Interview about A True CTA with Mikkel Thorup by the Financial Times.
Should investors favour the systematic approach, sometimes known as a black box approach, that relies on computers responding to the asset selection instructions programmed into it and removes any element of panic in attempting to ride changes in market conditions?
Or should they favour the discretionary approach that relies on the instinct and experience of humans who can smell a significant change in markets and take the necessary steps to avoid unwanted volatility?
A true CTA, whether systematic or discretionary, will not deviate from the chosen approach if the market context changes but will stay true to its roots.
“I still think a human brain is superior to any machine. Given a particular set of market conditions today, I might make one decision. Given the same set of conditions tomorrow, I might do the opposite. Research analysts today have trouble understanding that,” says Mikkel Thorup.
Mr Thorup, chief investment officer and founding partner of Copenhagen-based Capricorn Currency Management, could be said to epitomise the distinction between the discretionary and systematic approaches to investing. He launched the firm in 1999 as a focused currency manager after a career as a proprietary trader at Credit Suisse and Salomon Smith Barney.
Capricorn’s focus has been discretionary from the start, he says, using technical analysis as a backup and the human element, a brain, to decide whether to make any individual trade. The firm has around $320m assets under management, he calculates, with 85 per cent coming from institutions and the balance from Cayman Island funds which tend to cater for high net worth private banking clients.
Asked to demonstrate the strengths of the discretionary argument, he points to the profits made from making the right call on the US dollar/Swiss franc trade. This was very counter trend in nature, going long dollars while systematic investors were long Swiss francs. Within eight hours, the Swiss National Bank launched its programme to weaken the franc, and Capricorn logged profits of 400 basis points.
“It was a question of discipline,” he says. “We waited and waited. In hindsight, though, we should have moved earlier, bought bigger and not exited so quickly.”
However even Capricorn, which has been dedicated to the discretionary approach for more than two decades, began offering a systematic alternative in January.