I started my career with E.D.&F. Man in NYC in the early 1980’s and later in London. I had the pleasure of meeting Larry Hite & Peter Matthews in New York. They started me on my trend following and quantitative asset management journey.
Between NY and London the Man Group had me work for a while in Hamilton Bermuda. While living on an incredible estate on the South Shore I serendipitously had Ed Seykota as neighbor (he lived in the main house and I lived in the guest house on the old J.P. Morgan estate). Ed was generous with his time, whiskey and cigars and I learned a great deal in the short time we were neighbors.
In London, I was around for those exciting years when Man began its initial expansion into the CTA/AI world. One of its first major acquisitions was of AHL (Adam, Harding and Leuck).
Your book is like a walk down memory lane for me and I wanted to thank you for it!
What strikes me as incredible is just how resistant mainstream institutions remain after over 3 decades of evidence as to the efficacy of trend following and the abject failure of EMT based asset management. I work for a major US Bank/Brokerage/Financial Management Firm of the ‘Too Big to Fail” ilk and the policies it pursues are clearly about managing their “liability” as opposed to managing their clients money in a results oriented manner. Fortunately, I have found a team within this environment that is swimming against the current and has fully embraced trend following to develop strategies for its clients. Our activities are viewed as subversive but are for the most part tolerated…to date.
I look forward to devouring your book and the ammunition it will provide me in my personal mission to help as many innocent investors stuck in the EMT trap!
Michael, I really enjoyed your podcast with Ed Seykota (listen). Truly amazing stuff. Actually I enjoy most all of your podcasts. Thank you for your work on trend following. I practice trend following daily and long term with Dunn Capital largely because of your writings.
Seasoned traders know the importance of risk management. If you risk little, you win little. If you risk too much, you eventually run to ruin. The optimum, of course, is somewhere in the middle.
Placing a trade with a predetermined stop-loss point can be compared to placing a bet: The more money risked, the larger the bet. Conservative betting produces conservative performance, while bold betting leads to spectacular ruin. A bold trader placing large bets feels pressure — or heat — from the volatility of the portfolio. A hot portfolio keeps more at risk than does a cold one. Portfolio heat seems to be associated with personality preference; bold traders prefer and are able to take more heat, while more conservative traders generally avoid the circumstances that give rise to heat. In portfolio management, we call the distributed bet size the heat of the portfolio. A diversified portfolio risking 2% on each of five instrument & has a total heat of 10%, as does a portfolio risking 5% on each of two instruments.
Our studies of heat show several factors, which are:
1. Trading systems have an inherent optimal heat.
2. Setting the heat level is far and away more important than fiddling with trade timing parameters.
3. Many traders are unaware of both these factors.