FM: You started in the 1970s managing foreign exchange exposure for banks. Explain the difference in approach between managing risk and trading as a CTA.
JT: Managing any hedging business is horribly unappealing because if you are making money it means the client is losing money on his investment; if you are losing money that means the client is making money on his investment and wonders what the hell you are doing there. There is never a time when both you and your client are happy. Therefore it is really difficult. You make a killing some years because the client makes a horrific investment. He owes you a lot of money and he is angry as hell because he had a rotten year and he owes you a lot of money. The next year he makes a ton of money and you lose money and he is like ‘why I am letting you lose some of my money?’ so I am happy to say our business is 99.5% absolute return business.
FM: Since launching your first system in 1987, you have continued to research and launch various different trading styles, but mostly restrict your trading to the foreign exchange sector. Why?
JT: Part of it is marketing, to show that you are really good at something; maybe we are not that good because we haven’t figured out to do other things very well. We have been looking at the interest rate market since 1985 and trading it since 2003. Despite that, out of our $8 billion plus under management only $112 million is in fixed income, which is part of our macro product so it is interesting that foreign exchange has taken a lot of time for us and we spend a lot of time working on it. We are working on shorter-term models and different kinds of mean reversion. Volatility has proven to be a spectacular business for us.
FM: Volatility traders usually focus on equity indexes; there are few who focus on currencies like you. Why is that?
JT: It is a hard business to do unless you are really good with your systems. By that I mean back office systems, pricing systems. You have to know what the options curve looks like and then you have to track it back through a lot of years to write the system. So when we started doing options in 2002, we found we had to build up from zero. There was no one doing systematic analysis of options and so we had to create the data; we found creating the data was horrific because all the old data was bad. The systems always would trade the mistakes: ‘Let’s trade there,’ but you really couldn’t trade there, because it was a mistake.
So it took until about 2005 before we had enough of our own data that didn’t have any mistakes in it where we were able to write stuff. Then we had to train an analytical staff. We [hired an expert] in 2008 from Hyman Beck who had been in the business since the 1980s and was an engineer. He was mechanically oriented so he worked well with our systematical people. Instead of having, say, three different ways to trade options we ended up with seven or eight. The last year we made 35% in options and that is a hell of a lot of money to make writing and buying options.
[Volatility] is an area where the foreign exchange market has been nearly untouched. We are the biggest factor in the options market now. It is interesting because we are [important to] liquidity, we’re making the type of money that the banks make in this stuff. It is a great business. It is not [only] a premium collection strategy, it is both. We work both sides and we just invested in more people to do this in fixed income and in equity indexes, and maybe commodities. We are trading over-the-counter options so there aren’t strikes that you have to work around. The options space is different when it doesn’t have strike prices or dates to work around. Options are already about 12% of our assets under management.