Street Stories

Hedge Funds, Trend Following and Alternative Investments

Richard Dennis Trader Profile: Back from the Bottom of the Pit

October 1997
Vol. 4 -- Issue 10
Page 42

Trader Profile: Back From the Bottom of the Pit

By Daniel A. Strachman

Richard Dennis has long been known for his shoot-from-the-hop approach to futures trading. Once, he was even dubbed "The Prince of the Pit" by The New York Times. But after his legendary trading style produced big losses for himself and his customers in the late 10=980s, Dennis retired from trading, vowing to never again trade customer funds. "My hips are bruised," he said.

The retirement proved to be brief. By 1994, Dennis was trading again. But this time he had traded in his instincts for a mechanical system that relies on signals from a computer. Instead of shooting from the hip, hes shooting from the hard drive. "Using trading systems is currently the easiest and best way to trade," says Dennis. "At the end of the day, it is hard to perform better than a well researched and though-out system."

Currently, he uses a series of trend/counter-trend systems to identify trading opportunities. The systems evaluate price, volume and other market data to determine entry and exit positions for short- and long-term trades. The only way to win in the futures markets, he says, is to trade in a totally mechanical environment and perform countless hours of research.

"All of our systems have gone through rigorous testing before they are sued to provide us with trading signals," says Dennis. "A trading system is only as good as the architect behind it. Be testing our systems constantly, we are able to make sure that what we think is right, is right.

That approach is a far cry from his earlier trading style. Dennis got his start in the futures markets as a runner on the floor of the Chicago mercantile Exchange more than 25 years ago. He rose quickly to become a major player in the futures markets. By age 25, he had made his first million, and was on his way to amassing a personal net worth of more than $200 million. His impact on the futures markets go to be so great that just the rumor of his presence caused prices to gyrate.

But eventually, The Prince of the Pit was dethroned. In 1988, Dennis was forced to close up shot after racking up tens of millions of dollars in losses for both his and his customers accounts.

In 1994, however, he was back on the scene, with a strategy based solely on mechanical trading signals from computer systems. With this system, he executes an order every time the computer gives him a signal. "When I started in this business there were no computer, and it was hard to do research to determine what made the market tick," he says. "Now, with technology racing ahead, new computers will never tire of being able to perform research that allows me to improve the rules of the system to make my trading more successful."

Dennis can point to some successes. Last year, he placed fourth in a ranking of the top 10 fund managers in Futures and Options World magazine. And while his year-to-date performance is down 18 percent, Dennis fund was up to 112 percent in 1996 and 108 percent in 1995. During the eight months he traded with the system in 1994, he was up 8 percent. He equates the large difference in return between this year and the previous two years to the New York Yankees losing to the Philadelphia Phillies, statistically everyone is going to have up and down times.

Dennis credits the success of his trading system on his extensive research. "I am no longer a trader, I am now a researcher," he says. "I am constantly performing research to determine how I can tweak the system and create new parameters to allow it to adapt to the changes that are constantly occurring in the market."

Some critics believe that Dennis strict mechanical trading formula is a marketing ploy to put investors at ease over his past record. But Dennis says he has put in place checks and balances so that investors can see exactly what he is doing at all times.

Each night, Dennis transmits his signals to an independent party to evaluate and reconcile his trades for the day. The firm, Dennis says, has no impact on his trading or research. Rather, it monitors his actions to make sure that he is doing what the system tells him to do. "By having a third-party involved, we are able to add a level of comfort to investors who may require a high degree of oversight," he says. "They are able to provide real value to investors who want to know what we have done in the market during any given time."

Dennis believes his current system will allow him trade up to $300 million successfully. Currently, he has $80 million under management, which is up form the $2 million he started with in 1994. At the end of the day, a trader has to go with what works," he says. "I know that mechanical systems work best and therefore am quite comfortable that our strategies will continue to be successful."