Menachem Sternberg is an economist and trader whose analysis of the global market environment has allowed his firm, Eagle Trading Systems, to navigate one of the more treacherous periods for global financial markets. He has been a discretionary trader and a quantitative system developer, and he employs those skills with his current strategies. After earning his doctorate in economics from Princeton, he has developed global macro strategies since before anyone knew what that meant and worked at several of the more successful trading firms, including Caxton and Commodities Corp. We talked to Sternberg about markets, economic policy and the “new normal” market environment that has existed since the 2008 global economic meltdown.
Futures Magazine: Menachem, your history in managed futures goes back to your work with Commodities Corp. in the 1970s. How has the industry changed in that time and how unique is the period we are going through right now?
Menachem Sternberg: The global environment and the managed futures [world] that we started with have evolved into much more sophisticated and elaborate quantitative strategies quite different from what they were in the early days. It is different primarily by the number of markets, by the number of participants, by sophistication and diversity of what people are doing now relative to what they did [in the past]. It accounts partially for why we see more and more interest in the quantitative space from institutional investors who see it as a legitimate diversifier for traditional portfolios.
FM: You have extensive discretionary trading experience, but your programs are mostly systematic. Talk about how you approach trading and balance those elements.
MS: It is always a balance between the fundamental situation in the market, the economic environment [and] how markets are responding to those. As a discretionary trader, you rely on your expertise. Discretionary traders cannot, even if they want [to], have that vast a knowledge and ability to analyze such vast data in many markets. So, their particaption tends to be more focused, more concentrated. [Also], most discretionary trading relies on fundamental analysis of the markets and sometimes markets can ignore, at least on a timing basis, some developments. Today, you are bombarded by endless pieces of information and [that] information is available to everyone. You don’t have any more privileged information. Discretionary traders by nature [are] dependent on their own process and analysis. As a result, when there are major changes they may be slow to adjust.
One of the big advantages to quantitative participation in the market is the ability to analyze in a very balanced way vast information, and to participate with no emotion or no human element. As a result by listening to the markets, [traders using] quantitative strategies can identify a change in the market and adjust their participation accordingly. When you look in the past at key turning points in the market, you see that in those environments quantitative strategies tend to do better because they are [able to be identified] earlier. To me, you cannot participate in the markets only based on quantitative studies or only based on discretion; at end the of the day it is a matter of weighing different factors and trying to put them in perspective.
FM: Your global program has produced strong returns for more than a decade. How have you been so consistent?
MS: The key to consistency is to have diverse experience and use it day in and day out. One of the keys that the current environment has confirmed, is you need to be more tactical in your participation, because markets tend to change what they are focusing on from one period to another. Over the last couple of years we have seen periods of risk-on/risk-off. Markets have been adjusting quickly to news, policy developments and political developments; those change the focus of the markets. The key to participate is to be tactical and know when to move to the sideline and not force [getting] in the markets.