The Making of a Sustainable Business
It is a challenge for a money management business to survive and develop a stable operation that endures after the departure of its founders. Millburn Ridgefield Corp. and its affiliate, Millburn Corp., are a rare example of a futures-based investment management company with a track record that goes back more than three decades.
Millburn is the successor to an organization started in 1971 by Malcolm Hewitt Wiener to develop alternative investments for family and friends. After it achieved high returns, the futures trading program was opened to outside clients in 1975. Since then it has operated continuously. Mr. Wiener retired from money management years ago to pursue interests in archeology and philanthropy.
Currently seven principals own 100% of Millburn and manage the business. The firm has approximately 60 employees, a 24-hour trading desk and about $2.1 billion in assets as of August 2009. It has offices in Greenwich, Connecticut; New York City and Evanston, Illinois. One of the partners is executive vice-president and director of trading Barry Goodman, who joined Millburn as a trader in 1982.
Mr. Goodman discusses how Millburn adapted to the changing environment over time and what he expects in the near future.
Opalesque Futures Intelligence: How did Millburn develop as an organization?
Barry Goodman: Malcolm Wiener and a few friends wanted to find an alternative way to invest their own capital. Using technical indicators from futures markets, they made substantial money. Back in the early 1970s, the indicators were on paper, not on a computer. To manage outside money you need a system, so in 1975 they brought in Grant Smith, who has a masters degree from MIT. He computerized the code. Harvey Beker joined in 1978, I was brought in to enhance the firm's trading capabilities in November of 1982, and George Crapple, who was Millburn's outside attorney, became a member of the firm in 1983. As Malcolm started to pull back from the management of the firm in the 1980s, Harvey and George took over as co-chief executives. Grant heads our research department. Other partners - Mark Fitzsimmons, Dennis Newton and Gregg Buckbinder - joined in the 1990s.
OFI: Who are the clients?
BG: Early on, Millburn launched publicly registered managed futures products, sold through broker-dealers including Merrill Lynch. Today we have more than 20,000 clients in the US. The business has continued to evolve. Due to recent initiatives, we gained thousands of clients in Japan. We also run fund of funds portfolios that invest in hedge funds, primarily for ourselves, friends and family.
OFI: What are the strategies?
BG: Our portfolios are based on two broad systematic programs. Diversified Futures Portfolios track approximately 120 global markets, trading futures contracts and inter-bank foreign currency forwards. A separate commodity-centric program trades approximately 50 global commodity futures.
OFI: How similar is the business to what it was 25 years ago?
BG: You'll find some similarity, in particular our commitment to a systematic process and the belief that markets will exhibit periods of trendiness. A systematic approach takes the emotions out of trading and imposes discipline. As a result of the growing availability of information and more sophisticated techniques, we've come up with new systematic approaches. Our emphasis in recent years has been to build complementary strategies to trend-following. These strategies improved our risk-adjusted return profile. Our client base is also different from 25 years ago.
OFI: In what way has the client base changed?
BG: It is now global. Managers have to connect to various global groups of investors, whether through investment advisers, UCITS funds, broker-dealers or separate account platforms. These are all key elements that help sustain a manager over time. You want some variety in your client base so that when you go through challenging periods ˘â‚¬â€ś as will inevitably happen in money management ˘â‚¬â€ś all your investors don't react the same way. Even in times of good performance sometimes investors will leave. You need a stable asset base that allows you to continue to sustain the critical functions of the business.
OFI: What's the key to developing strategies?
BG: We think it is very important to have a strong research capability. Our research team is collegial. We encourage the group to work closely together. Researchers come up with ideas and present them to the group for peer review. Ideas that are accepted are taken to the next level. Each researcher has, at his finger tips, a powerful set of simulation tools that allows him or her to simulate strategies across multiple time frames (minutes to years). These results can be compared to existing strategies to see if they can enhance the risk/return characteristics of our portfolio. We have an in-house proprietary trading account that we can use to test new models before we commit any client capital.
OFI: What do you do when returns are disappointing?
BG: Throughout our history we've adapted to changes in the marketplace. In 2002-2003 we noticed sub-par performance in some of our funds and asked the research group to investigate. The conclusion was that noise levels had risen in markets, which was the result of the availability of high frequency data and its use in certain short-term trading strategies. We asked for an assessment and recommendations for adjusting our approach. Until then Millburn had a relatively concentrated portfolio focused on financial markets and intermediate-term trend-following with an average trade duration of three to four months. The research team came to three conclusions˘â‚¬â€ťwe should develop a suite of high-frequency strategies to get ahead of the new market environment, add longer term trend-following approaches to our existing mix of trend-following models and increase the diversification of the portfolio by adding additional markets. Phase one of these recommendations began in late 2004.
OFI: Does that mean you operate in both very long and very short time horizons?
BG: Today our trend-following approach can be categorized as long term. Trade durations can range from two weeks to a year, but average six to seven months. We allocate about 65% of risk capital to those systems in the diversified program. The other approximately 35% is in non-trend-following strategies that include fundamental, event, relative value and high-frequency models. These specifically target a faster time frame and, unlike trend-following, may not rely on price information. As a result they have a low correlation to our trend-following approach. Average duration of the non-trend-following models ranges from a few hours to several weeks. In the past couple of years we've increased the allocation to non-trend-following strategies to help reduce downside volatility without sacrificing the upside.
OFI: How does the future look?
BG: Historically we have made substantial investments in our research, technology and infrastructure. Over the past few years this investment has lead to our ability to simulate and implement a series of pattern and other high-frequency models. We expect that to continue. On the business development side, we have plans for the further expansion outside the US. After the experience of last year, investors put more emphasis when selecting managers on the manager's ability to control enterprise risk and manage extreme market risks. Over the course of its history, Millburn has had in place a process that can handle not only market risk, but business risks such as collateral management and counterparty risk. We will continue to augment these systems through investments in our infrastructure.
OFI: So far, 2009 has been a bad year managed futures. Why is that?
BG: No strategy will make money all the time. We believe that to generate the type of long-term returns we have generated over the years, you need to accept a 15% standard deviation of returns. This means that from time to time there will be drawdowns, though you can't predict when-if we could, we wouldn't take losses. This year's performance is within expectations. Looking forward, we believe that drawdowns in performance quite often presage significant opportunities for our approach. We believe our systematic approach has adjusted adequately to manage risk through this drawdown period and we will be able to capitalize on market opportunities as they develop.
OFI: What do investors want?
BG: Transparency has become a priority. It is very important for a fund business to have frequent and enhanced reporting capabilities and to offer access to the portfolio manager. Investors also want to have confidence in the manager's ability to adapt their approach and business over time to changing market environments. We believe our 37-year history demonstrates this.