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RICH DENNIS: A
GUNSLINGER NO MORE
The 1980s' superstar commodities trader, is now doing
what his computer tells him
For years, Richard J. Dennis lived by his wits in the commodity
markets--and quite a living it was. His knack for the quick kill made him an
estimated $200 million in the 1980s and brought him fame unmatched by
any other futures trader. Then his instincts failed him. By the early 1990s,
having lost tens of millions for his customers, he quit the business. Now, he's
trading again, with a difference.

Instead of acting directly on his thoughts, theories, and impulses, Dennis

translates them into computer programs. When those bits and bytes align
with market prices, the computer orders a trade. Under an agreement with a
third-party broker who controls most of his customer funds, Dennis must
follow the system. No matter what his gut tells him, discretion isn't allowed.
So far, the deal has paid off: With a 111% gain in 1996, Dennis once again
ranked among the world's top-performing commodity traders. ''The left side
of my brain has put the right side out of business,'' the soft-spoken
48-year-old explains.

HUGE LOSSES. Dennis' transformation to robo-trader could prove

significant. In derivatives markets, taming traders is the preeminent
risk-management problem--just ask Barings PLC or Sumitomo Bank Ltd. A
computer system that limits potential losses has great appeal. In Dennis'
case, his goal was to separate a brain loaded with money-making insights
from the heart of a gunslinger. By the time he retired in 1988, he had shot
himself in the foot by making unusually risky trades--purchasing huge
quantities of options just before they expired and became worthless, for
example. In one day, he lost $8 million in a soybean trade gone bad. Losses
in his personal accounts paralleled those of his funds. Adding insult to
injury, an early 1990s comeback attempt flamed out in months.

Now, the system curbs Dennis' tendency to go off on fliers by imposing

strict risk parameters. In programming the computer to evaluate price,
volume, and other market data in search of profitable trades, Dennis says he
employs only strategies that have survived rigorous testing and proved
successful in the past. While many traders employ computer models, such

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rigid systems remain more the exception than the rule; most traders keep
some discretion.

Despite his past big losses, customers have responded enthusiastically to

Dennis' new approach. So far, they've given his Dennis Trading Group Inc.
$85 million to manage, up from $2 million at the beginning of 1996. ''What I
see here is completely different from the way he was before,'' says Bob
Collins of Rosenthal Collins Group, an investor in the fund whose firm has
cleared trades for Dennis since the 1970s. ''It's very disciplined and
regimented.''

If the past is any guide, Dennis is reaching the point where his computers
will be truly tested. A review of his trading over the past decade shows that,
like many traders, he has performed best when handling relatively small
amounts of money. In 1987 and 1988, when he was trading as much as $159
million, his net loss after fees was $60 million. And in 1992, when his equity
climbed as high as $86 million, he lost $48 million. So far, the fast growth of
his stake hasn't caused him to spin out of control, though it may have slowed
him down. Through February, he was up 6% for the year, compared with
nearly 10% a year earlier.

By thwarting the impulses that led to huge losses in the past, the computers
have freed him to concentrate on the theorizing that was always his greatest
love, Dennis says. His faith in his new system has led him to promote
himself aggressively, even though he swore in the late 1980s that he'd never
trade again, except as a pastime. He changed his mind, he says, because he
wants to build a war chest to support a variety of philanthropic and political
goals--among them, legalizing marijuana and aiding victims of domestic
abuse. Money, he says, ''is the main ingredient if you want to influence
things.''

Like many kids growing up in blue-collar Chicago, Dennis viewed the city's
futures exchanges as his best shot at riches. He became fascinated with
trading even before he was old enough to enter the pits. While still a
teenager, he persuaded his dad, a city engineer, to fill orders for him. Before
long, the plump, bookish kid had lost half his father's life savings and his
younger brother's pizza-delivery money, too. ''I made every mistake 10 times
over before I was 21,'' he says. Yet even as he learned through painful trial
and error to anticipate price movements, he never lost the courage to bet the
ranch. He made his first million by age 25, and his fortune soared over the
next decade. Never married, he remains close to his brother, Tom, a veteran
trader and his longtime partner. He guards his privacy carefully and declined
to be photographed for this article.

By 1984, Dennis was one of the biggest single traders in the commodity
markets, and mere rumors that he might be buying or selling would move
prices. When he placed classified ads proclaiming ''trader wanted,'' he got
some 1,000 responses from people eager to learn his secrets. He settled on
fewer than two dozen novices--among them two professional gamblers and a
fantasy-game designer--and after a two-week training program, he gave
them money to trade under his firm's auspices. Several went on to become
top commodity-fund managers, including Jerry Parker of Chesapeake
Capital Corp., who now manages more than $1 billion. ''It was sink or swim.
Sort of an experiment,'' recalls Parker, a former accountant. Dennis ran the
training, Parker says, ''because he wanted to have a certain chunk of money
traded using systematic rules'' while he went on and tried out new
techniques.

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As Dennis' bank account grew, his interest in influencing public affairs grew
along with it. Starting with a $1,000 donation to George McGovern in 1972,
he has given $10 million to politicians, he reckons. An additional $20 million
went to a think tank he founded in the early 1980s and closed in 1989, and
still more went to a private foundation, he says. While some of the money
paid for domestic-violence shelters, his chief cause is decriminalizing pot,
which he calls good economic and social policy. ''A lot of people give money
to the heart association,'' he says dryly. ''I try to pick things that are as
unpopular as possible.''

In addition to giving money, Dennis has participated in political debates and

written op-ed pieces and magazine articles, including a 5,000-word article
on the economics of legalizing drugs that ran in The Atlantic in 1990. When
his public funds collapsed in the late 1980s, burned investors accused
Dennis of being so distracted by politics that he failed to monitor trading--an
accusation he disputes. In any case, Dennis says, all his political giving
achieved little. ''I wasn't looking for an ethanol subsidy. I was looking for
specific policy outcomes,'' he says. ''[The politicians] would say, 'What's the
hidden agenda?''' The lack of results helped transform him from liberal to
libertarian. These days, he advocates less government at all levels: ''The rule
of thumb in politics ought to be, when in doubt, don't do it.''

BIG LOAN? Dennis is deeply bitter about a class action brought against him
by investors after his big losses. In 1990, plaintiffs concluded that he was
''financially strapped'' and ''debt-ridden,'' and court records say he agreed to
borrow $2.5 million from his brother for a settlement. Dennis says his net
worth has been in the millions for more than 20 years and that he paid the
settlement. But Philadelphia attorney Merrill G. Davidoff, who represented
plaintiffs, insists: ''He had no money.''

That's not an issue any longer. The question now is whether he can maintain
his phenomenal rates of return. Will he substitute nerve endings for
microchips if his results head down? Dennis says no. Yet his funds'
disclosure documents impose no legal obligation to obey the computer. The
fine print must read that way, his partners say, so that Dennis can exit
markets quickly in the event of war or financial meltdown. If he overruled
the computer under less drastic circumstances, ''We would close our
accounts,'' says Esther Goodman of Kenmar Holdings Inc., the firm that
reconciles Dennis' computer signals with his trading blotter on behalf of
customers. Still, for investors it's a matter of trust that Dennis, once so quick
to shoot from the hip, will keep his guns holstered in bad times as well as
good.

By Greg Burns in Chicago

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