The Derivative - Trading Chinese Futures Markets with Abingdon Global

Episode Date: April 2, 2020

Chickity China the Chinese chicken futures. Between strict regulations, gated access, mainland-based employees, and more seemingly difficult roadblocks, the Chinese Futures Market can feel untouchable. But with abundant growth possibilities and highly volatile (= good for trading) markets, some firms are leading the charge in accessing this growing marketplace. In this episode, we talk with Fred Schutzman and Stephen Klein about their Chinese-launched Abingdon fund and dive deeper into liquid Chinese futures markets, NY sports alliances,  moving strategies into Chinese markets, testing systematic models, the best pizza places in THE city, Fiberboard futures, black metals, tricking dogs into volunteering, and the process of taking strategies live in a new marketplace. On top of their individual U.S. ventures, the team on the Abingdon fund has over 50 years of combined experience in managing portfolios, and for the China-specific ventures, they focus on a classical systematic multi model strategy with directional trades in futures grounded by technical analysis. Notes:  Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications Stephen Klein LinkedIn Donate to Village Care here Donate to Gilda's Club here And last but not least, don't forget to subscribe to The Derivative, and follow us on Facebook, Twitter, or LinkedIn, 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. One of the biggest benefits that we see in China is diversification. If China opens up its borders, I see everyone in the U.S., everyone in Europe rushing out to trade Chinese markets because they're not highly correlated to the traditional markets that we trade. They're not currency markets. They're not interest rate markets.

They're pure commodity markets. Now, not only that, they're unique markets that aren't traded elsewhere. So anyone trading, say, a basket of U.S. futures markets that then would add a basket of Chinese futures markets will get markets that are not highly correlated to the markets they're currently trading. They'll contribute a positive return to the portfolio and they'll reduce risk substantially. Welcome back to the Derivative podcast, listeners. I'm your host, Jeff Malek, and I have a trio of guests with me here today to talk about China, and not just the coronavirus or trade wars, but trading derivatives in China. This is the derivative, after all.

We're talking futures on things like rubber, rebar, and apples, which have quietly sneaked into the billion contracts a year club with the likes of the CME, Eurex, and the like. I'm joined today by Matt Bradbart of Jinxi Shang. Did I say that right, Matt? You certainly did. Jinxi Shang is RCM's China subsidiary. And we also have Stephen Klein and Fred Schutzman of Abdington Global, who are running their quant models on Chinese markets. Welcome, everyone.

Ni hao. Thank you. All right. Do we want to do the rest of the pod in Mandarin? It's going to be a short podcast. All right. That's as deep as we go with the, what'd you say? Hello? Hello. That's correct. So Steven and Fred, let's get a little background on your history in the business first. Steven, can you give us a quick overview of your background and how Abington came to be? Sure. I started in this business at a very young age, actually when I was in high school. I was a futures broker at Sons of Barney and at Mann. I met Fred in the early 2000s when I was his futures broker at Mann. I would leave Mann to go on to join a large Caxton portfolio manager and start his fund. I would stay with him from 2004 until

2013. Then I would go off to a big fund known as Graham Capital, where I was a portfolio manager there. And the whole while I'd kept up with Fred. And then in 2016, I started Abingdon to begin trading discretionary in the U.S. again. And also, when Fred had stopped trading for his predecessor firm that he'd founded named Briarwood, Fred also traded for Abingdon a systematic U.S. strategy, very similar to the one that he's traded for many, many years that I'll let him speak about. And as time would go on, Matt would introduce the idea of trading Chinese futures and that it was, you know, Matt pondered that it was a possibly better opportunity systematically trading the Chinese futures. So we had Fred check to see if that was the case. And sure enough, our back test was pretty amazing. And we got into business trading systematically Chinese futures through Abingdon, through RCM in July of 2018.

And this whole history of New York? Oh, yeah. Everything's New York. And everything's New York. Everything's New York. Did you grow up in New York? Yeah. No. So I grew up in New york i went to high school at a place called horace man in new york went to college uh up in poughkeepsie new york a place called vassar college and started my first internship in 1997 at smith barney in uh new york at their headquarters at 38 greenwich and um was smith barney the uh smith barney the old ads of we make money the old-fashioned way we earn it yeah i remember that ad they were spending some money on that they put it on meet the press

a lot back then and i remember bob rubin um getting hired to be sandy wiles like some sort of advisor and he spoke to the internship class of the first speech he gave it all to the party and he said that he thought that he should get a bigger signing bonus because the stock was five percent that day uh... and whatever what happened to smith barney refresh my memory as a smith barney uh... was a member of the travelers group actually before that smith barney was a member of the primerica group uh which was sandy wilde's company uh sandy wilde

would take over travelers group it would become smith barney a member of the travelers group then it would uh become solomon brothers when smith barney bought Solomon Brothers, became Solomon Smith Barney. And then, and I want to say 98, because I was there for it, City Corp and Travelers Group merged to form City Group, which was, I would say, the largest financial services supermarket anyone had ever seen, from insurance to brokerage to wealth management to commercial and individual bank accounts. And I was there for much of that. The dotcom bust in 2000 led me to go from Smith Barney to Mann because I followed my group there. And then when I finally graduated school in 2002,

Smith Barney would be known as Citigroup and I would be working at Mann. Though as many years later, I was at a big family office in 2008 and was a very large clearing customer of Citigroup at that time. Got it. Fred, your turn. Talk a little bit about your background. Stephen buried the lead a little with some of what you've been doing, but we'll let you share it in your own words. Okay. I had a strong interest in technical analysis and I was taking chart reading classes while I was still in college. And right out of college, I was very fortunate. I was able to get jobs in the technical analysis field as an analyst. And my first four jobs went from working at a charting firm

where I was holding the chart paper to make sure each bar printed properly on the line to doing analysis that had input into the trading decision. And I gotta ask you real quick, who was teaching the charting classes? Was that some charlatan? Was that a real thing? Being in New York, I was very lucky.

The New York Institute of Finance had like the top technicians in the world, some of the top technicians in the world. I had Ralph Ancampora, John Murphy, Alan Shore, and John Tyrone, four different classes, two on the equity side, two on the future side. And they were some of the best people in the industry back then and even now. And I learned a lot. I love doing that.

But after a while, doing pure research wasn't satisfying enough for me. I wasn't getting the feedback. It was almost like going to medical school, but never operating on anyone. And I wanted to start operating on people. So after about four years of doing pure research, I said, you know, I want to get on the front lines. I want to apply all these technical concepts to see if they actually worked. And I, you know, started dipping my toe on the other end of the pond in the money management side. And it took a lot longer than I would have thought. It took a good three or four years to really take my analytical skills and convert them into money.

You know, early on, I probably made every mistake in the book. And, you know, it's very easy to be correct with your analysis, but not be able to make money trading. But I was able, you know, after a while, I was able to, you know, I felt do that somewhat successfully. But, you know, in the money management field, unless you know how to program, it's very difficult to build a business and go anywhere. And the next big step I took was to learn how to program. Starting in the early to mid-1990s, I started to teach myself how to program. And that's really what changed my life. And when you were first in the business there, you were actually doing hand-drawn charts and

whatnot in the beginning yes I was doing hand-drawn charts and not that old no in those days the you know Commodity Research Bureau or commodity perspective you were able to purchase a chart service and you got the chart service. It was updated through Friday. And then during the week, you would update it by hand each day, Monday, Tuesday, Wednesday and Thursday. So you would add the bars. And so then you're learning how to code and you somehow somewhere along the line, came up with Briarwood? Exactly. You know, I mean, I also had a CompuTrack. It was an old charting service.

It was before the days of TradeStation back then, and people would use CompuTrack to draw charts as well. But, you know, back then, you know, adding, appending to your chart each day by hand wasn't a bad idea. It just gave you a good feel for the markets. But once I was able to put everything together, the analytical side of it, the trading side and the programming, we formed Briarwood back then with two partners. And we started to throw our hat in the ring and manage money. And we were able to slowly build up assets. And at our peak, we were managing as much as $247 million. I would just go ahead and round that up to $250 million these days. And make clarification, it's

USD, not RMB. Right. And I think that's around the time we met about 10 years ago when you were doing some stuff with Briarwood, was in your office down there near Wall Street, and you took me to some great pizza place where you got slices with all the Wall Street folks down there. What was the name

of that place? Do you remember? Oh, I forget. There's so many good pizza places down there. I forget. I think it's etched in my memory. It could have been the one on Liberty Street, but I forget. So then Briarwood ran its course and then you and Stephen met up. How did that come about? Briarwood, you know, was profitable for 15 consecutive years trading client money. And then after the financial crisis, we, along with everyone else, struggled. And for the last decade, U.S. money managers have had problems turning a profit, not only getting great risk to reward ratios, but, you know, even making money. And, you know, slowly Briarwood began to lose clients. And I didn't think there was much opportunity in the U.S. So I closed Briarwood. But, you know, Stephen was my favorite broker 20 years, close to 20 years ago. He was the most competent, competent broker we ever dealt with. I thought he was this

super smart young kid. And I wanted to remain friends with him. And we've tried to remain friends and do joint projects ever since. And about two years ago, you know, Stephen called me up. He goes, you know, what do you think about applying your models to China? I said, I don't know. I said, you know, maybe, maybe not. I wasn't too enthusiastic. But Stephen said, do don't know. I said, you know, maybe, maybe not. I wasn't too enthusiastic. But Stephen said, do me a favor. Just give it a shot. Do a back test. Let's see what the numbers look like. We'll come back to that. We'll come back to the China. But let me go a little deeper into

your background. Or first, I'll go back to you, Stephen. And so real quick, Fred, you sound a little more New York than Stephen. How is that possible? Stephen's been there college, high school, everything his whole life. You're the same? I am the same. All right. You have the better New York accent. Sorry, Stephen.

Stephen is more cultured than I am. That's why. All right, Stephen, a little bit more on your background. You volunteer at a homeless shelter, an adult home every weekend, which one? Oh, no, so I volunteer at two main places. One is called Village Care, which is a nursing home for the elderly, usually freshly out of operations. Another one is called Gilda's Club, which is a club that was started for Gilda Ratner, which has to do with...

Speaking of New York. to do with helping families of people with cancer or people with cancer themselves. We don't know when I'm there volunteering. You don't know if the person has cancer or if it's just a family member, but me and my dog volunteer at both places. At Gilda's Club, we volunteer in a part of the division called Noogie Land, which was actually seeded by Toys R Us, and it is for children. And so we do that about every other week. Does your dog know that he's volunteering or he just comes along? He's very transactional. So, you know, he's all about playing with his ball and then being given lots of treats. There was one funny instance where the kids kind of thought they were barking

with him. So they started, all these kids started to bark and he was barking with them. And I think he quickly realized that they didn't know his language. And so he just stopped barking, but the kids kept barking. You know, so he's kind of, he's got a good situation there, but he has 10 and a half, so.

Well, congrats on that. We applaud you for that effort. And Fred, you work with kids of a different nature. You're a professor, right? I taught technical analysis. After taking all these classes at the New York Institute of Finance, I actually started teaching there. So I taught maybe like seven or eight classes there. I haven't taught in some time, but I taught maybe seven or eight different classes. And, you know, I may have stopped about a decade ago. Okay. And at risk of Matt falling asleep over here, Matt, you're next.

How did you get into the business and end up being the head of a China initiative? It's a great question. So I got into the business about 19 years ago right out of school. I didn't even know what a commodity was and kind of bounced around a little at a small, a couple small boutique commodity firms that nobody's ever heard of in California and Florida. I've won a handful of different hats in my career. I've operated my own global macro CTA for about three or four years. I operated my own introducing broker for six years before I joined RCM about eight years ago. And how China came about, about three years ago, some of my colleagues and I at RCM thought there would be an opportunity to do business with China. We just didn't know at what capacity. A lot of our peers were thinking they could get money out of China and deploy it

in the traditional U.S. managed futures market. And in the RCM fashion, we kind of looked at things differently and reverse engineered it and said, what if we could apply the relationships and the systematic strategies that have shown success trading the European and U.S. markets, our current stable of clients that we work with, and work with institutional investors in China that seek alpha from Western managers? In other words, as opposed to getting money out of China or getting money into China, what if we could import the alpha and apply it to the Chinese futures markets? And fast forward to today, we've developed at RCM relationships with institutional distribution partners in mainland China,

and we have developed and further, I guess, exploited our relationships with managers that trade in the U.S. and Europe to trade the Chinese market. So, you know, we have brought six strategies to date to trade China. And, you know, I think it's very apropos to have Stephen and Fred on as guests because they're one of the managers that have had a lot of success. And so the general idea was instead of everyone was trying to get money out of China to trade on strategies, you said, hey, let's get strategies into China in order to have their money trade those strategies. That's exactly right, Jeff. And talk a little bit about that.

Why can't anyone just run their models on the Chinese markets? Is there regulatory issues? Yeah. So there's a lot of nuances that exist in China that you wouldn't even think of. In other words, you have to, unlike the United States, you have to tag orders if you're entering or exiting the market. In theory, in the United States, if you're long, call it 500 corn futures contracts, and you want to get short, call it 500 corn contracts. You could sell 1,000 and reverse in the market. In China, you have to do that in two separate orders. So you'd actually have to sell 500 to go flat and sell another 500 to reverse.

So there's little nuances like that. There's capital controls where you cannot get money in, money out. And there are certain regulations that only AMAC-licensed entities in China can represent funds. So it's been a wild ride and a lot of work and a lot of diligence over the last couple of years. But we're starting to show success in that we've brought six strategies to market and we think we'll be able to double in size, expand our distribution and grow our AUM in 2020 as... And back up a second. So if Fred, back when he's running the $247 million,

said, hey, I want to go trade these Apple futures in China, I'm going to just open an account and start trading those futures, he can't do that? That's true. So what we've done through partnerships in the United States and China is we have Chinese market data, which we're able to provide just for backtest purposes to systematic managers so they can run a backtest. We have certain mandates from our distribution partners in

terms of what they want it to look and feel like. Once they give us a back test, you know, just hypothetical back test on their models, which to Fred's point, he's applying the same algorithms that had success in the past in the United States to China. And through a consulting agreement, we are able to take those market signals from, in this instance, Fred or other systematic managers and partner through a consulting agreement in China and provide those market signals to those PFMs in mainland China. Got it. I guess what I'm getting at is only, as of now, only Chinese money can trade Chinese futures markets. Yes, because the capital controls money. It's very challenging to get money out of China into the U.S. and very challenging to get non-Chinese money into the country. So the whole concept here is provide strategies to Chinese money trading onshore Chinese markets.

So guys, so Matt comes to you with this idea. Stephen and Fred, you said, hey, you know, Fred, you were starting to talk, or was it Stephen, of, hey, let's run this, let's backtest it, see what it looks like? How did that go down? What did the initial test look like? The test was great. The numbers were fantastic. We had 30% annualized returns. So we, you know, the numbers were so good, I was actually surprised.

And since we were using the same models with the same parameters that I had used in the U.S. for the past, you know, 15, 20 years, we knew there was no optimization, no backfitting at all involved. And we knew these were legitimate backtest results. It was the ultimate out-of-sample test. Exactly. A technician's dream, right? Yes. And so let's get into a little bit of what these markets look like. So when you guys got the data and you started looking at the markets, you didn't know rebar from soybeans, right?

What have you seen in terms of volumes and market spreads and things like that? We feel these markets are thick markets. They're liquid. We've never had issues with volumes or fills. They're good markets to trade. China has some of the most liquid markets in the world. And, you know, there was a little bit of a learning curve. We learned, for example, not to put market orders in on the open.

You know, I mean, Stephen has a lot of experience executing orders, and he's helped us improve our fills over time. But thanks to Stephen, the fills we're getting in China are as good, if not better, than the fills we could get in the U.S. at the moment. Got it. Do you have a market that you would equate it get in the U.S. at the moment. Got it. Do you have a or Stephen, do you have a market that you would equate it to in the U.S.? Like it's it's not as deep in liquid as the E-mini or something, right? But do you have a market where it's roughly equivalent to? I would say kind of similar to gold or crude oil in the U.S., but we've had no no issues on liquidity in any market yet in China.

And I would just say that it's really similar to what it was like trading futures in the U.S. in that 2000 to 2004 window. In terms of like directional volatility and whatnot? The small details of execution, how it feels to execute in the moment, slippage, and slippage not being bad, sometimes even being positive. The fact that if you have a trading error that often it actually works out to a profit, that's something that reminds me of 2003. I don't think I've had a trading error in the United States that's been positive in a decade plus. Those have transferred to high frequency

shop profits. I feel that the reason why the Chinese markets are so much more beneficial for us to trade is because you have an exchange technology level similar to what you had in the U.S. in the 2000s. That exchange level technology being at that same level makes it harder for high-frequency trading shops to execute their trades. I also think that the regulations in China are, in my opinion, better enforced than they are here with what we just recently saw with Citadel. China is actively trying to protect their markets and the order of them, much more so than what I see in the United States. And so the exchanges and the regulators haven't kind of opened the door to the high-frequency pirates or wonderful people, whatever you want to call them.

They're clearly glad to have them. And they seem glad to have most market participants that are using Chinese onshore currency. But if they step out of line, they have no trouble literally shutting them down for years. Citadel securities are shut down for a number of years in China, and only recently was able to pay a very large fine to begin trading again because they were caught spoofing one order. In the U.S., that's the normal course of business. So I think eliminating that type of predatory market action and also having exchange technology that doesn't have native orders for, you know, spoofing orders as a native order type,

as we find in the U.S., where many exchanges actually have that as an order type. Of course, they don't refer to it as spoofing, but that is exactly what the order types are that are offered by U.S. exchanges to some of these customers. China does not offer that. Now, a downside is that when you go to do a spread, they also don't yet have spread functionality built in. So I do have to leg each order in. Got it. But it kind of goes back to your skill level too, right? Yeah. And you're not, I think what you've done better than some of the other traders there is you're not giving up edge on both sides either, where you may do a market order on one leg and then work a limit on the other. So working the order

has been to your benefit versus just a spread order like you do domestically. Yeah, Matt, I absolutely agree with that. And I think one of the things that, you know, Fred so kindly said that, you know, I was one of his best brokers back in the 2000s, is that if you just operate with a little bit of care, you really, really see the benefits in China today. And back in the early 2000s, you absolutely saw the benefits. Like my ability to run without even putting in a great deal of effort, my ability to run laps around people in regards to slippage and spreads was almost effortless. I just needed to pay attention and to care for each order. That's taken care. Quick side story, we used to,

when people would come into Chicago and say, oh, I do online trading, we'd take them down to a tour of the trading floor and I'd walk them over to one of the pits and there'd be like a dot matrix printer just printing off reams of orders. And I'd go, there's your online order, you know, six sheets down. When the broker walks over and gets that, rips it off.

This was before pure online, right? It would go, you'd put it in online, it'd route through, print on that printer, a broker would get it, put it in the pit. So people were quite shocked to be like, that's my online order in that pile over there like yep well i know exactly what you're talking about i remember i worked on the floor a little bit in years ago and i saw those dot matrix printers so matt talk a little bit about, I think, R. Sam just did a post about the volumes there and growing. I mentioned in the intro it's the Billion Contract Club. What are the different exchanges and what's their growth look like?

Yeah, it's quite remarkable, and that was kind of eye-opening, not just for me but hopefully the industry. So there's four exchanges predominantly across the country. The DCE, the Dalian Commodity Exchange, the ZCE, the Zeshuan Commodity Exchange, the CFFEX, which is Financial Futures Exchange, and then the Shanghai SHFE. That was good. I was just going to let you go in two others, but you got them all. Yeah. I mean, you can fact check me on those acronyms. There's also the INE that's owned by the SHFE that trades the sour crude oil contract that's

gaining a lot of traction that could be a benchmark in the future and compete with Brent and WTI. But the data that we're seeing, there's about 45 liquid commodity contracts. There's six financial contracts that trade on the CFFEX, three fixed income contracts, three indices, and then predominantly on the other three exchanges, they're commodity driven. So you're talking about metals, energies, agriculture, black metals, and outside of Abington and the other strategies that RCM is working with that are providing us market signals. We have the strategies trading about 30 or 35 different markets, and they are comparable and growing substantially to Stephen's point. You know, some of them may compete with the likes of volumes like the gold and crude oil. And then

some of the smaller contracts like corn, the China corn contract is trading way more than the CBOT corn contract here in the United States. So some of the agriculture from a notional standpoint may not be the same size. Some may be greater. But, you know, the contract size you have to pay attention to because some of the contracts like corn are very small. Other contracts like rebar or iron ore are very large from a notional standpoint. What's a black metal? Like iron ore, coal, ferrosilicon, and PVC, acid, flat glass.

I mean, it's just fun, all these new names for everybody. That's one of the best parts, right? Yeah, there's a lot of esoteric markets that aren't traded anywhere else on any other fiberboard. Like, what is it? I don't even know what it is. Right. And it just makes sense. And Fred and Stephen, did you guys look at this of like, that's the biggest commodity consumer in the world, the Chinese market, of course,

they're going to have should have thriving futures markets on these things. So people can hedge. Did you guys look at it that way? Or you just hey it works on the back test it's good for me i mean i think just seeing the back test and then wanting to see if we could execute it and then with rcm's help doing the executions and seeing each night as this thing began to run that oh it actually worked and then the feel of actually executing the orders in each night's experience, saying, wow, I remember what this feels like. And then seeing the returns match the feeling of 2003-like returns. And we've been very fortunate. We're basically, since this product began, since Abingdon began trading through RCM in China, it was basically never down since inception to date. It's been up 80% or more of months since it's been open. I

think that we've been up 16 out of 20 months. Our worst monthly draw is about 2.7% with a return of, I think, close to 30% at this point. I'll throw out the quick pass. Performance is not necessarily indicative of future results, disclaimer there, but well done. But, I mean, you have in live trading now for, you know, 20 months, you've got a sharp ratio well over 2. You've got a Sorrentino well over 5. You've got a risk to reward of, let's say, 12 to one on a monthly drawdown versus total return. This is what futures used to be. And I

can only imagine how much better these returns are if you state them as returns based on cash rather than returns based on notional. It's been an absolute pleasure. How much of that is your skill versus the environment there? I think that the environment is always most important. If you don't have a good environment, if you've got no waves to surf, then there's going to be no surfing. And then having somebody with Fred decades of academic, professorial, real life application experience in exactly these sorts of markets that are moving and trending just like these markets, which these markets I think are very similar to the 1970s, 80s, 90s, 2000s U.S. markets, and to have had those models trade

in real time in the U.S. for all that time, now trading an environment in China that is much more similar to the trading environment that existed in the U.S. than the current trading environment in the U.S. is to the U.S.'s old trading environment. But I think most important is environment and Fred's models. And then I would say, lastly, just having somebody that really takes care of the business, such as myself and RCM, to just make sure there aren't any problems and to make sure that there is not some sort of operational hurdle that damages the ability for the model to be successful. Got it. Do you think the environment will be short-lived? Seems like the next question there is, of course, okay, the environment's great.

It's like the 70s and 80s here. course okay the environment's great it's like the 70s and 80s here well the 70s and 80s ended so i guess what would the the signs be that the environment's going to shift or that more high frequencies coming in or something of that nature so i think the two signs that i would look for would be one if all of a sudden i see the regulators allowing um what i view as predatory market actors to become the majority of volume. Right now, we see anything but that. And then the other would be if by chance the central bank in China became as interventionist as what we've seen in U.S. central banks. But I think that's a long way to go. And I very much like the fact that the

majority of the products that are traded in China are largely commodities. And even in the U.S. and Europe, these last number of years, the central banks really have not been able to be that interventionist in commodities. So I guess in short, I just want to see that the market regulators there continue to really take things very seriously and enforce their own rules. And I want to see their central banks not go to negative interest rates. Has there been any coronavirus impact in terms of like exchanges shut down or trading halted or anything like that? So, I mean, there's been a great deal of volatility over that period. I think that we were fortunate that that volatility was that the coronavirus occurred largely over the Lunar New Year holiday, which meant that the kind of crescendo of the movement was when the markets were closed.

For us, though, we were also fortunate because, you know, we're a relatively conservative manager. So as you're coming into the holiday, margins often go up quite a bit before the holiday at the exchanges. So we, you know, stopped taking new signals about a week ahead of time. So the book began to naturally shrink. We also had market movement because the market did begin to trade off a little bit before the holiday. And so that took us out of any sort of many of our long positions. But ahead of the holiday, we were lucky to get long Chinese bonds and we were already long gold and both those performed very well. So since the since the resumption of trading, we're up about two percent and we're quite happy with our returns being very businesslike since that time. But

there's no question that the movement from the coronavirus could have been very damaging to some man. Got it. Welcome back. You're listening to The Derivative, and we're back with Stephen Klein and Fred Schutzman of Abington Global and Matt Bradbart of Jinxi Shang, RCM's China subsidiary. Fred, I'd like to throw it back to you and talk a little bit more about the strategy of exactly how you modeled it, how it's working on these markets. You don't have to give away all the secret sauce,

but give us some guidelines on what the strategy is doing over there. Sure. Sure. We, you know, the models that we built are basically constructed to capture trends. Any market that trends, you know, should be profitable when you apply these markets. And, you know, we didn't just look at the last few years of data or just China or just the U.S. I've tried to incorporate as much data as possible. And when building systems, we look, you know, for at least 2000 trades.

That's our sample size. Anything, you know, anything less is not that statistically significant, in my opinion. So we built models based on a lot of data that should work in, you know, any market around the world, as long as it's trending and any period of time over the, you know, last 40 years or more. Um, and so unpack that a little bit of, as long as it's trending, right? There's people who would say that means it's gotta be two years in the same direction. There's some people who'd say it's two hours. What do you mean by it has to be trending? Yeah, two weeks to two months would constitute a trend in my opinion. And it's classic kind of volatility breakout entries on the trend? I mean, we have various systems.

You know, some are volatility breakouts, some are trend breakouts, some are longer term, some are medium term. We've tried to diversify as much as possible among strategies, among time frames, among concepts. And so how many different strategies and time frames are implemented on the China portfolio? On the China portfolio, we're trading three different strategies and timeframes are implemented on the China portfolio? On the China portfolio, we're trading three different strategies and two different timeframes. So the three different strategies, it's three separate unique entry points and exit points? Exactly. Got it. And the timeframes, again, across those three.

So you have six different entry exits we timeframe two of them a medium term systems and one is a longer term system and then if you have well the each of those give a signal in the same market or if it's one market gets a signal that's, and then you wait for another signal? Each one is run independently, so the best signals over time have been when all three systems have kicked in and we've received confirmation. Got it. So it's kind of a built-in voting machine of, okay, I've got it. Exactly. You know, if it's a weaker trend, maybe we're only getting one or two systems generating buy signals, for example.

So if it's a one system buy signal, it's usually not the same high quality trend as, say, a three system buy signal. And so how is that different from when these models were working in the U.S.? It's just more trendy? No, it's identical. The only difference is the Chinese markets are trending a little bit more. You know, the models that we built work in the U.S., but they don't work as well currently since the U.S. markets aren't trending as well. Right. So volatility and you have more directional volatility over there than seeing in the U.S. commodity markets. Exactly. And, you know, we built the models to really do what we would do subjectively if we were looking at charts. If a market is breaking out, like gold, for example,

if gold is breaking out to the upside, and the more confirmation you have, the better the signal. You know, right now, gold has broken out on a daily, weekly, and monthly timeframe. So, you know, there's an uptrend in three different timeframes. So it's a stronger signal. You know, I can make a good case, gold is a solid uptrend here in the US. And the way the systems were constructed was, you know, they're doing exactly what they were constructed to do. They're capturing what we see on a gold chart. Is there any protection against volatility decreasing across every market in the portfolio? Or is the main protection and kind of

coverage against bleed and low volatility times the diversification across all these different markets? It's more the diversification and the different concepts that we're employing. There's three different systems. One is more of a trend or a volatility type of breakout system. Another one is a pattern recognition system. So we're looking at price patterns, say, head and shoulders, bottom or double top. And the third one is a long-term statistical system. So the, you know, the protection is basically that if a market is not doing what it should be doing,

we're not going to be involved in all three systems, most likely. You know, if a market is going up slowly with a lack of momentum, then we're not going to be long all three systems. It's a lower quality signal. Not only that, each system has built in exits that dynamically adjust. So if we're in a period where markets aren't doing what we think they should be doing, hopefully the model will identify that and tighten stops. And a little bit off topic, but what are your thoughts over on the overall status of trend following in the US? A lot of AQRs shed like $12 billion or something off their mutual fund, and a lot of big trend followers have shed assets as their performance has flatlined a little bit.

You feel like it's debt or it's the central banks messing around? What are your overall thoughts? I think it's the central banks, the government, and the stock market messing around. I think the key will be the stock market when the equity, you know, when the U.S. equity market and world equity markets stop moving higher. I think trend following will have its day once again. It's just can you survive to get there? It's the old line. Nobody doubts you're a pioneer. It's whether you'll die in the Rockies.

Exactly. And, you know, a lot of people said, hey, this has never occurred before. We've gone a decade without trending. And if you look at the history of the managed futures industry, this never occurred before. But on the other hand, the history of the managed futures industry. This never occurred before. But on the other hand, the history of the managed futures industry only goes back to 1980. So, you know, it's not, you know,

we don't have that big a sample size. We don't have a two or 300 year history of managed money. We only have a 40 year history of managed money. So things like this can certainly occur. I mean, they've occurred in the stock market even recently with the lost decade when equities in the 2000s went sideways, did nothing. Matt, I'm going to bring it back to you. What's next in China?

So things are working. Abington's doing well. What do you see in terms of next steps and new opportunities in China? Yeah, that's a great question. So clearly, we need to grow the assets in China for Abington and other strategies. It starts making a lot more sense when there's more assets under management. If and when the day comes where we're able to use our global distribution and by we, I mean the managers and strategies that we bring in, RCM, where we're able to allocate to the strategies that we bring, I think that would be a game changer.

What do you mean by that of Fred being able to say, hey, I love it over there. I want to put in 500 grand of my own money. peers can allocate and people that have allocated investors to Fred or Stephen in the past or, you know, the ultra high net worth family office network that RCM has and being able to use our distribution and bring it into China as well. I think that would be a significant change. We're going to continue to grow our distribution relationships in mainland China. So we are talking to several institutional groups about larger tickets and growing AUM outside of just trading futures and bringing strategies to mainland China. RCM is also exploring talking to mainland China equity traders that are taking their strategies offshore to Hong Kong, trading A shares through China Connect and having an offering there

to our global network. And then, you know, behind door number three at a later date, we would also explore bringing our execution algos to the Chinese equity and or futures markets. So, you know, what I think is very important for RCM and any strategy that looks at China, there's no free lunch. There's no instant gratification. And you really have to look at what can I do in China and what will happen in China in the next 12, 24, 36 months, because it's a heavy lift and it takes a lot of work and nothing happens overnight. And even if it never opens up to Western money trading these strategies in China, for Abington and groups like Abington, for western strategies that have shown success outside of China to come to China. It's just growing the assets.

You know, you have to crawl, walk, run. And, you know, I can let or you can let Stephen and Fred answer this. But the economics start making sense when they manage, you know, 25 million, 50 million U.S. And for RCM as an aggregate, you know, north of 100 million U.S., things start making a lot more sense. And what does it look like in terms of the asset allocations over there? Are they institutional investors? Are they retail investors? Are they mostly in real estate equity? We're talking alternatives and managed futures that are a small, maybe low single digits of the assets in the US.

What's it look like over there? Yeah, it's a relatively new marketplace in China. The institutional investors in past have done private equity. They've done real estate. Alternatives is a very, very small, minute portion of their allocation. So, you know, typically the ticket sizes are relatively small. And then once you have a live track record and, you know, the goalpost keeps moving. But, you know, once you're trading live in China for 12 to 18 months, you can start have conversations with institutions, SOEs, banks, insurance companies. But our stance is get there, get live, have a live track record so you can have those conversations because day one, you're not having conversations with institutions until you do live trading.

And I forgot to ask, when you were given your background, that's a Boston accent, not a New York one with these guys? Yes, that's a Boston accent. So Fred and Stephen, what do you guys see as what's next for you in terms of China? Is it just steady as she goes in terms of the model? Are you constantly researching and updating it? No, we are constantly researching and updating, making evolutionary, not revolutionary changes, as they say. I like that. But one of the biggest benefits that we see in China is diversification. If China opens up its borders, I see everyone in the US, everyone in Europe rushing out to trade Chinese markets because they're not highly

correlated to the traditional markets that we trade. As Stephen correctly pointed out, most of their markets are not, can't be manipulated. They're not currency markets. They're not interest rate markets. They're pure commodity markets. Now, not only that, they're unique markets that then would add a basket of Chinese futures markets will get markets that are not highly correlated to the markets they're currently trading. They'll contribute a positive return to the portfolio and they'll reduce risk substantially. Love it. So if nothing else, China is going to gain a tremendous amount of volume by all CTAs worldwide as soon as they realize this.

All right. We're time for our favorite section. I'm going to ask you guys some of your favorites. Being New Yorkers, I'll start out with Jets or Giants. Giants for me. Giants, Steven? Giants for me as well. Mets or Yankees?

I'm sort of neutral. I was nine years old in 1969 when the Mets won, so I was a Mets fan growing up. But as an adult, my kids were Yankee fans. So I jumped on the Yankee bandwagon. So I'm neutral. Got it. Favorite New York borough?

Queens. Queens. Where were you, Steven? Manhattan? Yep. All right. Steven, favorite investing Manhattan? Yep. All right. Stephen, favorite investing book? Reminiscence of a Stock Operator.

All right. We've had one of those on the pot already. Fred, how about you? Didn't you write part of a book? I contributed an appendix to John Murphy's book, Technical Analysis of the Financial Markets. All right. We'll put that in the show notes. What's your favorite investing book? Stock Market Theory and Practice. Real page turner.

You ever hear of Edwards and McGee? They wrote the, everyone thinks that they wrote the Bible on technical analysis, technical analysis of stock trends. Anyway, Edwards' father-in-law was a gentleman by the name of Richard Shawbacca. And I forget the exact year, roughly 1932, he wrote that book, Stock Market Theory and Practice. It was, you know, it is to me the Bible on chart patterns. The first book written and the best book ever written for anyone who wants to research chart patterns or chart pictures. All right.

We'll put that in there. Matt? Mets or Yankees? Red Sox. I knew that was coming. How about favorite Star Wars character for you, Fred? I don't have one. Oh, you got to take a guess.

Princess Leia? I'll let you vote for both of us. Han Solo. Han Solo. There you go. All right, guys. Thanks so much for both of us. Han Solo. Han Solo. There you go. All right, guys. Thanks so much for your time today. For more information on Abington, we'll put it in the show notes, and you can reach out to these guys.

Where can they reach you guys? Do you have Twitter handles or find you on LinkedIn? I guess find me on LinkedIn. All right. We'll put that. Matt, thank you. I guess find me on LinkedIn alright we'll put that, Matt thank you and for more information on China you can reach out to Matt we'll put his info in the show notes as well

alright thanks guys that's it bye guys thanks Jeff, bye bye 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 Alts and visit our website to read our blog or subscribe to our newsletter at RCMAlts.com. If you liked our show, introduce a friend and show them how to subscribe. And be sure to leave comments. We'd love to hear from you.