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Program Description:
Investment Objective
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The investment objective of
the Winton Capital Management's
Diversified Program is to achieve
long-term capital appreciation
through compound growth. This
goal is achieved by pursuing
a diversified trading scheme
that does not necessarily rely
upon favorable conditions in
any particular market, or on
market direction.
The Diversified Program
seeks to combine liquid financial
instruments offering positive
but low Sharpe ratios (meaning
that profits have been achieved
with a certain level of risk)
and generally low correlation
over the long term to other
markets such as equities and
fixed income. Please note, however,
that there is no assurance that
the Diversified Program will
have low correlation to other
markets, even over the long-term,
and over the short-term the
Diversified Program may be highly
correlated to other markets.
Past Results are not necessarily
indicative of future results.
The risk of loss in trading
futures, options and off-exchange
forex can be substantial.
A Systematic Investment Approach
The Diversified Program employs
what is traditionally known
as a “systematic”
approach to trading financial
instruments. In this context,
the term “systematic”
implies that the vast majority
of the trading decisions are
executed, without discretion,
either electronically or by
a team responsible for the placement
of orders, based upon the instructions
generated by the Winton Computer
Trading System. The majority
of trades in the Diversified
Program are in fact executed
electronically. The Diversified
Program blends short-term trading
with long-term trend following,
using multiple time frames in
addition to multiple models.
As its name implies, the Diversified
Program allocates for maximum
diversification. A sophisticated
system of risk management is
evident in all aspects of the
program.
The Trading System
The Winton Computer Trading
System is a proprietary, computer-based
system best described as the “output”
of a complex schema of numerous
computer programs and subprograms
developed by Winton’s
research team. The Trading System
is maintained and managed by
Winton’s Production Team,
the team responsible for encoding
and running the computer programs
and sub-programs.
The Winton Computer Trading
System instructs the Diversified
Program on how to respond to
unfolding market events in order
to profit from price movements.
The Trading System tracks the
daily price movements and other
data from the markets it follows,
and carries out certain computations
to determine each day how long
or short the portfolio should
be to maximize profit within
a certain range of risk. If
rising prices are anticipated,
a long position will be established;
a short position will be established
if prices are expected to fall.
As a result of its statistical
research, Winton believes that
each trade executed by the Diversified
Program will have a slight statistical
advantage leading to profits
over time. Past Results
are not necessarily indicative
of future results. The
risk of loss in trading futures,
options and off-exchange forex
can be substantial.
Technical System Using Both
Trend-Following & Non-Directional
Trading
The Diversified Program can
be thought of as more “technical”
than “fundamental”
in nature. The term “technical
analysis” is generally
used to refer to analysis based
on data intrinsic to a market,
such as price and volume. It
is often contrasted with “fundamental
analysis” that relies
upon analysis of factors external
to a market, such as crop conditions,
the weather or supply and demand
One feature of a trend-following
system is that it attempts to
take advantage of the observable
tendency of the markets to trend,
and to tend to make exaggerated
movements in both upward and
downward directions. These exaggerated
movements can be thought of
as resulting from the influence
of crowd psychology, or the
herd instinct, amongst market
participants.
Trend-following systems
are frequently unprofitable
for long periods of time in
particular markets or market
sectors, and sometimes for spells
of longer than a year or so,
even in large portfolios. However,
in Winton Capital Management’s
experience, over a span of years
such an approach has shown to
be profitable in our track record
to date. Past Results
are not necessarily indicative
of future results. The
risk of loss in trading futures,
options and off-exchange forex
can be substantial.
The Diversified Program
relates the probability of the
size and direction of future
price movements with certain
indicators derived from past
price movements to produce algorithms
that characterize the degree
of trending of each market at
any point in time. While all
trend-following systems function
in this way to some degree,
the unique edge possessed by
the Winton Trading System lies
in the quality of the research
underlying its algorithms. These
enable Winton’s Trading
System to suffer smaller losses
during the markets’ inevitable
whipsaw periods and to take
better advantage of significant
trends when they occur. Winton
Capital Management is continually
involved in improving upon its
models through its commitment
to research.
In addition to its trend-following
models, the Diversified Program
contains certain “nondirectional”
models that derive their forecasts
from factors often excluded
by technical analysis. In these
quantitative systems the primary
input is likely to be information
about the yield curve or an
economic variable rather than
market price. These models work
in the same way as those based
on technical analysis, except
that they use a different set
of forecasting variables.
A Trading System Subject to
Constant Adaption
The Winton Computer Trading
System instructs and adapts
the Diversified Program’s
trading exposures automatically
and continuously. As is to be
expected with any research-driven
trading system, the Winton Computer
Trading System is dynamic. It
is subject to modification over
time as new relationships are
discovered. This research may
result in the development of
additional computer models or
revisions to existing models.
Examples of research and
investigation that might lead
to the modification of the Winton
Computer Trading System include
research pointing to changes
in the liquidity or volatility
of markets, the interpretation
or meaning of data or the long-term
expectation of market interrelationships.
Another key factor contributing
to change is simply the availability
of new data.
In short, the Diversified
Program relies not just on the
trading system, but a process.
Inevitably, as a result of research
developments, Winton Capital
Management must make decisions
about the timing, frequency
and size of modifications to
the trading system. Certain
changes may occur on a daily
basis whilst others may involve
more significant adjustments
and therefore occur less frequently.
Generally, non-substantive changes
may be carried out to the trading
system at the discretion of
Winton Capital Management’s
CIO and the Production Team,
or respective equivalent teams
in the case of Winton’s
cash equity strategy and high
frequency trading strategy.
However, material changes require
the approval of both Winton’s
Trading System Committee and
Winton’s Chairman. Its
Trading System Committee meets
monthly, and its membership
is comprised of all senior heads
of Winton’s research teams,
the Chairman, the CIO, the deputy
CIO, COO, CEO and the Head of
Risk Management.
Responses to Unusual Circumstances
Occasionally, external, unforeseen
or dramatic events may impact
the markets. These exceptional
market events by their very
nature are often difficult to
predict and have uncertain consequences.
Examples of such exceptional
market events include loss of
market liquidity, the threat
of counterparty risk as presented
in the credit default swap debacle
of 2008, the closure of an exchange
(as occurred after the terrorist
attacks of September 2001),
the introduction of the Euro,
the closure of the tin contract
in 1984, the suspension of the
Hong Kong Futures Exchange in
1987 and the suspension of trading
in the Malaysian Ringgit in
1997.
Winton Capital Management’s
trading principals (Winton’s
Chairman and CIO) may decide
that such events fall entirely
outside the scope of the research
upon which the Diversified Program
is based and may determine to
exercise some discretion rather
than follow the dictates of
the system. Whilst discretionary
inputs are generally not essential
to the effectiveness of a “systematic”
trading model, it is nonetheless
important to recognize that
given the often rapid and unpredictable
nature of some market events,
not every decision to change
the trading system can be conceived
as entirely “systematic”
and may be more “discretionary”
in nature. Examples of discretionary
actions might include decreasing
the margin-to-equity ratio,
liquidating all positions in
certain markets or declining
to execute an order generated
by the trading system. Such
discretionary decision-making
would normally only be taken
in order to reduce risk and
would generally be temporary
in nature. It is important to
stress that these acts may not
enhance the performance of the
Diversified Program over what
might have otherwise been achieved
without the exercise of such
discretion.
The Capacity of the Diversified
Program
At present, the Diversified
Program has no pre-set capacity
limit. This is not to suggest
Winton Capital Management’s
lack of concern about capacity;
indeed, it is an issue of great
importance to Winton’s
research team and significant
resource is dedicated to understanding
factors that impact upon it.
Winton Capital Management believes
that its ability to manage capacity
is, to a degree, related to
the success of its ongoing research
initiatives in this area. For
example, part of Winton Capital
Management’s research
is focused on the studying of
the mechanics of open interest
in order to better understand
liquidity in global futures
markets, looking beyond Winton
at the industry as a whole.
Winton may, in its absolute
discretion and at any time,
impose or modify the capacity
limits of the Diversified Program.
The Diversified Program - Portfolio
Composition
The Diversified Program tracks
approximately 100 diversified,
highly liquid financial instruments.
At any point in time, it may
be holding long or short positions
or hold no position at all in
each of the markets it follows.
The Diversified Program’s
portfolio may consist mainly
of positions in the following
futures markets: stock indices;
bonds; short-term interest rates;
currencies; precious metals;
base metals; crops; livestock;
and energies. In addition, the
Diversified Program may trade
in certain OTC instruments,
such as, but not limited to,
forward contracts on foreign
exchange and interest rates
and swaps. All OTC FX or currency
instruments are off-exchange
foreign currency transactions
and Winton Capital Management
does not engage in retail forex
transactions. In addition, the
Diversified Program may also
trade in government securities
such as bonds and other similar
instruments, listed cash equities
and CFDs. Through its research
initiatives, Winton Capital
Management is constantly looking
for new opportunities to add
eligible markets to the portfolio,
thus further increasing the
portfolio’s diversification.
Emphasis on Diversification
The Diversified Program strives
to maintain a diversified portfolio
because holding positions in
a variety of unrelated markets
has been shown, over time, to
decrease system volatility.
Research has demonstrated that
use of a sophisticated and systematic
schema for placing orders in
a wide array of markets increases
the possibility that an overall
profit may be realized after
a sufficient period of time.
Whilst Winton Capital Management
intends to seek to diversify
the portfolio as it deems appropriate
and consistent with the investment
objective of the Diversified
Program, the extent of diversification
of the portfolio may change
from time to time. If the portfolio
is concentrated in a small number
of investments, the portfolio
will be subject to a greater
level of volatility.
Emphasis on Managing Risk
The management of risk is an
integral part of the Winton
Computer Trading System. Return
and risk are two sides of the
same coin. It is impossible
to achieve a given level of
return without accepting a certain
amount of risk. Winton Capital
Management's focus within
risk management is on targeting,
measuring and managing risk.
Owing to the leverage inherent
in futures trading, position
sizes are set according to Winton
Capital Management’s expectation
of the risk that such positions
will provide rather than the
amount of capital required to
fund such positions. In the
experience of Winton Capital
Management’s management,
efforts to preserve capital
have a greater effect on rate
of return than does the identification
of profitable trading opportunities.
The following serve as examples,
but do not begin to describe
the many efforts Winton makes
to attempt to limit risk. However,
there is no assurance that any
of these efforts will succeed
in lessening the possibility
or size of a loss.
The Setting of Volatility Estimates
and Gearing
Each day, the Winton Computer
Trading System sets volatility
parameters (known as the “instantaneous
forecast standard deviation”)
for each position held in the
portfolio. The purpose of these
parameters is to estimate the
likely size of a market shift
(whether up or down), in much
the same way as the futures
exchanges estimate the likely
market shift when deciding how
to set the initial margin for
a future or the daily price
limits for a market.
The primary determinant of the
daily volatility parameters
is the amount of leverage or
level of gearing used by the
Diversified Program. The leverage
or gearing may be measured in
terms of the Diversified Program’s
margin-to-equity ratio. This
ratio is calculated by dividing
the amount of margin posted
with the futures commission
merchant by the value of the
portfolio. The Diversified Program’s
long-term annualized volatility
target is currently approximately
10% (please note that if applied
to a managed account, a fully-funded
managed account is assumed).
However, it should be noted
that the Diversified Program’s
instantaneous forecast standard
deviation (defined as the instantaneous
risk Winton expects within the
24 hours following that particular
instant) may vary outside these
limits. In order to target a
given level of long-term risk
the instantaneous risk is allowed
to fluctuate within a range
around the long term risk target.
In order to achieve the long-term
risk target the correlation
between different markets is
estimated by the Diversified
Program, and is employed in
the calculation of the overall
level of gearing which is reset
on a daily basis.
The level of gearing typically
used by the Diversified Program
is normally determined by targeting
a long-term daily standard deviation
of less than 1 percent of the
value of the portfolio as a
whole. The long-term standard
deviation refers to the long-term
average risk that Winton expects
over a number of months. However,
it should be noted that the
Diversified Program’s
instantaneous forecast standard
deviation (defined as the instantaneous
risk Winton expects within the
next 24 hours) will vary outside
these limits. In order to maintain
a given level of long-term risk,
the instantaneous risk is allowed
to fluctuate within a range
around the long-term risk target.
Additionally, from time
to time, the long-term standard
deviation (defined as the long
term average risk that Winton
expects over a number of months)
may also be above or below these
limits, thereby having an impact
upon the level of gearing used
by the Diversified Program.
For example, in the event that
exceptional market conditions
arise, such as the threat of
closure of an exchange or other
loss of liquidity, it may be
determined to operate the Diversified
Program at a lower level of
gearing.
Monitoring Slippage
Slippage refers to the difference
between the market price at
the time an order is placed
to purchase or sell a contract
and the actual price paid to
make the purchase or sale. One
of the main causes of slippage
is attempting to fill an order
that is too large to be absorbed
easily by the market. Winton
Capital Management monitors
slippage primarily to make prompt
adjustment in position size
and thereby avoid having to
give up potential profits.
Use of Stress Testing
Winton Capital Management conducts
frequent stress testing of its
models utilizing proprietary
simulation software which attempts
to measure risk from several
perspectives.
The trading methods applied
by Winton Capital Management
in its Diversified Program are
proprietary, complex and confidential.
As a result, the explanation
above is of necessity general
in nature and not intended to
be exhaustive. Winton Capital
Management plans to continue
the research and development
of its trading methodology and,
therefore, retains the right
to revise any methods or strategy,
including the technical trading
factors used, the financial
instruments traded and/or the
money management principles
applied. Such ongoing revisions,
unless deemed material, will
not be made known to clients.
The trading strategy and account
management principles described
here are factors upon which
Winton may base its trading
decisions. Accordingly, no assurance
is given that all of these factors
will be considered with respect
to every trade or recommendation
made on behalf of the Diversified
Program or that consideration
of any of these factors in a
particular situation will lessen
a client’s risk of loss
or increase the potential for
profits.
Execution of Orders and Order
Allocation
Winton Capital Management will
select the type of order to
be used in executing client
trades and may use any type
of order permitted by the exchange
on which the order is placed
or accepted by a counterparty
where the order is executed
over the counter. Winton Capital
Management may place individual
orders for each account or a
block order for all accounts
in which the same financial
instrument is being cleared
through the same Futures Commission
Merchant (“FCM”)
or broker-dealer. When using
a block order, Winton Capital
Management will allocate trades
to accounts using a proprietary
algorithm. The aim of this algorithm
is to achieve an average price
for transactions as close as
mathematically possible to the
mean for each account. This
takes the form of an optimization
process where the objective
is to minimize the variation
in the average allocated price
for each account. On occasion,
it may direct the FCM or broker-dealer
for the accounts to apply its
own neutral order allocation
system to assign trades. Partial
fills are allocated in proportion
to account size.
Management Information: David
Winton Harding
Winton Capital Management was
founded by David Winton Harding,
Martin Hunt and Osman Murgian
and started trading in October
1997. David Winton Harding is
one of the pioneers of trend-following
systematic trading in Europe.
Whilst at Winton Capital Management,
David Winton Harding has been
registered with the CFTC as
an Associated Person and listed
as a Principal of Winton Capital
Management and has been an Associate
Member of NFA since January
1998.
David Winton Harding was born
in Oxford in 1961 and graduated
from Cambridge University with
a First Class Honors degree
in Natural Sciences specializing
in Theoretical Physics. In September
1982, he joined stockbroker
Wood MacKenzie as a graduate
trainee and became involved
with futures trading just as
the London International Financial
Futures Exchange opened. A year
later, in September 1983, he
left Wood MacKenzie and moved
to Johnson Matthey & Wallace,
a commodity futures broker,
where he was involved in gilt
trading and sales. When that
company closed due to the failure
of its parent company, in November
1984 David Winton Harding left
it and joined Sabre Fund Management,
one of the UK’s first
Commodity Trading Advisors where
he was an Associate Member of
NFA from April 1986 until July
1988 and registered as an Associated
Person from May 1986 until July
1988. In his new position, for
the first time, David Winton
Harding was able to apply his
scientific training to develop
techniques for trading a wide
variety of futures markets.
In November 1986, David Winton
Harding left Sabre Fund Management
to join Brockham Securities,
the Adam Family sugar trading
company, where he assisted in
development and marketing of
futures fund management services.
In February 1987 he left to
form Adam, Harding and Lueck
Ltd (“AHL”). AHL
brought together the programming
and system development abilities
of Michael Adam and Martin Lueck
with Mr. Harding’s research
and marketing skills. AHL rapidly
became a successful Commodity
Trading Advisor and in 1989,
The Man Group PLC (formerly
ED&F Man PLC) acquired a
51% stake and began distributing
AHL’s products globally.
Over the next five years, the
three principals built a firm
with assets under management
of $300 million and a staff
of nearly 100, including research
teams developing mathematical
and statistical trading strategies.
AHL is still the flagship fund
of the The Man Group which is
a FTSE 100 Company. Mr. Harding
was an Associate Member of NFA
and an AP of Man AHL USA Corp
from July 1988 until January
1996. He was also listed as
a Principal of Man AHL USA Corp
from July 1988 until February
1995.
In 1993, David Winton Harding
was invited to present a paper
to a special symposium of London’s
prestigious Royal Society, on
the subject “Making Money
from Mathematical Models.”
This paper was subsequently
incorporated into two books.
In 1994, ED&F Man Group
floated on the London Stock
Exchange and acquired the remaining
49% of AHL. David Winton Harding
then formed and ran Man Quantitative
Research, an in-house advanced
statistical research team until
August 1996.
In August 1996 David Winton
Harding left ED&F Man Group
and took leave until February
1997. In February 1997, he co-founded
Winton Capital Management with
Martin Hunt and Osman Murgian,
one of AHL’s early shareholders.
David Winton Harding continues
to lead Winton Capital Management’s
research efforts.
David Winton Harding is
also a trustee of the Winton
Charitable Foundation, which
in 2007 endowed the Winton Professorship
of the Public Understanding
of Risk in the Department of
Pure Mathematics and Mathematical
Statistics at Cambridge University.
Similarly, in 2008, the David
Harding Foundation endowed the
David Harding Centre for Risk
Literacy at the Max Planck Institute
in Berlin, Germany.
The descriptions above are from
the manager’s disclosure
document.
THE RISK OF LOSS IN TRADING
FUTURES, OPTIONS AND OFF-EXCHANGE
FOREX CAN BE SUBSTANTIAL.
PAST RESULTS ARE NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS.
PLEASE READ THE CTA'S RISK
DISCLOSURE DOCUMENT CAREFULLY
BEFORE INVESTING MONEY.
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