Education, Experience, and the Right Opportunity

Mike Rothenburg recently told us how his background in engineering and consistent interest in finance and management led, in 2006, to launching Hi-Tech Futures with two colleagues.

Tell us about your firm, as you would tell an investor.

We’re a small Commodity Trading Advisor and Commodity Pool Operator. We’re certainly considered an emerging manager, with a registration that only goes back about a year and a half. But the experience of our principal and of the individual who does the trading extends far past that. He was trading proprietary funds for a number of years while he was developing a trading system. We legitimized that into something we could offer to our clients over the last year and a half.

Probably two things to point out are, one, that we have a real focus on risk management. Anybody can trade, be it futures or equities. Anyone can make financial investments. But if they’re not managing the risk, the potential for ruin is there, particularly in something as highly leveraged as commodity futures. Second, is maintaining strong compliance, and that really pervades our culture. We’re a very casual group; we’re a very small group. We don’t have a large corporate bureaucracy by any stretch, and we’re able to make decisions pretty quickly. But everything is toward maintaining a professional operation in terms of Risk Management and Compliance.

Something else about the team?

The principal has been a commodity broker since the early 1990s. He’s an entrepreneur in the computer industry, when you could actually make money putting computers together in your garage. But as that industry matured, he gravitated towards trading and introducing brokers to the futures industry. Since 1999, he developed a lot of his skills in the trading arena. He started out trading for his own accounts, like a lot of guys who may be able to grow it from there, because, one, they are good traders and, two, they can manage a company or find those that can.

Another individual was a schoolteacher for a number of years, again with a lot of interest in the futures industry, and he also served as a broker since the late 1990s. Those two guys have been together since that period.

A schoolteacher?

At a high school.

It takes all kinds.

It really does. A lot of it is interest and, let’s face it, if you’re looking at changing careers, you’ve got to develop the knowledge and skills on your own, to be able to present yourself as someone that’s worthy of being hired.

With young people coming out of school, I think there is a little more traditional means of entry into our industry, but there are a lot of engineers, accountants, school teachers, and entrepreneurs that gravitate towards the managed funds industry.

What is your title or role?

Titles don’t mean much, but I guess you could say Director of Operations. In a small start-up firm, that may involve anything from client issues, business development issues, and perhaps sweeping the floor on Fridays.

How did you get to where you are now?

I’m actually an engineer, BS in Engineering, and always had an interest in the financial markets. I pursued that a little bit, picking up an MBA in 1983.

But I had stayed in the private sector, in my particular case, the engineering world. I worked my way up to be COO of two different publicly-held engineering firms, but again, I always had the interest particularly in the futures market and managed futures, which in the late 1990s was starting to grow quite a bit. I pursued that interest individually, and took the Series 3 exam back in the late 1990s. But I wasn’t headquartered in New York or Chicago or any of the larger cities that have a financial basis.

A few years later, I hooked up with a guy who had an introducing brokerage in the commodity futures industry. Over time, he and I developed a concept of working with his trading skills, working with managed futures, and setting up a hedge fund, which is a commodity pool. After about three years, it finally came together, and I said, “Well, time to make a move and change careers.”

So — education-wise, an engineer; and, experience-wise, an MBA in the corporate environment, which I think is important because you have to have some pretty strong corporate governance background; and then finally, the right opportunity with the right person.

From the beginning you had an interest in management.

Very much so, and certainly the market was maturing as I was maturing. I’m sure managed futures back in the early 1990s was a very, very small universe. Today it’s not, and hedge funds are obviously huge.

How typical is your story of somebody in a comparable role?

Probably fairly non-traditional. We work with a few clients who came to the managed funds world via corporate positions in other industries. Maybe they find the kind of road I took to work for them. But I think most of the people we deal with have come through the educational system with a background in finance and financial analysis, and are able to work their way into a hedge fund as, perhaps, a junior analyst. That’s going to be far more prevalent than anyone with a story like mine.

Do you work with executive recruiters?

We have not to date simply because we’re not quite poised yet to start adding significantly to the firm. I have worked with recruiters in the engineering industry, and they’ve been very, very productive relationships. We just don’t have that experience yet on the financial side. We’ve spent the last year and a half putting all this together and establishing ourselves, so the big growth is 2008.

When you do begin to assess candidates, how will you judge the cultural fit?

Sincerity is key. They need to be able to present their background and education clearly; they need to be able to communicate in a very straightforward fashion. I have hired and fired a lot of people in business development, sales, and marketing roles over the years. If they don’t have that sincerity, they just don’t tend to survive very long. So I try to test out attitudes, thought processes, and level of commitment. All of that boils down to how sincere they are about doing a good job for their future.

What are a major obstacle and a major opportunity that exist in the industry today, that did not exist, say, five or ten years ago?

A major obstacle is being with a firm that can get past the critical mass. If you’re young and looking at employment with the multi-billion dollar funds, you don’t have that kind of issue or worry. But if it’s a smaller fund, the obstacle is: Have they got enough capital to grow? Obviously, I’m thinking from the perspective of an emerging manager and a small growing firm.

There are huge opportunities out there in this industry. It’s growing rapidly. There’s a tendency for styles to be imported. One year, 130-30 funds may be real attractive, and the next year, real estate funds may be real attractive. If you’re flexible and can learn the various segments of the industry, you can create your own continuing opportunity.

Is there ever a point when a fund is so well-established, that they back off fundraising and put it on the back burner?

Some have done that, and I can particularly speak for the CTA and commodity pool spaces. Some groups have so much money under management that they can sit back and earn a pretty good living on the management fees. They take very, very limited risk and try to return 15% or 18% a year. Now some funds are becoming public, and there’ll be a real drive for growth because they’re public companies. Others, I think the egos of the managers tend to drive the desire for bigger and bigger AUM. It’s kind of hard to not continue to do that. And frankly, when you’re young, a million-dollar allocation is big, but when you hit the billion-dollar mark, you’re on the radar of all the huge allocators out there, and those bigger pieces come a lot easier.

How is the credit crunch affecting things now?

It’s having a very negative impact on the economy, but it’s impacted the returns of those who invested in collateralized debt obligations. When the returns in one segment go down, money has a tendency to look for other segments. People I’ve talked to think that 2008 is going to be a good year for CTAs and CPOs, because money invested in something that did not do well in 2007 may migrate to the commodities side. With inflation and the resulting impact on commodity prices, I think commodity is going to be pretty hot for this coming year.

Do you network and stay in contact with people at other funds?

We do, because some of our clients are in those funds. I don’t think you can do enough. You have to do what you’ve got a budget for, but I would never short the budgets for networking and maintaining involvement in the different organizations.

What are your satisfactions working in this industry?

It’s a fascinating industry. It’s dynamic, it’s changing, and you can almost count on the fact that no two years are going to be similar. There are always market forces, environmental forces, fundraising issues that are going to make every year different. You just can’t stop learning.

Given your background, what do you advise to someone coming at the industry from engineering?

Get an MBA; you’ve got to have something to legitimize your ability to analyze. Engineers have got a great educational background because they’ve been trained to look at a problem, take it apart, solve the individual pieces, and put it all back together again. That’s a really critical skill for anybody, but the MBA provides you an awful lot of background in business and financial analysis. I don’t think too many people are going to look at you too strongly, unless you’re able to bring a strong business background and financial understanding to the table.