Gerry Black and Jeff Dean are used to people calling them crazy. They've heard it from friends and from brokers on the golf course. But they don't let it faze them — they chalk it up to people not understanding options.
Perhaps appropriately, their company's name is ITB Capital Management. ITB stands for “In the Black.” The company specializes in alternative investments, trading derivatives on the S&P 500.
It's difficult for many to understand the firm's strategy, for it relies on the volatility of the market rather than directional moves. For most investments, “if the market is up, you're doing well. If the market is down, it sucks,” Black says. “With this strategy, it doesn't have to go down when the market goes down.”
Black and Dean started trading together in 1995, but started their first fund in 2006. They projected to start with around $20 million to $25 million under management, but they ended up with more than $60 million in the first year. They now have more than $200 million in assets under management.
Today, ITB runs three commodity pools and six individually managed accounts, each with different levels of volatility and risk. The firm's portfolio has maintained an average 25% return over the last five years. According to Vanguard, the S&P 500 Index had a 16.8% average annual return over the last five years during the same period.
Most investors track the return on the funds based on the month, rather than concentrating on the bigger picture, according to Dean. Out of the last 36 months, ITB was up in 30 months and down in six.
“That's the nature of the beast,” Black says. But recovery rates are more accelerated than investing in a mutual fund, and the strategy is also easy to liquidate, he says. “We can be 100% cash in three weeks.”
In the early '90s, Black and Dean realized they both liked to trade outside the norm of stocks and bonds. After trading together for a decade, Black asked Dean if he wanted to leave his post as chief operating officer of a large building products firm to “start a commodities pool with nothing.”
Dean always knew he wanted to trade full time. Even during his 12-year career as a lawyer, his colleagues would come into his office and catch him with an antenna stick in the window to get quotes to trade during the day. He agreed to Black's proposal.
Black was president of his father's financial investment firm, James I Black and Co. in Lakeland, and had been working as a retail broker for 40 years. He told a book of his clients that he had put money in ITB's new fund, so they agreed to invest as well.
Charging the industry standard of a 2% management fee and 20% incentive fee, the duo has more than 120 individual investors and two institutional accounts, but every investor knows someone at the company.
Investing money for friends and family is not always easy, and can be a bit dicey, Black admits. The duo's saving grace is that their own money is tied up in the funds as well. “Our skin is in the game, we're invested,” Black says.
The Tampa-based firm has eight employees, but Black, 66, and Dean, 55, are the only two who trade. They have a dedicated line and three guys working on the floor in Chicago.
Dean and Black are constantly updating the portfolio, never content waiting to see what happens. In fact, they have a hard time tearing their eyes away from their screens. They both have CNBC running in multiple rooms in their homes and they keep their phones by the bed.
“It's addictive,” Dean says. “When I take off, I just want to get back on.”
The two both feed off of stress; it's one of the reasons why they're not sure when they'll hire another trader. In a matter of minutes you can make or lose a million dollars. “You can't do this if you don't love stress,” Black says. “When it hits the fan, you have to be able to handle it.”