The Extraordinary Returns from Investing in Coaching for Professional Traders and Portfolio Managers.

The last few years have seen a sharp growth in the use of coaching for developing trading and investment performance. This growth echoes in the many ways the rise of ‘Executive Coaching’, which is used to develop top leadership talent, and elite ‘Sports Coaching’ which is used to develop top sporting talent. The growth of performance coaching for traders still face many challenges, including an inability to provide data to a results driven industry which shows the ‘added-value’ from coaching. However for the first time, ‘Alpha R Cubed’, a bespoke trader and portfolio manager performance coaching business, has attempted to show the returns possible from using coaching to improve trading performance. This article highlights four examples of the work of their coaches taken from a wide body of work over recent years.

The table below summaries the results of the examples used in this article. The results seem exceptional, and as Alpha R Cubed's Managing Director Steven Goldstein explained, we were almost a bit embarrassed when we did our calculations, we had to keep double checking the numbers, or wondering whether we right to claim these improvements. However when we thought about it, we decided to use these, as they were deemed by our clients the additional returns which they feel would not of happened without the coaching:

  

What exactly is Performance Coaching for Traders, Investment and Portfolio Managers?

Performance Coaching is an immensely powerful process whereby a coach works with an individual to challenge and support them to achieve greater levels of performance. The coaching occurs in a series of one to one meetings held off the trading floor and spaced out over several months. The coaching is supported by various forms of analysis including risk profiling, personality assessment, 360 degree feedbacks, and behavioral questionnaires. In helping explain what the coaching tries to achieve, Alpha R Cubed’s Steven Goldstein likes to quote Sir Edmund Hillary, ‘It’s not the mountain we conquer, but ourselves.’ He says for many traders, often the problem is the enemy within, the coaching supports and helps traders to overcome the enemy within and then turn it into the ally within. As a consequence people start to improve and even master their abilities in key areas of performance, they become better at engaging with risk, better at managing risk, and better at making decisions in uncertain situations.
 

Examples of the Performance Coaching with Attributed Returns.

In all the following examples, the client firm stated the added-value that they believe resulted from the particular piece of coaching work. The clients involved provided permission to publish the details, though they did request anonymity in order that confidentiality is maintained.

Example 1

The individual was an experienced FX trader who had consistently returned a profit of about $2.5 million per year in recent years. A respectable performance for a mid-size franchise FX business, however the head of trading felt this individual could achieve higher levels of performance.

The coaching explored the trader’s way of working, approach and attitudes. This trader was highly talented but felt that he could not significantly improve performance without sacrificing low levels of volatility, or risking a counter-reaction to his performance. The coaching worked on raising the individual’s self-awareness to a point whereby he became more conscious of powerful drivers influencing behaviours which he had previously been blind to. As the coaching proceeded the trader started to introduce adaptions and a more proactive approach to his trading. 

By the end of the first year of coaching the trader had achieved a profit for the year of around $4 million, the following year this increased to $6 million. Collectively, the two years since the coaching have seen the trader generate an improvement to the bottom-line of an additional $5 million. This equated to an ROI of over 66,000%. Whilst this is extraordinary in any ones language, it is probably on the conservative side given that it excludes continued future performance and other non-quantifiable benefits. Furthermore, if the traders run rate remains elevated at around $6 million per year, then it is feasible that the return over 5 years would equate to an ROI of over 200,000%. Whilst this is a good example, it is not extreme  nor untypical.

Example 2 Where higher levels of capital and leverage are available, the return on investment can be considerably higher as this example shows. A newly hired portfolio-manager at a leading hedge fund had been highly successful as a bank trader. His first year at the hedge fund had however been somewhat underwhelming, achieving only a small positive return for the year, and finishing in the bottom 10% of PMs at the firm. This particular fund does not normally retain PMs who perform poorly in their first year; however, in light of his potential, they decided to give him a further chance and enlisted one of Alpha R Cubed’s coaches to help him.

It was apparent he had struggled to make the difficult transition from bank to hedge fund. There was a very different trading and risk environment at the hedge fund and the pressure to perform was far more intense. The coach worked with the individual to help raise his awareness of the issues which were impacting his performance, investigating the roots of his trading style, and exploring the unconscious biases at work in his trading. His approach to risk, which he had applied at the bank, needed some serious modifications, whilst his attitude to discipline and money management needed to be re-appraised. The individual soon started to transform how he worked, adding a new level of discipline and incorporating new practices and processes. The results were almost immediate, and by the end of the next six months not only was he retained but he was given an additional injection of capital to trade with. His second year at the firm saw a dramatic turnaround, placing him in the firms top 5% of their PMs. His total P&L for that year saw an increase of over $48 million, whilst in the subsequent two years he exceeded this still further.

In its raw form, compared to a situation where had the firm decided to let the individual leave, the ROI equated to a first year return of over 410,000%. The exact numbers for the PM’s performance in the subsequent 2 years were not available, however it is known that both years were in excess of the $48 million achieved in the first year after coaching. It is therefore fair to assume that ROI on this particular investment is so far at least 1,230,000%. It could be argued that the returns in this case are exaggerated, since the individual always had the potential; however the firm recognized the contribution the coaching made and that it was the catalyst for him to fulfill that potential. Furthermore, even if the coaching had achieved only a fraction of this success, it still would have represented an extraordinary return. 

This fund subsequently adopted the coaching to improve the ‘on-boarding’ process for new hires, and as a consequence the success rate of new hires has significantly improved. This is a great example of how supporting people in high pressure trading roles, pays huge dividends. It is felt that many firms fail to support people adequately when it comes to the human aspect of performance. This was brought home further by a recent research paper published by Citibank*. This explored the positive effects that active people management practices, which includes coaching, has on performance at hedge funds. The paper found that over a 3 year period, funds that invested heavily in active people management, outperformed funds that under-invested by around 600bp on total AUM. In hard numbers, this approximates to enhanced returns of around $200 million per year for every $10 billion of AUM.

*Exploring the Concept and Characteristics of “People Alpha”: Citi Prime Finance, October 2013.

Example 3

This example highlights a more broad based improvement across a whole team rather than

a specific individual. The coaching had been working for two years with 12 traders and desk heads within the fixed income, currency and commodity (FICC) trading business of a small to mid-size European bank. After two years the head of the business sent an email stating the following:-

‘We are again looking forward to cooperation for this year, last year we improved our trading P/L by more than 10 MIO GBP and I would argue that our cooperation was a big part of the success.’ 

We do not know how much of an increase this was in percentage terms, however we do know that for a small to mid-size European Bank, this was a sizable increase. And when compared to the average performance within the entire industry, where average revenues for FICC trading business for the year were around 7% lower than the previous year, this was an even more outstanding outcome.

It is not possible to know how much the coaching contributed directly to this, if one conservatively assumes that the coaching contributed to around half the improvement, this equates to an ROI of around 12,500%, whilst full credit for the improvement would equate to an ROI of over 25,000%. This may understate the full contribution, since the improvements are often maintained. Thus potentially this could equate to an ROI over a 5 year period of anything from 62,000% to 125,000%.

Goldstein does admit states that ‘it is not always easy to know the true value of their contribution, after all ‘a rising tide lifts all boats’ ’. Alpha R Cubed rely on feedback from clients as the best indicators of value. A good example of this is shown in feedback a ‘Business Head’ provided to the ‘Head of Talent’ at a Tier 1 investment bank client. The ‘Head of Talent’ had requested an assessment of the value of the coaching to the business. The following is taken from the manager’s reply:

‘Trader 1: Best year prior to coaching $6m (Over an 11 year period). Years since: $32m followed by $20m this year. (He started mid-way through 2007 and was flat p/l but just shy of $7m by year end)

Trader 2: Best year prior to coaching $0m (Associate, showed promise but revenue wasn't happening for some reason). Since he has $8m and $12m this year.

Trader 3: Best year prior to coaching $8m; subsequently $28m and $15m

Trader 4: Best year prior to coaching $3m: subsequently $22m (just one year since).

Now obviously market conditions have played a part, as well as luck etc. But one trader who has declined to take part in the 'coaching' has turned out to be the lowest revenue producer for the past two years having been consistently the highest for the previous 5. Also, all the individuals that have taken part have become easier to manage, show greater teamwork and just appear to be happier overall. The positive impact on the group has been profound.’

Example 4

Whilst the coaching focuses mainly on developing potential, sometimes it is remedial in

nature. An experienced swaps trader at a bank was struggling to recover from a serious downturn. When the coach met with the trader he was down $2 million dollars for the year and bleeding confidence. Soon after starting the coaching, the trader had lost a further $400,000 and closing in on his yearly stop-loss. The coach suggested he cease running risk to help him get his head ‘sorted’ and to stem the negative spiral .Then the coach worked with him to explore and help him understand the complexities of his situation which had taken him on this negative spiral. After a few weeks the trader re-started taking risk and within a couple of months was starting to make money again. With his confidence improving he continued to get further back into the markets, and by the end of that year he had made back almost $1,400,000 from the low. The next year he achieved almost $5 million profit for that year, his best at that bank.

Net from the low the trader was up over $6,400,000. This equated to a ROI of over 83,000% or 830 times the investment.

These typical examples highlight the potential returns from ‘Performance Coaching for Professional Traders, Portfolio and Money Managers. It is worth also re-emphasizing that there are many other non-quantifiable benefits from the coaching, these range from improving people’s resilience, and reducing stress and anxiety, to helping enhance the organizational and risk culture within a business. A more complete list of the many benefits can be seen on Alpha R Cubed's website at http://www.alpharcubed.com/coaching.