Barings Bank: A Trend Following Kill Shot

Who is John W. Henry and Why Does
Barings Loss Matter to My Portfolio?

If you want to make more money than the average mutual fund holder, John W. Henry and Barings Bank must mean much more to you than any day trading hype. Included below are a few quotes from John W. Henry. These quotes offer perspective from a brilliantly successful trend following trader. Remember, John W. Henry’s past returns are highly correlated with many other trend followers. They all make money at the same time in the same markets.

John W. Henry Correlations

John W. Henry, Futures Industry Association:

I know that when the Fed first raises interest rates after months of lowering them, you do not see them the next day lowering interest rates. And they don’t raise rates and then a few days later or a few weeks later lower them. They raise, raise, raise, raise,… (PAUSE)…raise, raise, raise. And then once they lower, they don’t raise, lower, raise, lower. Rather they lower, lower, lower, lower. There are trends that tend to exist, whether they are capital flows or interest rates. So you can call trend following a blackbox, I guess, because some people refer to disciplined, mechanical-type trading as blackbox. But if you have enough discipline, or you only trade a few markets, you don’t need a computer to trade this way. It just makes it much, much more convenient for us.

Our philosophy is that there is an inherent return in trend following. I know CTAs that have been around a lot longer than I have, who have been trading trends: Bill Dunn, Millburn, and others, who have done rather well over the last 20 to 30 years. I don’t think it is luck year after year after year.

Henry and Dunn

Dunn Capital and John W. Henry are two of the most successful money managers in the business. Both have been around for 20 plus years. Between the two of them they manage over $2 billion USD in customer funds trading as trend followers.

Dunn Capital and John W. Henry don’t trade much during the course of a year, but when they do, they achieve spectacular returns. Shouldn’t individual investors trade like this? Why pay money churning brokerage machines for short term trading noise when the best in the business don’t trade often?

The only way to crack the code of the trading network is to learn how to trade for yourself. John Henry started trading an account of US$16,000. That account is now over US$1 billion dollars. Armed with discipline and commitment to a system, the individual investor or trader has tremendous opportunity to also crack the code and trade successfully.

Correlation 101

Why mention John W. Henry and Dunn Capital in the same breath? There is a distinct similarity in their trading. For trend followers, Henry and other trend followers alike, money is made at the same times in the same markets. The correlation is strikingly obvious if you compare individual months in disclosure documents. Trend followers all make money in the same years in the same months in the same markets. The correlation is beyond a shadow of doubt. We are not stating that long term trend following is the only way to trade, but trend following does make the most money. If your goal is not to make the most money you can, then adopt another system of trading.

An Opportunistic Trio

The first three months of 1995 must go down as one of the most successful periods in the history of speculative trading. This brief period should be a graduate program studied at institutes of higher learning. The market events of those months could, by themselves, be the subject of a graduate course in finance at Harvard Business School. Even more relevant to individual investors, is that those events revealed the success of long term trend following in stark relief. Yet only a few years later, despite the significance of what happened, those three months have been forgotten.

The basic plot outline goes like this: Rogue trader, Nick Leeson overextended Barings Bank on the Nikkei 225, the Japanese equivalent to the American Dow. He bankrupted the world?s oldest bank in a few months by speculating the Nikkei 225 would move higher. It tanked, and Barings, the Queen?s bank, one of the oldest, most established banks in England collapsed, losing $2.2 billion.

Who won the Barings Bank and Yen sweepstakes? That question was never asked by anyone, not the Wall Street Journal or Investor’s Business Daily. Why? Did the world only care that Nick Leeson had lost money resulting in Barings’ demise?

Was the world only interested in a story about failure, and not in the slightest bit curious about where that $2.2 billion went? If they had been curious, they would have learned a valuable lesson about trading.

They would have learned about zero-sum. Trend followers were sitting at the table devouring Leeson’s mistakes. Because their philosophy is fundamentally opportunistic, they saw, in Barings, an opportunity to win.

This is not a common thought process among novice or short term traders and investors which explains why so few people understood the market significance of that 1995 time period. Most traders do not have the discipline to plan ahead three, six and twelve months for unforeseen changes in markets. But planning ahead is exactly what trend following is all about. Big moves are always on the horizon. The idea is to capture the majority of any trend revealed on radar.

Because reacting is what makes trend followers winners, Barings provided the perfect opportunity to make profits. Moreover, since timing is not significant, trend followers could relax after making their winnings off of the Barings fiasco knowing that exaggerated moves are often followed by trendless periods, the perfect opportunity to prepare for the next big ride.

Barings Bank: A Very Big Ride

“…[Cumulative losses continued to mount through 1994. By 31 December 1994, they stood at 25.5 billion (S$373.9 million) and after the collapse of the Baring Group, amounted to 135.5 billion (S$2.2 billion). In retrospect, it seems probable that until February 1995, the Baring Group could have averted collapse by timely action.”
Report of the Inspectors of Barings Futures (Singapore) PTE LTD

The single most important lesson in the Barings blowout was who won. We all know the Queen’s bank lost. After all, do you think Nick Leeson and Barings were interested in long term strategies or quick profits? Observe the Nikkei 225 chart from September 1994 until June of 1995. Long term trend followers rode the Queen’s bank all the way home. It’s a zero-sum game. Barings assets padded the pockets of trend followers. Period.

Prepared for Large Moves?

“Our company, JWH, boasts returns that are as compelling as anyone’s in the financial industry. Our profits have been remarkable; about a billion dollars net to the investor over the last decade [a 1/2 billion in 1995 alone].”
John W. Henry, April 20, 1995, New York City.

We know Barings got slaughtered in February.

John W. Henry programs:

  01-95 02-95 03-95
Financials and Metals $648 $733 $827
  (3.8) 15.7 15.3
Global Diversified $107 $120 $128
  (6.9) 13.5 8.5
Original $54 $64 $73
  2.1 17.9 16.6
Global Financial $7 $9 $14
  (4.1) 25.6 44.4

[John Henry’s largest program has shown a 49% annualized return over ten years, but if you removed the 5 most successful months the annualized return was only 28%. Miss 5 months in 10 years and your returns drop by over 20% a year! This is the world of a trend follower. The discipline to wait for and ride the big move is richly rewarded.]

Dean Witter: John W. Henry’s Broker

“I have over $250 million with John Henry….I have been pleased to see how well the Original [John W. Henry] Program has done so far in 1995: up over 50 percent through April 18th [1995].”
Mark Hawley, Dean Witter Managed Futures, April 20, 1995, New York City.

50% in 4 months? Does one recall outsized trends during the first quarter of 1995? Dean Witter has remarkable correlation with other trend followers – click here for correlation chart.

Dean Witter Futures and Currency Management

  01-95 02-95 03-95
Currency $27 $31 $40
  (13.8) 19.4 35.8
Diversified $132 $180 $193
  (9.7) 6.9 8.8

On average these two firms lost in January 1995 and made double digit returns in February 1995 and March 1995.

What About Trend Followers?

Trend followers brought home huge gains in February and March of 1995 as well. However, their winnings were more the result of the fantastic Yen surge.

  01-95 02-95 03-95
Chesapeake $549 $515 $836
  (3.2) (4.4) 8.6
  $126 $134 $159
  (7.9) 7.7 21.3
Rabar $148 $189 $223
  (9.4) 14.0 15.2
2nd Generation      
KMJ Capital $5 $6 $8
  9.6 25.9 31.0
Mark J. Walsh $20 $22 $29
  (16.4) 17.0 32.3
Abraham $78 $93 $97
  (7.9) 1.2 6.6
Other Trend Followers      
Dunn (WMA) $178 $202 $250
  0.5 13.7 24.4
Dunn (FTOPS) $63 $69 $81
  (7.6) 9.9 22.7
Millburn Ridgefield $183 $192 $233
  (6.5) 8.7 19.4

The correlation among trend followers is solid. Sure there may be slight differences in leverage usage and execution, but even from a cursory analysis the relationship is crystal clear.


Trends persist over time and expectations of society continually manifest themselves in trends. Why then do so many people ignore trends in search of the short term Holy Grail or quick buck?

Trend Following Products

Review trend following systems and training:

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Michael Covel Trend Following Products