Capstone chief surfs the highs and lows of market volatility waves
Paul Britton had dreamt of being a trader but he needed a thick skin to survive the Liffe pit
Few people know more about market volatility than Paul Britton.
The founder of New York-based Capstone Investment Advisors, one of the world’s biggest hedge funds specialising in volatility and derivatives trading, has experienced the highs and lows of betting on market choppiness during a career of more than 25 years.
The former floor trader profited handsomely from the late 1990s volatility of the Asian and Russian crises. In the financial crisis he initially made a “shit-tonne” of money before later losses left him “begging for forgiveness” in Wall Street’s Trinity Church. But he profited again in last year’s coronavirus crisis, buying up cheap options from investors unloading their positions, and from the wacky stock volatility of this year’s GameStop saga.
In the process, he has built an $8.9bn-in-assets hedge fund business with a 14-year record of beating global stocks and the hedge fund industry average, from trading inefficiencies in the pricing of derivatives on stocks, bonds and other assets. Its success has allowed Capstone to back philanthropic projects, including a black interns programme.
We chat over several video calls. Britton, tall and with swept-back blond hair and a self-deprecating humour, appears first from his home in rural Connecticut, whose rolling hills remind him of the English countryside. Subsequent appearances are from a near-deserted Capstone office in Manhattan, where he sits against a perplexing background of blue and white squares that he explains are part of the firm’s branding.
Born in Epsom, Surrey, Britton grew up in a single-parent household. He admits to having “always dreamt of being a trader”, inspired in part by his grandfather, a fruit and vegetable trader whom he would accompany on pre-dawn trips to the wholesale market in west London.
In 1994 he started work for Vincent Viola’s Saratoga, wearing the yellow jacket of a trainee trader on the floor of the London International Financial Futures and Options Exchange.
“Immediately, going up the escalators on Cannon Street and opening the huge doors to 3,500 people screaming and yelling at each other, I realised I was home,” he said.
Graduating to a green jacket, he moved to the notorious Italian government bond options pit, run by a small and close-knit group of traders where he quickly had to grow a thick skin.
On his first day Britton was informed by a rival trader that he need not do anything and the other traders would make sure he got a share of the trades going through the pit. After several days of waiting around, and with no trades to show, Britton calmly told his boss about the arrangement.
“You’re more stupid than I thought you were,” replied his boss, adding that if Britton did not complete five trades the next day he could leave the firm.
When Britton tried to compete for one of the trades the next day, a rival trader told him that “if you open your mouth it’ll be the worst thing you do”. Pressing on regardless he bagged eight trades, but suffered “extraordinary” abuse that left him broken by the evening and lasted for months.
“I’d never heard of these words being thrown at me before,” he said. “People would follow me out of the building. You’d always be threatened.”
But he adds: “The pit played an incredible role in building up resistance. It was my moment of thinking, ‘Am I going to be able to survive?’”
After three years on the Liffe floor, Britton opened an office in Amsterdam, where they introduced the hand signals from Liffe, giving them a speed advantage that “would drive the older Dutch traders bananas”.
It also provided a step-change in his career. During the volatile years of 1997 to 1999, Amsterdam proved to be “a gold mine” that meant he could be part of a management team that bought Saratoga and changed the name to Mako.
After a year Britton became CEO of the US business, arriving in New York shortly before the 9/11 attacks. The experience of being in the nearby Nymex building when the planes hit the twin towers and then seeing a city rebuild itself was behind his decision to take a long lease for Capstone in the new complex, at 7 World Trade Center.
He launched Capstone in 2004, originally as a proprietary trading firm using large amounts of leverage, before opening to outside capital in 2007.
When the financial crisis began to ripple through markets, Capstone was well-positioned, making strong returns in a volatile January 2008. Cash from investors poured in.
Britton believed he had found a ceiling for the Vix, the market’s so-called fear gauge of volatility, which even during market shocks such as the Asian crisis or dotcom bust had rarely strayed much above 40.
As volatility rose again to about 40 during that September’s bankruptcy of Lehman Brothers, Capstone began betting the Vix would fall back. Instead, it rose above 80. Capstone had to buy back its exposure at 65.
“We got clobbered,” he admits. “We didn’t respect the markets enough, we didn’t have the humility.”
As the losses mounted, Britton, who is not “a religious person”, found himself walking to Trinity Church on the corner of Wall Street and Broadway to find respite from the office.
“You’re overheating in every aspect,” he said. “[But] it was so cool in there.
“I literally begged for forgiveness,” he said. “I was thinking about how am I going to get out of this.”
Capstone’s assets shrank by several hundred million dollars. But the firm survived, helped by an investment from a big European client.
Despite these bumps, Capstone’s has made an annual return of 7 per cent since 2007, according to a person who had seen the numbers. That included a 20 per cent gain last year, when Capstone — spotting that investors who had amassed options positions in Asia were being hit as coronavirus proved less economically damaging there than in the West — stepped in and bought these positions on the cheap.
GameStop, where options were implying “higher volatility than I’ve ever experienced”, proved another moneymaking opportunity.
In an age of increasing pressure on financial firms to demonstrate not just the economic but also the positive social and environmental positive impact they are having, Capstone has also been instrumental in two recent initiatives.
Capstone president Jonathan Sorrell is a co-founder of
#100blackinterns, which has made 365 offers of internships at investment management firms to young black people, and
#10000blackinterns, which starts next summer and will include a wide range of sectors. Capstone provides the financial support for the programme.
“This is an opportunity to fix the gross underrepresentation of the black community in the financial industry,” said Britton, who encouraged Sorrell to expand the initial programme following its success.
“I think we stand a chance of making a genuine difference to this community.”