The Derivative - It's not whether commodities keep going up, it's whether they remain distinct and volatile with Tim Pickering of Auspice

Episode Date: August 4, 2022

This week we're adding a different twist to our typical episode, and we're diving into WHY Commodities can be accretive in your portfolio with Tim Pickering (@AuspiceTim). Tim is the Founder, President, and CIO of Auspice Capital Advisors and leads the strategic decision-making and the vision for Auspice's diverse suite of award-winning rules-based quantitative investment strategies. In this week's episode, Tim illustrates why the current environment could be very bullish commodities long-term, active tactical strategies, and dives into Trend following, non-correlation, CTAs ability to act as a return-enhancer, inflation protection, and much more! Chapters: 00:00-01:52 = Intro 01:53-09:48 = Born from Canadian Commodity Country 09:49-20:08= Shell Oil and Tactical Active Strategies 20:09-29:19 = The Auspice Edge vs Buy and Hold Commodities 29:20-40:28 = The other 25%, an Agnostic approach & the Adaptive Volatility process 40:29-57:03 = Crisis Alpha Opportunities, Inflation hedges & Institutional products Follow along with Tim Pickering on Twitter @AuspiceTim and Auspice @AuspiceCapital. And for more information on Auspice check out their website and research! Don't forget to subscribe to The Derivative, and follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2, or LinkedIn , and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Welcome to the Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Happy Coast Guard Day, everyone, which was founded by one Alexander Hamilton. Not sure that was in the play, was it? On August 4th, 1790. And speaking of singing statesmen, we're maybe going to get Ben Eifern on here sometime soon. It's like scheduling the actual dead Hamilton at times.

Hard. Plus we have Augustin LeBron, a tail hedge manager and institutional vault trader all coming up over the next couple of weeks. On to this episode, which we hacked from a recent Lunch and Learn webinar I hosted with Auspice Capital's founder and CIO, Tim Pickering. He dished the education on commodities, trend following, oil, fertilizer, volatility, and much more. And I was there to ask some questions of my own, plus some audience questions, which meant, yeah, this is going to be a podcast too. Send it.

This episode is brought to you by the aforementioned Lunch and Learn series by RCM and co-sponsor CME Group. We do about one a month and have mutual fund and private hedge fund managers do a virtual lunch with advisors and investors in a casual, small setting where questions are welcome. Follow us on Twitter at RCM Alts or LinkedIn to catch news of the next one. And we give out Grubhub gift certificates. So yeah, go give our Twitter a follow to get a free lunch on RCM next time around. And now back to the show. Welcome, Tim. How are you?

Good. How are you? I. How are you? I'm pretty good. Thanks. I'll turn it over to Tim to introduce himself and Auspice, and then we can get started. Yeah, well, high level. Auspice has been around since 2005, launched by myself and Ken Corner. Ken and I have been trading virtually side by side since around 2000, so 22 plus years, both at Shell where I brought him in to help support the trading business I was running.

And then both had stops at TD, TD Bank, and then launched Auspice. The idea behind Auspice was take that quantitative skill set I'd started at TD Bank and took to a different level at Shell. Obviously focused a little bit more on the commodity side, energy specifically, and felt we had a unique experience set and a unique strategy that was applicable beyond energies and beyond commodities. And we wanted to expand that, which obviously didn't really fit the Shell world. And we started that in 2005. First fund launched in late 06. One of the things we did different was while we're building up that track record, we felt the ETF space was going to be an interesting one. And we went into the ETF

space very early, first with a very simple product, a beta like ETF exposure based on Canadian natural gas. It was kind of the Bitcoin of the time. And I learned a lot of lessons about the ETF space and indexing and how a rules-based manager fit in that space. We've now continued that with other strategies, more active strategies, more typical CTA like including managed futures strategies as well as broad commodity strategies to compete with the GSCIs and the long only BCOMs of the world. We continue to grow. We run right around $800 million in assets, a fair bit of growth in the last few years. Definitely see the environment we're in as a kind of a new paradigm or maybe back to an old paradigm. We don't really view the volatility we're seeing as outlandish or crazy, but maybe

more back to normal what we saw for the first 10-15 years of our career so kind of doing what we do uh not much different and uh it's an opportune environment it's an exciting one awesome um and just quickly because i always find it super interesting touch on what you were doing at shell were you slinging around hundreds of millions of barrels of oil and derivatives? Yeah. So my part of Shell was almost just think of it being the CTA, being the non correlation focused on energies, but going about those markets or trading those markets in a way different from a large part of the trading team, which was physical and fundamental.

So Shell had assets, whether it's pipeline rights, logistics, storage, and would trade around those assets, if you will, or that optionality. Our job was to go out and create exposure that was non-correlated. So trade those same energy markets, but do it in a non-correlated way that was accretive. So really the CTA philosophy. At the time, we didn't really know what a CTA was. We were quantitative and trend following is where most managers go. We all want to follow trends, whether your driver is technical or fundamental. And so we were to provide that non-correlation. A lot of it was focused on obviously the energies,

but again, natural gas really was the proving ground, not only at Shell, but early formative years of my career at TD Bank in that natural gas teaches you a lot about risk, a lot about how to capture trends because they change very quickly in that heretic commodity. And that really became the basis for what our systematic rules-based approach still is today, has become. And you mentioned you guys had that white paper a little while ago

talking about this new kind of, or as we said, a return to normal commodity volatility environment. Can you dig into that a little bit more and what you guys found there? Yeah, well, so from a commodity perspective, I think we are, we're back to something that's normal. If you look back, you know, many years, you know, it could be everything from interest rates to inflation to just the overall volatility level. There was a lot, a lot of opportunities. And then we went through this period that was post financial crisis that was really driven by quantitative easing. And kind of what we view as a bit of an artificial environment. The question is, you know, where are we going from here?

And we think, you know, we're back to sort of that more normal state. Yeah, we're going to have the odd chaotic event. COVID for sure, you know, started that way. It moderated fairly quickly Russia Ukraine you know but these things happen but when we look at the environment more now whether it's CPI VIX just overall volatility level and that opportunity set for CTAs you know we think we're kind of back to a more normal environment, not that artificially compressed environment that we saw driven by quantitative easing and the financial crisis. And that doesn't matter up or down. You're not saying we're back to this up market. It's just we're back to bigger ranges, more opportunity.

Yeah, exactly. And I think that's a super important point is, is, you know, because we're a commodity tilted CTA and something I haven't mentioned, we run about 75% commodity risk, even in our diversified flagship CTA, which is different from many CTAs. It's not because we just believe in bullish commodity scenario. What we believe is that commodities are the most diverse asset class. They provide the most opportunity. They are a little bit more volatile typically. And cotton's not like crude, not like coffee, not like canola. And that's a great opportunity set.

And we're back towards an environment where those up and down scenarios exist. Let's just go back three years when this sort of regime shifted out of the, you know, the low volatility, morose environment of a 2019. And that had continued into 2019 for many years. What happened? Well, we sold off. So it wasn't just because we were bullish commodities. In fact, we were bullish commodities overall, you know, coming out of 2019. But that wasn't the opportunity,

you had to be agnostic about it. The opportunity in Q1 of 2020 was to get short quickly, capture that opportunity and flip around and wait for the next opportunity that happened to come along from the long side. But even just look in the last few months, that opportunity set has yet again flipped. So you're right. We are agnostic as to market. We are agnostic commodity or financial. We are tilted commodity,

but we're definitely agnostic up or down. This, as you just mentioned at the end of that this past few months right like there's most everything you would see on twitter in the press these days is cotton's down 40 percent corn's down below where it was at the start of the war all these negative headlines sir you guys have held up well right you're not down 40 percent 40% like some of these markets. So how does that work of being able to capture the upside, but mitigate the downside? Yeah. I mean, it's funny. I've said to colleagues of mine that I think we're a better short trader than we are a long trader in a lot of ways. I mean, trading from the long sides, it's going to sound a bit flippant, but it's a little bit easier as a general progression.

It's kind of like escalator up. But, you know, how can you capture that elevator down? That's the hard part of trading. But, you know, if we go back to those lessons learned at a conservative Canadian bank in TD and trading natural gas, you know, we had to apply ourselves in a certain volatility window. We had to be able to capture those opportunities. And natural gas kind of taught you those lessons about what we call trend capturing versus trend following. And we've seen that a number of times in the last three years. We saw it Q1 of 2020. We saw it again here recently. Now you're right. All of a sudden the narrative in the media and everybody's flipped on while commodities is

over. We think we're so far from that being a reality that it's not even funny. The thing about commodities that people don't seem to get is this isn't Bitcoin. This isn't ones and zeros. You can't flip the supply demand equation on a dime. You can't even flip it in a year or two. These are long term cycles. And you're talking about an area that has been underinvested in for the better part of a decade. CapEx has been in decline since 2012 in oil and gas, mining, and other areas.

So when you consider how challenging it is to invest in the commodity space, and for lots of reasons, we believe that that paradigm is going to last for some time. But we've always said that does not mean it's going to be a one-way street. We're going to see ups and downs, and that is the opportunity in commodities. It makes me think, I don't know if you read that letter of the Petroleum Refiners Association back to President Biden. Biden said, hey guys, help us out. And the letter was basically, hey, we just saw California say no gas engines by 2030. We saw this national mandate. It cost us $100 million to build one of these refinery plants.

Why would we invest in that when it's a 10-year project when you're taking that away in 10 years? Yeah. And you're seeing that in the United States. You're seeing Europe's definitely feeling the effect of that philosophy that started earlier. And Canada, where we're based and where we're from is the same, and I'd argue much worse. You know, we've got a resource-based economy, as everybody kind of understands. Yet we've got a government that is fighting from a policy perspective to make it extremely difficult for the oil and gas space just recently this last week they've come out with some uh

pending uh rules and legislation and policies around fertilizer use for farmers and capping the emissions and making it much more difficult for farmers who are supplying the world's you know the world's grains i mean canada's largest supplier of canola yeah number two in weed or something right yeah so i mean it's you know these governments want these narratives and i think they want them because of political reasons right they want to win votes uh our our leader surely does uh in many regards yet same as as that letter in the u.s you know the uh the suppliers and the people taking risk in this area saying you're not making it any easier for us yet. You want your cake and you want to eat it too. And you want lower gas prices yet.

You're making it very difficult for us. So, you know, these, so this is an interesting point. These are the things we're fighting. And so when we look at commodity cycle drivers, and if I can't, can I share a screen on this? Yeah, go for it. Talk about that. Let's just see if I can pull this off here.

Shuffle a couple of things around. Just while you're doing that, I'll just add one thing that we find we're explaining a lot of times. Commodity trading advisor, what is that? Historically, that registration and that name actually used to be very relevant. CTAs traded commodities. Commodities were a great opportunity set for a number of decades. When you look at the B top 50 or benchmark, you know, that annualized like 9% on 10 vol for I think 30 odd years until we hit QE. So like this opportunity set within commodities historically has been the best. It's

really only over the last decade that we kind of saw, you know, some of our peers, they move more into financials for, you know, what at the time looked like good reasons, fixed income, equity, you know, great trends, commodities not doing well. But, you know, what we're seeing since 2020 is really back, you know, a step back to a more normal environment where we're getting volatility, we're getting moves on the upside, now on the downside as well. And as Tim mentioned, you know, the opportunity set within commodities is just so much higher, the correlation between these markets is lower, the volatility is there, and it's a really great place to trade. Yeah, so for, I haven't introduced Brennan. So Brennan Beznicki is our product specialist at Auspice. He comes from a great background in the CTA space, having allocated to CTAs from TRS Illinois and went on to Campbell & had, we had a bullish commodity market that started in, like, I mean, arguably it started in late 2019. It was one of the biggest calls out of a number of banks and different analysts in 2019. We could see there was an underinvestment in supply. I'll actually going to flip back and just show you that. So this is CapEx on the left and right.

Spending on the right is oil and gas companies and on the left is mining. And so you can see that peaking about 2012. So we've been in decline from a CapEx perspective. Investment in the underlying commodity supply for quite some time. And so that's existed for quite some time. And so where do we get to now? So we see two main drivers for a commodity super cycle. They are an extended period of underinvestment in supply, which we just illustrated with CapEx, and then some sort of generational demand shock.

And of course, immediately say, well, the demand shock is COVID. Well, it's not really COVID per se. It's what comes out of COVID. And so it's the things that cause you to do something different or act. And so what are those generational demand shocks? Well, it's this green transition, right? We want to build back better, but we want to do it better. It means we have to build. The first word's build. We've got decarbonization. We've got ESG and stakeholder capitalism. These things are inherently inflationary and put pressures on the commodity system. That's kind of your catalyst to get going. And if we go around the wheel from the green bubble, what are the other things that we see? Well, we see supply chain complications. We see labor shortages, unionization, aging demographics. We, of course, saw the war between two powerhouses, and that continues. And by the way, we believe in that. That surely didn't start this party. It became sort of just another event, a very serious one.

But what I believe it does is it elongates the problem. Then you've got the overall investment in commodities and inflation protection type products has been underinvested in. I mean, that's just plain and obvious that there's a lot of catch up to be had. I mean, we see a lot of pensions that kind of come in in the third or fourth or fifth inning of things as it gets processed that aren't even there yet. They're on their heels. You've got rising interest rates. We'll talk about that in a second. of things as it gets processed that aren't even there yet. They're on their heels.

You've got rising interest rates. We'll talk about that in a second. You've got potentially the significant reopening of a top economic superpower in China. And then back to that underinvestment and supply, we've got government policies that are impeding resource development and progression. And then that decade, again, of underinvestment. So here we go around in these circles. When we look at all these factors, they are bullish. So So what does the Fed do? The Fed says, well, we're going to rise raise interest rates, we're going to deal with consumer driven inflation. And that's going to solve what that's going to solve the, you know, the commodity problem, it doesn't solve the commodity problem. In fact, we argue that raising interest rates can, you know, yes, it can reduce demand for manufactured goods, but it surely doesn't increase short-term commodity supply.

It surely doesn't incentivize long-term commodity infrastructure investments. It likely doesn't increase labor, you know, labor-related issues or improve them, sorry, aging demographics, supply chain, and surely doesn't resolve pandemics and wars. So perhaps even raising interest rate exacerbates the problem. Yes, it can deal with you and me if we get in our vehicles and if we spend money at Walmart and we're seeing the effects of those things. But long term, we think that setup's there. But what I want to make clear to people is we don't think that's an escalator. We don't think that's one dimensional. We're just going to go up. We're going to have ups and downs. And those down moves are going to be largely aggressive

and violent. And so can you find a manager that is good at capturing that downside flush? That's where we think we have a particular edge which we you know we're welcome to talk about um a few thoughts are one right people still got to eat so right i wish if you raised interest rates i could lose a few pounds right let me eat less but i don't think that's going to happen talk a little bit about right if i'm sitting at an endowment or institution, I'm like, yeah, I get all this. I love this. I agree with all this. That's why I'm going to do 5% in commodities, right? Just a passive 5% in commodities in the Goldman Commodity Index or something. So talk a little bit about how that differs from what you're doing. It seems obvious on its face to me, but just in case others are making that decision

in their portfolios of like, why not just have a standalone, active, long-only commodity allocation? So you said some interesting things there, a standard active, long-only commodity allocation. So there's a pretty big trigger there, and that is active versus passive. I think I meant to say standalone.

Yeah, standalone. So there's the door open. there. And that is active versus passive. I think I meant to say standalone. Yeah, standalone. So there's the door open. I'm going to walk through it. So yeah, okay. So largely commodities have been taken out of portfolios. And I'm going to definitely separate resource equity and commodities. They're different. So let's just put that aside and research on that.

We've got it on our website. But let's talk about how to get that exposure. Long only is one way. And so you go buy the GSCI or the BCOM related products, even find one with a little twist in there. But generally, you're just long only. You're hoping it rises. And it may. And if you look over the last two and a half, three years, I mean, there's been quite a run in commodities and GSCI is up whatever number it is, but it's about your investment experience or your client investment experience during that time. And, you know, these are products that trade anywhere from 18 to 30% vol. They have massive

drawdowns even, you know, in the last couple of years, the GSCI and BCOM have pulled back 50 plus percent. Could you apply principles from the CTA space, i.e. trend following, volatility-based position management, term structure that give you a better experience in that upside? So if we just said we want commodity upside, instead of just being passive, could we be active and what are those things we could do? Well, we know trend following and commodities are two of the key things in terms of fighting inflation. So how do those blend in? So our approach, and we've got a number of products, but one is Auspice Broad Commodity, where we look at a commodity basket, we look at each commodity on its merits, i.e. is it going up or is it going down? And then apply CTA-based sizing and resizing

and risk principles to that. And what comes out in the wash is a much better client experience, whether it's a retail client or a institutional client. And we all want that upside, right? Like it's been a big rally in commodities to start this year. And maybe our product didn't, you know, keep up with the GSCIs for that period, but then you get the flush and it's giving back far less because we're cutting risk, cutting risk, getting out of positions, going from long to flat in that particular product. So, you know, again, chasing returns and making yourself feel good for a period is one way. But if you accept that maybe long term, there is a spot for commodities to fight

inflation, it's surely understood as one of the best ways to get it. And then you apply these principles that we use as CTAs in terms of risk discipline. You know, I think there's the opportunity for a far better client experience. And, you know, I think there's the opportunity for a far better client experience. And I think that's what we're experiencing is clients are gravitating to these tactical active strategies that still give you the commodity upside, but do it in a far more risk responsible way that's a better client experience. And I pulled up while you were talking there, your slide on the upside performance versus the downside performance. So you can capture most of the upside and avoid that if not. That's exactly right. That's right. So thank you for

doing that. So this is, you know, it's basically looking at the BCOM as a benchmark in the commodity space. Let's look back at those periods when that rallies and how has Auspice diversified being this 75% commodity tilted CTA. Can it get that upside? We can see in that first section that it can, fairly highly correlated in those periods in the past and captures a lot of that upside. But the question is, when those things flush, and they will, most recently in the middle section, Q1 of 2020, you saw BCOM drop almost 25%. Wasp is diversified, flipped around and went short and gave you a gain, and yet still participates in that commodity cycle full term. And I can tell you, it's not in this slide,

but if you even be more aggressive about it and say, how has the GSCI done since Jan of 2020? And how has, you know, Auspice broad commodity done or long flat or how is Auspice diversified done? We've outperformed it with a fraction of the volume, the fraction of the drawdown. So you're getting that upside, but you're doing in a much more controlled way. And to impress upon back to the point way back, is it just because we're gathering commodity upside? Is that the only game that we bring

to the table? No, we think there's so much more to the commodity side and that's trading both ways. And you mentioned a few times the model and the risk control. And just if you could give a quick example of how that works, because a lot of people would be scared, oh, this is some crazy black box algorithmic something or other. My quick example would be, right, if you just put a simple 100-day moving average and the price goes below that, you get out, would be the very simple example. Yeah. I mean, so there's a bunch of ways to do it. So first of all, like point blank, I mean, we're rules-based managers for lots of reasons. One is for consistency. The way that natural gas is behaving is different than the way

corn is behaving is very different than the way the Swiss franc is behaving. And so being consistent in that application is key. One, because we're all emotional human beings and we're going to react to things and we're going to do the wrong thing at the wrong time. And so for sure, we're rules-based, but that's the edge. Now, does that mean that we put our head in the sand and just hope what we've built and curve fitted in the past works out in the future? This is where we believe that we have a particular edge at Auspice.

And that is this. We've developed strategies. It goes back to those natural gas days that adapt to the market environment. So I'll give you an example. So you look at something like a breakout above previous highs to indicate momentum. It's just one thing, like, so take it with a grain of salt, but you look back and say, well, you know, we're breaking out from previous highs. Well, how far do you look back to define a previous high? Do you look back two days, two weeks, two months, two years? Well, what we believe is it depends. It depends on how volatile that commodity is. So let's say natural gas is in a low vol state. It's not moving around much. Looking back too far back really tells you nothing about a more significant recent breakout that's going to tell you something about current

momentum. You don't need to look as far back, but if natural gas is super volatile, looking back only two days, isn't going to tell you much about a significant breakout or qualifying your trend. And so what we do is we look at, we look at a robust universe level parameterization where we look at breakouts across all assets. What's a good spot that indicates momentum up in a breakout from previous highs? And set goalposts. And now the strategy can find its way between those goalposts, between looking back a short period of time and looking back a longer period of time, based on the characteristics of the volatility of that particular asset at that time. So this is accomplishing a number of very important things. One, you're adapting to the volatility regime of that particular asset at that moment in time. Number two, by saying it doesn't have to be some particular number, our look back period is 30

days. That's the magic number. That's the curve fitted number. That's going to work perfectly forever more in future. I mean, that's curve, and that's not robust. So we're allowing it to range between these results. So that introduces a robustness. Then the third benefit is that same parameterization that's universe level across all assets, forgetting energies or commodities, all assets we can find in the world, and saying this is a nice sweet spot that allows the strategy to be applicable across all assets and all different markets. And so when you put all those together, you know, that's what we discovered worked really well with natural gas. And that's what, you know, that's ultimately why we left Shell to start Auspice is we felt what we had done

and our research had led us to, to survive the heretic volatility and capturing trends in natural gas was applicable in all assets. I'm going to move off commodities for a second and talk through. So that other 25% and kind of what I was alluding to before, right, of commodities, I think Bloomberg index was down 10% in June or something. I believe you guys were slightly up in the Auspice Diversified Program. So how is basically the question. I know the answer, but right, because you're short bonds, you're short foreign currencies, you have all these other complementary trades.

So just talk through the portfolio level, that other 25% for a second. Yeah, so for sure. Why do we even include the financial markets, whether it's bonds, currencies, or equity indices, because they're incredible diversifiers. They're unrelated to what's going on in the commodity space. And remember, the ultimate goal is to provide a non-correlated return stream to what a client has in their portfolio, whether that's equities, fixed incomes, or other alternatives. You should ultimately be non-correlated to all of that if you've gone about

this in a unbiased way. So what does that imply? That implies that at times we're going to capture those equity moves up or down, like in a year like 2022 or back in 2020. But maybe there's not much trending going on, save for equities grinding higher. In that case, we're going to have a little bit less equity exposure than a lot of other CTAs. And so maybe we are going to underperform a little bit. And we did a little bit in a 2019. But is that when you needed me to kick in and help your portfolio? Was that the time or was it Q1 of 2020? And so I think there's a fairly obvious answer there in that most portfolios did pretty good in 2019 because they had a lot of equity exposure. Even the alternatives they had had a high equity beta and they felt maybe they didn't need inflation protection. What value were commodities giving? They weren't moving much. But it's finding that balance between the areas.

So if you look back historically, did we make all our money in just commodities? The answer is no. We find incredible opportunities in those financial markets. Look here recently. I mean, currencies have been pretty sleepy for a long time. But look at the opportunities we're seeing in currencies right now. So again, we're agnostic. the opportunities we're seeing in currencies right now. So again, we're agnostic. Yeah, we're a commodity tilted manager. Yes, we have a big background in commodities and we see a massive opportunity there, but we're not going to put our head in the sand and say that's the only game in town. Yeah. And I personally, right? Well, I'm personally

invested in a lot of trend following. So me i could spend years researching the euro right first the dollar and when i should go long or when i should go short and probably spend a lot of money versus most every trend following program caught right the euro went down par with the dollar which which 10 years ago people would have thought was ludicrous but here we are and there's no magic bullet you didn't sit there in your lake house cabin there, which looks beautiful and say, oh, I think the euro is going to 90 cents on the dollar. It's just the models captured the downtrend and you got involved. It's that agnostic word.

I mean, you have to take what's happening as the reality. Like, and I'll give you another perfect example of this. The idea that the US dollar has to be weak or weakening for commodities to rally. I mean, we've heard this over and over again for years and years. It seems like my whole career. There's like so little basis for it. And if you adhered to that, you would have missed a lot of this opportunity because the US dollar is bloody strong and doesn't seem to be getting much weaker either. And so there's other factors at play. Why not just say, you know what, we don't know, we don't have crystal balls. Our job is to follow trends, capture trends and manage risk. And if you stick to that, I think you're going to be

very effective. Now, you can't always just be a pig at the trough either. We believe, and it's going to be different philosophy than other CTAs and many that you've had on here, that eventually the risk reward changes. When the volatility gets to a certain level and you've got mark-to-market gains in a trade, the probability of keeping those mark-to-market gains is diminishing. It's just math. And so the traditional philosophy is ride that out and never take your foot off the gas. We disagree. We believe there's a discipline there to capturing trends when the risk reward changes. And the proof's in the pudding. whether financial crisis back in volatility in 2014, 2015, the end of 2018 when everything flushed, 2020, Q1, 2022, we've never missed. And it's adhering to that discipline.

That's pulled up. I think this is the slide that goes with that concept, which I also like because it is showing that you trade carbon emissions, which is another cool thing. Yeah, it was one of our best markets last year. It's obviously one of our newer markets that we've added. But this talks about that volatility adaptive process in some great detail here. Starting at the bottom, number one, it's a lower volatility environment. We're looking for a breakout from previous highs, again, one qualifier, take it as just one piece of

the puzzle. You don't need to look as far back. And then things explode higher and things get much more volatile. Well, so now you're looking further back to qualify a breakout, you know, either on the upside, which is the way we're going or on the downside, well, you know, what is going to take you out of that trade for us, it's that point, number three, we call it a volatility stop, where we're exiting risk or cutting a position completely, because that risk reward has changed too great, too far. And the probability of keeping those gains has diminished. But we may reenter that market, but we're going to, again, adjust our position sizing based on that. It also allows us to flip around and flip from long to short quicker. And so we believe this agility is part of the edge

in these opportune volatile times, which are akin to a lot of the times in commodities in general. So quieter in the financial markets in general, but you want to capture those opportunities. More volatile in the commodity markets in general. And that's where we started this philosophy. And it works really well across, you know, really all assets. And then had a question in the chat here of how do you approach, like you added the carbon market, how do you approach that? Is there a certain level of volume or liquidity that's needed? Yeah. So it's a great question. I mean, we'd love to add, you know, everything. We don't adhere to the philosophy that you hear a lot in the CTA space that we should be trading 250 markets.

We don't believe there's 250 markets to trade. We believe, you know, it's the philosophy of adding that one extra thing. It's diminishing value add, right? So, you know, if we added, pick a market, we add Bitcoin, yes, it may be opportune, but it's one of many, many things we trade on a fixed fractional basis. It's not going to change the world. It's just another opportunity. So, yes, we're looking for those opportunities. But why would you trade many, many more markets?

Well, capacity issues, those are some of the key things. What are we looking for? Yes, liquidity. We have an approach that is fairly agile. So we need liquidity. We don't want to slip too much. Is it highly slippage sensitive? No, because we're not a short-term trader.

But, you know, execution in and out means a lot, especially if you're trying to capture trends at these key volatile times, it makes a difference. So yeah, certain markets adhere to that and fit in that philosophy. You know, you don't want big gaps in markets. So you don't want markets that you wake up and, you know, you've blown through stops and that keeps happening could help, could help you, but oftentimes it doesn't. So it has to fit certain criteria for us. Always looking to expand and we'll continue to do so. Carbon is a perfect example of that. Yeah. Just two quick further comments to that. I mean, we're very focused on maintaining the crisis alpha reliability of diversified, you know, we can basically,

you know, shut down our portfolio in a matter of minutes. So liquidity needs to be there, we need to be able to get out of markets, you know, very quickly. And then second, I think, where we differentiate is we're really trying to give meaningful exposure to a lot of these core markets. I'm just looking at our attribution from last year. November, carbon was our biggest winner. October, zinc. December, soybean meal. A lot of these things are markets that other CTAs trade, but in very small allocations. They won't come up in any meaningful attribution. This is where we really differentiate. We're giving meaningful exposure to a lot of these markets that most investors

don't have in their portfolios. I think that's a good point. Like we used to, back in the day, AQR's managed futures program was $14 billion, maybe it got to. Right. And just at that level, they physically can't put on enough corn futures. No, that's it. And so we are in a sweet spot, we believe, Jeff, in that we're growing, but we've got a lot of capacity and we've been at it. Ken and I've ran much larger portfolios in our career institutionally. I think we have a fairly good feel for where we can get to, but we don't have an illusion that we're trying to get to the AQR level and be as effective as we are in capturing trends. That's not the goal here. The goal trying to get to the AQR level and be as effective as we are in capturing trends. That's not the goal here. The goal is to get to a different level, but do it

providing the same value that we have for the last 15, 16 years. Yeah. And I think you can see right there, not the pile on, but their performance and their assets have flowed out because they just couldn't do it at that larger level. It's very tough. Yeah. And they're one example. And we've heard that same story out of peers we have at other big brands. I don't like to name the names, but half the battle is, okay, what do we do with this pile of money? And how do we be anywhere near as effective? And how do we execute properly with this much exposure, well, you can get cute with things like with swaps and, and, you know, all sorts of things. And, and Ken and I have a ton of experience in that area, because we were so big at shell, that, you know, used every tool in the toolbox.

We ran a lot more of all as as well. But, you know, again, we think there's a lot of growth to the, you know, to where we are right now, but it ain't infinite. And then you mentioned, I'm just going to share something real quick here. You mentioned the crisis period performance. So here on the bottom left here, performance when you need it most and this is a classic uh trend following type profile right of they do well in extreme events so just talk through a little bit of that that's not on purpose you're not predicting those events that's just how no i mean and and you know look i mean by talking about crisis alpha and it's it feels like that's

all cts have talked about for the last better part of a decade is crisis alpha because there wasn't many other opportunities. And to Tim's credit, he was always saying, hey, don't forget about commodities. Well, everyone else. That's exactly where I was going with it. Crisis alpha is fantastic. And there has been another opportunity to develop here the last three years. But in the meantime, there's been two incredible crisis alpha opportunities being beginning in 2020 and here in 2022. And so we're, you know, we're kind of coining this one.

We kind of flipped what we called this year already. We called it, you know, we called it the commodity, the commodity crisis because it became this big boom in commodities in Q1, exacerbated by Russia, Ukraine. So that was one set of opportunities. But at the end of the day, really, what is this? This is the big wake up call that, you know, we've kind of as as all managers and CTAs been warning about. And that's a 60-40 crisis or whatever way you want to describe that. But, you know, your bond allocation didn't work. Your gold allocation didn't work. You know, hopefully you had to describe that. But your bond allocation didn't work, your gold allocation

didn't work. Hopefully you had enough tips on, you didn't. So that didn't work very well. And other tricky things to put on in the portfolio, those just didn't help much this year. What helped? CTAs helped, and especially commodity tilted CTAs, and especially commodity tilted CTAs who could flip around and get short fast enough. And talk through that. That was one of the questions here. Do you view this as an inflation hedge? Well, it's proven itself as a fairly good inflation hedge. Yes. So there's a couple of things. One, commodities are, and two, trend following is. And so when you combine those things, they end up being a great inflation hedge. And actually you did a great job in bringing up that upside commodity participation slide a number of minutes ago. We have a number of products that

fit into this category. Some of them are long only or long flat commodities, and some are long short like Auspice Diversified or Flagship. And what they've illustrated is they are very good inflation hedges if you can capture that commodity upside, and then you have that added benefit of the crisis alpha on the downside. So yes, CTAs can be a good inflation hedge, but not all CTAs are painted with the same brush. We've seen a lot of CTAs struggle that are financially tilted, a number of different tilts in their portfolio, and they just haven't participated. Or they did participate, but then commodities turned around and they gave it all back, like you started this conversation with. And so it's finding that sweet spot. There's no perfect answer. There's definitely value in CTA diversification. What I argue is just,

we're kind of built for this. And to me, if you have gold, you have commodities, you have foreign currency, right? You have things that will act as an inflation hedge in the portfolio that will only kick in when they're needed to kick in. Well, exactly. And, you know, so this is one of the things like, what's going to be that inflation hedge? I mean, gold gets talked about all the time. Gold isn't an inflation hedge. Gold is a statistical diversifier. I mean, there's, you can pick some times when it, you know, it's coincidentally rose, or maybe it rose for a period of time. Think of coming out of the COVID shock and what was the first commodity that started to move again, it was gold. And we got long. That was the first thing we added back

to our long flat strategy was gold. But by September, it was out the door because it wasn't going anywhere. And it was those other commodities that started to kick in in the summer of 2020 and provide commodity upside. So if you only relied on gold, or if you only relied on oil, that ends up being an unideal experience. We got a slide for that. Can you actually, can you go to slide, I just want to cover the crisis alpha comment a little bit further. Can you go to slide 19? I think that's, so the crisis alpha, so Tim kind of gave me a little bit of background at the beginning. I was at Campbell & Company for a while. I actually led Illinois teachers' investments into CTAs 2013 to 2016.

This idea of crisis alpha, it's definitely one of the core parts of most CTAs, Auspice Diversified. Definitely, it's something that we've outperformed in. But this concept is really only a concept of the last decade. If we go back post-2010, I mean, prices awful wasn't even a term back then. CTAs historically still were uncorrelated, but very much used as a return enhancer, standalone, absolute return strategy. It was really just this last decade, you know, post QE inflation, essentially at record lows, interest rates, you know, at zero volatility low, that this, you know, concept of crisis alpha is what drove a lot of investment in CTAs. You had a lot of the biggest pensions look at CTAs, and you know, and say, basically,

you know, you know what, if we only get this crisis output from a CTA, that is very accretive. And they kind of handicapped it to that saying, you know, if we lower the bar and say that's the expectation, even in that case, it's still very powerful. And they can be created these, you know, crisis risk offset or risk mitigation portfolios. So that's great. But what we've seen since 2020 is arguably returned to a much normal environment. The returns are a lot more consistent. We have long trades, we have short trades, we have volatility back at normal levels. The environment that we're in today isn't abnormal. Arguably, it was really that last day that or sorry that last decade that was abnormal and really compressed returns so like crisis alpha is definitely poor to the cta story but there's a

lot more than just crisis alpha and that's kind of what i think people are being reminded of today just to finish up on that but that is not going to fit for a lot of ctas because a lot of ctas tuned themselves to that qe environment and financially tilted and adjusted a lot of CTAs tuned themselves to that QE environment and financially tilted and adjusted a lot of what they did in their portfolios and even the trend following approach that they took. And you've seen them struggle. You've really seen them struggle in this past three years. And it can come up with all sorts of excuses, but the reality is they went and chased returns and money flowed in. We never deviated. And so, you know, we got to bear that cross. That cross is that, you know,

at times we did underperform, but you know, how much, you know, like a tough year for us. I always say the tough year was 2019 because there's just nothing going on. I think we were down six or seven. And so we were a little paper cut in the portfolio, but we showed up when we needed to 2020, Q1, the rest of 2020, 2021, 2022. And if we are in a more normal environment, we're excited about that going forward. Nobody has a crystal ball,

but I think we're in the right place. Right, and that, just to put a point on that, to me, those other CTAs, they added long equities. They added a long tilt. They added more financials, as you said. But speak to that because it's not the case that if the equity market rallies sharply higher, you're going to lose money like 19. It was not a function of equities going higher. It was a function of very low volatility across many, many asset classes. We were long equities. Equities as a whole can be about 15, 20-ish percent of our portfolio. We were long equities. The challenge was that nothing else was going on, right? So summer of 2020, we had a little bit of excitement. If you remember,

we had the yield curve inversion in August of 2019. Nothing else happened that year, but that was an exciting moment because the yield curve inverted and equities dropped and CTEs actually popped the other way in general and put up a positive result when we had this sort of shocking August 2019 month. I think we were up 10% that month. And so it's not that we weren't in the equity space, it's that there wasn't much else going on. And so if you were totally equity tilted, you outperformed. If you were tilted to anything else but equities, you underperformed to some degree. And so, you know, that's a trade off. That's a decision we've made in terms of what our opportunity set is. We believe just this bit more volatility, we're not talking chaos of Russia, Ukraine, just this bit more volatility expands our punch bowl of opportunities exponentially. Yeah. And I would call it not even volatility per se, but dispersion, right? If cotton's starting to do its own thing, if crude oil is doing its own thing, these

supply chain issues have really opened all that up. Like, hey, it's not all dependent on the Fed. Like there's actual real world things that are going on. So that's back to that commodity slide I showed and you talked about the super cycle. But all those nodes around that, you know, that super cycle potential speak to that, you know, labor issues in you know colombia to do with coffee planting like you know like the list goes on and on and on and on and and these are very real things well now we got like canada is the largest supplier of canola in the world and our federal government's pressuring us not to use as much uh fertilizer you know or severely handicap the the farmers

like it's it's it's asinine but that's the reality. And this keeps happening commodity by commodity. Well, that's too deep. Anyone have any further questions there? I was just going to say, why did the market care only about the Fed for those 16, 17, 18, or 17 through 19? Because they're a powerful tool know they're a powerful machine with powerful tools and with the ability to you know go further and farther and deeper and you know than most people may be expected so you can't ignore the Fed but you got to be realistic about what they're going to do here is the Fed raising rates going to fix the commodity problem that's a really easy answer and anybody who thinks that's that's the case has been fed you know a bunch of media fed raising rates going to fix the commodity problem? That's a really easy answer. And anybody

who thinks that's the case has been fed a bunch of media garbage. That is not going to fix the problem. Yeah. Just to bring it home here to Canada, we had some inflation data come out last week. And I'm just going to read you a couple of things. So the return of sporting events, festivals, and other in-demand gatherings has resulted in higher demand for accommodation so prices for accommodation rose about 50 from from a year ago so in that case you know that may be an example of you know raising rates might affect that element of inflation in the same article they have a big table with a bunch of basic food items and the year-over-year So onions, 25% up from last year, carrots, 23%, chicken breasts, 20%, cereal, 18%. Raising rates isn't going to affect any of that.

So it might affect elements of our discretionary spending, but the underlying commodity shortages that are a result of a decade plus of underinvestment, you know, raising rates isn't going to affect that. If not, it's going to make it worse. I think so. So again, but please don't get the impression that I'm just calling a commodity bull run. It's going to go one way 45 degree. We're getting that schooled right now. That's not what we said. We think there's a bigger opportunity, but you better buckle in for it. And you better have a manager that can participate in a risk responsible way. And Brandon, we had one here for you. When you were working with those

institutional investors, where would they put a program like this into their, what allocation bucket would it go into? Sure. Well, I can give you a couple of answers to that. Illinois teachers, so historically, like a lot of institutional investors, they got their kind of diversifying strategies through fund-to-funds that proved to be largely ineffective. My role was to essentially liquidate those and introduce real diversification. So CTAs went in the quote-unquote diversifying strategies portfolio. Other pensions have created these very specific, what's called crisis risk offset or risk mitigating portfolios.

And then more recently, I think we're seeing CTAs being used a lot just broadly, whether it's inflation protection, commodities, if you're a commodity-focused CTA like us, there's a much larger role. So I think historically, it was very much focused on the diversification element. Today, arguably a larger role. So I don't know if that answers your question. Hopefully, it gives you some perspective. Yeah, definitely.

And to me, it's like, are you talking to a lot of investors that are saying, hey, my 60-40, I'd rather have part of that 40 be, be this. Yeah, a hundred percent. Like we've seen, um, so something like Ontario teachers, for example, um, their fixed income was, I think, cut in half over the last year or two years and commodity derivatives, um, internal CTA strategies are, I think, I can't remember. It's like 20% of their portfolio right now. So, you know, historically fixed income, you know, you had yield, that was part

of it, but also your diversification, that fails in an inflationary regime. So we've seen that this year, you've seen that throughout history, that low to negative correlation that you get from bonds and equities, that fails in a rising rate environment. So a lot of people are moving away from fixed income and potentially literally taking money from fixed income allocations and putting it in CTAs. Obviously, they're different in a lot of regards, but in terms of diversification benefits, similar role. I'll just add one last thing and we'll end the call here. And that is what Brennan described in the institutional side and that movement towards product like these and taking down fixed income and this type of philosophy. We are absolutely seeing that in the RIA space, 100%. Sophisticated RIAs act like institutions, and that's what they're doing, is they're looking for products like these.

We hope to win some of that business, but that's what they're looking for. One hundred percent. Love it. All right. Well, thank you, Tim. Thank you, Brennan. Thank you. Have a great summer up there in Calgary. Is the rodeo over? The Stampede? The Stampede was kind of the first week and a half, first two weeks of July. And we've got finally some beautiful summer has hit. We've had weather in the high 90s here in southeastern British Columbia.

So it's been quite beautiful. Awesome. Thanks again for everyone. Go into the chat there. Thanks for the opportunity. Just a final note for anyone who needs any further information, our website, we put a ton of resources there. We have explain opportunity. Just a final note for anyone who needs any further information on our website, we put a ton of resources there. We have explainer videos, our research is on our homepage. A ton of stuff that we put up there.

So check that out. You can email us directly. Email RCM, fund specifics. And yeah, any questions, don't hesitate. Sounds great.

Thank you guys. Thanks everyone. Have a great day. Have a great summer. Bye-bye. You've been listening to The Der links from this episode will be in the episode description of this channel follow us on twitter at rcm alts and visit our website to read our blog or subscribe to our newsletter at rcm alts.com if you liked our show introduce a friend and show them how to subscribe and be sure to leave. We'd love to hear from you.

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