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Book Reviews

"This is a great book for novice and experienced traders. Soaking up its wisdom distilled from experience and introspection will help you become more successful. And that's true even if it doesn't make you a penny." --Aaron Brown, AQR

Legendary traders Richard Dennis and William Eckhardt began a trading program in the early 1980s – one that is steeped in lore and one that has put a much needed face on Trend Following: the Turtle.

In his new book, The Complete Turtle Trader: The Legend, The Lessons, The Results, author Mike Covel gives us the complete Turtle backstory where Schwager’s tome left us hanging. Covel’s book has the teeth where Schwager’s had the smile. Covel has the Turtles talking and the result is a well-rounded, thoroughly researched, soon-to-be classic in the vein of narrative nonfiction.

Now if you think the word “Turtle” alludes to the fable of the tortoise and the hare, that’s a good guess. One look at the monthly performance returns in Complete Turtle Trader’s Appendix and you’ll see that there is nothing “slow and steady” about this race. Their style was about “high-performance” trading. Many Turtles had annual returns north of 100% and frequently had monthly drawdowns in the double digits. The most successful Turtle based on longevity, Jerry Parker of Chesapeake, has only had 1 losing year out of the last 20.

Nowadays, you can forget raising money from Institutional allocators with these type of numbers, but then again, the Turtles were effectively unregistered CTAs working for one client – C & D Commodities – Rich Dennis and Bill Eckhardt’s firm.

The Chicago Trinity: The Church, The Dems, and the White Sox

But before there were Turtles, there was Richard Dennis. The way he’s described in the book I immediately thought of Mike Stivic, the character played by Rob Reiner on the hit show, All In The Family. Him, or some stereotype of an Insurance salesman. That’s bias for you.

Sperry Top-Sider’s notwithstanding, he is as close to being a Rock Star as a commodity guy can get (think Nuture). Now a Board member of the Cato Institute (along with another Market Wizard, Jeff Yass – founder of Susquehanna), Dennis’ beginnings were of the humble sort. He was not the one his teachers would have thought destined for success, never mind becoming a centi-millionaire. Yet history shows that he was indeed precocious. At about the same age that Wayne Gretzky was signed by the WHA’s Indianapolis Racers, Richard Dennis had his father signaling his trades in the ring because he did not meet the the Mid Am Exchange’s minimum age requirement. He was 17.

This is my rifle, there are many like it, but this one is mine

Turtles were taught/shown 2 different trading systems, System 1 (S1) and System 2 (S2). Both systems were Trend Following in nature, with volatility-adjusted position sizes based on notional account equity. They were also told which markets they could trade, and effectively how many contracts they could trade for each (4 Units). Turtles scaled in and out of positions most of the time. Most, and I mean most, not all, were allowed to scale in up to 4 times, but some followed their own set of parameters – they exercised Discretion. Some faded the rules, some leveraged the rules and traded stronger based on notional account value. “The feeling that you’re unwilling to feel is your true system.”

All Turtles are equal, but some Turtles are more equal than others

It seemed that favoritism started to evolve within the offices of C & D Commodities. Curtis Faith and Mike Cavallo were favorites according to fellow trainee Jeff Gordon, but it was C & D’s “bat and ball” – they made the rules. By following his own set of rules, ie, neither S1 nor S2, Faith’s erratic behavior began to make his peers wonder what the heck was going on. They became disenfranchised with the program. It became clear to at least a few trainees that there were “Turtle rules,” and then there were “CF rules.” During this time, Faith was quoted as saying “Rich and I were talking last night, and…” The thing was, Dennis wasn’t talking to other trainees at night. It appears from the book that Dennis had a much different relationship with Faith than the other trainees. Faith’s remarks seemed to make the other jealous and such statements probably made Faith as endearing to the group as Yoko Ono was to Paul, George, and Ringo in the recording studio.

Fooled by Randomness – Trainees were born “lucky”

In the famed tome Market Wizards, Jack Schwager asked Dennis, “How much of a role does luck play in trading?” His response was “In the long run, zero. Absolutely zero. I don’t think anybody winds up making any money in this business b/c they started out lucky.” I believe that luck plays an enormous role in both short and long-term trading results, as well as in one’s longevity as a money manager.

It is clear that Dennis and Eckhardt were able to impart these models to their trainees, thus Nuture prevailed. Most were able to follow either S1 or S2 religiously. Several – two according to Covel – “left” the program – wandered too far off the “turtle farm” so to speak. Or maybe they were not compatible with either of the 2 systems they were presented with. They were “unlucky” perhaps in that they did not have the emotional constitution to stick to the rules, even though they could comprehend the concept of mathematical expectation, or the Accuracy versus Expectation argument.

There were a few times in Covel’s book that luck played a material role in the lives of Dennis and Eckhardt, the evolution of the program, and the Turtle Training program’s ultimate success.

First, the whole program may never had begun if C & D did not survive the events surrounding November 1, 1978. Dennis and Eckhardt held large long positions in Gold, Currencies, and Grains. Losses that day exceeded $2MM. This was the first year of business for C & D Commodities. As Covel notes, “…it was touch and go for a while…that day came close to wiping them out.” Luck or intention?

Another was circa 1987 when most of the Turtles were heavily short Eurodollars and the contract opened 250 points against them – “10 standard deviant Black Swans” beyond what any were ready for. Losses across accounts were staggering and the accounts needed to be re-funded. Faith experienced a 70% drawdown alone, a drawdown which may have been exacerbated by his inability to follow the rules. Dennis and Eckhardt added the much needed corpus to the accounts. They were lucky that they had the funds available. Collectively, they were lucky that they didn’t go into “negative equity.” For those not familiar with Futures margin accounts, it is possible for an account’s equity to go “less than zero” whereby the Guarantor must add additional funds just to bring the account back to a zero balance.

When one thinks of the cult of personality that surrounded Dennis, or the math genius Eckhardt, no one would think to question them or their rules. (Truth be told, it was Eckhardt who actually delineated the trading rules to the trainees, although his “bet” was that trading could not be taught – think Nature.) Yet, four members of the second training class did just that and decided to actually put the rules to a computer and see what the results would be. Astoundingly, no one had tested the heuristical model to this point. They found that the Turtles as a group were trading at a risk level that was TWICE what Dennis and Eckhardt had originally thought. Teacher becomes student. Dennis sent out a memo instructing the trainees to cut notional values in half, thereby reducing the risk. Again, you can call it fate, but they were surely lucky that fate fell their way. “Some people were lucky to be born smart, while others were even smarter and got born lucky.” — Ed Seykota

According to Covel, Turtle recruits needed to show “a willingness to take calculated risks” and needed to think like “a Las Vegas handicapper.” Risk Avoiders were not included. Only risk-averse and risk-lovers were interviewed (and then hired). So now we are not talking about just anyone.

Pedigree was to play no role, yet Dennis looked for high ACT scores in Math. Dennis also looked for candidates with a strong knowledge of computers, who could naturally systematize things. These were not random folks or ordinary people, per se, as in “taken off the street.”

Cuius regio, eius religio

Dennis sort of retired (after he blew up) in the late 1980s. Schwager’s title A Legend Retires was a little wimpy, but I’m sure he was just happy to get the interview. Dennis had a massive drawdown of -55% in April 1988. I think this was bad luck. Had Dennis been luckier, he may have had a +200% month with the level of risk he must have been taking on. The funds he ran at Drexel were shut down. It seems unfair that after 18 years of making money, Dennis would be afforded a second chance. Such treatment doesn’t seem congruent for a legendary trader. It’s the equivalent of A-Rod getting booed in the Bronx last year. It was probably written in the offering docs that drawdowns of such magnitude would cause for an automatic liquidation and return of the remaining capital.

Caste of Characters

It’s probably only a coincidence, but Dennis’ favorites Faith and Cavallo were the only ones to suffer monthly drawdowns over 50%. In June 1984 Cavallo took a -57% hit, but followed that with an 86% gain for July. He finished 1988 at -14.50%. Faith had several drawdowns over 50%. These were the worst reported monthly drawdowns suffered by any Turtle of any training class.

Most trainees lost money in April 1988 like Dennis, but not to the extent that he did. It’s not clear why he had such massive losses. He may have been trading several times his actual capital or he may have traded position sizes many times the levels that he taught his students.

Who was the best?

In looking through the book’s Appendix, you can see how each Turtle did on a monthly and annual basis. Annual returns in excess of over 100% seem the norm. Look close and you’ll see that Liz Cheval, Philip Lu, Stig Ostgaard, Jerry Parker, Brian Proctor, and Tom Shanks achieved over 100% RoR at least 2 years in a row. Mike Cavallo and Jim Melnick achieved over 100% on 2 occasions, but not consecutively (what losers!). More shocking was some of the monthly returns. One would expect positive months at least of the same magnitude as some of the drawdowns.

Yet Stig Ostgaard returned 193.50% in one month – July 1985. He finished that year +296.56% – the highest of any Turtle.

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—This article originally appeared in the Aug/Sep 2006 edition of The Reporter, newsletter of the Managed Funds Association.

When I was in India in July 2005, the Sensex had just crossed 7,000 and a local brokerage firm was handing out celebratory chocolates – “Sensex 7000” read the high-relief exclamation. In May, 2006, the index crossed 12,600 and now stands at 10,300. Local investors feel like Derek Jeter does in the playoffs: that monthly returns of 5-10% are their birthright.

There does seem to be a “country myopia” running rampant through India. To be fair, investors in the U.S. lived with the same mania in the late 90s through early 2000. Indian investors cannot export investment funds to other asset classes, so all they know is India. This perspective affects transaction in extra-India investments including foreign exchange. There is a maximum that one can invest outside the country and that is $25,000 per year, per person. At an exchange rate of INR 45 = $U.S. 1, that amounts to Rs 11,25,000 (how they write 1,125,000) or as they say, “11 lacs.” From that perspective, one might conclude that Indians are not a great target market for investments made outside their country, unless they have money outside of India already – and that is not readily available information.

Despite the massive run-up in the market, most investors feel that scrips (what Indians call stocks) will continue to burgeon as will their account balances. The power of the emerging middle class shows no sign of slowing either. Investors can tell you their exact holdings and the prices that they own them and why they bought them. I speak with corporate treasurers and institutional investors. On a few occasions I have asked them “when do you know when to sell?” They either say “Never, because growth will never slow” or “I don’t know, maybe after it doubles.”

At this moment I recall my old professor, the economist Jagdish Bhagwati, telling the story of when his wife Padma Desai, a brilliant economist in her own right, was being interviewed during Naturalization: “Ms. Desai, can you tell us the significance of July 1776?” the interviewer asked. She said, “That’s so easy, it is when Adam Smith wrote Wealth of Nations!” “Uh, we were thinking more along the lines of the signing of the Declaration of Independence?” “Oh, yes of course. How could I have missed that one?”

I asked the investor if he knew what March 10, 2000 stood for or if he’d heard of “Black Monday.” He didn’t know either, but he guessed they were “auspicious dates” since I singled them out. I said “For some.” “I know but one sure tip from a broker. It is your margin call.”(Jesse Livermore, How to Trade in Stocks.)

The Reserve Bank of India (RBI) has been tightening credit at least in part to assuage the disintermediation (hemorrhaging) that has occurred over the last few years. But this has not slowed down the demand to borrow funds for the purpose of investing. There is ample availability of cash. India is lending at margin interest rates between 10.5% and 16%. And the local investors are lined up to borrow. These rates are for what they call “Loans against Scrips.” In other words, these are collateralized loans! Initial margin on scrips is between 10% and 15% of the market value. They must really be bullish: when they can’t borrow versus their scrips, they borrow unsecured amounts at interest rates as high as 24%.

The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) determine which scrips have loan value. Together, they have created a list of about 400 scrips which they call the “A Group” which are marginable. Initial margin for commodity futures is typically 6% of notional value, but can be expanded due to increased volatility. Such is the case with the metals. Initial margin for silver is 12%, for example. It has not slowed down the interest in the metal.

Yet the FMC has tried another method for curbing volatility in commodity futures trading. On May 10, 2006, the FMC instructed the MCX and the NCDEX to reduce the level of the maximum daily price fluctuations across several commodities. These upper and lower circuits, known as limit moves in the U.S., have been reduced from 6% and 3% to 4% and 2%, for the first circuit breaker level and the second level respectively, once trading is resumed from a mandatory 15-minute break.

Meeting the demand for information on investing are two new financial news channels which have launched in the past few months. Joining NDTV and CNBC-18 are “Times Now” (a news channel from Time of India) and “IBN Live” (joint venture between CNN and IBN). The advertising rupees must be there. According to the securities regulator, the Securities Exchange Board of India (SEBI), there are 10 different stock exchanges in India. They are regulated by SEBI as is the trading and listing of scrips. They act much like the SEC here in the U.S.

U.S. investors typically utilize a master/feeder structure for making equity (scrips) investments in India as a foreign institutional investor (FII). The feeder fund may be based in such tax efficient jurisdictions such as Cayman or BVI (as LPs), which in turn would invest in a master fund based in Mauritius (as a company expressed as “Ltd”). The latter would make direct investment into India as an FII. This is true for equity investment only. Non-Indians are currently precluded from trading in local commodities.

Indians, like U.S. investors, are obsessed with gold and crude oil, especially since the financial TV channels have added gold and crude oil prices to the scrolling ticker on the TV screen. They love the “internationally-linked” commodities because they trade seemingly all day. No one had spoken about channa (chick peas) when they traded at historical levels.

To that point, the exchanges have made commodity data more readily available. The Multi Commodity Exchange (MCX) has a day session and a night session so that the contract can trade in parity with other markets such as LME and the COMEX divisionof NYMEX. All trading is done on the screen though, there is no outcry market. But that is only for this exchange.

The MCX currently lists four different gold contracts and the NCDEX lists one. One has ample liquidity and the others act as “spoilers,” like in politics. My guess is that if they did away with the “also rans” you’d get better liquidity in the one.Accordingly, we study volume and open interest daily to look for pockets of liquidity. Getting into a position is easy, getting out is another story.

According to the NCDEX Web site, “the NCDEX is a nationlevel, technology driven de-mutualized on-line commodity exchange with an independent board of directors and professionals not having any vested interest in commodity markets. It is committed to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency.” The NCDEX is one of three national multi-commodity exchanges.

Forget going long gamma or vega, you can’t do it yet. Currently there are no puts or calls traded on commodities. Options on futures were on the agenda for the FMC meeting on June 8, 2006, as is a discussion on stock index futures and the participation of mutual funds in commodities. Not much has been released on the discussions. For further updates visit

There are, however, derivatives on equity scrips, as well as a phenomenal single stock futures (SSF) market that is very mature and robust. In fact, selling SSF is the only short selling that is allowed right now. Only delivery-based trades are allowed. FIIs that wish to “lend” securities must only do so through an approved intermediary that will do so in accordance with the stock lending scheme of SEBI. (Source: Nishith Desai &Associates)

Commodity trading is dominated by hedgers and small speculators, but the trading is mostly retail, broker-assisted accounts. I would expect the volume of contracts traded and open interest to increase dramatically once the government allows the trading of options on futures and once they allow banks and foreign investment in commodity futures. Commodities are regulated by the Forwards Market Commission (FMC)

India has a whopping 21 regional commodity exchanges and three national multi-commodity exchanges. Perhaps, similar to the U.S. a few decades ago, some of them will either fold or merge with one of their counterparts, especially given that most of the markets are not connected electronically. Out of these the MCX, NCDEX and NMCE are large exchanges and MCX is the biggest among them. (Source: FMC) Many of the exchanges are highly specialized. They only trade one commodity contract. An example of this is the Ahmedabad Commodity Exchange Ltd. which trades solely castor seeds. Castor seeds are ground to create castor seed oil which is used to make everything from plastics, to components for shatter-proof glass to cosmetics and related products.

One can understand how this exchange came into existence in 1952. Although China and Brazil produce castor seeds, a full 40% of the world’s output is created in Gujarat, the state where the exchange in located. This is not unlike how the exchanges in the U.S. came to be. They are centralized meeting places where participants can buy and sell risk and get price discovery.

Training of personnel for futures commodity trading is also on the rise. India has its equivalent to the Series 3, called “NSE Commodity Module.” The NSE stands for “National Stock Exchange.” It was reported in the Business Standard, a Mumbai-based newspaper, the Forward Markets Commission may sign a memorandum of understanding with the U.S. Commodity Futures Trading Commission for information sharing and training programs.

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William C. Rhoden wrote in the NYT that the Baseball Hall of Fame is being hijacked. Marc Ecko has no right to deface the historic home run ball because it’s messing with history and that the HOF has no principles in taking the ball.

Mr. Rhoden neglected to state that the website had taken in 10 million votes, with 47% of them voting in favor of the asterisk. Instead, he wrote that Ecko cast 3 votes himself, as if that skewed the voting.

Ecko won the ball in an auction with a winning bid of $752,467 – “more…than many families make in a lifetime,” Rhoden states. That true, and it’s much more than Barry Bonds must have spent on the steroids to hijack the record from Hank Aaron.

What matters here is how the fans feel. It’s their Hall of Fame. The HOF is for the public. Not asterisking the ball would show a lack of integrity around the record. The HOF can arrange the ball so that the asterisk does not show.

Barry Bonds invented the asterisk – not a cynical fan or the press. Bonds will be lucky to have his spot in the HOF. Everything associated with Bonds should have an Asterisk. He should wear it like a Scarlet Letter A.

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There is not a better Manager in the pros than Torre to culture the talent pool the Yankees have. Brian Cashman knows this. So do Hal and Hank Steinbrenner.

Don Mattingly and Joe Girardi are good candidates to take Torre’s place, but they need some more time to ripen. It’s too soon. Guess who they look to for mentoring? Torre. As Yogi said, “you can observe a lot by watching,” and that’s what Mattingly and Girardi will do – that’s how they learn.

The Yankees made an investment in their future this year. By not trading away young talent during the year, they made a statement. The statement was that they were going back to what helped them win big in the mid to late 90s: develop the farm system and let them compete alongside an all-star team of veterans for a spot. Torre is the best Manager to assimilate that talent into day players and bring that investment to fruition.

That education is something a player can’t get on any other team. And this is before the Bronx Faithful in the stands let you know how they feel about you. Remember how they booed A-Rod last year? And he’s the best in baseball…

At the core of this strategy is Brian Cashman, who wanted sole responsibility from Mr. Steinbrenner to make the decisions about player personnel. Now he’s got all his marbles, and all his players. IMHO, I think it was Torre who saved Cashman’s job this year.

Although Torre’s contract is not under Cashman’s control, it is with Mr. Steinbrenner and his sons, Cashman will nonetheless weigh in heavily with Mr. Steinbrenner as will Jeter, Posada, A-Rod, Rocket, and Mo.

The Yankees will most likely face Cleveland in the first round and the Indians are tied with Boston for the best record in baseball. The Yankees have not won the World Series since 2000. They have had two wild-card berths recently in 95 and 97 and neither of those berths ended up with an AL Championship, never mind WS. This is daunting for a team whose ethos states that the season is a failure if they don’t win the World Series.

This is the 12th season in a row that the Yankees have advanced to the post season and bringing the Yanks to the post season from 14 games out with the issues they had this year will weigh heavily in Torre’s favor. The Steinbrenner clan knows that as it translates to additional revenue to Yankee Global, LLC, the holding company that owns The Yankees and YES Network. Torre adds a lot of Alpha to their portfolio.

Torre will sign on for another 2 or 3 years regardless of how they do in October. If Cashman is going to acquire any free agents over the winter break, having Torre back as Manager will be a significant selling point for top talent. Torre showed that he’s as much a Chess Master as much as a Manager.

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The Treasury Department has announced the formation of two advisory groups to determine “Best Practices” for hedge funds. The new advisory groups were formed under the auspices of the President’s Working Group of Financial Markets. One group is comprised of hedge fund investors, the other Asset Managers, and they are tasked with deriving some recommendations by year’s end.

Their main focus should be to look at Portfolio Financing. I’m not so concerned with how Hedge Funds trade or their strategies, but I am interested in what they come up with around Hedge Fund Operations wrt Prime Brokers. Specifically, Prime Broker risk management within their Portfolio Financing/Lending Operations.

Three or 4 Prime Brokers control the majority of the business – it is very concentrated. While a hedge fund might broker trades through literally everyone on the street, it is uncommon for a large hedge fund to have more than 2 Prime Brokers. Trading strategies are less of a concern to me than how they are financed.

Prime Brokers provide hedge funds with enough credit so that a fund may be trading 2 to 10 times nominal capital. How are the loans priced? Computer models are used to evaluate a manager’s strategy and calculate event risk to said strategy in the fund. Financing decisions are made off computer models. IMHO, these models most likely underestimate the chance of an outlier event.

Given that there are only a handful of Prime Brokers controlling a large percentage of the Prime business, the models and the eventual lending are not diversified enough to withstand a cataclysmic shock to the financial system should there be such a Black Swan event. We saw what happened to the markets during the subprime fallout and loans that were priced to models, not the markets. We need to know more about how the Prime Brokers diversify their books. On the outside, it looks like one big trade to me.

A second area with Prime Brokerage to look at is the lack of transparency around Equity Loans.

The Working Group was created in March 1988 by President Reagan in response to the events that led to Black Monday. The Working Group is comprised of The Secretary of the Treasury, and the Chairs of the Fed, the SEC, and the CFTC.

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