A track record worth honoring

On the morning of the day the CME Group would present its Fred Arditti Innovation Award I read small item on the Financial Times back page on French economist Benoit Mandelbrot who had passed away the week before. The story pointed out how the recent financial crisis vindicated Mandelbrot’s work, which “disproved the precepts of the efficient market half a century ago” even though it is still be taught as gospel today. 

Mandelbrot’s historic work on the study of fractals and his study of cotton, debunking the myth of efficient markets for many, represent some of the most significant contributions in the fields of mathematics and markets. I say for many because the efficient market model is still being taught at many of our most prestigious universities.

I would suggest, however, that proof of the obsolescence of this theory is the fact that managed futures has survived and thrived for 30 years. And that is a long time for any investment methodology to last especially one that could not be successful if you subscribe to the efficient market theory. Many academics claim managed futures in general and trend following in particular do not work, they cannot work if you subscribe to that. Easier to ignore one lone mathematician then scrap a faulty model that provides a living to many.

Which brings us up to the recipient of the Fred Arditti award, Dr. David Ferucci. Ironically Ferucci hails from IBM (actually head of the semantics analysis and integration department at IBM’s T.J. Watson Research Center), where Mandelbrot spent most of his career.

Ferucci and his team developed programs in automatic question-answering, intelligent systems and saleable text analytics. The highlight of his research was the creation of a computer system named Watson that challenges players at the game of jeopardy and wins.

He was impressive but I must confess that I did not see the significant practical benefit of this. It is clear that those who selected Ferucci are much better judges on the matter than I but I must report that the whole presentation had the feel of an elaborate parlor trick and did not have the substance of say Mandelbrot’s lifetime of work.

We recently noted that the BarclayHedge database of alternative investments showed that money under management in managed futures has surpassed every individual hedge fund sub category it follows. That is good news for CME Group , which has more than 95% of the market share of U.S. futures trading. That wouldn’t have happened if some folks weren’t paying attention to Mandelbrot’s work and his discovery of fat tails.

The FT concludes its piece with this, “Last years (Nobel Prize in Economics) award to Paul Krugman was widely interpreted as a rebuke to efficient marketeers. If that was the intention, the award should have gone to Mandelbrot.”

One could say the same here. Mandelbrot was a maverick, so much so that his work still has not been fully accepted. Much of CME Group’s incredible volume can be attributed to those other mavericks in the asset allocation world who have accepted that work.

About the Author
Daniel P. Collins

Editor-in-Chief of Futures Magazine, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange. Dan joined Futures in 2001 and in 2005 he was promoted to Managing Editor, responsible for overseeing all the content that went into Futures and futuresmag.com. Dan’s incisive reporting and no-holds barred commentary places him among the most recognized national media figures covering futures, derivative trading and alternative investments.

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