The Derivative - Trend Following Plus Nothing with Jerry Parker

Episode Date: July 20, 2023

What do you do when you’ve already done everything there is to do in trend. Managed billion of dollars: check. One of first to run a trend following mutual fund: check. Trend following on individual equities: check. You push the envelope again, and convince the folks that create ETFs that you actually can pack your fully diversified equities plus futures portfolio into an ETF wrapper.  On this episode of The Derivative, we sit down with the legendary Jerry Parker, a former Turtle Trader who’s newest effort is an ETF product called ‘Trend Following Plus Nothing’.   Jerry and Jeff explore a wide range of topics, including whether multi-billion CTAs sold their (trend) souls to get there, just why nobody really tries to trend follow on individual equity names. Seeing a green light when they tell you it can’t be done. Jerry also opens up about finding the perfect balance of personal risk and mental fortitude to achieve success in trend following while sharing some personal anecdotes, including his love for pet birds.  Discover the power of trading components instead of an index of components, the impact of Fed limits on trend, and the intricacies of volatility targeting (hint: Jerry doesn’t believe in it). We'll also delve into the art of portfolio construction, the virtue of trend following impatience, the true essence of trend following as an inflationary hedge, and so much more — SEND IT. Chapters: 00:00-02:00=Intro 02:01-04:50= No birds allowed on Long Island, NY 04:51-16:38= The journey creating the new ETF needed diversification 16:39-30:02= Replication – what’s your limit? Hard=Simple/Simple=Hard 30:03-41:45= Market Makers, Outlier Moves, and what’s deserving of your portfolio 41:46-48:50=Embracing the Trend Following philosophy 48:51-01:00:02= The narrow road taken 01:00:03-01:03:29= Trend following+nothing From the episode: The Swiss(Franc) isn’t all that neutral – blog post Trend Following Turtle Tails (and Tales) with Jerry Parker - podcast Check out our Trend Following whitepaper! Follow along with Jerry on Twitter @rjparkerjr09 and visit ChesapeakeCapital.com for more information! Don't forget to subscribe to ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, follow us on Twitter at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and our host Jeff at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@AttainCap2⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, or ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ , and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠sign-up for our blog digest⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠www.rcmalternatives.com/disclaimer

Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Hello there. We had a great live event with Mercer and Cohen & Co. this week with myself, Joe Kelly of Chesapeake, former Turtle Brian Proctor of EMC, and Rodrigo Gordillo of Resolve on a panel moderated by David Triplow of Mercer covering why systematic, why now? And we recorded it. So that will be out next week as a pod. Go subscribe today so you don't miss that.

On to this episode, we have a trend-following OG, Jerry Parker of Chesapeake, talking about his latest innovation, which happens to be kind of no innovation at all. With all the replication and adding up strategies and tilts and ball control and the rest we talk about on this pod time to time, Jerry stuffed his entire hugely diversified trend model into an ETF. He's calling it trend-following plus nothing. Send it. This episode is brought to you by RCM's Guide to Trend Following White Paper.

We talk about the goods and bads of trend and why investors want it, but also why they have trouble sticking with it. In this pod, we cover all that and more in the white paper, plus highlights on top managers and more. Go to rcmaltz.com slash trend today to check it out. And now, back to the show. All right, everyone. We are here with the one and only Jerry Parker.

Jerry, how are you? I'm doing well. I was going to say, I don't think I've seen this room. Where are you? I am in Long Island, New York, on the beach in a very peaceful, quiet place. It's been a hectic week. A lot of work. We've been doing a lot of work to get this ETF up and running.

But it's been a good atmosphere. It's good to be here here relaxed with my five dogs and uh wife we have been uh enjoying our time nice out here bring the bird oh no bird i know i should have she is gonna be so mad when i get back to florida uh because she does not like to be left alone she's more demanding than any of the all these uh or girls. So she's the most demanding woman in my life, female in my life. She does not look kindly upon me leaving her behind. And what kind of bird is it again? It's a cockatiel, rescue cockatiel that we flew on my wife's head one day when she was out walking the dogs.

She brought the dog inside i mean the the bird inside and i was like i don't like birds you know they're gross get this bird out of here yeah so she immediately ordered a cage off amazon so we know exactly the gotcha date and i fell in love with the bird within a matter of days or weeks and uh yeah they're really calming influences especially they live like some of these parrots live a hundred years or something right now I think 20 you know something like that 20 so yeah but yeah we'll miss the bird and I didn't know you have Long Island roots or what made you go up there no just nice part of the world yeah nice to get to be in a kind of a cool spot during the summer versus florida and uh people made fun of me for vacationing in myrtle beach

and not spreading my wings i love new york the city uh hamptons it's all kind of fun something different uh my children some. My children have lived up here, and one of them still is in Brooklyn. And, yeah, it's a really good family spot. Yeah, I was just – my daughter had a softball tournament in Panama City Beach last week. Very hot. Very sticky down there, which I didn't know until then. I grew up in Florida, Vero Beach. Didn't know that Panama City is central time zone. I would have bet my life that the entirety of Florida is eastern time zone.

That is a good trivia question. I'm going to have to use that. West of Tallahassee is basically central time zone. Who knew? Basically everything under Alabama. So you launched a new TF. You finally did it. Tell us about the ETF.

Tell us about the journey. And we'll go from there. Okay. The journey. So, you know, there's many elements to the ETF. Okay, the journey. So you know, there's many elements to the ETF. It's the wrapper itself. There's a story behind the wrapper. Why would you do an ETF and on purpose, reduce your fees, and that sort of stuff.

But we wanted to do it because we had nothing to lose. It's not like we have a big, huge business any longer. So we had some really great ideas. We thought, well, at least there were ideas that no one was doing. And when we approached the ETF people, some of them told us, you can't do it. If you could do this, it would have already been done. You can't really accomplish this. I have no idea why the people you're working with told you they

could do it they can't do it so and it was combining a lot of stocks with a lot of futures that was the it part for the execution and market makers to um be able to handle that simultaneously making a market and hedging and all the things you have to do for an ETF to do that in futures and stocks. So yeah, there would be futures funds primarily that traded some equities or some ETFs and there'd be primarily stock funds that traded uh some futures currencies or whatever but uh the whole idea of 150 stocks and then 150 futures long short um all around the world europe um south africa malaysia singapore brazil that would be a difficult thing to pull off so we haven't you know

we've got it up and running but we haven't, you know, we've got it up and running, but we haven't pulled anything off yet. We have got to raise assets and have a good bid offer. And yeah, so there's a lot left to do, but that was our main thing. It was our main idea, which was trend follow equity. So the whole CTA managed futures of here's your traditional portfolio of stocks and bonds, let us trend follow those because that'll be something different. And some people will see the value the trend following adds to the traditional markets,

but not in the traditional way. That's what we are trying to sell. You and I, this must've been 20 years ago or something. We're having lunch there in Tampa, maybe 15. And you said the first time I'd heard it of like, you don't trade the GCI commodity index in your trend following program, right? You trade all the commodities. So why would you trade the E-mini or the NASDAQ, right? Trade all the stocks in there. So when did you first unlock that? That was that far ago? That was 15, 20 years ago? Oh, yeah. I mean, in the 90s, we started trading stocks. In the total program, it was just a big point of emphasis was diversification. And at the time, we traded maybe 20 markets. And futures markets over the years have grown and grown. It's where we have lots more, especially financial futures. But certainly if you sort of start thinking about it,

I don't have access to China futures. Yeah, we're working on it for you. Yeah, so it's obvious, you know, the place to go is 5,000 equities, 5,000 stocks. And then you get to the trend following and the outlier trades and letting profits run, you kind of see the limitations in a big index. You're not going to get the big outlier.

Tesla is gonna be nice and it's gonna help the S&P go up, but it's not gonna be the big outlier trade that you size with your algo and it has an outlandish impact on your performance like in 2020 and 21 when the commodities went up yeah you had the corn went up beans went up wheat went up but canola and rapeseed and bean oil were the ones that made way more profit and And so that's the CTA formula. So the same thing can work in stocks. Yeah, you're having the market exposure.

And when everything goes up, you're happy for it. But every now and then, something will really make a lot more money. The correlation doesn't really speak to the amount of profit that something can make versus other other markets that it's correlated with uh you know one of those the two of those can really have an outrageously large profit so that was another thing we picked up on and we were like primarily focused on trend following first, not managed futures, not fitting into the portfolio crisis alpha. It was how do we make this trend following

the greatest thing on the planet? How do we put it into a situation where it's gonna shine and have the best ability to really show itself? And that is with all these different markets, a lot of stocks, a lot of currencies, commodities, interest rates, long and short, and letting those profits run. And it's a lot easier to let them run

and really sit with that volatility and not manage the vol or manage the correlation when you have 300 of them, because each individual position is kind of inconsequential most of the time. And so if it does have a big drawdown, it doesn't really devastate your portfolio. So you have a better chance of kind of sticking with the traditional trend following formula the more markets you trade.

Right. It's a few things to unpack there. It's almost like traditional CTAs who are just doing the indices are short dispersion and long correlation inside the index, right? They're inadvertently taking on that trade of that there's not going to be any outlier moves in the underlying securities, that it's just going to be highly correlated moving at the same time. So you're saying that wasn't a conscious effort to be like, I want to be long dispersion at the same time. So you're saying that wasn't a conscious effort to be like, I want to be long dispersion and get these names. It was just more of like, hey, I want as much diversification as possible. Where can I find it? Here's 5,000 listed equities. That'd be a good place to start. That's right. And of course, a part of that too is the short part. You want to have some decent shorts as well. I would say that a lot of times, including now,

the stock trade is long. It's the, all the indices are pretty heavily correlated and they're going up. Probably hard to have a short index position now, but you can definitely find short positions in the stocks. And it's multiple different trends going on in different companies and industries and company sizes. You know, I enjoyed making a lot of money in short interest rates last couple of years

and then long the dollar. But we kind of, as risk managers, always kind of prefer to make the money and have some diversification uh and that was um so now we it's a little bit safer and a little bit more uh able to sleep better at night if knowing that i have a lot of stocks long and i have a lot i have quite a few short as well from a risk manager point of view. But if we get into a big bull market, I'll accept that as well. We've seen those and we've seen those drawdowns after it ends as well. So a little bit of mixing up, unpacking the indexes, unpacking the stock market and trying to treat it like we would treat commodities and currencies. very happy to be long and short at the same time.

And how do you protect against becoming just like a long, short equity hedge fund? Right. Of like those return profiles haven't been too sexy over the last six years. I know that's more factor based and they're doing different things to get into those long shorts. But it seems on the far end of some theoretical thing that you would kind of converge on their portfolios right you know if they're using trend following uh and they're long the ones that are going up and short the ones that are going down i i could have some uh similarities with those um but i do think that if you start analyzing the stock market and get away from the indices and what drives the indices of the large companies, and you really dig down deep and create a portfolio that's primarily based on liquidity and diversification,

it's shocking to see how on a daily basis you may have everything up and everything down based upon big days in the S&P. But over a certain period of time, you're going to see a lot of different chart patterns as you would see in all the other markets. And you overlay the trend following, it creates more diversification. You're not always going to be long. So yeah, I don't think it's, I'm really happy though to maximize, and you know, you don't just trade half your portfolio in stocks because it's stocks. You allocate and weight the stocks based upon what they deserve. Is it real diversification? Do they deserve this?

If it was 5,000 commodities, we would probably have around 50% in the commodities because they would deserve it. So that's our idea. And deserve, you mean both are they trending and then what's the volatility? How am I going to size it? No, it's basically, are they diversified enough? Are you having decent diversification? So there's like six or seven energy contracts. They don't deserve half your portfolio. There's like 50, 60 currencies. Maybe give them 25%. Those 5,000 stocks, now go out there and find some that are liquid that give you some decent diversification and i think for us there's more diversification in our stock portfolio than there is in the currencies and interest rates and commodities because there's just so many more of them they all of these sectors they all suffer

from the same thing which is they're all down on the day they're all suffer from the same thing, which is they're all down on the day. They're all up on the day or for the week or for the month. Yes, that's true. And then at some point in time, they go back to doing their own thing. And the benefits of this diversification, you start to see them. You can see this in the stocks as well. It's strictly a function of there's just so many,

and they don't always look the same and act the same, even when they act the same during COVID. Everything went down. So you want to have some shorts. Don't step onto the playing field long only all the time. Although we do. We do it in commodities. We did it in the dollar. We did it in interest rates. And we liked it because we made money. But we have to be careful in those markets as well, as well as the stocks. It's not just the equities that go to one. And we only think about, well, it's a problem if it goes to one, if we lose money. True, but on a daily basis, we're just all going to sleep better, whether we're making money or not, if we just have longs and shorts within the sectors and in the portfolio in general.

Talk a little bit about, it seems the rest of the world is going the opposite direction, right? They're doing replication. They're doing, okay, I'm going to replicate trend following with these 12 markets. And you've had Andrew Beer on the Top Traders podcast, I think, talking with him. And there's more, though. Some other people are doing some replication stuff. But compare and contrast those, right? You're saying, I'm going to expand and trade as many markets as physically possible, almost.

Is there a limit to it, how much you'll do? Versus that other construct, which is, hey, I think we can replicate what you're doing with only this small subset of markets. That's a really good topic. I mean, I have a lot of strong thoughts. Well, let's see, where do I even start? I do love Andrew and I have two positions. One is our new ETF and one is Andrew's. And it's really funny how they're so different. Andrew has 14 positions,

he's got a big ETF, 700 million, easy to replicate. I I mean easy to make a market it's only 14. all of them are very liquid U.S um and he always has a position in each one of the markets and it doesn't change very often he's replicating the sock gen 20 ctas now in my opinion ruffle some feathers here they've made it too easy for him to replicate that's the problem and they need to do something about it the CTAs have made it too easy

it's easy for him I have the opposite approach let's maximize trend following let profits run don't vol manage correlation manage 300 markets um who knows where the hell my profits are going to come from uh sometimes it's sunflower seeds sometimes it's tesla well as long as andrew's trading 300 markets because i'm going to let them run the sock gin cpas they're not going to they're going going to vol manage, correlation manage, try to smooth things out.

If the yen gets going crazy on the downside or the pound, we'll scale it back, make it look like the euro and the Swiss. So Andrew can get away with trading only the euro and the yen because if any of the currencies get out of control, i.e. making lots of money, lots of volatility, it's going to be scaled back. And so it's really not a big, huge opportunity cost for him to limit his currencies to two or three. Whereas with me, I'm not going to do that. I'm going to let the profits run. And you're going to have to trade all those currencies

if you want to replicate me and get my similar performance. So the simplest way of trading, cut your losses short, let profits run, one entry, one exit, and a stop loss, but you're trading lots of markets, very difficult to replicate. The most sophisticated way of trading with a lot of moving parts, a lot of science

and management and fall and correlation and different bells and whistles, easy to replicate. Plus you put it into 20 different managers, you just come up with the net position and there's no really outlier, crazy outlier there because it's going to be scaled back. Then it makes it easier for him to replicate so uh that's a great i do i love that thought like the simple model hard to replicate the hard model

easy to replicate which makes no sense but as you're telling it makes perfect sense yeah right so i do think that uh they these suction 20 might defend themselves, not give daily performance, try to do something. So maybe he has some issues there. But I do think the greatest thing about Andrew's product is that there was no way for people to invest, for medium to low net worth people, retail investors, to invest and get that Sock Gen 20, the top minds of the industry, except through Andrew. So that's really a, and then I know Corey's coming out

and maybe it's already out with his and that's going to be a great thing too. And he's all about growing the pie. And so am I. And are you part of the Sock Gen 20? No, no, no. Because that would make it even more fun right boy yeah i would i would not only not get invited to the parties but i would be uh yeah but um so you mentioned in there somewhere the market maker in etf right there's a market maker he needs to

make a spread so i'm sure you went through 20 whose head exploded of like what you have 300 markets no thanks um how did that process go and like two parts of that of like i obviously you got someone on board they're going to figure it out but two do you think that spread is even all that important for an etf like this like it shouldn't be day traded right it shouldn't be traded in and out. It's kind of a long-term investment. So who cares if there's even a 5% spread that you're going to hold for five years and it's not going to be that bad. I'm just being extreme here. Even if there's a large spread that you hold for five years, who cares? Yeah, I kind of agree, but it works like that for me, of course, but I don't think that's-

Yeah, yeah. Right. The investing public doesn't see it that way, but we're going to change their minds right here. Yeah. As it builds AUM and interest, it just behooves everyone to have a really tight bid offer. So I think that that's the goal. One of the great things too is that one of the problem is, you know, it is so many markets

and some of them will be closed during ETF trading times. And one thing that helps it is there's so many markets because, you know, maybe some of these markets are irrelevant. Usually the 20 least liquid or the 20 that are not open all the time during U.S. hours, probably the net impact on the fund is negligible. So hopefully it'll work out. We could certainly get to a situation where all of our ETF partners have said, oh, sorry, this is not working out. We'd say, well, we gave it a good shot. We were like, oh, wish you would have told us this a long time ago.

But we certainly are coming in under the assumption that we have a great idea. It can be done. I would get in meetings and say, is it too many markets? They'd say, no. Can I get rid of the 10% that are the least liquid? No. Do you need to get rid of South Africa and Brazil? No. I'm like, okay, you're the experts. Let's go. So we're trying to do something really crazy and see, does it matter if you trade a lot of markets?

And does it matter? Oh, a lot of markets? Does it matter? These are the two big questions. The big debates on top traders unplugged. Do you need to trade 300, 400 markets? Florin Kort does it, and others do it, and they've had tremendous success. But I think people are sort of skeptical. Then can the classic trend following, does it really matter?

And so to let the profits run and accept all of that volatility and the potential give back and not smoothing things out, which is 99% of managed futures, it doesn't seem to really matter too much if you do the smoothing or if you just let if you accept the huge volatility so we need to prove that all of this debating that we've been doing about markets and classic trend or modified trend if it really makes makes a difference and so i think it's going to make a tremendous difference but i'd have to tell you i'm on record as saying if we're not making a difference if you don't see the results, fire me. Exactly.

I'm going to say not only fire me, but I'm going to say I apologize. I was wrong, but I'm not wrong. I'm not. But pull on that thread a little more because I kind of even struggle with this, and I'm on your camp thinking the more the better. But one out of 300 markets, right? i kind of even struggled this and i'm on your camp thinking the more the better but one out of 300 markets right what is that 33 bips of exposure or something one third of one percent um even if i make a hundred percent on that market right i'm only adding 33 bips to the bottom line so part of me is like the more of that diversification you have the less each piece

adds to the pie and that's where the other camp is like you know it's not worth it just make sure you hit the big get the big moves and interest rates and whatnot and you'll be covered if you make 400 in cotton it's not really doing much to the bottom line that's right And then if you lose a bunch in cotton or remember that big Swiss franc, then you won't get destroyed either. So it does take a lot. I think one of the rules of thumb is we like to use, and it's kind of plays out in the back test is like five or 10% of the markets, 5 percent of the ten percent of the trades annually will have a big trend so whether it's 50 markets or 500 markets you're going to have this maybe 10 of the trades really being the outlier outliers so you're like okay then

why not just do the 50 markets since it's still the 5%? I think – and then another thing too is you can sort of prove that every time you add a new market, it's less benefit to where it reaches almost zero. I think that idea kind of goes away if you uh let the profits run and so since managed futures doesn't let the profits run they're correct if you're going to reduce positions based upon vol increase fall or increase correlation then yeah you you're fine with your 50 or 60. but if your five or ten percent have a potential for way bigger profits and bigger drawdowns and bigger fall and things that clients don't like all the negative stuff um then uh then you can see a reason for increasing the number of markets and then you spread out those outliers more evenly throughout the data so if you trade 50 markets maybe you get 20 all your outliers in one year and like no

outliers the next year so kind of a compounding maybe works out better with the 300 500 markets because the outliers you number one you're getting them and number two they're spread out over the data more um and you have less of a chance of having them being bunched together and go in a couple years without really having uh you know outsized outsized performance so but have you done the math on how big of an outlier those moves have to be to make it worthwhile or the concept is just as long as it's infinitely possible right it can go as far as possible yeah and another thing people say too is uh one of the big benefits of diversification is the small bet size back to the swiss franc you You know, you're going to have these,

trend following is trying to push these outliers to the right side where they're all positive. The shorts were short. So they get pushed there. But sometimes you are going to wake up with a really, really unfortunate gap. And so it does help us sleep better at night knowing that with 300 markets, and each one of them traded the same size, that those gap openings can be less catastrophe.

And I'll give a little listeners, if you don't, I'll put it in the show notes, but the Swiss franc de-pegged back in 17 or something, 2017. We'll find the blog post, but it was like uh the blog post was cool it had the volatility of the last 21 years i think in one day right so deep pegged and just took out all sorts of of levels that hadn't been seen so if even if you're risking one percent your one percent became ten percent um if you weren't stopped out but yeah a huge outlier move not most in most trend were long right i think most trend followers were long and then it then it got the bottom ripped out you know another thing that happened on that particular day is my friend called me and said are you seeing this swiss frank and i had gone down the list of markets that morning and I just had the decimal place in the wrong spot like yeah

what's what's up with the Swiss Frank no big deal he goes oh no it's a big deal but what's funny about that trade was we were we had the wrong position on in the Swiss but we had correct positions on in some of the crosses like Swiss Yen, Euro-Swiss, Sterling-Swiss, Canada-Swiss, Aussie-Swiss. So the diversification kind of bailed us out there is that we didn't have just the Swiss. So it was kind of an interesting situation. And will you seek out even more? You're saying you want to try and get access into Chinese markets, right? Because there are more commodity markets. It's just hard to trade in a US product at this point in time. Right. I think it's dependent upon AUM, for instance. Yeah. Now we're at a billion. So let's say we need to get some more markets in here.

One of the things we don't want to do over the years, because at one point we did manage $2.5 billion, and people asked me, well, what's the limit? And honestly, my answer was always, I don't want to diminish the commodity exposure. There's position limits or liquidity limits. I want to have a full position of corn soybeans wheat all of those really great markets so I don't want to get to a situation and we would access commodity swaps back in the day to achieve exactly that. But, and then a lot of my bias has been to find stocks that are commodity based. You know, we don't have exposure to lithium, uranium, steel, you know, and sometimes

in lumber. So sometimes we did, we did did trade lumber was it 20 and 21 in the big uptrend and we found that well you know lumber did really well but some of the lumber companies did even better and then sometimes the commodity would do much better than the stock probably most of the time the commodity itself would do better than the stock but not always and that gives you some more diversification so our positions are readily available that's one of the downsides of an etf is now now i looked up this morning and we have you know 200 positions on and so now everybody can see what's in jerry's head and you can see a lot of commodity exposure you know like i said and that's my job basically it's going out there and researching these companies and trying to get more of a pure play, finding a market where supply disruption, some sort of commodity price movement is going to have a material impact on a company.

And yeah, so I'm still drawn to the commodities. And so I guess in some respects, you may say you can't really count all those 150 stocks as stocks only. They're kind of commodities as well. And what's that look like? So you're not just purely having machine learning, look at a universe of stocks and pop out the ones that are non-correlated and should be in the portfolio you're actually saying i want exposure to this commodity market and this company helps give me that exposure yeah like sometimes i'll sit around and i'm at the dinner table and i'm and i'm just brainstorming and i pick up the salt shaker i'm like salt oh yeah salt so i do this research and i find a couple of salt companies. And so they're on.

And then I read an article in Barron's, and I'm like, okay, let me research this. And one of the things is that you can get, let's say, a company like Lumber. I'm looking at this now. Okay. Electric weapons, engines, lumber, shipping, water meter technology. You can get those concepts from an article or brainstorming or chatting with your friends. But then I do use AI to, well, you know, chat GPT to ask it, what does this company actually do?

Because a Google search or Yahoo is not as good as, you know, tell me exactly what it's doing. And then it'll tell me exactly what it's doing and it'll tell me but i'll say does it make all of its products i want to know if is this the base is it really mining coal is it really making uh are they farming like i have an egg company uh it's the biggest egg producer and so i want to trade china eggs you know i want you guys to set me up with China eggs, but also have this company that is the biggest egg producer in the company. But are they really producing them? Are they really raising these chickens? Is it going to be the same thing if

they're buying everything from the farmers? And so sometimes you get a hold of something, you think this is perfect. I really like it. And it says, Chai TPT will say, no, they don't really do anything. They're just a marketing company. So you have to dig a little bit deeper. But it is kind of interesting because I do feel a little embarrassed sometimes when you're with stock people. You don't want to say too much because CPAs don't know a damn thing

about corn and wheat and soybeans. I know nothing. And if it's a future, it's golden. I mean, we're going to trade it. We're not going to ask any questions. It's a new future. You're going to trade it? Of course I'm going to trade it.

Why? The CME told me to trade it and it's liquid and I'm going to put it in my portfolio. And so we're happy with that. But then you started getting a little guilty. You find this amazing stock that you think is commodity related. It's small.

A little bit of fundamental shift here and there can really drive the price. It's going to go right to the bottom line. And you're like, what do you know about it? I don't really know too much about it. I mean, it's liquid and it's in this business. And I'm sure I should know more things. Even CTAs get kind of corrupted by what they have learned from the stock market. Over the years, we've watched Wall Street Week, we've read Barron's, and we just have a separate part of our brain. And part of the challenge for me was don't buy into that. Shut that off.

Shut it off. Force these stocks to be like your futures. You don't know anything about them. You're only looking for liquidity and diversification. You're going to take all the trades and you're going to play for an outlier and i'm and i fight myself like everybody i consciously catch myself treating them a bit differently than i would all the other markets just because they don't have the futures right to it they have a they have more of a narrative right like oh this this ceo did this and he was out and did this press release and

here's what's happening but yeah at the end of the day for you it's just a price it's a return stream right return return stream yeah so but then why not just do all 5 000 stocks that comes back to liquidity. You have a little bit of fundamental in there like, okay, I want this exposure. Right. I want this exposure. I'm heavily tilted towards smaller companies. I don't want to trade a stock index because it's going to, by definition, water down the outlier.

I don't want to trade Berkshire or Microsoft because they have too much diversification inside the company. I want companies that are $1 to $5 billion that have no diversification. They will get diversification if you give them enough time. That's what they're going to do. They're going to seek it out. They're going to buy other companies they're going to grow they're going to be less outlier prone so i want something that has one line of business smallish uh if something happens i make it a benefit of a buyout or a merger, of course. But if a wind of a fundamental wind blows just the right way in some of these companies that are sort of small, liquid, but not diversified,

then I don't want diversification. I want to put it in my portfolio and I have more diversification than anyone, right? Long and short. But I don't want it to come in with diversification like an index or a big, huge diversified company. And so statistically, does that look like they're all higher beta, basically? They move more as compared to the index? I think they move more, but they probably don't have this type of correlation to the index because the index is pretty much controlled by the five biggest companies, at least recently.

So in technology, yeah, I think what we think of as outliers, the S&P going up due to the fangs is not the outliers that CTAs get on to with their position sizing based upon the ATR and you know getting something that goes up thousands of percent not just 100. A quick aside I think this was on our last podcast was breaking down the EQD conference and there was a guy who did a presentation there on how do you get access to lithium some of these rare earth minerals that are in these batteries that are hot i'll give you two guesses what the answer was we already talked about it earlier replication yeah replicate so he's like to do to get lithium do 42 percent gold 16 platinum 10 palladium and that blend correlates and it's dynamic so it's the same thing of like okay i'm

just going to adjust these weightings to get the lithium return which is always to me like yeah it worked in the past will it work in the future um but anyway i like that idea that's very good yeah i think that's great you know there's actually um but you would kind of be doing it anyway right so you're going to already have those markets maybe not in those exact weightings but you're kind of getting that anyway yeah I'm kind of getting it based upon each individual market there is a a uranium trust that actually holds uranium and I own a lot of it yeah yeah I am long that but I wouldn't discount you know the diversification benefits of something that's kind of commodity related but it's built inside of a company

and something else is going on. Like Jerry, it had nothing to do with all the things you've mentioned. All it had to do with was a new CEO and the market just skyrocketed. It's Elon. Which you don't care, right? Like, okay, price went up. One of the things I don't want to do is I don't want to live through another period of a lost decade. I want to put myself in a situation where I'm trading individual equities that are going to have outlier trades, that are going to have outlier trades like the rest of my portfolio. And we've already seen that stocks

are great trenders in fact we've bemoaned the opposite that people think that they're the best trenders that stocks are superior to our other currencies commodities and interest rates right and uh so this way um i'm all for giving more diversification and trend following equities and giving some protection around that they don't get from buy and hold. But also, selfishly, CTAs in general are going to always be at risk if they don't have a reasonable material allocation to equities that they can really profit from. Because at the same time, we had a lost decade. The stock market did not and so that part of the portfolio and how you handle it probably needs to be looked at because if we had a we've had some really good moves and interest rates in the dollar and we did really well we need to make sure that that other part of our portfolio, the stocks does well too.

So you're saying a lost decade in managed futures, like 09 to 19 or whatever. Right. So talk a little bit about that because I wanted to get into your psyche and how you held the flame for these, what, 30, 40 years. Have you had some dark times? Have you had some times of like this trend following stuff's bogus? I'm out. How did you keep the love all that time? Oh, wow.

That's a really good question. question well I just think intellectually I never could defeat the brilliance of the trend following I mean and then I think there's just givens in life and there's givens that you're not going to give up on am I going to take large losses no am I going to is, is the road to success smaller profits and not letting profits run? I kind of doubt it. Am I going to choose stock only and fit in? And that, do I honestly think that less diversification is going to make life better? I don't think so. No. Long only and no shorts? No, I don't think so. So when you break down what it means to be trend following, CTA, diversified, traditional trend following, I just could not eliminate or emphasize any of those aspects over what I've been doing for so

long. And I finally just said, look, staring us in the face, we just didn't have the proper way of trading the stock sector. And I think we put ourselves in a situation like, if we only traded commodities, should we expect a lost decade? Absolutely. If we don't trade commodities,

should we expect really a bad period? Yeah. And it's just you can't take these things out of the portfolio regardless of recent performance. And so I think in the stocks, it's the same thing. You need to allocate to stocks using the CTA approach. I allocate based on what it deserves and it deserves its part in the portfolio based upon the diversification it's going to give me. And that's not what the industry is doing. And so that's why we have a little first mover advantage here. And we were in a unique situation to where, if you remember that book, The Innovator's Dilemma, where the large companies could have a hard time moving because it would hurt their current business.

And so we had nothing to lose. Let's go to the ETF wrapper. We've already raised more money in the past two days than we've raised in like a year, just because it's an ETF wrapper. And there's just people out there who love trend following. It's usually people who have like $2,000 to invest, not an institution with billions. So that's a little bit of a problem. But there are people out there who love trend following.

I think it's the greatest thing in the world. I speak to them. They love love me they love the classic approach they love my unrelenting uncompromising way of doing it and we just need to convert more of those and find more of those people and hopefully get some sort of first mover advantage and just embrace the idea that we were free to go with where our heart was and where our mind was and only doing what the trend following philosophy would dictate which was ad markets let profits run ad markets to the degree that they benefit and add diversification to the portfolio. But if we would have still been a $2 billion CTA with most of our clients being institutions who looked at us as crisis alpha and who absolutely do not want stocks, oh my God.

Yeah, they'd say, don't add that stock. I would sit in meetings and I would just be so excited about what i was so different and i'm like don't you want somebody different like no we don't yeah i don't know you need to quit quit calling yourself managed futures yeah get in this uh lane here with the rest of my my exactly in his futures bucket exactly and we'd say look all the big guys- Different gets them fired. Yeah. That's right. We would say, look, all your current managers, they don't trade stocks. They don't. They've all managed. They correlation management. They have this risk overlay, and we don't.

You got to add us for diversification. They say, no, no, no. There are some givens in managed futures that you're trying to violate. And so we're like, okay, that's a bummer for us. We're not loved. Our ideas have been blackballed. Right. You should have been like, I should be telling you what the givens in managed futures are not, vice versa, right? You're the OG.

Yeah, well, only in the sense that I'm being a little picky in the sense that I try to make this big distinction between managed futures and trend following. It's two entirely different things. It's two different things. Managed futures, CTAs do a little bit of trend. The core of what they do is trend following usually, but it's a lot of improvements, quote unquote. And Jerry hasn't improved since 1983, except to add markets and lengthen my look back period. Do you think 1989 Jerry, if you met him in the street and you'd be like, we're trading trading 300 stocks that would have his head of exploded or been like no you can't do that like were you 1989 Jerry saying it's a sad comment no you know what he would say he would

say what took you so long you had this idea so many years, why didn't you just fight hard to put your vision out there and just live with it? And I think this is one of the things I've learned from Andrew and other ETF people is that, oh yeah, you can have a billion dollars or two billion and you get it very quickly, but you spend five or ten years with 100 million yeah and i'm like oh okay so you know the jury's out it's a fun story today on day three but honestly i prefer it to be a little bit more successful and have you know i don't know if i could wait five or ten years to have this thing show up to be a success. So maybe to inspire someone else and inspire people to really give people what they need,

which is a lot of trend following, a lot of trend following on your equities. So you don't have as many crisis events. Not to be a downer here but what's that like because there's very few people or a few people who are back on camera that would say you had managed two and a half billion down to next to nothing in the managed account business like it was that hard or you're just saying okay whatever they didn't they're not seeing the light or it's part of partly drawdowns and that lost decade like how that was the psyche too so you both had the personal right you've always invested almost 100 of your money in trend following right um and then you're trying to tell the clients

changed gear but you stayed personally there on the business side how tough was that to say like okay we got to reboot we got to keep going what we're doing yeah i know it's very it's very uh tough and i think uh the thing that really bothered me was just a personal rejection you know yeah personal rejection i went from uh being like i think it was chesapeake and john Henry were the top two or in the, I think we're in the top five, at least as far as the old days of managed futures with Merrill, Smith Barney, Prudential, Dean Witter, public funds, nothing to kind of be too proud about the early years of managed futures. No one really wants to talk about that and what that looked like. Yeah, we charged them 6% loads, right? Right.

And then mutual funds kind of came along. And we do have a mutual fund. It's sort of not doing that great as far as raising assets. Performance has been pretty decent. I think just the biggest mistake is that if you're going to do, you need to just choose. Are you going to be retail or are you going to be institutional? Or you can do both, but it just takes different talents to maximize your AUM. And I think we just didn't realize that how difficult it is to come across as just a good old-fashioned CTA trend follower

when you're talking to institutions. It needs to come across a lot more sophisticated. Maybe even be a lot more sophisticated. And I think a lot of the CTAs, they would probably say, look, Jerry, we understand what you're saying. Dude, you're not smarter than we are. We get it. We're just playing the game better yeah yes yes you know and so my bad for not being a good a better game

player but if playing the game is like sacrificing a lot of the stuff you said of like i got a vol control i got a correlate control right if there's things you didn't want to do so right would you kind of sell your soul like okay i'm going to stay go to 10 billion by selling my soul and doing these things i don't think should be done in the portfolio true that's true you know there was one person on top traders unplugged you know neil's had a fantastic a series of an interview with all the Sock Gen CTAs in the index. And one of them, I can't remember who it was, but he probably shouldn't remember it anyways,

but he said like, all I woke up every day wanting to be was the best trend follower possible. I said that so many times, let's just make our calling card the best trend follower possible. It got me nowhere. He went on to raise billions of dollars and still has billions, this guy. But then he proceeded to describe his trend following and it was vol management, correlation

management, profit objectives. You're not the best trend follower possible. No, he just redefined it. They redefined it. They're like uh i don't know where you're coming up with this i'm trying to make this stupid distinction between trend following and managed futures but you can do whatever you want to do but we we are both we're managed futures is trend following and friend following those managed futures and the your problem is that you just haven't updated your algos because now trend following is much more improved with the fall management and correlation management.

And I would go with that if I thought the data supported that. I would do it in a heartbeat. I've been on podcasts before. I've literally been on podcasts and Twitter spaces where people in the industry have shown up and challenged me on something I was saying. And I literally got off the phone and changed my system that day. I said, they got me. Because they reminded me of something I learned many years ago and called me out on it. And I'm like, I have no defense. And I'm so interested in being successful at this that I will change immediately. And boy, if I thought in any

way possible, taking small, cutting your profits short and not trading stocks was the way to do things, yeah, no one would even have to convince me. But I'm pretty sure- What's a different goal line, right? They're trying to be like, I want to deliver a 12% return with a 10% vol. We were saying, no, I want to compound at the greatest amount possible over a long period of time. But I think they're also convincing themselves

and their clients that there's no opportunity cost here. That all you get with this money management and correlation management overlay is upside. It's just all reducing risk. And I'm saying, ah, not so fast. This risk doesn't disappear. It goes somewhere. And there is a downside to not letting that profit go as far as it's going to go with a healthy stop loss uh trailing stop loose pants trailing stop to where it can kind of express itself and become a mega outlier yeah you you know you can't have it both ways. You can't reduce your risk and then tell me, reduce your risk on the volatility side if you even think volatility is risk. You can't reduce your risk and make more money. You can have one or the other. I certainly make

no pretense that my volatility is not a lot higher, but also on a risk adjusted basis, if you don't look at volatility, they have to throw in sharp in some sort of measurement of volatility that's not appropriate for outlier trading in order to convince themselves and a client. And a client, let me just tell you, a client wants to hear that so much. You mean to tell me I can have that and that? Sold. It's like if you could convince them that they could get less risk and more return, you could raise billions. Guess what they did? They did that. They raised

billions. Jerry comes in here and you know what his thing is? Eat more broccoli. Really? Yeah, I do not want to hear eat more broccoli right i want to hear you can eat the candy and be healthy yeah and it's all going to work out well and uh so yeah you can't i bet if you had done nothing to your model but changed your marketing right it would have been fraud and lying we wouldn't want to do that but if you had in this alternate universe if you just

changed your marketing and said you were doing all those things, but kept your returns and the strategy the exact same, you'd probably have gone to 10 billion, right? They just want to hear the story. Right. That's right. And I was talking to people like they felt like I did. And trend following is the narrow road to take.

It's not something that most people are going narrow road to take. It's not something that most people are gonna want to do. And sadly, it's not what most traders want to do. And given an opportunity, they will get rid of holding onto those outlier trades that scare us half to death, that piss off everybody because you're giving back way too much profit. Even though the back test says you want to make the most amount of money, be willing to give back the most amount of profit. On any one individual trade,

it's going to absolutely suck. If you ask me today how to maximize the profit in cocoa and sugar. Now, they're pretty decent trends. The trend following says no idea. I have no idea how to make yourself look good on these two trades, but I can't promise you how to make money over all the trades on a 20, 30 year period. If you want to make the most amount of money in your portfolio, then you've got to follow these rules. But it won't apply to any one trade. Totally unqualified to help you with any one particular trade. But what do we all care the most about, all of us?

Today's trades, today's performance, this week's performance. Yeah, and I think that's, in my opinion, that's the hardest part of trend following, right? They want the stock market profile. They want small, consistent gains. And every now and then there's a big down spike because they'll ignore that. They'll push that possibility of a big down spike out into the future. Which trend following is small, consistent losses with its exact opposite, right?

Of a big spike upwards. But that small, consistent losses with its exact opposite, right, of a big spike upwards. But that small, consistent losses really wears on people. I think so. And I think what wears on every trader that you've ever talked to in your entire life, when I would go do more events to talk to brokers and traders, clients, everybody shakes their head when you mention something about, did you ever get out of a trade too quickly? And did you ever book 100% profit? And they're like, yeah. And it went up 500%.

1,000, yeah. And we all have done that because that's day one of the turtle class. And that's what Rich said. Yeah, the hardest thing is let those profits run. And we wouldn what Rich said. Yeah, the hardest thing is to let those profits run. And we wouldn't do it. My God, I wouldn't even do it. But the computer just keeps coming back saying, you can't beat it over the long run. If you're willing to sit there with open profit, I'm not even asking you to risk your capital

per se, just the open profit that you've got a tremendous profit on. And then people will accuse me, you don't take care of your profits enough. You don't care about the profit enough because I'm managing it. I'm making sure it doesn't go away. And I say, I'm taking more care of it than anyone because I'm only accepting strategies to handle the profits that the back test says is the best way to handle them. And sometimes, just like with children, raising your children, you've got to let them fail.

You've got to let the profit turn into a loss. It's the marshmallow test, right? In trading, right? If you're going to wait, you get two marshmallows. Right. But everyone these days wants the one. Give me the one right now. I'll find another one later. What's the symbol? Oh, the symbol, outrageous symbol outrageous symbol tfpn which stands for trend following plus nothing yeah can you believe that that's for real what it says they let me go with that yeah so i was a little jealous because simplify i think has cta yeah that's a great one. Somebody has TRND, trend. But yeah, that's my calling card recently. Trend following plus nothing. Trend following alone. That's another one. However, we trend

follow everything. So I need to apply for the trademark for that as well. Trend following everything, but trend following alone and trend following plus nothing. And where are you tempted to do a turtle like TRTL? No. Or JPRK? No, I don't think we were tempted with anything else. And the other people involved in the project were like, yeah, sure. We love it.

And I was like, really? You love it? That's good. I think we just found the title for this podcast, Trend Following Plus Nothing. Yeah, yeah. Awesome. I think we'll leave it there. You got any other thoughts?

No, let's save all of our other thoughts for another time. Thank you. You've been so kind to have me and let me go on and on. I really appreciate it. No, I love it. Have fun there in Long Island. That was my attempt at a Long Island accent. And we'll talk to you soon. Yes, sir. Thank you very much. All right. Thanks, Jerry. Yep. Take care.

Okay. That's it for the show. Thanks to Jerry. Thanks to RCM for supporting. Thanks to Jeff Berger for producing. Tune in next week to hear from those top systematic managers. Peace. 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. 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.