Market Wizards

On Richard Dennis the Master of Turtletrader
http://www.streetstories.com/rd_finan_trader.html

October 1997
Vol. 4 -- Issue 10
Page 42

Trader Profile: Back From the Bottom of the Pit

By Daniel A. Strachman

Richard Dennis has long been known for his shoot-from-the-hop approach to futures trading. Once, he was even dubbed "The Prince of the Pit" by The New York Times. But after his legendary trading style produced big losses for himself and his customers in the late 10=980s, Dennis retired from trading, vowing to never again trade customer funds. "My hips are bruised," he said.

The retirement proved to be brief. By 1994, Dennis was trading again. But this time he had traded in his instincts for a mechanical system that relies on signals from a computer. Instead of shooting from the hip, he’s shooting from the hard drive. "Using trading systems is currently the easiest and best way to trade," says Dennis. "At the end of the day, it is hard to perform better than a well researched and though-out system."

Currently, he uses a series of trend/counter-trend systems to identify trading opportunities. The systems evaluate price, volume and other market data to determine entry and exit positions for short- and long-term trades. The only way to win in the futures markets, he says, is to trade in a totally mechanical environment and perform countless hours of research.

"All of our systems have gone through rigorous testing before they are sued to provide us with trading signals," says Dennis. "A trading system is only as good as the architect behind it. Be testing our systems constantly, we are able to make sure that what we think is right, is right.

That approach is a far cry from his earlier trading style. Dennis got his start in the futures markets as a runner on the floor of the Chicago mercantile Exchange more than 25 years ago. He rose quickly to become a major player in the futures markets. By age 25, he had made his first million, and was on his way to amassing a personal net worth of more than $200 million. His impact on the futures markets go to be so great that just the rumor of his presence caused prices to gyrate.

But eventually, The Prince of the Pit was dethroned. In 1988, Dennis was forced to close up shot after racking up tens of millions of dollars in losses for both his and his customers’ accounts.

In 1994, however, he was back on the scene, with a strategy based solely on mechanical trading signals from computer systems. With this system, he executes an order every time the computer gives him a signal. "When I started in this business there were no computer, and it was hard to do research to determine what made the market tick," he says. "Now, with technology racing ahead, new computers will never tire of being able to perform research that allows me to improve the rules of the system to make my trading more successful."

Dennis can point to some successes. Last year, he placed fourth in a ranking of the top 10 fund managers in Futures and Options World magazine. And while his year-to-date performance is down 18 percent, Dennis’ fund was up to 112 percent in 1996 and 108 percent in 1995. During the eight months he traded with the system in 1994, he was up 8 percent. He equates the large difference in return between this year and the previous two years to the New York Yankees losing to the Philadelphia Phillies, statistically everyone is going to have up and down times.

Dennis credits the success of his trading system on his extensive research. "I am no longer a trader, I am now a researcher," he says. "I am constantly performing research to determine how I can tweak the system and create new parameters to allow it to adapt to the changes that are constantly occurring in the market."

Some critics believe that Dennis’ strict mechanical trading formula is a marketing ploy to put investors at ease over his past record. But Dennis says he has put in place checks and balances so that investors can see exactly what he is doing at all times.

Each night, Dennis transmits his signals to an independent party to evaluate and reconcile his trades for the day. The firm, Dennis says, has no impact on his trading or research. Rather, it monitors his actions to make sure that he is doing what the system tells him to do. "By having a third-party involved, we are able to add a level of comfort to investors who may require a high degree of oversight," he says. "They are able to provide real value to investors who want to know what we have done in the market during any given time."

Dennis believes his current system will allow him trade up to $300 million successfully. Currently, he has $80 million under management, which is up form the $2 million he started with in 1994. At the end of the day, a trader has to go with what works," he says. "I know that mechanical systems work best and therefore am quite comfortable that our strategies will continue to be successful."

 

If one does this for his own reasons, then what each of us considers to be best is the only thing that matters.

I suppose I'd tend to look at things from the perspective of the investment community at large. I want to be best as measured by the best, most sophisticated investors. Great returns with consistency, and low volatility without excessive leverage or exposure to Black Swan events.

As a practical matter, I don't think you can make absolute rankings unless someone stands out in a class by themselves because there are so many factors that go into excellence.


I earlier wrote:

This prompted the question from OddTrader:

I really meant that you can't really compare your performance as an individual trader against a trader managing a fund because they are so different. So you can't really say whether or not you'd better or are better unless you are in the same market and dealing with the same issues.

If you are trading a large fund, however, you can make comparisons more directly that are valid.

- Curtis

 

That's definitely a compliment I don't deserve, though I hope to live up to it one day.

Basically a macro trader w/ discretionary entry and mechanical trade management.

 

Thanks for your feedback, Curtis.

It seems the best would be something equivalent to one of the top (say) ten traders for a number of consecutive years in a certain market(s), according to some common measures by the sophisticated investors.

Do you think there could be a problem of diminishing returns after a hedge fund has grown to a certain size? E.g. a manager trading 1b capital + 4b OPM returning 20% (yearly gain about 0.36b) may one day prefer to trade only 1b capital returning 40% (yearly gain 0.4b).

 

I will speak only for myself here, but at a certain point its not about money. It always is because its how you see how you are doing, but money is not the motivation in and of itself.

Brandon

 

A British trader called Joe Lewis built up a fortune of a couple of billion dollars and is/was one of the biggest individual currency speculators in the world. However, he had business interests before he became a speculator, and has built up stakes in various companies over the years, so it is not clear how much of his fortune is from trading. I would imagine his trading profits are at least $500 million (<25% of his net worth).

 

I'm very excited to hear that you're a macro trader. I'm dying to speak to someone who knows a thing or two about macroeconomics and most of the people on this board are primarily short term TA orientated from what I've gathered.

Would it be possible for you to roughly give me your macro view on the markets? Maybe an example of a trade?

 

Q
The company is privately held and is backed by the ETF Group and Joe Lewis.
UQ

http://www.forexdirectory.net/hotspot.html

Is this news related to the person and his businesses?

 

That could be what your investors would be very glad to hear about.

 

I can't give you that, but I can give you some food for thought from the big dog (PTJ interview):

"Q: How would you describe your general investment philosophy?

A: I think I am the single most conservative investor on earth in the sense that I absolutely hate losing money. My grandfather told me at a very early age that you are only worth what you can write a check for tomorrow, so the concept of having my net worth tied up in a stock a la Bill Gates, though God almighty it would be a great problem to have, it would be something that’s just anathema to me and that’s one reason that I’ve always liked the futures market so much, because you can generally get liquid and be in cash in literally the space of a few minutes. So that always appealed to me because I could always be liquid very quickly if I wanted to. I’d say that my investment philosophy is that I don’t take a lot of risk, I look for opportunities with tremendously skewed reward-risk opportunities. Don’t ever let them get into your pocket - that means there’s no reason to leverage substantially. There’s no reason to take substantial amounts of financial risk ever, because you should always be able to find something where you can skew the reward risk relationship so greatly in your favor that you can take a variety of small investments with great reward risk opportunities that should give you minimum draw down pain and maximum upside opportunities.

Q: How do you measure your performance?

A: You’ve got to look at good traders historically. If a trader can on average annually deliver two to three times their worst draw down, then that’s a very good track record, and I’d say that that’s what I try to do. If I thought that for the funds that I managed that 10% would be the worst that I would tolerate in a given year then hopefully I’d annualize two or three times that and that’s probably what I’ve done. Maybe a little below that in the ‘90’s and a little above that in the ‘80’s.

Q: What’s your competitive advantage as a trader?

A: The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge. Because I think there are certain situations where you can absolutely understand what motivates every buyer and seller and have a pretty good picture of what’s going to happen. And it just requires an enormous amount of grunt work and dedication to finding all possible bits of information.

You pick an instrument and there’s whole variety of benchmarks, things that you look at when trading a particular instrument whether it’s a stock or a commodity or a bond. There’s a fundamental information set that you acquire with regard to each particular asset class and then you overlay a whole host of technical indicators and that’s how you make a decision. It doesn’t make any difference whether it’s pork bellies or Yahoo. At the end of the day, it’s all the same. You need to understand what factors you need to have at your disposal to develop a core competency to make a legitimate investment decision in that particular asset class. And then at the end of the day, the most important thing is how good are you at risk control. Ninety-percent of any great trader is going to be the risk control. "