What do you do when you’ve already done everything there is to do in trend. Managed billion of dollars: check. One of first to run a trend following mutual fund: check. Trend following on individual equities: check. You push the envelope again, and convince the folks that create ETFs that you actually can pack your fully diversified equities plus futures portfolio into an ETF wrapper. On this episode of The Derivative, we sit down with the legendary Jerry Parker (@rjparkerjr09), a former Turtle Trader who’s newest effort is an ETF product called ‘Trend Following Plus Nothing’.
Jerry and Jeff explore a wide range of topics, including whether multi-billion CTAs sold their (trend) souls to get there, just why nobody really tries to trend follow on individual equity names. Seeing a green light when they tell you it can’t be done. Jerry also opens up about finding the perfect balance of personal risk and mental fortitude to achieve success in trend following while sharing some personal anecdotes, including his love for pet birds.
Discover the power of trading components instead of an index of components, the impact of Fed limits on trend, and the intricacies of volatility targeting (hint: Jerry doesn’t believe in it). We’ll also delve into the art of portfolio construction, the virtue of trend following impatience, the true essence of trend following as an inflationary hedge, and so much more — SEND IT.
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From the episode:
The Swiss(Franc) isn’t all that neutral – blog post
Trend Following Turtle Tails (and Tales) with Jerry Parker -podcast
Check out our Trend Following whitepaper!
Check out the complete Transcript from this week’s podcast below:
Trend Following Plus Nothing with Jerry Parker
Jeff Malec 00:07
Welcome to The Derivative by RCM Alternatives where we dive into what makes alternative investments go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Hello there we got a great live event with Mercer and Cohen and CO this week with myself Joe Kelly of Chesapeake former turtle Brian proctor of EMC and Rodrigo great deal of resolve on a panel moderated by David tripla Mercer covering why systematic why now? And we recorded it. So that will be out next week as a pod go subscribe today so you don’t miss that. On to this episode, we have a trend following Oh gee, Jerry Parker of Chesapeake talking about his latest innovation, which happens to be kind of no innovation at all. With all the replication and adding up strategies and tilts and vol control and the rest we talked about on this pod time to time, Jerry’s stuffed his entire hugely diversified trend model into an ETF. He’s calling it trend following plus nothing. Send it This episode is brought to you by RCMs guide to trend following white paper we talked about the goods and Bad’s of trend and why investors want it but also why they have trouble sticking with it in this pot and we cover all that and more in the white paper plus highlights on top managers and more. Go to our SaltStack comm slash trend today to check it out. And now back to the Show All right, everyone. We are here with the one and only Jerry Parker. Jerry, how are you?
Jerry Parker 01:40
I’m doing well.
Jeff Malec 01:44
I don’t think I’ve seen this room. Where are you?
Jerry Parker 01:47
I am in Long Island, New York, on the beach, at the beach. In a very peaceful, quiet place. It’s been a hectic week. A lot of work. We’ve been doing a lot of work to get this ETF up and running. So it’s been a good atmosphere. It’s good to be here. Relaxed with my five dogs and wife. We have been enjoying our time Night Out hearing the bird. Oh no bird I know I should have. She is gonna be so mad when I get back to Florida. Because she does not like to be left alone. She’s more demanding than all these dogs are girls. So she’s the most demanding woman in my life. Female in my life. She does not look kindly upon me leaving her
Jeff Malec 02:30
behind. And what what kind of bird is that? Again?
Jerry Parker 02:34
It’s a cockatiel. Rescue Cockatiel that we flew on my wife’s head one day when she was out walking the dogs. And she brought the dog inside. I mean, the bird inside and I was like, I don’t like birds. You know, they’re gross. Get this bird out of here. Yeah. So she immediately ordered a cage off Amazon. So we know exactly the gotcha date. And I fell in love with the bird within a matter of days or weeks. And yeah, they’re really calming influences.
Jeff Malec 03:04
Especially live. Like some of these parents live 100 years or something. Right?
Jerry Parker 03:09
I think 2020. So. But yeah,
Jeff Malec 03:14
we’ll miss the bird. And I didn’t know you have long island roots or what made you go up?
Jerry Parker 03:19
No, just
Jeff Malec 03:21
nice part of the world.
Jerry Parker 03:23
Yeah, nice to get to be in a kind of a cool spot during the summer versus Florida. And people made fun of me for vacationing in Myrtle Beach. And spreading my wings. I love New York City. The Hamptons. It’s all kinds of fun stuff, the different. My children. Some of my children have lived up here. And one of them still is in Brooklyn. And yeah, it’s a really good family spot.
Jeff Malec 03:53
Yeah, it was just my daughter had a softball tournament in Panama City Beach last week. Very, very sticky down there. Which I didn’t know until then. I grew up in Florida, Vero Beach, didn’t know that Panama City is Central Time Zone. I would have bet my life that the entirety of Florida is Eastern Time Zone.
Jerry Parker 04:15
That is a good trivia question that I have to use that
Jeff Malec 04:18
cow has the west of Tallahassee is basically central times who knew everything under Alabama so you launched a new TF, you finally did it. Tell us about the ETF tell us about the journey. And we’ll go from there.
Jerry Parker 04:43
Okay, the journey. So you know, there’s many elements to the ETF. It’s the wrapper itself. There’s a story behind the wrapper. Why would you do an ETF and on purpose, reduce your fees, and that sort of stuff? But We wanted to do it because we had nothing to lose. It’s not like we have a big huge business any longer. So we had some really great ideas. We thought, well, at least there were ideas that no one was doing. And when we approached the ETF people, some of them told us, You can’t do it. If you could do this, it would have already been done. You can’t really accomplish this, I have no idea why the people you’re working with told you they could do it, they can’t do it. So in it was combining a lot of stocks with a lot of futures, that was the part for the execution and market makers too. Be able to handle that simultaneously, making a market and hedging and all the things you have to do for an ETF to do that in futures and stocks. So yeah, there would be futures funds, primarily, that traded some equities or some ETFs. And there’d be stock, primarily stock funds, that traded some futures currencies or whatever. But the whole idea of 150 stocks, and then 150, futures long short all around the world, Europe, South Africa, Malaysia, Singapore, Brazil, that would be a difficult thing to pull off. So we haven’t you know, we’ve got it up and running. But we haven’t pulled anything off yet. We have got to raise assets and have a good bid offer. And yeah, so there’s a lot left to do. But that was our main thing. It was our main idea, which was trend follow equities. So the whole CTA managed futures of here’s your traditional portfolio of stocks and bonds as CPAs, five or 10% allocation for crisis alpha, or for some sort of diversification during bad times. We were like, no, let’s try and follow those stocks. So sell your stocks and bonds. And let us trend follow those, because and that’ll be something different. And some people will see the value that trend following adds to the traditional markets, but not in the traditional way. That’s that’s what we are trying to sell.
Jeff Malec 07:20
You and I this must have been 20 years ago or something. We’re having lunch there in Tampa, maybe 15. And you said first time I’d heard of like, you don’t trade the GCI commodity index and your trend following program, right? You trade all the commodities. So why would you trade the E Mini or the NASDAQ? Right trade all the stocks? And so when did you first unlock that? That was that Fargo? That was 1520 years ago?
Jerry Parker 07:45
Oh, yeah. I mean, in the 90s, we started trading stocks. You know, in the turtle program, it was just a big point of emphasis was diversification. And at the time, we traded maybe 20 markets, and futures markets over the years have grown and grown. It’s where we have lots more, especially financial futures. But certainly if you sort of start thinking about it, I don’t have access to China futures. Yeah, we’re working on it for you. Yeah. So yeah. So yeah, so it’s obvious, you know, the place to go is 5000, equities, 5000 stocks, and then you get to the trend, following the outlier trades and letting profits run, you kind of see the limitations in a big index, you’re not going to get the big outlier, you know, Tesla is going to be nice, and it’s going to help the s&p go up. But it’s not going to be the big outlier trade that you sighs with your algo. And it has an out outlandish impact on your performance. Like in 2020 and 21, the commodities went up, yeah, the corn went up, beans went up, wheat went up. But canola and rapeseed and bean oil were the ones that made way more profit. And so that’s the CPA formula. So the same thing can work in stocks, you’re having the market exposure, and when everything goes up, you’re happy for it. But every now and then something will really make a lot more money. The correlation doesn’t really speak to the the amount of profit that something can make versus other other markets that it’s correlated with. One of those two of those can really have an outrageous ly large profit. So that was another thing we picked up on. And we were like primarily focused on trend following First, not managed futures, not fitting into the portfolio crisis Alpha. It was how do we make this trend following the greatest thing on the planet? How do we put it into a situation where it’s going to shine and have the best ability to really show itself. And that is with all these different markets, a lot of stocks, a lot of currencies, commodities, interest rates long and short and letting those profits run. And it’s a lot easier to let them run and really sit with that volatility. And not manage the vol or manage the correlation when you have 300 of them, because each individual position is kind of inconsequential most of the time. So if it does have a big drawdown, it doesn’t really devastate your portfolio, so you have a better chance of kind of sticking with it traditional trend following formula, the more markets you trade, right, it’s
Jeff Malec 10:43
a few things to unpack there, it’s almost like traditional CTAs, who are just doing the indices are short dispersion and long correlation inside the index, right? They’re inadvertently taking on that trade of that there’s not going to be any outlier moves in the underlying securities, that it’s just going to be highly correlated, moving at the same time. So you’re saying that wasn’t a conscious effort to be like, I want to be long dispersion and get these names. It was just more of like, hey, I want as much diversification as possible, where can I find it? Here’s 5000 listed equities, that’d be a good place to start.
Jerry Parker 11:16
That’s right. And, of course, a part of that, too, is the short part, you know, you want to have some decent shorts as well, I would say that a lot of times, including now, the stock trade is long as it’s the all the indices are pretty heavily correlated. And they’re going up, probably hard to have a short index position now. But you can definitely find short positions in the stocks. And it’s multiple, multiple different trends going on in different companies and industries and company sizes. You know, we I enjoyed making a lot of money and short, short interest rates last couple years, and then long the dollar, but we kind of as risk managers always kind of prefer to make the money and have some diversification. And that was it. So now, it’s a little bit safer, and a little bit more able to sleep better at night, if knowing that I have a lot of stocks long. And I have, I have quite a few short as well, from a risk management management point of view. But if we get into a big bull market, I’ll accept that as well. We’ve seen those and we’ve seen those drawdowns after it ends as well. So a little bit of mixing up, unpacking the indexes, unpacking the stock market and trying to treat it, like we would treat commodities and currencies, very happy to be long and short at the same time. And
Jeff Malec 12:46
how do you protect against becoming just like a long short equity hedge fund? Right have like those return profiles haven’t been too sexy over the last six years. I know that it’s more factor based, and they’re doing different things to get into those long shorts, but it seems on the far end of some theoretical thing that you would kind of converge on their portfolios.
Jerry Parker 13:08
Right, you know, if they’re using trend following in their log, the ones that are going up and short the ones that are going down, I that I could have some similarities with those. But I do think that if you start analyzing the stock market and get away from the indices, and what drives the indices of the large companies, and you really dig down deep and create a portfolio that’s primarily based on liquidity, and diversification, you know, it’s shocking to see how on a daily basis, you may have everything up and everything down based upon big days in the s&p. But over a certain period of time, you’re gonna see a lot of different chart patterns, as you would see in all the other markets. And you overlay the the trend following it creates more diversification. You’re not always going to be long. So yeah, I don’t think it’s, I’m really happy to to maximize it, you know, you don’t just trade half your portfolio in stocks, because it’s stocks, you allocate and wait the stocks based upon what they deserved. Is it real diversification? Do they deserve this? No, if it was, if there was 5000 commodities, we would probably have around 50% in the commodities because they deserve it. So that’s our idea. So
Jeff Malec 14:33
and deserve you mean, both? Are they trending? And then what’s the volatility? How am I going to size it?
Jerry Parker 14:41
No, it’s basically are they diversified enough? Yeah. Is it? Are you are you having decent diversification, you know, by, you know, so there’s like six or seven energy contracts. They don’t deserve half your portfolio. There’s like 50 60 currencies, you know, maybe give them 25% of those 5000 stocks Now go out there and find some that are liquid. That gives you some decent diversification. And I think for us, there’s more diversification in our stock portfolio than there is in the currencies and interest rates and commodities, because there’s just so many more of them. They all of these sectors, they all suffer from the same thing, which is, they’re all down on the day, they’re all up on the day, or for the week or for the month. Yes, that’s true. And then at some point in time, they go back to doing their own thing. And the benefits of this diversification, you start to see them, you can see those see this in the stocks as well, but it’s strictly a function of, there’s just so many, and they don’t always look the same and act the same, even when they act the same. During COVID, you know, everything went down. So you know, you want to have some shorts don’t step onto the playing field long, only all the time. Although we do we do it in commodities, we did it in the dollar, we did it in interest rates, and we just we liked it, because we made money. But we have to be careful in those markets as well, as well as the stocks. It’s not just the equities that go to one. And we only think about well, it’s a province that goes to one if we lose money. True, but on a daily basis, you know, we’re just all going to sleep better. Whether we’re making money or not if we just have Long’s and shorts, within the sectors and in the portfolio in general.
Jeff Malec 16:40
Talk a little bit about it seems the rest of the world is going the opposite direction. Right. They’re doing replication they’re doing okay, I’m going to replicate trend following with these 12 markets. You’ve had Andrew beer on your on the trader top traders podcast, I think talking with him. So in there’s more though, that some other people are doing some replication stuff, but compare and contrast those right? Like you’re saying, I want to expand and trade as many markets as physically possible, almost, is there a limit to it? How much you’ll do versus that other construct, which is, hey, I think we can replicate what you’re doing with only this sub small subset of markets.
Jerry Parker 17:20
That’s a really good topic. I mean, I have a lot of a lot of strong thoughts. Well, see, what do I even start? I do love Andrew. And yeah, I have two positions. One is the our new ETF and one is Andrews. And it’s really funny how they’re so different. Andrew is has 14 positions and a big ETF 700 million easy to replicate, I mean easy to make a market, it’s only 14, all of them are very liquid us. And he always has the position and in each one of the markets and it doesn’t change very often he’s replicating the Socci and 20 CPAs. Now, in my opinion, to ruffle some feathers here, they’ve made it too easy for him to replicate. That’s the problem and they need to do something about it. Don’t complain
Jeff Malec 18:12
TAs have made it to you. Yeah,
Jerry Parker 18:14
it’s easy. It’s easy for him. Like I have the opposite approach. Let’s maximize trend following let profits run. Dope, vol manage correlation, manage 300 markets, who knows where the hell my profits are gonna come from. Sometimes it’s sunflower seeds. Sometimes it’s Tesla. Well, as long as Andrew is trading 300 markets, because I’m going to let them run the Socci and CPAs. They’re not going to they’re going to Vall manage correlation manage, try to smooth things out. If the yen gets going crazy on the downside, or the pound will scale it back, make it look like the euro and the Swiss. So Andrew can get away with trading only the Euro and the yen. Because if any of the currencies get out of control, ie making lots of money, lots of volatility, it’s going to be scaled back. And so it’s really not a big huge opportunity costs for him to limit his currencies to two or three words with me, I’m not going to do that I’m gonna let the profits run. And you can have to trade all those currencies if you want to replicate me and get my similar performance. So the simplest way of trading, cut your profit cut your losses short let profits run one entry, one exit and a stop loss. But trading lots of markets very difficult to replicate the most sophisticated way of trading with a lot of moving parts a lot of science and management and fall and correlation and different bells and whistles. Easy to replicate. Plus you put it into 20 different managers you just come up with the net position and there’s no really outlier crazy outlet Are there because it’s going to be scaled back? Then it makes it easier for him to replicate. So
Jeff Malec 20:08
that’s a great dude. I love that thought like the simple model hard to replicate the hard model easy to replicate, which makes no sense. But as your talent it makes perfect sense.
Jerry Parker 20:17
Yeah, right. So I do think that they sucked you in 20 might defend themselves, not give daily performance, try to do something. So maybe he has some issues there. And I but I do think the greatest thing about Andrews product is that there was no way for people to invest for medium to low net worth people, retail investors to invest and get that Socci and 20. The top minds of the industry, except through Andrew. So that’s really a and then I know Cory is coming out? Or maybe it’s already out what’s his and that’s gonna be a great thing, too. And he’s all about growth growing the pie. And so am I.
Jeff Malec 21:02
And are you part of the section 20? No, no, no, because that would make it even more fun. Right? I
Jerry Parker 21:10
would, I would, I wouldn’t not only not get invited to the parties, but I wouldn’t be.
Jeff Malec 21:16
But so you mentioned in there somewhere the market maker in ETF? Right? There’s a market maker, he needs to make a spread. So I’m sure you went through 20 Whose head exploded of like, what you have 300 markets? No thanks. How did that process go? And like two parts of that of like, I obviously you got someone on board, they’re gonna figure it out. But two, do you think that spread is even all that important for an ETF like this? Like it shouldn’t be day traded? Right? It shouldn’t be traded in and out. It’s kind of a long term investment, right? So who cares if there’s even a 5% spread that you’re going to hold for five years? And it’s not going to be that bad, but I’m just, you know, being extreme here, even if there’s a large spread that you hold for five years? Who cares?
Jerry Parker 22:00
Yeah, I don’t think Yeah, I kind of agree with adult works like that for me, of course, but I don’t, yes.
Jeff Malec 22:06
Right. the investing public doesn’t see it that way. But yeah, I think we’re gonna change their minds right here.
Jerry Parker 22:12
As it builds the U. M, and interest, it just behooves everyone to have a really tight bid offer. So I think that that’s the goal. One of the great things too, is that one of the the problem is, you know, it is so many markets, and some of them will be closed during ETF trading times. And one thing that helps it is, there’s so many markets, because, you know, maybe some of these markets are irrelevant, usually, they kind of the 20 least liquid or the 20, that are not open all the time, during us hours, they’re probably the net impact on the fund is negligible. So hopefully, it’ll work out, you know, we could certainly get to a situation where all of our ETF partners have said, Oh, sorry, it’s not working out. If we’d say, well, we gave it a good shot. We’re like, oh, wish you would have told us this a long time ago. But we certainly coming in under the assumption that we have a great idea it can be done, I would get in meetings and say, Is it too many markets? They say no. Can I get rid of the 10%? That are the least liquid? No, you need to get rid of South Africa and Brazil? No. Okay, you’re the experts. Let’s go. So it’s, we’re trying to do something really crazy. And let’s see, does it matter if you trade a lot of markets? And does it matter? Oh, these are the two big questions that are big debates on top traders unplugged. You know, do you need to trade 300 400 markets, you know, foreign court does it and others do it? And they’ve had tremendous success. But I think people sort of skeptical and then can sort of the classic trend following doesn’t really matter, you know. And so, to let the profits run and accept all of that volatility and potential give back and not smoothing things out, which is 99% of managed futures. It doesn’t seem to really matter too much if you let if you do the smoothing, or if you just let if you accept the huge volatility, so we need to prove that all of this debating that we’ve been doing about markets and classic trend or modified trend, if it really makes makes a difference. And so I think it’s gonna make a tremendous difference. But I’d have to tell you, I’m on record as saying, if we’re not making a difference if you don’t see the results. Fire performance. Exactly. I’m going to I’m gonna say now like fire me, but I’m gonna say I apologize. Yes, wrong, but I’m not wrong.
Jeff Malec 24:56
I’m not, but pull on that thread a little more because I can’t even struggle with this. And I’m on your camp thinking the more the better, but one out of 300 markets, right? What is that? 33 pips of exposure, something 1/3 1%. Even if I make 100% on that market, right, I’m only adding 33 bits to the bottom line. So part of me is like, the more of that diversification you have, the less each piece adds to the pie. And that’s where the other camp is like, you know, it’s not worth it. Just make sure you hit the big get the big moves and interest rates and whatnot. And you’ll be covered. If you make 400%. In cotton, it’s not really doing much to the bottom line.
Jerry Parker 25:41
That’s right. And then if you lose a bunch income, or you remember that big Swiss franc, yep, then you won’t get destroyed either. So it does take a lot. I think one of the rules of thumb is we’d like to use, it’s kind of plays out in this in the back test is like five or 10% of the markets, 5% of the 10% of the trades annually will have a big trend. So whether it’s a 50 markets or 500 markets, you’re going to have this, maybe 10% of the trades really being the outlier outliers. So you’re like, okay, then why not just do the 50 markets, since it’s still the 5%? I think. And then another thing, too, is, you can sort of prove that adding and adding every time you add a new market, it’s less benefit, right, to where it reaches almost zero. Yeah, I think that I think that idea kind of goes away if you let the profits run. So since managed futures doesn’t let the profits run, they’re correct. If you’re going to reduce positions based upon vol, increased vol or increased correlation, then yeah, you’re fine with your 50 or 60. But if you’re five or 10%, have potential for way bigger profits and bigger draw downs and bigger fall and things that clients don’t like all the negative stuff, then, then you could see a reason for increasing the number of markets. And then you spread out those outliers more evenly throughout the data. So if you tried 50 markets, maybe you get 20%. All your outliers in one year, and like no outliers the next year. So it’s kind of a compounding maybe worked out better with the 300 500 markets, because the outlier is you number one, you’re getting them. And number two, they’re spread out over the data more. And you have less of a chance of having them being bunched together and go in a couple of years without really having, you know, outsized, outsized performance, so But have
Jeff Malec 28:01
you done the math on how big of an outlier those moves have to be to make it worthwhile? Or the concept just as long as it’s infinitely possible, right, it can go as far as possible.
Jerry Parker 28:14
Yeah. And another thing people say, too, is one of the big benefits of diversification is the small bet size back to the Swiss franc, you know, you’re, you’re gonna have these trend following is trying to push these outliers to the right side, where they’re all positive. The shorts were short, yeah. So they get pushed there. But sometimes you’re gonna wake up with a really, really unfortunate gap. And so it does help us sleep better at night, knowing that we’re 300 markets. And each one of them traded the same size. That that gap was gap openings can be less catastrophe.
Jeff Malec 28:55
And I’ll give a little listeners if you don’t, I’ll put it in the show notes. But Swiss franc D pegged back in 17 or something 2017. We’ll find that blog post but it was like the blog post was called it had the volatility of the last 21 years I think, in one day, right. So deep pegged and just took out all sorts of, of levels that hadn’t been seen. So if you even if you’re risking 1%, your 1% became 10%. If you weren’t stopped out, but yeah, a huge outlier moves. Not most in most trend. We’re long, right? I think most trend followers were long and then it then it got the bottom rip down. You know,
Jerry Parker 29:38
another thing that happened on that particular day is my friend called me and said, Have you seen the Swiss Franc and I had gone down the list of markets that morning. And I just had the decimal place in the wrong spot. Like yeah, what’s what’s up with the Swiss franc? No big deal. He goes, Oh, no, it’s a big deal. What was funny about that trade was we were we had the wrong position on this worse, we had correct positions on in some of the crosses like Swiss yen, Euro, Swiss, Sterling Swiss. Canada, Swiss, Aussie Swiss. So the diversification kind of bailed us out there is that we didn’t have just the Swiss. So it was kind of an interesting situation.
Jeff Malec 30:27
And will you will you seek out even more like, we were saying you want to try and get access into Chinese markets, right? Because there are more commodity markets, it’s just hard to trade any US product at this point in time.
Jerry Parker 30:38
Right, you know, I think it’s dependent upon AUM, for instance, yeah, we’re now we’re at a billion. So let’s say we need to get some more markets in here. One of the things we don’t want to do over the years people, because at one point, we did manage two and a half billion. And people ask me, Well, what’s the limit? And honestly, my answer was always, I don’t want to diminish the commodity exposure, you know, position limits, or liquidity limits, I want to have a full position of corn, soybeans, wheat, all of those really great markets. So I don’t want to get to a situation and we would act as commodity swaps back in the day to achieve exactly that. But and then a lot of my bias has been to find stocks that are commodity based, you know, we don’t have exposure to lithium, uranium, steel, you know, and in sometimes in lumber, so something that we did, we did trade lumber was at 20 and 21, in the big uptrend. And we found that well, you know, lumber did really well, but some of the lumber companies did even better. And then sometimes the commodity would do much better than the stock, probably most of the time, the commodity itself would do better than the stock, but not always. And it gives you some more diversification. So opposition’s are readily available. That’s one of the downsides of an ETF is now I looked up this morning, and we have to enter positions on it. So now everybody can see what’s in Jerry’s head. And you can see a lot of commodity exposure, you know, like I said, That’s my job, basically, is going out there and researching these companies and trying to get a more of a pure play, finding a market where supply disruption, some sort of commodity price movement is going to have a material impact on a company. And, yes, I’m still drawn to the commodities. And so I guess in some respects, you may say, you can’t really count all those 150 stocks, as stocks only they’re kind of coming out of theirs as well.
Jeff Malec 32:54
And what’s that look like? So you’re not just purely having machine learning, look at a universe of stocks and pop out the ones that are non correlated and should be in the portfolio, you’re actually saying, I want exposure to this commodity market, and this company helps give me that exposure.
Jerry Parker 33:12
Yeah, like sometimes I’ll sit around and I’ll look at him at the dinner table. And I’m, and I’m just brainstorming, and I pick up the salt shaker. And I’m like salt. Oh, yes. So So I do this research, and I find a couple of salt companies, you know, so they’re odd. And then I read an article in Barron’s that I’m like, Okay, let me research this. And one of the things is that you can get, let’s say, a company like lumber looking at this now, okay, electronic, electric weapons, engines, lumber, shipping, water meter technology, you can get those concepts from an article or brainstorming or chatting with your friends. But then you do use AI to well, you know, check GPT to ask it. What does this company actually do? Because a Google search or Yahoo is not as good as it tells me exactly what it’s doing. And then it’ll tell me, but I’ll say, does it make all of its products? I want to know if is this the base? Is it really mining coal? Is it really making? Are they farming? Like I have an egg company? It’s the biggest egg producer. And so I want to trade China eggs. You know, what you guys to set me up with China egg, but also have this company that is the biggest egg producer in the company, but are they really producing them? Are they really raising these chickens? You know, is it going to be the same thing if they’re buying everything from the farmers? So sometimes you get a hold of something? You think this is perfect? I really like it and it says, shut TPT will say no, it’s they don’t really do anything. They’re just a marketing company. So you have to dig a little bit deeper. But it is kind of interesting, because you know, I do feel a little embarrassed sometimes when you’re with stock people. You don’t want to say too much because CPAs don’t do a damn thing. about corn and wheat and soybeans, ah, no nothing. And if it’s a future, it’s gold. I mean, we’re going to trade it, we’re not going to ask any questions, right? It’s a new future, you’re gonna try. And of course, I’m going to trade it why the CME told me to trade it, and it’s liquid, and I’m going to put it in my portfolio. And so we’re happy with that. But then you started getting a little guilty, you find this amazing stock that you think is commodity related, it’s small, a little bit of fundamental shift here and there can really drive the price, it’s going to go right to the bottom line. And you’re like, What do you know about it? I don’t really know too much about it. I mean, it’s liquid. And it’s in this business. Yeah. And I’m sure I should know more things. Even CTAs get kind of corrupted by what they have learned from the stock market. You know, over the years, we’ve watched Wall Street week, we’ve read Barron’s, and we just have a separate part of our brain. And part of the challenge for me was, don’t buy into that. Not at all force these stocks to be like your futures, you don’t know anything about them. You’re only looking for liquidity and diversification, you’re going to take all the trades, and you’re going to play for an outlier. And fight myself, like everybody, I consciously catch myself treating them a bit differently than I would all the other markets. Just because they don’t have the futures to it.
Jeff Malec 36:24
They have they have more of a narrative, right? Like, oh, this, this CEO did this. And he was out and did this press release. And here’s what’s happening. But yeah, at the end of the day for you, it’s just a price. It’s a return stream, right?
Jerry Parker 36:37
Returns return string. Yeah. So
Jeff Malec 36:40
but then why not just do all 5000 stocks? That comes back to liquidity? Are you still trying to you have a little bit of fundamental and they’re like, Okay, I want this exposure.
Jerry Parker 36:52
Right, I want this exposure I want heavily tilted towards smaller companies like, I don’t want to trade a stock index, because it’s going to by definition, watered down there outlier. I don’t want to tray, Berkshire, or Microsoft, because they have too much diversification inside the company. I will companies that are one to 5 billion that have no diversification, they will get diversification. If you give them enough time, that’s what they’re going to do. They’re going to seek it out, they’re going to buy other companies they’re going to grow, they’re going to be less outlier prone. So I want something that has one line of business smallish. If something happens, I may get a benefit of a buyout or a merger, of course. But if I’ll fall, if our wind of a fundamental wind blows just the right way. And some of these companies that are storing small, liquid, but not diversified, then I don’t want diversification, I want to put it in my portfolio. And I have more diversification than anyone right now long and short. But I don’t want it to come in with diversification, like an index or a big, huge diversified company.
Jeff Malec 38:14
And so is statistically does that look like? They’re all higher beta? Basically, they’re good, they move more. It’s compared to the index.
Jerry Parker 38:23
I think they move more. But they don’t they probably don’t have this type of correlation to the index, because the index is pretty much controlled by the five biggest companies, at least recently. So in technology. Yeah, I think what we think of as outlier, is this NP going up due to the fangs is not the outliers that CPAs get onto with their position sizing based upon the ATR and getting something that goes up 1000s of percent, just 100.
Jeff Malec 38:58
A quick aside, I think this was on our last podcast was breaking down the EQ D Conference, and there was a guy who did a presentation there on how to get access to lithium. Some of these rare earth minerals that are in these batteries that are hot. Yeah, I’ll give you two guesses what the answer was. We already talked about it earlier. Replication replicate. So he’s like to do to get lithium do 42% Gold 6% Platinum, 10%, palladium, and that blend, correlates and it’s dynamic. So it’s the same thing of like, okay, I’m just going to adjust these weightings to get the lithium return, which is always to me like yeah, it worked in the past. Will it work in the future? Anyway,
Jerry Parker 39:50
like that idea. Very good. Yeah. I think that’s great. You know, there’s actually
Jeff Malec 39:55
but you would kind of be doing it. Right. So you’re gonna already have those markets. Maybe Not in those exact weightings. But you’re kind of getting that anyway.
Jerry Parker 40:04
Yeah, I’m kind of getting it based upon each individual market, there is a a uranium trust that actually holds uranium. And I and I own a lot of it. Yeah, I am law that. But I wouldn’t discount, you know, the diversification benefits of something that’s kind of commodity related, but it’s built inside of a company and something else is going on, like Jerry had nothing to do with all the things you’ve mentioned. All it had to do with was a new CEO. And skyrocket.
Jeff Malec 40:38
Right? Yeah. So which you don’t care? Right? Like, okay, price went up? Well, yeah. But what are the things
Jerry Parker 40:43
I don’t want to do is I don’t want to live through another period of last decade. No, I don’t want I want to put myself in a situation where I’m trading individual equities that are going to have outlier trades that are going to have outlier trades like the rest of my portfolio. And we’ve already seen that stocks are great trenders. In fact, we bemoan the opposite, that people think that the best trenders that stocks are superior to our other currencies, commodities, and interest rates. And so this way, I’m all for giving more diversification and trend, following equities and giving some protection around that they don’t get from buy and hold. But also selfishly, we’re CPAs, in general, going to always be at risk if they don’t have a reasonable material allocation to equities that they can really profit from, because at the same time, we had a lost decade, the stock market did not. And so that part of the portfolio and how you handle it probably needs to be looked at. Because if we had a we’ve had some really good moves and interest rates in the dollar. And we did really well, we need to make sure that that other part of our portfolio the stocks does does well too.
Jeff Malec 42:13
So you’re saying last decade in managed futures, like Oh, nine to 19, or whatever. So talk a little bit about that, because I wanted to get into your psyche and how you held the flame for these, what 3040 years? Have you had some dark times? Have you had some times of like this trend falling stuffs bogus. I’m out? How did you keep the love all that time?
Jerry Parker 42:38
Oh, wow. That’s a really good question. Well, I just think intellectually, I never could defeat the brilliance of the trend following I mean, and then I think there’s just Givens in life, and there’s Givens that you’re not going to give up on. Am I going to take large losses? No. Am I going to is the is the road to success? Smaller profits and not letting profits run? I kind of doubt it. Am I going to choose stock only and fit in? And that? Do I honestly think that less diversification is going to make life better? I don’t think so. No. Long only and no shorts? No, I don’t think so when you break down what it means to be trend following CTA diversified, traditional trend following. I just could not eliminate or emphasize any of those aspects over what I’ve been doing for so long. And I finally just said, Look, staring us in the face. We just didn’t have the proper way of trading the stock sector. And I think we put ourselves in a situation like, if we only traded commodities, should we expect a lost decade? Absolutely. If we don’t trade commodities, should we expect really a bad period? Yeah. And this just you can’t take these things out of the portfolio, regardless of recent performance. And so I think stocks, it’s the same thing you need to allocate to stocks to the using the CTA approach, I allocate based on what it deserves, and it deserves it’s part of the portfolio based upon the diversification it’s gonna give me. And that’s not what the industry is doing. And so that’s why we have a little first mover advantage here. And we were in a unique situation to where, if you remember that book, The Innovators Dilemma, yeah. Where the large companies could had a hard time moving, because it would hurt their current business, so we had nothing to lose. Let’s go to the ETF wrapper we’ve already raised more money in the past two days that we’ve raised like a year. And just because it’s an ETF wrapper, yeah. And there’s just people out there who love trend following. It’s usually people who have like $2,000 to invest, not an institution with billions. So that’s a little bit of a problem. But there are people out there who love to and fine, it’s the greatest thing in the world. I speak to them, they love me, they love clap, the classic approach, they love my unrelenting, uncompromising way of doing it. And we just need to convert more of those and find more of those people. And hopefully get some sort of first mover advantage and just embrace the idea that we were free to go with where our heart was, and where our mind was, and only doing what the trend following philosophy would dictate, which was ad markets, let profits run ad markets to the degree that they benefit and add diversification to the portfolio. But they would have been if we would have still been a $2 billion CTA with most of our clients be in institutions who looked at us as crisis alpha. And who absolutely do not want stock? Oh, my God, that stock expert, I would sit in meetings and I would just be so excited about what I was so different. And I’m like, don’t you want somebody different? Like, no, we don’t? Yeah. Quit calling quit calling yourself managed futures.
Jeff Malec 46:33
Get in this lane here with the rest of my my Exactly. Features bucket.
Jerry Parker 46:40
Exactly. It’s I look, all the big guys different gets fired. Yeah, that’s right. And we’d say to all the, we would say, look, all your current managers, they, they don’t trade stocks. They don’t they fall manage their correlation management, they have this risk overlay. And we don’t, so you got to add us. That’s yeah, for diversification. They say no, no, no, it’s you’re not. There’s some, there’s some Givens in managed futures that you’re trying to violate. And so we’re like, okay, that’s a bummer for us. We’re not gonna We’re not loved. Our ideas have been blackballed.
Jeff Malec 47:19
Right, when you should have been like, I’m, I should be telling you what the givens and manage futures are not vice versa, right. You’re the Oh,
Jerry Parker 47:26
yeah. Well, only in the sense that I’m really picky in the sense that I tried to make this big distinction between managed futures and trend following it’s two entirely different. Yes. Yeah. It’s two different things. Managed futures. CTAs, do a little bit of they do the core of what they do is trend following usually. But it’s a lot of improvements, quote, unquote. And Jerry has an improved since 1983, except to add markets at length in my look back period. I
Jeff Malec 47:57
don’t know. Do you think 1989 Jerry, if you met him in the street, and you’d be like, we’re trading 300 stocks that would have his head have exploded or been like, No, you can’t do that, like where you would? Jerry say?
Jerry Parker 48:12
It’s a sad comment. No, you know what he would say? He would say What took you so long? You had this idea? So many years ago? Why didn’t you make it? Why didn’t you just fight hard to put your vision out there? And just live with it, you know, for and I think this is one of the things I’ve learned from Andrew, and other ETF people is that, oh, yeah, you can have a billion dollars or 2 billion, and you get it very quickly. But you spend five or 10 years with 100 million. Yeah. And I’m like, Okay, so, you know, the jury’s out. It’s a fun story today on day three. But honestly, I prefer it to be a little bit more successful and have, you know, I don’t know if I could wait five or 10 years to have this thing show up to be a success. So maybe it’ll inspire someone else, inspire people to really give people what they need, which is a lot of trend following and a lot of trend following on your equities. So you don’t have as many crisis events
Jeff Malec 49:24
to be a downer here. But what’s that like? Because there’s very few people or a few people who are back on camera that would say, you had managed two and a half billion down to next to nothing in the managed account business. Like it was that hard or you’re just saying, okay, whatever they didn’t, they’re not seeing the light or as part of partly drawdowns and that last decade, like how that was the psyche, dude, so you both had the personal, right, you’ve always invested almost 100% Your money and trend falling right. And then you’re trying to tell the clients changed gear but you stay personally there on the business. I, how tough was that to say like, Okay, we got to reboot. We got to keep going what we’re doing?
Jerry Parker 50:06
Yeah, no, it’s free. It’s very tough. And I think I don’t think that it really bothered me was just a personal rejection. You know? Yeah, personal rejection. I went from being like, I think it was Chesapeake and John Henry. Were the top two or in the, I think we’re in the top five at least as far as the old days of managed futures, with Merrill Smith, Barney Prudential. Dean Witter public funds, nothing to kind of be too proud about the early years of managed futures. No one really wants to talk about that.
Jeff Malec 50:44
6% loads, right. Right.
Jerry Parker 50:47
The mutual funds kind of came along. And we did we do have a mutual fund, it’s sort of not doing that great. As far as raising assets, performance has been pretty decent. I think, just the biggest mistake is that if you’re going to deal do you need to just choose we’re going to be retail, or are you going to be institutional, or you can do both. But it just takes different talents to maximize your aum. And I think we just did realize that how difficult it is to come across as just a good old fashioned CTA trend follower. When you’re talking to institutions. There there. It needs to come across a lot more sophisticated. Yeah, maybe be a lot more sophisticated. And I think a lot of the CPAs they would probably say, look, Jerry, we understand what you’re saying, dude, you’re not smarter than we are. We get it. We’re just playing the game better. Yeah, yes. Yes, you know, and so my bad for not being a good a better game player.
Jeff Malec 51:52
But if playing the game is like, sacrificing a lot of the stuff you said of like, I gotta evolve control, I gotta correlate control. Right? If there’s things you didn’t want to do, so, right, would you kind of sell your soul of like, okay, I’m gonna stay go to 10 billion by selling my soul and doing these things I don’t think should be done in the portfolio.
Jerry Parker 52:11
True. That’s true. Oh, there was one person on top traders unplugged. Now Neil’s had a fantastic series of interview with all the sock Jen CPAs in the index, and one of them I can’t remember who it was, but he probably shouldn’t remember it anyways. But he said like all I all I woke up every day, wanting to be was the best trend follower possible. I said that so many times. Let’s just make our calling card. The best trend follower possible. It got me nowhere. He went on to raise billions of dollars and still has billions this guy. But did he proceeded to describe his trend following and it was while management correlation manager.
Jeff Malec 52:58
You’re not the best trend follower?
Jerry Parker 53:00
No, he just redefined it. Yeah. You know, they redefined it. They’re like, I don’t know where you’re coming up with this, trying to make this stupid distinction between trend following and managed futures. But you can do whatever you want to do. But we we are both we managed futures is trend following and Frontline was managed futures. And the Your problem is that you just have an updated or algos because now, trend following is much more improved with the fall management and correlation management. And I would go with that. If it was if I thought the data supported that. Yeah, I would do it in a heartbeat. I’ve been on podcast before I’ve literally been on podcasts and Twitter spaces where people in the industry have shown up and challenged me on something I was saying. And I literally got off the phone and changed my system that day. I said, they got me they because they reminded me of something I learned many years ago and call me out on it. And I’m like, I have no defense. And I I’m so interested in being successful at this, that I will change immediately and employ if I thought in any way possible taking small cutting your profits short and not trading stocks was was the way to do things. Yeah, no one would have you would have to convince me. But I’m pretty sure
Jeff Malec 54:27
different goal line, right? They’re trying to be like I want to deliver a 12% return with a 10% Vol when you’re saying no, I want to compound at the greatest amount possible over a long period of time.
Jerry Parker 54:39
But I think they’re also convincing themselves and their clients that there’s no opportunity cost here. Yeah, that all you get with this money management and correlation management overlay is upside. It’s just all reducing risk. And I’m saying ah not so fast. This risk doesn’t disappear. It to go somewhere, and there is a downside to not letting that profit go as far as it’s gonna go with a healthy, stop loss, trailing stop loose pants trailing stop to where it can kind of express itself and become a mega outlier. Yeah, you know, you can’t have it both ways you can reduce your risk, and then tell me, you know, reduce your risk on a volatile on the volatility side, if you even think volatility is risk, you can reduce your risk and make more money. You can have one or the other, I certainly make no pretense that my volatility is not a lot higher, but also on a risk adjusted basis. If you don’t look at fall, they have to throw in sharp in some sort of measurement of volatility, it’s not appropriate for outlier trading. In order to convince themselves in a client and a client, we just say the client wants to hear that so much. You mean to tell me I can have that and that Yeah. Sold.
Jeff Malec 56:08
It’s like, if you could convince them that they could get less risk and more return, you could raise billions guess what they did? They did that they raise billion.
Jerry Parker 56:16
Jerry comes in here. And you know what his thing is? Eat more broccoli. I do not want to hear eat more broccoli,
Jeff Malec 56:26
right? I want to hear you can eat the candy and be healthy.
Jerry Parker 56:29
And it’s all gonna work out well. And so you can’t
Jeff Malec 56:34
I bet if I was done nothing to your model, but changed your marketing, right? Would have been fraud and lying. We didn’t want to do that. But if you would, in this alternate universe, if you just changed your marketing, and said you’re doing all those things, but kept your returns in the strategy the exact same, you probably have gone to 10 billion, right? They just want to hear the story.
Jerry Parker 56:56
Right? That’s right. And I was talking to people like they felt like I did. And trend following this is that is the narrow road to take. It’s not something that a lot of most people are going to want to do. And sadly, it’s not what most traders want to do. And given an opportunity, they will get rid of holding on to those outlier trades that scare us half to death, that piss off everybody because you’re giving back way too much profit. Even though the back test says you want to make the most amount of money, be willing to give back the most amount of profit on any one individual trade. It’s gonna absolutely suck. If you asked me today, how to maximize the profit and cocoa and sugar. Now they’re pretty decent trends. The trend following says no idea. I have no idea how to make yourself look good on these two trades. But I can’t promise you how to make money over all the trades on a 2030 year period. If you want to make the most amount of money in your portfolio, then you got to follow these rules. But yeah,
Jeff Malec 58:06
I won’t hold on apply to any one trade.
Jerry Parker 58:10
totally unqualified to help you with any one particular trade. But what do we all care the most about all of us? Today’s trades today? It’s performance. This week’s performance.
Jeff Malec 58:22
Yeah, and I think that’s in my opinion, that’s the hardest part of trend falling, right of they want the stock market profile, they want small consistent gains. And every now and then there’s a big Down Spike. Because they’ll ignore that they’ll push that possibility of a big Down Spike out into the future. Which trend falling is small, consistent losses with a it’s the exact opposite, right of a big spike upwards. But that small, consistent losses really wears on people?
Jerry Parker 58:51
I think so. And I think whereas on whereas on every trader that you’ve ever talked to in your entire life, when I would go do more events to talk to brokers and traders and clients. Everybody shakes their head when you mentioned something about did you ever get out of a trade too quickly? And did you ever book 100% profit? And they’re like, Yeah, and it went up? 500,000? Yeah, yeah, we all have done that. Because that’s day one of the turtle class. And that’s what Rich said. Yeah, the hardest thing is let those profits run. And it’s no, no, but we wouldn’t do it. My God, I wouldn’t even do it. But the computer just keeps coming back thing. You can’t beat it over the long run. If you’re willing to sit there with open profit. I’m not even asking you to risk your capital per se. Just the open profit that you’ve got a tremendous profit on it and then people will accuse me, you don’t take care of your profits enough. You don’t care about the profit enough because I’m managing it. I’m making sure it doesn’t go away. And so Say I’m taking more care of it than anyone, because I’m only accepting strategies to handle the profits that the backtest says is the best way to handle them. And sometimes, just like with children, raising your children, you got to let them fail. You’ve got to let the profit turn into a loss.
Jeff Malec 1:00:22
It’s the marshmallow test right in training the right you’re gonna wait you get two marshmallows. Right? But everyone these days wants the one give me the one right now. I’ll find another one later what’s the symbol?
Jerry Parker 1:00:41
Oh, this symbol, outrageous symbol TF p n, which stands for trend following plus nothing. Can you believe that? They let me go with that. Yeah, so I was little jealous because simplify can it can CPA. Yeah, that’s a great one. Somebody has TR N D trend. But yeah, that’s my calling card recently trend following plus nothing. trend following a loan. That’s another one. However, we trend follow everything. So I need to apply for the trademark for that as well. trend following everything. But trend following alone. And trend following plus nothing.
Jeff Malec 1:01:26
Where you tend to do turtle like TRTL? Ah, well, no. Or J Park JPR. Que?
Jerry Parker 1:01:37
No, I don’t think we were tempted with anything else. And the other people involved in the project were like, Yeah, sure. We love it. And I was like, really? You’d love it.
Jeff Malec 1:01:45
That’s good. I think we just found the title for this podcast trend following plus enough. Yeah, yeah. Awesome. I think we’ll leave it there. You got any other thoughts?
Jerry Parker 1:01:54
No, let’s save all of our other thoughts for another time. Thank you. You’ve been so kind to have me and let me go on and on. I really appreciate it.
Jeff Malec 1:02:02
No, I love it. Have fun there in Long Island. That was my attempt at a Long Island accent. And we’ll talk to you soon, sir. Thanks, Jerry.
Jerry Parker 1:02:15
Yep, take care.
This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.
