Hennessy & Son: Trading off the Generation Gap
Holter, James T., Modern Trader
J Patrick Hennessy, 68, hasn't always practiced technical analysis, but he always has understood discipline. A grain and soybean pit trader in the 1950s and 1960s, founder of the brokerage Hennessy & Co. in 1962 and private trader since he sold his interest in that firm in 1983, Hennessy's experience has served him well. Most recently, he has partnered with his son, Thomas Hennessy, 35, to form the commodity trading advisor (CTA) Hennessy & Associates Inc. The two have combined Pat's 47 years of experience with a modern technical trading system. The result has been a 31.73% annualized return since inception in September 1995.
The program, which trades only Treasury bond futures and options, returned 8.75% the last four months of 1995, 24.25% in 1996, 39.45% in 1997 and 13.45% through October 1998. The CTA sports a Sharpe ratio of 2.35 - anything over 2.00 indicates a strong reward-to-risk relationship - and manages 16 accounts with assets of $1.1 million. Despite the CTA's success, it might not had happened if not for an earlier failure.
In 1992, the Hennessys smelled an opportunity overseas. They started a trading company in Dubai, United Arab Emirates, and attempted to leverage the historical performance of their system and the numerous contacts of an Arab partner to attract offshore funds. Investment didn't come fast enough, though, and they pulled out in 1995 to start the CTA.
The CTA trades the same system that was the cornerstone of the Dubai trading firm. Developed with independent researcher Tony Stack, it's a "complex moving average" system that signals at specific times during the trading day, Tom says. A trend-following system, when it's working it might go three weeks without a trade. When it's getting whipsawed in a choppy market, the system might make several trades a day. But the system is more than just the trading rules. Pat's risk control and discipline complete the model.
The Dubai experiment - and the CTA, for that matter - is just a blip in Pat's career. Introduced to futures by Alpha Delta Gamma fraternity brothers while at Loyola University, the elder Hennessy came to the Chicago Board of Trade as a runner right out of college in 1951. He stepped into the oats pit as a local that December, and there, safe from the relative wildness of soybeans and corn, he learned trading discipline. After a year, he was comfortable enough to "follow the volume," trading whichever contract offered the most liquidity and opportunity that day.
One day that brought extraordinary opportunity - for both profit and loss - and taught Pat a great deal about risk was the day President John F. …