According to the Mercenary community — and we agree — the interview with our good friend Peter Brandt was one of the best things we’ve ever done.
Well, if Peter’s interview blew you away, prepare to get blown away again… because now we’re excited to introduce “Deep Alpha,” or DA for short.
Deep Alpha is the code name for a female trader (still notable in this male-dominated world) with more than three decades of experience in markets.
DA is remarkable not just for her performance, but the depth and range of her journey. She began as a commercial hedging liaison at the Board of Trade, then moved on to financial futures and day trading.
As a floor trader in the grain pits, she rode thousands of contracts limit-up (for days on end) in the great North American drought of 1988.
As a hedge fund manager, employing primarily short-term strategies, she booked an incredible 280% annual return for her investors (that’s two-hundred-eighty, not a typo) in 2010.
Over the course of this multi-part series, she’ll tell you how she did it.
And her biggest encore is yet to come…
Having transitioned from floor trader to day trader to hedge fund manager, DA is now spreading her wings in the discreet world of family office management — hence the code name for this interview — where capital allocation runs into the hundreds of millions to billions.
In addition to all the above, DA is a close and dear friend of many years.
So without further ado…
Note: This interview segment is Part I of a series. Also available:
- Part II: Big Positions On
- Part III: Embracing Market Profile
- Part IV: Long-Term Transition
- Part V: Global Opportunities
- Part VI: New Horizons
JACK: Why don’t we start at the beginning. How did you get involved in trading?
DEEP ALPHA: Trading was not on my radar in college. I started out studying psychology. I had always been fascinated by human behavior.
But I was disappointed with psychology. It was taught, back then, with an emphasis on dysfunctional traits — slapping on labels with all kinds of scary names. I decided to shift to an area that explored perception, consciousness, and how we know what we know.
I went into a major that was built around general semantics — studying how we think through language — and general systems theory, which helps you think about how systems are organized. How the cells in the body organize themselves… how bees organize themselves… how humans organize themselves in thinking and in groups, and so on.
That combination was very interesting. And then I had the good fortune of spending a summer at a Buddhist school in Colorado, the Naropa Institute. This school was known mainly for cultural arts and poetry. But, the summer I attended, a group of neuroscientists got together at the Naropa Institute to share ideas. They decided to turn those ideas into a course, to study things like the circularity of the mind, how consciousness is created, and so on.
This was at the forefront of the whole biology of cognition. I did not want to be a neuroscientist, but I did want to study this area. Unfortunately, back then, there were not any masters programs that focused on this, as it was just emerging. I came away fascinated by 1) meditation and how it quiets the mind, and 2) learning how the brain affects how we think, how through language we think about things in duality, and linearity, and so on. All important areas of study that have helped my trading.
Economics, on the other hand, held no interest for me in college. I actually dropped economics. I just thought it was so dry…
JACK: Ha! Same here. I took a macroeconomics class at Macquarie University in Australia (part of my studies abroad), and walked out in less than two weeks. The concept of “rational economic man” was so offensive to my trading sensibilities, even back then, I couldn’t stand it. So I dumped the class and read “General Economic Theory” on my own instead.
DEEP ALPHA: Yes! Rational economic man — that was the driest stuff, and it just didn’t make sense to me. I hadn’t started reading the Wall Street Journal or anything yet, but it seemed wrong.
So I’m getting ready to graduate from college, and I’m kind of depressed, because there isn’t a masters program or a clear path in terms of all the things I’m interested in.
At this point, a major change is about to occur. When people say a book can change your life, this sure did apply to me…
JACK: Small world once again. The book that changed my career path forever – also in college – was “The Investment Biker” by Jim Rogers. Sorry to keep interrupting… what was yours?
DEEP ALPHA: A friend had given me this book, “The Merchants of Grain.” It rocked my world, as it was so different than anything I had read up to that time. It was a history of the grain trade, dating back to the early 19th century, and a glimpse into the world of the secretive families that controlled it. This is the Cargills, Continental Grain, Louis Dreyfus..
JACK: Who wrote Merchants of Grain?
DEEP ALPHA: The author was Dan Morgan. I found the narrative about early commerce to be romantic and intriguing, full of drama and power. I fell in love with the history and, in the process , I learned how they started to use futures (called commodities back then) and hedging, and thought “Wow — this is really, really interesting.”
At that point I literally just got on a plane and went to Chicago. That’s where the commercials were… Continental Grain and Cargill and Dreyfus… and of course the Board of Trade was there.
So I go to Chicago, and go right down to the Board of Trade for the first time, similar to the way Peter Brandt did. But my reaction was a little different than his. I said to myself: “This is, by far, the coolest human lab I’ve ever seen!”
JACK: You saw it as a sort of giant psychological experiment.
DEEP ALPHA: Exactly, a full-on human laboratory. I thought it would be great to demystify the chaos, figure out how they were communicating, how the system works… but in the background my whole goal was to learn about the commercials, how they do what they do.
I started out as a runner with Conti –
JACK: Conti Commodities?
DEEP ALPHA: Yes, owned by Continental Grain. After a month or two of being a runner, they put me on the phones. When they realized I was good at communicating, taking orders and so forth, they put me with the top right-hand man of Michel Fribourg, who ran all the Japanese business and just put up some huge numbers.
I took orders from this guy — his name was Miles, since passed away — and Miles would give me these orders and I would run them in as fast as I can. We had a great relationship, and because of that my name got around Continental Grain.
At this point, one of Continental Grain’s top producers needed a new assistant…
JACK: And what year was that?
DEEP ALPHA: It was 1980. I went through three different interviews with this top producer, Dave Milligan. A lot of people wanted the job, and I got it. That was one of the best experiences of my life. He had all commercial accounts, plus two huge speculators — very nice men from the Midwest.
We had accounts like Pioneer Corn, the largest corn seed company at the time, do all their hedging through us. A big Canadian company, who did vegetable oil and soybean processing, did all their hedging through us. Then we had a ton of farmers with big positions… and I helped build the business.
The bond futures were beginning to build volume, and I pursued clients that needed to hedge interest rate exposure, branching out from grains. We created a nice balance of agriculture and financial hedging.
Within another year from that point, Dave made me partner. He knew he was sick — he had the same blood clot disease that Nixon had — and I think he wanted someone he trusted to take over the business. We had worked together three years, and in the fourth year he passed away suddenly.
With Dave gone, I inherited this huge business. And my goal at this time, by the way, was to get my membership and trade on the floor.
JACK: You’re not on the floor yet.
DEEP ALPHA: I’m not on the floor. I’m in an office at the Board of Trade. And all of a sudden, this succession happens overnight.
JACK: What is your role at that point? You have large commercial clients and speculator clients who give you orders… and you then give them to brokers on the floor?
DEEP ALPHA: Exactly. And I had a great relationship with all the top brokers on the floor, because I was feeding them such big business. Which is key to when I actually go down on the floor, because I already know everyone and they treat me well.
With Dave gone, all these other brokers were circling and going after my clients. At the same time, Conti had a huge trader in Texas that blew up. Michel Fribourg doesn’t want all this speculating business, he’s getting sick of it. So he sells Conti Commodities to Refco, right when I’m in the process of handling all these clients for myself now.
JACK: Did you go with Refco?
DEEP ALPHA: We were taken over by Refco, but we weren’t staying. Within a week I went to a small boutique firm. It was two men, long-term Board of Trade guys, who wanted to start a research and hedging company — primarily grains — and have great research, which they did.
I was with them for another year or two, with an assistant at this point. I had taken all of Dave Milligan’s clients with me, and didn’t lose one. That was a real coup, with Refco and so many other brokers circling. But there were some things I wasn’t happy with there, and I was still trying to build the financial side of the business…
JACK: This is still the early 80′s.
DEEP ALPHA: Still early 80′s, maybe 1985. By 1986 I’m getting antsy, and really wanting to be on the floor. This was also a time when commissions are starting to fall aggressively. We had clients doing huge, huge numbers, and we were still charging hefty commissions.
JACK: Nothing at all like today.
DEEP ALPHA: It was amazing how much brokers could charge back then. But, it was becoming very competitive. I started shopping around at other firms, and my focus was still “start trading, get on the floor.” I had hired an assistant and trained her well — she was good at taking orders and so on — and that freed me up to buy a seat on the Board of Trade and start going down to the floor.
JACK: This was still 1986?
DEEP ALPHA: 1987 now. And the clients love it, because now I’m talking with all the commercial brokers, giving them great information — but my goal is still to really just trade for myself. So I hired yet another person — a broker — to help manage the client business, so I could focus on trading from the floor.
I did well my first year on the floor, and the broker did well with the clients too. He wanted to take over, and I was focused on the floor, so I started phasing out of the client side.
I would do some strategic things, but more on a weekly and monthly basis — the hedging programs — and by 1988 I was basically trading full-time on the floor.
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