To many investors, commodity markets are the ultimate crapshoot, and legendary Chicago trader Richard J. Dennis is just the sort of high roller they would never trust with their money.
Dennis, after all, once lost $8 million in a single day of soybean futures speculation. His public commodity funds went down in flames during the late 1980s and again in the early ’90s, costing his customers tens of millions.
Yet he’s recently staged a surprising comeback, attracting some $90 million in new capital. In 1995 and ’96, he posted eye-popping 100 percent-plus returns. The secret to that success: a computer.
Over the last few years, Dennis has used a series of programs to determine his every step in the 65 markets he trades. When the computer says buy, he buys without fail. No discretion is allowed, and his quick-on-the-trigger impulses are kept under lock and key.
A separate firm, Kenmar Holdings, monitors his Dennis Trading Group every day to ensure he’s adhering to the system.
In the first half of ’97, the system has gone into reverse. Dennis is down 12 percent so far. But, characteristically, the soft-spoken market veteran is not worried.
Help will come, he said, from a collapse in U.S. stock prices.
The current bull market in stocks is nothing short of “a mania,” Dennis said in an interview. “It’s insanity. . . . By any historical measure, there’s 50 percent fluff.”
When the stock market falls, as Dennis believes it will, investors seeking a haven will pour money into commodity markets, he said. And Dennis thinks his mechanized approach will give him a big advantage in capturing that business.
Most other commodity trading advisers retain at least some discretion, overruling their computer when their gut feelings conflict with the bits and bytes.
The Dennis approach is becoming somewhat more popular, though. Investors worried about their fund managers taking fliers with their money feel better with a computer at the controls.
“Once you start using discretion, where do you stop?” asked Jack Schwager, chief executive of Wizard Trading, who, like Dennis, relies entirely on systems to make market decisions. “It’s a slippery slope. You can’t be half pregnant.”
Taking risky fliers once was the 48-year-old Dennis’ trademark. From humble roots as a small-time member at Chicago’s MidAmerica Commodity Exchange, the DePaul University philosophy grad became one of the city’s most celebrated traders.
He made his first fortune in the 1970s, parlaying a few hundred bucks borrowed from his father, at the time a city engineer, and his brother, who delivered pizzas.
Headlines followed in the early 1980s when he offered to teach his methods to an eclectic group of novices. Known as the “Turtles,” more than a half dozen went on to successful independent trading careers, and the experiment added to Dennis’ fame.
“He took people off the street, and he put a lot of his own money at risk funding them,” said Sol Waksman, president of Barclay Trading Group Ltd., who tracks commodity trading advisers.
“He had the strength of his convictions.”
Dennis also drew attention with his political convictions. He spent big bucks promoting favored causes, like legalizing marijuana. And he backed candidates in a big way, including a donation of $570,000 to the failed Illinois gubernatorial campaign of Adlai Stevenson III. Altogether, he gave about $10 million over the years, he reckons.
Another $20 million funded a liberal think tank in Washington, D.C., the Roosevelt Center for American Studies, which shut down in 1989.
The money was mostly wasted, Dennis said. And seeing the nation’s political system up close turned him from liberal activist to libertarian. “If I can find anything that lessens the effect of government on peoples’ lives, I tend to be for it,” he said.
After his funds collapsed, Dennis swore off trading temporarily. His customers brought a class-action lawsuit against him, claiming his trading suffered because he’d been so distracted by his efforts to influence public policy. Dennis, who disputed the allegations, settled the case for $2.5 million in 1990.
He’s back trading today partly to build up a war chest for philanthropic interests like battered-women shelters, he said. And Dennis still wants to reform the nation’s drug laws. Among his favored politicians: Sen. Fred Thompson, (R-Tenn.), who chairs the current hearings on campaign-finance reform.
Meantime, Dennis is taking his first-half losses in stride, regarding a mere 12 percent drawdown as little more than a hiccup. “If that fazed you, you’d be in the wrong business,” Dennis said. “That’s how it goes.”
Part of the trouble is a general deflation in commodity prices, which makes markets tougher to trade.
“Downtrends are harder to make big bucks on,” he said. “Markets tend to lose their volatility.”
Dennis does best as markets move from periods of low volatility to plenty of action. He exited this year’s bull market in coffee early on, because the sharp rally carried too much risk, he said. Sugar, which has barely budged in recent months, has more potential for his trading system, he said.
The current equity buying binge, he believes, is making commodity markets look tame. “They should call them tulips, not stocks,” he said, referring to the wild price runup of Dutch tulip bulbs during the 1600s. That episode darkened the reputation of commodity markets for centuries to come.
The stock market probably won’t crash as it did a decade ago, Dennis predicted. Instead, equity prices will descend more gradually, steadily erasing billions in paper profits. “It will be very palatable, at least in the beginning,” he warned.
No surprise, considering his bearish views on the market, Dennis is betting on a decline in U.S. stocks. And, in spite of this year’s strong rally, Dennis said he’s made money trading stock indexes like the Standard & Poor’s 500.
The trick has been catching the few brief corrections when they occur, he said. “They build more wiggles into that market.” A return to black ink could be a few big wiggles away.
