An audience with Capstone CEO Paul Britton: I thrive on uncertainty

Investors hate nothing more than uncertainty. Paul Britton, however, is someone who benefits.

The 48-year-old managing director of derivatives firm Capstone Investment Advisors made a brief trip to London from the United States when Financial news visits the company’s offices just off Regent Street.

Capstone, which Britton founded in 2004, is headquartered in New York City, where it is also looking for additional office space. But London has become one of Capstone’s largest footprints and is home to around 70 of its global pool of 210 portfolio managers.

The sleek, modern office is a far cry from the commercial pit where Britton cut his teeth in the early 1990s, when he worked for Saratoga at the International Financial Futures and Options Exchange in London.

“It was amazing and a miracle for me to have it all done. It was loud, ”says Britton, recalling the first time he arrived in the LIFFE offices as a newcomer. The exchange would later become ICE Futures Europe.

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Britton says his early days in the trading room taught him resilience – not more than when some senior traders tried to keep him from taking their share of trades during his early days on the job.

“I thought they were taking care of me,” Britton recalls. “When I explained everything to my boss, he looked at me and said, ‘You are an absolute idiot’. He told me to come in and make five exchanges the next day or to return my badge and hang up my jacket.

After stints in Amsterdam and New York – where Britton established a U.S. presence for the company shortly after changing its name to Mako Global Markets following a management buyout – the executive d British origin created Capstone.

Initially, Capstone only traded his own money, but a turning point came in 2007 when he was first entrusted with clients’ funds. However, overseeing outside capital has proven to be a steep learning curve for the company, which now manages some $ 9 billion for around 50 clients.

“We underestimated the importance of the no-investment side of managing client money,” Britton says bluntly. “We were very fortunate that our initial investor was a large pension plan that taught us the standards you need to meet to manage large institutional funds. We were lucky that they had patience with us. We have always known how to make money. But asking ourselves about our compliance policy was like a whole new world.

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Money poured in quickly – just four months after securing its first client, Capstone posted a 10% return. “It made us believe we were very special,” says Britton.

This high level of confidence was to be short-lived, however, as the world moved closer to the global financial crisis. “Later that year you could feel the market cracking,” says Britton, who announced shortly after the Lehman Brothers collapse in September 2008 that the VIX volatility index – the so-called “fear indicator” – had reached the top when it approached 40.

It wasn’t even near the top – the fear gauge almost hit 90 in October. “We lost a decent amount of money and ended the year down 5%,” says Britton.

Thirteen years later, Britton argues that investors aren’t paying enough attention to volatility, which has become an asset class in its own right for some investors looking for ways not only to protect themselves from it, but also to lure it out. ‘to exchange.

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Underestimating portfolio volatility is “wickedly dangerous,” suggests Britton, who argues that the fact that markets continue to hit new highs over the past 13 years has led investors to focus less on their volatile nature.

“The idea of ​​buying the drop worked wonderfully. At some point you really need to focus on how risky your portfolio is and how much volatility you’re willing to accept, ”he says.

Although large institutional investors often claim their outlook is long-term, Britton says that shouldn’t excuse them from exposing themselves to “endless levels of volatility.”

“If you look at the average portfolio over the past 13 years, everyone is at more risk,” he says.

“It has been 13 years since the world’s central banks have extended their balance sheets to around $ 36 billion. We all sit here in awe of the wealth that has been created.

“But we are not geniuses. We have just been fortunate enough to be part of a multigenerational windfall created by expanding central bank policy. “

With the traditional 60/40 portfolio split between stocks and bonds becoming less common as fixed income securities lose their appeal as a diversifier, Britton disagrees with some cryptocurrency proponents. who claim that bitcoin is an effective diversification tool.

“It feels like it’s a speculative instrument that has good value for some market participants and constituents,” said Britton.

“We have exposure to crypto, but that’s because we follow certain trends. We don’t see it as a long-term store of value in portfolios. Large institutional investors will have a hard time with it because of its ESG component. “

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Like other investment managers, Capstone seeks to improve diversity within its own ranks and across the industry.

Following George Floyd’s murder in May 2020, Britton’s colleague Jonathan Sorrell suggested Capstone support a program to provide internships for black students. In two weeks, 80 companies had registered. Britton realized that the initiative had the potential to be rolled out on a much larger scale. He asked Sorrell if it was possible to expand to 10,000 internships and include other industries.

“I thought if we could be successful we have a real chance to have a multigenerational impact,” says Britton, adding that over 11,000 applications have been received for the 2022 program. However, Britton acknowledges that Capstone has work to do with it. To do. “It’s improving, but far from where I would like it to be,” he said. “The talent pool is not big enough because there hasn’t been the attention it should be. This must change.

The same can be said of the number of female portfolio managers, says Britton.

“It bothers me that there are so few female candidates who want to be in hedge funds. This is an industry-wide problem that must be resolved and will not resolve on its own.

CV

Not

July 1973

Education

1991-94

BA in European Corporate Finance, London Metropolitan University

Career

2004-present

Founder and CEO, Capstone Investment Advisors

1999-2004

Co-founder, Mako Global Derivatives

1994-99

Options Trader, Saratoga

To contact the author of this story with comments or news, email David Ricketts

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