Jazz Pianist Turns Hedge Fund Quant With Sale of Options Startup

(Bloomberg) -- Larry Richards, a trained jazz pianist and former phone-company executive, is an unlikely entrepreneur in the esoteric world of stock options.

Just three years after taking an online course on equity derivatives, Richards set up his own company in 2013 to develop trading software for individual investors and small funds. At the end of 2016, the 53-year-old sold the firm to Wall Street hedge fund Gammon Capital, becoming that company’s chief technology officer.

“They say one in 10 startups succeeds,” Richards, who co-founded Iota Technologies Pte with two others, said by phone from his home in Fukushima, Japan, near the site of the 2011 nuclear disaster. “To be among the 10 percent is such a relief.”

When Richards took a course in options trading at a mentoring school set up by former Chicago Board Options Exchange market maker Dan Sheridan, he became convinced the tools available to smaller investors were too crude. Using coding skills he’d been teaching himself since high school, he created a program that allowed traders to backtest positions systematically before they put money at risk. Then, by adding a branch of machine learning called predictive modeling, he made the models more sophisticated.

Iota’s software caught the eye of derivatives-arbitrage trader Michael Mescher, the founder and chief investment officer of New York-based Gammon. Mescher decided to buy the company so nobody else could get the benefits of its technology. The two signed the final paperwork on the deal in December, which took Richards and a team of five engineers to Gammon.

‘Absolutely Amazing’

The technology “was absolutely amazing,” Mescher said in a phone interview. “It was years ahead of the current standard.”

Mescher says Gammon’s Sharpe ratio, a measure of risk-adjusted return, has almost tripled since he started processing his strategies through Richards’ software in May. The firm, which manages $20 million in separate accounts, posted an annualized return of 40 percent from May 1 through the end of January, Mescher says. That compares with an annualized figure of 24 percent from July 2015 through the end of April last year. Gammon is planning to start a commingled fund in the second quarter, which Richards says should help it increase assets.

Richards studied music at the University of North Texas before heading to Japan on a scholarship to research the country’s jazz history, focusing on the pre-World War II era. While teaching music in the Fukushima area north of Tokyo and occasionally performing as a jazz pianist, he met his wife and settled down, becoming fluent in Japanese.

Bar Mitzvahs

“I realized where I was in the pyramid, and if I were to pursue a career as a performer, I would be doing Bar Mitzvahs and weddings for $100 a night for the rest of my life,” Richards says.

Luckily, Japan’s mobile-phone business was hiring. Richards started working in the industry in 1994, developing wireless infrastructure for companies including Ericsson AB and Nec Corp.

“When I joined, they were looking for anybody who had a pulse and who was bilingual, and I satisfied both requirements,” he says.

As the industry matured and more low-cost players entered from China and elsewhere, Richards says it became less attractive. He took early retirement from Alcatel-Lucent SA in 2010 to pursue the interest in options trading he’d developed by subscribing to programs offered by the Motley Fool.

Frustrated with the trading tools he was using, Richards founded Iota Technologies with David Wilt and Jonathan Kirk. They hired a bunch of engineers and others from Manila to Budapest, who helped write about a million lines of code. The company started offering its main software program to individual traders and others in early 2015, upgrading it with machine learning capabilities along the way.

Venture Financing

The Louisiana native Richards says he struggled with getting financing to expand his business because the options industry is too niche to appeal to most venture capital investors. Not only that, he overestimated how many traders might be interested in his program.

Just as Richards was thinking he should use the models to trade rather than market them as a service, Gammon stepped in with an offer to buy the company. Richards, who declined to disclose the terms of the sale, now serves as CTO for the fund from his home in Fukushima, and still performs jazz every couple of months. He’s looking at ways to help increase Gammon’s assets under management, and has no regrets about no longer being his own boss.

“There were times when I thought as CEO of a startup that we weren’t going to make it,” he says. “I’m much happier now that I’m not sitting in the entrepreneurial chair.”

(Updates with details on Richards from eighth paragraph.)

To contact the reporters on this story: Tom Redmond in Tokyo at tredmond3@bloomberg.net, Brian Fowler in Tokyo at bfowler4@bloomberg.net. To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Sarah McDonald

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