Hedgeweek: Evolving alpha Long-running quant fund Millburn Ridgefield’s 50-year strategy for success
The following was prepared by a third party unaffiliated with Millburn. Please see the important disclosures appearing here (https://www.millburn.com/disclosures) and at the bottom of this page. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE POTENTIAL FOR PROFIT IS ACCOMPANIED BY THE RISK OF LOSS.
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Hedgeweek Hugh Leask, Editor
July 16, 2021, 9:13 AM EDT
Evolving alpha: Long-running quant fund Millburn Ridgefield’s 50-year strategy for success
Over the course of its remarkable history, global quantitative investment manager Millburn Ridgefield Corporation has evolved through several iterations – from starting out as one of the early pioneers of traditional trend-following in the 1970s to becoming a major innovator and practitioner of machine learning quantitative investment approaches during the past decade. Now, with the launch of a new strategy, Millburn aims to build on its success by including exposure to global, Chinese and thematic commodity markets.
The firm, which this year celebrates its 50th year in business, is a systematic manager, running some USD6.6 billion in assets – including those managed by a joint venture in China – with 57 employees, nearly 40 per cent of which are involved with technology-focused research and development. While the firm cut its teeth in futures trading, today it has developed a capability in futures, forwards, and securities.
“It’s been interesting to see the firm evolve in the way it has,” Barry Goodman, co-CEO and executive director of trading, tells Hedgeweek.
“Whereas in the 90s and early 2000s, you would have seen us focusing on longer-term price momentum and being relatively slow in our trading frequency, the current approach is very nimble.”
Goodman – who has been with the firm for nearly 40 years – explains how the systems are designed to evolve, making fine-tuned adjustments throughout the day, in real-time as the data flows in.
“We may still find ourselves in a long or short position for a period of time, but as new data flows into the suite of models, like a spike in short term momentum, or a flattening of volatility, or maybe the release of some new inventory numbers, or even increasing proximity to the next Fed meeting, the models have the ability to interpret this and change that signal fairly rapidly.
“But whether the signal changes or not, and to what extent, is now context-dependent, rather than based on simple rules or hypotheses as it may have been in the past.”
A data-driven edge
Today, Millburn applies this approach in the management of a broad range of primarily long/short strategies, with its models designed to be particularly agile in a diverse selection of markets and regions in various timeframes.
“One of our key cornerstones is diversification. We’re not global macro traders, we’re data-driven in our approach – so we always try to provide very diversified access with the view that as many of these markets are going to move and be volatile, we can trade on that volatility,” Goodman adds.
Reflecting on the firm’s more recent evolution, he says that as investors grew increasingly comfortable with complex algorithms and machine learning-based strategies, Millburn Ridgefield was quick to capitalise on this shift in sentiment.
While there was always a certain class of investor who believed in quant, and were willing to sacrifice a degree of transparency in exchange for the level of alpha that they believed quants could generate, the increased importance and perceived value of data within the alternative investments sphere during the past decade has accelerated this change.
“We believe that there’s an increasing recognition amongst even traditional investors that data is key,” he continues. “It’s become accepted that data can provide an edge, even on the discretionary side, with more people now focused on the data that they’re using and evaluating.”
Against that backdrop, he describes the firm’s systematic trading strategies as what he believes to be a “common sense approach” to making use of data and computing power.
“For us, even though we rely on a highly technical and very sophisticated machine learning approach to finding patterns in historical data, we try to limit the problem for the machine, providing it with a lot of data, but making sure the data has, in our view, at least some economic rationale and a reasonable chance of influencing price moves. So for us it is really the combination of our experience with the power of the machine,” Goodman observes.
“We let the machine do the difficult work of finding those complex patterns that humans simply could not find. But we set up the framework with the goal of enabling us to explain to investors what was driving the signal at any particular time. We try and make sure people understand our process, and get comfortable with the process.”
Building on this theme, he continues: “Based on history, we may sometimes look like a trend-follower, meaning we’ll be following trends and riding those trends out. But at other times, we appear more like a short-term trader, taking what look like mean-reverting positions or holding positions for perhaps just a few days, or even a few hours.”
It’s an approach that has ultimately reaped rewards for the firm’s flagship diversified offerings, but also for its sector-specific strategies.
The diversified offerings comprise two identical quant strategies – the Diversified Program, whose track record stretches back to 1977, and the Multi-Markets Program. Each one trades around 100 liquid futures and forward markets globally, spanning equities, fixed income, currencies and commodities. Together, the Diversified and Multi-Markets strategies manage approximately USD4.5 billion in assets, the bulk of Millburn Ridgefield’s AUM.
The firm has also established a formidable presence in more specialist sector- and region-focused systematic strategies.
The first of these is the Millburn Commodity Program, trading a range of commodities futures. This strategy has been closed to new capital since 2018 as a result of strong demand. Meanwhile, the China Futures Program, which Millburn developed with a local on-shore partner through a joint venture, provides access to a range of unique markets to local Chinese investors.
In June, the firm unveiled its long/short Resource Opportunities strategy. Like the Commodity Program, its capacity is limited – the Resource Opportunities strategy is thought to have an initial limit of between USD350-500 million, although with continued research the hope is this will grow.
“Providing access to truly global commodity futures markets is exciting, but the strategy also seeks to build thematic trades across disruptive global sectors and markets such as wind, solar, water, rare earth metals, lithium and more,” Goodman says, describing it as a “next generation commodity strategy.”
As the Covid-19 pandemic has upended global economies over the past 18 months, and the fallout from various central bank responses still carries potentially far-reaching responses, Goodman maintains that any potential movements towards increased volatility can be a positive for Millburn Ridgefield’s strategies.
“There are many things going on – decarbonisation trends in commodities; supply chain disruptions, which create supply/demand imbalances; how the actions of central banks can affect inflation – all of which we believe can be supportive of the way we trade,” he says.
“We’re fully long/short in the majority of our approaches. We have no bias to whether we want to have a long view or a short view in a market, and we believe we are in a position to take advantage of that and help investors navigate this volatility.
“Our strategy is not static. The models that we build and the data that we use are always evolving. The models that we built eight years ago and the ways they interpreted markets and data might have a very different view of the world in 2021. Certain drivers of the markets may be much more important now than they were back then – and other drivers may take a back seat now. That’s why we continually update and refresh the models.”●
IMPORTANT DISCLOSURE AND RISK INFORMATION AS OF JULY 16, 2021
The information contained herein is intended for use by sophisticated investors who may be interested in opening a separately managed account. Prospective managed account clients must be "qualified eligible persons" within the meaning of CFTC Rule 4.7.
This article was prepared by an independent third party, based in part on information provided by employees of Milburn Ridgefield Corporation and its affiliated entities. No compensation was paid to the author or publisher of the article or any other person in exchange for publication of the article. Millburn Ridgefield Corporation is the successor to an asset management organization that first began its operations in 1971. The term “Millburn” is used herein to refer to the activities of Millburn Ridgefield Corporation, its predecessors and its affiliated entities, except as indicated otherwise by the context.
This article reprint is not an invitation to invest in any investment strategy managed by Millburn Ridgefield Corporation, but rather describes its approach to investing generally. The purpose of Millburn distributing this article is to provide further insight into Millburn’s investment approach. This article is based on information available as of the date indicated. Any markets, models, leverage, portfolio weights and other data described herein change over time, but are accurate as of the date in the article. This article is not an invitation to invest in any investment strategy managed by Millburn and must be supplemented by certain disclosure when considering an investment, including important information concerning risk factors, conflicts of interest and other material aspects of an investment; this must be read carefully before any decision whether to invest is made. Investors may lose all or a substantial amount of their investments.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The information in this article has been developed internally and/or obtained from sources believed to be reliable; however, neither Millburn nor the author (if not Millburn) guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE POTENTIAL FOR PROFIT IS ACCOMPANIED BY THE RISK OF LOSS.
Commodity interest accounts are illiquid, speculative, employ significant leverage, and involve a high degree of risk. Commodity interest accounts involve high fees. There can be no assurance that an investment strategy will achieve its objectives. The performance of various indices is shown for comparison purposes only. The securities and other instruments included in these indices are not necessarily included in any strategy managed by Millburn and criteria for inclusion in those indices are different from those for investment in any such portfolio. The performance of those indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness. Unless noted otherwise, index returns do not reflect fees or transaction costs and reflect reinvestment of net dividends. Neither Millburn (nor any author other than Millburn) assumes any duty to, nor undertakes to update forward looking statements.
NOTES TO PERFORMANCE AND NUMBERS
Estimated performance results are subject to final verification.
Millburn’s current firm AUM is approximately USD 6.3Bn. This figure includes approximately USD 1.2Bn in assets managed by Shanghai Quadrant Asset Management Co., Ltd. (“Quadrant”) and its affiliate, SIYE Investment Management Co., Ltd. (“SIYE”), each of which is a Chinese registered asset manager. These assets are invested on behalf of Chinese investors in the Chinese futures markets. Millburn Ridgefield Corporation indirectly owns 40% of Quadrant, which operates as a joint venture between Millburn and the principal of SIYE.
Millburn Multi-Markets Program returns are net of all fees, expenses and transaction costs for direct investors (1.75% management fee [2% prior to April 1, 2021]; actual transaction costs incurred; up to 0.25% per annum operating and administrative expenses; 20% profit share, subject to a high water mark), and reflect the reinvestment of profits.
Millburn Diversified Program returns are net of all fees, expenses and transaction costs for direct investors (1.75% management fee; actual transaction costs incurred; up to 0.25% per annum operating and administrative expenses; 20% profit share, subject to a high water mark), and reflect the reinvestment of profits.
Millburn Commodity Program (“MILCOM”) returns are net of all fees, expenses and transaction costs (2% per annum management fee; actual transaction costs; 0.25% per annum ordinary operating and administrative expenses; 20% annual profit share, subject to a high water mark), and reflect the reinvestment of profits.
China Futures Program has been running under a private security fund structure since April 20, 2016, the date utilized as the inception of its track record, and has had positive returns each calendar year. The inception of the strategy was August 19, 2013. China Futures Program is implemented through the above referenced joint venture.
Millburn Resource Opportunities Program returns are net of all fees, expenses and transaction costs for direct investors (2% management fee; actual transaction costs incurred; 0.50% per annum operating and administrative expenses; actual organizational/initial offering expenses incurred; 20% profit share, subject to a high water mark), and reflect the reinvestment of profits.
Reprinted with permission of hedgeweek