085: Blair Hull – Know Your Edge, Exploit Your Edge—Survive the Game

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Alright traders, I hope you're ready for this one. We have a really big episode in store. So let's get right into it. My guest this week has been labeled by Forbes as one of the most successful traders of the last 40 years. He was also profiled in Jack Schwager's The New Market Wizards. The man I'm referring to is Blair Hull. Prior to trading, Blair was a serious blackjack player for five years during the seventies.

From there, he took his winnings to the floor of the Pacific Exchange to trade mispriced options and shortly after founded one of the world's premier market making firms, Hull Trading, in 1985. At its peak, Hull Trading was active on 28 exchanges in nine countries. Then in 1999, the firm was acquired by Goldman Sachs for$531 million.

Today, Blair is the founder of Hull Investments, which is the parent company of an actively managed ETF, Hull Trading Asset Allocation, and proprietary firm Ketchum Trading. Listening to this interview, you're going to hear more about Blair's career and his observations as a trader, why he believes great things happen in teams and having an edge. Because like Blair says, if you're missing an edge, there's no reason to play.

So here it is, folks. I'm Aaron Firefeld, and here is my interview with a trader who I look up to and greatly respect, Blair Hull. I've got to say before we go any further, it's such a huge honor uh to have you here on the podcast. So thanks a lot for agreeing to do an interview. My pleasure. I'd like to get this underway by asking you about your first trading experience, which started at the Blackjack tables. How did you get into blackjack?

Well, my uh brother-in-law used to go from San Francisco to Tahoe every weekend, or not every weekend, but say every six weeks or so and and and he'd play blackjack and he said that he paid for his vacation by going and playing blackjack. And I thought, This is ridiculous. This guy is an accountant. Uh if he were really making money he wouldn't be playing at the one dollar table, he'd be playing at the five dollar or the twenty five dollar table.

And so I I didn't didn't really believe him, but I did read the book, Beat the Dealer, and I tried to use it did it myself to some extent. Uh and um and I found that uh there was an edge you could get an advantage playing blackjack. So uh for the next five years, nineteen seventy one to seventy five, I played fifty days a year.

Uh in blackjack. Well I still had a full time job, but every chance I had I was in Nevada, either at Reno, Tahoe or Las Vegas. Okay, so what was that full time job that you were holding down at the time? I was working at Kaiser Cement as a middle manager. I did have an MBA from Santa Clara University and was doing financial analysis for a cement company.

Right, right, okay. So would you mind telling us a little bit about the strategy that you were playing to win at Blackjack and were you successful with this right away? Well this is um there's a book uh called Beat the Dealer by Ed Thorpe that was It really came out of a academic article. Most things do come out of the academic world uh that are substantial uh in nineteen fifty eight and then it was a hardback in book in nineteen sixty two and then a paperback in nineteen sixty six.

And this uh gave a strategy and there have been oh I'm sure almost a thousand books written on blackjack since that time that uh uh people realized it was a a winning game and of course with all good things, they do go away. The casinos learned how to counteract the players over a long period of time. It took them until uh about the year in into the two into this century for them to learn to counteract the

And the players to such an extent that it's it's very difficult to beat the game of blackjack today, but still possible. There there are some games that can be beaten. So when you were playing it, the the strategy that you were that you were playing to win at blackjack Was this what you might call a foolproof way of making money? Like how great was your edge? Well not nothing's uh I I wish there was something foolproof, but the best advantage you ever got was fifty one forty nine.

That means there's a fifty you know, you had a two percent edge. Um, that means uh for every hundred dollars you bet you'd win two dollars. Uh, but uh it it took uh takes you a long time to get into the long run. Anytime you'd go up and play for a weekend you'd play eight hours a day, two straight days, and you'd still have a only a two out of three chance of being a winner at the end of that weekend. So uh this was a game of chance.

To have and to having the odds in your favor was uh certainly a game that I I learned I wanted the odds in my favor, not in the game in the odds of a of uh of somebody else. Now if I were to play Click Craps or play Blackjack or play uh

uh the the slot machines, the odds would be in the casino's favor. And uh we're gonna transition into trading and investing and uh Uh William Sharp at Stanford University, a Nobel Prize winner, defined a an investment as a sacrifice of current consumption for expected future gain. Well gambling is just a sacrifice of current consumption for expected future loss.

Um so we want the it's we want the odds in our favor, but it's there's there's still whether the odds are in your favor or somebody else, there's still A lot of uncertainty. Okay. And did you ever consider what you were doing as gambling? Like most people think when they go to the casino, whether they win or lose is pretty much just sheer luck. Um, you know, because they are gambling. Did you ever consider what you were doing as gambling in the traditional sense?

No, I do not consider gam I I consider myself as an investor. I'm not gonna play with somebody that where the odds are in somebody else's favor. It's it it's not uh It's just not part of my um any time I make a wager, whether it's on the golf course or wherever, I'm I'm uh I'm I'm I must have the edge in my favor. Absolutely. Okay. So a little bit later on, I I know that you became part of a blackjack team.

I know this was a strategic move on your part. What were the advantages you saw from joining a team and playing blackjack? Well I have a philosophy that all great things that happen in our world happen with teams, not with individuals. And I learned that at an early age with the blackjack team. The first thing that I did when I learned about the blackjack team is I met the founder and and then I had to go take some tests, some exams.

Uh one of the exams was you took a fifty two card deck and you took two cards out and then he put a stopwatch and he said, Ready go. He wanted you to count the cards and to tell you what the last two cards were. Um, and be correct all the time. And so I had to be relatively fast. So I learned how to develop a skill of being faster counting the cards.

The second thing I had to do is I had to take a basic strategy test and that is what what do you do when you know what the dealer has and you know what's your cards. And it's usually a a multiple choice question, hit, stand, split, or double. And so I took that test and I got I think I got Ninety four out of a hundred, right. Well,

Black check really requires that you get all the answers right. You're gonna give something back to the you're gonna give them an edge back from the casino. So the fact that we took exams and there were ten different time tests. in order to qualify for the exam led me to be a much better blackjack player than I was originally.

Okay. Okay. And did the one of the one of the motives for joining a team was that you were able to get more bets on, um, you were able to play a more hands and and that sort of thing. Was that one of the reasons for joining the team as well? Well certainly it did help to get uh more money into action. More more individual bets allowed you to get into the long run sooner.

So that was an advantage. It was that was part of it. Okay, excellent. So what was it that motivated you to up and leave the blackjack tables for the floor of the CBOE?

Well actually uh the team got barred. We all got barred in 197 I guess it was 70 s early 76. And so it was hard to get a game. And so uh but at the same time I had been working on developing a model that would calculate the expected value. uh of an option. And I associated a probability distribution with the stock outcome. And then I calculated the net present value of the expectation.

And that that model actually converges to another model that was developed a year earlier called the Black Shoals model. So I had developed something very similar that very close to the Black Shoals model at the same time it was developed. So I had a value out of value for the option and then I tried to buy under cheap options and I tried to sell expensive options.

That was the uh that was the strategy. Okay. And if you had to summarise it for us, what ways did did Blackjack help you to prepare for trading? And why were you Actually you kind of answered that. I was gonna ask you why were you attracted to options markets over other types of markets?

Well, the um Blackjack uh in any kind of a game any kind of a game, whether it's uh gambling or investing or whatever you call it, there's two things you need. You need an advantage and then you need to stay in the game. And what blackjack taught me is that I had to bet in proportion to my bank role. Uh I had to bet in proportion to my advantage. If I had a a big advantage I could bet more money.

But never more than one fiftieth of my bankroll. That was so if I had a hundred dollars, I could never bet more than two dollars. So if so that's a pretty good rule. You think about you're gonna go to the casino. And you have um ten thousand dollars, the most you can bet is two hundred dollars.

uh or you will r ruin you will you will risk ruin. You ca you risk losing all your money. So when you when you're Playing a game, whether it be trading or black check and you lose half your money, you have to cut your bets in half. And most people would try to go they'd try to get even.

But you have to do the opposite. So I'd say staying in the game was the most important thing that I learned. In fact I uh you mentioned C B O E. I actually started on the Pacific Stock Exchange where I leased a seat for five hundred dollars a month. Um but I would go around and I'd have a there would be an option that would be the all the public were going after this option it was Yeah, I had it worth according to my model of say twenty five cents and it was selling for a dollar.

And so I had sold maybe two hundred of these options and I'd run around and I'd say, Oh, that's such a juicy bet and then I'd say I'd look at I'd look at the price again Oh, I gotta sell some more of those. And then I'd say, I've already have that bet on the table. I could st I envisioned a a a stack of chips. And so I couldn't, so uh I wouldn't over bet.

So overbetting's the thing that kills you in any kind of game. You can have a winning strategy, but because of the way in which you wager uh you can almost uh be guaranteed to go broke. Well that's uh it's important as to whether you have an advantage, uh how much you bet is as important of getting as getting an advantage.

The models that you created that you had calculated, did these set you up to be a a profitable trader pretty much um straight out of the gate? Well, um I don't know if straight out of the gate. I think I remember I was down a thousand dollars. I had I went over with twenty I took twenty five thousand dollars that I had won on the blackjack tables.

This is in 1974 dollars, so you'd probably put about a almost a 10 on that, I guess. But um 10 multiple on in today's dollars. I was pretty successful, fairly successful the first year. Fairly successful. Um yes, there were at those days options were mispriced. And it was much easier to m to beat that game and much easier than it is today.

Yeah, can you just give us a bit of an example and kind of explain the idea about um options being mispriced? Do you have like a of some sort of a basic example to help us understand what you mean by mispriced? Well, um one thing about options is that uh they do tend to be overpriced. If there were a tendency for options at all to be priced, they tend to be overpriced because there are fewer people that can sell options.

Everybody can buy an option because the clearing firm or the brokerage firm, Merrill Lynch or Morgan Stanley, they have to you put a certain amount of money, and let's say you put ten thousand dollars into account. If you buy, if you pay for an option, you pay for it out of your account and you own it and you get the payoff after.

If you sell an option, you need a certain amount of collateral, but they have to keep track of the collateral, and they won't let people sell options unless they have a fair amount of money in their account and they know what they're doing. So although it's a risky endeavor selling options is definitely preferable to buying options as a general rule. So that would be one way of a mispricing of an option. Now not all options are mispriced, but um

Uh but if they're if they're mispriced they're they tend to be overpriced rather than underpriced. Right, right.

Can you tell us a little bit about how you traded the eighty seven crash? I know this was a very big day for you, uh where you made a significant amount of money as most people were losing a significant amount of money. Um can you just give us a tell us a little bit about that story? Well the eighty seven crash we had options on in all kinds of places. We it was a f by that by nineteen eighty seven, and I went down to the floor on in in nineteen seventy seven.

Uh we had built an organization and had about 19 people working together. Now I realize that I'm I am a believer in teams. Um easy but I did start as an individual and then hired somebody and then we made a partnership and um so there were Uh there was a team of us, nineteen people in various positions. It was interesting that the Federal Reserve and the banks.

tightened credit at the worst time. They suddenly told everybody that they had to reduce their positions. Uh so that put me in a position that I had to we actually happened to be short the major market index. which was a mirror of the Dow on that day on on Tuesday when the market reached a low. And I had to go over to the Chicago Board of Trade because I was the only person that could actually trade on that seat. We least owned and least

seats on the major exchanges. And so I was actually in that pit at that time. And um it was interesting that the New York Stock Exchange with everybody had panicked. They didn't know what to do. Um, and the Chicago mercantile was gonna halt trading, and I said. I was trying to figure out what happens on trading halts and I finally had said told everybody that that's the culmination of panic. after when they've halted. So we want to be long on the halt.

And then I was in the right place at the right time when a firm that used to exist, Drexel Burnham, and they went out of business not too long afterwards, um, came to the floor and the us the Chicago mercantile had shut down. So the only place they were trading equities was The Chicago Border Trade in this in this major market index. And uh They asked me where I would where would I buy a hundred. They knew that I was the I was a guy that was was on both sides of the market and I said

gave him a a ridiculously low price and they said sold. He later sold me another fifty and that was the only a hundred and fifty contracts that traded at that price. So I was in the Right place at the right time. So you bought those, I believe it was around about like two ticks off the lowest price. Was that right? I think that that is right. There was another trade there was another small trade. There were one hundred and fifty lots at uh two eighty five. There was a two lot that traded at uh

At uh two eighty seven and then there was some some trade at two ninety. But uh that's sort of interesting. Two ticks. Well I was I that was the low price. The price that I brought'em with a low price and there were no other trades at that price. But I'm sure you're curious, how did you get that information with two ticks off the low? You said two ticks

No, it it actually was the low. My my my contract was you said two ticks off the low. Where did you get that? Oh okay. Oh I must have misheard it or misread it somewhere. Yeah. Uh so it actually was the low price, 150 contracts.

Was it low tech? So that was eighty seven and eighty five you started whole trading, which I'm really keen to ask you more about. So how did whole trading come to be and what were your objectives for starting this firm? Well it was an extenuation of my own trading. Normally on the floor of exchange a trader would have clerks. And I actually had uh I had tried to build a computer system. I knew that things ought to be automated.

Uh and when I f saw the exchanges and the first time I walked down, having been a computer programmer uh before, having some programming experience, I should say. Um, I knew that when I saw the floor of the exchange in 1976. I said, this place, my God, if I come down here, I better make a lot of money very quick because it's all gonna be automated.

Now the direction of technology, I knew the direction of technology, but my timing was off by about thirty years. Uh it took us until about the year two thousand to to actually get automated options exchanges. Yeah, so that's really interesting. Can you tell us a little bit about um what were some of the things that you were doing at Whole Trading which were very uh unique and innovative for that point in time?

Well when we had a decision to make we usually wrote an algorithm and and created a system that would execute that trade. Um, we did believe that everything that we were doing by hand could be done by a machine. And so we were when exchanges Um, you know, we have the status quo at a lot of things and it's hard to break the status quo when it was finally broken in about nineteen ninety and um in Germany. Germany actually had the first automated options exchange.

out of the Deutsche Termesbureau b which became UREX. And uh they were the first ones to do it and we were over there in Europe m providing liquidity on those exchanges, so we learned we learned in Europe. Okay. Okay.

Now, one of the things which I find quite interesting about whole trading, um, and I'm hoping you can share a little bit about this, is the type of people that you were hiring there. I understand and correct me if I'm wrong, but you were sort of one of the first to employ, you know, your your PhDs and mathematicians and those sorts of people over the traditional trader types. Um what was your reasoning for this?

Well, I had had a job in corporate America, so I looked at things as in in from an organizational standpoint. Um and we we did uh believe that one needed an objective way of buying and selling things. You couldn't uh especially in the options market where everything was related. And so we had quantitative models that would tell us how to price the SPX options versus the NASDAQ options, say.

to risk adjust those fair values and then automate that process to get those those those prices to the traders. And that took uh that took a lot of uh higher mathematics And um and computer skills to do that. Mm. Okay. Okay. Could you give us a little bit of insight to how you would describe some of the strategies that you were running there at whole trading? Like maybe sort of the frequency, um, what sort of markets you were involved in, obviously options markets, but

I know I think you were in about nine different countries at the at the peak. Just tell us a little bit about the type of strategies that you were running. Well, uh most of them were we were trying to buy undervalued securities and sell overvalued securities and uh Uh and stay as neutral as possible. We we didn't nobody liked risk, but our capital would swing significant amounts on any one day just because things became more pr mispriced or less mispriced.

Um so the strategies, uh although we did do a lot of option strategies, and of course we hedged with the underlying instrument. If we'd sell calls on IBM, chances are we were a buyer of the stock. Or we were doing some other option to offset that transaction so that we would be relatively neutral IBM. But another strategy that we employed about nineteen uh ninety-eight, nineteen somewhere nineteen ninety-five actually, was we bought and sold securities in a separate portfolio. So we were

Operated on, I think it was called the dot system then. And so we automated a process. And we would do things like uh you might think of it as pairs trading, where you would buy one stock. uh Pepsi and Cell Coke or um used to be General Motors and Ford, or it might be uh Morgan Stanley and Goldman Sachs. Uh where we would But what we did is we really took a security and we took the five most correlated securities and we built a basket and then we

we'd say that this stock is gonna follow that basket. So if that industry tended to go higher we would tend to be a buyer of that of that stock, et cetera. So we had a fair we try to fairly price securities and then we would make a market around our fair value. Everything we did was to come up with a fair value and then pro put put a bid and an offer Uh around that fair value. Uh never thinking that we were going one direction, but always being willing to go both directions. Okay.

So Hull grew at an incredibly fast pace. Um, at your peak, how much volume did you account for in the various options markets that you traded? Oh that's that's hard to hard to tell. Um I I do think uh you know it it uh we were certainly large in Chicago. We were in Frankfurt, uh London, Paris, um Yeah, we were in Tokyo. We we had a joint venture with Dio Securities. Uh which uh was uh certainly interesting.

Um, so it's it's hard to say. We did do we were doing over one percent of the New York stock exchange stock buy in, equity buying though, at that time. Actu and actually one of the one of the firms we did trade with trade with a lot with was was Madoff. And this is with legitimate portion of their operation. Um but Peter Madoff Uh and I were both served on the Cincinnati Stock Exchange Board and we found it uh Peter and I didn't see the world in the same way. Um he had affirmed that

uh executed order flow for other people at various prices and and so sometimes he liked to trade them above the market or below the market. And we had an automated system that was uh would provide bids and offers around what we considered a fair value. We didn't really care who we traded with. Well Peter Mainoff had this idea that he thought we shouldn't be in there providing this liquidity and

We shouldn't be getting in the front of his trades. And I think I get one of my greatest compliments was that uh Peter Mayoff said. That goddamn guy Hull, he's costing me two hundred fifty thousand dollars a month. Gotta get rid of him. So it's my greatest compliment. I like that. That's funny as

In 1999, you were acquired by Goldman Sachs. What was Goldman's motive for acquiring whole trading? And they saw the way the world was going. They couldn't compete um with um without an automated electronic market maker. uh market maker that could analyze data and come up with fair values for security so that they could trade them, they could uh provide good liquidity for their customers and and for others.

Um, and they they saw that uh they could they could build what we had, uh probably and it'd take'em about two years to get where we were, but by that time we'd be uh eighteen months ahead of'em. So they just wanted to wanted to shortcut the process. Okay. Okay. And what did they do with the firm um following the acquisition? Well the first thing they did, which was uh really quite bright, um, they were um they um went on a hiring spree.

And there were 250 people in the firm when uh I was uh when we sold. Within a year, they had 450 people. So what they did is they they and actually Henry Paulson said this. He said, uh, I look at this as a DNA transfer. And what we're gonna do is we're gonna take your methodology and the way you look at problems and and markets, and we're gonna take that throughout our firm. And uh so I thought they were very effective in in the way in which they hired and trained people.

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Moving into current times, can you describe to us what is whole tactical funds? Like give us the rundown on what you're doing today. Well one of the things I I I talked about blackjack and I talked about option strategies. Um I actually have been intrigued with the direction of the general market. And uh I have felt that

There's gotta be some edge in whether the Dow Jones and the S P five hundred are going up or down on any one day. Uh not necessarily one day, but over a longer period of time, any over multiple horizons. And I actually presented a paper in 1981 where I was on a panel actually with Ed Thorpe who presented another paper. Um But m what my paper did, it talked about Gambling and the and and and timing the market. And what I concluded was that gambling

was um gave me a better return on my investment. Blackjack gave me a better return on my investment. relative to risk and options did the same thing. So for the next eighteen years I sort of I sort of said, hey, timing the market isn't isn't for me. But I returned to that I returned to to that strategy in about two thousand and six. And was working on a very short-term strategy. Then in 2008, when the market collapsed, I said, I've got to have a systematic and disciplined way to deal with this.

And that's when I started to to really work to develop a a strategy for uh really timing timing the market. So it's pure market timing. Can you can you be on the right side of the S P five hundred? Uh and that's what the um The E t whole tactical funds is about and the ETF which is Uh H T U S is the symbol and it's been uh operating for about a year. Okay. And that paper you referred to, I believe that's available online for everyone to see, isn't it?

Oh yes, we have a paper that is very transparent about our strategy and it's on a website called hullinvest.com. Um or you can get it through the social science um research network, SSRN, uh and just Google Blair Hull. It's called a def um Practitioners defense of return predictability. Okay. Well I'll link to that in the show notes as well. So um you also be able to find a link to it there. The basic idea here is that there's this stigma against market timing.

Uh whether it's uh the Nobel Prize winners, everybody says vanguard funds have been ex they they are created by the idea that you can't time the market and that timing the market is dangerous. Well that may have been true up to about year two thousand, but with this explosion of data.

that we've had uh with govern new government data, the internet, even Twitter and social media, we now have a situation uh where with new predictive analytics That it is now possible to time the market, just as we have. Cars being driven by machine learning techniques, it's now that your portfolio should be driven by predictive analytics.

So I just wanna be very clear here. When you're talking about market timing, what does that actually refer to? Are you talking about like buying the very bottom, selling the top? Like could you just elaborate on what you mean by market timing, please? Um what we believe is we believe that there is some optimal position. of equities and cash that you should have every single day. And that comes out of a variety of information.

So uh what we do is we actually publish this an hour later. And one of the ways if you look at hullinvest.com, you don't have to buy the ETF or All you have to do is copy our strategy. Because we give you what our optimal position. We have a short term model and we have multiple long sh we have a long term model and multiple short term models and they and we have a short term adjustment to our long term and we have a position every day.

So you could uh you could just copy our strategy. That would be one easier way to do it. Okay. So this might be a bit of a a newbie question, but what's the benefit of creating your own ETF? Like Uh I how do you make money from that? Like how does that how does that work? Well there's uh uh there's there's a um a fee that goes along with e every f ETF that you

you buy, even if it's the S P 500, like the spiders have a nine basis point fee associated with it. Uh so you're gonna pay uh for every hundred dollars you have invested, you're gonna pay nine cents a year on that. And most fees, uh most fees could go up to um they could be up to one and a half or two percent. The the fee for this fund is one base one percent.

And that's ninety three basis points go to the people who put the fund up, put the ETF and had the strategy, of which we get about two thirds of that because there's a variety of things that you have to pay for. Um so it basically any any ETF that you buy, you're you're paying a an expen there's an expense ratio associated with every ETF. Okay. That makes sense. That's something I was completely unaware of.

So what are the securities that make up your ETF? Are they I mean, really just cash and what is it, the S and P futures? It's it's cash and either the S P futures or spiders, the ETF. Either those one or those two and and we may be long or short. The fund can go two hundred percent long or it can go one or or it can be as little as one it can be one hundred percent short. Got it. Got it. Okay.

Well Blair, just for the later part of this um of our discussion here, I'd like to get some guidance from you for upcoming traders. Now one of the things you've kind of really it's kind of been the underlying theme for our conversation so far, which I've noticed and you've obviously talked about it um in talks you've given in the past is The necessity of having an edge and having an advantage whenever you come to, you know, a game such as trading. What is your definition of a trading edge?

My definition of a trading S is that if you do this trade uh multiple times. uh you will come out on top. You will you end up making money. That's that's the definition. If you did this same kind of trade whether it was with this chart pattern or with this relationship of these things and he did it hundreds of times, in the long run, you would have more money than you started with.

That's my de my definition of a of an edge. So if a trader feels as though they do not have an edge, right, and then that's a problem that a l and it's a reality for a lot of traders coming into this business is that they do not have an edge. What should they do in an attempt to try and get one? Like where's maybe the

I don't know. Where should they even start? Like, do you have any advice? I know it's a bit of a a difficult question, but do you have any uh any advice that might point them in the right direction for where to look for an edge? You're probably not gonna like this answer, but if you were to go to a casino, let's talk about going to a casino, and you didn't count the cards, so you're not gonna play blackjack, but you can play roulette, uh you can play uh craps, you can play uh

Um oh I don't know. Baccarat, poker. Um, but you didn't have an edge. So that means that every Every hundred all you gotta figure out is that for every hundred dollars I bet how much am I going to lose? Am I going to am I gonna come out? And and uh because you're gonna you and that's your disadvantage. So if you have a disadvantage of all the games you're gonna play, my recommendation is But if you're an investor.

And that's what I am. I would not play. I'm not gonna play. If I don't if I'm missing an edge. There's no reason to play. There's no reason to play. I mean if you get some joy out of if you if and that's where gambling comes in. There's some joy. People enjoy the the fluctuation. It's a fun game. It's a fun game to do it. But not for you don't do it for financial reasons. It's only going to hurt you financially if you don't have an advantage.

We're doing that. We we have a propriet I have a proprietary trading we have the the ETF, which we hope has an advantage, and we but we trade p we have a proprietary trading system that has servers We do things with computers. We have computers that trade. We don't have people that trade. And these we have twenty five different servers at Aurora at the Chicago Mercantile Exchange. Well, each of those and we're trying to figure out, did this server and this strategy lose its edge?

Because we have our capital fluctuations go up and down, we probably do any any on each one of these servers, we do anywhere from uh oh a hundred trades to two thousand trades. I would think on these each of these servers well, maybe could be up to oh, we could do we could do we could do four thousand trades on one server, sure easily. Um And um we're evaluating those trades. We look at the trade from the time when we transact it and we look at the P and L one minute later, five minutes later.

And an hour later. And then of course we look at and then then we look at it at the end of the day. Uh so each of those trades are sort of marked out into the future. So and then we go back and do a a postmortem to say which trades were effective and which weren't.

So we're always worried that our strategies are losing an advantage. In fact you you should assume that whatever trading system you have, the profitability is gonna go down because somebody's gonna discover that and they're gonna they're gonna

They're gonna take part of the action. Yeah, yeah. Okay. So this is something I want to ask you about is um, you know, you can almost be quoted as saying you need to be systematic. It it may seem obvious to you why there's a need to be systematic, but would you mind explaining for uh anyone listening to this podcast why you believe there's a need to be systematic in your trading approach?

Let's see, I keep I keep going back to the game of blackjack because you count the cards and you if you have a positive count, that means the odds are in your favor. So you'll bet some money during that time. If it's a negative count, you bet as little as you can. So we just read, we try to determine what our advantage is, and we bet in proportion to that advantage in a systematic way, in a disciplined systematic way. You there's so much randomness that occurs in the marketplace.

You've got to re reduce reduce the randomness to any extent you can, and doing it in a systematic way is the only way that I know about uh of of getting more consistency. We want to get we want consistent profits. And those are those are hard to obtain. So we want to remove as much randomness as we can and by s being systematic that's That's a really great answer, Blair. I like how you describe that as removing randomness from markets um or from your trading as much as possible.

Um, when you're evaluating a strategy, what are the most important performance metrics uh which you give the highest value to? Well there are all kinds of things. The return per trade and the return on capital and the hit race. What percentage of the time are you correct? Um there's down, you know, how much time time underwater. I love that one. That one that's time underwater. There's um

There's maximum drawdown. I mean there there you could go on and on. You get these reports of the strategy from a money manager and he's got he's got twenty six different managers of measures. And so the one and some of'em some people say There's the Sharp ratio, which is the return, divided by the standard deviation of return. And there's a Sortino ratio, which says it's the return, but it only takes the standard deviation of the downside of when you lose money.

Um, I'm real simple. I just take the return. Divided by the standard deviation of the returns. And annualizing that number, the sharp ratio. And sharp races over two, I like, and sharp races under two. I I will take sharp races up. Above one. I'll take sharp ratios above one. I don't like sharp ratios below one. Okay, so a sharp ratio less than one, if anyone is trading a strategy with a sharp ratio less than one, you would sort of uh discourage that.

I'm not very I'm not very excited about those. Okay. Uh of course if you combine a lot of sharp ratios of one, you can get sharp ratios of two or three. And um, you know, we have a trading firm that of course it's it's got lots of servers and all kinds of overhead, but you know, it's there are many traders that have always their entire life they've traded with sharp ratios uh over ten. Over ten. Over ten, yes. That's huge. Now the problem is they have all kinds of costs associated with that.

And a lot of this requires those servers at the Chicago Mercantile I was talking about, those are Those are pretty expensive. You know, it's costing costing us, I'm sure I don't even know what our bill is over there, but it's I'm sure it's fifty thousand to a hundred thousand a month. Wow, okay. So in your personal opinion, young traders coming into this business today, where do you believe they should be focusing their efforts?

Well I think um I'm assuming that they have a good education. I'm assuming they have a at least an undergraduate degree and that they've taken some quantitative courses in their math and um they've taken a They've at least gone through calculus and they're um so I would say they'd concentrate their efforts in making sure they're up to date on new techniques. Uh I did go to graduate business school, uh but they're also there now

quantitative finance programs all over the country. There must be thirty of'em, um, which uh are master's degrees in in financial engineering. Um, there's uh I would also be I'd make sure that they at at the earliest possible age that they pick up a computer language and Python or R would be the languages I would recommend that they code in. Uh if you don't code in a language, you don't get an R door. Um, there's no question about you. Don't even...

You don't even apply for a trading job unless you uh can program and uh well in in one of those two languages. Yeah, so that's that's a really interesting point you make there, uh, Blair. So If someone is very efficient in one of those languages you mentioned, I believe at uh catch them trading R is the the language that you focus on there. If someone is very efficient in R, let's say, but has no trading experience, are they someone who you still may consider for a position with you?

Uh we uh w we might do we we would do we might do that. Uh they would they would be up against some other top competition with somebody that uh probably without a master's and master's degree in finance or some experience if they were just an R programmer or Python. Now we might take a C plus plus developer. Who didn't have ex we might we might do that, but certainly the financial engineers would have to have some either education

Or experience in the financial markets. Okay, sure. Very good. So uh just one last question before we close this out. Do you believe it's b become harder for traders to make money in the past ten years or so? And if that's the case. Do you think it's gonna continue to get harder for traders to make money in these markets? Well, I um have this idea that uh markets do uh it's just water seeks its own level and and um um markets are meant to be more efficient every day.

And so that means that no matter what you do, your your edge is going away a little bit each day. And then it really takes uh but there are tremendous opportunities in quantum breakthroughs in doing things that people have not thought about before. So uh I do think there are tremendous opportunities at the same time. Whatever strategy we have today is gonna be less profitable tomorrow. Okay, okay.

Blair, it's been incredible having you on the podcast. Uh once again, uh, thank you very much for doing this. I I really appreciate you taking the time to speak with me and share a lot of your insight with uh everyone who's listening to this podcast right now. So Where can listeners go to find out more about you? Well um Hullinvest.com is the is the website that we have that where the there's inf more information on the

ETF, the Exchange Traded Fund, H T U S. And to uh there's also there's a the read the paper. It m it would be interesting for you to read the paper, Practitioner's Defense of Return Predictability. And then take the quiz that is on the uh on the website. There's a quiz uh that will test your knowledge of um predicting the market.

It's all about it's all about education. And that quiz is on the Hull Invest website? Hullinvest.com, yes. Excellent. Thank you very much. It's been a huge honor. Let's speak soon. Very good. You've reached the way soon. We'd love it if you'd leave our-