The Derivative - Texas Style Trend Following with Salem Abraham

Episode Date: April 30, 2020

This episode’s guest, Salem Abraham, is a bit of a legend in the trend following/managed futures space, with his 30+ years of knowledge and experience making for some of the best stories in the industry (and one of our most entertaining guests to date). In today’s episode we learn more about tiny Canadian, Texas; how you have to noodles and red sauce if in a contest to make the best spaghetti, the turtle traders, the tourist boat capsizing in front of the nude beach, talking how low oil can go, being buddies with Boone Pickens, honeybees, sending the first ever computer-generated orders electronically to the CME, trend following (of course), apple salads not equaling fruit salads, bonds at zero, and pecan & apple orchards. Abraham Trading Company is a research-driven investment management company managed by Salem Abraham that now runs the Fortress Fund for endowments and institutional investors. Since 1988, Abraham Trading Company has managed alternative asset portfolios on behalf of families, individuals, foundations, endowments, and institutions. Check out Abraham Trading’s website, and follow along with Salem himself on LinkedIn. And last but not least, don't forget to subscribe to The Derivative, and follow us on Twitter, 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

Thanks for listening to The Derivative. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, 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. 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. For the managed futures business, if I were to speak to everybody in the industry, I'd say, look, let's stay true to what we do. Let's make sure that we provide non-correlation. People have stocks.

Don't give them more stocks. But the flip side of that is, yeah, but I've got to survive. All right. Welcome to The Deriv, and thanks for tuning in with us. Today's special guest is someone who anyone familiar with the history of Managed Futures will know well. With many stories from being far removed from Wall Street and LaSalle Street, to extensive work with nonprofits, to creating his own fund, he's got a lot to share. And we're talking about Salem Abraham, of course, and his Abraham Trading Group, which has about as long a history in trend following and futures markets as you'll find. His newest venture finds him focusing a little more on the total portfolio, not just the alts part, and weathering the storm for a total portfolio approach, which we'll get into.

So this is sure to be entertaining and educational. So welcome, Salem. We're so glad to have you with us. Jeff, it's great to be here on The Derivative. Thanks for having me. No worries. And so I've known you for a bit, having crossed paths at various conferences and whatnot, but let's give listeners a little more color on you outside of the trading world. You're down there in Canadian, Texas, right? Where in the world of Texas is that? So Canadian is a little town of 2,500 people, two stoplights. It's up in the panhandle at top square in the Northeast corner, um, about a hundred miles Northeast of Amarillo. It is a town that's, uh, ranching. The main industries are ranching and then, um, oil and

gas. And so it's, um, I had two great grandfathers settle here with a Lebanese merchant and an Irish rancher. And the Lebanese boys kept marrying Irish girls for a couple generations. Really? Those seem like an odd mixing, right? Oh, no. Well, the Lebanese are real mean and tough, and the Irish have a good time. So it's a nice mix. And so you're far north.

You're like further north than Oklahoma City. Right. You're as further north than Oklahoma City. Right. You're as far north as you can get in Texas. Right. Yeah, no, you go, if we go about 50 miles north, we're out of Texas. And then about 30 miles east, we're over into Oklahoma there too. So we're close to five other state capitals than we are to Austin, including Lincoln, Nebraska. So way north.

Really? And so you spread out your roots there. You've got some farmland, you've got some ranch land, you got some orchards. So tell us a little bit about all that. No, we, yeah, well, we're so, um, yeah, you know, out here in the country, they it's, everything's cheaper. So they just give this stuff away. So we're, we're ranch land. And then, um, and then I've gotten over the last 10 years or so into orchards more. So I've got a, an apple orchard here in Canadian, then a peach orchard over in Oklahoma and a pecan orchard down in central

Texas. And so just mainly as a source of fixed income for me, that is, um, so, um, you know, and I have some other real estate investments that are just, um, really fixed income type. Um, I don't like bonds as well. So, but I like the fixed income component and as a trader, you know, you kind of tend to, you make money in lumpy ways and it's feast or famine. So to have that fixed income components good, but I'd rather have it in the form of kind of real commodities, not fiat money. So. Got it. And so I'm envisioning you like out there working the ranch and the orchards. Is that the case or no? No, not so much. I go out there when they let me, I usually break things or, or maybe hurt myself if I go out there too much, but no, but I do have, you know, I, my kids,

they'll keep honeybees and I help them with honeybees. So we've got honeybees out here. That's kind of fun. And then we, and then to go steal some apples or peaches when you're, you know, it's a, it's a minute, 45 seconds. If I go straight to work halfway across town, so I could swing out to the orchard and make it a five-minute commute and still some peaches or apples on the way to work so that's nice. Got it and you've separated you don't have the work compound as part of your house and everything you've got a separate office? No I'm in I'm yeah no I'm in so my house is in the middle of town and then offices yes halfway across town seven blocks away so got it and then

it's been hard to separate canadian from you for a while right like you've helped do renovations and buildings and a bunch of well no we are not sure well i've been real blessed um you know financially and i think you know when you look at a town and you look around, it's especially a small town, you look around and there's really a group of, you know, a small group of people, maybe probably even 50 people that are gonna, that really are able and willing to make a difference. And so you, you know, you end up, um, people step up and do different things, what they can. And, you know, that's true of even running, you know, the local government, things like that. And so, no, we try to help out where we can and do things, you know, invest in the community.

And there's sometimes a return on investment that can't be measured in dollars. But, yeah, the best job I don't get, Jeff, though, the best job in a small town, you know, isn't mayor or anything like that. It's you want to be fire chief fire chief you get to you get to drive a truck and talk on the radio and every little every boy's dream right yeah no and i'm not cool enough to be on the on the fire department there's yeah 32 people and you you got to be in the club and really cool and so no that scott brewster my friend scott gets to be fire chief. And so, no. And I'm sure in a town that small, it's just all volunteer, I'm sure, right?

Oh, yeah, I know. So the bell rings and they leave what they're doing and go grab a truck. You bet. No, that's right. No, and with eight kids, you know, so my wife and I, we dated in high school here. Then I went off to Notre Dame, got a finance degree, came back, and we've been married now almost 32, let's see, yeah, 32 years this year. And we have eight kids. So, um, you know, um, there's not as much to do in the country. So we had to make our own entertainment. And so we, so, but I was on school board. So school board is bad. I was on school board for 12 years. I make everybody,

you know, after 12 years, everyone's mad twice. So it's time to get off. They're, they like you, they're mad at you. They like you, they're mad. Yeah, no, that's it. So eight kids, what's the spread there in the ages? So today there's really, there's, there's 10 years, 10 months, oldest to youngest. So, so there's seven, almost 17 on Saturdayurday it'll be 17 to almost 28 so this saturday so so we're got uh four brothers and two sisters in my world but they're from many different fathers and mothers and mixtures few divorces and stepmoms and stepdads and yeah i know everybody wonders if there's a trick and you're like, no, no trick. It was the two of us.

There was no surrogates, no twins. No Netflix. No, no, nothing. No multiple wives, multiple husbands, no adoptions. It's all, yeah. So what's the secret on 32 years of marriage? How do you, you got an algorithm for that? Yeah, no, it's crazy coupons.

So everybody gets probably i think it depends me i need a few more extra crazy coupons in my wife she's less crazy than me but if you can if you can just say look you're allowed to have say you know for me four crazy coupons you could be really crazy and make no sense on four things and i'm gonna love you anyway and um so i think you just got to give them a pass on some things and then it gets, instead of trying to fix them, you just say, you know, you're, you're fine. Crazy and all. I like that. And then do they give the coupon, then it gets ripped up or they can be crazy on the same thing for, for their whole life? Oh no, it's, it's pretty just one thing. You just say, no, this thing, but we're going to work on you elsewhere. There's some ways that, yeah,

you'd like to try to fix them on some other spots, but no, we, um, I think you just got to say, all right, we've all got our, our crazy and, um, we're going to, and that's okay. So I love it. And then besides your work in the town, you're doing some, you've been heavily involved in a few different charities as well. Well, you know, I think being just, you know, in the land of the blind, the one I've been is king. And so if you know something about investments and there's, you know, there's foundations and endowments out here that need, you know, that need investment

advice. So I get on a lot of investment committees and things like that. And so, yeah, so different foundations and endowments trying to help. And really and truly what you notice, you know, I know that, you know, there's this red state, blue state and city and country. And what, you know, I get to go to the city and I can put on my suit and I can take the subway in New York City. I don't know my way around the city well. I've seen you in a suit. Yeah, you clean up nice. Yeah.

And so, but, you know, I always think they talk about a frog in a well. So frog, you know, you just know your own little world. And I think that's true of in today's society with politics, what they are, where you're in the country, you know, this country perspective. And if you're in the city, you know, the city perspective. I think you need to know the tune and everything makes a lot more sense why people think what they do. And out in the country, really and truly, I mean, you look around and it's like if, you know, if you and I lived across the street from each other and there's no one within miles of us, you'd say, if we've got a problem, Jeff, you and I have to

figure it out. And out in the country, that's what you've got to do. People have to step up because if you're, you know, if not if, if, if not, you know, this, this small group of people, then who, and it's nobody. And so you, you really, you, you step up and help. And so I've, I've done that. And then, um, and then that's led to some other things where, you know, now I'm on the investment committee at St. Jude Children's Research Hospital out of Memphis. And, um, so I've been, you know, from that, which is about a $5 billion endowment down to, you know, a $500,000 endowment. And then I've done things with Boone Pickens and I, he's a neighbor. He was a neighbor to us on a ranch, and then he bought

our ranch back in 08. But he and I have been friends for about 30 years he was a friend of my grandfather's and so and he's his big ranch is right here near town and so he and i started a foundation together back in 08 and that was a lot of fun yeah best biography book name ever the first billions the hardest yeah yeah yeah no and i'm in the book too he's sorry i hadn't read it i know the title but i was in uh colorado once at a bar or restaurant or something talking with a guy and he's all right i hadn't read it i know the title but i was in uh colorado once at a bar restaurant or something talking with a guy and he's like what are you doing in town he's like i'm writing this book on boone pickin yeah yeah um so and when he passed not so long ago right was a year in september yeah september he was but he's yeah we had i was real fortunate to get to

spend time with him and he was a good mentor and we, a good friend and yeah, no, I was a Paul Barrett, his funeral. So we were, we were, uh, that was nice to get that honor. And he, you know, he was a good guy and a lot of fun. We had fun together. Oklahoma state cowboy. That's it. That's it. So how did, how'd you go from Canadian Texas to becoming a hedge fund manager, for lack of a better word? I don't know if you like that moniker or not, but. Yeah, well, no, it's, it's fine. That's, you know, I started, I started trading futures in college. And so I was lucky to – Jerry Parker, I'd met him through a family connection and he –

Chesapeake family. Chesapeake, yeah, right. And so I've always been – there's a lot of things I'm not good at, Jeff, but I am good at math and data and statistics. And so he had mentioned, and I was studying finance at Notre Dame and he had mentioned to me while I was about halfway through college, he had talked about what he does with basically technical analysis and basically using data to predict where markets may go. He was there at Notre Dame or he was? He was. So I saw him and I met him in Canadian.

So his, his first wife, she and I had mutual first cousins. So we were at, um, we were at those mutual first cousins houses here at the house here in Canadian. And so I met him,

the new husband to a cousin of a cousin. And so he, um, wow. He told me, he told me about trading and what he did. And I thought, wow, that's fascinating. And so he was an original turtle, right told me about trading and what he did and i thought wow that's fascinating and so he was an original turtle right and it was when he was a turtle he was still

working for richard dennis at the time oh wow so he said hey well you could come to richmond and and i could you know at least show you some of what i'm doing he was just being nice to the new you know here he comes and meets you know 30 people uh his wife's family and so i know he was just being nice looking back, but at the time I thought, okay, great. Well, so then, then about three days later, I'm on the phone to him and said, Hey, when can I come to Richmond? And so, so then he was nice. Well, you were probably the only one of the 30 that wanted to talk math instead of ranching. You know, I asked him, I said, well, had anyone ever taken you up on that offer? Cause he had

made this offer and it was, I guess, just, just an offer that no one says yes on. But I was excited to go hear about it. So he was nice to kind of show me some things and point me in the right direction. So then I started trading during my last semester at college and then right out of college. I got out a semester early with honors out of Notre Dame with a finance degree. Started in January of 88, managing money. But, you know, but it was interesting. I started in August of 87 with a $50,000 account. I was taking 21 hours at Notre Dame, a big load of classes. I was hurrying to try

to get back to my now wife, my then girlfriend. My grandfather was back here with a job and he was a great guy to work with. And, um, but so the crash of 87 was two months in. And so that was an interesting time. So you were trading from college during the crash of 87. So, you know, it's interesting, like here we are now in the middle of the coronavirus, um, crash and it's, um, and you know, we've had some crashes in between. So crashes tend to, they're, they're each one a little unique, but they all rhyme to some degree. So there's probably some kid at Notre Dame or elsewhere right now trading some account, doing something they're not even thinking about.

Yeah, no, that's right. We're getting an education. I know that first crash in 87 was an education for me. It was a, so the Euro dollar, the interest rate markets moved 37 standard deviation move. And, and, you know, I'd taken statistics about a year before and I thought, you know, they talk about one, two and three standard deviations and 99.7 is within three standard deviations. Well, it's that 0.3 that's outside of three standard deviations really is the most important part. And that's the part they never talk about because that's the part that breaks you or kills you is the, you know, that 0.3% outside of three standard deviations.

And you think you understood that from that early point that the markets aren't normally distributed and they have these outlier moves? No, but when they took half my account's value, I had a $50,000 account. It sunk in a little bit. It went to $66,000 in two months and then to $33,000 on October 20th, 1987. That Tuesday was the day after the crash because the Eurodollar futures, that's when they moved up that 37 standard deviation move. And it takes a while for some of that to sink in. So, you don't realize it right away, but I did know it was a historic event i was lucky to survive without you know without losing all my money and um and i tried you try to model where you're doing it's trend following i was trading

21 markets and trend fall a trend following model was a turtle version version of a turtle version yeah yeah and then said all right i'm coming back to canadian i'm going to do this for a living a trend following model. It was a turtle version. Kind of a turtle version. Yeah. Yeah. And then said, all right, I'm coming back to Canadian. I'm going to do this for a living. Right. Right.

You know, my back of a 50% drawdown. Right. Yeah. My grandfather, he said of all the ways to lose money, why in the heck do you have to pick the very fastest one? So he was a businessman.

He'd been, he had done deals all his life in oil and gas and he had seen, you know, he was a, he was an interesting deal maker guy that he was just great so the oil and gas to me always is a good corollary to trend following and to right because you're digging a lot of holes that don't pay off but doesn't cost a lot and then boom when one hits you got this huge outlier outlier gain so it's lumpy like a classic trend following would be. Absolutely. Yeah, no, it's a, it's an interesting,

there's a lot of parallels to risk management and diversification apply to oil and gas very much. So. How to side topic, how are all those people doing in the current? I tell you, it's really bad. I mean, right now it's worse than 86. So 86 and 14 are both kind of parallel to me. But right now we've gone from bad to incredibly bad. You know, there's literally there's people with oil right now in the last 48 hours. there have been um i've been hearing stories of just shutting in wells just go turn off wells to say look we're we're not even selling the oil and the gas usually that they at least produce what they've already drilled they stop drilling new wells but they at least produce what they're doing but i think i read today we're rallying today and because of that because they're just shutting down production yeah yeah and they i mean literally i know people who are out that the guys that what they call pumpers and they go

they're turning off wells um we've got a company on a you know and i invest some too in oil and gas as well and um we've got a company that is saying we're not sure we even want to buy any oil from you they canceled our contract two days ago and so they just say you know and you know you could and then you see $20 oil on the futures but it's out in the field it's like $10 oil really so it's not yeah you've got this big basis differential and then jet fuel I'm reading they don't even have enough places to put all the unused jet fuel right so not enough physical storage out there in the world yeah no oil and gas is going to be jet fuel i'm reading they don't even have enough places to put all the unused jet fuel right there's not enough physical storage out there in the world yeah no oil and gas is going to be really

hurt you know there will be like if you had a restaurant you could see in six months you go open the restaurant back up everybody's back to work but oil and gas you know you're really you know you're it's bad for six months but it's going to be bad for another six to twelve months because of all this excess supply that's been stuck everywhere right and you're not no one's putting the investment in right now no no the uh and that's on top of 18 months of terrible mlp and right whole industry's had a tough go of it yeah no we've really gone from bad to not worse bad to horrible i mean really i've never seen it in my lifetime. This bad. I saw 86 was bad. 14 was bad. Oh, eight was bad and back. It was that V drop, but this is, I mean,

this has gone to a point where it's just catastrophic for the oil and gas business, but, um, and a business really that's used to booms and busts. So. Yeah. Well, God speed to those guys oh yeah so so then you're there and uh what so you started in your 87 8 once you got back to canadian started managing money and that was just small friends and family and whatnot right right my two brothers and my grandfather and and me and yeah my grandfather he said he it was so he had his, his provision was, so I put in 45,000 and then two brothers put in 10 and 15. And so I had 30,000, my grandfather put into round out the a hundred thousand. And, and I mean, he would, I mean, this is a guy who would go drill a half

million dollar well and, and come up zero. So 30,000 is kind of in 88, in 88. So chump change, chump change to him. So he was a real wheeler dealer and did. And so he said to me, he said, he said, okay, I'll put the 30,000. But if you get down to half, if we lose half our money, we stopped this commodity trading nonsense, throw that quote machine out the window and get back to real business. And so I said, okay, so that's January of 88. Well, it was funny then. So January, February, March, April, May, it 88 well it's funny then so January with February March

April May it's it's going down 81,000 I start May well May the first 10 days of May were bad and and I'm down to just above 70,000 well then I remember about mid-May because I was hoping would stay above 70,000 well it dropped below 70 and I'd get this fax in you know those curled up fax machines for my little thermal paper yeah that whenever that paper was yeah yeah that's right and so he comes in my office sticks his head in that morning he said where are we today and i said 68 742 and he's just a matter of time he wanted to get you into the oil business oh yeah he was like let's stop this junk and this is a waste of time. And, you know, and I remember I showed him a big simulation.

I said, look, Granddad, if I had done this, look how much money I'd have made over this year. And he said to me, he said, oh, Salem, he said, you know, you think that you and that Notre Dame degree, you think you're pretty smart. But those guys in Chicago, man, they're going to eat you for breakfast, spit you out for lunch. He said, you know, he said, what do we do with all this paper? I said, well, look at the, look at all that. He said, what do we do this? We send it to Chicago. They cut us a big check. And I said, well, no, not really. But, and so, and so he was to say he was a non-believer is a, is a big understatement. But so the funny thing then is middle of May 88, you know, then if you remember the drought of 88 kicked in. So I was 68,000 in the middle of May. By the end of May, I was back above a hundred.

By the end of June, I was at like 170,000. And at the end of the year after I had a fee of zero and 20, so a 20% incentive fee after that, it was like at $240 it made 140 year one so that that was a pretty good uh cost of living increase in canadian texas oh yeah you bet 88 yeah no so that was so that so then i traded till january of last year january end of january 2019 i stopped trading and and had a great time. And we, we had, you know, as much as 600, a little over 600 million at one point when we shut down, we had a little over 200 million, but we, you know, the hedge fund space had gotten tougher. Fees had gotten lower. You know, I think we've, and expenses are higher. So what used to be a great business had gotten to be a good business and it had nine years of oh yeah tough very tough the toughest on record trend following right uh environment and and we had and then we

had this new idea with the fortress fund this new fund that we're doing we had started it a year earlier back in the middle of eight of 2018 and we were excited about what it could do and really it was an opportunity to kind of come from being – it's like being a baseball player going to be a manager a bit. So the Fortress Fund is a little bit of a hybrid between we manage it and we trade a little in it, but we also have a lot of outside traders, third-party traders, hedge funds in there. So it's an interesting opportunity for us to –

and for me personally to kind of slow down a bit, but really to, to interface with, it's really well suited for foundations and endowments. And it's kind of, it's playing off of my role as an, you know, being on investment committees. And then in the nonprofit world, and you see a lot of small foundations and by small, I would say really anything under a hundred million, they just really tend to do a poor job of managing their money. Some, some do a really good job, but some, I'd say the majority have trouble either if they do a good job and then the fees are high or they, so, and they, and we just say,

they don't have a lot of scale. They don't have a lot of leverage. It's all about resources. Right, right right and so that makes it harder and then and they can't attract good people on those investment committees and so that's um yeah that's it we'll come back to fortress in a little bit i want to go back to 88 and your quote machine that your granddad wanted to throw out what were you what were you using how were you generating your signals and all that way back then so I had a Tandy 1000 a used Tandy 1000 computer um that was you know that orange screen and big monitor like a Texas Instruments I think it's Tandy was its own brand I think okay maybe it was a part of Radio Shack. I don't know, but I couldn't afford a new one. So I bought a used one and I had charts. I'd send it every week and I'd mark the charts every day, update them. And then I would just generate signals from running the numbers

and I'd have my numbers every day and so and you'd actually run a basically a back test manually so i had yeah no i had um it was back then it was system writer so which now became trade station yep i remember and i had a i had another programming it was called key works was that you. It would memorize your keystrokes. So you could essentially write a macro on top of System Writer. And it took about 24 hours to do one simulation. Wow. And this is before you had a team or anything. So you're doing all this yourself. Right. No. Your story of bringing your granddad the results, the back results, reminds me.

I was starting Attain Capital, and I spent all this time on a business plan and all these projections and took it to my dad and be like, hey, we checked this out. And I was so proud of it. And he just turned to me. He goes, nobody loses money on a spreadsheet, son. Well, and it's good advice. You know it's good advice. So do I do it? He's like, do whatever you want. But it's not going to look it's good advice but so do i do it he's like do whatever

you want but yeah it's not gonna look like that i'll guarantee you but but i think um you know it instructs me when i with eight kids when i want to kind of scoff at them and say you know kid it's not that easy and you know um no one cares no one loves you you're your mom and i sort of love you but that that's it. You know, you want to give them that speech. But I remember I got that speech, but they were wrong because it did work. And so now about three out of four things he told me I was wrong on, he was right. But the one was a good one. That's right. So I wonder when with my own kids, well, maybe this is one of those one out of four.

I better give them the benefit of the doubt. I don't want to throw water on cold water on everything. So and then somewhere in there, you told me the story once you were one of the largest electronic traders or you had a whole you started to hire a team and have technology in the whole bit. Well, so we had so in the late, late 90s. So hedge funds, you know, the stocks, if you look at 95, 96, 97, 98, 99, those five years, I think the worst stock performance was like 22% to 38. And you know, it averaged about 25%

stocks did for those five years. And I remember someone said to me, and I at the time I was working for commodities corporation, which was a great group of people. And I was one of their traders. And they, well, someone said to me, why would I want the risk of futures if I can make 20% in stocks? And I heard that the last three years. Yeah. And I said, yeah, exactly the same that we've heard lately. And I said, well, no, I get it, but I just don't think it'll keep that up. Well, so we had a lot of money leave. We were having five years of tough performance. Stocks were doing great. So when the money left, what we did in 98 is I got a membership on the Chicago Mercdal Exchange, got a quote machine, what was then Globex, their Globex machine,

and we started coding and we got permission. We are the first people that had permission from the CME to automate order entries, to have a computer generated order. It took us, we had to get board approval. And so we started doing arbitrage electronically with my personal money because, so in like 95, I had 130 million under management. In 1999, I had 3.7 million of which it was 90% family and friends and my money. And so then I had, I opened a broker dealer with my own money and started doing this arbitrage and just stuff where we were trading like an ETF, like the spiders SPY versus the S&P futures, or a lot of ETFs versus futures.

And there are a lot of groups in Chicago doing that on the trading floor. Right. And so it's doing it from Canadian, Texas, a little different setup. Well, and the thing that was interesting is kind of like, you know, the game slapjack, you know, except if you had, you're the 10 year old that shows up with a optical recognition and on a computerized arm hand slaps it and you start getting nine out of 10 jacks. So we were competing against people that were doing it on the phone and we did real well for a while. And so we did that from really 99 through, let's see, 05, we stopped. We stopped in 05.

So for about six years. The competition started to get there. Everybody got faster. Kind of the high-frequency training was being born. Like true today, what we think of in nanoseconds. Right. So when we were doing it early, we had a lot of fun. It was a great experience because you're programming. You program all night. And then during the day, you're, you know, you can see

how it goes. But at night, it was quiet. So you could play around with their machine. Basically, it was quiet. So it was a, it was a neat opportunity. We have a lot of fun. It was fun to program like that. It was fun to see really the floor operation. And, and I think to me, I'll say to, you know, this this high frequency trading it's so much better than the floor i mean i i get the floor was good but i think just to be anonymous as an off as an off exchange trader that anonymity is good to to be able to to feed orders in the it's cheaper everything about now i mean basically electronic trading not right high frequency but high frequency but electronic versus the floor.

I like, I just, people kind of bad mouth it. And I said, well, I get it. There's problems with everything, but it's better than the floor. Even though I have a lot of friends that were floor traders and did a great job. Well, I tell people when I was a clerk and I'd go down there at 6.20 in the morning in the bond futures, you know, as a 20 something year old hung over from the night before and i'd have to reconcile trades with other clerks right at six in the morning i'm like this is insane we're matching millions of dollars of trades and people are just like

it was kind of go fish do you have a four lot you're looking for in the bonds nope okay i'll try this guy i mean so inefficient oh yeah you know inside of all that inefficiency people were like walking away from trades and hiding trades well those guys with the light blue coats they were the the isn't that the ones that the reporters yeah they would end up um well the out trades all the morning you were fixed it's like four percent of all trades were out trades there was yeah and it was hugely inefficient yeah no and it's but um but yeah no so we've i've and so i've had a fun i mean i've really as a math geek and a data geek and to get to have a front row seat with the markets it's it's a lot of fun just to and for you especially not being a wall street guy or ivy leagues or right to even the playing field on electronic front is

is nice for you i would assume yeah no we because there were days we were doing over one percent of the volume of the chicago mercantile exchange from canadian from a two-stop like town in the middle of nowhere 100 miles from the nearest airport i would have loved to seen that meeting when someone at cme figured that out like wait where's this fine coming from what the heck's down there somebody get down there. I could tell you 10 funny stories about people just saying what you like, how did you cancel and replace an order 800 times? And you go, yeah, that's right. It's like you did, you canceled to replace every two seconds.

It's like, yeah, that's probably right. And now they have rules of like your messaging rates and all that. Oh yeah. No, we, we were, we were on the front end of a really interesting time and you know, but to read like flash boys, the book, you know, you see Michael Lewis book. Yeah. It's interesting. Cause about half of that, I knew half of it. I didn't know. And there was probably a whole nother half that he didn't know that, you know, you, there were interesting things that, um, but, um, but,

you know, progress, things move and the world's changing all the time and we got to adapt. As of the end of your trend following training career in the beginning, like how much did the model change over those years? And, you know, we just kept, it was evolving always. We added more, you know, we added different timeframes of trend following from shorter term to really long term. And then we even had some mean reversion things and we had some things that were more pattern recognition. So we, anything that we could, our toolbox was find any kind of price pattern that has a predictive value and so we were able to find things that we were constrained just to trend so we were able to do other things too so it was so it I think

just kind of the repertoire of models expanded and that did you ever find yourself I've been arguing for a while that the a lot of the trend followers have had to kind of add long bias add a longer time frame in order to survive and stay afloat like yeah fight that battle internally of like do i stay true to the the core philosophy of what am i trying to do or do i try and stay in business no absolutely no we had that we had exactly that for i would say 10 years because what you saw really was the biases to add beta. Because you could basically go in and add, you know, you say, well, I'm a trend follower and gee whiz, stocks are going up. So I'm going to get long.

And you're like, look, this is just an excuse for beta. So really, you're adding beta to the market, to the model. But the research, I had one research guy that was always like, yeah, but it's better. And you go, yes, it's better. But if we have a big market sell-off, we don't want to be, we've got to be that diversification. We can't be correlated. It's better if it's the only thing on the planet. Right. If they're using you to be not that thing, then it's not better. Right. And that's where, see, in a way, the fortress is that, where it's like, no, we've got beta in the fortress. We got stocks, bonds, and alternatives. We that's where, see, in a way, the fortress is that, where it's like, no, we've got beta in the fortress.

We've got stocks, bonds, and alternatives. We do all three. But they know there's beta, so they expect it. But with us as a trend follower, there's always this pitch in alternatives where we need to be, you know, we're going to be non-correlated and the non-correlation pitch, which is true in most cases. But I think what's happened is different groups have let beta kind of sneak in. And you've really got to be diligent in analyzing their returns to see, I know what they're telling me, but is it true in that, is there beta in here? Well, it's hard to believe, right? We just posted our asset class scoreboard yesterday for March. I think the SOC Gen C T- CT index was up 17 basis points in March.

Wow. Yeah. And see, that shows that they did their job. Unbelievably hard to believe. But no, they did their job. But in the old days, you'd expect it to be up 10. Well, yeah. With energy making that move, with bonds making those moves,

you'd expect it to be a lot bigger upside than it was. And for the years, it's flat to maybe down slightly well you get some guys that um that have openly added beta but others that haven't we but we didn't see as much beta in our group of traders in fortress we didn't see we we had one trader that really had some beta but for the most part we didn see it. So it was, I think if you pick the right traders, you just got to be careful now. And I think as the, as the, for the managed futures business, if I were to speak to everybody in the industry, I'd say, look, let's stay true to what we do. Let's make sure that we provide non-correlation. People have stocks. Don't give them more stocks. But the

flip side of that is, yeah, but I've got to survive. It's an insanely hard proposition. You could manage $8 billion by putting stocks and futures together. You could manage $200 million and be a small percent of someone's overall portfolio you know people got to feed their families and make a living they're going to probably choose the former you bet no that's right that's right so yeah let's dig into the fortress fund we've been dancing around a little bit here so um well we ought to talk can we talk about just kind of lessons before we go to Fortress? Can we talk about, yeah, let's talk lessons, you know, over the last three plus decades, the lessons that I've learned. Um, and I think there's things that your listeners and,

um, can, can get some that, you know, I had to pay for some of these lessons. So I'm going to, I'm going to try to give for free. Anytime you get free lessons is better. So the one thing that I've thought of is I always, you got to be aware of where the crowd is in the market. If you think of the crowd as a hundred people, some people, you know, a hundred pounds, some, the big traders are 500 pounders and you've got to say where are they and um and if ever they're all leaning one way then sometimes you get in a situation where the market can't get worse or can't get better and it can only go the other way and those are times i think in the markets that you need to watch for they don't come along as often as we would like but when they do you got to be paying attention so so like for instance instance, I think the energy market, which we talked about, are sort of that way now.

They're horrible. They can't, I think, you wait another week or two and they can't do anything but get better, maybe. You know, once that gets priced into the market. Doesn't it seem like that's a little counter to trend following, though? It is. Oh, no, it totally is. That's one of the lessons. All right.

But trend following works. Oh, yeah. is. That's one of the lessons. All right. That's, but trend following works. Oh yeah. No, you're always with the trend. But, and the thing about trend following that you've got to remember is it'll go further than you've ever imagined. Right. Like crude oil. You've got to imagine crude oil

could go to $2 a barrel. I think crude oil could go to $2. So that's where, be open to extreme possibilities. So, so that's where, um, be open to extreme possibilities. But once you get to extreme, then, um, then you end up, you've got to understand, okay, it may not go any further than this. Well, so I always imagine it like a boat and if you could sit at the back of the

boat, watch a hundred people in the boat and you say, is everyone ever get on one side or the other, then you need to pay attention. Generally, they're somewhere in the middle, probably 99% of the time. But every now and then, you see them lean one way or the other. I was listening to the radio, and they were talking. This has been 10 or 15 years ago. And they were talking about a tourist boat down at Austin, at Lake Austin. And there were these tourists, and they were going around, giving the tour of Lake Austin. Well, I guess part of the tour is they go by the new beach at Lake Austin, at Lake Austin. And there were these tourists and they were going around, giving the tour of Lake Austin.

Well, I guess part of the tour is they go by the nude beach at Lake Austin, which is a place called Hippie Hollow. When I was telling the story, I think you'd heard it at a conference. I think you called out Sean Jordan in the middle of the conference and said, Sean, what's the name of that nude beach? Sean, what's the name? Yeah, I know. He would know and he did know.

He actually did know. Hippie Hollow, he calls it. So, yeah. So, tourist boat goes by Nude Beach. Nude Beach is on the right. Lake is on the left. Which side are the tourists on? Well, they're all on the right. They're looking at the nude beach. And now, unfortunately, nude beaches, we would imagine they would be full of supermodels. But generally, they're not full of supermodels. Not so much. No, not so much. It's unattractive naked people that are fine being naked. And so you've got these tourists on the right side of the boat, gawking at the unattractive naked people at the new beach. And then, so they get so far on the right side that instead of,

you know, I would think, well, it's can only come back. Well, there's another option. The boat capsizes. So now you've got the boat capsizes. Now you've got the tourists in the water and who comes to their rescue to help them get ashore is the unattractive naked people so that was the real life story of this isn't going to lower than 20 the boat capsize it went to right that's right so so yeah so the lesson is if you're with the crowd you gotta be careful because at some point you may be um you know, you may find yourself being rescued by unattractive naked people. And so that's a, that's a bad outcome. So, so beware when you're with the crowd, particularly if the crowd is going to an extreme, you might want to say, no, let's all go to the, let's go to the left side of the boat while everybody else goes to the right side.

And you're, you're the one person not being rescued. I love it. I love that story. Yeah. So there's that. And then I think the other, you know, the one thing too is that idea where we talked about earlier, the things beyond the three standard deviations. I think to survive a financial storm, you need to study financial storms. You say, what happens in a financial storm and how do I build a portfolio that can survive a financial storm? And so that's where really, you know, we know we hear about diversification, but but that's where that diversification and really smart and thoughtful diversification needs to come in because, um, right. We're talking just value stocks and growth stocks isn't diversification. No, no. And then national stocks and us stocks isn't diversification, right? No, you get, you know, you, you can, you know,

what I liken it to is someone that does a fruit salad and they say, Hey Jeff, try my fruit salad here. It's great. I've got red delicious apples. I've got Granny Smith apples. I've got Honeycrisp apples. I've got Fiji apples. You know, all these. You know your apples. Yeah, and you just say, yeah, no, I'm an apple orchard guy.

So you say, look, hey, you would say to me, Salem, this is just an apple salad. You might want to try a grape or a banana. So when we just do versions of equity, we've got an equity fruit salad. That's it. So it's not diversification. And study it in the RECs. Say what happens to this portfolio in the financial RECs? Challenge to, you know, you know, has been with fixed income in the last, really since 08, with fixed income getting, the rates getting so low. And now we're, you know, last week they were, you know, they've actually been dipped a little bit negative territory on the front end of the yield curve.

Yeah. So you see that and you say, well, what used to be say 60 40 before 08 now is actually the benchmark is 70 30 because people keep creeping more and more toward equities and you know equities to the lower lower yield yeah because the because bonds are worse and worse and you know equities are kind of like a you know you know say it's like a dog that is is really nice 99 of the time but but every now and then it goes crazy and bites you and craps on your carpet you say you know i think i think you need to be an outside dog even bite you but like rip your face off right right right so that dog you say no you need to sleep outside i don't want you in the bed with me. If you, if you, you know, if that 1% of the time happens. So stocks, you don't want to get too close to stocks because

every, you know, in my career, about once every 10 years, it, it goes haywire and really hurts you. And so you got to think about that. 12 year one, a little bit of an anomaly of taking a little while to go. The flip side of that is people would argue, right, of, well, hey, you told me this and I was buying puts for 12 years and lost 40% or something, right? So it can't just be something that's negatively correlated and bleeds to death. You got to have something that survived. I think that's still the argument for bonds, but I would agree with you that bonds at 5%, 6%, 7%, yeah, no brainer. Have that in the portfolio. You're getting paid for protection. Bonds at zero or negative, I don't know if I want to get nothing for protection.

I'd rather have some absolute return potential in there. Yeah. No, bonds are the worst. I'd rather own gold than bonds. If I'm going to have to be in something really like that, I'd say, well, at least I get inflation. But better than that is that's the alternative space. That's why you love alternatives. It's because, and again, as a math geek, I'm, I'm saying what, you know, alternatives are if they're non-correlated and they have real return, like I can make a decent rate of return with them, then they really bring something to the table that's nice. And so I think in that time of, you know, when bonds, like you say, we're yielding five, 6%, a 60, 40 portfolio is a good portfolio. You know, 70, 30, it's funny, no one's 30.

No one has 30% bonds. You go looking at the largest college endowments, everybody, they're five to 10% bonds. And sometimes they're high yield bonds so it's like well this isn't even this is zero bonds which got dumped on this in march right yeah right they're equity like when they're again they and then and then a lot of the hedge funds that they sometimes pick end up being you know equity like um you know like you get long short hedge funds you're like okay let's think about long stocks yeah is is long equities which is going to have a correlation even though they say well the beta is 0.5 and you go with a beta is 0.5 because it has half of all but it's if it's correlated at a one it's not going to help you so it's going to go down and it goes down less it's just watered

down stocks yeah i agree so you've had a nice story on your watered down whiskey before oh yeah no well that's it because you pay for you're like well if you're going to pay for whiskey would you rather pay you know five dollars for whiskey or five dollars for watered down whiskey and that's where yeah right people have been like great i'm cutting my fees i'm giving you this new low fee product. But yeah, all I did was water down the whiskey. Yeah, no. So yeah, so you got to be worried about just, you know, in that case, you're paying hedge fund fees for watered down equities.

And you're like, well, if you bought half equities and half treasuries, you've got half of all and you got the correlation of one. You've duplicated that, you know's a lot of hedge funds that are long short, but you get some of the alternatives like global macro, managed futures, some that are stat, ARB, that are equity neutral, not a long bias. There are some things, hedge funds, that really have no correlation. They have a decent rate of return. And even better, I would argue, even better, they have negative correlation in a crash. So they have, decent rate of return and even better i would argue right even better they have negative correlation in a crash right so they have on average non-correlation but negative

correlation in a crash versus some of the other products you're talking about i have on average non-correlation but positive correlation in a crash yeah yeah you know that's that deal of if you want to have if you want to kind of hurricane proof your portfolio study the study, study the storms. And in the storms you hear people say, well, yeah, well, when that happens, the correlations all go to one. We say, okay, you need to pay attention to that. That's important. They do often throw that out. Oh, well that you shouldn't look at that because everything went haywire. Yeah. Well you say, well, look, I don't want, it's like a compass had a magnet next to it. You can't pay attention to those. Yeah. Yeah. Yeah. It's kind of like a guy that tells you, Hey Jeff, I got these seatbelts. They're really great. But, um, you know, on the

average day, they're awesome. Now in a wreck, they don't work, but, and you're like, well, that one time I need a seatbelt to work is in a wreck. If the seatbelt does not work, if my diversification model does not work in the wrecks, I need a different diversification model. Agreed. Agreed. So that's, so study the Rex. If you've got something that correlation goes to one in the Rex, that's not what you want. You want to create something that's, that you want to build your financial house with the storm in mind, and then it can survive the storm. And you've got to know, I can't put my, it's like back to the seatbelt analogy. I cannot do this in the split second while a crash is happening.

If I'm in a car wreck, it's not in the middle of the car wreck I put my seatbelt on. You've done that when you left the driveway, when everything was calm, in an environment where you could build your financial house that is hurricane proof. You built it long before the hurricane came. So it's this idea of thoughtfully building a portfolio before the storm and what things can you include that are helpful. And when you do that research, you find that there's stocks and then bonds sadly are not as good of an asset anymore.

But that's where alternatives can come in too. And alternatives, I think, are more important than ever now. Two comments on that. One, the storm, quote unquote storm you're talking about, I feel like people have a too narrow view of when and if that storm is coming. Like you think of that on decades long or a hundred years long. How do you view that of like what timeframe you need to be protected for on this storm? Well, it's kind of like, you know, it's got to be, you figure your investment career, me as an investor, starting when I started trading when I was 20, um, I've got pretty good genes in my family.

If I take care of myself and, you know, so let's say I trade till I'm 90. So I'd say over 70 years, you know, it's kind of like dying. It only has to happen once for the game to be over. Exactly. And that's where, you know, you say, okay, if I only have to go broke once to be broke forever, because you lose your stake. So you've got to, I think you've got to look at it. And then then you once you if you look at it in a, you know, a 70 year timeframe, you say, well, it's not if it's when there will be a storm. And in my experience, there's an extreme storm about every 10 years and so you just, it truly is like wearing your seatbelt.

I mean, the odds of needing your seatbelt, you probably need it once or twice in your life. You're glad you wore your seatbelt and you want to make sure, the same with building a portfolio, you say, I need to build it knowing that there will be a financial storm at some point and I have to be always ready for there will be a financial storm at some point. And I

have to be always ready for it. Just like I have my seatbelt on. And then my other comment on this whole concept would be, you know, the person who's like, I love everything you're saying. I get it. I didn't used to get it, but now I'm scared. Is it too late for me? Like, well, you know, that's, that's, I'm hearing a lot of that lately. I'm like, great. I get it. I should have had all this long volatility exposure, but I didn't. So what do I do now? Well, I, you know, it's kind of like when in October 20th, 1987, I lost half my accounts value, but what I did was I soaked up the lesson and you know, I think that first storm and even there was a storm came in January of 1991. I think it was a 17th. It was a Wednesday night, six o'clock. The U S starts bombing Baghdad and crude oil.

I lost, that was the biggest percentage loss day of my trading career as a hedge fund manager again it sinks in because it was a losing time but you but those times so when something bad happens you can either say well i'm gonna learn from it or not and to me what a crude rallied you were short no so everybody thought crude was going to go up and it so it sold the news yeah yeah it was yeah buy the rumor sell the fact. And, and, and, and I sat there what I, and I wrote it down when I was done. The markets didn't behave like I thought they would.

I thought gold would go up. I thought stocks would go down. I thought crude would go up. Everything went opposite of what I did. And then as a trend, as a systematic trader, what I did was I let my system run. And there's times that I would say this, the systematic model is always looking and assessing risk in the rear view mirror. Yeah. And sometimes as a human, you have to say, okay, it's, it's not assessing risk properly because there's something getting ready to happen. Let's say there's an earnings report or something like that. Like if you had a black shoals option pricing model where, you know,

implied volatility is different than not than the historic fall, because you say, well, there's something getting ready to happen. Therefore the market's built in a higher ball. Well, so as a systems trader, I learned I needed to override the risk parameters and add more risk in the models. So it would lower my position sizes. Yeah. My example to clients, I was there to is say there's some huge asteroid coming to hit the earth and they send a probe out to check out if it's on the exact trajectory. Ball is what it is looking backwards until they say, hey, Wednesday at 4 p.m. the probe's going to tell us if the asteroid's going to hit the earth or not. There's just a total phase shift right it's binary if it comes back yes volatility goes 50x if it's no it's so yeah i

agree with you on there that you can't always be looking in the rearview mirror no and you need to adjust your positions knowing that hey there's going to be a big event because like you say it's either all good news all bad news binary and the market's going to react so but in the meantime there's no vol everyone's on the edge of their seat ready to move one way or the other so so my back to your point is it's never too late because there's another train wreck there's another storm coming it may be another 10 years from now but it's never too late to to do it and sometimes they're not evenly spaced you know know, when the crap hits the fan, it's not evenly distributed and it doesn't come in nicely spaced intervals. And so we don't know

when the next storm's coming. It could be in six months or it could be in, you know. Right. I mean, who knows if we're even out of it yet, right? Oh yeah. No, there's plenty of storm left. You know, the interesting thing as a data person, you know, I panicked on, panicked. I kind of rang alarm bells at Abraham Trading on January 26th. I said, look, this is a big deal. We need to watch it. And then over the next, because there was about, I think, 500, less than 500 deaths in China and about 22,000 cases. And I said, I wanted to see if what I would consider a top medical country

had people die. So it was about a week or two later, someone died in Japan. And I said, no, this is serious. Yeah, that's a real deal. Yeah. Because they can't blame it on the medical care in China. Well, now we're hearing that there're really like 40,000 deaths in Wuhan and they were underreported. Yeah. But to me, this whole thing has been interesting. You can quickly see the type of people that,

uh, understand exponential movement and outlier events and all that. They were worried and they were preparing and other people are like, what are you talking about? There's only 20 deaths. Right. And I was like, yeah, if you double that every two days right it's a big you know it's that joke uh would you work for me for 30 days i'll pay a penny the first day but i'll double it every day and by the end you want a million dollars now or a penny doubled every day for 30 days yeah and by the end it's more yeah it's like 450 million or something at the end yeah

yeah the last day so it's crazy but you know because it's like 450 million or something at the end, the last day. So it's crazy, but you know, cause it's a penny, two pennies, four pennies, eight pennies, 16 pennies, 32. And you're like, this stinks. You're like, give it time. Right. My kids have that. How many times do you have to fold a piece of paper to reach the moon?

And it's, I think it's 46 times. Wow. But that's the right, the 45th time you're halfway there. You're halfway there. The big, that 46 fold is a big one. We've tried it. We can only actually physically fold it, I think six times before it's too unwieldy. Yeah. Well, that's fascinating. No, well, that's good. Well, the exponential piece is the part that you, it's kind of like compound interest. People underestimate it.

So those lessons, that's what led to the fortress. The fortress fund was an idea that, you know, we were, where we were in the alternative space with a hedge fund. And we would say, you know, Jeff, we, we do this one thing in the hedge fund space. We could be one piece of your 20 piece puzzle. And, and then we would see them really mess up the other 19 pieces. They wouldn't do a good job. And so, so that's. It might even fire you because they screwed up the other 19. Right, right, right. And so what we did, that's it. And so we,

so with the fortress fund and it's an outgrowth too too of a Boone Pickens and I did a foundation together called the Pickens Abraham foundation. We both had put in 2 million bucks to help kids in this, these two counties of Hemphill and Roberts County, Texas, where Canadian is and where his ranch was. And, you know, total population in the two counties is about 4,500 people total. And you've got two school systems. And we wanted to help really kids and do college scholarships, things like that. And so we did that.

I knew you were downplaying your charitable efforts earlier. Okay. Well, so. Congrats on that. Yeah, no, well, it was fun. It was fun working with Boone and we, he cares, you know, about, um, obviously OSU and, and there's a lot of kids in our area go over to Oklahoma, um, to go to go to school too. And so we, so we, um, it was fun for me cause I got to be king of my own investment committee. So I had my $2 million, I got to invest. And Boone invests his $2 million.

And so we ended up then, so I got to try out what I wanted to do if I could be king of my investment committee. Because they say, what a committee formed to build a horse, you get a camel. And anytime you're on a committee i always remind myself when they're doing something that i think is stupid i'm like okay i guess here's one of these stupid humps and then i just kind of keep my mouth shut and know that this is this is the inevitable and steve steve jobs famously said we have no committees at apple yeah we run it like a startup and he would say like no that button's stupid well sir everyone thinks like no yeah yeah no no well there's there's some yeah there's good and bad with it i'll say i've seen the wisdom of a committee but i've seen the bad of a committee and the part that's bad is a committee

they they don't believe the math they really want they're we've all been taught like 60 40 who came up with that i mean yeah it just became a thing. Yeah. Yeah. Seventy thirty people pull these numbers out of their ear and everybody says, well, you know, we've been all been taught. I'm like, well, have you ever done the math? Because the math will tell you a different outcome. And to me, what I always saw when I looked at the math is I'm like, look, your stock portfolio, your stock piece is way too big. You've got way too much risk to stocks. You need to reduce that. You're and you need to bring in alternatives, but the right alternatives. So there was this real clear way I had in mind.

And so I did that for 10 years in the Pickens Abraham, and it did really well and had this proof of concept and at a much lower risk. And so then that's where the team said, we ought to have this as a product because there's a lot of foundations and endowments that could do this. And so that's where the Fortress Fund came. And we, you know, and then our fee was just 0.65%. So we have this low fee and we say, look, and I've got, you know, I've got over 10 million of my money in it, either personally or my kids or then now my foundation. And so I'm like, look, you basically, you co-tell me, I'm going to invest in stocks, bonds, alternatives. It's the whole package. And if, and really, you know what,

it's, it's like Ray Dalio's all weather fund. I thought that was a neat idea where, what he did. And, and so it's, and it's, it's probably half the work for me. It's a smaller team on my side. You know, it's, again, back to the baseball analogy, I don't have to get up for 6 a.m. workouts. But I've got a great, you know, but we have between six and 12 hedge funds that we invest in, third-party hedge funds. So it's a neat product.

And so the Abraham Classic model is not one of those funds? No. It was for the first year of it from eight from 2018 to 2019 no we don't we we just say no we're gonna let third-party people do it and then um and so it i just think it's a cleaner model and i think too it it becomes a model that you know someone says you know salem you just handle it you know I was talking to a lady this morning who's does a foundation in Lubbock, Texas. And, you know, they're, they're worried about people in Lubbock now with the coronavirus and how do

they, you know, they've got, they're worried about the mission they have. And what it allows us to do is we can come in and say, look, let us be your investment committee all in one year foundations invested along our, my own foundation and my own retirement money and some of my kids money. And so you say, yeah. And then, and then just coat tell me. And, and, and so it's a fun product, but you know, it's like what you all do at RCM where if someone comes to you and you say,

look, we would like to understand alternatives. Can you help us? And, you know, and y'all can look at their portfolio and you can give them a piece of that portfolio because the hard part is, and I see this on investment committees, people don't understand alternatives. They don't do the math. They don't have the depth of knowledge that like, you know, like someone like y'all would have or others. There's, you know, there's, I think there's probably a dozen really good alternative shops in the country that understand it well and friends of ours and people like RCM. And so it depends on- They usually end up with a big name because of that lack of understanding of like, all

right, if I don't know the right one to pick, I might as well pick the one everyone else picks. Yeah. No one got fired by an IBM approach. No, yeah, no, absolutely. You see the big, yeah, the big, the big marquee names. But the reality is, you know, and I had this discussion with a consultant not long ago. I said, look, they're a big name, but I think the smartest people don't work for the big names.

Really, they go out on their own and do their own deal. So, and me and the business, I've just seen the smartest people go do their own deal because, you know, the big name, you pay to be at the big name shop. So, they can't, the best talent in the business goes and does their own thing. Yeah, I agree. And so then on Fortress, are you guys also running the beta piece? We, yeah, no, we do the stock. So we do beta and we'll do stocks and bonds and there's no, so we don't do, there's no mutual funds, no underlying. We just pretty much index those. So we say, look, we're going to give you, you're not trying to

add out there. Just let's get a pure beta. Right. So we do beta. SPY ETF or whatever. Right. But no, but no, not even, but we don't have ETFs. We build it like, you know, when we did the, so going back to say the, the equity arbitrage stuff that we did. So we would build baskets. And so we were like, well, we know how to build that. So there's no cost. So we don't want the nine basis points of SPY even. We just say. I love it. There's not too many people are worried about nine basis points. We know how to get around that. Yeah. And the piece of just the third party, I don't want to have my money in an ETF. I'd rather have the exposure directly that then, you know, my grandfather taught me about CIF and CIF is cash and fist. It's like, look,

you better be in your fist if it's your cash. So I want to make sure I haven't given my money. I want to have it close to my hand. Yeah, and we've seen in this crash some of the bond ETFs and getting dislocated from their nets and whatnot. Right, right, right. And it's in the storm that you have trouble. And that's when you don't have trouble.

And so this started just for your Pickens Abraham foundation, right? We should have come up with something a clip more clever for that. The Abraham or the I have, I have a lot of respect for Boone. So he gets to go first Pickens Abraham. Yeah. And, but then you said you said hey where other people are approaching you and you said well we've got this program we're running for this foundation we can run the same thing for you right right so and then it's since so the the way the foundation was set up is if

either one of us uh if if Boone or I the first to pass away then it gets split so his part went to the T. Boone Pickens my part is in the Salem and Ruthann Abraham Foundation. So for my wife and I, and so we, um, so then, um, and really that's then where, um, and the Salem and Ruthann Abraham Foundation is invested in the fortress fund. And so it's, you know, we don't pay fees. The foundation does not pay Abraham trading fees because of conflicts of interest. But it, um, so that's where a hundred percent of my foundation is, is where, uh, about

90% of my kids' money is. And then I've got a big chunk of my, um, retirement in there as well. So it's, it's a safe place to put money. Your wonderful daughter, Kate works for the Fortress Fund. She works in ham training. Yeah, no, so she's the oldest of the eight, Kate is, and she is director of marketing and a smart girl. Yeah, and you know, the good thing, Jeff, about eight kids is I tell people, said, you know, diversification works in all ways. And with eight kids, you know, you're bound to have a few winners out of eight. And there's not as much pressure, you know.

And then, you know, like in your family, you're one of the winners, see. But you go, but, you know, there's bound as much pressure you know and then and you know like in your family you're one of the winners see but you go but you know there's bound to be a few losers too oh we we got some and you go okay we love them but you know but uh you say but but again there's no pressure you say you know if you have one kid or two kids you're like oh they gotta be winners and you're like with eight you're like no i'll just accept the average. Let the chips see where they land. I love all my kids. But yeah, no, Kate's one of the winners for sure. I'm not sure about some of the others.

They're all. I get it. I'm in the same boat there. Yeah. In a quarantine too. Now with the quarantine going on, we're not sure if we like them as well. I love my wife. How old is the youngest?

Are there any still in high school? Two in high school. There's a junior and a senior. The youngest turns 17 Saturday. So we're in that 10-year, 10-month, that two-month window where there's going to be 27 to 17. My kids are young, eight and 11. So I've been saying like, I feel bad if you were in high school right now during this lockdown and all this stuff, or even in college, like taking away some of your best years. Yeah. So three of our

kids are in college. They had to, they got sent home from college. We have a senior who she's, you know, no junior, senior prom, no grant, probably no graduation, no, all the end of school stuff. So no, it's kind of a bummer for them for sure. So. Yeah. This is going to shape that generation in ways we probably don't even realize yet, but. Yeah. They'll, they'll, they'll all be tulip paper hoarders. I don't get that, but we do have a lot ourselves. Yeah.

All right. We're going to wrap things up here. Anything else you want to add on the Fortress Fund? No, no. I just think it's... In the portfolio approach? No, I think it's good. I just think, yeah, no, I think we covered it well. I actually had a question I just remembered.

So is part of the whole idea there's the rebalancing as well? Right. Well, so. If stocks are doing really well, I'm going to take chips off the table, put it into the alts. Right. In a period right now, the alts just paid out. I'm going to take that off. It's going to allow me to buy into stocks at these lower levels.

Right. No, yeah, no, we, there's, there's some rebalancing. There's some risk management too, yeah, no, we, there's, um, there's some rebalancing, there's some risk management to, you know, uh, you know, in, uh, January and February, we were actually, you know, a stock volatility went up. We, there's some rebalancing there that doesn't happen very often. That would be something rare, but typically we're about 45% allocated to stocks, 20% bonds and 35% alternatives. And so will you amend that per our bond discussion or that'll stay? No, we always have some exposure to bonds. I don't like it, but we're going to have exposure to it.

It's how the math works. Yeah, no, you will. And you know, and if you're competing, our competition is really, we're trying to beat the top 10 college endowments. And you know, if you're in a, if you're in a, you know, a contest, who can make the best spaghetti, you gotta have noodles and red sauce so we gotta have stocks and bonds it's the spices Jeff yeah Harvard's been coming under a lot of fire because they're like laying off their cafeteria workers and stuff it's like why do you have this 50 billion dollar endowment if you're not going

to use it in a scenario like this no exactly what is it for right well it's just to keep building bigger and bigger no no i think that's right great well i'm gonna switch over my background here for our favorite section yeah give me a second there we go inside the millennium falcon, look at this. There you go. That's great. Yeah. So this has been a great episode. Thanks for joining us and sharing all your wisdom. We wrap up all our pods with a little bit rapid fire favorite section. So I'm going to ask you some of your favorite things. Okay. Favorite animal on the ranch out there. Oh, you know, so honeybees wouldn't count. That's an insect because we like our honeybees. I think an insect's an animal. We could give you. Yeah, I'd say chickens. So the chickens we just got so we can get our eggs. Yeah. Yeah. My wife's cousin,

they're in Seattle and they have three chickens actually in their little backyard. So they say they get an egg a day. Yeah, no, that's it. You bet. You bet. Yeah. Do you listen to podcasts at all? Sure, some. Yeah. What are your favorite podcasts? Oh, man, The Derivative. You don't love the one you live, right? Yeah. Besides this one. Besides this one. You know, I liked the one that the Systematic Invest investor with Jerry Parker and Moritz and Niels.

Those guys. That was fun. Very good. Yeah. Favorite orchard crop. They call it a crop or a. A crop. Yeah.

Peaches. I like peaches. Now apples. I make more money from pecans though. Yeah. There's a old fund, old fund guy here in Chicago. He quit, retired, moved out to California, and started an almond operation. And so he makes 10 times more money than he ever did in the hedge fund business.

It's a good fixed income substitute, I would say. Because you make, now it's a little lumpy, but it, but it provides regular income and it isn't, you know, negative rates. It's a, you know, I think you can make on an orchard if you're willing to kind of put up with the extra work with it, you know, you can make eight to 10% on your money and really not work that hard. So. Really? And then, so does that, are there management companies or people run all that and you're just the investment or you got to figure all that out? No, I've got, I've got, I've got, I have managers that run it. And then there's a one main orchard manager that he runs the orchard here and then he

manages the other two. Helps, helps manage them. Kind of oversees it. I could do a whole podcast on orchards. I'm so curious, but I'll just, the last bit on orchards is, have you seen a downturn at all with what's going on? Or people less likely to get there? An upturn?

They want more? Or is it such a long lead time? It doesn't matter. No, it's kind of a little of both. You know, I think ultimately there's going to be, it'll help, but we've got to pivot where we've got to do more kind of deliver to your door. You know, if I could say, Jeff, hey, in these trying times, we're going to deliver a box of fresh peaches to your door. Then you say, hey, right from the orchard.

And so I think that's what that kind of thing with peaches and apples. Now pecans, pecans will be interesting, but I think people right now, you know, a pecan is a, is a food that you can, it stores well, so you don't have to refrigerate it and it can sit there, you know, in the shell. And so I think that the things I have are going to work well. I think others, it's a little harder. It depends on how well it stores. And so it's, it'll, it'll be interesting. We don't know yet. Yeah. it's odd to me you've chosen crops without futures markets to hedge. Yeah, no, no, it's more fun.

It's in a way, you know, the volatility, you get, I think, rewarded for that being willing to take a lumpy set of returns. And if you diversify, it's kind of like alternatives. If you diversify on their non-correlated stocks or non-correlated crops, you know, in this case, you say, it's kind of like alternatives. If you diversify on their non-correlated stocks or non-correlated crops, you know, in this case, you say it'll work out. Yeah. Pecans and apples are pretty, I mean,

I guess you could have both those could be a nice pie, but. Yeah. I need, I need a pineapple orchard and then I can get in the fruitcake business. So I don't know if that's as lucrative. Favorite investing book? You know, I really like Jack Swager's Market Wizard and New Market Wizards. I like those. Were you in either of those? No, it would have been better if I was in there.

Yeah. You were in Covell's book, right? Yeah, no, I was. And, you know, I think to read an interview, I think to really hear the words of a trader is important. Sometimes you see there's something lost in translation, so I liked it where it's that interview style. I think that was helpful to me. You know, I like two other books I like,

which are just good financial advice. There's one called The Richest Man in Babylon. And then there's a book, Rich Dad, Poor Dad. And they both are really talking about the importance of saving. And, you know, to save 10% of your, you know, that discipline to save. You know, I think one of the, you know, one of the biggest things about building wealth is saving. And saving early, especially.

Right. And it talks about those in those two books so i think for someone that says hey i want to have some money and have a good retirement read yeah richest man in babylon or rich dad poor dad both of those are really good books too got it uh favorite what do you have down there in canadian tex-mex or or barbecue or mexican food oh all of it yeah no it's all good. Yeah, it depends on the day of the week, right? How many restaurants are there?

In Canadian, so we have the Dairy Queen and Pizza Hut are the only two chains. The nearest Starbucks was 101 miles away. Then they put one in a grocery store 45 miles away. But there is a good coffee shop. But then there's um the best restaurant in town is so we're on the second and third floor of our building and the first floor is the cattle exchange steakhouse and barbecue place and they have they were listed as one of the top barbecue places in texas and um and you know it's um a barbecue that's just one floor below you and steaks one floor below you is better than barbecue

and steaks 500 miles away so so that's got to be at the cattle exchange steakhouse for both barbecue and steaks i love it i can't wait to go back out to a restaurant yeah yeah absolutely uh and then we ask everyone lastly your favorite star wars character as I'm sitting here in the Millennium Falcon. Yeah. No, you bet. And it looks very cool too. You know, I would have to say Luke Skywalker because just because, you know, Yoda, it would be great to be, you know, I would, I guess I'm trying to identify who Yoda is. He's like there. He's arrived. Luke is still meta. Yeah. Yeah. Luke's still seeking knowledge and Yoda's given knowledge. I don arrived. Luke is still- He's too meta, yeah. Yeah, Luke is on the journey. Luke's still seeking knowledge and Yoda's given knowledge. I don't know.

You're probably pivoting more to Yoda these days. No, well, I don't think- You're giving out knowledge. Any trader, yeah, you never get to Yoda. Yoda is the ideal. And Luke Skywalker is all of us on that journey to our best version of ourselves. So I think whatever you're doing, you always hope for that force to be with you and good and all that.

So I like that. I love it. That's our best answer yet out of anybody. Oh, man. All right. Well, thanks so much for joining us, Salem. This has been fun. And good luck with the Fortress Fund and all you're doing to help everyone

down there in Texas and St. Jude and everything. Yeah, well, Jeff, thanks for having me. Thanks for having me, man. It's great to be with you. Stay safe, too. I look forward to sitting down maybe to some barbecue or steak sometime soon in person instead of just. Will do. I got to make it down that way.

My brother's in Dallas. Maybe I'll drive and stop. Yeah, stop in. Stop in. We'll take good care of you. We'll make sure you show up in Dallas heavier than you'll drive and stop. Yeah. Yeah. Stop in, stop in. We'll take good care of you. We'll make sure you show up in Dallas heavier than you left Chicago. We'll do. All right. Thank you. you've been listening to the derivative links from this episode will be in the episode description of this channel follow us on twitter at rcm alt and visit our website to read our blog or subscribe to our newsletter at rcmalt.com if you liked our show introduce a friend and show them how to

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