Sam Barnett is the 24-year-old founder and CEO of SBB Research Group — a Chicago-area quantitative hedge fund that currently has $US115 million under management.
He started his fund while studying applied mathematics at California Institute of Technology.
SBB Research Group currently employees 14 people and Barnett told us that they’re actively recruiting talented engineers to join their team.
What they aren’t looking for right now though are investors. There’s a waitlist for new ones, Barnett told us. He also said that he’s like to see the fund run more than $US1 billion in assets.
While at CalTech, Barnett played in the No. 1 position on the school’s varsity tennis team. Now he plays tennis professionally competing on the ATP’s Challenger Tour. His highest ranking in doubles was 801 in the world at one point.
On top of running a hedge fund and playing tennis, Barnett is also in the process of earning his PhD from Northwestern. He also teaches two classes at Kellogg School of Management alongside Professor Phillip Braun.
Oh, and he does karate — Barnett has a black belt in the martial art, and continues to train, though he doesn’t compete.
We caught up with him over the phone yesterday and have included a transcript of our conversation below. (Note: It has been lightly edited for clarity)
BI: First off, tell us how you got interested in the markets.
SB: Well, I’ve been interested in the markets for quite sometime. It dates back to when I was in elementary school. I was good at maths and interested in this kind of stuff. I actually played in a stock picking game in school when I was in 5th grade. That’s how I get interested in the markets, first. So basically I was interested in that, but really I was studying maths throughout my entire academic career and then I went to CalTech and majored in Applied Maths. And really just pursuing numbers and looking for patterns and finance is a great way to apply that skill. And being able to combine numbers with competition, you know, I’ve enjoyed athletics my whole life and that influences my interest in finance because it basically is the perfect blend between data and keeping score.
BI: I read that when you were in high school you made $US250,000. Talk to me about when you realised this is something you want to pursue.
SB: I think it was working out well. Things I was doing in practice were starting to work well in the market. And, I think when you have good results, that itself is exciting. It’s very motivating to keep pursuing and getting better results. I was always looking for new challenges.
BI: Talk to me about setting up SBB Research Group. How did this all happen?
SB: My sophomore year in college, I was basically starting an experiment to just see whether my algorithmic trading model I developed at CalTech would work. And basically it worked really well. I started with $US2 million over the summer after my sophomore year. And just before the beginning of my junior year I founded SBB Research Group and decided that it was going so well that I wanted to do it for real. We made all the arrangements to, you know, have an offering starting in February the following year and doing it was professionally as possible and really take it seriously as a business.
BI: And you run a quant-based strategy.
SB: Everything is very mathematically driven. Very disciplined. And we’re constantly looking to cut our risk and outperform the market.
BI: So quant based strategies, they seem to be one of the more polarising subjects on Wall Street. What do you think the most misunderstood aspect of a quant strategy is by the general public?
SB: I think many people think that quant strategies inherently are riskier and quant strategies can be very much the opposite. You’re relying on a disciplined strategy — a formula to invest in the market — rather than intuition and other kinds of subjective measures of how the market’s doing. So in many ways, people think the quant market — the quant driven strategies — are riskier, but, in fact, in our quant strategy we’re able to limit risk much more than the other strategy.
BI: Has the low volatility environment of 2013 been good or a challenge for your quant based strategies?
SB: I think we’re able to find opportunities in every market environment and low volatility this year has been interesting. It’s been different than things in the past, but one of the things that we try to do is we try to develop strategies that are theoretically able to perform in all kinds of markets even conditions that haven’t happened before. And another thing that people misunderstand about quant funds, is many quant funds rely on back-testing data as their main way of producing new strategies. But we develop strategies from a theoretical perspective also and so our strategies don’t require that a particular year looks like any year in the past and that’s really powerful.
BI: A lot of quant strategies fall under 1.) Trend following 2). Mean reversion 3.) Relative value. Which category do you feel that you fall under?
SB: We employ a variety of different strategies that don’t exclusively fall in one category versus another. And also, I should point out that our strategies are not high-frequency. So in terms of the strategies that more typically fall into the categories you outlined are high-frequency strategies looking to capitalise on small deviations from one of those three kind of general models. We’re really looking for true outperformance. When we make a prediction, we’re in particular looking to see that being realised over a business quarter — 90 to 110 days.
BI: Is there any discretionary aspect to your strategies or are they all fully systematic?
SB: Once we have a strategy online, it’s a systematized strategy. When we’re developing the strategy we’re using discretion in terms of coming up with new ideas and trying to formulate our intuition.
BI: I want to talk a little bit more about you. Your routine. How do you manage running a fund, going to school and playing tennis professionally?
SB: First of all, I don’t sleep very much, but I get through the whole day because I have a wonderful team working with me… That really helps me organise everything and be able to accomplish everything that we’re doing. On a daily basis, I go to classes and work on research during the day. I’m also am taking meetings and going to work and checking on things throughout the day. I’m practicing tennis during the night. My tennis club is nice enough to let me play when the club’s closed. Sometimes I’m practicing at 11 or 12 at night, so I’m able to try and get that in as well.
BI: Let’s talk about your tennis career. Tell me about that and what your goal is playing professionally.
SB: I’ve been playing tennis competitively for many years now. I first picked up a racquet when I was five and was pretty competitive by the time I was 10 and was a top ranked junior throughout my junior career. In high school, I was fortunate as a senior to win the state championship in doubles for Illinois…After that, I played in college. I was the No. 1 player in singles and doubles for CalTech. And you know I always hoped throughout my entire tennis career that I would be able to play professionally someday. I was playing really well in college and decided to try and start playing professionally. My lifetime goal was to get a world ranking and I was able to do that. Now I’m just trying to continue to improve and continue to do better and challenge myself more.
BI: Do you find that playing a sport has helped you with your trading?
SB: Absolutely. I mean I’m a competitive person so I like that aspect. I also feel like having an athletic pursuit alongside business endeavours is a good balance. I think of things for my business when I’m on the court. It’s good to have that other perspective and other part of life.
BI: What advice would you give to a young person?
SB: I’d advise that someone focus on the skills in the area that they’re really interested in more so than the actual job or actual application that they think they want to do. I’ve built my career thus far on developing mathematical expertise. I was really interested in playing with data and numbers and that gave me the tools that I needed to launch an algorithmic hedge fund. So I always suggest that people focus on developing skills and studying things that really interest them and also to just keep learning all the time. People ask me all the time ‘Why are you still in school? Why are you in the PhD program?’ and I just tell them that there are so many more things to learn and continuing to hone skills and staying on the cutting edge of research and academia is so important as well.
BI: Speaking of learning, in your experience has there been a major lesson you’ve learned?
SB: I think that’s also something that connects very strongly with athletics. There are wins and losses in everything. You try so many different strategies and you’re trying all these different mathematical ideas and not everything works and it’s important to be patient and to continue looking for really successful ideas when you encounter failure.