Jeff Norman, founder of Alpha Centauri Capital Management and designer of its global macro Tactical Opportunities Program, has an affinity for games, particularly math-related games, which goes back to his childhood.
“I always liked games and I played a lot of games with my dad who was a math professor at Dartmouth and [he took me] to bridge tournaments with him,” Norman says. Norman became such a math whiz that he started computer programming for Dartmouth College at the age of 13. Later he would graduate from Princeton with a degree in Mathematics and earned a graduate degree in Computer Science from the University of Washington.
“I always liked games and I played a lot of games with my dad who was a math professor at Dartmouth.”
After programming for IBM, he took a position at Oppenheimer, arbitraging government bonds. This led to a job at the ZAIS Group where he worked on the first iterations of Collateralized Debt Obligations (CDOs). He also traded currencies, options and credit derivatives.
He initially wasn’t drawn to Wall Street and trading because at an early age he read A Random Walk Down Wall Street, and concluded it was all random so there was not much use. But he entered the trading world through his programming skills and would spend the next three decades trading. “I went to Wall Street in 1983 and I found my way to a bond desk at Oppenheimer,” Norman says. “It was easy because there was all this new debt coming through the Reagan years. I would [arbitrage] bond spreads. It was really fun but the market got pretty efficient.”
After making what he thought at the time was a lot of money, he left to pursue other interests. This included playing poker which he still enjoys and where he advanced to three final tables in the World Series of Poker.
He made his way back to the trading world with ZAIS, where he traded currencies and sovereign credit default swap and CDOs. “I get impatient and like to learn new things, which is not a great way to earn a ton of money but it is a good way to become a global macro trader,” Norman says.
Despite his understanding of individual equities, he chose to launch Goldman Management Inc. (GMI) as a commodity trading advisor trading stock index futures. “There is only so much one person can do with all the analysis and trading and its just easier to trade stock index futures,” Goldman says.
“I would never buy gold without looking at silver and what the dollar is doing.”
After a while, his wanderlust took over. “I started [trading] on my own and when I left the firm, thought I would start a CTA,” he says. “I had a very volatile proprietary trading record— five years at 36% annualized return with 36% volatility, nothing institutions would want but it indicated I was good at it.”
So in 2011 he launched Alpha Centauri. With a background in computer programming, arbitrage, quantitative research and math, you would think that Norman would gravitate towards systematic trading, but this is where his impatience and love of gaming comes in. “I always admired the big global macro traders like [George Soros and Stanley Druckenmiller],” Norman says. “You can trade any market in any direction and if things aren’t moving you can always sell volatility so there is always a winning trade out there.”
He describes his strategy as correlations based. “Some people trade gold without looking at something else. Trend following systems look at moving averages and can be successful. But I would never buy gold without looking at silver and what the dollar is doing,” He says. “I don’t think these things tell me when to buy gold, but if I’m looking at gold I am more apt to buy gold when silver has had an upward spike and gold has not.”
There is a mean reversion aspect to his approach which is short term and often includes spreads.
“I will wait until something is overdone and wait until it [gets] more overdone and when it starts to move back I will get in,” Norman says. “If it surpasses a previous high or low that is the get out signal.”
One of his bread and butter trades is trading the Nikkei futures versus the S&P 500, because of their correlation.
“If the S&P 500 futures are up a percent you would expect the Nikkei futures to be up a half a percent; if they are not up at all and the yen is weaker that would be a buy signal,” Norman says. “If they are not up at all and the yen has gotten stronger than I am going to stay away from it, but I am looking for a situation where I get two or three modest statistical indications that a trade is a good trade and I will put it on.”
His executions are all discretionary, but with his programming and quantitative skills, there is a lot of data processing in testing his ideas. “I have tried to automate at various times but haven’t gotten there. It is largely discretionary. Informed speculation is what I like to call it,” Norman says.
“The S&P is sort of my proxy for risk assets,” Norman says. “When risk is on you want the S&P 500, sometimes you want bonds in periods when they are correlated, sometimes you don’t want bonds. I look at all of the positions in the portfolio and think ‘is this going to do well in a bullish environment or in a bearish environment.”
Alpha Centauri trades four sectors: fixed income, currencies, commodities & stock indexes. He will trade outrights and spreads, but likes to base his trades off movement in the S&P 500 futures.
“I look at the news and from that I try and see where S&P futures are; and then bonds and the dollar. The S&P is sort of my proxy for risk assets,” Norman says. “When risk is on you want the S&P 500, sometimes you want bonds in periods when they are correlated, sometimes you don’t want bonds. I look at all of the positions in the portfolio and think ‘is this going to do well in a bullish environment or in a bearish environment.’”
He adds, “You don’t want too many [positions] that are going to do well in the same environment. It is pretty easy to tell just watching each position whether it does well when the S&P pops up. You [see] what are bearish trades and what are bullish, and you want to be roughly balanced between the two.”
His skills in poker have helped his trading. “It helps me with the risk management aspects of it. Despite being a poker player, I run a very low volatility program (4-5% margin-to-equity ratio),” Norman says. “It also helps you intuitively, position sizing and working with statistical concepts like expected value, standard deviation and correlation. Everybody knows about these things but if they are in your blood it does give you a better feel for the markets and the magnitude of surprises and how those surprises spill into other markets.”
Trading is in Norman’s blood, which is perhaps why he hasn’t automated his approach— he processes the variables intuitively. “It is the same way in poker, you are not necessarily doing arithmetic all day long but [those skills] help with logic, they help with discipline and they help with intuition. Everybody always thinks that with my background I should have built a model but that is not the way it ended up,” Norman says.
Trading multiple markets—especially when trading market correlations—provides Alpha Centauri an edge. “When there is a surprise in one market, my experience trading all kinds of markets gives me a feel of how that price move will spill into other markets.”
Finally, his poker skills allow him to read the market players. Norman doesn’t necessarily believe the markets have tells, but says, “The players in the markets have tells. You get an idea how some of the players, like the Fed are going to react to things.”Back