David Harding built Winton Capital into one of the largest and most respected systematic trading operations in the world. His approach, rooted in rigorous quantitative research and applied to global futures markets, represents trend following at its most institutionally developed. His candor about what it took to attract capital to the strategy is worth reading carefully.
Recently David Harding was asked: You’ve attracted quite a lot of new money into the fund since you’ve launched, but particularly in the last couple of years. Why is that do you think?
David’s response:
I think that the market has bought what actually is quite a complicated story. The Winton story is not a simple story. In our early years we were impeded by the terrific performance of dot-com stocks. Later people became very attracted to certain types of hedge funds, which produced very smooth and steady returns; something which we’ve never purported to do. And, to be honest, as I said before, the Winton story, obviously I believe in it, but it isn’t simple and I’m not that surprised that it took the market some time to show considerable enthusiasm for it. But now that the story has been got across better, people are, I think, realizing that Winton is a good horse to back in the race to try to find genuinely talented hedge fund management companies.
David’s comments about the dot com bubble might seem dated today, but they are not. That “bubble” caused a great many people to take bad steps with their portfolios and years later many still have not learned the lessons.
Why the Winton Story Is Not Simple
Harding identifies two specific obstacles that slowed Winton’s capital growth in its early years. The first was the dot-com bubble, where the “terrific performance” of technology stocks made anything that did not participate in that run look inferior. Investors chasing hot performance abandoned diversified systematic approaches for concentrated technology bets, many of which eventually proved catastrophic. The second obstacle was the popularity of hedge funds producing “very smooth and steady returns,” a description that in hindsight applied to several operations that were either taking on hidden risk or outright fraudulent, and in any case delivering returns through mechanisms very different from genuine systematic trading.
Trend following does not produce smooth and steady returns. It produces drawdowns, sometimes extended ones, followed by large gains in trending markets. That profile is difficult to sell to investors who have been conditioned to evaluate managers by Sharpe ratios and monthly smoothness. Harding’s observation that the story “isn’t simple” is honest precisely because a systematic trend following approach requires investors to understand that volatility in returns is not the same as risk of permanent capital loss, and that the drawdown periods are the expected cost of capturing the large trending moves that drive long-run performance.
The lesson from the dot-com era is directly relevant to every subsequent market cycle. In every bubble, the superior short-term returns of the inflating asset class attract capital away from systematic approaches whose returns look modest in comparison. When the bubble deflates, the systematic approach is still running, the rules still intact, positioned to capture the trends that the deflation creates. Investors who abandoned the approach to chase the bubble typically suffer the deflation without having benefited from the systematic approach’s capture of it. The lesson is rarely learned cleanly because the next bubble arrives before the previous one’s lesson has fully settled.
For more on how Winton fits within the broader history of systematic trend following, and on the family of traders whose approaches Harding’s work builds upon, see the TurtleTrader story and the managed futures overview.
Frequently Asked Questions
Who is David Harding and what is Winton Capital?
David Harding is the founder of Winton Capital Management, one of the world’s largest systematic trading firms. Winton applies quantitative research to global futures markets, using data-driven, rules-based approaches to identify and follow price trends. Harding built Winton from a small operation into a firm managing tens of billions of dollars, becoming one of the most prominent figures in systematic trend following.
Why did the dot-com bubble impede Winton’s early capital growth?
Because the spectacular short-term returns of technology stocks made systematic approaches look inferior by comparison. Investors chasing performance moved capital toward the hot asset class and away from diversified systematic managers. When the bubble deflated, those investors suffered large losses while systematic trend followers who had stayed the course were positioned to capture the resulting trends.
Why does Harding say trend following doesn’t produce smooth and steady returns?
Because it doesn’t, by design. Trend following produces drawdown periods when no strong trends develop, followed by large gains when sustained trends appear. That profile looks lumpy and volatile compared to strategies that smooth returns through other means. Harding is honest that this return profile is difficult to explain to investors conditioned to evaluate managers primarily on monthly smoothness and Sharpe ratios.
What is the lesson of the dot-com bubble for trend following investors?
That every bubble makes systematic approaches look inferior during the inflation phase, creating pressure to abandon them. Investors who do typically miss the systematic approach’s capture of the deflation trends and suffer the bubble’s collapse without having benefited from the approach they abandoned. The lesson recurs in every market cycle and is rarely learned cleanly because the next bubble arrives before the previous one’s consequences have fully played out.
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