The Derivative - Unlocking the Commodity Risk Premium with Kurt Nelson of SummerHaven

Episode Date: February 13, 2025

Join us for an insightful exploration of the fascinating world of commodity futures with Kurt Nelson, co founder and Managing Partner of SummerHaven Index Management. Kurt shares his unique perspective, honed over decades of experience, on the rich history and evolution of commodity markets - from the Dojima Rice Exchange in 16th century Japan to the modern-day cocoa futures trading. Discover how SummerHaven's research-driven approach, including the firm's dynamic commodity index, aims to uncover the elusive commodity risk premium and provide investors with diversified exposure to this complex asset class. Kurt offers insights on the challenges and opportunities presented by factors like inflation, supply chain disruptions, and geopolitical tensions, and explains why commodities deserve a place in a well-balanced investment portfolio. Whether you're a seasoned commodity trader or just curious about this unique asset class, this episode is packed with engaging anecdotes, market analysis, a glimpse into the future of the commodity landscape, and trading history you might have missed out on! Don't miss this captivating conversation with one of the industry's leading experts in Commodities – SEND IT!Chapters:00:00-01:22=Intro01:23-07:15= Tracing the Roots of Commodity Futures07:16-20:51 = Adopting business models & creating indexes20:52-35:29 = The Evolution in commodity risk premium’s and SummerHavens’ research-driven approach35:30-46:17 = Lessons in resilience & optimization with an impacting factor: Inflation46:18-01:00:01 = Diversifying is essential: Vacationing in Cocoa01:00:02-01:06:38= Positioning for the next decade’s opportunities01:06:39-01:13:45 = Culinary Corner: The Best Indian dish in StamfordFrom the episode:The Commodity Futures Risk Premium – 1871-2018 whitepaperFollow along with Kurt onLinkedIn and check out SummerHaven's website:summerhavenindex.comDon't forget to subscribe to⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, follow us on Twitter at⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and our host Jeff at⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@AttainCap2⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, or⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ , and⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, and⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠sign-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, visit⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠www.rcmalternatives.com/disclaimer⁠

We ventured into the index and ETF space. We thought to ourselves, well, there's a lot of investors who can't do a separate account or can't invest in a private LP, but they deserve to have well-designed vehicles and opportunities to access the asset class. But what we brought was diversified commodities. And it wasn't really a term of art back then, but you think of like a smart beta or an enhanced beta. We could bring our research edge and Geert's research and his credibility in the space. And so we launched an index, which is the Summer Haven Dynamic Commodity Index. Welcome to The Derivative by R. Sam Alternatives. Send it.

Hi, I'm Kurt Nelson. I'm a co-founder and managing partner of Summer Haven Investment Management. We started in 2009 and are focused in commodity futures, which we think are a unique asset class, different from your traditional futures markets and financial assets. It's where we specialize and happy to speak with Jeff in the podcast today. What's going on behind you on the wall there? Looks interesting. So my partner and co-founder is Yale professor Geert Rauenhorst. So he's Dutch. So he always reminds me that what we think is old in the United States is still pretty new in Europe.

But, you know, commodities are as old as human civilization. And even commodity futures, interestingly, date back to over 500 years ago in Japan. So we have this history is to remind ourselves and visitors to Summer Haven that there's a rich history to commodities. They may be new in portfolios, but they're certainly not new.

Even as commodity futures, the Ujima Rice Exchange was started in 1590s or so in Japan because rice was money to the Japanese economy with the samurai and the feudal lords. And so they actually had not just a spot exchange, but a futures exchange. We have, interestingly, an image from 1830. It's a painting. It's not a photograph because we didn't have cameras then, but the exchange was already a few hundred years old, and it shows people running around the floor, but there's even a back office in the corner, and you can see men carefully scribing on paper, doing operations. That was the ops room. That's Chicago, guys don't like to hear that. We think

we were first in the commodity. The Board of Trade history files won't like that. Yeah, we do have things going back to the, you know, obviously the 1800s because, you know, commodities started in Chicago around 1870s. So even there, we've got 150 years of rich history. So you got your own little museum there. I love it. What's, you have a favorite piece? I think it's the, um, it's the piece from a state of Massachusetts Bay, uh, because it's just important to American history. But, you know, when the country started and we were in a war with England, uh, we had

something called colonial pounds. We didn't have dollars yet. Um, uh, they weren't British pounds and, and we were, uh, you know, a rough credit, right? We were a startup country at war with our founding owner. And inflation was 100% plus per year in the United States, what was to become the United States at that time. Soldiers would usually sign up for three years. And many of the colonies would do a fixed payment system. They guarantee a certain amount of wages if you survived and three years later you could collect from your colony. So Massachusetts came up with something really creative.

We think it's the first commodity index. They said, we're going to pay you in pounds, but whatever we'll buy this basket of goods, think of it as CPI at the time, and it was a certain amount of bushels of corn, pounds of shoe leather, pounds of beef, and wool. And roughly, interestingly, we got prices from that time, Jeff, it was roughly equally weighted across those four. And looking at prices and inflation at that time, it actually did a good job of immunizing those soldiers from the costs of inflation while they were sacrificing their lives to try to create our new country. So we have an actual original bond that is used to pay somebody.

And it was so fun to see commodities back there when we were starting our country. We don't have shoe leather futures anymore, unfortunately. No, but that's the other thing that's interesting. shoe but we don't have shoe leather futures anymore unfortunately no yeah but you know that's the other thing that's interesting if you think about if you looked at the dow 30 from the 80s it would have like sears and woolworths and just companies that you know your kids didn't have no idea they think really that's like that's the dinosaurs right um that you had people going into you know into department stores and getting catalogs that were print every Christmas or holiday period to order from. It's the same thing with commodities.

But just because they aren't relevant today doesn't mean that they weren't commercially really important 50 or 100 years ago. One example that we found in our historical dive was silk futures. Silk is not maybe as common, but still used in certain fabrics and in clothes today. It was really big in the first half of the 1900s, and it largely came from Japan. And it had a very liquid, important futures market that traded for decades. In 1940 or so, early 41, it

stopped trading because FDR could, you know, we were beginning to have tensions with Japan, right? We were halting oil shipments there. It was the precursors to Pearl Harbor. And so he stopped the entire silk trade with Japan, which made the futures go away. But it was very interesting. They were Japanese futures? What's that? They were Japanese futures as well? There was a market in Japan and in the U.S., yeah.

I love it. So, yeah, there's interesting things over time. So, yeah, I mean, silk futures today, no, but, you know, we don't trade. We used to trade mess pork because we didn't have refrigerated rail cars yet. They were like 50-pound wooden barrels of salted cured pork, but they were deliverable against the future. Mess pork? Mess that you inserted in the mess? I had to look it up, Jeff.

Then you had pork bellies, and now it's's lean hogs but it's all pigs right so things change over time too now it's the custom cutout thing that they're doing but uh it's a separate conversation um awesome well i'm gonna cut where are you guys at in connecticut right we're in stanford connecticut yep all right next time i'm out there'm going to come visit the museum. Thanks, Steve. Yeah. So let's go into how did you get started in this whole world? What's your background? Sure. I came out of school with a bachelor's in statistics and math. And I was fortunate that I met a postdoc, kind of PhD. I was at William & Mary in Virginia.

And at the time, I wanted to do business in math. And I was thinking actuary. And this woman, thank God I met her. She's like, no, no, no, no, no. You know about derivatives, right? And I said, I have no idea what you just said. And so she me john hull's book she had been a quant at o'connor in chicago and uh she turned me on and i was hooked i guess she was a professor there she was uh yeah she was uh yeah essentially a an adjunct professor finishing up some postdoc uh research and and um those you know, you meet people in life, right, that kind of can change or influence your course. And she saved me from, you know, calculating mortality tables in Hartford in a closet. And I was destined to go to Wall Street. But you still ended up in Connecticut.

That's right. So I did end up in Connecticut. And so I went to, started with AIG trading um uh great proving ground uh and then uh UBS back pre-merger with Swiss Bank back in the city um I spent I was recruited from there to go to a really great uh lab for derivatives which was AIG financial products and you know there were a few of those there's a credit swiss financial products gen re had one they were multi-asset mostly over the counter derivative groups and so for me it was the best learning environment where I got exposure to rates fx equities commodities and They were doing commodities as well?

Well, we weren't initially. So what happened is Hank Greenberg and AIG, they had AIG Trading Group, which had commodities and FX. And then we were more in rates and in equities and more in other financials. And in 2003, 2004, Hank Greenberg said, I don't want two financial products or financial services companies anymore. You're going to merge financial products in Westport. You guys make a lot more money and are a lot smaller. So I'm going to let you guys drive the combination and just keep what you want and get rid of what you don't and just make everything one firm and run better which was

quite a mandate but hank was that way um and so one of the things we inherited was something called the dow jones aig index and it had about a billion dollars in it and uh it was trying to compete with gsci and this is important to kind of the history of summer haven too because we we we sort of scratched our heads said okay we don't we aren't sure we know enough to say whether we invest in this or shut it down. Let's do some work. And we brought in Geert as a consultant, and he helped to co-author some research to study commodities as an asset class. Like, is this a gimmick or is this something real? And what came out of that was a paper called Facts and Fantasies of Commodity Futures. And it really gave not just AIG, but the street and allocators and consultants a leg to stand on to understand commodities as an asset class.

What does that even mean? And so it was the first really rigorous and deep study of diversified commodities futures compared to like things like stocks and bonds and trying to understand why is there a risk premium what how big is it how risky is it and real quick was aig's trade group basically hey we have all this excess cash from insurance premiums we need to invest it somewhere it actually was uh you know the what i understand it was um a team that left goldman sachs and said we can do something better like we helped to build the gsci but it was really designed to to be a matched book against all the producer hedging we do so we've got a ton of oil because our book is full of oil. So we're doing all these hedges with the street.

It's sort of production liquidity weighted. So we're going to sell an index and sit in the middle. And I think there's some truth to that. But it wasn't designed with investors. That's the GSCI. And if you look at it today, you know, 65% petroleum and energy. And so it's got some really huge commodities and it does have a number 20, over 20 commodities in it,

but some of them are just de minimis, you know, less than 1% weight. So BCOM said that this is, by the way, Dow Jones AIG today is the Bloomberg Commodity Index. It's one of the, it's probably the premier benchmark for indexing performance. So the new index was going to be, we're going to have sector caps and floors, and we're going to have individual commodity caps and floors. So we are going to be liquidity and production oriented,

but we're going to do some sensible things for investors to help diversification. And so that was the Dow Jones AIG index that we inherited. You know, we, there were probably 100 to $200 billion that came into commodities as an asset class from 04 to 08, just before the financial crisis. To gather assets, to invest in it, or to invest? These were directional assets. You know, I think at AIG, our book, you know, grew to, you know, over 20 billion. But, you know, at the time, you book grew to over $20 billion. But at the time, Goldman was raising assets, JP Morgan, Barclays.

And it was all swaps, typically, structured notes, swaps, coming from a derivatives desk to offer an investor exposure. She saw pensions coming into the asset class and they were looking for the first time i think investors saw commodities diversified commodities as something in the pie chart of asset allocation right yeah okay so fast forward to the financial crisis it suddenly became um you know not as fun to work for a large financial institution yeah i was trying to get it were they trying to like spend this premium money and then they ran out and uh yeah i mean like aig had its own set of issues right back then and um uh the i had gone to ubs aig actually sold its commodity index business to ubs and i helped to acquire it for ubs so it briefly became dow jones ubs um and then the index business was sold to Bloomberg and now it's Bloomberg my index, all the same index over that time. But I just, you know, I wanted to do something entrepreneurial.

I wanted to do something with investors and I didn't want it to be synthetic. I wanted to be a fiduciary. I wanted to be a, you know, co-investor and a manager. And so talked to Geert about this. And there was a group of us that wanted, had this idea that you know let's do this as a as create an investment manager it's the market is underserved in general there's just not that many independent commodity focused managers and we have ideas that really don't belong in a swap or an index that really belongs in a fund And so we started Summer Haven together in 2009 and have steadily learned and grown the firm over that.

Right after commodities had gotten taken to the woodshed. Were you ever like, oh, are we sure we want to do this? Did that help the thesis of like, hey, look what we did during that crisis period? It's funny, Jeff, you know that old joke about, you know, my mom always said I should have gone to trucking school. And, you know, we had a, you know, we had a fork in the road in our careers in 2009. And, you know, in hindsight, probably would have been, you know, a very different experience if I had gone into private equity. You and me both, right? And what we did is that it was really a trial period.

It was a proving ground for us because commodities started a 10-year bear market. 2010s were not kind to commodities. And yet we survived and we've succeeded. And I think the reason we did that is for a few reasons. One is we were really committed to doing this. You know, we were all in and people understood that and they liked that specialty focus. We had, you know, good performance in the kinds of strategies that we tried to deliver in. So if we were in an along only mandate, you know, it might be trying to perform relative to a

benchmark or relative to our peers, how did we do? So if the asset class went down 10%, but we went down five, some allocators viewed that as a big win, right? Because it was their decision to invest. It was our job to manage money in the best way we could. The other thing that I think we learned as a firm is something that it's a free lunch that almost no one takes enough advantage of, which is divers right and so what does that mean for a manager well it means uh perhaps you do absolute return but also you do long only or directional and another way a manager can diversify is that you might focus on the large family offices and institutions but also think about how do you reach the high net worth or mass

affluent and so you're saying diversification on your business not in the portfolio exactly so diversification the lowercase d you know it's just like in general it's a good idea yeah um and so what what we did is we um we did grow our our business, and that is still alive and well today. At the same time, we ventured into the index and ETF space. And so we thought to ourselves, well, there's a lot of investors who can't do a separate account or can't invest in a private LP, but they deserve to have well-designed vehicles and opportunities to access the asset class. How can we reach those people, those allocators, those investors? We didn't want to invent this ourselves from scratch, so what we did is we partnered with another firm, USCF Investments. And you may be familiar with them as innovators in commodity ETFs.

They brought out the first oil ETF, USO, first natural gas ETF, UNG, and they've done other things. And it was a two-way street. They had a recognizable platform that investors, you know, were familiar with and had pipes to the street. But what we brought was diversified commodities. And a, what's now, you know, it wasn't really a term of art back then, but you think of like a smart beta or an enhanced beta we were we could we could bring our research edge and geert's research and his his credibility in the space and so we launched an index which is the summer haven dynamic commodity index um that's a um you know uh it's got a 15-year track record now it's it's done very very well uh it's a long only commodity futures um but with this dynamic basically long flat uh it's not long flat it's always long only so it's fully invested but what let me describe real briefly what we do

because i think it gives you a lens into how we are different from maybe some others in this space. So we kind of look at 27 markets that are all the large commodities that would be in a Bloomberg Commodity Index or in GSCI. And we rank those on indications that we believe are correlated very much with scarcity and low inventory. And so we cross-sectionally sort those at the end of each month. And we come up with out of these 27 commodities, 14 that we think are relatively more attractive and 13 that are less. So I think we kind of cut in half, right? And those 14 that we like get equal weight. And then the 13 get zero. It is sort of long flat in that sense. But we do fully invest.

If you put $100 into this index, then $100 would be allocated to these 14. There are some minor kind of guardrails on diversification. Like we do require one petroleum, one grain, one precious, one industrial metal. But otherwise, we allow these to float, you know. And it doesn't have this production liquidity constraint that traditional benchmarks have. And that's had really great performance. And it's kind of how we bring our research to bear to try to, you know, increase risk-adjusted returns. And so that approach of being research-driven and then figuring out how to represent that in an effective way

in a product or a fund is something that we just do across the board. Let me back up a hair right so we had what was it going into 07 jim rogers is on tv in his bow ties and china commodity super cycle right yeah you just see i was huge so all those assets are flowing into commodities institutions were saying yeah we need to have 5%, 10% in long-only commodities. Just take me through that progression from, say, 2000 to the 2010s to today of where you see institutions, whether they have that long-only mandate at all, whether it's all shifted to absolute return with commodity exposure. How did you see that evolution yeah i mean our i think what we saw you know as an industry there was still uh um concerns about what happened during the financial crisis but that affected all assets that

deleveraging took you know it sucked assets out of fixed income, equities out of commodities, out of credit. And then it kind of came back with a vengeance, right? Every risky asset rallied hard until kind of mid-2011. I think the expectation of everyone, including Ben Bernanke and Janet Yellen, who I think, you know, was, you know, and Stan Fisher and, you know, these great minds, as well as people in administration, you know, on the street. Everyone thought inflation is going to come back with a vengeance, too, because we just printed $4 trillion. QE is not fictional like we printed this money um it's got to be inflationary if if if if inflation is a monetary phenomenon

and um what did we have we had disinflation and we had you know draggy wearing draggy in europe worrying about a deflation trap right we thought we god help us if we get into japan's trap um so not only was it not inflation it was disinflation and lower inflation and and commodities represent you know they they reflected that you know commodities as an asset class probably went down 20 30 percent during the decade when equities were you know going to the moon um and they didn't slow down so then i think that that what what we witnessed and this is across the board uh you know across other managers peers just a general there was a general um weakening desire to be long-only commodities yeah we were there were fewer and fewer investors

who wanted to be long we still managed to find them and we still had assets, but there wasn't as much conviction. And we saw consultants start to give up on commodities as an asset class. So I think that that trough was in like 2020. And I think that was true. When oil went negative? Yeah. And we had that crazy moment like just who'd who'd have thunk it right you know minus 36 37 dollars for that short-term

print um but so you think it went like from zero i mean before the 2000s were was anyone trying to have commodities yeah no i think i think as a let's think about commodities as an asset class. So I'm thinking not long short here. I'm thinking long long. Because CTAs, as you know, have been active in commodities for decades, right? And so commodities have had a representation even among trend followers. But I would say there was tens of billions in the early 2000s. I think by 2010, I think even with the sell-off and the financial crisis,

I think there was still around a couple hundred billion, maybe $250 billion in directional commodities. So that's across ETFs, private funds, separate accounts, various ways to try to measure that and track that. And I just think that number, you had a 30% decline in performance, so you just had negative performance which reduced assets, and then some people gave up. So that number probably came down to somewhere between 50 to 100 billion by early by 2020 yeah and i curiosity is whether it went from we need 10 now we only want two percent or zero but who knows no i think you think about more investors they had they had zero and then they went to you know

three to ten and then i think a number of them went back to zero yeah yeah or to trend followers or other commodity adjacent stuff as you're saying yeah and we would hear messages like uh well i'm not sure about the commodity futures risk premium um we were uh but you know some of the investors might be skeptical uh or their board might be and it was just hard to defend and so they would say well i'll do natural resources equities you know like timber or farmland or oil and gas, privates. Some of them would say, I'll just buy gold or I'll buy public equities and resources because it's easier for me to defend.

I want to dig into all those. So what do you say, right? If I run the stats, and maybe you're saying this because you're using the wrong index, but if you line up most any commodity index, I think I have used the Dow Jones AIG before, but it's more volatile with lower return than almost anything, than bonds, than stocks, than combos. So I guess that's the argument some of these guys are making. Like, I don't understand the thesis here.

What's your argument for like, no, this is why it still needs to be in a portfolio? Yeah, for us, it's a data problem. So when you think about Jeremy Siegel or Roger Ibbotson, one of their major contributions was just their empirical studies, like collecting all the stock data back 150, 200 years. And that led to stocks for the long run. So we actually undertook that project. So the original Facts and Fantasies paper went back to 1959, and it covered 59 to 04.

And that was when it was initially published. We actually took it upon ourselves to do a 10-year update in the late teens and to say, okay, there's all this skepticism about the commodity risk premium, and let's look at the out-of-sample 10 years. And it turns out there was still a positive risk premium, that it was orders of magnitudes not dissimilar from the scale and the vol of what was found in the original study in some ways that that did something to assuage people but there's still a lot of negative bias against commodities so um you know being kind of you know nerds about history and and really passionate about kind of uh understanding the the history of commodities we went back and collected all the commodity futures data to the beginning of time so we went you know through a number of of you know paper sources newspapers you know university libraries spent you know a number of years and we collected data going back to 1870s

and it's all exchange traded commodity futures so these are and these were all the major ones that were worth reporting you know in the wall street journal or in the you know the boston globe or the philadelphia inquirer um and so we waited a couple of years and AI could have done all that work. Right. Yeah, exactly. So what that gave us was a time series now that we could compare to stocks and bonds over 150 years. And in fact, we wrote a paper which is available called 1871 to 2018. We've now updated it to 22, a commodity risk premium. And the findings there were striking.

When you look at the, like on a log scale, the returns to stocks, bonds, and commodities, bonds are at the bottom. They have a lower vol, lower return. But you can definitely see the Bill Gross's career on Wall Street, long- term bonds just going straight up. You know, the whole line took a different slope for the last 40 years as rates fell after the after the OPEC inflation. But interestingly, you know, equities have this, you know, volatile, but, you know, steadily growing upward sloping line to the right, which is the equity risk premium.

And it turns out to be sort of a mid-teens vol with an excess return of about 5% to 7%. So you get a sharp of 0.4 on just just on just a vanilla like s&p 500 over 150 years you look at commodities it sort of ends up in a similar place after 150 years it's got a similar return capture and a similar vol turns out the sharp to commodities is 0.4 it's that that's sort of sensational and you know kind of i would assume it had a much larger ball, but you're saying over that huge period, similar. Because what's interesting is we've seen that equities have a much higher correlation with each other now than they used to. It used to be that you could diversify U.S. stocks with equities in Europe and in Japan. That doesn't work.

They're still very correlated. Even emerging markets and emerging markets have become, and frontier markets have become correlated. But there's still a really low correlation between corn and oil and copper. Yeah, fundamentally. Fundamentally. And that still stands true today, Jeff.

So you get a great diversification benefit by having an equally weighted index over a long period of time. And so there's no optimization to it, but it is rolling front month futures. It captures things like roll yield and contango and backwardation. And so it's an investable time series based on exchanges that were liquid and open for the last 150 years. And so that was fascinating, just that fact alone. Because you think, okay, just to revisit a comment we had earlier on our discussion, you know, a lot of investors have a ton of equity right now.

They have public equity, they have private equity, but their commodity futures allocation might be zero. And one of the things we say is, well, it might be something that you have an aversion to. It's a futures market, which might be a little unfamiliar to you. But if you look at the facts, if you look at the returns, the correlations, the volatility, zero can't be the right number. Right. Any optimizer will tell you that. Unless you're optimizing for pure return, maybe, but even then.

Yeah, but it must be a recency bias or a behavioral bias against them. We respect that, and that's real. The best fix for that is to generate returns for people. So it shakes them out of their complacency. Ironically, you know, COVID did that. You know, we commodity returns are difficult to forecast, right? You can get a long term average. But you know, if you say where our commodities can be up next year or the year after, that's trickiest. It's as easy in commodities as it is in stocks right it's which is to say it's not easy um inflation turns out to not be easy to forecast either and so we came out one of the reasons why commodities behave so poorly and why investors weren't that worried

about them is inflation was almost zero for you know most of the 2010s right and the shocks to supply chains and you know shifts in supply demands uh you know trends from consumers created some pretty uh intense shortages during the period right after covid. And we did not see inflation of 9% coming. No one did. And you had what I call the immaculate disinflation right after. No one saw that inflation was just going to naturally fall to 3%. It's like the whole ride was just, it was a shock to our confidence about you know being able to predict these things but what we saw was commodities did what they're supposed to do they just responded really strongly you saw stocks and bonds go down at the same time

and you saw commodities go up you know scream higher across the board so that was a great reminder to everyone you know well it's not that everyone. Well, it's not that they're rallying because there's inflation. There's inflation because they're rallying, right? Yes. Yeah, you're exactly right. And some people say, well, why is there a connection between commodities and inflation? So we'll just think about what inflation is to an economist. It's the consumer price index. And so it's the price of goods that the consumer's paying for and it's their prices going up well if you go back one step then you're in the ppi you're in the producer price index so it's the the kind of prices that of finished goods that producers are you know like

things like you know rolls of copper or yeah you know uh corn that they can use to make corn flakes or wheat for Wheaties. And you go back a step further, and you're in the raw good. You're in the actual bushels of oil, barrel of oil, raw copper ore before it's been refined. And that's commodities. So I almost think these price shocks, I'm not sure exactly the lag, maybe a few months, but first it hits commodities, and then it goes to the producer. And then the producer tries not to increase price until he hits a pain threshold and then he does.

And then he passes it on to consumers. And so those makers of finished goods try to not raise prices, but eventually they kind of have to. And they as a group kind of raise prices and then you, then it shows up in CPI. And so like, maybe unless they ignore a few pieces, but yeah, but there's other things like,

you know, healthcare or rent equivalents. There's some goofy things in the way we calculate CPI, but there is a direct drive relationship. And that seems to be intact over time real quick just because you mentioned the timber right family offices institutions love timber real estate all this so what's your thing like you don't need to go is that too specific it's not diversified enough what's your argument for against

that and resource companies of like, why own the copper miner when you can own the copper? Right. I think what I would say to someone is there's nothing wrong with owning to own real estate or owning tips or owning commodity equities. That's okay. But understand that commodity futures are different. And so in the commodity equity space, you know, I think that some people that have an aversion to futures, even if there's an easy product that, you know, that they can use, they might say, well, I'm going to buy oil companies instead of buying oil. And so 10, 15 years ago, you might have bought a huge company like British Petroleum and said, that's oil, Exxon Mobil, these are oil companies.

And the problem is that for several months or a year, you didn't buy an oil company, you bought an oil spill in the Gulf. And the price of BP fell 50%, oil didn't move at all. And so clearly, commodity equities equities we think are just that yeah you buy debt equities and you might manage right yeah yeah and in fact you know as you probably know that you know some some big commodity firms hedge their their production it's sort of they're running a business. You might sell futures. Farmers do it. Some producers do it. That's been back and forth debated in the gold mining space. People want it. It makes sense to hedge the price of gold, but investors want you to have

full beta. Yeah, the shareholders are like, actually, we don't want you to be this very profitable company with low volatility. We want you to be this very profitable company with low volatility. We want you to be a gold proxy. And in fact, looking back at the 2010s, what you saw was that commodities fell 30%. Commodity equities went up maybe 50%. And then the stock market broadly went up 300%. So you kind of had the negative returns from commodity beta and the positive returns from equities.

And so they kind of are 50-50. I just think they're a different animal. I think gold, for example, you can buy gold as a GLD. You can buy it physical. There's different things you can do. In fact, that's been something that's been flying off the shelves at costco if you've read that story they've sold something like 500 million dollars of physical gold uh they can't they run out of stock uh you know it's like it's so funny you get coins or what are like yeah they're coins gold and silver and so i'm sure

there's like a 40 markup on it yeah you Yeah, you get your 18 rolls of paper towels and you get five pounds of trail mix and then you get your gold bars. A little bit of gold bars. But commodity futures are different. And why are they really exciting to us? Well, number one, they've been around for a long time, right? That's usually not what gets people excited.

Well, okay, but they do have this risk premium, which is positive, and it's different in nature than the equity risk premium or credit risk premium. And I think it really is. We've done a lot of work studying this. And they're price risk exchanges where generally a producer, a hedger comes from the market.

And Keynes wrote about this, you know, 100 years ago. This is why commodity futures exist and exchanges exist, is a farmer owns corn and he wants to sell his production and so he goes to the futures market he sells forward. I've argued they should be called nows instead of futures right because that farmer wants to lock in a price now. Now but you're right he wants to deliver it in the future right but he's demanding a price right now. He's demanding liquidity and so whenever I try and explain what I do to people and their futures, I don't get it. I'm like, just think about as nows and they want to get a price right now.

And like, do they have to give up to get the price right now? You asked me to kind of, you know, explain like why commodity futures when there's equity or real estate. And so I agree that those are options. And why would an investor, if you can own equities or real estate. And so I agree that those are options. And why would an investor, if you can own equities or real estate or hedge funds or gold, why would an investor or what Keynes called a speculator come to the commodity futures market? Because what's different about a speculator or investor is that you don't have that physical and you're not running a matched book you're running a naked long or a naked short right you're you so an example if you if you go long

hog futures to provide a price hedge to someone and you say I want to run a matched book that you have to cash short how short sell hogs and there's no way to do that you know if you turn that on its head and you say well if i'm going to short futures i can't borrow their hogs you can't borrow their hogs and sell them short and then re-deliver them yeah um the um if you flip that on its head you say well i can buy i can invest cash in hogs and sell futures it's like well kind of but you're you're probably buying a farm in iowa or north carolina or something and and you futures it's like well kind of but you're you're probably buying a farm in iowa or north carolina or something and and you know that's a very different thing and if it's a mining company

or uh if it's cocoa or corn like cash carry is really right back you're taking on that idiosyncratic risk yes so what you the speculator investor is actually wearing the price risk and our belief is that that's why there's a risk premium that to entice to get paid to do that you got to get paid to do it another way to say it is imagine that you're providing uh uh flood insurance or hurricane insurance in florida and the premium gets driven away by competition so that you can't make money on it anymore well i think the insurance goes away. I think the market fails.

Which is happening right now. But often what you do is that market participants, your people offer it. The ones who remain, they offer it and they get paid a lot. They take a lot of risk and they earn a lot for it. If you're offering hurricane insurance in Minnesota, you might have a market for it but you're probably taking very little risk and getting very little return and we think that that is a that is a dynamic that exists in commodities that um the other way to say it right the producer's not um profit motivated I mean they are in a weird way, but they're willing to give a discount

on their price because they have other needs that they're meeting. Right. They're managing risk in a different way. And so I did a, you know, one of the benefits of having been both in the index and public space, as well as in the private as a firm, this was something I didn't know going in, but it was a wonderful kind of added benefit, which is that I can, because these are registered products and I'm managing an index, which is rigorous and public and has returns that are online on Bloomberg, et cetera, I can talk about that. And so I can talk about our index and how it was, how it's dynamic and we're at one. And our story, I just did a webinar last week for several hundred people. And what we talked about was our public index did really outperform last year. And two of the big winners were cocoa and coffee. And so they're softs that are overlooked by many, but they're relevant and interesting to us. And the reason why I'm mentioning this

is I got a lot personally out of researching these markets for the webinar. Much like the historic wall behind me, I dove into the the history of cocoa in the U S um, the New York cocoa exchange was started in 25. So it's having its hundredth anniversary now. Um, they were located in a building called the beaver building, which, um, had, it was a flat iron style, style building that had the tip that little point, like the flat iron building and, you know, in lower Manhattan, it it was located that tip was on wall street and it's still there the building's still there and it's like two

blocks from the new york stock exchange and the new york coco exchange was the set prices for coco globally and i think still is really important right it's it's successor exchange that's on ice but for 50 years the exchange was there And the quote in the Times from 1931 from the president of the exchange said, it was very important to establish a market for businesses in the cocoa industry that needed a hedge market to protect their business and enterprise. And it was like, i extracted that and highlighted it for this webinar because that's exactly what we think that this is why commodity futures exist the funny thing that i think tickled me too is that uh i have you seen the john wick movies um or you know

of them i know of them yeah so there's a hotel company the continental that all of the the assassins hang out in which is iconic that that's the beaver building that's where the exchange was they filmed it there so i just thought what a rich history there's like okay so coco did well last year and so a bunch of people are noticing it and looking at it and i think you have and it's severely underrepresented in most other industries and even some trend follower portfolios of like, this thing's never done anything. Why is it in the portfolio? And a funny anecdote on that.

When we used to manage the Dow Jones AIG index, COCO was one of the 24 commodities that was in the index. And the oversight committee removed coco just because of its smaller scale and liquidity they removed it from the index about six or eight years ago uh it's still something that you can they track and observe but it's not in the index anymore and so but not to bash the oversight committee but there's no way if it had been up like it has been the last four years they would have removed it from the index right correct yeah so it's like oh the liquidity in this well really getting back to something i said before you know predicting the future is is hard and i understand if you're trying to run an index designed to track 200 billion that you have to make, you know, judgment decisions.

And you end up with a lot of petroleum, a lot of natural gas, a lot of gold. And even, you know, cocoa is not any, but even other smaller things like sugar and cotton and coffee are in the index. But they're a much much smaller weight our view is you know you don't know what's you know in advance what's going to win where you're going to have a shortage and so kind of spread your bets and we buried the lead here we forgot to talk about your so you do have a long short strategy also right so? So. Yes, sir. Part of me is thinking, OK, over time, you're like, hey, it's actually better to be long short commodities than just long only or long flat. Was that the logic or just meet the investors halfway?

Some of them want this short side exposure also. Right. That's been my personal experience of like commodity buying whole commodities is very volatile, low sharp trend following commodities only is better but still pretty volatile and not as high of a shark commodities only inside a main a main trend following portfolio they look great but then long short commodities starts to look even better if you're talking compared with just trend following um yeah i think yeah no you're absolutely right je just trend following. Yeah, I think, yeah, no, you're absolutely right, Jeff. And so we have been doing this for the last three years.

And I think the motive was that there is, it's a different investor sometimes. So an investor that might want long-only commodities has their head around the risk premium. They're often looking for an inflation hedge. And so I think some of our and others investors in long-only commodities maybe have a healthy skepticism about whether it really is a 0.4. Is there really a persistent risk premium to capture? But I do know that when inflation spikes, I have strong belief that commodities will go up and i that's why i have it in

my portfolio along with tips and real estate uh and other things so that's that's one reason why you might be in long only but for those that um uh aren't as maybe they're not at that threshold yeah they're still on the fence um they Many investors are looking for uncorrelated return streams, often market neutral or absolute return. That is a very rich environment to try to compete in. And so our thought was that long, short commodity futures, it was fairly unusual. The fact that we do not include financial futures, like rates and currencies and equities, kind of separates us from many CTAs that are doing trend following. And to be clear, it's not trend following. You can get in how the longs and shorts are chosen no it's really more of a you know we take a fundamental

approach driven originally from you know our research about why these markets work and and and where compensation to a speculator is higher or lower as a fundamental matter and that informs our view so um we also have you know the benefit, you know, today we have firm AUM about 1.2 billion. You know, we have over a decade of experience at Summer Haven trading in these markets and sort of seeing how they behave, how they work, how our research approach and trading approach seems to apply more or less effectively. And so we've learned from that and we've said, well, if we're, if an example in the long only space, an objective would be to be delivering sort of a beta plus, you're trying to deliver some kind of a benchmark that someone might have, and then you're trying to outperform that and if you can demonstrate a steady outperformance in different markets uh different market environments and driven by different sources of return and you you really have a robust outperformance it's i think a natural

extension then to say okay how do i take that that and convert that into a long short that's not, it's just portable alpha in a sense. It's just an uncorrelated alpha stream. And I think that drove it more than anything for us, Jeff, was we have investors who we're not going to reach with long-only commodities, at least not today. And so what is it that they are looking for? And they're looking for a diversifier they're looking they're pulled up on lots of equity private equity public equity tech vc or even you got a guy like me loaded up on trend all this i want a little wrinkle out of my commodities of something not price driven something fundamentally driven and so my my thought is that one of our goals is to be

distinct and differentiated. So it's not that I, you know, nothing against successful trend followers. You know, I've met some of them and have respect many of them who have been at this for a long time. We're doing something we believe different. And so, you know, it sits really interestingly alongside other absolute return streams. And so talk a little bit as much as you can share without giving away the secret sauce of how these longs and shorts are identified. So you're kind of trying to see where the shortages are,

where, I'll let you take it. Yeah, I think what we're trying to do is find uh uh markets where there's you know a risk of a stock out where there's a potential shortage a stock explain a stock out for my study george real quick yeah absolutely so stock out would be like uh you know a risk that you're going to run out of something that the global economy needs desperately, you know. Like cocoa. Well, what was interesting is that with this price run up, there hasn't been a lot of demand destruction. And so, you know, when you start to run out of something you know you you what you find is

because it's not elastic you can't substitute whatever correct oranges for chocolate certainly in in the near term what gives us price right now what happens is that over longer periods of time there can be some demand destruction there can be substitutes so in the case of like a cooking oil, right, you can use canola oil, soybean oil, canola oil. I mentioned rapeseed in Europe is more of a biodiesel. There's palm oil in Malaysia. But in the short term, like the sunflower shortage driven because of Ukraine and the conflict there just wreaked havoc in Europe. Not as much in the U.S. because we don't depend on it as much. So the short term, you see an amplification of volatility and price action.

You also have the ability over a longer period of time to kind of develop new sources. Right. So in oil you can or in mining you can you can develop more mines, more extraction. You know, in Canada, you might kind might bring online some of the tar sands when oil gets high enough in price, but there's a delay, there's a lag. And so you'll see a sharper response at the front end. And I would highlight that it could be supply driven, but it could also be demand driven you think about what like the the construction demand and what we saw in lumber post-covid um you know it didn't affect all commodities equally right right um and and uh eventually these things high prices eventually solve high prices low

prices eventually solve low prices and so there's different frequencies to this but it kind of whacks and wane over time each commodity has this different cycle some of them are seasonal some of them are not um but so you are you saying you seek out these commodities where you see these patterns versus i have a portfolio and i'm trading yeah we're seeking commodities where a scarcity-led risk premium is greater. And then looking for those others that are in full carry, full storage, ample supplies. If you're providing price insurance to a market, I'll say an example would be crude oil during the fracking period. We're getting more and more and more oil in storage. We weren't exporting that much yet.

In many cases, we had contracts to import still that we had to honor while we were creating more and more domestically. Storage at Cushing at some point was almost full. We've seen this in natural gas, too, where during the injection period sometimes all the the salt mines and everything the caves where we store gas we're reaching capacity if there's a during that once you have that big buffer stock it could be grains and silos and you have an increase in demand or a decrease in supply you get a muted effect but you aren't that worried because you can deliver out of inventory yeah yeah right but when like like coco right now where inventories are super low um there's you know we haven't had that much demand destruction and so the only thing to

give is price there's no inventory to pull from in the near term. And I highlight Cocoa as a story because this isn't really a high-frequency thing. We're not talking about trading on microseconds or nanoseconds or trying to be smarter than the market. This is intrinsically a dynamic in commodity futures markets. So this movie that we're seeing right now in Coco, I joked during the webinar this was a 2020 sequel to a 1970s movie. So Coco futures are 100 years old in the US and you can actually pull up on Bloomberg,

the Bloomberg Commodity Cocoa Index. And they have returns going back to the 1960s. The 1960s were really boring for cocoa, nothing really happening. And starting around 71, they had something very similar to what we're experiencing right now. They had a series of poor annual crops. They had lower and lower harvestable land that was dedicated to cocoa, still subsistence farmers. It wasn't organized or supported by a trade group or by government coming from west africa and they were getting hit with series of disease weather events and other things so that inventories just got very depleted in coco coco investable coco if you look at the index from

the 71 to 78 went up 8 000000%. 80 times. There's a reason why people don't go long only just cocoa because you can imagine the volatility of that experience. But if you map what we're experiencing right now in the last two years on top of that seven-year time series, we're right on top of it. We're up seven times in two years, which is basically where cocoa was in 73. And if you read the news stories about the time, a few years into it, the news story said, well, prices are really high, but we really haven't seen demand destruction crops are still challenged coming out of West Africa and

There's definitely a thought among Speculators like is this is this a bubble that's gonna break or isn't it overdone and yet we still don't have Equilibrium in price and it keeps going higher so this was kind of two three years before the peak price in price and it keeps going higher so this was kind of two three years before the peak price in cocoa and so i don't know if that's going to happen but it has happened before um and so those are really makes you think this time's different and this is so unique it's grown in west africa and they have their political issues and so yeah so things are different like for example you know uh we have genetically modified crops right we you know uh we can you know we have arable land in the tropical regions that

aren't being uh focused on cocoa and they could potentially grow that cocoa those are all hypotheticals but it needs to happen and it takes you know a few years to get you know plants that are ready for harvest so thousands of acres to cocoa yeah i think um you know we'll wait and see what happens but um we those are all good important lessons for us and um so we're not really i think there are some tourists in cocoa uh there are some managers who have picked it up and found it interesting to trade. But, you know, we've been trading it for 15 years and we're trading it before Summer Haven. And I think it's important to have that long experience and to be humble that we're not trying to hang our hat on one commodity, but we're trying to trade as many as we can. Anything else you want me to touch on? No, I think what I would say is the things that have worked for investors over the last 10 to 15 years, I think are going to be

different for the next 10 to 15. I think 2010s were an odd decade, right? As I mentioned with the QE and inflation went to zero and credit spreads went to zero. I started my career in the mid-90s, so I watched the internet bubble. I remember that it took, for example, the, the Nasdaq after it corrected in 2001. It took it, you know, 13 years to get back to break even. Yeah. I'm not forecasting that that will happen, but I think that this is a different market and it will be a different decade. And so I think it's going to be a very interesting time for commodities um i think that there's there are this administration is bringing in a lot of of shocks to the marketplace that will affect you know commodities and and

other financial assets too in general do you want and like the volatility like the more right climate change administration political foreign unrest whatever that's generally going to create an opportunity the reason you know i think what's interesting is uh when you think about like a normal distribution of returns you know often in like for example equities tends to have a fatter left tail that that monday morning event is often you know an accounting scandal or you know something negative and so you'll see a stock just gap down 20%. You can have it go the other way, but, you know, more than half the time it's sort of a fat tail to the left.

Interestingly, commodities, if you look at the data, it tends to be more on the right side. Those surprises of negative news, drought war um uh supply chain disruptions tend to be positive for price yeah and so um and i think it's positive for volsher but they create opportunities so we think this is going to be a rich decade and um uh i think you know without forecasting precisely what's going to win i think there's going to be a rich environment to to transact in and that will be the hot take award of the year that the next 10 years won't look anything like the uh last 10 but as we were

talking about before a lot of people just can't see that right what do you comment why would you do commodities why i've been saying more and more of like why would you do anything except u.s equities i think um uh i think recency bias is you know it's a big deal it's just a human condition is you know it's something to be aware of and um if you left uh business school you know around the financial crisis say you started in 2010 you've been on Wall Street 15 years I remember when I had 15 years under my belt I thought I knew a lot I'd seen a lot yeah if you had been on Wall Street from 2010 to 20 or yeah 2010 to 25 that's 15 years you you're like it's all equities it's all US equities it's leveraged tech. It's, you know, definitely not commodities. And, you know, private is better, illiquidity risk premium.

There's all these kind of stories that have worked out for you. But, you know, the risk premium to equities over the trailing 15 years is something like, I don't know, 10 to 15 percent per annum. Actually higher than 10, 12 to 14, 15% per annum. Actually, higher than 10%. 12% to 14%, 15% per annum. We know that that's twice normal. But my counterargument would be, but maybe they've figured it out. The Fed's more transparent. Companies are like, are they, they're tricking us, right?

They're making that happen by making sure earnings come in a penny or two exact and all that stuff. Of course, you can do that for only so long. I think that's what it is. And I think I'm not sure that there's a Fed put anymore. With this administration and with the amount of debt that we have and the burden of financing that debt, which is non-zero now, right, with interest rates where they are, rolling over debt is not nearly as cheap as it used to be. So I just think it's going to be different.

And I understand that if you've been on the street for 15 years, you haven't seen it yet. But try to talk to the guys with gray hair like me around a little bit longer uh because i think it'll give you some uh you know lens a window into a different market and what what's your go-to like how much in commodity so okay yeah i agree all this is going to be crazy okay i think there might be inflation i want to get commodity exposure whatever your reasoning how much so you know in in the long short space it's it's really uh you know it's it's what you would put into alternatives you know and to other hedge funds ctas and i think you compare it on a on a fair basis against those other kind of absolute return alpha streams in the directional space

which i think is what you're asking je Jeff, I guess I have two answers. I'd say that the street right now, the common wisdom is zero in commodities. We've found exceptions to that, but that's a very commonly held belief is I don't have anything in commodity futures. Yeah. the variance-covariance matrix, the volatility, return expectations, and put it alongside equities and real estate and fixed income and other things, you'd get a number that was surprisingly high. You'd get probably something like quarter magnitude 15, 20%. I think that that's unrealistic for an investor who's coming off zero.

I think what we find is 5% to 10% in commodities is sort of a comfortable zone for many allocators. And then that gives you the ability maybe from that base to tactically overweight or underweight, depending on your views on inflation and the opportunity set. And I think that commodities futures can sit alongside, you know, commodity equities or gold or real estate or other things that you might hold. But I think that what all of our research has shown us is that the right answer in a diversified portfolio can't be zero. Yeah, it seems the right answer is rarely zero.

We're going to end it up with a little fun culinary corner we caught. Great. Give me your Mount Rushmore, your four favorite around the world in New York City. Where do you want to go? In Connecticut? Restaurant spots? Restaurant spots. the world in new york city where do you want to go in connecticut restaurant spots restaurant spots um well uh one of my family favorites this is hard because it pleases everybody which and i've got very distinct tastes in my family and i love it and um there's a... Don't say Olive Garden. But I will say there's a modern Indian place in New Haven called Sharken, S-H-A-R-K-E-E-N.

It's right next to the bookstore for Yale, kind of near campus. But it's like a modern take, not stuffy, but like a modern take on Indian. And if you've had indian food in most american it's sort of like tex-mex or chinese american food you know it's like the same things kung pao chicken you know um etc this is really unique indian every we we go there a few times several times a year and we drive we'll drive you know what's really crazy is that we'll drive 40 miles there's 40 you know whatever to new haven to have this food

and then we'll kind of come up for some reason with some reason to be in new haven but that's like the pizza mecca of the world so we could be going to pepe's or frank's or colony pizza and we go to get you know indian um in uh new york um you know along the commodity in New York. Along the commodity theme, I think I'd give a shout out to this restaurant called Cote, C-O-T-E. I think it's a Korean barbecue. My son found it and we went there when he graduated from high school last year. It was the one place he wanted to go. I think it's the only Korean barbecue with a Michelin star. If you want to have extraordinary beef and it's fun it's the commodity italian i missed that yeah beef beef okay

um where did your son end up going to school he's at babson uh and so um he uh i i had to ask him what babson like what do they do yeah that's how ignorant i was that's what i was had to ask him what Babson, like, what do they do? Yeah. That's how ignorant I was. That's what I was about to ask you. And then my colleague who's a Yale Business School professor said, oh, Babson is really great. I said, well, if you know it and you think that, then I need to respect this choice and investigate. So what Babson is really neat about is they're all about entrepreneurs.

And they're not about, you know, there are some people that will go into finance to Wall Street or to, you know, a consulting firm, but many of them are trying to start something from scratch. And that's neat that they take that as an art form. The things that you can learn, whether it's starting a restaurant or a clothing company or any business like how do you do it how do you get capital what are the things that are so hard why do people make it some people don't so you think you can teach that i'm always dubious whether you can teach i guess you can but it's like at some point it's also like i gotta think outside the box and think of so i guess better to have some base to then go think outside the box just speaking from personal experience you know i've i've done two things that i think of like this so like when we uh we bought an old

house it used to be a carriage barn and literally have like farm animals in it and it was restored but we but hadn't been worked on in 50 years and we bought this thing seven years ago and historically renovated it and made it bigger so kind of kept the this the character of it but made it modern and by the time the project was done i knew everything i needed to know before i started it and yeah and i think you know now i'm 15 years into summer haven and it's like wow you know having been all of us all this largely came from wall street right we didn't we hadn't cut our teeth in a small investment manager before. And so I've learned through trial and error what works and a leadership style that works for me. I wish I would have had four years at Babson to prepare me for running a small investment management company.

I've found that the small guys aren't all that different than the big banks. Once you get down to actually doing the work, and I don't know if you agree or disagree, but maybe they have more expensive Bloomberg terminals and they kind of spend more money. I don't know if they're really... I think what I would say is whether you're a small company or a big company in my ecosystem, the main thing is don't take your eye off the ball. Remember why you do what you do. Don't forget about investors. Don't forget about risk and return.

Don't forget about taking care of your people. And understand, you know, control what you can control and understand that there's going to be some things that you can't, you know, make yourself, you know, as resilient as you can. There's a quote that I enjoy. I heard it from General Petraeus. I think it was right after he got out of the Army. He may have gone to Carlisle. I think that's where he went. But anyway, he said, you know, luck is when opportunity meets preparation.

And I was like, I like that. You know, there will be luck, but you need to be ready to take advantage of it. And if it's bad luck, be ready for that too. Yeah, that exists. Awesome. I think we'll leave it there unless you got one more restaurant burning a hole in your pocket. No, no. I just really enjoy your podcast and the opportunity to speak with you and your audience, Jeff.

I really enjoy this. Love it, Kurt. We'll talk to you soon. Saw you in Miami and now freezing cold. We need to get back there. Let's do that again. Definitely. All right.

Thanks so much. We'll talk to you soon. You got it. Cheers, Jeff. 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.

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