The Derivative - Trading Commodity Volatility – A Woman’s Perspective

Episode Date: March 26, 2020

Take a listen to our latest podcast to hear why we think trading in and out of different volatility regimes in the commodity markets “like a woman” is a big PLUS. We talk with Kimberly Rios, portfolio manager of the Catalyst Hedged Commodity Strategy Fund about: the CFHIX mutual fund, meeting Muhammad Ali, being a woman in the male dominated asset management world, where commodity option liquidity is, OJ and Nicole Simpson, why buy and hold commodity investing sucks, missing senior prom, seasonality in Corn futures, why female hedge fund managers outperform males, working the Sydney Olympics, and navigating high and low volatility periods with vol as an asset class. The Catalyst Hedged Commodity Strategy Fund seeks to provide positive returns in most market conditions with low correlation to the global equity and commodity markets by investing in dynamic option strategies using physical commodity futures contracts on Crude Oil, Gold, and Corn. Trades focus on volatility, seasonality, technical analysis and price; rather than attempting to forecast where the markets will be in the future. Episode Links: Catalyst Hedged Commodity Strategy Fund page Catalyst Funds Twitter Catalyst Funds LinkedIn Kimberly Rios LinkedIn and email RCM blog post “Asset Class Scoreboard: The Decade” 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. If you look at a long-term chart of commodities, it doesn't go lower left, upper right. If prices get really high, substitutes come in. Prices get really low, subsidies come in. But then you're left with, you're trying to pick highs and lows. And we all know that that's very, very difficult to do over a long period of

time. So if I'm not trying to pick highs and lows, and I don't want to have a long-term view on commodities, this is actually the strategy that we came up with. Welcome to The Derivative by RCM Alternatives. I'm your host, Jeff Malek, and today we are joined by Kimberly Rios, Portfolio Manager of the unique Catalyst Hedge Commodity Strategy, CFHIX, for anyone wanting to pull up the mutual fund symbol. The Hedge Commodity Strategy utilizes an opportunistic volatility approach on commodity markets, which is unique indeed. And Kimberly, you're also our first female guest, so welcome.

Thank you very much. Thanks for having me. You came down from Wisconsin? Yes, from Madison this morning where it was nice and sunny when I left. Was it? It was. Well, it's sunny in like 20 or something. Sure, but it was still sunny. And what's with Madison?

Why does it always get the top places to live, best small town, all those awards? Do you guys pay those magazines or how does that work? Sure. No, actually, it's a wonderful place to live. It's a very, very small town feel. Why I love it, my husband and I, we once figured out that within one mile of our house are nine very important things to us, including like work, school, grocery stores, you know, post office. Everything is kind of right there at your fingertips.

So and not only that, the summers are gorgeous. You've got, you know, the city between two lakes. It's just a wonderful place to be. And how big of a University of Wisconsin fan are you? From our house, you can see the jumbotron of, uh, UW and my husband and son are massive sports fans. So, um, I gotta say there's a lot of red and white in our household. Yeah. And my experience, University of Wisconsin are kind of way over on the fanatic side of fandom. I think so. I think that would be an accurate statement. Yeah. My 80 plus year old

aunt lives in Elm Grove, Wisconsin, and she like the whole football season, she has like Wisconsin pants, Wisconsin sweatshirt, Wisconsin purse. Yes. And hat. That's about right. You don't have to wonder what day of the week it is, depending on what people are wearing around town. Right. Sunday, they'll have Packers gear. Sunday is Packers, even in church. I mean, like the altar one day was in green, and there were plenty of comments from the parishioners, you know, good choice today. I know. We forgot to have a no Packers. This is a Bears town, Bears pod.

Yeah, I've heard that. Sorry about that. All right. One of these days. You won't have a Hall of that. Sorry about that. All right. One of these days. You won't have a Hall of Fame quarterback, and we'll beat you. One of these days. One of these days. So tell us how you got from, you're from northern Wisconsin, what part? I'm from Eagle River, Wisconsin. Eagle River.

Yeah. What's that movie where they say, Eagle River? Oh, I don't know. Maybe I need to see that. Yeah. Oh, I remember. It was Hot Shots. Here's the clip. We used to spend our summers in Eagle River. Oh, I don't know. Maybe I need to see that. Yeah. Oh, I remember it was hot shots. Here's the clip. We used to spend our summers in Eagle River. Eagle River. So tell us how you got

from Eagle River to managing a $50 million mutual fund. Well, in the Eagle River, there's really not that much to do. So the winters are very long. And for some reason, I was always just interested in numbers. And I remember when I was 11 years old, there was a Wall Street Journal in our house. And I was interested where they would print out all the prices of each stock. And then the next week, you're looking, there's differences in prices. So I remember thinking, if only I could figure out what the prices were going to be from one week to the other, I didn't have to get a real job. And of course, obviously, it's a real job.

I didn't know that when I was 11. And I just found that fascinating that every week these prices change and you had to try to figure out which way they were going to go. At least you wouldn't have to get a manual labor job. A manual labor job, which everybody up there had. It's a difficult, it's a difficult place to live, beautiful place to vacation to, but difficult place to live. So that fascinated me. So from when I was like 11 years old, like I knew I wanted to be in this business. Fast forward, I went to college in Arizona. They have an experimental economics program.

So my degrees are in finance and economics. And right out of college, I got a job trading currencies. And then I ended up at Brandis Investment Partners on the currency desk, which then led me to private equities, to wrap accounts. I got a really large amount of exposure there. Brandis is in San Diego? It's in San Diego. And it's actually an international value place.

And they have mutual funds. And it's kind of interesting because I trade commodities now. And people are like, oh, you must like torture. And I think that looking through the whole phase of everything that I did, I was at Brandis International Value at the time of the internet boom. And then I left there to work at another mutual fund firm in Los Angeles, which was large cap growth during 9-11. So I think I just like being slowly tortured. Like, right. Those were totally out of favor.

Completely. Same thing with, you know, how commodities have been the past couple years. I'm on a commodity fund and commodities, you know, everything is about equities lately. And then I had a friend who worked at Brandis in Milwaukee. So they had a Milwaukee office or something? They had, I believe when I was there that the Milwaukee was a fixed income part. I don't know if that's still the case or not, but we were in San Diego, and I believe I was at the time where they were just bringing on the Milwaukee part. And is it coincidence that a girl from Eagle River ends up in Arizona and then San Diego? Were you pining for some warm weather? I don't even know if I interviewed or applied any other place. I wanted nothing to do with cold weather again. And I actually left high school early. And I remember leaving Eagle River, and it was negative four degrees when I flew out to Arizona to go to college.

And I landed, and it was 85 degrees. And I thought, this is right. This just seems right. And you're like, I never want to see a snowmobile again. The Midwest has its own great benefits, though. You left high school early on purpose? You graduated early. Yes, I did. All right. What was that like? You feel like you missed senior prom or something?

Oh, absolutely not. Gosh, can I even say this? When I left, everybody assumed, you know, it's a small town in other Wisconsin. So everybody's like, who are you marrying or, you know, what are you doing? And doing and I was like no I'm actually going to college and like I had like show them like acceptance papers and things like that to the board I don't think they didn't believe you I don't think that they really believed me I think that they thought I was you know getting married and starting a family I've always been like I wanted high school to be like eight years oh really yeah I um I just I always thought thought that there had to be more. I mean,

it just didn't click with me. I went to college and I felt like I was at home. It was a wonderful thing. Nice change for me. And so you're there doing the Brandis stuff and then the, it was a Santa Monica firm? I went to Roxbury Capital Management in Santa Monica after that. Did you get to live in Santa Monica or just in the L.A. area? I lived in Brentwood, and I got to work in Santa Monica. Of OJ fame? Of OJ fame. Actually, not too far from everything.

I mean, Brentwood's pretty small. But what was amazing is Roxbury had the most incredible office on the 10th floor right at the ocean, looked all the way up the coast. So it didn't really matter how bad things were. You had this amazing view like every single day. And whenever you walked outside, you know, it's all full of beautiful people. And it was a great experience, especially in your 20s. Is that like night at the Roxbury? Maybe. Not quite, but it was a great experience to be in your 20s and be there.

And my other O.J. Simpson story, I was skiing in Vail when I was 10, I don't know, some young age. And there weren't a lot of Africanrican americans that skied at that time and we're at the top of the thing and there's this african-american gentleman and this tall blonde woman and it turned out it was oj and nicole were on a ski trip and there they were at the top of the slope wow so i i don't think we said hello but we saw them so i always had this weird connection with that i'm like i actually saw saw that woman who was then murdered. But anyway, enough about murder. So then you left there.

You got into video blogging, video logging. What do they call it? Vlogging? Vlogging. Vlogging. Vlogging. Okay, so there's a gap in time there. So 9-11 happens.

I mean, everybody gets laid off pretty much. 9-11 was, you know, terrible. So I leave Southern California and I come back to Wisconsin and I end up working actually as like a stock analyst, investment analyst for another mutual fund company in Madison. It's called Northern Capital Management. And I'd always been on the trading desk, you know, like the portfolio management side, you know, implementing trades, going into the market, a lot dealt with volume, what percentage are we, that type of thing. And I went into an analyst position, which is completely different. So at some points in life, you're doing a job that you know that is just not you.

That was really, you know, where I was at. Was it because it was all kind of narrative? You're like just creating narratives around what should be happening? I think that was part of my problem. So I was in the CFA program, Chartered Financial Analyst Designation Program. I had received that, and it's a lot of reading, a lot of fundamentals. And then all of a sudden, you know, I go from a very active trading desk to, you know, here's a hundred companies, you know, you're going to be looking at these companies and, you know, figure

out which ones are more of interest. And I remember this, I spent so much time on Best Buy at the time, I believe it was Best Buy. And I go in, I'm going to present. And then that morning, there was like some article in the Wall Street Journal about it was either, it was just something negative on the company, whether it was their accounting or however. So I spend like a month and a half on this company. And then I go to present to the investment committee. And they're like, okay, what else do you have? Did you still present? Or did you like, oops, I'll drop that in the garbage on the way in the meeting? I told them the situation and they're like, okay, what else do you have? And well, I had started on something else, but it was kind of

one of those to where that didn't feel too good. Like it wasn't, it really wasn't for me. So from that, I started looking at what else was out there. Okay. So at this point, I love investments. And I had, you know, other people in my family and stuff, and they were into real estate. So I actually took a hiatus from the investment world, got into the real estate world. And I mean, I jumped fully in like buying properties, management. I bought a franchise, like all this kind of stuff. And it did well.

And I ended up, you know, selling it as, you know, I built it from scratch, sold it. So that was good in itself. But again, really not, that was not my passion. That was not my love. Was this like housing bubble time or before that? Oh, of course. Of course. Again, I love the torture. So, you know, really got into it really. A lot of properties was buying in like 2005, 2006,

2007. So yes, 2008, 2009, very painful. So I've definitely been able to choose the industries with the most pain and still make it through. So with all of that, I said, I'm going to go back to my main love and that's investments. Through all of this, I also got my chartered market technician designation. So now I have the CFA designation and the CMT designation. So the fundamental side, the technical analysis side, back into the investment world, exactly. I mean, I now have the job that I feel that I was born to do. And so I have the CAIA, Chartered Alternative Investment Analyst. That's great. What about the Chartered Market Technician? So I see that it never really took off. Do you feel

like it took off? Was it worthwhile? I think it's still in its infancy of taking off. So the CFA and the CMT are now using some similar items. So somebody in our office, they just went through the CMT program. And I'm very proud of him. He got in three years. He was 24 years old. So I'm very proud that he was interested enough to go through with it. But it really is a psychology of markets. So you can look at indicators that will give you relative strength, things like that. interested enough to go through with it. But it really is a psychology of markets. So if, I mean,

you can look at indicators that will give you, you know, relative strength, things like that. But when you start to put multiple indicators together or multiple facets of investment together, and then you can combine that with, you know, fundamentals, charter financial analysts, aspects, I really think that is almost like a powerhouse of a combination because you've learned enough in both programs to have you look at many different things and that can sometimes be bad but as you're getting experience you choose what you find works best for how you look at things and then I think that that helps guide you with the decisions so I'm very happy to have both and I definitely use both yeah I think it got unnecessarily lumped in with like the negative aspects of like charting and

okay, you drew a line on a chart. What does that really mean? And I think it's had a bad rap for a long time, but I'm seeing less and less of that. You know, 10, 15 years ago, I mean, I first started looking at technical analysis in 1994, like right out of college. I read as much as I could about it. I mean, I first started looking at technical analysis in 1994, like right out of college. I read as much as I could about it. I learned as much as I possibly could. The first time I ever sat down for the CMT was like right around 9-11. So I actually went through the program twice because I just never took the level three right around 9-11. I've always believed that, you know, a chart can, you know, show you things that you might not

be paying attention to, which is the news that's out there. I love looking at charts. They kind of give me comfort. Not saying that, you know, there's absolute terms, you know, if this and this happens, you know, the next one is going to be here. But it can give you biases. You know, if you're looking at, you know, seven things that are oversold, is there some type of risk reward ratio that you can put on saying, OK, now would be a decent time to buy? We had actually Fred Schutzman on the pod a little while ago, and he was talking about back in the 70s, I believe. And he had a charting service. So they would deliver weekly. Right.

Someone was actually like creating the charts because there was no computer program. So the charting service would deliver these like stack of papers that had the charts on them. Yes. I one time went to, and I mean, this is, you know, 20 some years ago, I went to a presentation from Luis Simada and she does point and figure. And she brought out this briefcase and unfolded these charts where they just update by hand every day. I was so impressed. It was incredible to see. Yeah, I wish I could remember the name.

There used to be a manager we dealt with, and he would travel. He'd be at the conferences. He'd be at cocktail hour, and he had the football. And it was like his briefcase thing of all his important charts and numbers, and he wouldn't go anywhere without it. Nice. One last personal thing. We were talking offline and you mentioned that you worked at the 2000 Sydney Olympics. I did. How did that all go down? What was that like? Okay. So I had just taken the level two of the CFA of the CFA and I was working at Brandeis in San Diego.

Is it three levels? It's three levels. I think the CHI is two levels. So CFA is three. You'd taken two. Right. It was three. So at this point, I had taken two.

So you needed a break. I needed a break. I definitely needed a break. And actually, the girl that sat next to me told me that her husband got the contract for the Olympics in Sydney. And I had been to Australia before. My best friend lived there. And I just, you know, I said all that. I'm like, oh, just take me with you.

She's like, actually, we need to hire four people to come with us. And I'm like, really? And I knew her husband. She goes, oh, just go talk to him. What was the contract for? The contract for what? He owns a company that did catering for the contract for what? He, he owns a company that did catering for the Olympics. So for NBC. Perfect. So and he's done it, you know,

all these years. So you were feeding Bob Costas? Pretty much. Yeah. So the venue that I was in charge of was the aquatics venue. So I got to meet, you know, anybody who went through there that they interviewed or anything. I got to meet just an amazing amount of athletes. It was an incredible experience. And my absolute highlight was our venue. Of course, it was NBC, so they had the Today Show, which would actually film at 10 o'clock at night. And I was over there just kind of just kind of sorting stuff out and sure enough people walk up to the gate and it's Muhammad Ali Howard Bingham and Muhammad Ali's wife and there's no

one around but me and I'm the one that let them into the gate they showed up like 10 hours early for their interview that night they just got off the plane and and I got to actually like sit there and hang out with them for about 45 minutes I I, I still can't believe it happened. What was he like, this is full on Parkinson's version of Muhammad Ali, but still super impressive. Very impressive. Um, as he walked up to me, he kind of like gave me the boxing sign. I was just like a puddle. I couldn't believe it. I didn't know that many athletes. And, but I mean, you know who Muhammad Ali is. Yeah. So, um, and then I ended up talking with his wife on it. They were, you know, living in Michigan. And hadn't the Olympics before been the Atlanta? Atlanta. Where he was the star and did

the whole lighting. Exactly. Exactly. And this was opening day of Olympics of 2000. And I'm sitting here like with Muhammad Ali's family. I. I still can't believe it happened. So hopefully some of the greatness rubbed off. Yes, I became a big fan, especially after. I remember growing up and watching my dad, having my dad watch the games. And then I read his book, and yeah, it was a great time. Cool. thanks again to kimberly from the catalyst hedge commodity strategy for joining us so kimberly let's get uh into exactly what's happening inside of cfh ix i feel like we need

a better symbol because it's hard for me to roll that off the tongue but uh inside of the hedge commodity strategy fund give us the quick elevator pitch. The quick elevator pitch, it's a fairly straightforward strategy. It's just option spreads on gold, corn, and oil. Just building profit ranges. And if price ends up within that profit range at option expiration, you take the profit. If it's outside the range, you take the loss, but you know where the loss is because it's hedged. And then you move on. The goal is to get to the end of the year, look back and say, hey, you know, that was a pretty good year. So very good on the elevator-ness of that, perhaps. So is the name a little bit of a misnomer? So it's not hedging commodities per se. There's always been an issue with the name

because it's kind of a hard where it fits. I mean, we only deal with commodities. We only deal with, you know, three commodities. It's option spreads. So it's not like we're in the market, you know, writing options or something like that. Yeah, I guess that's always been one of those things. A sophisticated investor might say hedged commodities. Okay, you're long commodities and hedging the downside, but that's not the purpose isn't to give the commodity return, a hedged commodity return. It's to give an absolute return. It's an absolute return strategy. Correct. And so why, what are the three markets again? Gold, corn, and oil. Gold, corn, and crude oil. Right, crude. Not bean oil or corn oil. Vegetable oil?

No, don't say that. Crude oil. What do they call that oil? Canola oil. So how did you end on those three? Okay, actually, very simple. Want liquidity. So we were looking at an energy, an agriculture, and a metal.

And we were looking at the options. agriculture and a metal and we were looking at the options so options with deep liquidity in each of them so corn is deep liquidity and options gold is the metal so liquidity there for the metals and then crude oil so deep liquidity there and by having that liquidity obviously you can go in and out, but you're not getting dinged on the bid-ask spread. And I never want to be in a position to where, I mean, part of what research went into it is finding out what not to do, like reading how other funds did not do so well. And a lot of it really came down to lack of liquidity or leverage. So we didn't want to do leverage. We didn't want to go into a market. Like, I don't want to trade, you know, cotton or milk or cheese or it had to be something that's easily accessible just to be able to build the positions and not have to worry about, you know, are you going to move the market at what point?

And then we extrapolated that out to how big could the fund get with those? So instead of having a strategy that somebody created, and then, you know, all of a sudden it grows and it gets popular, it was actually created the opposite way. We looked at the big picture. If the fund was, you know, $5 billion, what would be able to be sufficient in it? And we kind of worked backwards from there. So we know if the fund got to a certain size, you know, we'd be looking at a different metal or a different agriculture, that type of thing. So it was kind of, it was built instead of just a fund getting, you know, somebody doing a smaller fund getting bigger, it was kind of built from the top down. And so, yeah, it seems to me it makes sense eventually. So are you saying eventually you will add other metals or you didn't want to get to a point where you had to say, now we're so big, we need to add other metals?

Right. We didn't want to be the, oh, my gosh, it's grown so much. What are we going to do? It was actually built if this did happen, you know, what gets brought in next? So we looked at it in many different ways. Were there tons of markets that you would have loved to trade, but you had to cut out because of that? No, not really. The oil market has very, very deep liquidity. I mean, you can have a fund in the billions of dollars, and you have the liquidity there.

Gold, we'd have to look at silver, maybe copper, somewhere along there if the fund got to a certain size. And then with agriculture, we could have easily done soybeans as corn. So, I mean, there's definitely things to go at. But the main part of it is to be diversified through an agriculture, a metal, and an energy. And then the reason why we looked at doing commodities rather than whether it be foreign exchange or bonds or whatever. The strategy is really a volatility strategy. So we wanted to have large changes in volatility.

So I'm sure we'll get into that more, but we wanted to have volatility that can get really high, but then also it can drop to fairly low, and that would be okay too. And these markets fit what we were looking for. So let's get into that now. So are you targeting, are you selling the volatility? Are you buying the volatility? Or are you doing both? Okay. So they're spreads. So we're buying something, we're selling something. But how volatility comes into play, how I look at it is we have certain option strategies that we prefer for high volatility and certain option strategies for low volatility. So when volatility gets really,

really high, I'll go in with spreads of one type. And when volatility is really low, I'll go in spreads with another type. And just to sharpen the point on that, when volatility is high or low in that market, in that sector. In that market, right. So not if the coronavirus just sent the NASDAQ lower, but gold doesn't move. Well, it's a bad example, but corn doesn't move. Right. So it's interesting how this all works out because, you know, oil has its own volatility. It's the OVX that's measured by that. And then gold has its own volatility, the GBZ. And you can measure corn volatility also. So I look at the absolute levels of their own volatility,

and then they're segmented to high, medium, low, and then they're segmented a little bit more. When you look at the VIX, the VIX for equities, when the VIX is high in equities, that spills over into the other markets. Because if the equities are going down, gold gets affected as a safety haven. Or if the equities are going down, it could be pulling the oil stocks with it. Or even vice versa, if oil is going down, it could be pulling the equities with it. So if you're getting high volatility in the equity market, that will spill over to the commodity market. I want to have that high

volatility because the preferred spread is the one with higher volatility. So it just so happens that when volatility is really, really high, that's when I go to work the most because I want to put on the spreads that I'm looking at that can have better potential with higher volatility. I want to put those on when there's an opportunity to strike. So a lot of what I do is waiting. So a lot of people are going to be like, hurry up and wait. Well, it takes a lot of patience to do that. But I've been doing this for five years now.

So I know when high is high and when low is low. And are you wanting that high volatility because you want it to go higher or because it's going to revert to the mean and come back to a more normal vol? It can do whatever it wants. If the higher volatility, I'll give you an example. So if oils is $50, I might put on an option spread from like 45 to 55 dollars okay so $10 spread if volatility is really really high for the same amount of money I might be able to make that spread 42 to 58 dollars so I'm able to build a wider profit range and you want the market to settle somewhere between 42 and 58 right so at option expiration I

wanted to settle sometime in between there. By having a higher volatility, I might be paying less. And so that's a strangle? Well, it depends how you build. So my favorite, I'm not going to get into things, but I do have like two favorite spreads that I like are either like a butterfly or a calendar spread.

But yeah, I use them at different times and in different situations. And I always confuse straddle and strangle. They kind of have the same profile in my opinion, but you're kind of, you're bracketing the market and wanting the market to close, settle at the end of the option term in between those two strikes. Right. You have that. And then by having the higher volatility to enter the trade, the higher the volatility, the less money I'll have to put out to get into that trade. And then if volatility does reduce from there, it's almost like kind of

a bounce back to where you can get kind of like a jump right away on it. So if there's a big volatility spike and some trades are put on and volatility comes down pretty quick, then you can have kind of a fast return. And was your concept always that I want to reflect my strategy with options? The only way to reflect it? Was there ever thought to I could play these three markets directionally? No. It was always designed to be an option strategy. And here's the whole thing.

There are so many funds out there that are directional. So why try to create something that's already out there? We're really looking to do something that, you know, maybe it's not completely 100% unique, but there's plenty of funds out there. Like if you want to be long oil, you know, there's plenty of funds where you can be long oil. Or if you want to be long ETFs or everything. Right. I mean, there's plenty of funds where you can be long oil or if you want to be long ETFs or everything. Right. I mean, there's plenty. If you want to have a directional play in anything that we do, there are many, many ways to do that and go for it. I mean, no one's stopping you. But I will say that when we looked at markets and how to build something and we were looking

at commodity funds, really the long term return, if you look at a lot of commodity funds, you know, there were some things that were standing out. And one of the things was that long-term return, a lot of times on commodity funds can have a negative sign in front of it. Yeah. Right? You've seen that, right? Yeah. I think we did a blog post a while back. We'll find it, put it in the show notes, but basically all these asset classes, and it was the by far lowest return and highest volatility. Right.

Just plain buying whole commodities was the worst on two counts. Right. Yeah. So it's like, and we were kind of saying to all these, you know, and a lot of pensions, endowments, whatever, have this blanket, like we need to have 5% in commodities. They're like, why? Right. Like they all say an inflation hedge, all this stuff, but like you'll go broke waiting for the inflation to spike to make money on that five percent.

And it's it's a very, very difficult market to be in. When when I really broke it down to look at, you know, what's what's in these funds. So let's just take an index, you know, an index of commodities. So it's not one commodity and index index is many commodities. And if prices are more in the future due to if you have storage, insurance, transportation, if you have all these costs, the price is typically more expensive in the future. So it's called contango. Yeah. Right.

So a huge part of that negative in front of the commodities is the roll cost. Right. It's that negative roll yield. So if you have a contract that has five contracts a year, so you have to roll it five times a year. Or what if it's oil and you have to roll it every month? If you have headwinds five times a year, and that's just one commodity,

and then you've got another commodity in there that has headwinds 12 times a year, you have to make a lot of money to make up all those headwinds even before you can, you have to make a lot of money to make up all those headwinds even before you can make even one penny. So we said right there, we do not want to take a long-term view on commodities. I mean, that's a lot of work that has to be done in order to even make one penny. And then the second thing is if you look at a long-term chart of commodities, you know, it doesn't go lower left, upper right. If you look at equities, you know, a company can have earnings, make profits, you know,

reinvest them, grows over time. So if you look at the long-term equity curve, it can go lower left, upper right, you make money over time. Look at the stock market. That's what it's done the past hundred and some years. But if you look at commodities, they oscillate. They go up and down. If prices get really high, substitutes come in. Prices get really low, subsidies come in. But then you're left with, you're trying to pick highs and lows. And we all know that that's very, very difficult to do over a long period of time.

So if I'm not trying to pick highs and lows, and I don't want to have a long-term view on commodities, this is actually the strategy that we came up with. So we don't have to be right all the time. We just have to be like somewhat in the ballpark. And then by adding factors such as, you know, volatility, waiting for the right times to put on the trays, seasonality, tactical analysis, and fundamentals,

it really comes to what we have now. And, you know, we've been doing it for five years almost. So talk a bit about that seasonality. So you've got this whole setup. It's the hive all you want. You're targeting. It's going to be in this great range. Everything's good.

Then there's some seasonality flags of like, hold on, seasonality might push it out of that range. Let's be careful. Completely, completely. And I mean, the easiest one to explain is corn. You know, corn has seasons. It's fairly flat and mundane during the winter. And then you get, you know, growing season, and then you get the uncertainty of weather in the summer, and you get some really, really high volatility spikes in the summer. And then in the winter, you can have very low volatility. So corn volatility can be, you know, low teens in the winter, and it can be 30s and

40s in the summer. There are actually option spreads that you can put on to, you know, be better risk reward ratios for that type of environment. So if you're in low volatility, and you're looking for a season of high volatility in a couple months, you know, I look at like what type of trade would fit that scenario. Or if it's at really, really, really high volatility in a couple months, you know, I look at like what type of trade would fit that scenario. Or if it's at really, really, really high volatility, and you know, volatility doesn't stay high for a really long period of time, you know, what type of spread can I put on if volatility kind of reverts back to the mean? So it's very much looking for extremes, but also knowing that, you know know if you're looking within one standard deviation two standard deviations you know losing the strike

tools of you know where are a lot of contracts all those things get factored in and how to build a portfolio and I think people get scared of hearing seasonality with amaranth and natural gas and that big blow-up fraud trade of you know I think they were just blindly, first of all, it was supposed to be a multi-strat fund. And the manager had billions and billions in a spread calendar spread trade based on seasonality that natural gas was going to spike in the winter basically. And it didn't that year for some reason. So how do you protect against that of like, right? Cause seasonality is kind kind of like it works unless it doesn't work.

It's there most of the time but not all of the time. Right. When you're putting on a spread, you're looking at what your risk profile is when you're getting into it. So you can have a really, really wide spread, which brings on a lot of risk, or you can have a really tight spread where you're hedging your risk a lot tighter. But your profit ability is less. It could be. I mean, it depends how you're building it. So if you're doing a spread with strikes very far apart, you're taking on more risk. Or if you're making a spread with strikes

very similar, you have to pay definitely more money for that to get into the trade but you're reducing your risk so I've spent I've spent so much time over the past few years you know adjusting trades and what I have actually been doing is with the environment of so much uncertainty in commodities for instance the drone attack last summer in August you know know oil closed uh crude closed about 54 the drone attack the drone attack in saudi arabia oh right weren't those missiles they were drones drone missiles yeah i'm thinking of like my kids little drone oh he flies around the neighborhood we're talking like in august armed lethal drones when they did uh quite a bit of

damage but then yeah to the Saudi oil infrastructure. Exactly. So that was in August. So it closed on Friday about $54, and then it opened Sunday night in the low 60s. That is a massive move, and especially over a weekend. So if you're not hedged on that other side, if you're not capped on that other side,

that could have been a very difficult weekend for you and it could have been a very, very painful Sunday night when the markets opened again. But if you know where your maximum risk lies, it makes it much easier to sleep at night. So that's one of the main things that how I trade. I want to be able to sleep all at night, you know, knowing where the maximum risk lies. And so overall, are you mainly paying premium to get into these positions or collecting premium? Mostly paying. Mostly paying. It's been a while since there's been collection. So your main risk is kind of a death of a thousand cuts of like, I keep paying, I keep paying,

and it never pays off versus the huge spike. And I'm short these options. I collected the premium and now I have to pay out five, 10 X what I collected. Right. The risk to reward is, I try to, you know, I have, you know, my metrics of how much am I willing to risk in order for the reward? But at the same time, I'm not going to sell an option to where if there's a spike, we, how can I say this? The tariff announcement hurt corn. I mean, you know, corn, I mean, very, very quickly corn went down. And to have a seasonal trade on then, that was very hard to watch. So there's been some instances over the past couple of years to where, you know, I don't want some certain things to happen again. So if that means paying more at initiation, then that's fine.

I'm much better with that than just having a risk out there that, you know, I could not have foreseen. Right. And I would say people like, oh, I'm delta neutral. I've got this spread on. I'm in this front month and this back month. And I always go back way back to Katrina when it hit New Orleans, hit all the oil infrastructure. And there was plenty of oil, but it was all locked in. Right. Because they couldn't get to it basically in Houston, whatever, in that infrastructure area. But they knew they would get to it within a month. So the front month was just through the roof because they couldn't get to it. And then the back months did nothing. So it was like, okay, even if you're spread between those two months, there's situations

exist where it can get way out of whack in a hurry. And that's exactly right. I mean, you can't, you have to take the information that you have. You have to use the history that there is. And I really think just do the best job that you can. But there are going to be situations that are just, well, this actually happened. And this is how it was reflected. But if you're taking the measures that you can, I guess that's the way I look at it. I really just look at, you know, if I'm risking, you know, one unit, you know, what benefit can I get out of that one unit of risk?

And you're kind of looking at it from there's going to be times where I'm way wrong. There's going to be these outlier events that I'm not prepared for. Let me make sure I structure it so that doesn't bust. I don't go bust. Right. So if there's a terrible event, you know, I'm cat on both sides. You know, that's that when you go into a trade, that's your mentality. Like if something absolutely terrible happens, you know, where's my upper side? Where's my lower side? You know, what is what is out there? So if you're long something, you're short something. But and it's gotten much tighter over the years just because of, you know, what's out there. I mean, we've seen absolutely massive moves in the commodity markets.

Fourth quarter of December, October to December 2018, oil went from what, $76 down to 42 dollars in three months yeah i mean if you're directionally long i mean you have to have a really good heart rate in order to to deal with that and or you just have a different strategy or you're in different things but i don't i don't want to be in a situation to where i mean oil just had like a 20 drop recently within a couple days and i was still going down. I want to know where the risk lies. You know, I don't want to be surprised. What other ways do you mitigate risk?

We've covered them all. So you're spread, you're limiting how much you can lose on there. Any other risk metrics? Sure. So there's three markets that we trade. So we look at each of them individually and then actually as a portfolio. So I work really close with the chief risk officer of the company. And we look at risk at two standard deviations out in price and volatility.

So what that means is, you know, we get the spreadsheet and if volatility moves two standard deviations, we take that number with the worst number of the price moving two standard deviations. So you get two standard deviations up and down in price and volatility. And then we take the worst number from each of those. And then we add those to the worst number of the other two commodities. And then we get a number for like a two standard deviation, you know, perfect storm. Yeah. So you basically assume correlations go to one. Right. So everything price and vol moves two standard deviations away all at the same time. All at the same time. how much would we lose? How much would we lose? And that's a great, I mean, I love that metric. For me, that is a great guide to go on because like I said before, I want to be able to sleep well at night. And if I know

what that metric is, and then the, I mean, I'm not saying that the perfect storm can't happen, but we've really taken the worst sides of both, the worst on price, the worst on volatility, combine those together across all three. So at least it gives us something to sell. And what's that number look like? Are you allowed to say? Is that a... I'm not going to go through that number.

Okay. But it's not like an 80% loss. It's something that allows you to sleep at night. It's really... I mean, it's probably much less than people would think it is. Especially in the commodity market. I mean, our, you know, one of the whole goals of the fund is absolute positive return and a low standard deviation. In order to have a low standard deviation, that number's got to be pretty low.

So switching gears a little bit, would you consider this kind of volatility as an asset class like you're trading volatility as an asset you could say that but at the same time it's it's really in markets that are giving me the opportunity with the options so I don't exactly know where it fits specifically, but we are trading the commodities in the market. Yeah, I think a lot of people who do options do so because structurally they'll say, hey, there's, I mean, a lot come to it from naively of there's going to be a decay there. I'm going to grab the decay. Right. And that kind of works until it doesn't.

But they quickly say, oh, well, I can put on two sides of that trade, or I can do different calendar spreads. I can do different months and capture this structural return there, which is that decay, or the increase in the, if the underlying goes and the volatility increases more. So it just seems to me, yeah, it's, to me, is a little bit more of I'm trading volatility. It's reflected in commodities and it's reflected in options, but you're really trading the volatility. And I'm using it in a spread format. One thing that I've always enjoyed doing is just reading about, you know, how firms have done so well or how firms have really just gone to the way sides and by learning from other people's mistakes has kind of really focused me in on what I don't want to have in the portfolio and so what you mentioned OVX and GBZ are those the CBOE's right VIX

basically the VIX index on those commodity market right so the VIX on oil and VIX on gold what why do you think nobody uses those? I think probably plenty of people use them. Well, as an index, but are there options on them? I don't believe there's options on them. It feels like they should capture the VIX success and create futures and options on those indices. Possibly, but you could always just trade oil. You don't really trade the VIX VIX.

You could trade S&Ps and anyways. Yeah, but it's become hugely successful. It's become hugely successful, right. I don't know. I don't know why they do that. I'm curious. Or to ask you, if they came out with futures on the oil VIX and the gold VIX, would you trade those futures?

No. Or would you stay in the option world? I would stay in the option world. A lot of it gets down to that, just the decay or like the, you lose a lot with just having that VIX as you rolled on the curve. Yeah. I like having. One theory, you could have a counter spread in those futures.

Right. You could. Yes. There would definitely be a way to do it. I really like the strategy that we have, and it's taken a while to get it to where it's at. But I'm more excited about it now than ever just because we're finally getting some volatility. And when we started a strategy in commodities that prefers higher volatility. Yeah. When it was dead for two years. Well, years. I mean, we've had very few glimpses of volatility since we started the fund. So that's actually put us back to work to find a strategy for really low volatility also. I mean, we just

came up with that within the past year. So it's one of those where people are like, oh, you trade commodities? Ooh, sorry. But now I think we're finally getting into a time to where maybe some people will look at something besides equities to have in their portfolio. Right. And I'm putting my marketing hat on for you. I'm like, okay, it's trading commodities. I feel like you might have better success there. I'd be like, it's actually vol as an asset class reflected through commodities instead of like, yeah, you don't use this for your commodities exposure. You use this

for absolute return and vol as an asset class. As you're talking to people, and I'm sure you talked to a lot of investment advisors, is the main target for mutual fund? Right. What are some of the biggest misconceptions they have about options in general and the strategy in particular? A lot of people, I just break it down to really what it is. I think a lot of people want to make it more complicated than what it really is.

Because they're like, oh, you're using option spreads, then you're going out multiple months. And people, I think, try to read into it a lot rather than just really breaking it down. You're really just trying to build a profit range with options. And then if it's inside, great. If it's outside, oh, well, I know where the risk lies and then you move on. A lot of my job is going through education

and just explaining really what it is that we do. And then when you start adding volatility and technical analysis and seasonality, I think I lose a lot of people. And I've definitely been trained more of a technical aspect of everything. So I, a lot of times, have to slow down and just kind of like start over and say, hey, here's all it is. It's just an option strategy. We're using commodities because they work well in those markets. And here's how we try to aim to get a return. I did some research. There's about 10,000 mutual funds in the U.S. and a New York Times piece said there's less than 10% of those

have female portfolio managers and there's probably only a few dozen mutual funds focused on commodities and you're probably the only one single person that's doing volatility and options on commodities. So we're here with a truly unique one of a kind guest. That's the only one of the only females that even is a mutual fund portfolio manager. And then to have this unique commodity structure, too. So just want to ask your thoughts of what it's been like being a woman in finance,

what the barriers have been, what the barriers continue to be. That's interesting. I will say, though, that I have learned of another female portfolio manager in the commodity space on another mutual fund. So I was overjoyed. But does she do options? I don't know if she does options or not, but I was really happy when I found out that she was doing that.

That's great. So the barriers, there's just, yeah, we don't have the same conversations, I would say, in the office as if it were all men in the office. There's definitely more talk about your kids at home and that type of thing. But for me, it's been a fantastic experience, but I can't say that it's been an easy road in any way because I think there's always these low expectations, and then you're always trying to prove yourself.

Because you're a woman? because you're a woman because you're a woman so until I got the CFA designation I really just thought it was invisible like I actually looked at that as almost a way for people to actually hear the words coming out of my mouth and now this was a long time ago. I mean, I've had it for about 20 years. So the times have definitely changed. But it's still there. Like, that's what I feel like. It feels like it's changed. People make, they say, oh, we're making an effort. We're trying to increase diversity and more female managers. And I think they are.

I really do. I, you know, I've seen a change. I mean, I started in this industry in 1994. You know, I've definitely seen the change come through. So that's fantastic. But yeah, there's not a lot. I go to conferences and it's always interesting because, you know, as a female, there's always like a line for the ladies and I go to conferences and there's a line for the men and there's nobody in the ladies because it's an investment conference. Right. It's the opposite of the Bulls game.

It's the opposite. I will say that by taking the Charter Financial Analyst designation, by going for the CMT, I believe that when I was awarded the CMT designation that I was one of five women in the world that had both. Oh, wow. So when I found that out, that was really eye-opening and surprising to me. But then to actually have conversations with women about technical analysis, there's not a lot of interest that I've seen until people know that it's out there.

Like, oh, I can do this. I can, you know, have an education in this and I'm finding it more and more. So I'll go to events, something like the Money Show. And now there are so many women there and I've met so many, like foreign exchange traders and it's eye-opening and it's wonderful to see that. But 20 years ago, you would go to something and you were definitely the token female. And how about on the investment advisor side? So as you're talking to all these advisors, are more and more women popping up as investment advisors? I wish I could say there are, but it must be 95% men that I talk to probably. Yeah, that seems an oddly, and you read every now and then a great piece of like women,

financially independent women out there in the world want to deal with other women. Yes. For their finances, but it seems like nobody's. Yes. There's that one Goldman Sachs lady who left and starting her own firm. I'll remember the name in a minute. I'm sure she'll do fantastic because, I mean, women might have completely different goals than men for where they see themselves in retirement or what they want to do with their money. And a lot of it is, you know, do you fit into this box?

Oh, actually it wasn't Goldman. It was a Bank of America alum. I think it's called Ellen Best. As a man. It feels to me like a man could still understand those points. But, yeah, it's just you feel more comfortable dealing gender to gender perhaps. I would think so. There's definitely been times to where.

I'll caveat by saying I know for a fact that a lot of them don't understand that and can't do it. I'm just, in my personal defense, saying I would be able to understand it. Sure. Every once in a while, I think that it would be really nice to have, you know, a woman around to talk to you about, you know, looking at something maybe outside the box or looking at a different angle. But there's a lot of, I'm not gonna say lonely moments, but there's a lot of times where I just like go back to books and read more and kind of like get guidance that way. And the great part about where we are right now in the world is I know that I can do things to help mentor younger women. So, you know, at my child's school, you know, they have, like,

career days, and, you know, I get to talk to women, like, young girls at a young age, and they can see that this is a possibility. You know, when I went to high school, I grew up in a very, very small town, you know, it was very much, why would you want to do that? And you don't even see that really anymore. It's, you know, if a young girl has her eyes set on something, you know, there could be ways to get the education to do it. I think that the internet is an absolutely fascinating learning tool. With the amount of webinars, podcasts, the amount that you can learn without having to sit in that structured class or have to get the right grade and be in that group to get a specific education, you can learn so much now literally at your fingertips

that I think this whole industry will be opened up to women. And not only that, you've got authors like John Coates, who wrote Hour Before Dawn and Dusk, who was a futures trader. I don't know it. I'll have to look it up. It's a great book. He was a futures trader, went into neurology research, and he's done a lot of study on men and women on the trading floor and how they differ. So I get to read authors like that that just really give me hope and inspiration.

We had, my wife had this old 70s Marlo Thomas. Remember her? Yes. And there was like that record and it was like, girls can be doctors, girls can be. And we were playing it for my daughter and my daughter, she's like, this is dumb. She's like, of course women can do all that.

Why is she even singing about this? So I feel like it's progress that it's not even in our kids' minds. They're not like, oh, I wish I could do that, but I can't. It's just like, what is all this talk about? It's dumb. Right. Exactly. It's just a whole completely different world for them. And one last thing on this, I looked up, there was an article, it was back from 2016, but they had a stat that female hedge fund managers outperform male counterparts. I think I read that article. Do you pay any credence to that or have any ideas why that might be? Gosh, I don't want to make any enemies here. Yeah, I do. I think it's over-trading. I think that women have patience and that's really generalizing as the words are coming out of my mouth. But I know what I have to do in order for my job,

in order to have patience and just stay back and wait. And I think that there's a lot of incentive to always constantly have action and go for the thrill rather than just kind of sitting back and waiting for the right opportunity maybe that might have something to do with it but uh it's again i'm gonna refer you to that book uh in that book what i was reading is it's just completely different testosterone levels you know um how they were explaining the book is you know a man puts on a trade and it goes in their favor and they get excited. They want to add to the position to where a woman's looking at, where's my risk? What can I take off? So it's just completely a different view of even once you're in the trade.

I like it. I'll take it. All right, we're going to move on to our quickfire favorites. Learn a little bit more about you. So favorite place to get your Wisconsin cheese curds. There's only one? Are you kidding me? Favorite Wisconsin cheese curds place, madison's in madison in downtown madison madison's in madison in madison yeah in downtown there i once had a denver omelet in the denver diner in denver on purpose because i was like well i gotta go to this place okay but

also shout out to old fashions on the square in downtown as well. Okay. They're a close second. They're probably tied. I mean, absolutely fantastic. And we're talking, you go the raw cheese curd or the fried? Oh no, the deep fried. Yeah. That's right. Definitely. So if there was no lifestyle cost of living difference, Madison or Santa Monica? Where would you live? Madison. Madison. People.

Wow. It's people. Okay. And traffic. This one's from our in-house Wisconsinite, Allie Klein-Hans. One thing you can't leave quick trip without? Gas.

I don't know. Not the blueberry cake donuts? Those are good. No. Kumbacha? I don't know. And do you listen to other podcasts? Do you have any favorite podcasts?

No, I don't. All right. You got to start. No, I'm a big Audibles fan. So I try to go through so many books it's incredible I just you listen to them I listen to the books and I read so much for work that you're right I probably should listen to the podcast but also it's you know do I want to put more in my brain of what maybe I don't want to hear yeah I don't want to have other influences

I want to kind of focus and zone in. But if I'm reading a book, then I'm like in a different, you know. What is Audible? That's the Apple thing or the Amazon? It's Amazon. Yeah, yeah. So speaking of books, favorite investing book? Oh, wow.

Favorite investing book. Okay, maybe not investing, but about investing, Anti-Fragile by Taleb. Okay, great one. I investing book. Okay. Maybe not investing, but about investing. Anti-Fragile. Okay. Great one. Great. I love the quants. You love Anti-Fragile more than Black Swan? Well, what did he say in there? He said Black Swan is like Appendix A. Yeah. So yeah, definitely. Anything like that, anything regarding trading floors, anything along that realm, I have absolutely just loved. But I also like reading about powerful women.

I just read— Yeah, I was going to ask your non-investing book. Yeah, The Woman Who Smashed Codes is about William Friedman's wife who worked for smashing codes during World War II. I mean, stuff like that is absolutely fascinating to me. Here's this power woman that nobody knew about. So what was that movie and the codebreaker that got all the credit for it? The English guy.

And it was called Enigma, right? Yeah. That was the movie. We're blanking on his name, but she was doing it at the same time? She was doing it at the same time. Or in conjunction? She was doing it. They were kind of working together, but she was doing it at the same time she was doing it they were kind of working together but she was doing it at the same time in the states and she let them know like hey you know we've broken this and they said we just did

too yeah there's well that'll be a movie for sure oh i i can't wait to see this movie i hope somebody makes it a movie all right so uh that it. Where can everyone find you and more information on the mutual fund and everything? The mutual fund is pretty easy to find. It's catalystmf.com forward slash C-F-H-A-X.

C-F-H-A-X. I was saying I-X, but the institutional versus the A-X. Right. Whatever. Either one. Yeah.

Otherwise, email at Kimberly.Rios at catalystmf.com. All right. Thanks so much, Kimberly.Rios at CatalystMF.com. All right. Thanks so much, Kimberly. Thanks for having me. This has been fun.

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