Anthony Todd, Aspect Capital
Episode 3 of Perspectives our dedicated series where AIMA, in partnership with KPMG, speaks to alternative investment industry leaders from around the world continues with Anthony Todd, CEO and Co-Founder of Aspect Capital.
Anthony shares with listeners the best advice he received at the inception of his now multi-billion-dollar investment management firm, emphasising how the virtues of patience and conviction were crucial to its success. He also underscores the potential risks AI poses to intellectual property and offers insight into how Aspect wove its cultural principles into its DNA from day one.
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This podcast is the sole property of the Alternative Investment Management Association (AIMA). This audio production and content are intended as indicative guidance only and are not to be taken or treated as a substitute for specific advice, whether legal advice or otherwise. AIMA permits use or sharing of the content in media or as an educational resource, provided always that proper attribution is made. The rights in the content and production, including copyright and database rights, belong to AIMA.
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Anthony Todd
CEO and Co-Founder of Aspect Capital
5 Lessons from Anthony Todd
Seize opportunities beyond your field of study
While many individuals carve out their careers based on their academic background, Anthony's journey reminds us that opportunities often lie beyond the realm of formal education. Anthony initially pursued a career in physics but pivoted to finance after a year of working in a research laboratory. According to Anthony, his transition was guided by his attraction to the “fast-paced and entrepreneurial culture” of stock broking firms. A lesson to stay open-minded and explore paths where transferable skills may provide bridges into sectors adjacent to your educational background.
Cultural alignment is key
Anthony stresses the importance of cultural alignment and teamwork within a hedge fund. He shares how the very first thing his business did (even before any coding or research) was establish a strong cultural document outlining key beliefs of teamwork, respect, and integrity. This document guides the firm's decisions and interactions to this day, ensuring that every team member is aligned with the company's core values. Anthony's advice to start-up fund managers is to carefully choose team members who not only possess the necessary skills but also align with the firm's culture, fostering collaboration and mutual respect.
Respect the power of patience and have conviction in your product
Today, Aspect Capital is a multi-billion-dollar investment manager with over a hundred employees around the world, boasting more than two decades of history, but when Anthony Todd founded the firm no one was interested. Based on that experience, Anthony advises start-up managers today to have a business plan and the resources that can sustain operations for up to three years before you achieve any traction with investors.
When Anthony and his partners set up the firm in 1997, they were preaching the benefits of managed futures and the importance of diversification, particularly given the backdrop at the time of the boom in the tech sector, and nobody listened,” he explains.
In Aspect’s first year, Anthony recalls having 62 meetings with investors and raising no money from any of them. However, the team had “absolute conviction” in their investment strategy and a clear plan that accounted for a slow burn in investor interest. For Anthony, it is all about staying patient, keeping your balance sheet robust, and remembering that success may be just around the corner.
Market research should be driven by a hypothesis, not just data
For Anthony, it's essential to approach research with a clear, articulated hypothesis rather than just sifting through data without direction. “We believe in a hypothesis-led approach rather than a data net approach." This underscores Anthony’s philosophy that every research project should start with a concrete hypothesis to ensure focused and meaningful insights. This approach hasn’t been altered by the advent of AI, instead, it has sowed the seeds for Aspect Capital's future approach to the technology.
Embrace technology responsibly
“Technology is at the core of what we do”, Anthony notes. This is underscored by the belief that large language models such as ChatGPT could be “transformational” for his business. Yet this admission does not prevent Anthony from warning listeners of the risks that come with an overreliance on AI. Particularly the importance of ensuring that “intellectual property doesn’t actually just leak out to the outside world”. He further points out that generative AI tools can only get you so far, you have to understand how these generative tools arrive at their conclusions. "We want to be in a position where we can explain to our investors the drivers of returns." Therefore, melding AI into business operations demands transparency and a vigilant protection of intellectual property.
Read the transcript
Tom Kehoe, AIMA 00:06
Welcome back to The Long-Short. Over the coming few months, we'll be bringing something a little different, the ‘Perspective’ series, in partnership with KPMG. This podcast series will feature conversations with leading CEOs and founders of alternative investment firms from around the world. And today, we're excited to share with you one of a series of conversations we've had with them. Our guests share their visions in a variety of areas, including how to attract and retain top talent in the context of the fierce war for talent, as well as how to navigate the increasingly complex operational scaling challenges and much, much more. The discussions are being led by myself, Tom Kehoe, co-host of AIMA’s The Long-Short podcast, and John Budzyna, Managing Director and US national leader for market development for alternative investments at KPMG. So, sit back, we hope you enjoyed the show. Thank you for joining us. Hello, and welcome to another episode of ‘Perspectives’, featuring conversations with alternative investment leaders from across the world.
John Budzyna, KPMG 01:03
And today, we're delighted to be with Anthony Todd, the co-founder and CEO of London-based Aspect Capital, a multi-billion-dollar systematic firm. Hey, there's very little Anthony has not experienced being at the top of his profession for the past 30 years. So, there’s something for everyone in this episode. Anthony, it's great to be speaking to you today.
Anthony Todd, CEO at Aspect Capital 01:26
John, thank you very much for the introduction. Great pleasure to be here.
John Budzyna, KPMG 01:29
So, Anthony, you currently run a worldwide investment firm based out of London. Tell us a little bit about your background and what made you decide to work in the asset management industry to start with?
Anthony Todd, CEO at Aspect Capital 01:39
Yeah, I mean, in terms of background. At Uni(versity), I actually read physics. absolutely adored physics and was compassionate about it. It was a superb course that I studied. But actually, in the year before going up to Uni, I spent a year in the research laboratory working at GEC Marconi, and probably took a rather short term view that in terms of a future career in physics, it just wasn't for me. I just wanted to go do something else. And so, I started interviewing for other roles and started by consulting a couple of firms in the field of finance and immediately found a series of different stock broking firms. You know, at that stage, this is pre Big Bang, they were fast-paced, entrepreneurial, very strong cultures, exciting, new, super smart people to work with. That’s the kind of environment, that's the kind of culture that I want to work in. So, hence the move from physics through to finance.
Tom Kehoe, AIMA 02:40
In that move Anthony, where did you start out then? What role did you start out in? Given this mathematical background, presumably it would have been on the quantitative side or whatever that would have been described at the time?
Anthony Todd, CEO at Aspect Capital 02:57
Yes. I mean, it was actually an interesting point, because in fact, at that stage, this is right way back in the early 1980s. And of course, a lot of people today, in sort of the fixed income markets, people are drawing analogies with what happened in the fixed income markets during that period. And the early 1980s, obviously represented the very start of the major bull market which we've seen in bond markets over the course of the last 40 years. At that stage, stock broking firms were very much dominated by the equity trading desks andbonds were just very much up a bolt on, nobody during the 1970s, and very early 1980s was interested in the bond markets. But suddenly the bull market started and there was this rush from stock broking firms to bring in people who had a background in science or in math who could understand the fixed income markets. So, I was a part of that whole kind of diaspora who are from maths and physics and engineering kind of backgrounds. Subsequently, there was this hunt for people by these stockbroking firms to populate their fixed income trading desks.
Tom Kehoe, AIMA 04:12
Who would have been in that space at the time, Anthony? Thinking of what you were doing back then. And then looking ahead to the evolution of your career, as to what that the defining moment was, that pointed you to pursuing the particular type of investment strategy you're doing now?
Anthony Todd, CEO at Aspect Capital 04:34
I was thinking about this earlier.,I think there were two defining moments for me. The defining moment number one was back at Uni where I was studying physics with Michael Adam, and with Martin Lueck. Adam and Lueck, the A and the L of AHL. They left Uni and immediately started running a business together. So, that was the precursor to AHL. But that was the kind of business that started researching covering, running, and developing trend following models. So, I was just very lucky, and in a very fortunate situation to actually kind of get to know Michael Adam and Martin Lueck. Michael Adam was actually my physics practical partner. So, we worked very closely together over a number of years. I think that was a defining moment number one. Then obviously, I saw the growth of that business that was called Brocom securities in the early 1980s, of course, they teamed up with David Harding in 1987. So, I saw the kind of growth of that business during the 1980s.
I think the second defining moment for me and what very much catalysed the launch of Aspect Capital, so now I'm moving forward into the mid-1990s. I joined AHL in 1992 and joined them at a relatively early stage. They had US$200 million assets under management and a team of about 20 people. And although Man (Group) at that point, had a majority stake in the company, AHL retained its autonomy, it had its own board and investment committee, it had effective practical independence. In 1994, on the run-up to Man's IPO, Man actually bought out the minority interests and actually acquired the remaining stake in AHL, so took it 100% into ownership. And again, very important to emphasise, of course, Man has done the most remarkable job over the course of the last 30 years with that business. But in 1994, that did very much represent a huge cultural shift in the company. And it was that kind of cultural shift that very much triggered my departure from the business. Instead, I began teaming up with Martin Lueck, teaming up with Eugene Lambert, who had been the head of trading system development at AHL, together we decided to move on and start Aspect (Capital), and that was 1997.
John Budzyna, KPMG 06:59
Yeah, that's interesting. So, when Aspect Capital was formed, what was your vision for the firm at that time? What were your goals? And how do you compare them at that point in time to what they are today?
Anthony Todd, CEO at Aspect Capital 07:12
Yeah, I mean, it's really interesting to think back about the history then, and I think it's interesting to actually look back and think about the state of the managed futures sector in the mid-1990s. The main investors in managed futures strategies going back to the 1990s were high-net-worth investors, they weren’t institutions. There were very few institutional investors for very good reasons. The managed futures strategists were typically packaged as principal protected or guaranteed funds, with fixed maturities, with monthly liquidity, with very high levels of fees to incentivise the distribution network, very high levels of volatility. And that was an extremely successful business model at the time.
But our view at Aspect Capital, and the vision behind he firm, was that here was a source of return or style of return, style of performance with certain performance characteristics that could be of great value to institutional investors. The ability for managed futures to provide returns uncorrelated with stocks, uncorrelated with bonds, in a wide range of different market environments, we could see that this is something that could be of huge value to institutional investors, but packaged up in a guaranteed format, in a principal-protected format with limited liquidity andwith high fees was simply going to be of no interest to institutional investors at all. And that was the thinking behind setting up Aspect Capital, what we wanted to do is build a business that would meet the requirements of institutional investors.
So first and foremost, actually came the importance of actually investing heavily in research because, obviously, research drives innovation and that actually drives local performance. So, we want to invest heavily on the research side. But of course in doing so think about how to build a scalable managed account platform, where investors could then have daily liquidity rather than monthly liquidity, where they could actually customise different programs, it wouldn't have to be a one size fits all type approach. We want to actually provide that degree of broad level of customisation. And combine that then with a high level of transparency, a high level of attention to detail in terms of risk management, corporate governance, and the ability to be able to conserve these high-level institutions. That was the thinking behind setting up Aspect in 1997.
John Budzyna, KPMG 09:45
What would you look at the goals today to be? If you look forward to the next five years, how has that changed? Are there new objectives that the firm is looking to?
Anthony Todd, CEO at Aspect Capital 09:57
I think, John, in terms of the founding aims behind the business, they are very much research-led performance-driven, meeting the requirements of institutional investors working in partnership with our institutional investors, providing a range of different capabilities. We obviously started in the trend-following area. Over many years, we've diversified and now have set up a broad range of different capabilities. That was the founding vision behind the business, and I think that’s where we are today. And, the vision for what we want to create, of course, over the next 5 years, 10 years, 15 years, is very consistent with those founding principles.
John Budzyna, KPMG 10:40
So, the founding principles work great.
Anthony Todd, CEO at Aspect Capital 10:45
It's interesting for me to look back at them, John, because, you know, actually, when we set up Aspect Capital as a business, it was very much in the heat of the internet boom. So, think booming stock market, booming NASDAQ, and very little interest from investors to allocate to diversifying strategies When we set up the company, we were very much preaching the benefits of managed futures, and the importance of diversification, particularly given the backdrop of that huge boom in the technology sector and nobody listened! Nobody listened because people were just purely and simply interested in that kind of technology area. Then, of course, the whole technology bubble burst between 2000 and 2003, the S&P 500 index pretty much halved in value over that period and we and our peers, (the managed futures sector in general) was able to generate very strong positive returns in each of those four years, 2000 through to 2003. And that very much kind of catalysed some of the huge pick up in interest in the entire sector. So, I think there are some interesting parallels between that period and frankly, what we're seeing today.
Tom Kehoe, AIMA 12:02
Anthony, we've got a wide variety of listeners that tune in to these interviews and you mentioned a couple of times the ‘trend following’ strategy. Not everybody will understand what trend following is so for those who don't understand the essence of this , could you describe it briefly, please?
Anthony Todd, CEO at Aspect Capital 12:25
I can try to. The first thing when we talk about trend following, I think it's really important to come back to what returns we try to generate, what's the role of trend following? Why is it such a, , valuable strategy in investors portfolios? The key role of trend following is to be able to provide diversifying returns independent of stock and bond markets, particularly, not only, during protracted market crises. So, particularly during periods such as we saw last year, during inflationary periods, during the GFC, during 2008, and as, just mentioned, during the bursting of the dotcom technology bubble from 2000 to 2003. So, those are periods where when managed futures was able to deliver strong positive returns in a persistent market crisis.
How does it do that? Although the Managed futures sector, the trend-following sector is a disparate sector, I think there are quite a few common themes that run between the various different key competitors in the field. The first is, in terms of trend following, we talked about medium-term trend following, what we at Aspect are trying to do is identify trends or momentum, over a period of around two to three months or longer. That for us is the definition of convenience. In some of the markets that we trade, we trade the world's most liquid, and most current diversifying markets that we can find. So, we trade in eight different market sectors. Those sectors span, stock indices, credit, long-term bonds, short-term rates, currencies, energies, metals and agricultural. So, it's a highly diversified range of markets. In our longest-running program, we trade in around 180 different markets so that’s the diversification across markets.
I think most importantly is that we have no bias in our models at all. So, we're equally able to capture positive momentum or declining momentum or falling markets. And we do that in an entirely kind of systematic, totally disciplined manner. So then if you if you look at what we do, as I said, it's what we do in terms of stocks and bonds Yes, we trade stocks and bonds it's only a small part of what we do, it's a far more diversified portfolio than a traditional portfolio. We're capitalising on that momentum on those trends over a period of two to three months or longer. And we're equally able to navigate rising and falling markets. In some sense, it should be no surprise that trend following is able to generate those returns, that style of returns that I talked about earlier.
2022, as an example, if you look at the trend following firms, as a group, they performed very, very well. How would you look at your strategy, as you look forward as to how applicable it'd be to current and future market developments? What do you see as the opportunities for anyone thinking about investing in trend following strategies? And why 2022 and into this year (2023), was a particularly great time for trend following firms?
Anthony Todd, CEO at Aspect Capital 15:46
Environments, where the current trend following will be able to continue to generate strong positive returns is when there are strong themes across a range of different markets and those themes are actually driving investor flows and those investment flows driving trends or driving momentum in the market. So that's exactly of course, what we actually saw during the course of come 2022, there's suddenly this fear about inflation, the move from globalisation to isolationism. It's the move from quantitative easing to quantitative tightening and a move to a sticky inflationary environment that drove those trends. So that's why we were able to generate strong returns last year, because we saw those strong momentums in fixed-income markets, in the currency markets and in the energy markets.
I think the other components to bear in mind is of course, what we see today, and what we saw during the course of last year, is a diverse range of economic conditions throughout the world. So significant slowdown, for instance, in China, Chinese authorities easing monetary policy, the Japanese authorities still remaining in place yield curve control, and meanwhile, significant monetary tightening happening in the UK, the US and in Europe. When you see those kinds of disparate economic environments and disparate responses from central banks, that, again, can lead to a significant divergence in policy and a divergence of performance of different asset classes in different regions. And that opens up a range of different opportunities for us. We saw that in evidence last year and we’re beginning to see that in evidence this year.
Environments, we're always very careful to actually talk about. Environments which are more challenging for us are environments when markets are range bound. So when markets are range bound, there are new trends. And our models are constantly hunting for trends that aren't there, or environments where we actually see very sharp inflection points against the prevailing trend. But we're in a fortunate situation that markets spend their time trending for most of the time than they actually remain in a range bound environment. Hence, the ability of trend following points to generate those contracted returns over the long term.
Tom Kehoe, AIMA 18:07
Anthony, it's been remarked that long-term trend following is scarcely good enough to run a hedge fund. That's been a criticism. And a popular rationale being overcrowding, simply too many funds doing the same thing within a particular strategy. And over the past number of years, and I'm sure you know, we've seen a difference of opinion being expressed by some of the industry's pioneers, with some saying that trend following no longer works and others, including yourself, arguing very vociferously that it does. Why are you so convinced that it does work?
Anthony Todd, CEO at Aspect Capital 18:44
I think we're always going to be data led, so to me. I think one of the great strengths of this sector is its durability, is the length of track record. So actually, if you really look at the genesis of managed futures, conceptually, you have to go back to the 1970s. And actually, there are a number of firms around today in our sector, which actually had their track record running back to the early 1970s. So I think the first thing is, I'd say to anybody who's kind of questioning the sector, I'd say, “well look at the data”, just look at the data that actually says the managed futures sector is one of the longest running, I'd possibly argue it's the longest running alternative investment sector. I’d say, whether you know, our track record goes back 25 years, the number of firms in our sector that can actually point to track records going back kind of 40 or 50 years, with a consistent ability to be able to generate those kind of strong diversifying returns independent of stock and bond market returns. That's a rare characteristic in the alternative investment sector. And to me, it's interesting today because the outlook, and again, we're not economists, we can only just point to the risks that investors face. But you know, to us, investors face three potential market outcomes or economic outcomes. Soft Landing, hard landing, or no landing, no landing being a more stagflation type environment.
Now, I think one of the great strengths of our sector is that actually we can point back over the course of the last 50 years, to other periods in history where we have seen a soft landing, like the mid 1990s, we can point to the times, when we’ve seen a hard landing, that's when I started my career in the financial markets in the early 1980s, or we can point to a stagflation environment, that's the 1970s. And you can see how managed futures, how the CTA sector has performed in those different environments, and consistently they have been able to provide those very attractive, diversifying returns.
21:00 – Interlude:
KPMG is a global professional services firm, providing audit tax and advisory services to many of the world's leading alternative investment management firms to address the specific challenges and opportunities unique to alternative investments. KPMG has dedicated practitioners focusing on hedge fund, private equity, and real estate organizations. Our professionals devote their time to provide innovative and strategic solutions to alternative investment managers in areas ranging from strategy to operational and compliance functions. Through the knowledge of industry leading practices and customized technology systems. They provide advice and support that deliver value to these organizations and their investors. For more information, please visit kpmg.com.
John Budzyna, KPMG 21:52
But as Aspect Capital continues to grow, how do you continue to provide alpha at the scale that you have in the past? It's often difficult for firms to make that transition.
Anthony Todd, CEO at Aspect Capital 22:08
John, thanks for that. I didn't cover the kind of crowding point that some that you raised earlier. And I think, you know, whenever the sector, whenever the managed futures sector has had a difficult spell, then immediately people say, “ah, I told you so, it's become overcrowded”, you know, the market impact that has actually effectively been crowded out.
We have looked at that potential crowding risk on a number of occasions, as have some of our competitors. And we do that quite simply by actually building a naive common trend-following model, we can apply that to let’s say, a hundred of the most commonly traded markets in our sector. Again, we're very much data lead. So, the answer is in the data. We can actually then model on the basis of the size of the managed future sector, which is well documented, then what is the total consumption of the sector in terms of open interest, in terms of average daily volume. Now conducting that piece of analysis actually could point to the fact that we're a long way away from any kind of crowding effect in the markets. And again, I think it's one of the great strengths of this approach is that we are trading the world's most liquid markets, we're trading the world's most liquid fixed income markets, stock indices, currency markets, energy markets. And, that analysis will actually overstate the degree of volume consumption, capacity consumption, because we're not even taking into account actually the underlying cash markets or the option markets or the swap markets. But the crowding out hypothesis just simply does not hold water.
Tom Kehoe, AIMA 23:59
You can't have alpha without having the best people. So how do you then attract and retain the best people for your firm?
Anthony Todd, CEO at Aspect Capital 24:05
It is competitive. There's no doubt at all. It's highly competitive. I think what's interesting, what we're often asked today, is it more difficult to hire people then it was 10 years ago, or 15 years ago?I don't think it's more difficult, I just think the competitive landscape has shifted. Whereas 10 or 15 years ago, , we were in competition with the major banks and prop trading desks. Now today we’re more in kind of competition with the technological firms of the world. So, the competition is still highly intense. How do we compete? I think we can compete and we are competing successfully for talent. We've recruited actively as the business has grown over the course last few years. We continue to recruit actively at the moment. And I think our track record of talent retention, which is also equally important, is very strong.
I think there are two key components there. One is, of course, compensation plays a very important role, we have to make sure that we're rewarding people competitively. But it's not just purely the headline numbers. There are other, I think important facets to our approach, for example, everybody in the company has the ability to be able to acquire shares in the business. So, the vast majority of the people from the business are shareholders of the company itself. We have an active option scheme now in the business, which where again, we've issued options, this is going back over a 20-year period, again, to make sure everyone's interests are aligned. But I think just as important as the firm’s compensation structure is the culture of the business. And when Eugene, Martin and I set up the business, actually back in 1997, one of the first things we did before we did any research, before we wrote any code, we decided it was important, we actually set out a cultural documentation, just kind of setting out our key cultural beliefs. Because our view was unless the three of us could actually agree on that culture, then we frankly, just didn't have a business. That culture document still sits on the Aspect Capital network, and we refer to it on a regular basis. That’s something we can talk about at company meetings, when I talk to new joiners in the company, it's something I talk about as well. And that cultural document very much concerned about the importance of teamwork, the importance of the collegiate approach, the importance of mutual respect, important integrity, the importance of treating our investors, as partners. And I think that is as true today as it could have been back in 1997 when we set up the company.
John Budzyna, KPMG 27:01
Anthony, if you can reflect upon the type of people that you've hired, let's say 15-20 years ago, and look at that skill set that you're looking for now, let's just take an analyst, for instance, in your company, how has that changed in terms of the type of people that you're looking for, and the skill sets that they can bring to the firm?
Anthony Todd, CEO at Aspect Capital 27:22
If you'd asked the question saying, asking the difference in people we were looking when we were hiring 20 years ago, by comparison, now, let's say there is actually quite a shift, because 20 years, 20 or say 25 years ago, what we were looking for was really strong all-rounders. You know, although when we set up the company, we were fortunate enough to be able to raise a significant amount of working capital for the company, right from the start and significant amount of seed capital for the business. And that enables us to build a strong infrastructure on day one. And when we started trading, we had a 24-hour trading desk, which was pretty much unheard of at that stage. Still, you know, for that size of team, it was important to have people with a broad level of expertise, broad level of experience, people are able to contribute across a broad front. I mean, that's shifted during the early 2000s is we’re in the position then to be able to recruit specialists, real specialists, I mean, not only specialist researchers but people who specialise in certain areas of research.
I think if you look at the people, if we're looking at a group of research analysts today, by comparison with hires made 15 years ago, I think there are some very common elements that we're looking for, you know, Obviously, very strong academics, that almost kind of goes without saying, but, you know, individuals with inquiring minds, individuals who are self-critical, but also understand that cultural element, John it is just so so important as you can find people who have very strong academics. In some sense in the recruitment process, that’s the easy part of the job, the challenge is actually finding people who can combine that really strong academic discipline approach with an alignment to the business in terms of our cultural values. I mean, on the one hand, we want people with a broad range of different experiences, different backgrounds, different academic training. So, we need a diverse range of input styles and views that stimulates innovation. But that’s something where we need commonality, we need that in terms of the cultural side. So, we need people who want to be part of a team, who believe and can contribute to a collaborative culture and people who exhibit integrity. People who will thrive in that collegiate environment, that in terms of recruitment, that's the challenge find those people with, with those kinds of cultural attributes,
John Budzyna, KPMG 30:14
Talent is certainly one challenge all firms face in today's environment. If you reflect upon again, the times when you set up your hedge fund to those folks that are setting up hedge funds today, what advice would you give them relative to whether it be talent or anything across the board in setting up a fund today?
Anthony Todd, CEO at Aspect Capital 30:38
Three pieces of advice, John. One of the most important piece of advice I was given back in 1997, is you've got a plan that it's going to take three years for the business to get traction. And those three years is just so important, just in terms of having patience, and having the strength of balance sheet to be able to be patient and can take the time needed to actually build out the business. As I mentioned, when we started our business, in 1997, our first fund started in 1998. And that period, end of 1998 running into 1999, nobody was interested in what we were doing, nobody. And then suddenly, the world just completely pivoted on its axis, during the period from 2000, 2001, and 2002. And it was actually pretty much three years to the day after we launched, that we started receiving significant interest from investors, so having that, three-year timespan, I think it's important.
Setting out a business plan. So it's just making sure that as part of a founding team, my strong recommendation would be to actually write down on paper, what kind of business you actually want to try to build? What are the kind of goals and what type of programs are you going try to make or try to build? Who’s going to be part of the investor base? What kind of culture do you actually want to build? Writing that down in black and white, I think is absolutely crucial.
Third piece of advice is to choose your choose your team carefully. And that again, just comes down again to that cultural side and as I have said I was very fortunate that I was able to come set up the business with Martin Lueck who I've known since my university days, Eugene Lambert, who I've worked with since 1992. So as a founding team, we trusted each other, we knew each other, perhaps inside out, and that made a huge difference in terms of getting the business off the ground.
Tom Kehoe, AIMA 32:41
Anthony, there must have been a testing period? You've alluded to it, for three years you said it took before the breakthrough happened for your business. I would add to that, I guess, an unwavering determination to see the project out, right? Because there must have been moments in the early days where you were thinking, are we doing the right thing?
Anthony Todd, CEO at Aspect Capital 32:59
Yeah, I mean, we did. And then in the first year, between 1997 and 1998, I remember it well, we had 62 meetings with investors. And we raised no money at all, we were asked that conversation on seed capital and working capital, we had such a strong belief in what we were doing, absolute conviction that we could actually build a business that would actually generate the performance that institutional investors needed in their portfolios. And nobody was listening!. So yeah, there was no escape for that period. In those early days. That was definitely challenging, it was somewhat disconcerting. But again, I can come back to it, we had our conviction, we had our business plan. You know, we said, “we're going to give this a good three years, this is not just a short term sprint, it's a longer-term marathon”. So, the first year was unsettling. All three of us took the view that this was just the first year, we're going to give this three years, and we will give it the three years.
Tom Kehoe, AIMA 34:08
Excellent advice. Let's pivot for a moment and discuss the megatrends that are impacting the asset management industry and the world at large. And arguably, the biggest megatrend, and certainly, the most talked about topic right now is the growing influence of technology, and by this, we mean, AI, Artificial Intelligence. So, what is your view on artificial intelligence?
Anthony Todd, CEO at Aspect Capital 34:33
Yeah, I mean my view is that we are a technology-led business. Technology is at the core of what we do. In terms of, a branch of artificial intelligence, machine learning, we’ve been running and researching a set of machine learning models actually for a number of years now. So, in terms of all the discussion around ChatGPT, large language models, we see this as having a very, very, very strong capability that could actually be quite transformational for us. But it does come with its risks. And so, that's what we're exploring, we're exploring and already kind of using ChatGPT in a number of areas. We see it as being potentially transformational across a broad range for our business, in research in actually co-writing code, you know, potentially, on the marketing investment relations side, on the legal side, it has potentially a very strong impact across the business.
But we also need to actually come to think about the potential risks. And if I could just highlight a couple there. The first is that for years and years and years, many talked about the inception of Aspect, one of the key goals of asset was to actually provide very consistent diversified returns, but combine that with a high level of transparency about what we do. We want to be in a position where we can explain to our investors, the drivers of returns, we spend a lot of time and a lot of effort communicating very closely with our investors and providing that transparency. Now, in the implementation of models using say, an implementation of research, for instance using ChatGPT. Finding a way in which you can actually deploy ChatGPT, but at the same time retain the ability to be able to explain what the models are doing, and how the returns actually being generated. That, I think, is an important challenge that we need to consider.
The other area is, which is allied to that, is we always can talk about our research being hypothesis led. Every piece of research that we can do, we start by actually identifying and writing down and articulating a very concrete hypothesis about what elements of market behaviour, what effects we are actually trying to capture here. So again, we believe in a hypothesis-led approach rather than a data net approach, that for us, as I said, that hypothesis, starting every research project with that hypothesis statement is important. Again, being able to come do that, I think we've been able to do that in some of the work we've done in machine learning, but there's a danger of using some of these models in a completely unstructured format and generating models which potentially have a very interesting return profile, but have limited ability to be able to actually understand what effect has been captured.
Third risk, of course is one of IP leakage, in terms of applying ChatGPT to cover and write code, there are opportunities, we can actually come to see there, which could be really very attractive in terms of productivity. But at the same time, we have to be able to come do that will actually retaining the protection of our intellectual property, and making sure that our intellectual property doesn't actually just go leak out to the outside world. That's another challenge that needs to be addressed.
John Budzyna, KPMG 38:30
Anthony's, there's a lot of discussion that open AI and these types of tools will allow competitors or new entrants to the business to catch up with you quicker, because they have the tools that, as you mentioned, that you've generated over the years, a lot of that has been built into your systems, does this give them a little bit of a head start? How would you comment on that?
Anthony Todd, CEO at Aspect Capital 38:57
Across Aspect today, and we run a wide range of different capabilities and we've been focused so far on our trend-following capability. But, we also run, for instance, a highly diversified multi-strat program, which is able to select from 250 different models, we run as a company and the objective of that program is very much an absolute return. Now, on the trend following side, I think it has always been the case that trend-following models, there are many different textbooks and academic articles, articles on the web, describing how to actually build a trend following model. So, I would actually say that that information is already out there. But it's one thing to actually understand the fundamental principles of trend following, it is a completely different matter to actually build a long-term sustainable business. And that, to me, that's the big difference. So, in terms of ChatGPT or large language models, is there any ability to able to constructure potentially generate a range of different models?. Yes, absolutely. I see that. But actually transforming that, and actually building a business out of that, building a business, which is robust, which is resilient, which is scalable, and as I said, is able to actually provide transparencies and provide liquidity is something of business where it has those cultural attributes that I’ve talked about. Works in a close partnership with investors, that's a very, very, very difficult different proposition. And to me the barriers to entry to build a significant business are way higher than they were 25 years ago.
25 years ago, we launched Aspect with US$40 million of seed capital, the US$40 million seed capital in 1998 was a fairly major hedge fund launch. Today, it wouldn't even touch the sides, it wouldn't even touch the sides. And that's my view now, that investors, the level of operational due diligence, the level of research and due diligence is significantly higher than it was 25 years ago. And therefore, the barriers to entry to actually build a business today, are incredibly high. That's the challenge.
Tom Kehoe, AIMA 41:35
Clearly. Arguably, the other megatrend is responsible investment or sustainable investment wherever you are in the world. And so how do you then view ESG and sustainable investment through lens of your investment strategy?
Anthony Todd, CEO at Aspect Capital 41:49
I think, if you're an equity investor, that is a challenge, that is a challenge in itself. I think, in the markets we trade, so bear in mind that the majority the markets we trade, we're trading futures, forwards, interest rate swaps, credit. The whole nature of looking at those markets through ESG, or sustainable lens is even more complex. And it's an issue that investors are still wrestling with. We in the industry, in general, in our sector, we're all wrestling with this. We're working very closely with our investors on this, we'd love to actually build a program that was able to actually meet those ESG and sustainable credentials, it's set in the futures world, I think it's a very, very, very tough challenge, I hope we can actually complete that challenge. We haven't been able to as yet.
And therefore, our focus, rather than actually focusing on the ESG, CSR, from a program perspective and investment perspective, where we've really focused our attention is on a business perspective. And doing so, actually try to make absolutely sure we do everything we can to meet those ESG requirements or CSR requirements at the business level, rather than the program level. I think the best example of that is when we managed to secure B Corp certification during the course of last year. And for those listeners who are not familiar with a B Corp, that actually requires a change in our articles of association as a business, to ensure that we're running the business among lines, which actually can make sure that we are focused not just on our shareholders, but on our stakeholders, and doing everything we possibly can to look after our stakeholders. When I talk about our stakeholders, I mean, that is actually kind of looking after not only our shareholders but looking after our employees, the community, our investors, the environment. So that's something as a business we're very proud of. And I think that's where the big focus of the business has been in that area.
John Budzyna, KPMG 44:09
Aspect Capital is part of the broader alternative investment management industry, the hedge fund industry.If you were to look at the hedge fund industry in the years to come, how optimistic are you about the growth of the industry? The ability for it to play an important role in in asset management and maybe on a scale of one to five, how optimistic you are about the industry in general?
Anthony Todd, CEO at Aspect Capital 44:35
I mean, I'm very optimistic about the outlook. And I think the key drivers of my optimism is that over the course of the last kind of 40 years, we've seen this extraordinary kind of bull market in stock markets and bond markets, you know, which was obviously a signal of a significant air pocket over the course of last year. Now my strong belief now is that the market environment, the economic environment we're actually seeing today is completely different from the last 40 years. And that the market environments we're going to see over the course of next 5, 10, 15 years is going to be totally different, totally different from the last four years. Therefore, what's worked in the last 40 years is not necessarily going to become fit for purpose over the course of the next 10 or 15 years.
Now, what I think that means is investors are absolutely going to need to actually confine these diversifying sources of return which are not reliant on the rising tide of stock and bond markets. And that is what many, not all, but many hedge fund styles can actually provide. And in particular, to coming back to home base coming back to managed futures coming back to trend following, so obviously having shown that ability to be able to provide diversifying returns during a wide range of different markets, environments, stagflation environment, hard landing, soft landing, a broad range of different market environments. So in terms of looking from a very parochial standpoint, in terms of the range of different capabilities that we've built, spanning from trend following through to multi-strat, they've been very much built on the basis that need to actually build a set of programs which are robust, whatever the markets can throw at them over the course of the next 10 or 15 years, but there's definitely none of the programs we run that are dependent on that rising tide of stock and bond markets.
So, in terms of the managed futures sector, in general, you asked, John, on a scale of 1 to 5, I'd be 5 in terms of the ability of certain sectors to be able to meet those investors' requirements. I wouldn't give the whole hedge fund sector a 5 because my concern is that within the hedge fund sector, there are certain styles which are, heavily reliant on rising stocks, rising bonds, which have got hidden beta. And again, in fact, the trend we're actually seeing today is increasing numbers of hedge funds increasing the length of their lockups. So, you've actually got, to me, quite a dangerous combination of some funds not able to comply to transparency, potentially hidden levels of beta and less than less attractive liquidity terms for investors. Because that's why I wouldn't be a 5 for the entire sector, I’d be more cautious.
John Budzyna, KPMG 47:48
And maybe, Anthony, that's why the multi-strat trend that folks are aspiring today, you do multi-strat within the context of your investment strategy and then there are other firms that are setting up now, trying to provide access to a multitude of strategies as markets change, as you said. The next 10 years is going to be very difficult, different than the last 40 years. And obviously, you've built that into your things, but the whole multi-strat platform, maybe you can just comment on that briefly?
I think it’s very risky to just keep talking about an entire sector and actually refer to a particular sector and the homogeneous format. You know, if you look at the managed futures sector, by examples of dispersion in terms of investment c styles and significant dispersion in terms of returns over the course of the last few years. So, I'm very cautious about, when you're painting that multi-strat, multi-manager type of sector as a homogeneous sector, but there are some extremely strong competitors there, and they have generated remarkable returns. And I simply can't argue with that return profile. But I think that kind of cautionary, the three cautionary notes that I can strike is, one, the longer lockups. Just that there come a point when investors I think, are going to need that liquidity. We're actually seeing some managers in that sector moving in the opposite direction. I do have, when you talked about the risk of crowding in our sector, I tried to rip that up with the research we've done. But I can see with the flood of money going into that that multi-strat sector, that there is a risk of crowding there. The third risk is obviously the risk that's always been there in that sector, the lack of transparency. Being able to articulate to the investors, what's actually driving the returns is very different and very difficult with that type of structure.
John Budzyna, KPMG 49:51
And obviously also very difficult to build out the infrastructure to support all those products as well.
Anthony Todd, CEO at Aspect Capital 49:57
Yep, exactly. Exactly.
Tom Kehoe, AIMA 49:59
Anthony, it is been terrific to hear from you today. You've given our listeners a real treat. So, thank you so much.
John Budzyna, KPMG 50:05
And Anthony outside of Aspect Capital, what are the types of organisations and types of things that you have that you have passion about and are working toward?
Anthony Todd, CEO at Aspect Capital 50:15
At Aspect, we're very proud of all the work we've actually done from a charitable standpoint. So, I mentioned how in the very early days on the first things we did was write a cultural plan, we wrote a business plan, we also set up a charities committee. And in the early days, I was actually on the charity committee, and then actually quite quickly decided that actually, the charity committee was only going to work, in fact, if it had its own momentum, I didn't want it to be something that I was driving, and I wanted it to become and seen as something that had its own momentum. And I'm really quite pleased with what we've actually done there. But you know, every year, we, as a company, vote on a charity to support. We’ll be voting over the summer for the charity this year. Last year, we supported a charity called “Fair Share”, which is one of the Britain's leading food banks and food redistributing businesses. All that work from a charity perspective is important.
And from a personal standpoint, three charities I support, I was unlucky enough to go down with sepsis during the latter part of last year and was in hospital for literally a couple of weeks. And I have no idea at all about the number of people affected by sepsis, and actually who passed away as a result of sepsis every year. So that's a charity more recently I've got involved with. Another area I’ve supported for many years, my mother always said to me, “Anthony, make sure you can take care of people less fortunate than yourself”. And so, the homeless charities have always been important to me. So, it's a charity called “The Passage”, which I supported for a long number of years in the homeless category. Finally, my support also extends to environmental charities and one name I would like to mention focusing on Africa is the great work being done by Wild Philanthropy.
So ,those are three areas I support personally.
John Budzyna, KPMG 52:31
That's terrific. Thank you. Thank you for all of that.
Anthony Todd, CEO at Aspect Capital 52:35
Appreciate. Appreciate your time. Thank you so much for the questions.
John Budzyna, KPMG 52:40
Thank you for listening to today's episode of Perspectives done in partnership with KPMG and part of AIMA’s The Long-Short podcast. We trust you found the discussion both interesting and insightful. You can get the very latest episodes by subscribing to Spotify, Apple podcasts, Google podcasts, or Amazon music or streaming directly from aima.org. Thanks for listening.
The Long-Short
Perspectives is a series of episodes done in partnership with KPMG and part of AIMA’s The Long-Short podcast. You can get the latest episodes by subscribing to Spotify, Apple podcasts, Google podcasts, or Amazon music or streaming directly from aima.org.