39 President of Famous Managed Futures Firm Tells All with Mike Harris of Campbell & Company - 1of2

Niels

Welcome to Top Traders Unplugged, where my goal is to give you the clarity, confidence and courage you need when it comes to investing like, or investing with one of the top traders in the world, and I also want to acknowledge you for taking the time out of your busy day to spend some of it with me and today’s guest. Almost every day I wake up to a new message or email with very kind and encouraging comments about the podcast and trust me when I say this really does mean a lot, so thank you very much. If I could ask you one favor, it would be to share the podcast with your friends and colleagues via email or social media. Not only will it help me, but it will also help all of my previous and future guests as well as yourself since the bigger the audience, the more great traders would like to come and share their stories on the podcast. So please take a moment now to share the podcast with a handful of your friends and colleagues. On today’s show I’m talking to Mike Harris, President of Campbell & Company. Mike has an unusual background in that he has been involved in the managed futures industry every since he left college, so he knows this area pretty well, and has some interesting observations about the strategy as a whole in addition to how Campbell & Company has been able to navigate this approach for more than 40 years. In fact, it’s hard to find anyone who has been offering a managed futures strategy as long as Campbell & Company. Needless to say, I feel honored and privileged to continue to bring guests with this kind of depth and knowledge to my podcast and share their stories with you. If you want to read the full transcript of today’s episode, just visit the TOPTRADERSUNPLUGGED.COM website and click on the link of today’s episode. Now let’s get started with part 1 of my conversation. I hope you will enjoy it.

Mike, thank you so much for being with us today. I really appreciate it.

Mike

Thanks for having me.

Niels

Mike, I think it’s fair to say that many people who are involved in the hedge fund industry, and certainly people who are involved in the managed futures industry is very familiar with Campbell & Company and your founder Keith Campbell, of course, who really, in my mind, pioneered this approach which we know today as the CTA or managed futures strategy. Before we get into the story of Campbell, I wanted to ask you a completely different question. A question that I sometimes struggle with, myself, in answering and it, goes something like this. Imagine that you’re invited to a cocktail party with people that you don’t know, and after a few minutes someone comes up to you and ask, “so Mike, tell me what you do?” How would you respond? How would you explain what you do?

Mike

Well that’s a great question, and it’s one that I’m sure that we all get quite regularly. In fact, it’s funny: I still have a hard time after all these years explaining to my own mother what I do. I think she still tells her friends at cocktail parties that I’m a stock broker and that probably is the reason why I get emails from relatives asking me what I think about Microsoft’s earnings. When I’m faced with that question, I think the answer that I give them is that I’m Mike Harris. I’m the President of Campbell & Company, which is a systematic investment manager that happens to specialize in a very unique asset class called managed futures. At our core, like many investment strategies, what we’re really focused on is using data to propel trades in a rule-based fashion. So instead of using the fundamentals and being a discretionary type manager, we are using systems to help us trade the global markets in an active long/short fashion.

Niels

Absolutely. I want to stay with you for a little bit longer, so I want you to really go back and tell me your story. How you got into the business in the first place and perhaps what you were like as a kid, what were your interests, how was it growing up? Please feel free to back as far as you want.

Mike

Unlike many of the students, when I started in undergraduate studies, I knew exactly what I wanted to pursue from my first day in college. I had a plan. I knew that I wanted to major in economics and Japanese because I thought that both of those would be disciplines that would help me pursue a career in the financial markets. It’s funny that you mentioned childhood. I actually had my maternal grandfather loved to invest, was always doing different things in the stock market and in fact bought me a stock when I was very young in Tops, which is a company that made baseball cards because I used to collect them. He bought me that stock and every week when he would come to visit we would sit down with the Wall Street Journal, and we’d track the stocks. I’ll never forget, six months into it I got my first dividend check and I was pretty excited about that and I never forget him explaining to me that I owned part of that company and as they made money they shared their profits with me and that’s why I got that special check.

That really, for me, was where it all began and how I started to plan my academic career around pursuing a career on Wall Street and the Financial Markets. As it turned out, I think it’s really interesting to mention that I’m one of probably the few people in our industry who literally have been a part of managed futures since the first day when I started on the street. I got a job with Dean Witter Reynolds in New Your City in the World Trade Center, working in their managed futures department and literally started, I believe about two days after I graduated from undergraduate studies. From there, interestingly enough, we were an allocator and we had money invested with Campbell & Company as well as John Henry and a number of other legendary CTAs, so my baptism was very early in the space. I then through doing due diligence on managers, caught that market bug that so many do and realized that my calling was to be on a trading floor or trading desk and went across the street to the World Financial Center to work for Revco and was working in a department that had allocated money to a number of CTAs and macro hedge funds, so I actually was covering many CTAs including Campbell & Company as a futures broker. Then a short time after that, as I saw the industry becoming more electronic and realized that my value as a broker was somewhat limited, I was drawn to the buy side and really wanted to know when I picked up the phone and it was a CTA calling wanting to buy 10 year futures, I was really taken by wondering what’s happening systematically that’s causing them to want to put that trade on right now, so as I looked to interview for jobs on the buy side, Campbell was one of the firms that I approached. Fortunately for me they needed a European shift trader, and I joined Campbell & Company about 15 years ago in the year 2000. Then through my 15 years here, I progressed from the European trading desk to the currency 24 hour day operation, then became deputy manager of the trading floor, became global head of trading for a number of years, and then two years ago, as we were going through our third succession plan, myself and Will Andrews, who’s our CEO, he was our co-head of research – the two of us took over the firm. For the last two years, since 2012, I’ve been actively helping to manage Campbell & Company.

Niels

That’s fantastic – a great story, and, by the way, a great gift that you received back then. That’s inspiring.

Mike

He was a special man. Thank you.

Niels

Absolutely. Your story is fascinating, but the story that I’d very much like to dive into with some level of detail is the story of Keith Campbell and the firm that he created back in 1972. Let me try and set the stage a little bit from my perspective. What fascinates me, when I think about managed futures, is really four big stories come to mind. So we have the story of the Turtles, we have the story of AHL, and we have the story of John W. Henry, and the story of Campbell. I know I may offend some well-known CTAs by not mentioning them in this context, and if that’s the case then they can reach out to me and set me straight, but the fact is that both the story of the Turtles, and the story of AHL, have become quite well known over the years, and of course John Henry was always covered in the press when he was active, but the Campbell story, which in fact is the longest of all of them, has not really in my mind, been covered as much in recent years, so I’m really grateful for having the opportunity today to share this with our global audience and really would like you to take the stage here and tell us how the story unfolded 42 years ago and what the evolution has been so far.

Mike

Well I’m happy to do that and I think, just to address one of your points, one of the reasons that the story hasn’t been told as much is that Campbell & Company, from our very beginnings, we’ve always been raised as a humble organization. We’ve tried to fly under the radar. At the end of the day, the people that matter the most are our clients, and we want to make sure that they are happy. It’s not as much as far as making sure that the media and the general public is as happy. I really appreciate the fact that you have noticed the fact that we haven’t been talked about as much and have given us this opportunity. Interestingly enough I wanted to … this is an interesting story regarding Keith’s how he began. I’ve heard this story told many times, and it’s honestly one of my favorites. Keith started in the financial markets out in California. He was a financial advisor/planner in working with clients and he, like many people, in the 1960s caught the bug for commodity futures. There was quite a bit of volatility in those markets, and it was something that he was really attracted to.

He started actually managing client portfolios in the futures markets in the late 1960s and interestingly enough, he had a client who was a Ph.D. who worked at the Stanford Research Institute and they started having conversations about how Keith was trading the futures market for this particular person’s account and he was explaining that he was following the charts. He was, in those days, using graph paper and a ruler, and this Ph.D. was talking to him about this wild concept which was a computer. In fact, the main frame computer at Palo Alto, and how he had access to this. So as they put their minds together, they thought about how they could take Keith’s technical approach and create a rule based system that the computer could effectively run on their behalf and that’s really where it all began. In fact, they started with the beginnings of Campbell Fund Trust and trading that portfolio in 1972 using this very basic system.

Then really, Keith Campbell made the decision strategically at that point to come back to Baltimore where he was born and raised, in 1973, he got his brother Kevin as well as Bill Clark, one of his cousins who later became one of our earlier heads of research and really put together Campbell & Company. That’s where the name comes from, and got things started. As Campbell progressed over the years, one of the keys I think to Keith’s success and one of the things quite frankly that makes him different than many of the other CTAs, is that Keith himself is not a quant. He was not some sort of a scientist or somebody who is the brilliant mind behind it all. In fact, I’d say he was much more in the camp of a real innovative business leader. One of his guiding principles was the Mastermind Principle. He believed that the power when you take two minds and put them together, you effectively create a third mind, almost an invisible mind that then there’s a multiplying effect putting all these smart people together. So he went out and began to hire very intelligent people; in some case other PhDs, to really work together and create a research culture that then has grown over the years into what we now know as Campbell & Company.

I think it’s interesting that after the first 20 years of Campbell’s existence, even then, with all of this experience and being one of the biggest CTAs – certainly one of the oldest, Keith knew that he needed to hire somebody not just on the PhD side, but also on the business side. So he went out into the futures markets and he found Bruce Cleland, and a lot of people in the industry remember Bruce Cleland as somebody who was at the time running Rudolf Wolff, which was a very large futures brokerage operation up in New York. He was somebody that had been around the markets and really understood futures and the business, and Keith brought him down to Baltimore to run Campbell & Company as our President and CEO starting in 1993. So Keith then passing the torch on to Bruce for the next 20 years and certainly Campbell had a lot of success from 1993 to 2012, and then in 2012, Bruce made his retirement. As I mentioned before, Will Andrews and I, after both having been at the firm over 15 years, took on the reigns as President and CEO.

Niels

It’s funny you mention Bruce Cleland in 1993, in fact Bruce Cleland came to my humble, humble offices in Copenhagen, in 1993 and what was so great about it was really, as a memory at least, was really that Campbell at the time was very dominant and to have someone like him, so prominent within the industry and within your firm, actually take the time out to come and visit a small aspiring company in Scandinavia that wanted to get into this space was something that I have never forgotten, and I think that says a lot about Bruce and the culture that you have, so that’s quite interesting for me on a personal level. If you look at that 42 year period – I know you mentioned that there have been three leaders or teams at least, what are the big stages or events in that 42 year period would you say, before we get into the specifics, but just on an overall basis?

Mike

Well I think probably one of the big challenges, and I don’t want to speak for Bruce, but I can only imagine after joining the firm in 1993 we went into one of our larger drawdowns in 1994, 1995.That was a challenging period for the firm for sure, and I’m sure it was something where he probably at that time, and I’m not putting words in his mouth, but was maybe second guessing his choice to leave New York and come to Baltimore, but with his real strength and fighting spirit he hunkered down, he knew that really the focus needed to be in the area of research. He made some real strategic hires. In fact Dr. Xiaohua Hu, who is our current director of research, has been with the firm 20 years and was one of those strategic hires that was made in that 1993, 1994 period when the firm went into that drawdown.

I think that’s really been one of the real watershed moments for Campbell & Company, where we learned that in periods of difficulty, the best thing to do is to reinvest in the business, to kind of put your nose to the grindstone, and just fight through it as opposed to a lot of people with MBAs will tell you that from a business standpoint, when you go into a tough period like that where AUM declines, revenue goes down, that you want to do the opposite. You want to protect the business by shedding employees and really kind of hunkering down and trying to get through it. I think that in our business in particular, when you go through those tough periods, if anything you need to show signs of strength, that you’re reinvesting in the business, and that you’re here for the long haul. I think that the fact that the firm at that point was over 20 years mature helped them to be able to do that. Maybe if that struggle had come in the first couple of years in the 1970s, I don’t want to speak for Keith, but maybe it would have been more difficult to make that investment in the business. I think that that then dovetails nicely as you look at the most recent five to ten year period. Certainly we, as a firm went through our struggles in the 2007, 2008 period with a bit of underperformance relative to the industry. Looking back into that crucial period into the 1994, 1995 cycle we took the exact same approach of surrounding ourselves, reinvesting in the business and working hard to get back to our footing at the top of the industry. I think that if you look at performance over the last four to five years you would agree with me that we have gone back to being one of the key players in the space. I’m really proud that the firm was able to do that.

Niels

Sure, absolutely. That’s very important to bring that up. Before we leave Keith’s early beginnings completely, in my recent conversations with Jerry Parker and also with Marty Lueck, we talked a little bit about the early models for the Turtles looked like, and what the early models of AHL looked like, I don’t know whether you know this, but I’m just curious what the very early beginnings of Keith’s technical trading was based on and also how he got the idea to apply rules to trading because I can only imagine that back in the 1960s not many people were thinking like that?

Mike

I think you talking to Keith he’s always said that I think because he really was a lover of the charts, and believed in the technicals, there was always that rule-based approach. Though systematic trading and CTAs is not always based on explicit technical analysis, there are a lot of similarities just in the sense that when you say, as a rule, when the 50 day moving average crosses the 200 day moving average, I’m going to enter or exit a position, that in itself is a rule and by writing it down and holding yourself to it from a risk management standpoint it creates a return profile over time that’s way more repeatable than just playing Monday morning quarterback sitting there and making different decisions with every tick in the market place. From talking to Keith, I really believe that something that was always at his core.

I think that when you think about the early days and what those models look like for sure Campbell & Company was a trend follower. There’s no doubt about it. In fact, if you think about time horizons, I would say that we were a medium term trend follower. We certainly weren’t looking out beyond a year, and we weren’t very short term. I think that operationally as well as from a sharp ratio standpoint, back in the 1970s there was an advantage to your having less turnover in the portfolio and medium term trend following certainly helped with that. I think that that is really the interesting part of the story, is that Campbell, though there’s been a lot of press recently about what we’ve been doing in some of the non-trend following models that we’ve developed. When you think about it, we really got into non-trend following with the evolution of trading FX carry strategies. We started doing that in the late 1990s, so we’ve been at that for over 15 years and what we’ve tried to do is really just enhance the non-trend following portion of our portfolio to help diversify for times, to be quite frank with you, there are periods where trend following doesn’t work as well. We wanted to, as an absolute return manager, add things to the portfolio that were going to help diversify so that in those periods when trend following didn’t work as well, we would have a more stable return profile for our clients. There’s been quite an evolution over the 42 years.

Niels

Sure, absolutely. I wanted to ask you a slightly different question and that is that you as the President of Campbell & Company, obviously that’s a big part of your life, but what do you like to do when you’re not working? What do you like to spend your time doing?

Mike

Well, I’m an avid reader. I’ve always criticized young people coming into our business who say, “how can I have any experience, I’ve never had a job before.” When I talk about experiences I say, “yes, but I feel that financial markets are probably second to history and military in the sense that everybody who has ever traded anything seems to have written some sort of a book.” So there are a lot of experiences that you can gain as an individual by quite frankly learning from the mistakes of others through reading their stories. So I’ve always been a huge reader. I also enjoy sports and in the most recent kind of ten year chapter in my life I really enjoy spending time with my family including my two kids.

Niels

Yeah, fantastic. Before we jump into the next topic I wanted to ask you a slightly broader question and that is we know that many of the most successful managers today really have been based around its founder an individual, and the firm is often personified with this individual, but in your case, your founder stopped a long time ago running the business as you explained, what difference do you think this makes in terms of Campbell as a business from an internal point of view, but also Campbell as a business partner to an investor?

Mike

Well I think that one of the great benefits of systematic investment managers is that we remove key man risk from the equation. One of the thing you hear talked about all the time in discretionary macro is what happens when Paul Tudor Jones or George Soros or any of these real visionary traders, what happens when they leave their firm? I think on the discretionary side they worked really hard to build teams to allocate risk to those teams of traders, to teach them their ways, but there still is a bit of a fear when that principle sort of exits the scene and leaves their name on the door, but isn’t present on the trading floor any more, and I think that the real benefit of our strategy is that most folks understand the fact that the models are the ones executing the trades. That being said, I think we all can acknowledge that many of the legendary CTAs are started by, as a said, a quant or a scientist who is, they themselves, the people who are building the models. I guess to that extent there may be a worry that when the founder decides to retire, or walk off into the sunset that the research itself may lose something.

I think that Campbell is in a very unique position, as I mentioned, because we were founded by a business person who had a financial background, not a quant. By surrounding himself and really promoting a culture of team sharing of information, we’ve created a very sustainable business model where groups of people over time who have worked here on our models, and even though those people may not stay with us, the models do continue to reside as our intellectual property. As each new person comes to the firm, they help enhance that over time. I feel that though all businesses have that risk, I feel that as a CTA and specifically to our situation as Campbell, we have considerably less of that risk, as well as the fact that having been around for over 40 years, and the fact that we’ve gone through these three succession plans, I think that that also gives some faith to the investor, as well as our employees that we’ve executed on these transitions before and that we know something about how to do it.

Niels

Sure, absolutely. It’s very interesting. Another well-known firm that’s been around for about 40 years, Dunn Capital, they have done the same. They have been through their transition, so maybe that’s the mark when people start thinking about who knows. Anyway, I wanted to ask if you could… because you have a number of different programs today, and even though we’re going to talk about the largest of your programs as a theme, I want to give you the opportunity to maybe just highlight, from an overall point of view, what your product offering looks like today.

Mike

Sure, so one of the things that we have done recently, is really kind of almost bifurcate the portfolio and create almost a menu-based approach. What we’ve heard over the years, if you think back to 10, 20 years ago, investors were still educating themselves on the space. They would come to us and say, “please give me what you think is your best portfolio.” We’ve come a long ways as an industry now. In fact, when I’m out there as the President of Campbell, meeting with a lot of institutional clients, I see many cases where they’ve hired their own PhDs and many of these folks have maybe worked at a CTA or had their own CTA in the past, or have allocated to CTAs, and really understand all of the various alpha sources and drivers of returns, so now what we find is that a lot of investors come to us… some come to use and say we want what you believe to be your best portfolio, which is our flagship managed futures portfolio, but in other cases they may come to us and they’re trying to build a fund the funds, or a group of managers, so they say, “we just want your trend following, or we just want your non-trend following models, or we just want your cash equities.” Which for us is statistical arbitrage across the globe, so with that we have a trend following portfolio, where investors can get access to just our trend systems. We have what we call our Prism portfolio, which is just our non-trend following models and that’s the same portfolio that’s in the flagship vehicle, then we have as a center flagship fund which is our managed futures portfolio, which is… the mantra behind it is that it’s enhanced trend following. It’s 80% allocation to trend following and a 20% allocation to non-trend following, or that Prism portfolio that we just spoke about. Lastly, we have our multi-strategy portfolio. Multi is what includes our equities stat arb, so there you have a 40% allocation trend following, a 40% allocation to non-trend, and then a 20% allocation to the equity stat arb. We believe that that is the most diverse offering that we can offer to institutional clients, but in many cases if they are looking for something with a higher degree of correlation to CTAs they’re going to want our flagship managed futures portfolio and then obviously if they want to bifurcate that and invest in just trend or non-trend we have vehicles for that as well.

Niels

Do you… I know these questions are hard to answer sometimes, but do you have a wish from a business point of view to say, OK in the next five years I really want to see us having at least 25% of our assets in this strategy and 25% in this strategy just to become a more diversified systematic investment firm, or do you expect maybe that actually the original managed futures will always be our calling and always be maybe 75% of our business?

Mike

That’s a really good question. I think as a business person I always…I mean we’re selling diversity here so I would love to have more diversification across the various portfolios. That said, my fear is always that allocators from time to time will try to trade managers or trade styles and my fear would be that when trend following does well, people will allocate to trend following, at absolutely the worst time, or vice versa to the non-trend following portfolio, so at the end of the day a tremendous amount of research has gone into both our flagship vehicle and our multi-strategy vehicle that both offers the diversification across trend, non-trend, and in the case of multi cash equities. So I would feel more comfortable having the larger portion of my assets in those two vehicles simply because I think that they are going to have the longer or the better, I should say, track record because of the sharp ratio and the risk adjusted returns that we’ve seen in the back tests.

Niels

Yeah, and I guess also, it’s quite interesting to see that many of the largest firms in our industry really are one product shops: Winton is one, Aspect, and so on and so forth. They really are one product shops so maybe it is also sometimes too hard for investors to make the right choice, and it’s better that you do it for them. Interesting… now you’ve got a big organization, so I wanted to ask you to explain a little bit about how the organization is structured from an overall point of view.

Mike

Sure. Well, our current assets under management is just over 4 billion. We have a staff of about 132 people here in Baltimore and we do have a few sales people that live in various parts of the country and the world, but the lion’s share of that 132 is here in Baltimore. About 80 people of that 132 are involved or touch the investment process every single day. I think what’s important to mention as well is that when I think about diversity, and you just kind of brought this up as far as having the assets split amongst multiple products, but there’s another layer of diversification via assets, and that’s the types of clients that you have. If you have all of your clients in one type, they’re all fund the funds, or they’re all from one particular part of the world, or they’re all retail, or they’re all institutional, that in itself gives you some concentration risk.

I think one of the things that Keith Campbell did a great job of, in the early days, was being one of the early movers in the private wealth distribution business. So we’ve been creating limited partnerships that retail investors, who are credited in the United States can invest in for many, many years and that’s taken the form of our business, really being about 50/50 split between institutional clients and private wealth clients. What’s nice about that is that they tend to move in and out of managed futures at different times and for different reasons, and that really, to be honest with you, probably gives us more diversification from an AUM standpoint than even diversification across various products on the institutional side. I say that because getting into the private wealth distribution business is not easy. I think one of the reasons that we’ve been successful is because of our size. Often times people compare us to other CTAs who may have a slightly lower head count than 130 at 4 billion under management, but I often remind them that part of what makes us special is that private wealth piece and without the 130 employees we would probably find it very difficult to do that level of retail distribution. I don’t think it’s an apples to apples comparison to look at a 4 billion dollar CTA that only has institutional investors, if that makes sense.

Niels

It makes perfect sense, it’s a very good point. In fact it’s something that I wanted to bring up later, but I can’t actually remember what my questions is, so we may come back to this which is a bit of a unique feature for sure. So you say 80 of the 130 is involved in the investment process, but do you now-a-days with the technology, with outsourcing opportunities, how do you view that? Do you outsource any of the things that you do, or do you really keep it in house?

Mike

That’s a great question. So right now there’s limited outsourcing when it comes to actual people, but where we are seeing some unique outsourcing opportunities would be in technology. This is really something that as a firm it’s been a real transition for us. When you think about it, 20 to 40 years ago there were no vendors on the technology side that could provide anything that we needed to do our business and so another element to our higher headcount is that we have a very large technology team, because to be quite honest with you, we’ve had to build all of our systems going back in history. In the last five to ten years, we’ve seen that change dramatically, although many technology companies initially focused on what I’ll call the big asset classes like cash equities and fixed income. What we’ve seen recently is that they’ve started to migrate into what I’ll call the hedge fund space. So they’ve embraced futures and options, OTC markets like cash currencies and swaps, and so with that we’ve now seen a whole host of products that we can use to help us be more efficient. At the end of the day we’re still going to need technology resources like software engineers, but I want those people focused on our intellectual property. I want them working with research to build better alpha sources, not working in the trading department to build a better blotter for the traders to use to route orders out to the marketplace. So that’s really been our focus as of late is embracing outsourcing of technology in areas like accounting, operations, certainly the back office, and then the front office on the trading side.

Niels

Sure, absolutely. I don’t know whether it’s best to use the research team as an example, but what do you look for when you want to add people to your business or say your research team? What are the things that you look for in the people that you want to join the Campbell family?

Mike

That’s a great question. I think, if I could summarize it, we’re looking for strong creative, critical thinkers. Where we get those people from, I think that’s a bit of the secret sauce. I think that you’re putting all of your eggs in one basket if you just go to other CTAs or to the banks and just bring people in who have an understanding of the financial markets. I think that you do want to have some of those people as part of your team, but we’ve always believed that there are some really interesting people that you can pull directly out of academia. There are some folks that may even be working in… that have a Ph.D. say, but are working in another discipline – say physics or other disciplines within science. We’ve even had some success in hiring people that had maybe a medical background. I remember one particular gentleman who was working at the University of Chicago analyzing brain waves and at the end of the day he said well, how can you compare this to financial markets and we said it’s just a piece of data on a chart and maybe the way that you’re looking at it from a medical standpoint are different than the way that we’re looking at financial markets and maybe there’s something we can learn from that. There are a lot of interesting examples of people who have come from really unique backgrounds that help to add value to the overall team.

I think that that word team is really important because going back to Keith and how he started the firm in the early days that notion of he couldn’t do it all by himself. He needed to bring the firm back to Baltimore, to enlist some of his family members, to create a team, and then using that Mastermind Principle to build out a team of very intelligent individuals. That’s probably our number one focus: Is the person a team player? There are a number of people in our industry who have a hard time sharing their work with others. They believe that if they came up with an idea, and they don’t want to run around and tell everybody else about it. That’s completely anti to what we believe here. We want people that are going to work in a team fashion, share their ideas, not be afraid to be criticized by others in the group because we believe that’s what makes the idea better and at the end of the day that’s what limits that key man risk so that Campbell & Company and its models can continue to live on into the future.

Niels

Sure, absolutely. I had one more question about the organizational side, and that is about how do you build a strong culture in an organization like yours? What are some of the key things that you do to build that team and make the team work so well together?

Mike

I think at our core it comes down to really the history that we have. I remember what Campbell was like when I joined 15 years ago. To be quite frank, it’s a family culture. We take care of one another. Though we work very, very hard for our clients, to make our strategies better, I don’t think it’s the same cut-throat environment that I was exposed to when I was working on Wall Street in New York. I think that being in Baltimore, from a cultural sense, helps us to kind of slow down a little bit and to be very thoughtful about our research. We don’t have to rush everything to market like I felt like every deadline in New York had to be done by 5 o’clock and sometimes work was rushed and wasn’t as good as it could have been. I think that being involved more in having that strong sense of family has always been a big part of our culture. Once again, I go back to everything being done in more of a team fashion. Think about our leadership structure: it’s myself as President and Will Andrews as CEO, we’re co-running the firm, which means that I can be out on the road meeting with an institutional investor on the other side of the planet and Will is back here running the shop and vice versa, if he’s on holiday, I’m here. We think about… we have a very strong executive team with nine members – a total Campbell experience of over 100 years. Average 10 years or 8 to 20 years per individual, so when people come here they obviously feel pretty strongly about the culture because in many cases we want those people that are looking to retire in Baltimore at Campbell and not jump from job to job like we see at many other firms in some of the bigger cities like New York, Chicago, and London.

Niels

Yeah, I guess that’s definitely very true. I wanted to jump to more of the trading oriented side of our conversation, but before we get there, I want to talk about track record. I want to ask you about how people, or how investors – potential investors, should look at your track record? The reason I ask this is because we know that models evolve. We know that the trading models that Keith used in the 1970s is certainly not the models that are being used today, so this is also a little bit of an educational question and that is, how should investors approach looking at a manager with a long track record and make sense of it?

Mike

It’s a great question and we start by always telling people that we’re happy to show you our 42 year track record, but almost one of the first things that we caution people against is be careful when you are looking at the 1970s, for many reasons. First off, Keith would be the first one to tell you that I believe one of his early portfolios was about 12 markets and they were all commodities, and commodities during the 1970s, as we all know, during a period of aggressive inflation had some very, very big moves. So though we had some very spectacular returns back in the 1970s, we try to manage people’s expectations by telling them it’s a much larger, more diverse portfolio. Our group of strategies is much larger and more diverse than it was back then with multiple styles and “look-backs” and trend following and non-trend following, so that’s one of the first things that we always tell people.

I think when I tell people as far as looking at our track record, one of the things that I like people to focus on to be quite honest with you is the last three to five years and that’s for two very important reasons. The first is let’s face it, the last five years has been a very challenging one for CTAs and I think Campbell & Company’s done a great job of innovating and building and adding new strategies to the portfolio mix that have really helped us to outperform. I’m very proud of that, and so I certainly want people to focus on that because I think that that sets the bar quite high. In addition to that, we’ve made many enhancements to the portfolio since that 2007, 2008 period and I think that it’s important to look at the portfolio because the way it is today it hasn’t changed a whole lot in the last five years, but since that 2007, 2008 period, there were changes that were added in after that period of underperformance that have changed some of the dynamics of the portfolio. So I think if you really want to be laser focused on what that portfolio is going to look like in the future, focusing on the most recent period is probably the most applicable.

If I could, just since we’ve mentioned some of these changes, if I could just summarize them, as I mentioned before, one of the first changes that we made on the back of the 2008 period was to change the investment objective. One of the reasons we underperformed was we had a much healthier balance between trend and non-trend in the portfolio and though we were positive in 2008, we didn’t have as high of a return profile as some of the other CTAs that were more focused on trend following. What we heard from investors was that’s, in fact, what they were looking for – that bias to have a reasonable correlation to other CTAs and if other CTAs were going to have a lot of trend following in their mix, or in some cases 100% allocation to trend following, we knew that we had to have that bias as well. So we set the research team off on an optimization project to come back and tell us what they thought would deliver what we call now enhanced trend following and 80/20 was effectively what they arrived at. So that change was made post-2008, and we’ve stayed that 80/20 allocation since that period. In addition to that we’ve added several new forms of trend following going back to when Keith started the firm in the 1970s, we focused on what I’ll call market-based trend following, which is where you’re following the underlying signal of each and every market in the portfolio and effectively mapping a long or short position, to the strength of the uptrend or the downtrend. Now we’ve added what I’ll call sector based trend following as well as factor based trend following.

Sector-based trend following is where you actually think about the intuitive economic movement of markets and what makes economic sense as far as grouping markets together to lose some of the noise of individual market moves and then effectively create an index around that grouping or markets and trade them as a basket. I think one of the most interesting things about sector based trend following is that in an environment over the last few years, where many CTAs complained about the rise in correlation between markets, which in a market-based sense effectively limited their opportunity set, a model like this did quite well because as investors moved in and out of risky assets, as an example, instead of seeing trends in say WTI crude, or Brent or unleaded gasoline futures, you actually saw just investors moving into commodities like energies and moving out and it created sector trends that these models were able to follow, so I think that was one of the areas where we saw some outperformance.

The next one was the factor based trend following. Now factor based is similar to sector in that it’s still trading baskets of markets. The difference here is instead of up front deciding what the basket is going to look like, based on an intuitive economic sector, here you’re actually using correlation to tell you, OK, instead of what markets are or should be trading together, what markets are actually trading together? So it’s a similar approach, but going at it from a different angle so to speak and using that correlation matrix. Next was really to enhance our “look-backs”, so as I mentioned, going back to the 1970s we started as a medium term trend follower, which I would define kind of loosely as a 1 to 3 month “look-back”, and as we did more and more research, we saw that maybe there was value in adding both shorter term “look-backs” – one month and in, and longer term “look-backs” – 3 months out to a year, though we still have held on to a core allocation of medium term trend following because it has the best sharp ratio over the long term. We really liked the diversification benefits of say the shorter term models which help us in a trend reversal period to actively turn our portfolio quicker. We’ve intentionally lowered the allocation to short-term because you’ve always got to watch your trading costs and in some environments you can get whipsawed, so it does have the lowest risk adjusted return of the three “look-backs”, and so we’ve under-allocated a bit there, but we like the value that it brings to the portfolio. Then, in some cases, what I’ll call the anti-whipsaw, which is elongating your “look-backs” so that you’re not seeing as much turnover that you need a very long mature trend reversal in order to get you out of your position. Certainly the longer term models have done quite well in recent years in that in many cases, whether it was risk on risk off, or taper on taper off, if you were, say, long equities, you stayed long equities, even though there may be a two week or one month reversal in stocks, it took so much more to get you out of your position, so you held on to it. I think that at our core we believe in diversification, so it wasn’t about deciding which of these three “look-backs” was the best, but really introducing these two new “look-backs” in the short and long term to help compliment the medium term models.

Niels

Yeah, well it sounds like you’ve been very busy on the research side in recent years. Would you say, not that it’s that important, but would you say that they last five years is where you’ve just gone through some major improvements, would you say that’s probably been one of the most sort of busier periods in terms of research upgrades and really evolvement of the strategy?

Mike

I think we’ve always been extremely active in the research process. As I mentioned before, in recommitting ourselves to research after that 1994, 1995 tough period, we’ve always believed in research, and it’s always been an active process. I think that it’s much more that we made more significant changes to the construct of the portfolio post the 2007, 2008 period because we really had to respond, as you and I have discussed, we saw a significant outflow of assets. At our peak in 2006 we were at 13 billion and just a year and a half ago, or two years ago, when I took the role we had declined to 2.5 billion. So in seeing those types of outflows… now granted, I think we both can agree that some of that was just based on the financial crisis. We, like many people, had investors on the institutional side in particular that had significant liquidity issues and one of the best selling point of commodity trading advisors is our liquidity and so as the joke goes, we were the ATM of the hedge fund industry and everyone came to get liquidity and cash from us.

Now the other half of that story is that we underperformed our peers in those periods, in 2007 and 2008, and that also lead to… if you’re going to take the money from someone, maybe you take it from the worst performer during the period. I think that we haven’t talked about 2007, but there the story was different. There it wasn’t as much the balance between trend and non-trend. There in particular, as we talked about, Campbell’s really a pioneer in adding FX carry strategies into a CTA portfolio back in the late 1990s, and it worked quite well for us. In fact, many years between say 2003 and 2006 a lot of our outperformance came from FX carry. In 2007, as we saw the beginnings of the financial crisis and that high period of risk aversion, FX carry was one of the first things in many people’s portfolios that were liquidated. So we did see some losses as a result of that which led to some of that outperformance and then propelled additional changes on the research side and in the portfolio. One of the things was that we moved away from naive carry, and said that we’re not going to have a carry strategy in the portfolio unless it has an enhancement or an overlay or a modulator that will help it in some of these difficult periods of risk aversion. We also looked to build out our non-trend following suite of models away from just carry and in carry not just in the asset class of currencies.

So we added cross-sector models, which take information from one asset class and use it to propel trades in others. The investment thesis there is that information, we believe, is disseminated at different points in time from one asset class to the other so that there is information that can be gained say in equities that would allow you to trade currencies and there are many examples. We also added in short term mean reversing, where there we believe that short term mean reversion can help in several cases, but most importantly after a long mature macro trend often times you see not only the reversal, but sometimes a period of choppy price action before you break out into a new up or down trend, and so having short term mean reversion in your portfolio actually gives you a strategy that can specifically perform in that environment which we all know as trend followers is usually the worst possible environment for a trending system. So continuing to kind of build out that non-trend following suite helped. To be quite honest about short term mean reversion, when I say short I think I do need to clarify that though these are the fastest models in our portfolio they still only represent about a 1 to 2 week “look-back”, so they’re faster than a three month medium term trend following system, but we in no way have moved into the high frequency intra-day trading type world.

I will say from a CTA perspective it has made us more nimble. I think if you look at last summer as an example when many of our peers had difficulty during that May through September period after Ben Bernanke, on May 22nd said the “T” word, or taper, and the correlation between stocks and bonds broke down dramatically and many managers lost on both their longs in stocks as well as bonds, we saw specifically some of our faster strategies like short term mean reversion very quickly covering our bond position, and within a matter of about two weeks we were effectively short bonds and had a hedge on over the summer months. So we gave back a little bit of our gains for the year, but not these huge losses that we saw in other parts of the industry. To be fair, at the beginning of this year we underperformed a bit in the first quarter, because those same nimble strategies that when the equity markets corrected in January reduced our risk so that when stocks went back up to the highs in February we didn’t have the same equity position that many of our peers had. I think at the end of the day, once again, it’s about being correlated to the industry, but also being different so that we can justify our role in people’s portfolios.

Niels

I couldn’t agree more with what you have said. I think that’s very important. I have a philosophical question from the things that you just brought up just now, and maybe it doesn’t apply so much to you, because as you say, yes you’ve gone longer term in equities because that’s been a good thing to do, but you’ve also maybe added some shorter term models that kind of balances this out, but here’s my concern, because I hear that from many sides that many CTAs, if we call them that, have become more long term because we know that that has been a good way to enhance performance, and certainly in the equity sector where we’ve been in a bull market for five years and with very small corrections, so being very long term has been the right thing to do. Here’s my concern though, if everyone is becoming more long term, and in particular if we’re becoming more long term in equities, are CTAs going to lose the value that they play in the portfolio of managers or institutional investors who actually want CTAs to make money when equities go down. Simply, are CTAs in general going to be too slow to react and are they all going to head for the exit at the same time given that? I know it’s a bit of a philosophical question and maybe you don’t have a view on it, but I’m just a little bit concerned because I hear this from many sides about the time frame and in particular in equities.

Mike

I think it’s a very topical issue and one that we hear a lot in the industry. A couple of comments, first off, as I mentioned, because we have added both short term and longer term “look-backs” into our… we’ve in a sense embraced both of those elements, but I think that when you still look at the portfolio as a whole, it still is going to have a very kind of medium term “look-back”, because the short term and the long term balance each other out. As I said, if anything, the shorter term systems, for us are nice because it helps us to kind of cover our risk and maybe turn the aggregate position a bit faster than just a medium to long term system, but because we have implicitly made that decision and see the value in adding in shorter term models, I’m probably on the other side of that argument. I do think that from a research perspective, one of the things that we’re always focused on is looking at every change that we make to the portfolio and what impact it’s going to have on our correlation or beta to the equity markets. To be quite honest, because I think to your point, there are a lot of investors out there who look at their managed futures or their trend following exposure as tail risk protection for traditional assets like stocks.

There’s a reason that that term “crisis alpha” is used quite a bit in regards to describing commodity trading advisers. I agree that we would not as an industry want to lose that because I think that’s a very valuable role that we play. In fact, it’s funny that through this incredible uptrend that the Fed, if you’re of that belief, or if you think that equities have been going up for other reasons has created…now as it turned out, if I think about the most recent correction, it actually happened in what I’d say a much more gradual, though a few weeks ago it certainly felt a bit more violent, but if you think about over the last few months, the markets came off the highs and in our case, the short and medium term models had covered their long positions, the long-term models held to their long positions, so for us, we really just got flat the equity markets just in time for the abrupt downside moves to kick in. So as investors looked to our performance, they actually saw positive performance, in a large part because of the movement of flight to quality into bonds and our long positions there.

As I look at the industry as a whole, we are seeing quite a bit of dispersion this month, as an example across CTAs and maybe to your point that’s because there were people that didn’t get out of those long equity positions and struggled a bit as a result. I think it’s going to take more time for us to really kind of realize that, but at the end of the day I don’t think it’s a bad thing, necessarily that managers in our space start to kind of do things that are a bit unique and different and try to differentiate themselves, because if everybody has a 95% correlation to the largest managers, or to the Barclay CTA Index, then it’s going to be really hard for people to be able to pick and allocate to managers.

Niels

Yeah, absolutely. I think there are two thoughts on that. One is of course that we know now-a-days that investors predominantly feel that allocations should go toward the larger managers, that’s clearly why there are much fewer large managers and a lot more small managers who are struggling, so in that sense it is also important that large managers do things differently and not become too correlated as you pointed out. The other thing is, of course, there’s also a problem for the smaller manager if we just talk about them for two seconds, and that is they think that investors only want someone who looks like a Campbell, or who looks like an Aspect, or whoever it might be, so they often design their systems to look like that and actually it’s a bit of a shame because what really differentiates a manager from another is the manager itself, and therefore they shouldn’t really try and look like anyone else other than what they really believe in, but it’s a difficult thing to do in reality.

Now one of my listeners sent in a question that I think you might be really good at answering and that is how do we respond as an industry to the fact that many investors, and maybe those who have left this space in recent times, who claim that the reason why trend followers don’t really make as much money in the last few years has become simply that there’s too much money trading the same trends and there’s too much money flowing into this industry. Do you have a thought on that? Do you get asked this question on your side?

Mike

You know, we were definitely asked that question a few years ago. I feel that that question hasn’t been asked recently because to be quite frank with you, in the last six to twelve months, CTAs have actually had pretty decent returns, and though the industry has shrunk a bit, it hasn’t shrunk in a large material way and so certainly we continue to believe that there’s efficacy in what we’re doing because profitability has returned to this space. I think what will be interesting as well is to continue to follow the liquidity of the markets that we trade and I think that, to me, from a former trading standpoint, is the thing that I’m most focused on is the markets that various CTAs decide to trade. There’s a debate as to how diverse you should make your portfolio and where you should have your cutoff point for liquid markets. I’ve been quoted many times as saying that we have 80 markets actively in the portfolio and though we’re always looking for new markets to add into the portfolio, we’re probably on the lower end of the spectrum and a bit more conservative when it comes to making sure that we’re trading liquid markets because I’ve said very frequently that when you have 200 markets in the portfolio there’s two risks there: risk number one is that you’re starting to wade into markets that may not be nearly as liquid and then, as we all know as traders, you tend to make money on the way up, but then when everybody exits the trade you give back everything you made and then some, so it can lead to losses for the strategy.

The other risk is that you’re just really doing it to effectively add a bigger number to the marketing brochure and there, when I say that, I mean that you can add a whole lot of additional international equity futures to the portfolio, but if you’re adding a particular market that’s got a 95% correlation to the Nikkei or the DAX or the S&P 500, what are you really adding to the portfolio other than another name on your website as far as another market to increase that number, and you’re creating issues for the portfolio and the traders because you could be putting something in that’s not as liquid. I think there continues to be a real debate there. I think in addition to that there’s been a real debate within the industry around how you weight your asset classes because as managers have gotten some of the bigger managers in Europe have gotten larger, we’ve seen them focus way more on financial futures and I can only believe that that is because they are way more liquid than commodities. I had an investor recently kind of jokingly say that Campbell is putting the C back in CTA for the multi-billion dollar space because we continue to have an even allocation when we start the day to all four of the major asset classes. I think the fact that we have a 25% commitment to commodities is a real differentiator. You certainly see that with some of the smaller managers, particularly in the US, like in places like Chicago. For Campbell to have that much in commodities, I think it makes us a bit of an outlier, and listen, at the end of the day we just see that there are some really unique opportunities. Commodities, we like to bucket them as an asset class. When you think about it, between precious metals, base metals, energies, livestock, grains, even the sub-sectors: soft commodities like coffee, cotton, and sugar, these are markets that have very, very different supply and demand forces and when you are looking just within the commodity sub-portfolio performance can be very different, so there’s a lot of diversity and opportunities when you add commodities in a meaningful way.

Niels

Absolutely. This was one of the things I wanted to go into a little bit more so, so I’m glad you took me there. Given the fact that, as you rightly say, trading in 80 markets is certainly on the low side for sure compared to the size of your portfolio and compared to other managers, and the 25% allocation to commodities, what does that do, if you want to stick to this, what does that do to your optimal size, meaning growth? Where does that allow you to go and maybe you don’t have a vision of being as big as some other managers, I don’t know, talk to me about that.

Mike

Sure. Well, it’s a great question and one that we get frequently from our clients and our prospects. As we currently look at our existing portfolio, and if we look at the markets that we’re trading and assume that liquidity doesn’t change, we can run our current portfolio up to about 10 billion under management, so we’ve got 4 billion currently in the portfolio. It means we have a lot of upside for growth, but if we’re going to keep the allocation to both commodities as well as some of those shorter term strategies that I mentioned, we’re going to have to cap the portfolio. Now a lot of things can change. Think about it: liquidity has come in quite a bit from the highs of 2008. If we were to see a return to a rising liquidity environment for fixed income, equities, currencies, and commodities, then that is going to change. As I said, just kind of looking at where we are right now, we have room for growth, but at this point in time we don’t have visions of being a 20 or 30 billion dollar manager. That said, we’re always thinking about new products.

You mentioned earlier about diversifying yourself across different product sets. We’ve been trading cash equities and stat arb for a number of years, if interests were to come back into that space, that could be a portion of our business that would allow us to grow as a total firm AUM, but wouldn’t impact effectively our CTA AUM. So there are a lot of different factors at play. We want to make sure that we can grow, but I think that being a multi-billion dollar firm gives us a tremendous access to resources to create an institutional infrastructure that allows for redundancies and plenty of head count, legal and compliance: to be able to deal with all of the challenges that, as you mentioned, smaller CTAs struggle with today. We like being in that billion dollar group but at the same time I think that many institutional investors look at us as somebody who has growth potential, whereas maybe some of the larger managers, they do fear that how much bigger can they get before it degrades their returns?

Niels

Yeah, absolutely. I wanted to talk a little bit more about the trading program. In some ways I wanted to give you the opportunity to take us where you want in terms of describing or what you want to mention about the trading programs and so on and so forth, but I want to mention one thing that I noticed that I think is certainly an interesting topic and maybe that’s something you want to comment on, and that is how you create a strategy because maybe it’s a bit difficult for many people to really understand…

Ending

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