Reprinted from Futures March 1994 issue. Copyright 1994 by Oster Communications, Inc, 219 Parkade, PO Box 6, Cedar Falls, Iowa 50613

With currencies still gyrating and interest rates booming, 1993 gave many traders a wild and wooly ride. The winners are tried and true: those who tamed the markets in the past.

By Ginger Szak

What a difference a year makes. In 1992, the top fund performer was the Patriot Fund III, traded by A.O. Management and Colorado Commodities, with a 58% gain. In 1993, the fund was down 21.5%.

John W. Henry — on the other hand — had a single digit down year in 1992 — and this year tops the fund performance with a 69% return in his JWH Global Strategies (H) G fund, which follows his yen-trading model, focusing on the Japanese yen, yen bond and Nikkei stock index.

Furthermore, this year’s top 10 trading advisors with more than $10 million under management — compiled by Barclay Trading Group — reads like a fan club list for Richard J. Dennis…R. Jerry Parker of Chesapeake Capital Corp. (up 61.6%, his fund was up 67.5%), and Paul Rabar of Rabar Market Research (up 49.3%) dot the list. Mark J. Walsh, not a turtle but a close associate of the group (see Mark J. Walsh: Long-term view of the markets, below), scored with a 78.1% return, while Dennis’ partner in the turtle project, William Eckhardt, of Eckhardt Trading Co., had a 56% return this year. Despite this grade systematized score card, topping the list with a 148.4% return was A. Gary Shilling & Co., an economist, who of all things, bases his trading on his fundamental economic forecast.

Gerrit Rath, head trader of Hasenbichler Commodities in Vienna, Austria, once again was in the top list with a 70.1% return (the fund was up 64.5%). Rath has been hot since launching the group in 1990, garnering a 494.4% total compounded return. A systematized trader, the Austrian follows a fully global diversified market approach — including trading the London Metals Exchange, a tricky arena that fools the best traders.

The year seemed to belong to trend-followers, but those who were long-term and highly diversified. David Druz of Tactical Investment Management (see Tactical, Druz: Doctor keeps pulse of markets, right), embodies that method. In early February he had on four trades that were more than a year old — and that was fewer than normal.

Tactical, Druz: Doctor Keeps Pulse of Markets

With emergency room medicine on your resume, commodities trading is easy.

Or so it seems for David Druz — part doctor, part trader — all money maker. Druz, president of Tactical Investment Management Corp., based in Haleiwa, Hawaii, had two of the top performing public futures funds in 1993: Tactical Commodity Fund, his first fund opened in 1981 (up 56.5%) and Tactical Futures Fund II, launched in 1984 (up 51.3%). Each started with about $200,000. Today, they have about $2 million each. Almost all that money was made, not raised, Druz notes.

Double digits are nothing new for Druz, whose compounded annual return since starting is roughly 615%. His best year was 1990, when he brought in a 96% return. His worst year was 1986, when he was down 31% at year’s end. He gives no excuses for volatility — in fact, he thrives on it. After all, he contends, he’s in the business to make money. That’s his goal.

Druz’s interest in futures started while he attended the University of Illinois in Champaign, majoring in electrical engineering and computer science. A fraternity brother made a killing in the markets, and Druz was hooked. His buddy got him a job at Stotler & Co. doing fundamental research. Despite this interest, he continued on to medical school. He attended Johns Hopkins University, but still managed to do research for Stotler, where he got into weird scattergrams about previous years’ crops and did a lot of correlation analysis of supply/demand, aiding the firm in its forecasts.

“The amazing thing to me was this was all baloney,” he says. “The fundamental analysis was great, but I never saw a correlation between that and trading…the fact I did all this fundamental analysis was instrumental in pushing me away from it. It just didn’t work.”

After his residency at Michigan State, Druz joined a colleague in setting up an emergency medical group in Alaska, which he saw as a business challenge. But he always loved Hawaii — and moved the trading office there in 1984. From 1984 to 1991 he toggled between trading in Hawaii and medicine in Alaska. In mid-1991 he retired from medicine to concentrate on his first love: the markets.

“To be around forever holds certain principles,” he says. They don’t trade indexes and stay in trades long-term. Many of his trades are on for more than a year. And fiddling with a system — optimizing for markets — is death, he says.

“There are whole families of things that seem to work forever on any market,” Druz says. “The down side is they are very volatile because they are never curve-fit. They’re never exactly fit to any particular market or market condition. But over the long run, they do extract money from the market.”

“Key to his trading is money management. We focused on how we divvied up the risk in our portfolio, how much risk we take in each market, how many contracts we trade in each market, that’s the stuff that really counts…if you have money management wired, you can let volatility go because you know it doesn’t have any correlation with the risk of ruin. You can use volatility to your advantage.”

Reprinted from Futures March 1994 issue. Copyright 1994 by Oster Communications, Inc, 219 Parkade, PO Box 6, Cedar Falls, Iowa 50613

What the 1993 Rankings Prove

The Barclay rankings for 1993 are a snapshot of the trend following community at its peak of early public recognition. The top 10 list reads like a Turtle reunion: Jerry Parker, Paul Rabar, William Eckhardt, and Mark Walsh in the same rankings, all posting exceptional returns in a year when currencies and interest rates produced exactly the kind of large, sustained directional moves that systematic trend following is designed to capture.

The Patriot Fund III comparison at the top of the article is the complete object lesson in why consistency of approach beats consistency of returns. The fund that won in 1992 with a 58% gain was down 21.5% the following year. The JWH fund that had a modest down year in 1992 returned 69% in 1993. This is the pattern systematic trend following produces: not smooth consistent returns but a lumpy distribution that follows market conditions rather than calendar-year cycles. The fund that wins in any given year because its specific approach fit that year’s conditions will not necessarily win the following year. The fund that follows systematic rules will capture the large trends whenever they materialize, regardless of the year.

Druz’s statement that fundamental analysis “just didn’t work” despite rigorous application is the practitioner’s version of what behavioral finance research confirms: fundamental information does not reliably translate into trading edge because markets price information faster than any individual analyst can incorporate it. Druz arrived at the same conclusion through direct experience rather than academic research, which is why his conviction is particularly credible. He did the fundamental work. He watched it fail. He built a systematic price-based approach instead.

His observation that “families of things that work forever” are volatile specifically because they are never curve-fit is the clearest statement of the robustness-versus-optimization tradeoff available from any practitioner source. An optimized system fits historical data precisely and produces smooth backtested performance. It fails on new data because the optimization captured noise rather than signal. A robust system with parameters that work across a range of values and market conditions is volatile in backtests but durable in live trading. Druz chose durability over appearance of consistency.

Frequently Asked Questions

Why did 1993 favor trend followers specifically?

Because currencies were still gyrating and interest rates were moving strongly — conditions that produce the large, sustained directional moves that systematic trend following is designed to capture. The long-term, highly diversified approach that characterized the top performers was positioned to hold through the full extent of these moves rather than exiting prematurely based on profit targets or calendar-year thinking.

What did David Druz mean by saying fundamental analysis was “all baloney”?

That despite rigorous application of fundamental supply-demand analysis — correlation studies, scattergrams, crop data — he never observed a reliable connection between that analysis and profitable trading. The fundamental work was intellectually interesting but produced no tradeable edge. This direct experience with the limitations of fundamental analysis was what pushed him toward systematic price-based approaches.

Why is “fiddling with a system” described as death?

Because optimization removes robustness. A system continuously adjusted to fit recent market conditions captures the specific characteristics of recent history rather than the durable structural features that produce long-run edge. The optimized system looks better in backtests and worse in live trading. Druz’s observation that systems “never exactly fit any particular market” is the price of robustness, and he explicitly accepts that price in exchange for durability.

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