An audience with Capstone CEO Paul Britton: What the Lehman crash taught me about markets

Investors hate nothing more than uncertainty. Paul Britton, however, is someone who thrives on it.

The 48-year-old chief executive of specialist derivatives house Capstone Investment Advisors is on a brief trip to London from the US when Financial News pays a visit to the firm’s offices just off Regent Street.

Capstone, which Britton founded in 2004, is headquartered in New York, where it is also hunting for additional office space. But London has grown to become one of Capstone’s biggest footprints, and is home to around 70 of its global pool of 210 portfolio managers.

The stylish, modern office is a far cry from the trading pit where Britton cut his teeth in the early 1990s, when he worked for Saratoga at the bustling London International Financial Futures and Options Exchange.

“It was amazing and a miracle to me that anything got done. It was raucous,” Britton says as he recalls the first time he arrived at LIFFE’s offices as an upstart. The exchange would later become ICE Futures Europe.

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Britton says his early days on the trading floor taught him resilience — no more so than when some senior traders tried to thwart him from taking their share of trades during his first few days in the job.

“I thought they were looking after me,” recalls Britton. “When I explained everything to my boss, he looked at me and said, ‘You absolute idiot’. He told me to go in and make five trades the next day or hand back my badge and hang up my jacket.”

After stints in Amsterdam and New York — where Britton established a US presence for the business shortly after it changed its name to Mako Global Markets following a management buyout — the British-born executive set up Capstone.

Initially, Capstone traded only its own money, but a turning point came in 2007 when it was entrusted with client funds for the first time. However, overseeing external capital proved to be a steep learning curve for the firm, which now manages some $9bn for about 50 clients.

“We underestimated the importance of the non-investment side of managing client money,” Britton says bluntly. “We were very lucky our seed investor is a large pension plan that taught us the standards you needed to achieve to manage large institutional funds. We were lucky that they had patience with us. We always knew how to make money. But asking us about our compliance policy — it was like a whole other world.”

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The money soon came flooding in — just four months after securing its first client, Capstone posted a 10% return. “That led us to believe we were very special,” says Britton.

This high level of confidence was to be short-lived, however, as the world edged towards the global financial crisis. “Later that year, you could feel the market creaking,” says Britton, who made a call shortly after the collapse of Lehman Brothers in September 2008 that the VIX volatility index — the so-called “fear gauge” — had reached the top when it approached 40.

It wasn’t even close to the top — the fear gauge almost reached 90 that October. “We lost a decent amount of money and ended the year down 5%,” says Britton.

Thirteen years on, Britton argues that investors are not paying enough attention to volatility, which has developed into an asset class in its own right for some investors seeking ways not only to protect themselves from it but also to trade it.

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Underappreciating volatility in portfolios is “wickedly dangerous”, suggests Britton, who argues that markets’ continuing to reach new highs over the past 13 years has led to investors focusing less on their volatile nature.

“The notion of buying the dip has worked fantastically. At some stage, you really need to focus on the amount of risk in your portfolio and the level of volatility you are willing to accept,” he says.

Despite large institutional investors often claiming they are long-term in their outlook, Britton says this should not excuse them from exposing themselves to “endless levels of volatility”.

“If you look at the average portfolio over the past 13 years, everyone is carrying more risk,” he says.

“We’ve had 13 years of global central banks expanding their balance sheets to the tune of about $36tn. We all sit here and marvel at the wealth that has been created.

“But we are not geniuses. We have just had the fortune of being part of a multi-generational windfall that has been created by the expansion of central bank policy.”

With the traditional 60/40 portfolio split between equities and bonds now becoming less common as fixed income loses its attractiveness as a diversifier, Britton disagrees with some supporters of cryptocurrencies who claim bitcoin is an effective diversification tool.

“It feels like it is a speculative instrument that has good value for certain participants and constituents of the market,” says Britton.

“We have crypto exposure, but it is because we follow certain trends. We don’t see it as a long-term store of value in portfolios. Large institutional investors will struggle with it because of its ESG component.”

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Like other investment managers, Capstone is looking to improve diversity within its own ranks and across the industry.

Following the murder of George Floyd in May 2020, Britton’s colleague Jonathan Sorrell suggested Capstone should back a scheme to offer internships for black students. Within two weeks, 80 firms had signed up. Britton realised the initiative had the potential to be rolled out on a much larger scale. He asked Sorrell if it was possible to expand to 10,000 internships and include other industries.

“I thought if we can pull it off, we stand a real chance of making a multi-generational impact,” says Britton, adding that more than 11,000 applications were received for the 2022 programme. However, Britton acknowledges that Capstone has work to do. “It’s improving, but nowhere near where I’d like it to be,” he says. “The talent pool is not big enough because there hasn’t been the focus there should be. That has to change.”

The same can be said about the number of women portfolio managers, says Britton.

“It bothers me that there are so few women applicants who want to be part of hedge funds. It is an industry-wide issue that needs to be addressed and won’t fix itself.”



July 1973



BA in European business finance, London Metropolitan University



Founder and CEO, Capstone Investment Advisors


Co-founder, Mako Global Derivatives


Options trader, Saratoga

To contact the author of this story with feedback or news, email David Ricketts

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