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People: FUND MANAGERS
RICH DENNIS: A GUNSLINGER NO MORE
The 1980s' superstar commodities trader, is now doing what his computer tells him
For years, Richard J. Dennis lived by his wits in the commodity markets--and quite a living it was. His knack for the quick kill made him an estimated $200 million in the 1980s and brought him fame unmatched by any other futures trader. Then his instincts failed him. By the early 1990s, having lost tens of millions for his customers, he quit the business. Now, he's trading again, with a difference.
Instead of acting directly on his thoughts, theories, and impulses, Dennis translates them into computer programs. When those bits and bytes align with market prices, the computer orders a trade. Under an agreement with a third-party broker who controls most of his customer funds, Dennis must follow the system. No matter what his gut tells him, discretion isn't allowed. So far, the deal has paid off: With a 111% gain in 1996, Dennis once again ranked among the world's top-performing commodity traders. "The left side of my brain has put the right side out of business," the soft-spoken 48-year-old explains.
HUGE LOSSES. Dennis' transformation to robo-trader could prove significant. In derivatives markets, taming traders is the preeminent risk-management problem--just ask Barings PLC or Sumitomo Bank Ltd. A computer system that limits potential losses has great appeal. In Dennis' case, his goal was to separate a brain loaded with money-making insights from the heart of a gunslinger. By the time he retired in 1988, he had shot himself in the foot by making unusually risky trades--purchasing huge quantities of options just before they expired and became worthless, for example. In one day, he lost $8 million in a soybean trade gone bad. Losses in his personal accounts paralleled those of his funds. Adding insult to injury, an early 1990s comeback attempt flamed out in months.
Now, the system curbs Dennis' tendency to go off on fliers by imposing strict risk parameters. In programming the computer to evaluate price, volume, and other market data in search of profitable trades, Dennis says he employs only strategies that have survived rigorous testing and proved successful in the past. While many traders employ computer models, such rigid systems remain more the exception than the rule; most traders keep some discretion.
Despite his past big losses, customers have responded enthusiastically to Dennis' new approach. So far, they've given his Dennis Trading Group Inc. $85 million to manage, up from $2 million at the beginning of 1996. "What I see here is completely different from the way he was before," says Bob Collins of Rosenthal Collins Group, an investor in the fund whose firm has cleared trades for Dennis since the 1970s. "It's very disciplined and regimented."
If the past is any guide, Dennis is reaching the point where his computers will be truly tested. A review of his trading over the past decade shows that, like many traders, he has performed best when handling relatively small amounts of money. In 1987 and 1988, when he was trading as much as $159 million, his net loss after fees was $60 million. And in 1992, when his equity climbed as high as $86 million, he lost $48 million. So far, the fast growth of his stake hasn't caused him to spin out of control, though it may have slowed him down. Through February, he was up 6% for the year, compared with nearly 10% a year earlier.
By thwarting the impulses that led to huge losses in the past, the computers have freed him to concentrate on the theorizing that was always his greatest love, Dennis says. His faith in his new system has led him to promote himself aggressively, even though he swore in the late 1980s that he'd never trade again, except as a pastime. He changed his mind, he says, because he wants to build a war chest to support a variety of philanthropic and political goals--among them, legalizing marijuana and aiding victims of domestic abuse. Money, he says, "is the main ingredient if you want to influence things."
Like many kids growing up in blue-collar Chicago, Dennis viewed the city's futures exchanges as his best shot at riches. He became fascinated with trading even before he was old enough to enter the pits. While still a teenager, he persuaded his dad, a city engineer, to fill orders for him. Before long, the plump, bookish kid had lost half his father's life savings and his younger brother's pizza-delivery money, too. "I made every mistake 10 times over before I was 21," he says. Yet even as he learned through painful trial and error to anticipate price movements, he never lost the courage to bet the ranch. He made his first million by age 25, and his fortune soared over the next decade. Never married, he remains close to his brother, Tom, a veteran trader and his longtime partner. He guards his privacy carefully and declined to be photographed for this article.
By 1984, Dennis was one of the biggest single traders in the commodity markets, and mere rumors that he might be buying or selling would move prices. When he placed classified ads proclaiming "trader wanted," he got some 1,000 responses from people eager to learn his secrets. He settled on fewer than two dozen novices--among them two professional gamblers and a fantasy-game designer--and after a two-week training program, he gave them money to trade under his firm's auspices. Several went on to become top commodity-fund managers, including Jerry Parker of Chesapeake Capital Corp., who now manages more than $1 billion. "It was sink or swim. Sort of an experiment," recalls Parker, a former accountant. Dennis ran the training, Parker says, "because he wanted to have a certain chunk of money traded using systematic rules" while he went on and tried out new techniques.
As Dennis' bank account grew, his interest in influencing public affairs grew along with it. Starting with a $1,000 donation to George McGovern in 1972, he has given $10 million to politicians, he reckons. An additional $20 million went to a think tank he founded in the early 1980s and closed in 1989, and still more went to a private foundation, he says. While some of the money paid for domestic-violence shelters, his chief cause is decriminalizing pot, which he calls good economic and social policy. "A lot of people give money to the heart association," he says dryly. "I try to pick things that are as unpopular as possible."
In addition to giving money, Dennis has participated in political debates and written op-ed pieces and magazine articles, including a 5,000-word article on the economics of legalizing drugs that ran in The Atlantic in 1990. When his public funds collapsed in the late 1980s, burned investors accused Dennis of being so distracted by politics that he failed to monitor trading--an accusation he disputes. In any case, Dennis says, all his political giving achieved little. "I wasn't looking for an ethanol subsidy. I was looking for specific policy outcomes," he says. "[The politicians] would say, `What's the hidden agenda?"' The lack of results helped transform him from liberal to libertarian. These days, he advocates less government at all levels: "The rule of thumb in politics ought to be, when in doubt, don't do it."
BIG LOAN? Dennis is deeply bitter about a class action brought against him by investors after his big losses. In 1990, plaintiffs concluded that he was "financially strapped" and "debt-ridden," and court records say he agreed to borrow $2.5 million from his brother for a settlement. Dennis says his net worth has been in the millions for more than 20 years and that he paid the settlement. But Philadelphia attorney Merrill G. Davidoff, who represented plaintiffs, insists: "He had no money."
That's not an issue any longer. The question now is whether he can maintain his phenomenal rates of return. Will he substitute nerve endings for microchips if his results head down? Dennis says no. Yet his funds' disclosure documents impose no legal obligation to obey the computer. The fine print must read that way, his partners say, so that Dennis can exit markets quickly in the event of war or financial meltdown. If he overruled the computer under less drastic circumstances, "We would close our accounts," says Esther Goodman of Kenmar Holdings Inc., the firm that reconciles Dennis' computer signals with his trading blotter on behalf of customers. Still, for investors it's a matter of trust that Dennis, once so quick to shoot from the hip, will keep his guns holstered in bad times as well as good.By Greg Burns in ChicagoReturn to top