Interview: Stanley Fink, CEO, and Lawrence (Larry) Hite, director of investment strategy at International Standard Asset Management (ISAM)

Legendary Larry Hite of Mint fame has partnered with former head of Man Group, Stanley Fink, to produce a trend following, systematic strategy at International Standard Asset Management.

Some investors with a long memory may have a feeling of déjà vu when considering investing in ISAM Systematic. International Standard Asset Management (ISAM) has Stanley Fink as its CEO, running a strategy that originated with Lawrence (Larry) Hite. Fink was the man who negotiated the 50/50 partnership of Hite’s successful Mint Investment Management with Man Group in 1983.

Hite (pictured) co-founded Mint in 1981. Within a decade it was the largest commodity trading advisor (CTA) in the world and became the first CTA to manage over $1 billion. Since 1997 Hite has focused on other investment activities including private equity and other proprietary trading. He also formed a joint venture with Man to create a venture capital operation.

Since 2001 Hite, with some of the original Mint team, formed Hite Capital Management, a family office operation in New York where he continued to research and develop his systematic trading ideas.

ISAM, formed in 2008, struck a strategic alliance in February 2010 with Hite Capital Management. This resulted in Hite joining ISAM as a director of investment strategy. Alex Greyserman, who worked with Hite since 1989, is the chief investment officer for ISAM Systematic and was CIO of Mint for over 10 years.

“What we wanted to do was to use the quality computerised systems designed by Larry with his partners about 30 years ago originally for the Mint business and which he has been using for the last 10 years managing money for his family office,” explains Fink.

ISAM Systematic is based on Hite’s family office product that he has been running for the last 10 years. This, says Fink, gave ISAM a saleable product with a “good pro forma” but with higher leverage than Hite was running for the family office.

The plan now is to raise significant assets for the fund, now with over $300 million under management. Fink is confident he will have $1 billion or more in the fund by the end of the year. Despite the difficult capital raising environment, particularly for smaller funds, Fink is optimistic. “I think we are on track as a firm to get to a $1 billion within the next year. It’s still an aggressive target,” he admits. He is also encouraged by the fact that a significant part of the money coming into hedge funds is going into managed futures, a bit of a sea change from when he and Hite first met when equity long/short and Global Macro were the most favoured strategies.

Fink says he is getting a lot of reverse enquiries. He believes investors are looking at the pedigree of the fund – the combination of Hite and Fink should sway many investors – and deciding to get into the product early. “An increasing pool of people is looking at performance and seeing that on a diversified risk/return basis it is clear some of the small and medium-sized CTAs have outperformed some of the biggest CTAs. So there are many investors looking at us despite the fact we’re newly opened. They look at the pedigree and, truthfully, more people come to us than we market to,” says a delighted Fink.

Since bringing Hite on board, ISAM has been busy with moving the system from a platform that Fink admits was a bit dated onto a more robust one commonly used by money managers. ISAM Systematic is now fully automatic with all the trade orders going into the market without human intervention. In addition to ISAM Systematic, the company is offering Fusion, another hedge fund and a third fund aimed at emerging markets. Both have around $100 million each.

But the big pull for ISAM has to be Hite who famously said in his interview in Market Wizards: “One of the things I don’t trade for is excitement. I trade to win.” Thirty years on that has not changed. “I actually do this because I enjoy it. Sitting writing and testing the algorithms, watching it run and extracting the money,” says Hite.

“I was very happily trading for myself, not large amounts of money but sufficient for my lifestyle purposes, and then I got talking to Stanley,” says Hite. It was Fink that tempted Hite back into the public arena. “Stanley Fink is a very good businessman,” he states.

Hite started trading commodities in the early 1970s when he invented this system. Initially he aimed to make 20% a year but in the first year of trading in make a 110% return followed by 140% in 1974.

Hite, who has a habit of going off on entertaining tangents, explains the system with a bit colour. “If you really look at these returns, and I’ve followed these returns for almost 40 years, it has been a very consistent way of making money. I remember one time I had to make a speech in San Francisco talking to 2,000 people. I couldn’t actually tell people what we were doing so I stood at the podium, opened my wallet, took out a bill and said ‘See this? This is what we trade. This is money. Money can only do three things:  go up, which means you get more, go down or it stays still. What we do is trade risk.’ So I don’t see any commodity, I see the risk.”

Hite’s philosophy has not changed. Respecting the risk is still his catch-phrase. “It took me a while to actually understand the kind of business it was. We’re not gamblers. We’re bookmakers. We are odds givers but only after we set what we’re willing to take on the risk. We know what our risks are all the time. We fix those risks. I once proved just fixing your risks was a significant part of your return.”

Fink gives a more down-to-earth explanation. Under the system created by Hite, positions were put on at random, without any priorities, and allowed to run long or short. “The system identifies the trend. Effectively long positions that are winning money are allowed to run and positions that lose money are stopped out. “Just by operating this stop loss with agreed rules up front you generally made money across the 40 or 50 futures markets that have been in existence over the time period.”

The man who wrote the program based on Hite’s theory is Greyserman.

But 30 years on things are a bit different. Fink admits there has been a growth and proliferation of markets in the commodity sector and even more rapid expansion of markets in the financial sector. “Futures really started with physical commodities but the majority today are in the financial markets. The risk-free rate we are all trading against has come right down from around 10% to zero over this period. So the underlying gross return you’ll get will probably be a bit smaller than at peak simply because you’re only getting a return over the risk-free rate. And there’s probably more correlation between international markets than there used to be because of global traders,” says Fink.

The thing that has changed the trading world most for Hite is the speed and accessibility of information. “Today you could be anywhere in the world and they have the same data, the same information. So it’s a market that requires more Information Technology and a greater focus on avoiding heavy risk correlations leading to large concentrations.”“If you look from 1970 to today, the returns have come down as inflation has abated and interest rates have become more stable. But it’s still an extremely efficient way to control risk and make a very good return. Many believe that inflation and interest rates may start to climb again” believes Fink , The product has now been adapted to account for these market changes.. The fund now has a similar volatility to other products  in the marketplace that ISAM clients buy.“This product has been calibrated to have a 15%-20% annualised volatility which is similar to the volatility of many single stock markets . Most individual stocks have higher volatility,” says Fink.

He and Hite admit the chances of a 100% a year return at this volatility would be rare, although during the 10 years Hite was running the system at his family office outfit he managed a 70% in 2008 with only one losing year, 2005.

The basic system rules that decide how to optimise the portfolio have not changed significantly, confirms Fink.

Hite has another way of explaining this. “The big fundamental of the market: What is it? It’s people, human behaviour. They don’t change. They are irrational some times, sometimes they are rational. But mostly they are front-end weighted. They are very, very affected by what most recently happened. They tend to extrapolate the most recent event,” explains Hite.

“Everyone in the market has become a trend follower of one sort or another,” he continues. “Everyone sees similar data. So when they have a position and something goes against it, everyone sees it.”

For Fink it is about knowing when to stop. People may have a tolerance to withstand some losses but when a market moves a significant amount against them, they stop out. That exacerbates the trend. “So if you’re on the winning side of that trend you’ll get a last spurt that will drive the market up.”

Hite says: “That’s why you can actually make money being disciplined in the market. People get away from reality. The herd goes berserk. And you get a trend and people exacerbate it. The great advantage of people like us is that we are always monitoring the risk. We go right back to the risk. So if the risk increases, we lighten our position.”

The system is based on years of research. “What we have – and it’s something that Larry has instilled in us – we have a bias to not changing the system unless we have new research which is overwhelmingly defining and re-back tested to prove we have a better mousetrap,” Fink says.

Fink believes 90% of all new research is limited and may not work over a longer time frame. “We have the strongest bias against changing the system because we have over 40 years of data and 30 years of actual trading to show that what we have works. So we need a pretty compelling case to change. Other people are more prepared to change.”

For Hite it is simply that markets do not have opinions. “People could justify anything. They could tell you one thing or do another but if you work on a system that focuses on prices, they will always tell you what someone is willing to pay. It might be the stupidest, richest person in the room but you know that an actual event, a transaction happens, so price data is really valuable data.”

What it comes down to, says Fink, “is a sort of humility that says if the market goes against you, the market is right. You don’t try to fight the market. You accept the loss, close out the position even though you might think it’s an aberration and the market will bounce back. It may happen but if you’ve got the timing wrong, it may wipe out your investment. So as a trend follower, you just don’t try to fight it. When I’ve traded on fundamentals against the trend, I’ve generally lost money, which is the reason I generally take the view that “ the Trend is your friend”.”

Hite says that studying the market “didn’t really influence my trading that much but it gave me greater respect for the simple mechanism of trend following.”

He relates how he began a foundation for homeless people in New York with $250,000 following a two-week holiday in the Caribbean where using on phone in the hotel he made a cool million. In order to raise funds for the charity, he followed a simple rule. “I played a game. If a stock moved my way, I bought it. If it kept moving, fine. If it went back, I took the loss and the winnings went back to the foundation.” Today the foundation has around $8 million. “I had a very simple rule, cutting my losses, letting my winners run,” concludes Hite.

This is the same basic principle on which ISAM Systematic runs and that Fink and Hite hope will prove that old ideas can sometimes be even better than new ones.

Video interview with Stanley Fink