13 Larry Hite: The Billion Dollar Fund Manager 

It was mid-summer in 1992. I was driving through New York's Lincoln Tunnel. which connects New York City to New Jersey. passing underneath the venerable Hudson River. The fact that I was driving to New Jcrsey wasn't very surprising. but the fact that I was doing it in midday. during market hours. was. People who know me. know that it is almost impossible to pry me away from my desk and trading monitor during market hours. So. why the exception? 

I was on my way to have lunch with someone whom I've known for some 20 years. since the first time he called on me in my office at 25 Broad Street. in the heart of the Wall Street district. A former stage magician and rock star promoter and a most likable person. he had a simple proposition for me. He wanted to set up a computerized commodity trading system and then establish a series of futures funds which he would manage and market throughout the world. He wanted to know if I would be willing to join him in this venture? 

I briefly took stock in my situation. At the time. I had been in Wall Street for 16 years and for the past eight years. had owned and operated my own commodity brokerage. Not a very large firm. but it had a good reputation. was profitable and. most important. it was mine. I was a member of five commodity exchanges and my firm was a clearing member of the New York Mercantile Exchange. So far. his proposition sounded fine. I had plenty of room in my office and could easily set him and his colleagues up in private offices with whatever equipment they might require. But. there was one problem. and it concerned the 'timing' of this situation. 

I had just closed out huge long positions in copper and wheat which I had been nurturing and suffering through for the previous eight months. and on which my clients and I had realized a profit of several million dollars. Perhaps not huge by today's standards. but quite respectable for the early 1970s. I had already determined that. having been in the front line 'trenches' of high stakes speculation for so many years. the time was right for me to close my firm and retire. I was about to relocate to a large four-storrey villa at Evian. France. on the shores of the Lake Geneva. which I had purchased the previous year. In fact. I had already informed my clients of the closure. had been sending them back their substantial profits from our trading activities and had informed my staff of the situation. RegtetSJlly. I concluded that it just wasn't possible to turn back and that I ould have to inform Larry Hite. of my decision. He went on to become one of the largest commodity fund managers in the world. 

There I was. on the way to spend quiet afternoon with an old friend. looking forward to a nice lunch. plenty of reminiscing and discussion of future plans. People like Larry Hite always seem to have one eye on the present and one on the future. They're generally too busy to dwell on the past for very long. So. what about this Larry Hite; the billion dollar fund manager? 

First of all. he admitted that he doesn't consider himself a very good commodity trader. to which I replied that he could have fooled a lot of people. myself included. His surprising response: he isn't primarily in the commodity business; he considers himself in the "good bets' business. He said that. when he looks at trading opportunities. he doesn't really see markets and positions. Instead. he sees probabilities. risks and rewards. He notes that the strategy of investing. which includes money management and risk control. is as important. if not more so. than the actual technical aspeCts of trading. In fact. this is the thesis which underlies much of this book and it's good to see a world class fund manager in complete agreement. 

This is what Hite had to say about his development as a fund manager: 

'I began to devote my resources to developing an unemotional. risk averse quantitative approach to the markets. Price data was subjected to rigorous computer testing to determine if they were recurrent statistical events. If so. then the events were subjected to further testing using strict risk parameters to determine if such a disciplined methodology could be consistently profitable. 

I discovered that. yes. I could risk a very small part of the farm. and make above-average returns with reasonable consistency. Yes. I could totally avoid any interpretations of chart patterns or underlying supply and demand factors that impact a particular market. and my positions would not suffer. And yes. I could diversify into many markets. remain extremely disciplined. and I considered my strategy to be a real accomplishment because it has a trading plan that suited my personality and my wallet; disciplined, quantitative and profitable. In short, with the assistance of a statistician and a programmer, I have'developed a set of mathematically proven rules that have worked for me.' Here is what Hite had to say about the 'good bets business': 

'I consider myself to be in the good bets business. That is, through the use of a computer, we search for good bets and try to play only good bets. If the bet does not meet our standards, we throw it out, even if it is something that someone else might jump at. This is analogous to actuarial work. Essentially, what I did was to take a highly charged, exhilarating profession and turn it into an actuarial process something that would appeal to anyone who finds accounting too exciting. I deemotionalized markets and trading and reduced them to a probability study.' On trading being 'Zen like': 

'For me, this is a very Zen like business, and your most valuable tool is yourself. There is a Japanese book about sword fighting whose premise is this: when you get into a sword fight, immediately assume that you're dead so you won't have to worry about being killed. Then, all you have to worry about is making the appropriate moves. 

Once you figure out the right action, assemble the means to implement it correctly and then proceed. That is what a good trader does. He or she sets out a programme either through the use of a computer or through some other method to achieve a designated objective. In my case, I thought that de emotionalizing the markets was the right way to approach the idea of consistent returns. If that is not exciting enough for some people in the business, then so be it. I don't trade for excitement; I trade for profits.' ' And on limiting risk: 

'It boils down to a de emotionalized, risk management game for both the big trader and the small speculator. Although we are sometimes involved in as many as 50 markets at any given time, we have a set risk parameter, or stop level, in every one of these 50 markets. Beyond that, we use a maximum percentage draw down, which relates risk on each position to total equity. That is, we limit the risk on each position in our portfolio to one percent of the account's total equity, based on closing prices. And time that the loss on any position, as of the close, equals one percent (or more) of total equity, we liquidate that position the following morning.' 

In our conversation, I discussed with Larry Hite his strategy for implementing a maximum risk of one percent of the account's equity on each position. I pointed out that, while it was easy to limit losses to within one percent when dealing with accounts in the multi million dollar category, it would be more difficult for the smaller investor for whom the one percent limitation would obviously be too close. For instance, a one percent limit on an account with US$30,000 would only be US$300, and this would be so close as to stop the trader out tecuttently just on the 'noise' from the floor traders' scalping activities. 

Hite acknowledged that the one percent limitation would be too restrictive for smaller accounts. Nevertheless, he felt that the general strategy of this approach to risk control was valid. He would, on a smaller account, bump up the risk limitation to approximately two percent of capital. This would still adhere to the general strategy of risk control, but would allow the smaller trader additional leeway. Obviously though, risking more than the recommended one percent limit does make the overall operation more risky, and behaves each trader to exercise even more vigilance to avoid over trading and other inappropriate tactics.