Page 149

Henry emphasizes how the markets are always changing. When he started, he observed the driver was money supply. Now there is no one driver of markets. Markets are constantly changing, and new variables and events become drivers. For example, now (September 2000), oil and currency movements are drivers. In the third quarter of 1998, it was the Asian crisis and risk contagion around the world. He says, "This understanding and accepting of change has been the hallmark of our philosophy. No one can predict the future. What drives a particular market in one period will not do so in a later period. That's the problem I have with convergence trading using historical models."

Henry feels that one of the biggest problems with investors is that they stay wedded to certain ideas or linkages. The failure of some traders is not that they do not see the importance of money supply or some other fundamental variable, but they continue to believe it is important long after markets have moved on to a new driver. Staying wedded to old experiences or out-of-date statistical linkages is more risky than accepting the inevitable tumultuous and changing dynamics of the markets.

Henry calls his type of trading "divergence investing" as much as trend following. "We generate returns when markets change and move to new equilibrium prices. When there are divergences from the status quo, there will be trends and these will be the times of greatest profitability. We do not predict times of change; we patiently trade a broad set of markets and remain posted to take advantage of trends when they appear." He emphasizes that this should not be confused with passive investing, because the programs are working 24 hours a day to identify these trend signals within the noise of the markets.

TIGHTENS RISK CONTROL

Henry has been known as having a volatile track record. Over the years, volatility has been reduced; 1992 was a watershed in this regard. For example, in 1991, the financial and metals program, the second longest-running and second largest program, was up 61.9 percent. In December alone, the program was up over 40 percent. But in 1992, the program lost 10.9 percent. It was this environment that caused him to tighten risk control. In 1993, the program bounced back 46.8 percent.

Henry says market moves that broad and strong leave long-term systems vulnerable to give-backs, and that is exactly what happened.