Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond sound bites and headlines and looks deeper into
Speaker 1: the processes, challenges, and philosophies and security selection. I'm David Cohne,
Speaker 1: I lead mutual fund and active research for Bloomberg Intelligence. Today.
Speaker 1: My co host is Christopher Kane, us quantitative strategist at
Speaker 1: Bloomberg Intelligence. Chris, thanks for joining me today.
Speaker 2: Thank you for having me.
Speaker 3: David. So, you put out.
Speaker 1: An interesting note on third quarter earnings yesterday where you mentioned,
Speaker 1: you know, this season's really turned into one of the
Speaker 1: more surprising and paradoxical in years. Can you kind of
Speaker 1: give our audience just a brief overview of what's happening
Speaker 1: and what you mean?
Speaker 2: Sure, Yeah, I mean that was kind of a wrap
Speaker 2: of earning season. It's almost done now. I mean generally
Speaker 2: I always say earning season was very, very strong. You
Speaker 2: know what we do is we look at pre season
Speaker 2: analysts forecast for sales and earnings growth, and we looked
Speaker 2: at what actually happened. Basically, earnings grew a double expectations preseason.
Speaker 2: Even if you strip out the MAC seven, it's also
Speaker 2: about double sales has similar beats you know, we're paying
Speaker 2: very close attention to margins with tariffs and everything like that,
Speaker 2: but the margins are holding in very well. We also
Speaker 2: look at the price reactions of these stocks, you know,
Speaker 2: I would say generally they're a bit more volatile than average,
Speaker 2: meaning that they're been moving more. The misses have been
Speaker 2: punished more than the beats when you look at historical
Speaker 2: so it they skew to the downside a little bit
Speaker 2: as far as the excess returns after the earnings. But
Speaker 2: generally earnings continue to be very strong and seem to
Speaker 2: be continuing to you know, charge this bullmarket forward.
Speaker 1: Great, great, well, I think it's time to bring our
Speaker 1: guests on. I'd like to welcome Jerry Parker. Jerry is founder, chairman,
Speaker 1: and executive officer of Chesapeake Capital Corporation and a portfolio
Speaker 1: manager on a number of funds, including the Blueprint Chesapeake
Speaker 1: Multi Asset Trend ETF, which has a ticker of TFPN,
Speaker 1: and the ax S Chesapeake Strategy Fund ticker equ c HX. Jerry,
Speaker 1: thank you for joining us.
Speaker 3: Today, thanks for having me.
Speaker 1: So let's start with TFPN. The term trend following plus
Speaker 1: nothing is used for that fund. What does plus nothing
Speaker 1: mean for you. In practice, it means.
Speaker 3: A couple of things. It means the fund is going
Speaker 3: to be it's going to use a strategy that's just
Speaker 3: trend following and no other strategy mixed in there to
Speaker 3: smooth out return. It's you know, trend following is sort
Speaker 3: of known as being a bumpy not a smooth ride,
Speaker 3: letting profits run thicky small losses. But some of those
Speaker 3: profits can get kind of large and coming outside impact
Speaker 3: on the daily performance and the drawdowns and the crashes
Speaker 3: can occur as well. So some CTAs will introduce other strategies,
Speaker 3: mean reversion and recognition, carry trade other strategies along with
Speaker 3: the trend following in order to smooth things out. And
Speaker 3: we just don't add any of those ideas and just
Speaker 3: do the do the trend following only. And then another
Speaker 3: way to look at it would also be it's sort
Speaker 3: of real trend following. There is no way some CTA
Speaker 3: is trend following CTAs. They may have algorithms that in
Speaker 3: order to smooth it out. Once again, they'll alter the
Speaker 3: trend following a bit like don't let the profits run.
Speaker 3: Get out of something if it has a big profit,
Speaker 3: just get out at the very highs, which is one
Speaker 3: of the opposite of the way that I was raised
Speaker 3: to do trend following. So trend following plus nothing is
Speaker 3: very unique. There's not many CTAs or certainly in the
Speaker 3: ETF world that do both of those things.
Speaker 1: Interesting, Well, let's dig a little deeper. If if we
Speaker 1: stay on the TFPN, can you kind of walk us
Speaker 1: through your investment process for building the portfolio.
Speaker 3: Well, for building the portfolio, it is going to be
Speaker 3: maximum diversification. TFPN trades over four hundred markets, over two
Speaker 3: hundred stocks, single stocks, very different than most CTAs. With
Speaker 3: the single stocks. Most CTA's trade indexes only, so it's
Speaker 3: trying to find as many different markets as possible. Currencies, commodities, stocks,
Speaker 3: and interest rates, and crypto. So we think that crypto
Speaker 3: is slowly going to start being more of a material
Speaker 3: impact of the portfolio in a sort of the new
Speaker 3: fifth sector after those other four. So we build the
Speaker 3: portfolio trying to maximize diversification. We're going to have longs
Speaker 3: and shorts, and then we're going to not base any
Speaker 3: of these struct the addition the markets that are in
Speaker 3: the portfolio. None of that's going to be based upon
Speaker 3: historical returns. It's just you know, some of the market
Speaker 3: have performed great in history, so maybe not so well.
Speaker 3: And that's sort of a trend following philosophy. If you
Speaker 3: can't predict these markets the past, you shouldn't pay too
Speaker 3: much attention to the past except trying to uncover good
Speaker 3: places to buy and good places to sell using your
Speaker 3: back test, but don't rely too much on the historical
Speaker 3: performance to build the portfolio. So we you know, like
Speaker 3: like in the past few years when Coco was this
Speaker 3: big mover, everybody wants to use Coco right as an
Speaker 3: example for almost everything to do with trend following, So
Speaker 3: I'll do it as well. Coco hadn't made money in
Speaker 3: ten or fifteen years, but the good trend followers are
Speaker 3: going to have it in the portfolio and office diversification.
Speaker 3: So we do care about smoothness if we can get
Speaker 3: it from the portfolio and trying to diversify it as
Speaker 3: much as possible. And when you're trying to find these
Speaker 3: outlier trades and just maybe five or ten percent of
Speaker 3: the trades are going to be responsible for all the profits,
Speaker 3: it's really helpful to trade hundreds of markets because it's
Speaker 3: sort of is the bad luck factor. If you trade
Speaker 3: twenty or thirty markets, you know, you could go if
Speaker 3: you have a great year because a couple of those
Speaker 3: had really big moves, or a zero year because you
Speaker 3: didn't have coco in your portfolio or coffee and gold
Speaker 3: or silver. That would be unlikely. But that's sort of
Speaker 3: the reason that we build it the way we do.
Speaker 1: So if we think about the traditional sixty forty portfolio,
Speaker 1: where do you see these types of trend following funds
Speaker 1: fitting in. Is it, you know, a compliment you know,
Speaker 1: do you see it replacing, you know, another part of
Speaker 1: the portfolio.
Speaker 3: I think it fits in pretty well with the stocks
Speaker 3: and bonds. Especially take a year like twenty twenty two
Speaker 3: when they were both down. That was one of the
Speaker 3: best years in CTA history. Trend following history short the
Speaker 3: stocks and short interest rates and so that short the bonds.
Speaker 3: So that was a really good period. And it sort
Speaker 3: of shows very clearly how when you have the two
Speaker 3: main asset classes who are that are not doing very well,
Speaker 3: and maybe the trend following little ad some performance and
Speaker 3: smooth fakes out a bit. And I think it's also
Speaker 3: important for clients to realize that this type of strategy
Speaker 3: can underperform. When stocks are doing really well, bounds are
Speaker 3: doing okay, the trend following, especially like this year, has
Speaker 3: not really helped very much. It's kind of caused issues,
Speaker 3: especially in a time like April where there was a
Speaker 3: lot of whip saws and getting out of the lungs,
Speaker 3: going short and getting back into the lungs, and the
Speaker 3: long only indexing just stayed long all the time. So
Speaker 3: that was kind of the worst case scenario for trend
Speaker 3: But it's just always important not to get rid of
Speaker 3: your diversifiers because once again, it can't predict when you're
Speaker 3: going to need them and when they're going to do well.
Speaker 2: Sure, yeah, I feel like and correct me if I'm wrong,
Speaker 2: like a big differentiator of TFPN. I mean well, first
Speaker 2: of all, the trend following of the plus nothing part
Speaker 2: is awesome and a huge differentiator in itself. Another differentiator
Speaker 2: is individual stocks. I feel like that's maybe a break
Speaker 2: of CTA tradition tad individual.
Speaker 3: Stocks in there.
Speaker 2: Feel free to disagree with that obviously, So I would
Speaker 2: love to know, like your your thought process that went
Speaker 2: into that decision, Maybe some testing you did or maybe
Speaker 2: even didn't do when you added the individual stocks into
Speaker 2: the trend following program.
Speaker 3: It's a real good softball. I should be able to
Speaker 3: knock this one out of the park. Yeah, because I've
Speaker 3: been very out of it over many, many years. That
Speaker 3: CTAs need to expand into single stocks to pick up
Speaker 3: this diversification and to put the best foot forward for
Speaker 3: the trend following. They're always we're always sort of lagging
Speaker 3: behind when stocks do so well that we really need
Speaker 3: to make stocks and single stocks so a really big
Speaker 3: part of what we do, and it is a break
Speaker 3: in tradition. It's managed futures is what a lot of
Speaker 3: people call it. So these are not futures, but they
Speaker 3: can add a lot of diversification. And once again, the
Speaker 3: indices are going to be it's going to be difficult
Speaker 3: to get a really big outlier trade in an index.
Speaker 3: It was in the S and P right now. You know,
Speaker 3: some of the stocks are in an up trend, some
Speaker 3: are in a down trend, and some are flat. But
Speaker 3: if you look inside I did SMP at the five
Speaker 3: hundred stocks, for instance, you know you can really have
Speaker 3: positions in both. It can be long some and short
Speaker 3: some and playing those trends and not just sort of
Speaker 3: relying upon this index approach. No CTA which trade the
Speaker 3: dollar index only or a commodity index only. No. No,
Speaker 3: they're going to trade the metals and the grains and
Speaker 3: the softs and the energies, and they're going to trade
Speaker 3: all the different currencies because there can be different moves.
Speaker 3: You know, the big move recently in the end, I
Speaker 3: guess short short the end was a big move for
Speaker 3: CTAs over the past few years. And so it's the
Speaker 3: same thing with stocks. There's no justification for not adding
Speaker 3: those stocks in there. And we could be client related
Speaker 3: for clients or discouraging that you're CTA saying your lane
Speaker 3: and we have people trading stocks. But I think a
Speaker 3: CTA trend following stocks brings a new way of looking
Speaker 3: at stocks. It's not going to be the same performance.
Speaker 3: Sometimes it's going to be better, sometimes it's going to
Speaker 3: be worse. Taking small losses and letting the profits run
Speaker 3: and like I said, getting out when there's having to
Speaker 3: get out when there's a big crash or a V
Speaker 3: top and a V bottom and getting whipsawed around. You know,
Speaker 3: it's going to look a lot different for good or
Speaker 3: for worse. But it is much different than just to
Speaker 3: buy and whole strategy.
Speaker 2: That's really interesting. So kind of what you're saying is
Speaker 2: like the internal diversification of let's say a stock index
Speaker 2: is going to limit potentially the outliers that you could
Speaker 2: get from trend following the individual names.
Speaker 3: That's right. The CTA is going to take those individual
Speaker 3: names and all the markets, not just stocks, and they're
Speaker 3: going to size those positions based upon inversely to the volatility.
Speaker 3: So a low ball stock or market will have a
Speaker 3: bigger position than a market with a higher volatility. So
Speaker 3: you're missing the money management, you're missing the great sizing
Speaker 3: algorithm that we all have. And then I just find
Speaker 3: it difficult to own the S and P because it's
Speaker 3: an up trend, but a lot of the components of
Speaker 3: the S and P could be in a down tread
Speaker 3: and so I yeah, it's really a no brainer, and
Speaker 3: I'm not really sure why it hasn't been adopted more.
Speaker 3: It's really trying to put what t TFPN does is say,
Speaker 3: you know, this is putting trend following in a situation
Speaker 3: where it has the highest likelihood of success. All of
Speaker 3: these different markets, all of this diversification, long and shorts,
Speaker 3: even the stocks fixed income ETFs, and we tride a
Speaker 3: few of those that meuni bonds, mortgage backs, high yield,
Speaker 3: the markets, the interest rate markets that don't exist as futures.
Speaker 3: Of course we're going to go there. We're going to
Speaker 3: go everywhere all around the world, in all the different
Speaker 3: in Europe, Asia, South Africa, all the small commodity markets,
Speaker 3: sunflower seeds, palm oil, everything, and so of course the
Speaker 3: next stop has to be It was just drilled into
Speaker 3: my head and when I learned from Richard Dennis in
Speaker 3: the eighties, you diversification was so important, especially in a
Speaker 3: strategy like this, and so where you're going to go
Speaker 3: if you don't go to the stock market. This is
Speaker 3: a very logical and easy, low hanging fruit as relates
Speaker 3: to building the portfolio.
Speaker 2: So how do you determine what individual names are part
Speaker 2: of the program? Is it like a liquidity thing, is
Speaker 2: it a is it a back testing thing.
Speaker 3: It's definitely liquidity and back testing just but once again
Speaker 3: just in terms of let's build a portfolio of stocks
Speaker 3: that is maximumly diversified, not the stocks that have done
Speaker 3: great in the past, but lots of different stocks, different
Speaker 3: market caps, different industries. Because that's all we're trying to
Speaker 3: do is maximize the diversification, and stocks deserve to have
Speaker 3: a material part of the portfolio. There's so many of them.
Speaker 3: If there was a thousand commodities or five thousand commodities,
Speaker 3: then that would be fifty percent of the portfolio or greater.
Speaker 3: So I think what people, especially CTAs, who don't look
Speaker 3: at stocks, they only look at these indices. They don't
Speaker 3: really realize what's going on in the market. If the
Speaker 3: market is the S and P and then let's close
Speaker 3: our eyes to everything else. No, no, no, the market
Speaker 3: is not just the S and P. Right now, we
Speaker 3: monitor hundreds of different stocks, some that we trade and
Speaker 3: some that we don't, and we apply our systems to
Speaker 3: those stocks just to see, you know, what's going on
Speaker 3: in the in the individual stocks, and I'd say right
Speaker 3: now about sixty percent of them are long and about
Speaker 3: thirty percent or short, and so we have a meaningful
Speaker 3: short position. So when we have a period like April,
Speaker 3: when all health breaks loose very quickly and stocks get crushed,
Speaker 3: you know, we have a chance to come in with shorts.
Speaker 3: We're not just sitting there with one hundred percent long.
Speaker 3: Indices are all very correlated unlike the individual stocks. Sometimes
Speaker 3: you know, sometimes the stocks are very cool and they
Speaker 3: go to one. We know that. But that's why it's
Speaker 3: so important to trade the individual ones, because you're increasing
Speaker 3: your possibility of having some shorts on when the general
Speaker 3: markets in an up trend, which is what happened in April.
Speaker 3: You know, we didn't come in one hundred percent long.
Speaker 3: We actually did have some shorts on because we were
Speaker 3: following those trends. And it's I really get a kick
Speaker 3: out of hearing about how hard it is to short
Speaker 3: and how shorting is not that't profitable, which I agree
Speaker 3: with all of that, but it really is easy to
Speaker 3: short if you're shorting highly lifquid stocks that are easy
Speaker 3: to borrow and are cheap to borrow, and you're just
Speaker 3: selling the breakouts and the down trends, and you're doing
Speaker 3: it from a technical trend filling point of view. You
Speaker 3: can add these stocks to the portfolio and maybe they'll
Speaker 3: help in a period where the logs don't do so well.
Speaker 2: So interesting, you know, in the CTA world, you know,
Speaker 2: and you're an expert, like I feel like there's always
Speaker 2: these these thoughts about, oh, these typees of assets should
Speaker 2: should trend better. They're more trendy, right, like I've heard
Speaker 2: and I haven't done this testing, right. I've heard things
Speaker 2: like the big macro assets like your gold, your treasuries,
Speaker 2: your equity indices trend better than individual stocks that have
Speaker 2: you know, idiosyncratic risks, see a specific risk of them.
Speaker 2: I've even heard things like the argument that let's say,
Speaker 2: non traditional markets or illiquid markets, things like carbon credits
Speaker 2: or even like synthetic spreads between different securities could potentially
Speaker 2: trend better than the more traditional stuff. I feel like
Speaker 2: a lot of that is just a reaction to what
Speaker 2: was recently in the past. I mean, what is your
Speaker 2: thoughts about that stuff? Or are we getting too cute
Speaker 2: and we should just trend follow everything because we don't
Speaker 2: know what's going to be the winner.
Speaker 3: Definitely the latter. You want to trend follow everything. You
Speaker 3: can't predict these markets. I have seen people talk about
Speaker 3: these alternative markets. They call them the smaller markets, the
Speaker 3: ones that are not a lot of speculators and trend
Speaker 3: followers are in as being better performers. But that has
Speaker 3: reversed over the past few years, and I don't think.
Speaker 3: I think from a trend following point of view, there's
Speaker 3: no such thing as a superior market. All the markets
Speaker 3: can trend, they have trended, and probably over a long
Speaker 3: period of time, they're all going to look for similar
Speaker 3: to each other in the stocks and the commodities and
Speaker 3: the currencies and the interest rates will probably all look
Speaker 3: a little bit look very similar the performance of all
Speaker 3: of those who looked similar over time. I don't think
Speaker 3: it's proper trend falling philosophy to sort of think of
Speaker 3: the markets in those terms that some would trend better
Speaker 3: than others, because you know, we've seen a lot of
Speaker 3: great trends in the stocks. I mean, they've trended the
Speaker 3: best recently, right, And some of these moves are just
Speaker 3: gigantic and outstanding, and they will have some crashes sometimes
Speaker 3: and some big sell offs, but they also have some
Speaker 3: really big outlier moves.
Speaker 2: Sure like even mentioned Coco and how that didn't go
Speaker 2: anywhere for ten years and then all of a sudden
Speaker 2: it's you know, twenty twenty two was a huge contributor.
Speaker 2: So yeah, it's very hard to predict.
Speaker 3: I read recently that somebody posted something on Twitter, I think,
Speaker 3: where they were comparing the two best stocks over the
Speaker 3: past five or ten years, and one was in Nvidia
Speaker 3: and one the other one was build a Bear. So
Speaker 3: I was like right there to stop, I'm not going
Speaker 3: to don't put too much emphasis or too much research
Speaker 3: into trying to choose the perfect stocks. All these markets
Speaker 3: have trends over time, and you just need to kind
Speaker 3: of have a good diversified portfolio so you can participate
Speaker 3: when they actually do occur.
Speaker 2: Yeah, I love that. And build a Bear? Who would
Speaker 2: have thought?
Speaker 3: Yeah?
Speaker 2: All right, So let's talk about maybe like trend length
Speaker 2: if you will. You know, I've I've I've heard you
Speaker 2: say another podcast that your trend following, you know, look
Speaker 2: back period, let's call it has lengthened since your total
Speaker 2: trader days. You know, is that still true? Why do
Speaker 2: you think that has been true? Do you think it's
Speaker 2: just like, you know, markets trend in a more longer
Speaker 2: term manner now as opposed to short term you know,
Speaker 2: kind of back in the day. And then furthermore, you know,
Speaker 2: do you revisit your trend length? Do you have different
Speaker 2: trend lengths for different markets? How do you kind of
Speaker 2: approach that question?
Speaker 3: Well, we traded all the markets with the same system,
Speaker 3: the exact same parameters, multi system different entries to each system.
Speaker 3: Maybe you want to at least have two different systems.
Speaker 3: We have more than two. They all have this. They
Speaker 3: all have different parameters, different entry parameters and exit parameters.
Speaker 3: But we trade all those systems with you know, over
Speaker 3: all the all the markets, they all trade the same
Speaker 3: same systematic approach. That's been the big change over time
Speaker 3: since the eighties has been the need to linkeen the
Speaker 3: parameters and be longer term and have a look back.
Speaker 3: It used to be twenty days, Now it's hundreds of days,
Speaker 3: and so that's sort of made trend following even more
Speaker 3: bumpy and less of a you know, a worse sharp ratio,
Speaker 3: let's say, because in order to hang into the hang
Speaker 3: on to the trends, you need to have longer parameters
Speaker 3: so you don't get bounced out so quickly. And then
Speaker 3: you have to sort of walk that fine line of
Speaker 3: not having the parameters be too long term so when
Speaker 3: it does reverse, you don't give back all that profit
Speaker 3: two or three years of profitsing Coco. You've got to
Speaker 3: be careful, you don't give it all back in a
Speaker 3: few weeks. So you do the back test, and the
Speaker 3: back test says, yeah, this long term parameters. They seem
Speaker 3: to work pretty well. They've always worked well. Even when
Speaker 3: we were trading shorter term, the longer term stuff worked better.
Speaker 3: But I think that's sort of normal for the industry
Speaker 3: now for all the CTAs and trend followers to have
Speaker 3: systems that are a little bit longer term. Maybe due
Speaker 3: to more people trend following more computers. Hard to say,
Speaker 3: but the trends are there. We see them all the time,
Speaker 3: and you just have to sit back and get ready
Speaker 3: for some that are going to last a year or
Speaker 3: two or three, and much different than the early days
Speaker 3: of my training when we were in and out pretty quickly.
Speaker 2: That's so interesting. So you're saying when you were with
Speaker 2: Richard Dennis and everything, like, the longer term trend did
Speaker 2: actually work better even then, but it was just kind
Speaker 2: of like the culture to do a little bit shorter term.
Speaker 3: Oh yeah, it was Richard Dennis. We had to followed
Speaker 3: his rules right, and he asked us to do use
Speaker 3: tremendous leverage, and we were making two hundred percent a
Speaker 3: year with tremendous draw downs. And then when we started
Speaker 3: on our own and did our own back testing and
Speaker 3: realized that in the late nineties, it looked like the
Speaker 3: shorter term strategies were really suffering. We decided to explore
Speaker 3: longer term, and the longer term not only had performed well,
Speaker 3: but it always performed really well. So it wasn't like
Speaker 3: we were using part of the data, the most recent data.
Speaker 3: That we always use all of the data looking back,
Speaker 3: and that makes it difficult to change, because if you're
Speaker 3: using data that goes back into the sixties and seventies,
Speaker 3: you know, it's hard to change. But we do review
Speaker 3: our systems and we do embrace the idea of more
Speaker 3: data is better, but we look at the systems at
Speaker 3: least annually to make sure that they're behaving the way
Speaker 3: they need to.
Speaker 1: So you you talked a little bit about entry and exit.
Speaker 1: For our listeners that aren't as familiar with trend following,
Speaker 1: you kind of go over what an entry looks like
Speaker 1: for them.
Speaker 3: Well, Number one, it's one hundred percent systematic, and it's
Speaker 3: to be a moving average crossover the golden cross fifty.
Speaker 3: They move an average crossing above or below the two
Speaker 3: hundred day moving average, or breakouts. I prefer breakouts the
Speaker 3: fifty day high, the one hundred day high, the two
Speaker 3: hundred day high. You know, you can put all of
Speaker 3: those parameters in a back test and decide what you
Speaker 3: like and which you can tolerate. Basically, it's a lot
Speaker 3: of this is psychologically difficult to sit through. Periods where
Speaker 3: you're making lots of money, then you start giving a
Speaker 3: lot of it back gold silver, recently huge charts that
Speaker 3: we didn't even think about getting out. That's how long
Speaker 3: a term we are then. Also, I think it's recommended
Speaker 3: to have a stop loss, so you know before you
Speaker 3: even do the trade, if the trade gets elected, you
Speaker 3: know where you're going to buy and then where you're
Speaker 3: going to get out with a small loss. So I
Speaker 3: think that's those three components, the entry, of the exit,
Speaker 3: and the stop loss. That's sort of the core of
Speaker 3: a trend filing approach. Adding more parameters and rules on
Speaker 3: top of that, which is very tempting because it makes
Speaker 3: the back tests look better, but I have a doubt
Speaker 3: it's going to make the real time performance look better.
Speaker 1: So you mentioned having a stop loss, What does your
Speaker 1: loss cutting look like?
Speaker 3: Is it?
Speaker 1: You know, position sectors, portfolio level, and have you ever deviated?
Speaker 3: It is a per market, per trade, so you know,
Speaker 3: if we're getting hit in the currencies and a lot
Speaker 3: of buys. We calculate all the stop losses each individually
Speaker 3: for each market, so they could all get stopped out
Speaker 3: or a few could get stopped out. And then we
Speaker 3: have multiple you know, systems where we have different entries,
Speaker 3: so the stops the stop loss is going to be
Speaker 3: in different places. And so that's a number. One of
Speaker 3: the keys is making small bets in many different markets
Speaker 3: and having multiple markets, many many markets, and many different
Speaker 3: trees and exits. Once the trend gets going, and like
Speaker 3: gold and silver, you want those different systems to be
Speaker 3: one hundred percent correlated because you know, you don't want
Speaker 3: one system to not be engaged with the trend and
Speaker 3: not making money in these So there's a limit to
Speaker 3: the diversification at individual systems you can expect from them.
Speaker 3: But on some big trades like the gold and the
Speaker 3: silver and cocoa, having different exit points will give you
Speaker 3: some good diversification in your profit and loss on any
Speaker 3: individual trade, but not so much on a daily basis.
Speaker 3: You know, they're all going to be making and losing
Speaker 3: at the same time. And you know, I don't really
Speaker 3: deviate from it for many years, but when I first
Speaker 3: started trading, like most people, just got to get used
Speaker 3: to hating your fate over to a set of rules
Speaker 3: and following those rules. And I had a difficult time.
Speaker 3: I was a slow starter, and just following the rules
Speaker 3: was very difficult. And the very first turtle trade that
Speaker 3: made a lot of money was February heating or on
Speaker 3: nineteen eighty five, nineteen eighty four. And so we left
Speaker 3: the training and we were told, don't miss these trends.
Speaker 3: If you don't take a trade, if you miss a trade,
Speaker 3: if you don't buy the breakout, you're going to probably
Speaker 3: miss a big trade. And half the room probably miss
Speaker 3: that trade. I don't know what we were thinking. Two
Speaker 3: weeks after the class, and it wasn't January heating on,
Speaker 3: it wasn't March heating on. It was all February heating oil.
Speaker 3: Just so how idiosyncratic the heating off and be to
Speaker 3: cha crude. The different months of heating off can be
Speaker 3: different than each other. So it's so important to have
Speaker 3: that diversification and follow those rules. I think what I
Speaker 3: wasn't it wasn't so hard for me, I think to
Speaker 3: get out of a losing trade. I think what was
Speaker 3: hard for me was to anticipate this trade could be
Speaker 3: a loser. Thus I didn't want to do the trade,
Speaker 3: and that's just a real bad idea. It's probably worse
Speaker 3: the worst idea ever is to miss a good miss
Speaker 3: a trade. You can't you won't know if it's good
Speaker 3: or bad, but more than likely if you don't take
Speaker 3: the trade, you'll be you will regret it. And then,
Speaker 3: of course the other big problem is not taking losses,
Speaker 3: but also the one thing that everybody suffers from is
Speaker 3: desiring to get out of the profits too quickly. It really,
Speaker 3: the market really is testing us all the time for
Speaker 3: can you do what the back test says is optimal.
Speaker 3: It's pretty difficult hanging on to these profits. It's just
Speaker 3: so hard to see all that money you're making, and
Speaker 3: it's still a lot of it. It's going to be
Speaker 3: at risk because the back test says, be strong, be bold,
Speaker 3: hold on as long as you can, or at least
Speaker 3: as long as the back test is telling you to
Speaker 3: do that. And I think that's just another learning part
Speaker 3: to be a trader is that you have to suffer
Speaker 3: and make those mistakes in real life and say, yeah,
Speaker 3: this is really a big mistake that's at least what
Speaker 3: I had to do. I talked a big game. I
Speaker 3: was going to be one hundred percent disciplined. I told
Speaker 3: Richard Dennis that I'll follow the rules all the time
Speaker 3: and just not work for me.
Speaker 1: Now, I do want to move over, just quickly to
Speaker 1: the one of the other funds you manage, eq HX.
Speaker 1: So the strategy is described as long term trend following
Speaker 1: across more than hundred global futures markets plus equities as allowed.
Speaker 1: Could you walk us through how equity exposures versus future
Speaker 1: exposures are determined for that fund and that fund it's.
Speaker 3: More of a typical managed futures strategy where it's about
Speaker 3: twenty five percent each of currencies come out and use
Speaker 3: stocks and bonds and that is stuck in disease only,
Speaker 3: so no single stocks there. So more of our attempt
Speaker 3: to say, okay, on TFPN, it's really trend following centric.
Speaker 3: This is these this is what we're going to do,
Speaker 3: and we're going to put trend following as the most
Speaker 3: important aspect of TFPN. But in qu HX, it's more
Speaker 3: of a typical managed futures product. That's because some people
Speaker 3: will will prefer that it will and We'll be very
Speaker 3: happy with the indices, no matter what I say, and
Speaker 3: no matter how bad I talked about indexes, and that
Speaker 3: fund has been around for a long time, so we're
Speaker 3: not interested in kind of changing it too much.
Speaker 2: Jerry, I would love to ask you, you know, one
Speaker 2: of the hot new things, maybe it's not that new,
Speaker 2: is these replicators, you know, like doing regressions and basically
Speaker 2: teasing out the positioning of CTAs. You know, what are
Speaker 2: your thoughts about these products?
Speaker 3: I think they I think the replicators are okay. I'm
Speaker 3: not against the replicators. They seem to be very successful.
Speaker 3: And the big replicating ETF is replicating the stock gen
Speaker 3: twenty the top. The biggest rightest CTA is that it's
Speaker 3: not possible for retail investors or ETF investors to invest
Speaker 3: with those funds, so they're doing it providing a really
Speaker 3: good service for if people want the trend following index approach.
Speaker 3: They're able to replicate twenty CTAs that probably each of
Speaker 3: them trade hundreds of markets. They can replicate them with
Speaker 3: ten markets, and they're doing a pretty good job of
Speaker 3: doing that, so I can see the benefits of it.
Speaker 3: I think that once again, it's probably easier to replicate
Speaker 3: that type of trend following, which is not which doesn't
Speaker 3: have a tendency to let profits run like we would.
Speaker 3: I think we'd be harder to to replicate us with
Speaker 3: ten markets, because you know, we may get a big
Speaker 3: outlier in a bunch of individual stocks or some of
Speaker 3: the markets that are that the replicators don't don't trade,
Speaker 3: don't try to, they don't use to replicate. So yeah,
Speaker 3: I think that it's a good way for the industry
Speaker 3: to evolve and get more people interested in it. And
Speaker 3: it's I think it's going to be great for our
Speaker 3: fund and grow the pie, and who likes to talk
Speaker 3: about growing the pie, So I think it's definitely helping.
Speaker 2: Yes, Yeah, I think they're very interesting. I mean I've
Speaker 2: been I've been personally like surprised how they could use
Speaker 2: such little markets and seem to track the index very well.
Speaker 2: And like you said, I mean it's not for everyone.
Speaker 2: It's more for CTA index exposure per se. But yeah,
Speaker 2: I think it's very interesting, interesting topic. So, you know,
Speaker 2: the trader experiment is so legendary. Do you think we
Speaker 2: you know, do you think there could be a trader
Speaker 2: experiment in twenty twenty five, Like you do you think
Speaker 2: that would work or was that kind of like a
Speaker 2: you know, time and place, a very special thing that
Speaker 2: that might have passed us by.
Speaker 3: Both. I think it's both. I think it's definitely passed
Speaker 3: us by. I think that maybe Rich and Bill wonder
Speaker 3: why the heck they did it, Why do we do this?
Speaker 3: Why do we give them all these great secrets? And
Speaker 3: we were told that Rich wanted to have some of
Speaker 3: his money traded strictly by the rules, so he could
Speaker 3: kind of take some the other part of his money
Speaker 3: and do whatever he wanted to do so, and I
Speaker 3: think there was sort of an experiment there to see
Speaker 3: if trading could be taught. But of course a training
Speaker 3: can be taught. If it's going to be based upon
Speaker 3: just rules based trading, of course you can do that.
Speaker 3: I think these days, though, a proper turtle experiment would
Speaker 3: be to hire qlots who knew how to program and
Speaker 3: knew about math, and maybe give them some training like
Speaker 3: we had, but demand from them more. We want you
Speaker 3: to give back. We're giving you something. The turtles really
Speaker 3: never gave back very much. We just traded the money.
Speaker 3: The whole environment was not conducive to original thinking, and
Speaker 3: let's go tell rich how we can improve this strategy.
Speaker 3: It was that never occurred once we got out of
Speaker 3: there and didn't work for them any longer. We got
Speaker 3: more creative on our own, but the environment didn't produce
Speaker 3: a lot of creativity. I think now you would just
Speaker 3: man from people, smart young people, like we've given you
Speaker 3: the basics of trading or the basis of bread. Now
Speaker 3: you go out and you do your research. You're good
Speaker 3: at math, you're good at programming. Come back and tell
Speaker 3: us how we can make things better. I think that's
Speaker 3: the way it would be now. But I get a
Speaker 3: lot of calls from people or messages saying, look how
Speaker 3: great your life is. Look how Richard Dennis changed your life.
Speaker 3: You should do that for other people. You should hire me,
Speaker 3: sort of like morally, like you owe me, you owe
Speaker 3: us this to hire us and teach us about trading.
Speaker 3: And so the turtle rules and trend following rules are
Speaker 3: in the public domain, they're on the internet. So the basics.
Speaker 3: I think people need to read up on the basics
Speaker 3: of what we were taught in nineteen eighty three and
Speaker 3: then go out and improve upon it themselves or use
Speaker 3: that as a starting for their job. But yeah, I
Speaker 3: don't know why the turtle telling these giving us all
Speaker 3: these great ideas and rules and money to trade, a
Speaker 3: million dollars to trade and big salaries and bonuses. They
Speaker 3: probably wondering why the hell they did that.
Speaker 1: Well, this is great. This is a really fun conversation. Jerry,
Speaker 1: thank you so much for joining us, Thanks.
Speaker 3: For having me. I really enjoyed it.
Speaker 1: Great questions and Chris, thank you once again for being
Speaker 1: my co host.
Speaker 2: Thank you is honor. Thank you Jerry, and I.
Speaker 1: Want to thank you for listening. If you liked the episode,
Speaker 1: please subscribe and leave a review. Also, if you'd like
Speaker 1: to see more of our research on the terminal, go
Speaker 1: to bi Fund, go for fun research in Bisto X,
Speaker 1: and go for Equity Research until our next episode. This
Speaker 1: is David Cohne with Inside Active