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This week we’re adding a different twist to our typical episode, and we’re diving into WHY Commodities can be accretive in your portfolio with Tim Pickering(@AuspiceTim). Tim is the Founder, President, and CIO of Auspice Capital Advisors and leads the strategic decision-making and the vision for Auspice’s diverse suite of award-winning rules-based quantitative investment strategies.

In this week’s episode, Tim illustrates why the current environment could be very bullish commodities long-term, active tactical strategies, and dives into Trend following, non-correlation, CTAs ability to act as a return-enhancer, inflation protection, and much more!

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Check out the complete Transcript from this week’s podcast below:

It’s not whether commodities keep Going up, it’s whether they remain distinct and volatile with Tim Pickering of Auspice

Jeff Malec  00:07

Welcome to The Derivative by our RCM Alternatives, where we dive into what makes alternative investments go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Happy Coast Guard day everyone, which was founded by one Alexander Hamilton. Not sure that was in the play wasn’t on August 4 1790. And speaking of singing statesman, we’re maybe gonna get Ben Eifert on here sometime soon. It’s like scheduling the actual debt Hamilton at times hard. Plus, we have Agustin LeBron, a tail hedge manager and institutional vault trader all coming up over the next couple of weeks. On to this episode, which we hacked from a recent lunch and learn webinar hosted with auspice capitals founder and CIO Tim Pickering. He ditched the education on commodities trend following oil, fertilizer, volatility and much more. And I was there to ask some questions on my own plus some audience questions which meant Yeah, this is going to be a podcast to send it. This episode is brought to you by the aforementioned Lunch and Learn series by RCM and co sponsor CME Group. We do about one a month and have mutual fund and private hedge fund managers do a virtual lunch with advisors and investors in a casual small setting where questions are welcome. Follow us on Twitter at rcmalts or LinkedIn to catch news and the next one. And we give out GrubHub gift certificates. So yeah, go give her Twitter Apollo to get a free lunch on RCM next time around. And now back to the show. Welcome Tim, how are you?

 

Tim Pickering 01:43

Good. How are you?

 

Jeff Malec  01:45

I’m pretty good. Thanks. I’ll turn it over to Tim to introduce himself and hospice and then we can get started.

 

Tim Pickering  01:56

Yeah, well, high level awesomeness has been around since 2005. Launched by myself and can corner Canada I’ve been trading virtually side by side since around 2000. So 22 plus years. But with that shell we’re I brought him in to help support the trading business that was running. And then both had stops at TD TD Bank and then launched hospice idea behind hospice was take that quantitative skill set we It started at TD Bank and and took to a different level at Shell obviously focused a little bit more on the commodity side energy specifically. And felt felt we had a a unique experience set and unique strategy that was applicable beyond energies and beyond commodities. And we wanted to expand that which obviously didn’t really fit the show world. And we started that in 2005 first fund launched in late oh six. One of the things we did different was while we’re building up that track record, we felt the ETF space was going to be an interesting one. And we went into the TA ETF space very early first with a very simple product of beta, like ETF exposure based on Canadian natural gas. It was kind of the Bitcoin at that time. And it learned a lot of lessons about the ETF space and indexing and how rules based manager fit in that space. And we’ve now continued that with other strategies, more active strategies more typical CTA like, including including managed futures strategies, as well as broad commodity strategies to compete with the GSE eyes and along only becomes of the world continue to grow. We run right around 800 million in assets and a fair bit of growth in the last few years. Definitely see the environment we’re in as that kind of a new paradigm or back maybe back to an old paradigm. We don’t really view the volatility we’re seeing is as outlandish or crazy but you know, maybe more back to normal what we saw for the first 1015 years of our career so kind of doing what we do not much different and it’s an opportune environment. It’s an exciting one.

 

Jeff Malec  04:34

Awesome. And just quickly because I always find it super interesting touch on what you were doing at Shall we slinging around hundreds of millions of barrels of oil and derivative.

 

Tim Pickering  04:47

Yeah, so my part of shell was almost just think of it being the CTA being the non correlation, focused on energies but going about those markets or trading those more Markets in a way, different from a large, a large, a large part of the trading team, which was was physical and fundamental. So shell had assets, whether its pipeline, pipeline rights, logistics storage, and would trade around those assets, if you will, or that optionality, our job was to go out and create exposure. That was non correlated. So trade those same energy markets, but doing a non correlated way that was a creative. So really the CTA philosophy. At the time, we didn’t really know what a CTA was, we were quantitative and trend following is where most managers go, we all want to follow trends, whether your driver is technical or fundamental. And so we were to provide that that non correlation, a lot of it was focused on, obviously, the energies. But, again, natural gas really was the proving ground, not only at Shell, but you know, early formative years of my career at TD Bank, in that natural gas teaches you a lot about risk, a lot about how to capture trends, because they change very quickly in that hermetic commodity. And that really became the basis for what our systematic rules based approach has, has still is today has become.

 

Jeff Malec  06:23

And you mentioned, your you guys had that white paper a little while ago talking about this new kind of, or as we said, return to normal commodity volatility environment. Can you dig into that a little bit more on what you guys found there?

 

Tim Pickering  06:36

Yeah, well, so from a commodity perspective, I think we are, we’re back to something that’s normal. If you look back, you know, many years. You know, it could be everything from interest rates to inflation to just the overall volatility level. There was a lot, a lot of opportunities. And then when we went through this period, that was post financial crisis that was really driven by by quantitative easing, and kind of what we view as a bit of an artificial environment. The question is, you know, where are we going from here? And we think, you know, we’re back to sort of that more normal state. Yeah, we’re gonna have the odd, chaotic event. COVID, for sure, you know, started that way. It moderated fairly quickly. Russia, Ukraine, you know, but these things happen. But when we look at the environment more now, whether it’s CPI, VIX, just overall volatility level and that opportunity set for CTAs. You know, we think we’re kind of back to a more normal environment, not that artificially compressed environment that we saw, driven by quantitative easing in the financial crisis.

 

 

Jeff Malec  07:52

And that, that doesn’t matter up or down. You’re not saying we’re back to this rack market. It’s just we’re back to bigger ranges, more opportunity. Yeah,

 

Tim Pickering  08:03

exactly. And I think that’s a super important point is is, you know, because we’re a commodity tilted CTA, and something I haven’t mentioned, we run about 75% commodity risk, even in our diversified flagship CTA, which is different from many CTAs. It’s not because we just believe in bullish commodity scenario, what we believe is that commodities are the most diverse asset class that provide the most opportunity. They are a little bit more volatile typically. And cotton is not like crude. It’s not like coffee’s not like canola. That’s, that’s a great opportunity set. And we’re back towards an environment where those up and down scenarios exist. Let’s just go back three years, when this sort of regime shifted out of the, you know, the low volatility morose environment of a 2019. And that had continued into 2019 for many years. What happened? Well, we sold off, so it wasn’t just because we were bullish commodities. In fact, we were bullish commodities overall, you know, coming out in 2019. But, but that wasn’t the opportunity. You had to be agnostic about it. The opportunity in q1 of 2020 was to get short quickly capture that opportunity and flip around and wait for the next opportunity that happened to come come along from the long side. But even just look in the last few months, that opportunity set has yet again flipped so so you’re right. We are agnostic as to market we’re agnostic commodity or financial, we’re tilted commodity, but we’re definitely agnostic up or down

 

Jeff Malec  09:44

this as you just mentioned at the end of that this past few months, right, like there’s most everything you would see on Twitter in the press these days, cotton’s down 40% corns down below where it was at the start of the war, all these negative headed And sorry, you guys have held up well, right, you’re not down to 40% like the, like some of these marks. Oh, no. What does that work of being able to capture the upside but mitigate the downside?

 

Tim Pickering  10:13

Yeah, I mean, it’s funny, I’ve said to colleagues of mine that, you know, I think we’re a better short trader than we are a long trader in a lot of ways. I mean, trading from the long sides. You know, it’s gonna sound a bit flippant, but is a little bit easier. As a general progression. It’s kind of like escalator up. But you know, how can you capture that elevator down? That’s, that’s the hard part of trading. But, you know, if we go back to those lessons learned at a conservative Canadian bank and TD and trading natural gas, you know, we had to apply ourselves in a certain volatility window, we had to be able to capture those opportunities. And, and natural gas kind of taught you those lessons about what we call trend capturing versus versus trend following. And we’ve seen that a number of times in the last three years, it’s not q1 of 2020. We saw it again here recently. Now you’re right. All of a sudden, the narrative in the media and everybody’s flipped on while commodities is over. We think we’re so far from from that being a reality, that it’s not even funny, you know, think about commodities that people don’t seem to get is this isn’t Bitcoin, this isn’t ones and zeros, you can’t flip the supply demand equation on a dime. You can’t even flip it in a year or two. These are long term cycles, and you’re talking about an area that has been under invested in for the better part of you know, a decade of CapEx has been in decline since 2012. in oil and gas mining and other areas. So when you consider how challenging it is to invest in the commodity space, and for lots of reasons, we believe that that paradigm is going to last for some time. But that, you know, we’ve always said, that does not mean it’s going to be a one way street, we’re gonna we’re gonna see ups and downs if not as the opportunity and commodities.

 

Jeff Malec  12:10

Makes me think I don’t know if you read that letter of the petroleum Refiners Association back to President Biden, right. Biden said, Hey, guys, help us out. And the letter was, the letter was basically, hey, we just saw California say no gas engines by 2030. We saw this national mandate, it costs us $100 million to build one of these refinery plants. What Why would we invest in that? When it’s a 10 year project when you’re taking that away in 10? years?

 

Tim Pickering  12:35

Yeah. And you’re seeing that in the United States, you’re seeing Europe’s definitely feeling the effect of that, that philosophy that started earlier. and Canada, you know, we’re, you know, we’re based and where we’re from, is the same. And I’d argue much worse, you know, we’ve got a Resource Based Economy, as everybody kind of understands that we’ve got a government that is fighting from a policy perspective to make it extremely difficult for the oil and gas space. Just recently, this last week, they’ve come up with some pending rules and legislation and policies around fertilizer use for farmers, and capping the emissions and making it much more difficult for farmers who are supplying the world’s you know, the world’s greens. I mean, Canada’s

 

Jeff Malec  13:19

largest supplier of canola. Yeah. Number two, and wheat or something.

 

Tim Pickering  13:23

Yeah. So I mean, it’s, you know, these governments want these narratives. And I think they want them because of political reasons, right? They want to win votes, our leader surely does, in many regards, yet. Same as that letter in the US, you know, the suppliers and the people taking risk in this area, and you’re not making it any easier for us yet. You want your cake and you want to eat it too. And you want lower gas prices. You’re making it very difficult for us. So you know, these is so this is an interesting point is these are the things we’re fighting. And so when we look at commodity cycle drivers, and if I can, can I share screen on? Yeah, yeah, go talk about that. Let’s just see if I can let me pull this off here. Shuffle a couple of things around

 

Brennan Basnicki  14:16

while you’re doing out is that really one thing that we find? We’re explaining a lot of times, you know, commodity trading advisor, what is that? You know, historically, that registration in that name actually used to be very relevant. CTAs traded commodities, commodities were a great opportunity set for a number of decades when you look at the beat top 50 or benchmark, you know, that annualized, like 9% on 10 ball for I think 30 odd years until we hit QE. So like this opportunity set within commodities historically has been the best it’s really only over the last decade that we kind of saw you know, some of our peers they move more into Financials for you know, what at the time look like good reasons fixed income equity, you know, rate trends, commodities not doing well. But you know, what was Seeing since 2020 is really back, you know, a step back to a more normal environment where we’re getting volatility we’re getting moves on the upside now on the downside as well. And as to mention, you know, the opportunity set within commodities is just so much higher the correlation between these markets is lower the volatilities there, and it’s a really great place to trade.

 

Tim Pickering  15:20

So for I haven’t introduced Brennan so Brennan busy Nikki is our product specialist at hospice. He comes from a great background in the CTA space, having allocated to CTAs from trs, Illinois, and went on to Campbell and company brings a great perspective, I’m just going to jump to this share screen. So, okay, so so, you know, where are we? So yes, we’ve had we had a bullish commodity market that started in, like, I mean, arguably, it started in late 2019. It was one of the biggest calls out of a number of banks and, and different analysts. In 2019, we could see there was an underinvestment in supply, I’ll actually going to flip back and just show you that. So this is capex on the left and right ending on the right is oil and gas companies, and on the left is mining. And so you can see that peaking about 2012. So we’ve been in decline for cap from from a CapEx perspective, aid and investment in the, you know, the underlying commodity supply for quite some time. And so that’s existed for quite some time. And so where do we get to now? So we see two main drivers for a commodity supercycle, they are an extended period of underinvestment in supply, which we just illustrated with capex, and then some sort of generational demand shock. And of course, immediately say what the demand shock is COVID was not really COVID, per se, it’s what comes out of COVID. And so it’s the things that that cause you to do something different or act. And so what are those generational demand shocks? What’s this green transition? Right? We want to build back better, but we want to, you know, we want to do it better. Let me see, we have to build the first words built. We got decarbonisation, we got ESG and stakeholder capitalism, these things are inherently inflationary and put pressures on the commodity system. So that’s kind of your your catalyst to get going. And if we go around the wheel from the green bubble, what are the other things that we see? Well, we see supply chain complications. We see labor shortages, unionization, aging demographics, we, of course, saw the war between two powerhouses and that continues. And by the way, we believe in that, you know, that surely didn’t start this party. It became sort of just another another event, a very serious one. But what I believe it does, is it along gates, the problem, then you’ve got the overall investment in commodities and inflation protection type products has been under invested in. I mean, that’s just plain and obvious that there’s a lot of catch up to be had. I mean, we see a lot of pensions, you know, that kind of come in, in the third or fourth or fifth inning of things as it gets processed, that aren’t even there yet. They’re on their heels, you got rising interest rates, we’ll talk about that in a second, you’ve got potentially the the significant reopening of a top economic superpower in China. And then back to that under investment and Supply, we’ve got government policies that are impeding resource development and progression. And then that decade, you know, again, under investment, so here we go around in these circles when we look at all these factors, they are bullish. So So what does the Fed do? The Fed says, Well, we’re going to write raise interest rates, we’re going to deal with consumer driven inflation. And that’s going to solve what that’s going to solve the, you know, the commodity problem, it doesn’t solve the commodity problem. In fact, we argue that raising interest rates can, you know, yes, it can reduce demand for manufactured goods, but it certainly doesn’t increase short term commodity supply, it surely doesn’t incentivize long term commodity infrastructure investments, it likely doesn’t increase labor, you know, labor related issues, or improve them sorry, aging demographics, supply chain and surely doesn’t resolve pandemics and wars. So perhaps even raising interstate exacerbates the problem. Yes, it can deal with, you know, you and me you if we get in our vehicles, and if we spend money at Walmart, and we’re seeing the effects of those things. But long term, we think that setups there. But what I want to make clear to people is we don’t think that’s an escalator. We don’t think that’s one dimensional. We’re just gonna go up, we’re gonna have ups and downs. And those those down moves are going to be largely, you know, aggressive and violent. And so can you find a manager that is good at capturing that downside flush? You know, that’s where we think we have a particular edge which we welcome to talk about.

 

Jeff Malec  19:45

A few thoughts or one right, people still gotta eat. So I wish we raised interest rates, I could lose a few pounds right and eat less but I don’t think it’s gonna happen. We’ll talk a little bit about right if I’m sitting at a endowment or institution, I’m like, Yeah, I get all this. I love this. I agree with all this. That’s why I’m going to do 5% In Commodities, right, just a passive 5% and commodities in like the Goldman commodity index or something. So talk a little bit about how that differs from, from what you’re doing. It seems obvious on its face to me, but just in case others are making that decision in their portfolios of like, why not just have a standalone active long only commodity allocation?

 

Tim Pickering  20:34

So you said some interesting things there a standard active long only commodity allocation, so so there’s a pretty big trigger there. And that is

 

Jeff Malec  20:42

active. Standard. Standard. So there’s, there’s

 

Tim Pickering  20:46

the door open, I’m gonna walk through it. So. So yeah, okay. So largely, commodities have been taken out of portfolios, and I’m going to definitely separate resource equities and commodities, they’re different. So let’s, let’s just put that aside and read research on that. We’ve got it on our website. But let’s talk about how to get that exposure long only is one way. And so you go by the GSCI, or the be calm related products, you can find one with a little twist in there. But generally, you’re just longing, you know, you’re hoping it rises. And it may. And if you look over the last two and a half, three years, I mean, there’s been quite a run in commodities and GSCI is up whatever number it is, but it’s about your your investment experience or your client investment experience during that time. And you know, these are products that trade anywhere from 18 to 30%. Vol, they have massive drawdowns, even, you know, in the last couple of years, the GSCI and B call have pulled back, you know, 50 plus percent, Could you could you apply principles from the CTA space, ie trend following volatility based position management term structure, that gives you a better experience in that upside. So if we just said we want commodity upside, instead of just being passive, could we be active? And what are those things we could do? Well, we know trend following. And commodities are the two of the key things in terms of fighting inflation. So how do those blend in? So our approach and you’ve got number of products, but one has asked this broad commodity where we look at a commodity basket, we look at each commodity on its merits, I use it going up? Or is it going down, and then apply CTA based sizing and resizing and risk principles to that, and and what comes out in the wash is a much better client experience, whether it’s a retail client, or a institutional client, and we all want that upside, right? Like, it’s been a big rally in commodities to start this year. And maybe our product didn’t can, you know, keep up with the GSCI for that period, but then you get the flush. And it’s, it’s giving back far less, because we’re cutting risk cutting risk, getting out of positions going from long to flat in that particular product. So So you know, again, chasing returns, and making yourself feel good for a period is one way. But if you accept that maybe long term, there is a spot for commodities to fight inflation, it’s surely understood as one of the best ways to get it. And then you apply these these principles that we use as CTAs. In terms of risk discipline. You know, I think there’s the opportunity for a far better client experience. And I think that’s what we’re experiencing is is clients are gravitating to these tactical, active strategies that still give you the commodity upside. But do it in a far more risk responsible way. That’s a better client experience.

 

Jeff Malec  23:42

And I pulled up while you were talking there, your slide on the upside, performance versus the downside performance, so you can capture most of the upside and avoid that, if not,

 

Tim Pickering  23:53

exactly right. That’s right. So thank you for doing that. So this is, you know, it’s basically looking at the B column as a benchmark in the commodity space. Let’s look back at those periods when that that rallies. And how has auspice diversified being this 75% seat commodity tilted CTA can get that upside, we can see in that first section, that it can be fairly highly correlated in those those periods in the past and captures a lot of that upside. But the question is, you know when those things flush, and they will, most recently in the middle of section, q1 of 2020, you saw beacom drop, you know, almost 25% loss was diversified, flipped around and went short and gave you a gain and yet still participates in that commodity cycle full term and I can tell you it’s not in this slide. But if you even be more aggressive about it and say how is the GSCI done since Jan of 2020. And how has you know hospice broad commodity done or long flat or how is hospice diversified done? We’ve outperformed Armed with a fraction of the ball in the fraction of the drawdown, so you’re getting that upside, but you’re doing in a much more controlled way. And, you know, to impress upon back to the point way back, is just because we’re gathering commodity upside, is that the only game that we bring to the to the table? No, we think there’s so much more to the commodity side, that’s trading both ways.

 

Jeff Malec  25:21

And you mentioned a few times the model and the risk control. And just, if you could give a quick example of how that works, because a lot of people will be scared Oh, this is some crazy blackbox algorithmic something rather, my my quick example would be right, if you just put a simple 100 day moving average, and the price goes below that you get out would be the very simple example.

 

Tim Pickering  25:44

Yeah, I mean, so there’s a bunch of ways to do it. So first of all, like point blank, I mean, we’re rules based managers, for for lots of reasons. One is for consistency, you know, the way that natural gas is behaving is different than the way corn is behaving is very different than the way the Swiss franc is behaving. And so being consistent in that application is key. One, because we’re all emotional human beings, and we’re going to react to things and we’re gonna, we’re gonna do the wrong thing at the wrong time. And so for sure, we’re rules based. But that’s the edge. Now, does that mean that we put our head in the sand and just hope what we’ve built in curve fitted in the past, works out in the future. This is where we believe that we have a particular edge at hospice. And that is this, we’ve developed strategies, it goes back to those natural gas days that adapt to the market environment. So I’ll give you an example. So you look at something like a breakout above previous highs to indicate momentum is just one thing like so take it with a grain of salt. But you look back and say, Well, you know, we’re breaking out from previous highs. Well, how far do you look back to define a previous high? Do you look back two days, two weeks, two months, two years, or what we believe is it depends. It depends on how volatile that commodity is. So let’s say natural gas is in a low vol state, it’s not moving around much. Looking back too far back really tells you nothing about a more significant recent breakout, that’s going to tell you something about current momentum, you don’t need to look as far back. But if natural gas is super volatile, looking back only two days isn’t going to tell you much about a significant breakout or qualifying your trend. And so what we do is we look at, we look at a robust universe level parameterization, where we look at breakouts across all assets, what’s a good spot that indicates momentum up in a breakout from previous highs, and set goalposts and now the strategy can find its way between those goalposts between looking back a short period of time and looking back a longer period of time, based on the characteristics of the volatility of that particular asset. You know, at that time, so this is accomplishing a number of very important things. One, you’re adapting to the volatility regime of that particular asset at that moment in time. Number two, by saying it doesn’t have to be some particular number, our look back periods, 30 days, that’s the magic number, that’s the curve fitted number, you know, that’s going to work perfectly for ever more in future. I mean, that’s, that’s curve fitting, and that’s not robust. So we’re allowing it to range between these results. So that introduces a robustness, then the third benefit is that same parameterization, that’s universe level across all assets, forgetting energies, or commodities, all assets we can find in the world. And saying, this is a nice sweet spot that allows the strategy to be applicable across all assets and all different markets. And so when you put all those together, you know, that’s what we discovered, worked really well with natural gas. And that’s what that’s ultimately why we left shell to start auspices, we felt what we had done, and our research had led us to, to survive the hermetic volatility and capturing trends in natural gas was applicable in all assets.

 

Jeff Malec  29:18

I’m gonna move off commodities for a second and talk through so that other 25% kind of what I was alluding to before right of commodities, I think Bloomberg index was down 10% in June or something. I believe you guys were slightly up in the auspice diversified program. So how is basically the question? I know the answer, but right because you’re short bonds, you’re short foreign currencies, you have all these other complementary traits. So just talk through the portfolio level that other 25% percent Yeah,

 

Tim Pickering  29:48

so for sure, you know, why did we even include the financial markets, whether it’s whether it’s bonds, currencies or equity indices, because they’re incredible diversifiers. They’re unrelated to what’s going on? out in the commodity space. And, you know, remember what the you know, the ultimate goal is to provide a non correlated return stream to, to what a client has in their portfolio, whether that’s equities, fixed incomes or other alternatives, you should ultimately be non correlated to all of that if you’ve gone about this in a unbiased way. So what does that imply? That implies that, at times, we’re going to capture those equity moves up or down, like in a year, like 2022, or back in 2020. But maybe there’s times when the only game in town is equities. So let’s think back to 2019. That low vol, really tough environment for CTAs, there’s not much trending going on same for equities grinding higher. In that case, we’re gonna have a little bit less equity exposure than a lot of other CTAs. And so maybe we are going to underperform a little bit. And we did a little bit in 2019. But is that when you needed me to kick in and help your portfolio? Is that it? Was that the time? Or was it q1 of 2020? And so I think there’s a fairly obvious answer there, in that most portfolios did pretty good in 2019, because they had a lot of equity exposure, even the alternatives, they had had a high equity beta. And and they felt maybe they didn’t need inflation protection, what value were commodities giving, they weren’t moving much. But it’s finding that balance between the areas. So if you look back historically, did we make all our money in just commodities? The answer is no, we find we find incredible opportunities in those financial markets. Look here recently, I mean, currencies have been pretty sleepy for a long time, but look at the opportunities we’re seeing in currencies right now. So again, we’re agnostic. You know, yeah, we’re a commodity utility manager. Yes, we have a big background in commodities. And we see a massive opportunity there. But but we’re not going to put our head in the sand and say, that’s the only game in town.

 

Jeff Malec  31:57

Yeah, and I personally, right, I’m personally invested in a lot of trend following. So to me, I could spend years researching the euro, right, first the dollar, and when I should go long, and when I should go short and probably spend a lot of money versus most every trend fund program caught, right, the Euro went down par with the dollar, which, which 10 years ago, people would have thought was ludicrous. But here we are. And there’s no magic bullet, you didn’t sit there in your lake house cabin there, which looks beautiful, and say, Oh, I think the Euro is going to 90 cents on the dollar. It just the models captured the downtrend and you’ve gotten bumped.

 

Tim Pickering  32:34

It’s that agnostic word. I mean, you have to take what’s happening as the reality like and I’ll give you another perfect example of this, the idea that the US dollar has to be weak or weakening for commodities to rally. Man, we’ve heard this over and over again for years and years, seems like my whole career. And there’s like so little basis for it. And if you adhere to that, you would have missed a lot of this opportunity. Because the US dollar is bloody strong, and doesn’t seem to be getting much weaker either. And so you know, there’s other factors at play, why not just say, you know, what, we don’t know, we don’t have crystal balls, our job is to follow trends, capture trends and manage risk. And if you stick to that, I think you’re going to be very effective. Now, you can’t always just be a pig at the trough either, we believe and it’s going to, it’s going to be different philosophy than you know, other other CTAs and many that you’ve had on here, that that eventually the risk reward changes. When when the volatility gets to a certain level, and you’ve got mark to market gains in a trade, the probability of keeping those mark to market gains is diminishing. It’s just math. And so you know, the traditional philosophy is ride that out and you know, never take your foot off the gas. We disagree. We believe there’s a discipline there to capture in trends when the risk reward changes. And the proofs in the pudding. You know, if you look at the big crisis, alpha, you know, crisis events, the big flushes whether financial crisis back in volatility in 2014 2015, the end of 2018, when everything flush 2020, q1 2022. We’ve never missed, right? And it’s adhering to that discipline.

 

 

 

Jeff Malec  34:15

That’s pulled up. I think this is the slide that goes with that concept, which I also liked because it is showing that you trade carbon emissions, which is another cool thing.

 

Tim Pickering  34:25

Yeah, it was one of our it was one of our best markets last year. It’s obviously one of our newer markets that we’ve we’ve added. But this talks about that volatility, adaptive process and in some great detail here. Starting at the bottom number one, you know, it’s a lower volatility environment. You know, we’re looking for a breakout from previous highs. Again, one qualifier ticket is just one piece of the puzzle. You don’t need to look as far back and then things explode higher and things get much more volatile. Well, so now you’re looking further back to qualify a breakout, you know, either on the upside, which is the way we’re going or on the downside, well, you know, what is going to take you out of that trade. For us, it’s that point number three, we call it a volatility stop, where we’re exiting risk or cutting a position completely, because that risk reward has changed too great, too, too far. And the probability of keeping those green those gains has has diminished, but we may reenter that market, but we’re going to, again, adjust our position sizing based on based on that it also allows us to flip around and flip from long to short, quicker. And so, you know, we believe this agility is part of the edge in these opportune volatile times, which are akin to a lot of the times in commodities in general. Right. So, you know, quieter in the financial markets in general, but you want to capture those opportunities, more volatile in the commodity markets in general. And that’s where we started this philosophy, and it works really well across, you know, really all assets.

 

Jeff Malec  36:04

And then had a question in the chat here of how do you approach like you added that carbon market? How do you approach that? Is there a certain level of volume or liquidity that’s needed? Yeah. Yeah. So it’s a great question. I

 

Tim Pickering  36:17

mean, we’d love to add, you know, everything. We don’t adhere to the philosophy that that you hear a lot in the CTA space, that we should be trading 250 markets, we don’t believe there’s 250 markets to trade. We believe, you know, it’s the philosophy of adding that one extra thing. It’s diminishing value add, right. So, you know, if we added pick a market, we had Bitcoin, you know, yes, it may be opportune, but it’s one of many, many things, we trade on a fixed fractional basis, it’s not going to change the world. It’s just another opportunity. So yes, we’re looking for those opportunities. But why would you trade many, many more markets? Well, capacity issues? You know, those are, those are some of the key things. What are we looking for? Yes, liquidity, we have approached, an approach that is, is fairly agile. So we need liquidity. We don’t want to slip too much. Is it? Is it highly slippage sensitive? No, because we’re not a short term trader. But, but, you know, execution in a no means a lot, especially if you’re trying to capture trends at these key volatile times, it makes a difference. So yes, certain markets adhere to that fit in that philosophy. You know, you don’t want big gaps in markets. So you don’t want markets to wake up and, you know, you’ve blown through stops, and that keeps happening could help could help you. But oftentimes, it doesn’t. So it has to fit certain criteria for us. Always looking to expand, and we’ll continue to do so carbon is no perfect example of

 

Brennan Basnicki  37:56

that. Yeah, just to further comments to that we were very focused on maintaining the crisis, alpha reliability of diversified, you know, we can basically, you know, shut down our portfolio in a matter of minutes. So liquidity needs to be there, we need to be good. We need to be able to get to the markets, you know, very quickly. And then second, I think where we differentially is really trying to get meaningful exposure to a lot of these four markets. I’m just looking at our attribution last year, November carbon was our biggest winner, October zinc, December soybean meal. A lot of these things are our markets that other CTAs trade, but in very, like small allocations, they won’t come up in any meaningful attribution. This is where we really differentiate, we’re giving meaningful exposure to a lot of these markets that most investors don’t have on their portfolios.

 

Jeff Malec  38:48

I think that’s a good point like we used to back in the day. AQR is managed futures program was a 14 billion, maybe you got to Write Right? And just at that level, they physically can’t put on enough corn futures.

 

Tim Pickering  39:02

So that’s and so we are, we are in a sweet spot. We believe, Jeff, in that, you know, we’re growing, but we’ve got a lot of capacity. And we’ve been, you know, Ken and I’ve ran much larger portfolios in our career institutionally. You know, we I think we have a fairly good feel for where we can get to, but we don’t have an illusion, that, that we’re trying to get to the AQR level and be as effective as we are in capturing trends. That’s not the goal here. The goal is to get to a different level. But do it providing the same value that we have for the last 1516 years.

 

Jeff Malec  39:36

Yeah, and I think you can see right there not to pile on, but their performance and their assets have flowed out because they just couldn’t do it at that very target level.

 

Tim Pickering  39:44

Yeah. And, you know, they’re they’re another, you know, they’re one example, we’ve heard that same story out of peers we have at other big brands, I don’t like to name the names, but, you know, half the battle is okay, what do we do with this pile of money and how do we be anywhere near as effective and how do we execute properly, you know, with this much exposure? Well, you can get cute with things like with swaps and, and, you know, all sorts of things. And and Ken and I have a ton of experience in that area because we were so big at Shell that, you know, used every tool in the toolbox. We ran a lot more vol as well. But, you know, again, we think there’s a lot of growth to the, you know, to where we are right now. But it ain’t incident

 

Jeff Malec  40:32

and then you mentioned, I’m just going to share something real quick here. You mentioned the crisis period performance. So here on the bottom left here, performance when you need it most, and this is a classic trend following type profile, right? Have they do well in extreme events? So just talk through a little bit of that that’s not on purpose. You’re not predicting those events? That’s just how

 

Tim Pickering  40:57

No, I mean, and, you know, look, I mean, by talking about crisis alpha, and it’s feels like that’s all CTAs have talked about for the last year that are part of a decade is crisis Alpha. Because there wasn’t many other opportunities. And to

 

Jeff Malec  41:11

Tim’s credit, he was always saying, hey, don’t forget about commodities. Well, everyone. Exactly.

 

Tim Pickering  41:15

That’s exactly where he’s going with it is yeah, price itself is fantastic. And, and there has been another opportunity to develop here the last three years. But in the meantime, it has been two incredible crisis, alpha opportunities being beginning of 2020. And you’re in 2022. So we’re, you know, we’re kind of coining this when we kind of flipped what we call this year already. We call that, you know, we call it the commodity, the commodity crisis, because it became this big boom in commodities in q1 exacerbated by Russia, Ukraine. So that was one set of opportunities. But at the end of the day, really, what is this? This is the big wake up call that, you know, we’ve kind of as, as all managers, and CTA has been warning about in it, that’s a 6040 crisis or whatever way you want to describe that. But you know, your bond allocation didn’t work, your gold allocation didn’t work. You know, hopefully, you had enough tips on you didn’t, so that didn’t work very well. And other tricky things to put on in the portfolio. Those just didn’t help much this year, what helped CTAs helped, and especially commodity tilted CTAs, and especially commodity still tilted CTAs, who could flip around and get short fast enough?

 

Jeff Malec  42:25

And talk through that? That was one of the questions here. The do you view this as an inflation hedge?

 

Tim Pickering  42:34

Well, it’s it’s proven itself as a fairly good inflation hedge. Yes. So there’s a couple of things one commodities are and two trend following is. And so when you combine those things, you know, they ended up being a great inflation hedge, and actually, you did a great job and in bringing up that upside commodity participation slide a number of minutes ago, you know, we have a number of products that fit into this category. Some of them are long, only or long, flat commodities, and some are long short, like auspice diversified or flagship. And what they’ve illustrated is they are very good inflation hedges, if you can capture that commodity upside. And then you have that added benefit of the Christ itself on the downside. So So yes, CTAs can be a good inflation hedge, but not all CTAs are painted with the same brush. We’ve seen a lot of CTA struggle that are financially tilted, a number of different tilts in their portfolio, and they just haven’t participated or, you know, they did participate. But then commodities turned around and they gave it all back like you started this conversation with. And so it’s finding that sweet spot. There’s no perfect answer. There’s definitely value in CTA diversification. what I argue is just we’re kind of built for this

 

Jeff Malec  43:52

one. And to me, if you have, you have gold, you have commodities, you have foreign currency, right, you have things that will act as an inflation hedge in the portfolio that will only kick in when they’re needed to kick in. Well, exactly.

 

Tim Pickering  44:04

And you know, so this is one of the things like what’s going to be that inflation hedge? I mean, gold gets talked about all the time. Gold is an inflation hedge. Gold is a statistical diversifier. I mean, there’s, you can pick some times when it you know, as coincidentally rose or maybe it rose for a period of time think of coming out of the COVID shock. And what was the first commodity that started to move again, it was gold, and we got long that was the first thing we added back to our long flat strategy was gold. By September it was out the door because it wasn’t going anywhere. And it was those other commodities that started to kick in in the summer of 2020 and provide commodity upside. So if you only relied on on gold, or if you only relied on oil, that ends up being an ideal experience. We got

 

Jeff Malec  44:48

a slide for that.

 

Brennan Basnicki  44:50

You actually got a slide I just want to cover the the crisis Alpha comment a little bit further to slide 19. I think that’s a So the crisis output. So to kind of give me a little bit of background beginning, I was at Campbell and company for awhile, I actually led Illinois teachers investments into CTAs, 2013 to 2016. This idea of crisis alpha, it’s definitely one of the core parts of most CTAs asked us diversified. Definitely, it’s a, it’s something that we’ve outperformed in. But that this concept is really only, you know, a concept of the last decade, if we go back post 2010. I mean, crisis, alpha wasn’t even a term back then CTAs historically, still, were uncorrelated, but very much used as a return to hands for, you know, standalone absolute return strategy. It was really just as last decade, you know, post QE inflation, essentially, at record lows, interest rates, you know, at zero volatility low that this, you know, concept of crisis, Alpha was what drove a lot of investment in CTAs, you had a lot of the biggest pensions, look at CTAs, you know, and say, basically, you know, you know, if we only get this crisis, alpha from a CTA, that is very aggressive, and they kind of handicapped it to that saying, you know, if we lower the bar and say, That’s expectation, even in that case, it’s still very powerful, and they can’t be created these prices, rests offset, or risk mitigation portfolio. So that’s great. But what we’ve seen since 2020, is arguably returned to a much normal environment, the you know, the returns are a lot more consistent. We have long trades we have we have short trades, we have volatility back at normal levels, like the the environment that we’re in today isn’t, you know, abnormal, arguably was really that last day that day, or that last decade that was abnormal, and it really compressed returns. So like crisis, alpha is definitely towards the CTA story, where there’s a lot more than just Christ is awful. And that’s kind of what I think people are being reminded of today, just to

 

Tim Pickering  46:55

finish up on that, but that is not going to fit for a lot of CTAs. Because a lot of CTAs tune themselves to that QE environment and financially tilted and adjusted a lot of what they did in their portfolios, and even the, you know, the trend following approach that they took. And you know, you’ve seen them struggle, you know, that you’ve really seen them struggle in this past three years. And they can come up with all sorts of excuses. But the reality is, they went and chased returns and money flowed in. We never deviated and so, you know, we got to bear that cross that cross is that, you know, at times we did underperform for, you know, how much, you know, like a tough year for us, I would say the tough year was 2019, because it just nothing going on. I think we were down six or seven. And so we were a little paper cut in the portfolio. But we we showed up when we needed to 2020, q1, the rest of 2020 2021 2022. And if we are in a more normal environment, we’re excited about that going forward. Nobody has a crystal ball. But but you know, I think we’re I think we’re in the right place.

 

Jeff Malec  48:03

Right. And that, just to put a point on that to meet those other CTAs. They added long equities, they added a long tilt, they added more financials I just said. But speak to that, because it’s not the case that if the equity market rallies sharply higher, you’re gonna lose money like 19. Right. It was not a function of equities going higher. It was a function of very low volatility across many, many asset classes.

 

Tim Pickering  48:27

We were long equities, you know, equities, you know, as a whole can be about 1520 ish percent of our portfolio. We were long equities. The challenge was that nothing else was going on. Right? Yeah. So summer of 2020. We had a little bit of excitement. If you remember, we had the yield curve inversion in August of 2019. Nothing else happened that year. But that was an exciting moment because the yield curve inverted and, and equities dropped. And CTS actually popped the other way in general, and put up a positive result when when we had this sort of shocking August 2019 month, I think we were up 10% That month. And so so you know, it’s it’s, it’s not that we weren’t in the equity space, it’s that there wasn’t much else going on. And so if you were totally equity tilted, you outperformed. If you were tilted to anything else, but equities, you underperform to some degree. And so, you know, that’s a trade off. That’s a decision we’ve made in terms of what our opportunity set is, we believe, you know, just this bit more volatility, we’re not talking chaos of Russia, Ukraine, just this bit more volatility expands our you know, Punchbowl of opportunities exponentially.

 

Jeff Malec  49:35

Yeah. And I would call it not even volatility per se but dispersion right, like, if cotton’s starting to do its own thing. If crude oil is doing it something like the supply chain issues have really opened all that up. It’s like, hey, it’s not called dependent on the Fed. Like there’s actual real world things that are going on.

 

Tim Pickering  49:53

So that’s back to that commodity slide I showed in your talked about supercycle but all those nodes around that. You know that too. per cycle potential, speak to that, you know, labor issues in, you know, Colombia to do with coffee plant, like, you know, like the list goes on and on and on and on. And these are very real things. Well, now we got, like Canada’s largest supplier of canola in the world, and our federal government’s pressuring us not to use as much fertilizer in or severely handicap the farmers. Like, it’s, it’s asinine, but that’s the reality. And this keeps happening commodity by commodity.

 

Jeff Malec  50:29

And well, that’s too deep. Anyone have any further questions there? I was just gonna say like, why why did the market care only about the Fed for those right 16 1718 or 17? Through 19.

 

 

 

Tim Pickering  50:41

And now, because there are, because they’re a powerful tool, you know, they’re a powerful machine with powerful tools. And with the ability to, you know, go further and farther and deeper, and, you know, than most people maybe expected, so you can’t ignore the Fed. But you got to be realistic about what they’re going to do here. Is the Fed raising rates going to fix the commodity problem as a really easy answer. And anybody who thinks that’s, that’s the case has been fed, you know, a bunch of media garbage, and that is not going to fix the problem.

 

Brennan Basnicki  51:13

Yeah, just to, to bring it home here to Canada, we had some inflation data come out last week. And I’m just gonna read you a couple things. So the return of sporting events, festivals, and other in demand gatherings has resulted in higher demand for accommodation. So prices for accommodation rose about 50%, from from year ago. So in that case, you know, that may be example of you know, raising rates might affect that element of inflation. In the same article, we have a big table with a bunch of basic food items, and the year over year increase. So onions, 25%, up from last year, carrots, 23%, chicken breast 20%, cereal 18% raising rates isn’t gonna affect any of that. So it might affect no elements of our discretionary spending, but the underlying commodity shortages that are, you know, a result of a decade plus of underinvestment, you know, raising rates isn’t going to affect that. If not, it’s gonna make it worse.

 

Tim Pickering  52:09

I think so, again, but please don’t get the impression that I’m just calling a commodity Bull Run, it’s gonna go one way, 45 degree, we’re getting that schooled right now, that’s not what we said, We think there’s a bigger opportunity, but you better buckle in for it. And you better have a manager that can participate in it in a risk responsible way.

 

Jeff Malec  52:29

And Brandon, we had one here for you, when you were working with those institutional investors, where would they put a program like this into their? What allocation bucket? Would it go into?

 

Brennan Basnicki  52:40

Sir? Well, I can give you a couple of answers that Illinois teachers. So historically, like a lot of institutional investors, they got their kind of diversifying strategies through funnel funds, that proved to be largely ineffective. My role was to essentially liquidate those and introduce real diversification. So CTAs went in the quote unquote, diversifying strategies portfolio. Other pensions have created these very specific what’s called crisis risks, offset or risk mitigating portfolios. And then more recently, I think, I think we’re seeing CTAs being used a lot, just broadly, whether it’s inflation protection commodities, if you’re a commodity focus, CTA like us, you know, there’s a much larger role. So I think historically, it was very much focused on, you know, the diversification element today, you know, arguably a larger role. So, I don’t know if that answers your question, and hopefully gives you some perspective.

 

Jeff Malec  53:38

Yeah. And to me, it’s like this. Are you talking about investors that are saying, hey, this, my 6040 I’d rather have part of that 40 B, be this?

 

Brennan Basnicki  53:48

Yeah, 100%. But we’ve seen something like Ontario teachers, for example, their fixed income was cut in half over the last year or two years and commodity commodity derivatives, internal CTA strategies are I can’t remember, it’s like 20% of their portfolio right now. So, you know, historically fixed income, you know, you had the yield, that was part of it, but also your diversification that fails in an inflationary regime. So we’ve seen that this year, you’ve seen that throughout history, that loads and negative correlation that you get from bonds and equities that fails in a rising rate environment. So a lot of people are moving away from fixed income, and potentially literally, you know, taking money from fixed income allocations and putting it in CTAs. Obviously, they’re different in a lot of regards, but in terms of diversification, benefits, you

 

Tim Pickering  54:37

know, similar role, and I’ll just let one last thing and then we’ll end the call here, and that is what Brennan described in the institutional side. And that movement towards product like these and taking down fixed income and this type of philosophy. We are absolutely seeing that in the RA space. 100% sophisticated RAS act like institutions. And that’s what they’re doing is they’re looking for products like these. We hope to win some of that business. But that’s what they’re looking for 100%

 

Jeff Malec  55:09

All right. All right. Well, thank you, Tim. Thank you Brennan. Thank you. Have a great summer up there in Calgary is the is the rodeo over stampede. Stampede. Stampede

 

Tim Pickering  55:19

was kind of the first week and a half, first two weeks of July. And we’ve got to finally some beautiful summer has hit we’ve had weather weather in the high 90s here in in southeastern British Columbia. So it’s been quite beautiful.

 

Jeff Malec  55:38

Awesome. Thanks again. For everyone. Go. Thank you. Thanks for the opportunity.

 

Brennan Basnicki  55:41

Just a final note for anyone who needs any further information. Our website, we put a ton of resources there. We have explainer videos or research on our homepage. kind of stuff we put up there. So check that out. You can email us directly mail RCM fund specifics. And yeah, any questions don’t hesitate.

 

Jeff Malec  56:00

Sounds great. Thank you, everyone. Have a great day.

 

 

It’s not whether commodities keep going up, it’s whether they remain distinct and volatile with Tim Pickering of Auspice on RCM Alternatives.


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