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An interview with Jay R. Feuerstein & Bruce Mumford
In this interview for the High Frequency Trading Review, Mike O’Hara talks to Jay R.Feuerstein and Bruce Mumford. Jay and Bruce are respectively Chief Executive Officer/Chief Investment Officer and Director of Marketing/Investor Relations at 2100 Xenon Group, a managed futures systematic hedge fund.
HFT Review: Jay, Bruce, welcome to the High Frequency Trading Review. Jay, can you start by giving me some background on 2100 Xenon?
Jay R. Feuerstein: 2100 Xenon has been a “gleam in its father’s eyes” for the past 30 years. I spent 21 years at various Wall Street firms before forming the company in 2001. Most of my experience was in the fixed income departments of major investment banks — Drexel in the 80’s, Kidder and then Bear Stearns in the 90’s — but I always wanted to start my own trading shop.
Our edge comes from an understanding of fixed income, how that relates to liquidity in the marketplace and how that then affects all markets. Our program actually trades 56 markets and has as a good track record because fixed income behavior influences all behavior. We can therefore model and look for opportunities within other markets based on our fixed income expertise and our knowledge of global central banks. That’s the most important thing, that liquidity drives all markets. The fundamental concept of liquidity being the key driver, not just of the fixed income markets but commodities, currencies, equity markets as well, is an important consideration.
HFTR: One of the pillars of your investment philosophy is that systems outperform discretion. How did that philosophy come about?
JRF: It came originally from the graduate work I did at the University of Chicago. I was very much taken by a class I attended on Decision Theory, and some work I did based on a paper written by Dawes & Corrigan (Linear Models in Decision Making). Besides that paper, it just made so much sense to me that consistency and discipline would outperform gut instinct, and that’s what systems are.
If you know what you’re doing and you stick to what you do, if you’re consistent and repetitive and there are reasons for what you’re doing – reasons which have not been broken — then you will do better than if you constantly use intuition and lose your balance, lose your home base.
HFTR: Isn’t the logical progression of that philosophy to develop “black box” trading models?
JRF: “Black box” is not a good description of what we do. Certainly our methods are quantitative and sophisticated and complex, although not necessarily complicated. But we’re not black box because that to me conjures up an image of some very complicated equation that has no grounding in fact or reality or behavior, which leads to some arbitrary exploitation of an arcane fact within the marketplace.
That’s not what we do. What we do is grounded on experience and grounded on behavior; it exploits existing inefficiencies created by global central banks and the pricing of fixed income securities within the market, all of those things. Black box says, “I’ve got the only quantitative model, you’ll never understand it and I’m going to take your money”, whereas we build that experience, knowledge and behavior into the models we apply to our systematic trading.
HFTR: I’m interested in how you combine short term opportunistic trading with longer term trend-following strategies, because a lot of quant and systematic hedge funds tend to fall into either one or the other camp, whereas you’re doing both. What can you tell me about that?
JRF: Well, I’ve done both my whole life. The whole idea is if you’re trading, you look for the opportunity and those opportunities are not always the same. Where I’m more consistent is about trying to provide a long volatility profile to the program, not so much the timeframe. What we try to exploit is what drives the behavior.
Bruce Mumford: There’s another important point to providing that long volatility profile. We’re managing money for very large institutions who are looking for an asset manager able to capitalize on these markets when their other investments are having difficulty.
The best example of this profile is October 2008. As the equity markets went into free fall and most of investments suffered, we had our best month ever. Our managed futures program was up 20% for the month. Another example is the flash crash of May, 2010. A lot of high frequency firms got caught up in that but it was a phenomenal day for us — it was our best day in years in fact — because we were able to capture the flight to quality in the bond markets as liquidity was being sucked out of the marketplace. This ability to capitalize on market turmoil provides the uncorrelated source of alpha for our investors.
The beauty of managed futures as an asset class is that ability to generate returns when all correlations to go one. We also like to think that we tend to do some things different to many of our peers that improve our performance. Last year was a great example. Many managed futures strategies struggled, but we did particularly well because of the combination of our short term models and our non-trend following models. We were able to deliver some of the highest risk adjusted returns in our industry in a difficult market environment. The key is striking a balance between performance and risk management. Our goal is to preserve our clients’ capital when markets are difficult to trade, while being reactive enough to generate substantial returns when the markets move in our favor.
HFTR: So how do you find that balance? How do you combine short and long-term strategies to consistently make money in such volatile conditions?
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