Tuesday, June 23, 2009

Interview With Henry Carstens of Vertical Solutions

Long-time readers are familiar with Henry Carstens, a developer and trader of trading systems who has made his living from his work for many years running. Henry's Vertical Solutions site is a treasure trove of inspirations, including papers on system development (and an e-book on testing your trading ideas), as well as forecasts from his models and several tools for looking more deeply into one's trading systems.

Recently, Henry has made the transition from trading for a living to managing money for investors. His trading systems are available through a broker or by monthly subscription to his trading signals. I recently talked with Henry about his transition, as well as the broader challenges of trading for a living:

Brett: What led you to offer your trading system through a broker, rather than set up a fund on your own?

Henry: The marketing is hard. In the end, I decided to do what I *enjoyed* the most (building automated systems), had the most experience at (selling software) and concluded I had the greatest chances of both enjoyment and success by licensing my software to funds instead of becoming and running a fund, which would require me to either hire or wear too many hats...Raising money for a fund is harder than raising money for managed accounts...at least in the beginning.

Brett: When will the funds that you license to be making your systems available?

Henry: It's taken longer than expected. The first fund was scheduled to launch in October of 2008 and launched in May of 2009. A second fund should be out in the next 60 days; a third fund will probably use a subset of the strategies to gain an execution edge for its bigger trades. The funds handle managed accounts...Regulations and regulators just chew up time (and money).

Brett: What have been some challenges you've faced in making this transition?

Henry: Adding accounts adds complexity and complexity naturally increases the strain on technology. For instance, in March, TradeStation's data were very unstable, which meant creating a process for making sure that the data were clean each morning...When it came to managing multiple accounts, Interactive Brokers and Ninja Trader became my best friends: IB because their professional level service is so good and Ninja Trader because it allowed me to replicate orders across accounts without increasing the strain on TradeStation. I still like TradeStation because it removes all the hassle of managing multiple streams of data--something I have neither time for nor interest in.

Brett: What's been the hardest part of going public with your systems?

Henry: A losing month. There is nothing so painful as telling your hard won, newfound customers that you just lost money for them. It will be 30 days before you can redeem yourself in their eyes, so it will have been 60 days or almost 20% of the year that you've been a minus instead of a plus in the back of their minds.

Brett: What has been the best part of going public?

Henry: Turning nothing into something and something into something more. Having more and more people interested in your work. Ultimately, though, interest will only grow by making money for clients. (When you're a trader, your family *is* a client).

Brett: What kind of results do you shoot for?

Henry: The bar is lower than one might thing: 10-12% year in, year out without huge drawdowns is plenty ambitious. No one expects a double without a lot of leverage and a lot of risk.

Brett: Do you share your ideas with others? Do you partner with others for your research?

Henry: Research partners are the true leverage on the research side: add 1x returns per partner and compound! Partner with the best people you can find. Find one, share, and grow. Our "trade secrets" are never as unique as we tend to think.

Brett: Do you keep records of your research?

Henry: Paper doesn't work. Get a tablet PC and put all your research notes there. Have it automatically backed up. Use an online collaboration tool for partnered projects.

Brett: What are your thoughts about trading mentors?

Henry: They are invaluable. It's quite inefficient to learn it all yourself. It's not nearly as fun and the stories aren't as good! My trading muse is chess. I find that learning something in parallel with learning trading provides insight and momentum into the learning process. The leverage gained from a muse is similar to the leverage that research partners add, only different.

There are several takeaways from Henry's responses to my questions:

1) Stick to what you love and what you do best: that is the highest probability path to success. Stay firmly within your niche and outsource everything that falls outside your spheres of talent, skill, and passion;

2) Patience is the better part of success: There is a learning curve and a developmental phase to all undertakings, including trading. Things always take longer to get off the ground than you'd like. It's the love of one's work that overcomes technical challenges and inevitable delays;

3) Success is a team endeavor: Finding like-minded partners and mentors leverages your own skills and talents, just as you leverage theirs. In sharing ideas with the right people, everyone gains perspective. Surround yourself with talent and you will live up to the best within you.

Thanks to Henry for the excellent website and the willingness to share his entrepreneurial experiences.