Why We Are Not a Large CTA:
Q & A with Dr. Druz
Copyright 2003, 2008 by Tactical Investment Management
Tactical has a continuous, over 27 year track record and yet is not a large CTA. Most CTAs with performance approaching yours are managing hundreds of millions, if not billions of dollars. Why aren’t you?
It’s a matter of priorities I guess. Tactical’s goal is to do the very best job we can for our investors: to be the best systematic trader in the world if possible. It has never been to be a large CTA. Being the best possible and being big do not necessarily go hand in hand. No matter how good you are, if you don’t actively market yourself, you will probably never be a really huge player.
Are you implying that Tactical doesn’t market itself?
That’s right. We really don’t put much effort into marketing. You’ve got to remember that there is a cost to marketing, and not just in dollars. Someone has to pay it, and that person is ultimately the investor. Tactical is a big investor-advocate. So marketing, which clearly benefits us more than our investors, has never been our priority. We have done some marketing in the past, but never devoted a lot of resources to it.
How did you get this “investor first” mindset?
I think it comes from my basic personality and from my previous training in medicine where the patient’s wellbeing comes first no matter what. Never mind if you don’t get to eat or sleep or see your family. Your job is to care for your patient first and foremost. Granted, you hope to earn a steady living in the process. But your patient, not you, comes first. Just substitute “investor” for “patient” and there you have it. Colleen and Paul, my teammates since 1984, feel the same way.
Doesn’t being a larger CTA benefit the investor in some ways?
You’re right it does. A larger CTA has the clout to demand the lowest possible commissions, the very best possible execution, and the highest possible interest on cash reserves. So there is some trade-off between marketing cost and size benefit. But once a CTA reaches several million under management, further size benefits fall off pretty quickly in my opinion. Also if a CTA gets too big it runs into capacity problems and is forced to trade a suboptimal portfolio.
How can Tactical grow as a company if you don't actively market?
I realize that this may sound a bit odd, but it is not a major objective of Tactical’s to be a really big company. I love trading and research and don’t need a large company to do it. Our objective is to best serve our investors, to be an excellent CTA and futures fund manager. We figure if we do a good job at that, then everything else will work out. Our investors should be pleased, and the folks at Tactical should make a decent living.
Are you taking new investments now?
Yes, in our Institutional Commodity Program. In 1993 we created this variation of our Commodity Trading Program tailored for institutional clients. The Institutional has moderately lower leverage and drastically lower commissions than the original 1981 Flagship offering of our Commodity Trading Program which about balance out. Counting earned interest, both the Flagship and Institutional actually netted about the same total returns to the investor during the years they were running concurrently. They are exactly the same trading program, just with different fee and leverage arrangements.
What happened to the original Flagship program?
Tactical establishes internal statistical boundary limits on our trading programs as stop-loss protection for our clients’ overall investments. In the fall of 1999, after over 18 years of successful trading, the higher leverage of the Flagship version caused it to trigger its statistical boundary limits. Staying true to our highly disciplined trading approach, we closed our four futures funds trading the Flagship at that time and returned the money to the investors.
Was that a difficult decision?
It broke my heart. But our investors come first and we did what we felt was in their best interest. The rule was designed to protect our investors’ capital base from potential catastrophe. And we followed it. We closed down four funds with the best, or nearly the best, returns-to-investor in the futures fund industry, even counting the drawdown, and sent back millions and millions of dollars to investors. I don’t know many other CTAs who would have done the same. That month was the absolute bottom of the drawdown too. Markets are like that.
What happened to the Institutional program when the Flagship closed?
The lower leverage of the Institutional version of our Commodity Trading Program kept it well away from its boundary limits, and it continued trading. As fast as possible, I moved my personal money that had been invested in our Flagship funds over to an Institutional managed account. The Institutional offering of our Commodity Trading Program has continued trading right up to the present.
So the Commodity Trading Program has an uninterrupted, continuous performance since 1981. Is that right?
Correct. Our Commodity Trading Program has run continuously since 1981. Only our highly leveraged Flagship offering of the program closed in 1999. The Institutional leveraged version of our Commodity Trading Program has been trading since 1993 and is still the currently available offering of the program.
Tactical is managing less money now than in the late 1990s, yet your track record has made tremendous new highs. How is this possible?
When we closed our top-ranked Flagship funds in 1999, it really made the financial news. The media put a really awful spin on it, implying completely incorrectly that Tactical had either gone out of business, had blown up, or had totally lost faith in its trading system. In the aftermath, the majority of our institutional investments withdrew over the course of the next year. Ironically, no sooner had they withdrawn than our track record took off. Markets are like that.
Are you opposed to managing a significant amount of money again?
Not at all, provided it comes naturally from trading profits or the right kind of new investors. Tactical may have one of the best combinations of long-term performance and untapped capacity in the managed futures industry right now.