Managed futures guru David Winton Harding graduated from the University of Cambridge in 1982 with a first-class honors degree in theoretical physics, but decided he'd rather have a job in finance than work in a lab. Now chairman and director of research of Winton Capital Management Ltd., London, Mr. Harding was recruited as a graduate trainee by the London office of stockbroker Wood MacKenzie Ltd. Some years and a few jobs later, he formed his own managed futures firm, Adam, Harding and Lueck Ltd., which was acquired by Man Group PLC in 1994.
After leaving Man Group in 1996, Mr. Harding founded Winton Capital Management in 1997. In addition to its original strategy, the Winton Futures Fund, the company added three more investment strategies: the multistrategy hedge fund Winton Evolution Fund; the long/short equity hedge fund Winton Octo Fund; and the long-only Winton Global Equity Fund. Winton Capital Management's recent growth has been strong, fueled by institutional inflows: Assets under management increased to $21 billion from $13 billion in the last 18 months.
Last year, Mr. Harding's largess supported the study of sustainability. His $32 million donation to The Cavendish Laboratory of the Department of Physics at the University of Cambridge is the biggest ever to the physics lab since its establishment in 1874. The gift funds research seeking solutions to the effects on the environment of climate change and rapid global population growth.
How did you get into money management? I fell into it somewhat by accident. I wanted a glamorous job when I left college and I liked all the American investment banks, but they all turned me down. I only applied for one other job; that was the job I had to take. It was British stockbroker Wood MacKenzie. Within three months of my joining, the London International Futures Exchange opened, which seemed a bit more exciting to me. They asked for volunteers to go into this slightly glamorous new endeavor and it definitely appealed to my sort of personality. I certainly hadn't made a lifelong commitment to professional investment and financial services, but anything that was fairly sexy and glamorous definitely kicked the boxes.
Did you anticipate the strong growth in managed futures strategies over the past two years? There has been monster growth since 2008, but I never thought it would be like this in the earliest days. In 1990, I thought to myself: “This is great, this has worked, but I very much doubt that it will work in the 1990s.” I couldn't really picture it carrying on, being successful going on, that we would continue to be able to make it work and that we would get bigger from outside investors trusting us with their money. Over the years, my pessimism has gotten worn down as futures trading has continued to work.
How did you develop your trading and investment strategies? I had a job in the mid-1980s at a commodity broker, Sabre Fund Management, where I spent every single day drawing hundreds of minutely detailed charts of futures markets by hand. I was looking for market inefficiencies and being that close to it every day I saw patterns, patterns that did not seem random. They really looked much more like trends.
I was looking at ways to trade the markets. It was clear to me that if you traded randomly in the futures market, you would break even because costs are rather low. So you only need to be a little bit better than random and you would actually make money. So I could believe that you could be a little bit better than random because the data that I had seen didn't look random.
At that point, I was 26; I didn't have anything to lose in trying it.
So at that point, you co-founded Adam, Harding and Lueck Ltd. in 1987. Were you successful? Well, many of our old clients and Michael Adam's dad came with us and within a year, we were managing about $94 million. So we were making lots of money for clients at very high fees. We really were instantly successful. We had a company, with offices, staff, profits, all at very high fees. We moved our offices five times in the first year. We kept bursting out of it. AHL was the largest futures fund in the world until Winton surpassed it recently.
Was Winton Capital an instant success? We started trading in October of 1997 and went down 13% in the first month. It was quite funny. I was lucky. No one was watching. It was my own private shame.
I found it relatively easy to build a trading system with a fraction of the resources I had at Man Group. Necessity is the mother of invention. We opened to see if anyone would come and no one did. I ranted and raved, but still clients did not come.
Hedge funds of funds came first among institutional investors, beginning to look at us from 2002 and 2004, as that group started to look at investing in (commodity trading advisers). From 2004, Winton's growth has been linear and continuous. That was when institutional investors started to find us. We've had some institutions as clients forever. I can't even hint at the identity of them, they're so secretive.
Eastman Kodak Co., Virginia Retirement System and San Diego Employees' Retirement Association were not our clients, but they were early investors (in managed futures) and were always being held up as examples of “the institutions are coming! The institutions are coming!” But believe you me, they never ever came in force until 2004.
Now, I know what's it's like when the institutions have come. Since about 2008, institutional investors have been deconstructing their hedge funds of funds and have been making direct investments in the best CTAs, including Winton.
What was the genesis of your long-only equity fund? The kind of expertise we have in computational analysis and inference is not specifically applicable to trend following and managed futures, it is applicable to investment. Trend following and managed futures is really about asset allocation, it's an unconstrained asset allocation problem. We have made significant progress compared to other people in the world in this field of asset allocation. That's what our success and track record should be attributed to.
When it comes to stock selection, we've applied our same mathematical tools, the same understanding of probability, forecasting portfolio optimization, bias and survivor selection in the selection process, but absolutely not the same trading systems. We believe that we have made some significant discoveries in stock selection and portfolio construction which have enormous commercial value. The only bit (we still need to build is) ... a $100 billion fund company. Alternatively, we could do a deal with an existing $100 billion fund management company.
We charge fees in basis points so it has to be basis points times a big number. This is not a business that you can have $5 billion and charge 2% a year. In our hedge fund business, we make big margins on modest amounts of money. A $20 billion or $25 billion hedge fund business is a large hedge fund, but it's modest for a fund manager.
The fund launched internally about three years ago as a 130/30 fund, but morphed into a long-only fund. It's a business strategy for us that's entirely compatible with our existing business. It's all math. What I want are the best software and data teams. It's the science I want to have. I'm imperialistic about having the most and best science.