Tom Shanks, as a member of the famed turtles, received a great opportunity and learned his lessons well by understanding that systems need to evolve, improve or perish. He has honed this gem of knowledge to a system much different than the original, but one that shines just as brightly.
He was a professional blackjack player in the late 1970s, which is how he met Blair Hull, who later offered him a job as a research programmer at Hull Trading. In 1984, Shanks served as operations manager of Hull’s Options Research service. He left Hull in 1985 to work for Richard Dennis and Bill Eckhardt at C&D Commodities, where Shanks and two other turtles, Paul Rabar and Jiri Svoboda, began to program some of the principles they were being taught. "All of those trend-following principles were thoroughly confirmed in our testing," Shanks says.
By mid-1986 Shanks was trading the turtle method for Dennis and affiliated clients. In 1988, he took over the program as a registered commodity trading advisor (CTA) and would change the name to Hawksbill Capital Management.
"There was an effort to market a group of turtles as a CTA, but Rich wound down the effort in the spring of 1988," Shanks says. "Our trading approach doesn’t resemble the systems that we were taught initially except that it thoroughly and consistently embodies the principles of trend following that we were taught," he adds, referring to his Santa Rosa, Calif. based CTA.
It is hard to believe the valuable turtle trading method was let loose without restrictive contractual obligations, but Shanks was free to trade it for clients. "We had signed a non-disclosure agreement that we would not share it with the world," says Shanks, but adds that he was free to manage money with the systems he was taught. "Generous is a term that is fully applicable to Rich and Bill. No question their generosity was boundless. I, and I suspect, all the people who had the good fortune of learning from them feel profound gratitude for their generosity."
When he started, it was a game of high returns and Shanks delivered, earning more than 200% in each of his first two years. "I initially was using the same leverage that we used with Rich and that proved to be a little heavy for what the market was looking for," Shanks says. "We were swinging for the fences more than we should have been. The markets definitely changed and they continue to. The systems that worked so successfully in the ‘80s degraded tremendously in the ‘90s, so we continued to evolve."
One evolution that has come full circle is the use of discretion. "We initially were encouraged by Rich to use what he termed ‘flair’ and to bring our own sense of the markets and our personalities to trading, and that was a license to use discretion. Later Rich came to believe that discretionary trading was ‘sub-optimal’," Shanks says.
Hawksbill added a discretionary overlay in early 2008, but it only accounts for 10%-15% of its trades. "We had been burned by some poor discretionary trading in the 1990s, so we backed off of it."
Now discretion is more controlled and positions are liquidated systematically. "Once we put the trade on, it is on autopilot. We are not tempted to stay in a trade that isn’t working," Shanks says of his discretionary overlay. "If we get an aggregate position that is uncomfortably large because our systems all are getting in at the same time, we can liquidate some of the systematic trades [or] put on a risk control trade in the other direction."
The overlay uses a combination of fundamental, technical and risk control measures. It paid off in its first year. "Broadly speaking the first half of  profits were attributable to system performance and the majority of the profits in the second half of the year were due to discretionary trades," Shanks says.
It also helped in 2010 when Hawksbill did well in all its sectors, but earned the bulk of returns in fixed income.
Hawksbill returned 96.23% in 2008, was down 15.28% in 2009 and earned 57.61% in 2010. Shanks credits their shorter-term program that was added in 2007. He distinguishes it as the modern era of the program. In that time, Hawksbill has had an average annual return of 33.27% with a worst drawdown of 24.67% and a Sharpe ratio of 1.02. "We have become more short term in the last few years and our short-term and intermediate-term systems did very well last year. My sense is that we are on the shorter end of the trend-following universe."
All three strategies run independently and can take opposing positions. "We trade [each] signal regardless of what the other signals are doing," Shanks says. "These three systems work in concert as a suite to produce a better risk-adjusted return than any of the three does separately," Shanks says.
Shanks has learned a lot from the masters, the most important lesson being that he must continue to learn and improve.