John Henry: Back in the Game

The Boston Red Sox’s owner has suffered losses and declining assets at his commodities trading firm. Investors hope a call on oil trends is the start of a new winning streak.

By Kambiz Foroohar Bloomberg Markets, August 2009

On a late Friday afternoon in April, Boston Red Sox fans filter through the turnstiles at Fenway Park. Out on the field, New York Yankees stars Johnny Damon, Derek Jeter and Mariano Rivera stretch before the season’s first clash in one of the biggest rivalries in U.S. professional sports.

John W. Henry, 59, principal owner of the Red Sox and chairman of his namesake investment company, greets diners at the restaurant above home plate with his soon-to-be third wife, Linda Pizzuti, 30.

Henry, 6 feet tall with silver-streaked hair, wears a dark jacket, blue jeans and black glasses that make him look like a professor. His diamond-and-ruby encrusted 2007 World Series championship ring belies that image. As he heads to his box seat next to the dugout, well-wishers, many wearing Red Sox jerseys, clamor to say hello. Henry avoids eye contact and keeps his voice barely above a whisper.

“We were in the Louvre, in Paris, and four men came up to shake his hand,” says Pizzuti, wearing a red top and black jeans as she recalls the trip the couple took in the summer of 2008. The previous October, the Sox had won the World Series for the second time in four seasons. “I hadn’t realized what a big deal this was,” she says. “Here were grown men close to crying.”

Home Run

John W. Henry & Co.’s investment performance is also stoking enthusiasm. His $123 million JWH Global Analytics fund ended 2008 with a 91 percent return for the year, in contrast to the 38 percent plunge in the Standard & Poor’s 500 Index. To top it off, Henry met Pizzuti at the Alibi Bar in Boston’s Liberty Hotel in June 2008. Pizzuti, who has a master’s degree in real estate development from Massachusetts Institute of Technology, works at her father’s firm, Pizzuti Development LLC in Boston. She and Henry are scheduled to marry this weekend.

Henry is on a winning streak after three bleak years at his Boca Raton, Florida-based firm, a so-called commodity trading adviser, or CTA, that uses mathematical models to spot market trends.

Just a few months after champagne corks popped in October 2004 for Boston’s first World Series championship in 86 years, Henry’s investments began to tank. His longest-running fund, the Financial and Metals Portfolio, lost 39 percent from January 2005 through March 2007. JWH’s assets dwindled to less than $300 million by the end of 2008 from a peak of $3.4 billion in 2005. Merrill Lynch & Co., JWH’s biggest investor, withdrew its $600 million in investments in June 2007.

“They pulled the plug at the worst possible time for their clients,” Henry says of the end of the 20-year relationship. “But we were responsible for putting them in that position.”

Long-Term Trends

Like most CTAs, Henry’s firm buys and sells commodity futures and options. About half of Henry’s bets are in such areas as currencies, interest rates and stock indexes.

The son of a farmer, Henry drifted between colleges in Southern California and started trading soybean and corn futures in his 20s. These days, JWH invests in more than 80 markets, among them coffee and gold futures. Henry’s approach differs from that of his rivals in the $198 billion CTA market, which also goes by the name managed futures.

His computer programs look for trends that last more than 30 days -- longer than the 10 days for short-term trading strategies, according to Emanuel Balarie, managing director of Chicago-based financial adviser Balarie Capital Management.

Henry has stuck with the strategy since he founded JWH in 1982. When his programs find a trade, he bets as much as six times the fund’s assets and about double what peers wager.

‘Come Back’

“It can be difficult for those who don’t fully understand our approach to believe we will come back from a poor performance,” he says.

Henry’s tactics paid off last year when his computers captured the rise and fall in energy prices. Crude oil futures surged 51 percent in the first half of 2008 to $145.29 a barrel on July 3. Then oil and natural gas futures fell for the rest of 2008. Natural gas tumbled 33 percent in 18 trading days in July; crude plunged 69 percent to close the year at $44.60.

Even as JWH Global Analytics almost doubled investors’ returns in 2008 -- the third-best performance among CTA funds with at least $100 million, according to Fairfield, Iowa-based BarclayHedge -- Henry is finding it hard to attract clients.

In 1995, JWH was one of the largest firms of its type, controlling 6 percent of the $15 billion in global CTA assets. By 2002, as investments in CTAs climbed to $50 billion, Henry’s market share dropped to 2.5 percent.

Shrinking Share

By the end of last year, JWH Global Analytics, which held 52 percent of the firm’s $260 million of assets, ranked 173rd out of 969 CTA funds, according to BarclayHedge. Man Group Plc, Winton Capital Management, BlueCrest Capital Management and Aspect Capital, all based in London, control $40 billion, or 20 percent of total CTA assets.

JWH’s investments can swing 20 percent in a month, making pension funds and institutional investors queasy. In 2005, the average CTA fund gained 1.7 percent; Financial and Metals lost 17 percent. In the first five months of 2009, JWH Global Analytics dropped 5.5 percent compared with a 0.58 percent decline for the Barclay CTA Index. Other JWH funds have fallen more than 10 percent in 2009.

‘Check-Box Mentality’

“Institutions have a check-box mentality,” says President Kenneth Webster, who runs JWH from the third floor of a steel- and-glass complex in Boca Raton. JWH has found it easier to attract wealthy investors than to lure pension funds, he says. “Our volatility and drawdowns scare off institutions,” he says.

Henry says he’s not about to alter his trading programs. The Financial and Metals Portfolio delivered a 22 percent annual return over 25 years. Markets are always changing, and long-term trends will emerge, he says. If he bets on a position and the market moves against him, he bails, taking a small loss. When he’s right, he holds on for gains.

“We buy high and sell low,” he says as he heads to his Fenway box. It’s not a slip of the tongue. “We’re right 38 percent to 40 percent of the time,” he explains. “The key is how much money is allocated to the winning trades.”

Henry blames losses on the lack of sustained trends and on markets where prices change direction frequently.

“The key is not losing money when you’re waiting for trends to develop,” says Ken Steben, president of Rockville, Maryland-based money management firm Steben & Co., which allocates $1 billion to CTA funds. “Investors don’t like 40 percent drawdowns.”

Focus on Research

Aspect, Winton and other CTA firms have armies of mathematicians, physicists and engineers who devise tools to detect trends, says Andrew Lo, director of the Laboratory for Financial Engineering at MIT.

“Traditional CTAs, with a small research staff, will have a more difficult time competing,” he says.

Henry’s firm relies on six traders in Boca Raton, a community of 86,000 residents 50 miles (80 kilometers) north of Miami. His $6 million, 30,000-square-foot (2,787-square-meter) home there has a recording studio. He berths his 164-foot (50- meter) yacht, Iroquois, at nearby Rowes Wharf.

Last year, he paid $16 million for the 18,000-square-foot former estate of Los Angeles Dodgers owner Frank McCourt in Brookline, Massachusetts. He then applied for planning permission to knock it down to make way for a home of his liking. The old house is now gone.

Quiet Trading

On this sunny late-March day in Florida, two JWH traders in white shirts sit at computers in a glass-enclosed room. Flat- screen TVs on one wall broadcast business news; a 5-foot-wide photograph of frenzied traders at the Chicago Mercantile Ex- change adorns another.

Henry doesn’t spend much time at the office. In 2007, he named Webster, 44, president and chief operating officer of JWH. A graduate of Pace University in New York, Webster has been with the firm for 15 years.

On most days, the room is quiet as computers scan markets. A central system alerts traders to when they should place a trade for, say, oil futures contracts at a particular price. Another proprietary system, dubbed “mini-me,” checks trades against the program. Henry, who rarely goes to bed before 2 a.m., reviews Asian markets and sends e-mails to his investment team in the early morning hours.

“That’s when he gets a lot of his ideas,” Webster says.

Farmer’s Son

Multimillion-dollar trades, dual mansions and a private yacht are a long way from Arkansas, where Henry moved as an infant from Quincy, Illinois. Yet baseball, statistics and an obsession with winning have remained constants.

At home in Forrest City, Arkansas, 95 miles northeast of Little Rock, Henry listened to radio broadcasts of St. Louis Cardinals games. He cheered for outfielder Stan Musial, who’d go on to rack up 475 home runs in 22 seasons. Henry himself waves off his own Little League efforts.

“I was not very good,” he says.

Instead, he started keeping scores and calculating batting averages and pitchers’ earned run averages in his head. The family moved to Apple Valley, California, about 80 miles outside of Los Angeles, in the mid 1960s, when Henry was a teenager. He attended the University of California at both Irvine and Los Angeles. He never got a degree, instead taking philosophy courses, playing guitar and touring with a rock band called Elysian Fields.

“The Beatles were a big hit when I was 13,” he says. “Every boy in America wanted screaming women.”

At UCLA, he and a college instructor published a strategy on how to beat the odds at blackjack. Henry says he was ejected from tables at Las Vegas casinos at age 22.

Card Counter

“I was counting cards,” he says, grinning. Counters determine the probability of certain cards, such as tens or aces, being dealt. Although the approach isn’t illegal, casinos ban card counters. “I can count multiple decks,” Henry says. “It’s not hard.”

After Henry’s father died when John was 25, Henry looked for a strategy to protect the family soybean business. He entered the commodities markets, hedging to prevent losses if prices fell before the harvest. He read everything he could on commodities trading.

His favorite authors were William Delbert Gann on technical analysis; Bernard Baruch, who made a fortune in sugar and wrote an autobiography called “Baruch: My Own Story;” and Jesse Livermore, who shorted the stock market in 1929 and made $100 million, according to “Jesse Livermore: World’s Greatest Stock Trader” (Wiley, 2001) by Richard Smitten.

‘Seat of the Pants’

Henry’s early trades in corn, soybeans and wheat were very successful, he says.

“It was seat-of-the-pants investing,” he says. “Bull markets generally make you think you know markets a little better than you actually do.”

In the summer of 1980, Henry was in Norway with his first wife, Mai, a native of the Scandinavian country. Unable to speak the language, he occupied his time developing a trading strategy. He perused decades of prices and, using a calculator, pad and pen, drew charts to get a sense of how markets operated.

“I spent weeks that summer trying to devise a set of rules that would work consistently in all types of markets,“ Henry says. “I gained a sense of the ineffable mystery of markets and the fallacy of thinking that the time period just ahead will look somewhat like a preceding time period.”

Henry came up with betting on long-term trends. He used technical analysis tools such as moving-average price, a statistical method that smooths out fluctuations, to determine when to get into a position and when to exit. When the market goes against him, he sells with a small loss. When several markets turn against him, he can suffer big declines.

Hardworking and Ambitious

After nine months of testing, Henry set up a trading office in Irvine, California, in 1981. He invested family money from the farm in soybeans, corn and other agricultural commodities. Later, he brought on outside investors and expanded into currencies, interest rates and stock indexes.

Former commodities trader Jack Forest recalls Henry pulling up in a Ferrari to see him.

“He was definitely the most ambitious and hardworking of the bunch,” says Forest, who’s now a partner at Sunrise Capital Partners LLC, a Solana Beach, California-based managed futures firm that oversees $1 billion. “We were more laid back.”

Henry started his Financial and Metals Portfolio in 1984. Two years later, it gained 61 percent; in 1987, when the Dow Jones Industrial Average tumbled 23 percent in one day, the fund soared 252 percent. Henry made so much money that he considered retiring at age 38.

Going to Boca

Instead, he left day-to-day management in 1989 and moved his offices to Westport, Connecticut, to be closer to New York, which is about 50 miles south. In 1991, he set up trading in Boca Raton.

By the mid-1990s, Henry was managing $1.5 billion and charging 4 percent of assets as a management fee and 15 percent of profits for performance. Today, he charges a 2 percent fee and takes 20 percent of profits, which is more in line with the hedge fund industry.

At the end of the decade, he’d racked up seven winning years -- including an 84 percent gain in 1990, when oil prices took off after Iraq invaded Kuwait that August. From July 1 to Oct. 9 of that year, oil futures soared 142 percent on fear of supply disruptions.

‘A Lot of Money’

“His style worked for him,” says Gene Donney, founding partner at managed futures firm Dostan LLC in Boca Raton. “He’s made a lot of money and for years was charging investors the sort of fees you don’t see anymore.”

With his finances secure, Henry pursued his childhood passion for baseball. In 1989, he’d bought the West Palm Beach Tropics of the Florida-based Senior Professional Baseball Association. The roster included retired sluggers like Dave Kingman, who’d hit 442 homers for such teams as the New York Mets and San Francisco Giants. The league lasted a season and a half.

Next, he acquired a 50 percent stake in the minor league Tucson Toros in Arizona. In 1991, Henry took a 1 percent stake in the Yankees for an undisclosed amount. He sold after acquiring the Red Sox in 2002.

“In 1980, Henry told me, ‘I’m going buy the St. Louis Cardinals,’” says Mark Rosenberg, chairman of Stamford, Connecticut-based hedge fund firm SSARIS Advisors LLC. “I told him, ‘You don’t have any money,’ but he always believed he would.”

‘Going Home’

Instead of the Cardinals, Henry acquired the Florida Marlins for $158 million from Wayne Huizenga, who owned the Miami Dolphins and co-founded Blockbuster Inc. and Waste Management Inc. Henry failed to get politicians to back taxes to help fund a new ballpark in Miami.

He put the Marlins up for sale in 2001 and went after the Anaheim Angels, now called the Los Angeles Angels of Anaheim. “It would have been like going home,” Henry says of his California roots.

Henry gave up negotiating with Angels owner Walt Disney Co. in November 2001. He joined Larry Lucchino, 63, former CEO of the Baltimore Orioles and the San Diego Padres and television producer Tom Werner, 59, in pursuing the Red Sox.

Thomas Yawkey had bought the team from Robert Quinn in 1933 for $1.2 million. In 2000, the Yawkey Trust, which had controlled the Sox since the deaths of Yawkey in 1976 and his widow, Jean, in 1992, was selling. There were six bids, including one by Charles Dolan, chairman of Cablevision Systems Corp., which owns the New York Knicks basketball team.

Red Sox Acquisition

Henry, Lucchino and Werner made a $660 million offer in December 2001 and said they’d assume $40 million in debt. The group waited in a suite in the Boston Sheraton hotel for news from the officials of the Yawkey Trust, who met for almost nine hours.

“We had not heard anything and got dressed in jeans,” Henry says. “Then we saw on the TV that we’d won.”

Henry and his partners set about rejuvenating baseball’s second-most lucrative franchise, behind the Yankees, says Andrew Zimbalist, an economics professor at Smith College in Northampton, Massachusetts, who’s written about baseball finance.

“It was 180 degrees from previous management,” Zimbalist says, referring to former CEO John Harrington, who’d focused on a never-fulfilled desire to build a new ballpark.

Sprucing Up Fenway

Instead, Henry refurbished Fenway. He added 269 seats on top of the fabled Green Monster, the 37-foot left-field wall, and additional spots to accommodate more than 37,000 fans, up from 34,000 in 2001.

As of June 16, Boston had sold out 498 straight home games, a major league record. The Yankees are having trouble drawing big spenders to their new $1.5 billion stadium. On April 28, the team cut some premium seats to $1,250 from $2,500. At Fenway, the highest price is $325.

Henry brought in Bill James as a senior adviser to the team. Over the years, James had devised tools such as runs created and other formulas to analyze the game. Most baseball managers were skeptical of his methods, yet Henry, with his love of statistics, was a fan. CEO Lucchino promoted Theo Epstein, then 28, whom he’d hired as an assistant, to general manager in November 2002, making him the youngest GM in the history of major league baseball at the time.

Red Sox Comeback

In 2003, the second full year under Henry’s crew, the Red Sox reached the American League Championship Series for the first time since 1999, only to lose to the Yankees. The team appeared headed for the same fate in 2004. The Sox were three outs from elimination in the ALCS after losing three games to the Yankees.

No baseball team had ever come back from a 3-0 deficit in a best-of-seven series. Down 4-3 in the ninth inning, the Sox rallied to win 6-4 in extra innings. Boston added three more victories to beat the Yankees for the AL pennant and then swept Henry’s childhood favorite, the Cardinals, in four games to win the World Series.

The next year was less auspicious. The Chicago White Sox eliminated Boston three games to none in the first round of the playoffs. Epstein quit over disagreements with Lucchino.

Henry’s Doubt

“Maybe I’m not fit to be the principal owner of the Boston Red Sox,” Henry said at a Fenway press conference in November 2005.

Henry lured Epstein back in January 2006 with promises of more control and younger players. Henry has since become more involved in decision making. He paid $51.1 million to the Saitama Seibu Lions for the right to negotiate with Japanese pitcher Daisuke Matsuzaka, who signed a $52 million, six-year contract with Boston in 2006.

Henry was also involved in talks over Manny Ramirez, who left for the Dodgers in 2008. In May, Ramirez, who’s hit 533 career home runs, was suspended for 50 games for violating drug rules. Ramirez said in a statement the drug involved wasn’t a steroid. He didn’t appeal the suspension.

While Henry had a great 2004 with the Red Sox, life at his investment firm started to get less rosy. In 2005, 9 of Henry’s 11 funds posted losses of 10 percent or more. A bet on 30-year Treasury futures flopped. When rising December temperatures sent natural gas prices down 29 percent, that investment lost money too.

Merrill Lynch wanted Henry to alter his computer programs to reduce volatility, Webster recalls.

‘Markets Will Come Back’

“Merrill said other firms had made modifications to their systems and they couldn’t see that we had made those changes,” he says. “John Henry told them the markets have not changed and trends will emerge.” Merrill Lynch declined to comment.

Inside JWH, the investment policy committee engaged in long discussions on how to break out of the slump, says Jules Staniewicz, a former vice president and senior strategist at JWH.

“If you accept that markets will come back, then research is not so important and there is no need to change,” says Staniewicz, who left in 2007 after 15 years at the firm. That was Henry’s view -- and it prevailed. “The decision making was concentrated in Boston, and it was not a debate that was going to be won,” Staniewicz says, referring to Henry’s home during baseball season.

Henry and Chief Investment Officer Matthew Driscoll crunched data on price movements of commodities, currencies and interest rates to create another fund. Rivals were introducing short-to-medium-term strategies to capture trends lasting a few days rather than the 30 to 45 days at JWH.

Even Longer

Not Henry. The new JWH Diversified Plus had an even longer horizon: 45 to 60 days. It gained 24 percent in 2007 and 42 percent in 2008 with a bet on crude oil’s rise. The program was slow in determining the downward trend in July 2008. This year, it’s lost 5 percent through May.

During the Red Sox-Yankees battle in April, there are few positive signs as Henry watches from his box seat.

It’s 2-2 in the top of the seventh inning. Mark Teixeira, who snubbed Henry during the off-season to sign with New York, singles to center field, scoring Jeter. Robinson Cano’s sacrifice fly drives in another run. The Yankees take a 4-2 lead into the bottom of the ninth.

Rivera, New York’s star closer, gets the first out. Then Jason Bay, acquired from the Pittsburgh Pirates in the trade that sent Ramirez to the Dodgers, hits a two-run homer. The game goes into extra innings. Kevin Youkilis blasts the ball over the Green Monster in the 11th. Boston wins 5-4.

Henry is as charged up as the sellout Fenway crowd. One swing of the bat turned the game. If his computers can capture a market trend like they did last year with oil, Henry may have a shot at another year when both the Red Sox and his investors are winners.

Kambiz Foroohar is a senior writer at Bloomberg News in New York. kforoohar@bloomberg.net

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