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In Conversation with Martin Lueck – Aspect Capital The Aspect and AHL co-founder tells his story EXTRACTS FROM THE TOP TRADERS UNPLUGGED PODCAST, PART 1

Niels Kaastrup-Larsen in his podcast, Top Traders Unplugged, interviews some of the most successful hedge fund managers in the world. In episode 37, Niels speaks with Martin Lueck, co-founder and Research Director at Aspect Capital. Lueck is well known in the alternative investment industry as one of the co-founders of AHL in the mid-1980s.

Niels Kaastrup-Larsen: Now Marty, I think it’s fair to say that many people who are involved in the hedge fund industry, and certainly people who are involved in the managed futures industry, are very familiar with your name and that of your partners from AHL. So instead of me doing my usual summary of some of the key points in your journey so far, I’d like to start a little bit differently today, and I hope that’s OK with you? So here goes, let me start out by asking you this question: imagine that you are invited to a dinner party with people who don’t know you, and a few minutes into the dinner the lady sitting next to you looks in your eyes, she smiles politely and asks, “So Marty, tell me what you do?” How do you respond to that? How do you explain what you do?

Marty Lueck: Typically that’s the question I, usually, dread [he laughs], so I first of all have to get a sense of whether that lady is genuinely interested or if she knows the finance space. I start with something fairly neutral like I run a quantitative investment business, and I see whether her eyes glaze over instantly, and then change the subject. Assuming that she says, “Oh do tell. What’s that for? Why do you do it?” I can sort of walk her through a little bit of the story: that there’s a happy accident that I got into quantitative investment research and applied my original physics background to developing these models. Then in terms of the question of what’s it for? Well I think that the sweep of my career has sort of, unwittingly of course – I don’t think I set out in the early 1980s with this vision in mind, but I think with the benefit of hindsight, what we and others in the industry have managed to do in some sense is democratize a new form of investment, that actually I genuinely believe it has a contribution to make to pension funds, and to individuals’ investment portfolios. And Niels, if that hasn’t put her to sleep, or to talking to the person on the other side of her, then nothing will.

NKL: It’s funny Marty, because actually it’s something that I struggle with myself. When people ask “What do you do?” I think it’s so hard to the uninitiated to come up with an answer which both makes sense and is somewhat interesting.

ML: And keeps the conversation going. 26

NKL: Absolutely. Now, of course we’re here to learn about the great things that you do at Aspect, but we can’t ignore that your first company, AHL, had such a profound effect on the whole managed futures industry. So I’d like to spend a good deal of time going all the way back to where your journey begins and find out what led you to where you are today. To my knowledge, the AHL story has never really been told to the same degree as the story of the Turtles. But since they’re taking place more or less at the same time, and both had a huge impact for decades after the event, so to speak, I want to be sure that we cover a lot of that background as well today.

ML: Gosh, Niels, be careful what you wish for. Well, as I said, this is a happy accident. I studied physics at Oxford and my school friend and then also chum at Oxford was a fellow called Michael Adam, and he and I competed at math and physics. When Mike – he was a year ahead of me at Oxford, he took a year off and then started working for his father and the family business was originally... they were of Mauritian decent, they were involved in physical commodities on the London commodity markets. Michael went to work for his father and Cyril Adam said, why don’t you see if there’s anything in these technical trading models? So here you are, you’re about 1983 and personal computers were a bit of a rarity and Michael bought a Hewlett Packard 9816 and taught himself to programme in Pascal. I left and got my first job at Nomura, in January of 1984, and spent all of my lunches hanging out with Michael and just really thought what he was doing was great, and my trying to sell Japanese equities was not so great.

So I left Nomura after a whole nine months there, so that was the last real job I had, and started working for Brockham Securities, which was Michael’s father’s small broking house. Together we investigated a huge range of trading strategies and sort of distilled it down to some fundamental rules. I’m glossing over a lot of work. Our first portfolio was six commodity markets. I think we traded cocoa, coffee, sugar, aluminum, copper, and zinc, and we had £25,000 of Adam family money and we built that first systematic portfolio. Along the way we met this chap, David Harding, who was a Cambridge graduate and I met him when he was working for Sabre Fund Management, and that story, I’m sure,

David would tell it far better than I. David was the understudy to a man called Robin Edwards who was a chartist – a fund manager, but it was entirely based on chart patterns. So every day David, the sorcerer’s apprentice, would take the books off of the shelf and open up the charts and add the latest tick data point. In would come the grand vizier and determine whether that was indeed a rising pennant or a double bottom or a head and shoulders, and determine what the day’s trading would be.

So David and Michael and I, when we met, we said, if we could encode Robin’s rule set, that would be something, and it was just sort of a meeting of minds. Then there was a bit of a tussle. The Sabre folks wanted Michael and I to join them, but in the end blood was thicker than water, so David joined us in the Adam family business. In early 1987 Michael and his father had a difference of opinion on the direction of the business, and we left and AHL was founded. We managed to... we had one client that had been with us over the transition, so we had a whole $100,000 of investor money that bridged that interlude. Then we set up in February of 1987. We sort of floated around town. We didn’t really have office space. We were in my father’s office for a few weeks, then we had a cupboard at the back of the Sabre office for a while, and if I recall, Sabre were generous enough that they took a stake – they backed us for a while. Later on we bought those shares back. Eventually serviced offices and then on to Jermyn Street.

The relevant thing here is really, genuinely, Michael, David, and I didn’t know that there was an industry doing this in the States. So you talk about the Turtle experiment going on. We woke up, and we found that we were doing something where there was precedent, where there was an industry and in fact it was quite a burgeoning industry. I think that that’s relevant because we weren’t looking over our shoulders at how other people had done it or were doing it. Literally this was three nerds, and we approached the process of model development like a scientific experiment. We had the historical data; we had some models that we distilled down to some essential characteristics and then we said can we do this better? Can we add additional markets? Can we improve the models? Can we go faster? Can we go slower? Can we add more components to it? It was a scientific exercise. I think that that DNA, that approach really took off in the industry. I would contrast that, and I know it’s a gross generalization and therefore not true, but I think that a lot of the roots of the US early CTA industry were in floor traders that encoded their rule sets. So you look at the Richard Dennis story which you referred to, or John Henry, these were very smart folks, but they had a rule set that they were comfortable with, and in fact, we came really close to that with MINT.

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