Paul Tudor Jones Addresses Industry Growth in MAR

The Global Source For Managed Futures
Issue No. 233
July 1998

Tudor Jones addresses industry growth

By Chuck Epstein

When Paul Tudor Jones, the master money manager who has built an outstanding reputation and solid business after 16 consecutive profitable years, speaks to a peer group, people listen.

"On every front, it is a brave new world that can accommodate more participants," said Jones to an audience at the Managed Funds Association Conference on June 23, in Chicago. "And for all of us, the growth rate in the marketplace means a proliferation of complex strategies and a growth in assets."

To drive this point home, Jones said that 10 years ago the total amount of assets under management in the managed futures business was $10 billion. Today, there is over $30 billion in managed futures; if the equity and hedge fund managers are added in, the result is a $400 billion industry.

Significant change in customer profile
Accompanying the increase in assets under management has been a change in the customer profile. In the early stages of the business in the early 1980s, said Jones, a typical customer was a high-net-worth individual who was charged a $100 commission and could sustain a 30-40% loss with the prospect of doubling his money in about six months.

"This was the standard, shoot-from-the-hip cowboy style of trading. Clearly by the late ‘80s, early ‘90s, this had changed to where the funds had radically decreased their volatility, managers were earning fees rather than commission income and the business had started to seek institutional clients."

Today, Tudor Investment Corporation has investors in 35 countries, including funds of funds, individuals, banks, endowments and specialized equity funds. The firm has also expanded the list of tradeable assets and now regularly trades cash, futures and over-the-counter products.

Tudor admits working 80-hour weeks, supervising the firm and devising the trading strategies.

Risk management is a top priority
The increasing institutionalization of the business, said Jones, had made risk management controls a top priority. Specifically, he cited the 1994 market debacle.

That event was a wake up call for this industry to impose risk controls and change the high risk profile—commonly seeking a 20-40% return with a 50% decline to a more conservative one. He said investors would continue to seek more stable risk return profiles.

The industrys compliance with the more stringent standards imposed by the equities industry has prompted Jones to adopt some of these changes for his own business. For instance, since 1993 Tudor Investment Corporation has created separate committees for credit, risk management, Year 2000 and Euro conversion.

"We are obviously become more institutionalized as every day goes by," he said.

Downward fee pressure continues
Another factor changing the industry is that hedge funds are being recognized as an asset class by banks and conventional equity and debt fund managers. Changes in fee structures and the easing of regulations have allowed institutions, such as Swiss Bank, Bankers Trust, Alliance Capital and the Blackstone Asset Management, to use hedge funds.

Large institutions participation in hedge funds has had an important effect: "They have given an imprimatur to our business." This, in turn, has allowed people such as Margaret Thatcher and Bob Dole to join their boards, and put George Soros on the cover of Time magazine.

But accompanying this new growth has been the problem of too much capital chasing too few opportunities. The sheer size of the industry has exerted a clear downward pressure on fees that has produced a few responses: discounted fees for larger investments, or a decrease in fees for investors who agree to a three-to-five-year lockup.

"But clearly at the end of the day, it will be the track record which will determine what fee discount, if any, will be given," said Jones.

Much broader scope required
As for the future, he said, the opportunity that presents itself today requires a much broader scope than it did 15 years ago when there were limited trading vehicles that could be managed with fewer people.

Today, global markets require more staff to monitor worldwide developments. "There will be no more one-man shows," he says.

That is why Tudors 25 traders and their Asian presence (via an office in Melbourne) prevented a difficult period for the firm as they avoided the deterioration of the Hong Kong markets.

Pursuing a new paradigm
Today, said Jones, the firm is pursuing a new paradigm. It involves more team efforts, expanding its global expertise, creating of new partnerships and developing a broader commitment to technology.

"When you see this much consolidation in the industry, its apparent that growth begets growth since you have better access to information and a market presence," he adds.

How does a global fund with $2.6 billion in managed assets, 16 consecutive winning years, 220 employees and offices in London, Greenwich, Chicago, Melbourne and Boston pursue a growth strategy?

At Tudor Investment Corp., said Jones, his firm is moving ahead in four distinct areas to become an even larger global presence in both traditional and derivatives markets.

First, the firm is trying to recruit new talent to help increase the firms overall Sharpe ratio. As an example, Jones cited the new 20-person team installed in Boston to pursue a bottom up, fundamental analysis of new startup firms.

Second, it is recognizing the influence of global markets. Jones opened an office in London in 1993 to monitor activities in Europe. Today, 50 people staff that office. Similarly, he opened an office in Melbourne to monitor Asia.

Third, it is expanding Australian partnerships. Tudor Investment Corporation created a shareholder structure in 1990, which Jones said is extraordinarily important for a trading firm that is based on shared responsibilities, not proprietorships.

Fourth, it is deepening its reliance on technology, such as video conferencing between offices, developing a unified platform, and risk management software.

On a daily basis, Tudor Investment Corporation monitors cross correlations between futures contracts and asset classes. As a result, Jones noted, in early June there was a more than 85% cross correlation between the Japanese yen and every major futures contract on a 25-day basis.

"So what we are seeing is that the markets are becoming more integrated, and quite often the markets are in tandem on cue," concluded Jones.

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