FM: You recently secured a large allocation from the Kansas City Police Employee’s Retirement System. Is this a sign that your approach is gaining traction after all these years? Why has it taken so long?
MR: Our performance over the long-term has proven this theory. It has been accepted. I have been invited to several top-flight universities in the United States to lecture on this subject. It is getting a larger acceptance than we had in years past. It does take time for people to change a paradigm but we have one of those changes going on now.
FM: Many fund of funds had terrible years in 2008, which can be attributed to a lack divergent strategies in their portfolio. Did what happened in 2008 validate your philosophy? Is it why there is more acceptance for your philosophy?
MR: 2008 was the last time it had the opportunity to validate this theory. Our own multi-strategy program that I started in ’86 was up 11.4% in ‘08 and our hedge fund of funds were flat in ’08, largely [attributable] to the diversification into divergent strategies. So yes, it was validated again. Remember, divergent strategies are non-correlated, which means it is a random walk if the traditional markets of stocks and bonds go up; it doesn’t mean divergent strategies are going to lose money. However, the beauty of these divergent strategies [is] when the stock and bond markets come under stress these strategies become negatively correlated. That is the magic of these divergent strategies that we operate here at Ssaris.
FM: Isn’t 2010 a good example of this as it was a good year for equities, and many divergent managed futures programs did well too?
MR: It was a good year for us in 2010. Our multistrat did over 21% and our fund of funds won best risk-adjusted performance for the sixth year in a row. That shows even in a strong stock and bond market period we didn’t hurt ourselves having these divergent strategies; they actually contributed to our success in 2010.
FM: Many equity-based hedge fund managers deride systematic futures managers as being black boxes. Is the adherence to the efficient market hypothesis (EMH) the reason many academics as well as fund of funds are reluctant to embrace trend-following?
MR: I do believe [that] in the past many academics did hold onto the efficiency theory too long, [believing] that the markets would always be efficient. If computers ran the world it would be efficient but I’m afraid it is us human beings [who] are responsible for this irrational behavior. We like to think that we are completely rational, but under stress I’m afraid we act more like lemmings going over a cliff than we like to admit. Most academics today would say markets are efficient most of the time but from time to time could be irrational. John Maynard Keynes said, “Markets can be irrational longer than you can be solvent.” That is virtually understood now.