Winton Capital, has had rock and roll success as a trend following trader. Today, his trend following fund for clients exceeds $30 billion in assets, give or take a billion or two to the upside. He had a long stretch where his firm made 20 percent a year, but has dropped some with his explosion of assets under management.

Born in London and reared in Oxfordshire, Harding was always interested in investing—a result of his father’s influence, a horticulturalist who enjoyed betting on the markets. His mother by comparison was a French teacher. As a young man he had a natural inclination for science and quickly found a way to put the talent to use. Early in his career he took a job at Sabre Fund Management where he designed trading systems. Soon thereafter he met Michael Adam and Martin Lueck. The trio went on to launch Adam, Harding, and Lueck (AHL) a trend following firm managing money for clients. In a few years the Man Group bought AHL out and built its trend following firm and systems into a monster with billions under management. Harding, while wealthy from the sale, knew much of Man Group’s success was built around his trading systems. But he wanted more than to rest on his buyout winnings, and over time built his new firm Winton Capital into a juggernaut. All that success comes with a certain philosophical underpinning.

I have had the opportunity to talk with Harding on multiple occasions. He always comes across as down-to-earth, a hard worker, but also highly competitive. He wants to win. Harding did not start out with the silver spoon. He worked. To hear him describe it, he engaged in the sort of deliberate practice that Anders Ericsson researched:

I worked for a company [early on], and the people who ran that took a very old-fashioned approach to trading. About 10 people and I spent the first half of every day drawing about 400 charts by hand. It was very tedious. I did this for about two years. The act of laboriously updating these charts forces you to focus in much more minute detail on data than you normally would, and over a period of time, I became completely convinced the market was not efficient, contrary to the theory at the time.4 I became convinced that markets weren’t efficient and absolutely trended…We trade everything using trend following systems, and it works. By simulation, you come up with ideas and hypotheses, and you test those. Over the years, what we’ve done, essentially, is conduct experiments. But instead of using a microscope or a telescope, the computer is our laboratory instrument. And instead of looking at the stars, we’re looking at data and simulation languages…it’s counterintuitive to think in terms of statistics and probability. It takes discipline and training; it tortures the machinery. People are much better, for instance, at judging whether another person is cheating in a human relationship. We’re hugely social creatures. We’re keen on our intuition. But when our intuition is wrong, we’ll still be very resistant to being corrected. What are traders’ biggest failures about understanding risk? There’s a human desire to seek spurious certainty. We try to come to a yes-no answer, one that’s absolute, when the right answer might be neither yes nor no. People see things in black and white when often they need to be comfortable with shades of gray.

Shades of gray are tough medicine to swallow, a tough philosophy to believe down in your core. No one wants to think that hardcore when it comes to money. You might want to imagine uniform precision as possible, but if the guys who make the most money think like Harding, it’s smart to try and think that way, too. At the end of the day, perhaps the best lessons I took from Harding came from his original internally published book, The Winton Papers. His decision-making philosophy should be absorbed before anyone ever puts a dollar to work in the markets:

The aggregate effect of shared mental biases and imitation results in patterns of behavior, which while they are nonconsistent with Mr. Spock-like, rational decision-making or with informational efficiency, are demonstrably systematic. The market equivalent of these behavioral patterns is trending, whereby prices tend to move persistently in one direction or another in response to information. The widespread adoption of investing fashions, like indexation, introduces market mechanisms, which magnify herding behavior on a large scale.

Although Harding’s words were written before the events of 2008, his insights explain the crash that followed. To those who want to learn how to trade, to those who don’t want to affix blame for down performance, Harding offers a way out. But he knows his agnostic approach has critics: “Most people believe it doesn’t work or if it did it soon won’t work. We almost never do anything based on our opinions. If we do it’s based on opinions about mathematical phenomenon and statistical distribution, not opinions about Fed policy.”

Trend Following Billionaire

Who doesn’t want to make a billion dollars?

I imagine there are downsides to that type of wealth, but it must be one helluva ride to produce that kind of success from essentially nothing.

Is it a reasonable goal for you to make a billion dollars?

Well, the odds are probably not on your side for that. However, sometimes in this world, this crazy and often chaotic world of ours, people win the lottery. They buy a scratch-off ticket and win millions. They didn’t practice. They didn’t struggle. They didn’t do anything except buy a scratch-off ticket.

On the other side are people like David Harding. Harding struggled early. However, he stuck with it for decades and is now a true billionaire. Don’t get me wrong Harding, like many mega success stories, has had some luck on his side.

However, that’s not the takeaway here.

The takeaway is perseverance.

The takeaway is not quitting.

That’s how Harding really hit it big.

Without perseverance, Harding would have had no chance for luck to shine through.

What can you do?

You can learn to think like a trader who has made a billion dollars. And if you think like him, and if you model how a trader like that views the world, you can put yourself in a place to possibly make your billion.

I say possibly. Anyone with guts and determination can figure a way to make their first million, but there are not many billionaires. Statistically–a billion is not a wise goal.

Success

Recently David Harding was asked: “You’ve attracted quite a lot of new money into the fund since you’ve launched, but particularly in the last couple of years. Why is that do you think?”

Harding’s response:

“I think that the market has bought what actually is quite a complicated story. The Winton story is not a simple story. In our early years we were impeded by the terrific performance of dot-com stocks. Later people became very attracted to certain types of hedge funds, which produced very smooth and steady returns; something which we’ve never purported to do. And, to be honest, as I said before, the Winton story, obviously I believe in it, but it isn’t simple and I’m not that surprised that it took the market some time to show considerable enthusiasm for it. But now that the story has been got across better, people are, I think, realizing that Winton is a good horse to back in the race to try to find genuinely talented hedge fund management companies.”

Winton’s investment technique consists of trading a portfolio of around 60 contracts on major commodity exchanges and forward markets worldwide, employing a totally computerized, technical, and broadly trend-following trading system developed by its principals. This system tracks the daily price movements from these markets around the world, and carries out certain computations to determine each day how long or short the portfolio should be to maximize profit within a certain range of risk. If rising prices are anticipated, a long position will be established; a short position will be established if prices are expected to fall.

Translation: Trend following 101.

David Harding is profiled in Michael Covel’s Trend Following classic.

David Harding writings here and here.