Nov

11

As noted previously by a spec, and confirmed in today's WSJ, trendfollower John Henry is leaving the money management business — having had his assets dwindle from 2+ Billion to well under $100 million.

JWH will be ensured a footnote in financial history if only for his purchase of the Red Sox. As to his money management, his latest disclosure document is here. Interested specs might want to download it for posterity — so the facts and track record will never be in dispute…and before he shuts his website down (which will presumably happen forthwith.)

There's a lot of grist for statisticians in his track record — including the fact that he has no visible, continuous track record from his launch in 1982 to his retirement this year. The closest thing to a track record is his financial & metals portfolio which launched in 1984 and which closed in 2011. And even here, the results have an asterisk (reminiscent of certain baseball hall of fame members' asterisks). Henry claims a 252% return in 1987, but the asterisk reads, "The timing of additions and withdrawals materially inflated the 1987 rate of return. The three accounts that were open for the entire year of 1987 achieved rates of return of 138%, 163% and 259%.

Anyway, for this fund, he claims a 27 year compounded rate of return of 19.8%. And if you eliminate the home run in 1987, I reckon his lifetime record is around 14% — which isn't too shabby. His worst years in this fund were 2009 at -17%, 2005 at -17%, 1999 at -19%. So his average 19.8% compounded return over a lifetime matched his maximum drawdowns — and that's pretty darn good in my book — certainly hall of fame material for a 27 year run.

Unfortunately, his other funds have not performed anywhere close to this fund. He shuttered a bunch of funds that were disasters (and doesn't report those results) ; and his other open funds have returns nowhere close to this fund (and much higher volatility.) So a skeptic could rightly attribute the aforementioned 27 year return to a combination of luck and survivor bias. I am agnostic. It is what it is.

More interesting to me is the fact that from 1985 to about 1996, his returns really were consistently excellent. You can see them on page 43 of the pdf. Then something happened. And so the point of this entire post is for people to consider the question: WHAT HAPPENED AFTER 1997? Did the world change? Did he change? Did he have too much capital?

I have some theories, but before I weigh in with my theories, I'll allow others to chew on this… There's many meals to be found in correctly answering this question.

Richard Owen writes:

A component seems to have been the purchase of a groin guard: Beginning in August 1992, the position size in relation to account equity in this program was reduced approximately 50%.

Anatoly Veltman writes: 

Some great points, because I believe trend-following died exactly when the leverage left the regulated exchange trading, which went all electronic; and moved to exclusively OTC derivative biz, which is more flexionic. An easy example, a rule that used to work well in futures of the open outcry era: surprise (i.e. big intraday price change) follows trend. Don't try to fade a market that's been gradually and continually trending, as you are likely stepping in RIGHT IN FRONT OF FORCED LIQUIDATIONS. But since electronic execution prevented over-leveraged position-taking, this rule muted up: nowadays, it may well be a profitable strategy to fade prolonged trend - as more surprises began to SUDDENLY correct overdone trends

anonymous writes:

Hard to tell without analyzing the cash flows, but I propose JWH followed the time honored tradition making great returns on a small assets base then poor returns on a much larger asset base.  The compounded annual rate of return may look very good, but in absolute dollars making a large contribution of investor funds to the market infrastructure.  Paulson is carrying on the tradition more recently.  On the performance degradation I sense from interviews I have read he developed his trading ideas in the 70s and did not modify much since then.


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2 Comments so far

  1. Ed on November 11, 2012 8:53 pm

    I would like to see the time weighted vs. money weighted return going back for the full history of his premier portfolio. This might reveal the mystery.

    I might be dead wrong but I would guess that his time-weighted return was better in years where the gap between it and money weighted return was greatest. Meaning, the strategies time weighted return benefited from massive withdraws of capital, which put the strategy back near its optimal funding level.

    Once a certain level of more permanent capital was attained, this effect was less pronounced which forced the fund to consistently trade at a sub-optimal capital level, which dulled returns.

    The other element (based on prior reading, hope I am remembering correctly) is that Henry did not invest much in the business in areas such as research and execution, but rather sucked almost all profits out. I think after such strong performance he got lazy and was unwilling to invest in execution and research ability that could have maintained the edge, or at least kept it a bit more sharp.

  2. Jaden on November 13, 2012 1:10 pm

    I’m not sure if there is a connection between this story and the Lakers being hiring D’Antoni as the new Lakers coach, but really looking for the Chair to make an appropriate jab at the Lakers for hiring such a terrible coach.

    After reading the Chair’s observation of the Knicks under D’Antoni was great amusement for myself. Unfortunately now the folly will now reign over my beloved Lakers! To make matters worst, the Laker’s management chose D’Antoni over Phil Jackson.

    So maybe there is a connection with these stories, as why would someone invest in someone with a long-term losing track record over someone with a proven winning record? Or why is this person still able to run a fund/coach?

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