The Complete TurtleTrader

by Michael W Covel

  For someone famous for being sanguine about losses, it was surprising to hear Dennis voice frustration. Many had no sympathy. He was once the boy wonder. He was the guy who’d made hundreds of millions. He was the guy giving money to politicians to spread his influence. His career competitors, those he won money from in the zero-sum game, were not feeling his pain.

  Lawsuits soon followed as his former clients in the Drexel funds argued that Dennis had deviated from his own rules. Eventually, U.S. District Judge Milton Pollack agreed to a settlement in which nearly six thousand investors shared $2.5 million and got half of Dennis’s trading profits over the next three years. Under the settlement, Dennis and his firms did not admit any wrongdoing.6

  Even in the midst of losing and being understandably angry about nonstop lawsuits, Chicago’s living legend still managed to wax philosophical about what he was going through: “The sad truth is the legal system is so porous that even reflections of things gone and settled have liability that they shouldn’t. If I say one day I had a headache and didn’t take an aspirin, I guess someone could call me into court for that.” Dennis believed that at any time, the vast majority of trading results were determined by uncontrollable factors. He felt that was the case in this period.7

  Uncontrollable? Dennis’s students did not lose 50 percent in April 1988; he did. While followers of Dennis routinely thought his Turtles were an overly risky group because of his trading record, the Turtles’ trading strategy was not the same strategy their teacher was using. His losses were not the result of pure trend-following trading, and there is no way to know exactly what he was doing differently.

  Larry Hite, a founding father in the hedge fund industry and someone at the beginning of the now multibillion-dollar British-based Man hedge fund, wasn’t sure what Dennis was doing at the time. He said that Dennis’s trading did not make sense, since there was no one market move that should have caused his losses.

  Like Hite, David Cheval appreciated what Dennis had been through but questioned his decision-making at a time when his peers were doing quite well: “The fact that Richard Dennis made a fortune from a small opening stake is admirable. The issue is whether he followed his system when he took public money. I believe his drawdowns and volatility were far in excess of those experienced by the Turtles during the same period. Trust me, I admire what Richard Dennis achieved. However, I do believe he is human and open to criticism.”8

  Mike Shannon, who was there to witness the chaos, was alarmed along with other Turtles at Dennis’s risk-taking. Shannon said that the Turtles always knew what Dennis’s positions were because of position limits. The Commodity Futures Trading Commission (CFTC) had limits designed to keep any one trader from trading too much of any one market.

  However, there was another reason for the Turtles’ knowledge of Dennis’s trading positions: He was an open book. When Dennis was trading the Drexel funds, Shannon said the Turtles were allowed to trade one, possibly two, units of the S&P 500 stock index. Shannon said Dennis was trading ten or fifteen units of S&Ps. He said the Turtles couldn’t figure out why Dennis was overtrading when he had stressed time and time again that overtrading would kill you: “We calculated one day that his risk was probably one hundred times greater than the risk we were taking.”

  That Dennis was possibly taking risks over and above his Turtles by a factor of 100 simply made no sense. He knew enough to make his students do the right thing, but had a difficult time disciplining himself. Both his achievements and shortcomings were in plain sight.

  Amazingly, even though Dennis was losing money on his own trading decisions, his Turtle trading hedge, in the form of his students’ great performance, was keeping him in the black. How much money did he make off of the Turtles’ trading over those four years? He did not blink, in answering, “Tons. I think they grossed $150 million and we made $110 million. We started out paying them ten percent. Why not? Why give them a lot—it was our money, we took all the risk.”9

  However, while Dennis was bowing out of the game, his Wall Street fame was about to skyrocket thanks to a new book that featured top traders ranging from Bruce Kovner to Ed Seykota to Larry Hite to Paul Tudor Jones.

  In the book Market Wizards, author Jack Schwager softened the blow to Dennis’s tough times by entitling his chapter “A Legend Retires.” Schwager’s Dennis chapter became a cult classic. He may already have been an underground legend, but this chapter minted the Dennis legend to a whole new audience right at the rockiest time of his career.

  With his fame greater than ever, Dennis hit the speaking circuit. He was invited to make appearances at assorted investment conferences. Not since the 1970s had so many people wanted a piece of him. Now that everyone had read Market Wizards, they had visions of being selected for the next Turtle class — even if none were scheduled.

  Charles Faulkner met Dennis around this time at a Chicago Board of Trade conference in Chicago. He said, “When I read Dennis was appearing on a panel moderated by Jack Schwager, I immediately bought tickets. I had been thinking a lot about what made it hard for traders to follow their system.”

  Faulkner saw Dennis being treated like a rockstar. Would-be Turtles mobbed him as he left the stage. Faulkner observed that Dennis was wary with so many people wanting something from him.

  Later that evening Faulkner was introduced briefly to Dennis. Faulkner, a close observer of human nature, who would himself be profiled in the second Market Wizards book, was struck by Dennis’s appearance: “I was close enough to notice that his face had the look of someone who was having a tough time of it and generally not taking care of himself. This got me to wondering about what the non-academic, not ‘hard work,’ requirements might be for successful trading. For here was someone whose success was costing him dearly.”

  Whether or not Dennis needed a break from the most tumultuous time of his life, his Turtles had graduated. It was time to see if they could continue to win at the game without their teacher. This would be the real life experiment and with no Richard Dennis safety net.

  9

  Out on Their Own

  “The biggest conspiracy has always been the fact that there is no conspiracy. Nobody’s out to get you. Nobody gives a shit whether you live or die. There, you feel better now?”

  Dennis Miller, comedian

  Fame is a drug. It distorts perspective. The movie Trading Places, a fire-starter for the Turtle experiment, addresses fame when Eddie Murphy’s character, Billy Ray Valentine, makes the transition from street hustler to successful speculator.

  Jettisoned into the lap of luxury, he is enjoying the good life, reflecting on his fortune while smoking a cigar and reading a Wall Street Journal article about himself. Coleman, his butler, peers at him admiringly and remarks how well he has done in only three weeks. Billy Ray thinks about it: “Three weeks? Is that all? You know, I can’t even remember what I used to do before all this happened to me.” His butler smiles back and says, “All you needed was a chance.1

  The Turtles were also given a chance, but in a heartbeat the security of trading Dennis’s millions was gone. One minute they were trading for a moneymaking god and the next minute they were literally on the Street. As it turns out, some of the Turtles foresaw job insecurity with Dennis and were preparing their own version of C&D Commodities. Others were on cruise control, unaware that life under Dennis’s cushy umbrella was about to end.

  Jim DiMaria regretted the ending, saying that he thought all of the Turtles would have stayed if Dennis had kept the program going. He said, “I would never have left. Unless they made it that I couldn’t make money somehow.” Mike Cavallo agreed that it had been one great gig, but also said that Dennis shut the program down ultimately due to problems he had incurred from the 1987 stock crash. (Dennis’s April 1988 performance was a big reason, too.)

  However, just because Dennis pulled the plug on the Turtle program didn’t mean his students were headed back to obscurity. Instead, they became Wall Street’s newest rockst
ars. The phenomenon of students surpassing their teacher may not have been envisioned when Dennis created the Turtles, but it is not uncommon in other areas of life. The ascension of assistant coaches from winning sports teams to head coach happens all the time. Winning rubs off, and people want a piece of winners who have associated with even bigger winners.

  Clearly, if Dennis had anticipated the Turtles (as a group) would make hundreds of millions of dollars trading for clients after working for him, he never would have shut down the program. Yet how could he have known that once his students were out of school, Turtle-mania would hit? Maybe he should have known. Other trend-following traders were doing well at the time. They were raising millions to trade, without the snap, crackle, pop of the Turtle story.

  In fact the Turtles as a group, along with Michael O’Brien, who had long raised client money for Dennis to trade, saw an opportunity in the whole being greater than the sum of its parts. The Turtles were going to use O’Brien as a broker to set up a Turtle fund. They met to discuss trading as a group, but could not agree on the split. Egos were on full display.

  Mike Shannon said that since they were probably “the best traders on the planet at the time,” it all went to the heads of some Turtles. Some thought they were better than others. However, the Turtles’ performance numbers while working for Dennis did not show great performance differences on average.

  That said, while most of the Turtles were confused about what to do next, one of them clearly saw the writing on the wall. Jerry Parker went back to Virginia to start figuring out a trading business on his own. One Turtle thought Parker was a “traitor” for going solo so fast when a Turtle fund idea was on the table. But the name of the game was survival.

  Parker’s desire to go at it alone was the final demise of any effort to create a single Turtle fund. The collective disappointment could be heard in one Turtle’s resigned tone: “It never worked out. It should have; it would have been one of the greatest superfunds in history.”

  Quickly, most of the Turtles filed with the government to trade for clients. Anthony Bruck, Michael Carr, Michael Cavallo, Elizabeth Cheval, Sam DeNardo, Jim DiMaria, Jeff Gordon, Erle Keefer, Philip Lu, Stig Ostgaard, Jerry Parker, Brian Proctor, Paul Rabar, Russell Sands, Howard Seidler, Tom Shanks, Michael Shannon, and Craig Soderquist all had dreams of running the next C&D Commodities. Curtis Faith did not continue trading, saying that he was now retired at twenty-three.

  Turtles in The Market Wizards

  While the idea of a group Turtle fund died a quick death, Turtle fame on Wall Street began rolling. When Jack Schwager wrote The Market Wizards (1989) and its follow-up, The New Market Wizards (1992), his chapters on Richard Dennis and the Turtles made the Turtle experiment accessible to many for the first time.

  However, Schwager’s Turtle chapter ended up being about the fact that the Turtles kept saying, “No comment.” He even titled it “Silence of the Turtles” because they all refused to talk substance with him.

  Nondisclosure agreements were one reason why the Turtles wouldn’t talk, but another just as significant reason was that they were afraid too much publicity about their techniques would hurt their returns. Just the opposite happened. Their protective stance of “no comment” created an aura of mystery, even if this was unintended. It seemed that everyone who had heard of the Turtles wanted some of their money managed by them. The time was right to capitalize on their good fortune.

  They all pursued that good fortune in different ways. Paul Rabar said the key was to get to Wall Street as soon as possible so they knew the Turtles after Dennis were alive, so to speak. Jerry Parker, however, stayed far away from Wall Street, heading to Richmond, Virginia, to explore ventures with Russell Sands. Sands had been trading in Kidder Peabody’s Richmond office. It was a good place to be, as Kidder had access to clients interested in traders like Sands and Parker. One Turtle remarked about Kidder Peabody’s operations there, “It was two guys sitting down there traveling around the world trying to raise Middle East money to trade. They had office space down there that they had given to Sands and he had been trading their money.”

  Most Turtles, however, were essentially one-man road shows. For example, when Paul Rabar first started out, people who wanted to invest with him would ask how he traded. Rabar said that if they wanted to invest, they could give him their money. Period. No questions asked. Potential investors would have to meet him at the airport. Some investors probably walked away from what could be perceived as his arrogance, but without a doubt, many were smitten by Rabar’s “take it or leave it” attitude. There is a fine line between confidence and arrogance, and Rabar walked it with great success.

  Russell Sands and Jerry Parker initially walked that fine line together. Sands, in a classic small-world story, knew Kidder Peabody broker Kevin Brandt from college at NYU. Parker called Sands to ask if he would introduce him to some Wall Street people (read: brokers to help raise money to trade). Since the two guys at Kidder Peabody in Richmond were Sands’s friends, he quickly introduced Parker. Sands added, “The guys at Kidder Peabody basically looked at Jerry when they met him and they looked at me and said, ‘You guys will make a pretty good team together. If you [set up a firm], we’ll give you some seed money to get started.’ That’s how Chesapeake Capital got started.”

  Making Dennis’s Rules Less “Risky”

  With the skids greased by Jack Schwager and the Wall Street Journal, all the Turtles should have been able to land on their feet. Yet one of the decisions each Turtle had to make was whether to trade at the level of risk they had been taught by Dennis or dial it back to make it more palatable for clients (go look at the volatility of the Turtle month-by-month numbers again in the Appendix). They had all just witnessed Dennis’s Drexel blowup, so theirs was rightful concern.

  Jerry Parker, it turns out, was the first Turtle who figured out the importance of using less leverage to appeal to investors, saying, “The bigger the trade the greater the returns and the greater the drawdowns. It’s a double-edged sword.”2 At the same time, the Turtle adventure was the learning experience that pushed Parker to reassess leverage choices:

  I lost 60% in one day, although we were still up 140% at the end of the day. I was probably managing $2 million when the program ended in 1988. When I started Chesapeake, I was sure it was not a good idea to lose 60% in one day. So I compromised on my risk, traded smaller, and tried for 20% a year.3

  Using a ton of leverage (even if it was well thought out) was the reason for huge swings in the Turtles’ performance. Parker said, “We were nuts. And then later in the mid 1980s and 1990s, we said, ‘okay, let’s make +15%, +20%’ and we raised a billion dollars.’ If you’re going to raise a lot of money, people will be very happy with +15% or + 20%.”4

  Others in the hedge fund industry were on the same page with Parker’s view on leverage. Paul Tudor Jones (not a Turtle), for example, does not think he is a different trader today—except for reducing leverage. His returns have dropped since the 1980s, but his risk-adjusted returns are the same as in his early days. He said, “What’s different has been my own personal appetite for risk and volatility. I think that probably happens with a lot of people, as they get older. Everything is a function of leverage, how much of a drawdown are you willing to tolerate, how much leverage do you want to put on. When I was younger, I had much greater drawdowns, much greater drawdown frequency, much greater leverage.” (Side note: Jones got into trading after reading an article on Richard Dennis in college; he recalled, “I thought that Dennis had the greatest job in the world.”)

  Parker simply used Dennis’s trading system in a way that was more appropriate for nervous clients. Not all clients always want the early Turtle-trading absolute returns, the big home runs. In general, high returns do not attract as much money from investors as lower-volatility trading (which means less return).

  Not surprisingly, Parker’s efforts to change how he traded had an impact on other Turtles. Once big institutional investors
looking to invest with a former Turtle had Parker, they didn’t really need more Turtles—that is, unless they offered something different than Parker. With Parker covering that piece of many investors’ portfolios, the other Turtles had to try and push their individual differences. The problem was that their performance numbers under Dennis showed a near identical group of traders. Many investors thought the Turtles all sat in a room and when a green light went off, they all bought Swiss francs.5 For Turtles looking to stand out on their own, this was not a good characterization to be making the rounds.

  That did not stop the Turtles from trying to distinguish their trading. Michael Carr said that he was now prone to lighten up or take a portion of the profits.6 But it was more than just their style that the Turtles wanted to differentiate. Stig Ostgaard, in an effort to gain some distance from Dennis, said he traded on behalf of a well-known Chicago commodity trader in the Turtle program.7 In a stark demonstration of the Turtles’ ambivalence Ostgaard wanted to have Dennis on his résumé without having to name him.

  DiMaria also distanced himself from Dennis, saying that clients did not want 150 percent returns and double-digit negative months.8 The challenges for all of the Turtles, in starting their own version of C&D Commodities, were tough. The industry simply did not want Richard Dennis-type volatility.9

  This is not suprising. The industry is made up of institutional bean counters managing billions upon billions in pension plans. They don’t want higher-volatility or higher-return trading. There is no immediate benefit for them even, if it might be the optimal strategy for their pensioners in the long run. Why? Pension fund managers judge themselves by targeting benchmarks. They only worry about aggregate measures of what their peers are doing, which is by and large trading “long” only. With that mandate, Turtle returns are useless.