From front-running commodity index rolls to trading spreads, we’re taking you on a bit of a historic journey with Emil Van Essen and Bryan Kiernan of Katonah Eve. Join us as we explore the evolution of their strategies and firm, while talking the world of commodities.
In this episode, we’ll uncover the evolution of Katonah Eve, from pulling data ahead of the game to mastering roll yields and transitioning into the world of spread trading. We’ll also discuss what it takes to survive so long in this business, going institutional for in-house operations, and how they have more than just skin in the game, they’re putting skin in the the pre-game as well to test new sources of Alpha.
We unpack what makes their Long/Short Commodity strategy different, and how long/short differs from trend, and explore topics like term structure, spread trading and data, the importance of diversification, and the importance of testing ideas with live ammunition. And we can’t talk with Emil without talking about the energy patch, the crypto space, and China – all of which we touch on. SEND IT!
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From the episode:
Crude Oil goes negative…What ^%$# – Derivative podcast
Check out the complete Transcript from this week’s podcast below:
Long/Short Commodities with Emil van Essen & Bryan Kiernan of Katonah/EVE
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. Welcome back from the world between worlds for those of you who have been watching the Ahsoka series, if not, well, you won’t get it. Check it out. We were going to bring you the Russ Kellites interview this week, but the good folks in compliance took a bit longer to review that. So that’s on tap for next week with us talking through option income strategies, downside protection, even capturing s&p upside. And then we’re recording our live event in Philly for the pod. So go subscribe on your favorite pod platform today to get those new episodes dropped into you automatically. Onto this episode where I got to sit down with two old friends in this business, Brian Kiernan and Emil van Essen of Katonah EvE, we talk through their journey from spread broker to spread trader to spread head fund, and what it’s like being big, what it’s like being small and then dig into their long short commodity program, which tackles commodity trading and in a unique way, using the term structure to identify coming market moves. Oh, and we also jet energy crypto in China, send it This episode is brought to you by our CMS China division where we help Western asset managers access Chinese assets using Chinese futures markets as discussed a bit in this pot. Is it rcmalts.com/china, for more information on how all that works. And now back to the show? Welcome, guys, how are you guys? Great. Brian, I get asked what happened to the wing there? Well,
Bryan Kiernan 02:03
I started a new career and mountain bike racing and blew a tire last week and broke my hand.
Jeff Malec 02:09
So well, actual racing. You weren’t just riding for fun? Well, I’ve
Bryan Kiernan 02:15
been riding for fun. And I’ve started to take it to the next level. So yeah, and with that, you know, I’m learning and when you learn, well,
Jeff Malec 02:27
your new career lasted as long as Aaron Rodgers.
Bryan Kiernan 02:32
Yeah, about the same right little longer did you make it around at least has a word because that lapse? Yeah, they they? It’s lap times. And so I’ve been out of the race as I’ve been doing. I’ve been about 100 riders, and about about middle of the pack. It’s my first season. And but I’m only going to be out for they think, you know, unlike Aaron Rodgers, maybe maybe six weeks so not season ending. And so yeah, I hope to be back out on the trail soon.
Emil Van Essen 03:05
Wait, is Aaron Rodgers out for the season
Jeff Malec 03:07
yet? For snaps last night? Yeah. And then is Achilles blue. So listeners and we’re recording this on Tuesday, September 12. The day after that game? That’s I don’t know why they paid him. 100 million or something for for plays. Yeah. 00, completions. Oops. Anyway, and Emile you’re here in Chicago for now?
Emil Van Essen 03:33
Yes, I am. till mid October.
Jeff Malec 03:38
And where do you do though? You, Brian, you move down to Kentucky. Right? Yeah, so just
Bryan Kiernan 03:45
Yeah, Northern Kentucky, just outside of Cincinnati.
Jeff Malec 03:49
Awesome. So people finding come here is talking about mountain biking. So even though it’s interesting, Peter Sugandh you know? No, Tour de France guy. And then he tries to compete in the Olympics in the mountain bike race. Okay, so that’s all we’ll say about that we’ve known each other forever. It seems like been in this business for a long time. So just wanted to kind of have you guys give the Cliff’s Notes version of how it got started, kind of ran it up big hired, some institutional people came back, downsize into the smaller group launched some new programs merged with another group. So you’ve kind of been all shapes and sizes and pieces of this puzzle for what’s been 20 plus years. So that’s right. Yeah. So someone start and we’ll we’ll dig into that journey that you’ve been on.
Emil Van Essen 04:50
Yeah, so we we started really as a as a brokerage firm, IB and started developing programs. I mean, that was sort of my thing I thumb as over as a bank trader, long time ago Bank of Montreal, and started developing programs and eventually developed the spread program in 2006, to trade commodity spreads. And that looked pretty exciting. It was a time in which commodities were growing dramatically. And that program really took off. We averaged over 30% a year for five years. And, you know, the assets crew as commodities became more popular. So we built that to almost $500 million in over over the course, till 2012, then, that, you know, the people the long only commodity funds started changing their behavior a little bit, started trying to make it hard for us to make money off of their backs. And so the space started shrinking. A lot of the big institutions started pulling back on their commodity allocations. And so we that that program kind of shrank and we shut it down a couple of years ago, because there we we weren’t seeing the kind of alpha that we used to see way back when. So that was the history.
Jeff Malec 06:28
Was it as simple as the like Goldman roll trade? I know. But that was the genesis of it.
Emil Van Essen 06:37
Yeah, so the start was looking at, you know, all the long only funds, which total couple 100 billion, were rolling from one month to the next. And they were doing it in a very consistent way. So we could easily get in front of how they were moving their money. And we knew everybody else who was front running it. And we essentially, were front running the front runners. But through all the trades we did in spreads, we started doing a lot of testing and developing systems to trade spreads as well. So we started merging the two, the, you know, front running the Goldman roll, as they say, and then just trading spreads. So we found a lot of unique opportunities and spread it spread trading. And that’s what we did for a number of years.
Jeff Malec 07:27
And Brian, were you guys using the spread prices own dataset, or were using looking at each market separate and then calculating? You wanted to be long this market, you wanted to be short this market and it created a spread? Well,
Bryan Kiernan 07:41
I mean, at that time, data wasn’t as readily available as it is now. So we were pulling in data from a variety of different sources, creating our own proprietary spread databases, building our own contracts. You know, now it’s, it’s, it’s a little easier to get that data. But you know, I feel at that time, one of the things that gave us a competitive advantage was being at the advent of electronic spread trading, you know, being able to have the forethought to to realize that that was the direction that that markets as a whole, were moving to that being electronic trading. And that was probably a byproduct of being in the brokerage business and being in the financial technology business. And so, you know, many of the tools that we were building for the CTA, you know, were part of that data aggregation process that we were using within brokerage, and the financial technology, business, and it all it all was kind of fitting together that we were, we were finding that nobody else was doing that at the time. And we found ourselves with a set of data that nobody had. And that allowed us to develop different strategies beyond the rule trade on spread data. And I think that that really allowed us to stay ahead of folks that were trying to gain entry to, to term structure trading. And we’ve we’ve always tried to kind of just stay ahead of the game as it relates to term structure trading. And and that’s part of, you know, data construction.
Jeff Malec 09:23
What are the Were any of the banks who had those long only programs front running themselves front running their product team? Off the record, even though we’re recording
Emil Van Essen 09:36
you know, you know, I I wouldn’t be surprised if Goldman’s trading group was front running their owns, right? Yeah, it seems CI. But I don’t know firsthand. I know that the guys who are running the long only commodity funds were pretty afraid of us, front running them. And they would ask to talk to me, and then I, Newsweek wrote an article about it. And that that was kind of stupid on my part to actually do went on say, In the article, I went on record as saying, you know, we try, we try to get get in front of the dumb money. And they made it they made a big point of that. Oh, that will show you who’s dumb. Yeah, exactly. They, they kind of changed their strategy. And
Jeff Malec 10:31
it seemed like they had to change anyway, right? Because these ETFs were poorly constructed just the constant roll and they were losing the quote unquote, role yield. Right? So it seems they kind of had to move to what like, average of three months or six months or whatever. Yeah, but
Emil Van Essen 10:46
don’t forget, like in the mid 2000s, everybody wanted into commodities and everybody wanted. So people came up with these, these formulas, and they came up with a standard way of rolling. So eventually, then people evolved and changed the institutions change their strategy, but in the early stages, they just wanted the exposure, and they wanted it to be well defined. So that’s what they got. And that created an opportunity for us to make money off. And then we evolved to so we evolved from just front running the roles to trading spreads. And that was profitable.
Jeff Malec 11:27
And let’s clear up there was nothing illegal about front running, right? Because you didn’t know the orders, you’re assuming the orders are assuming the rules. Right? It has a negative common connotation front running. But
Emil Van Essen 11:39
yeah, and I don’t think there wasn’t any inside information involved. I mean, basically mapped out where the market was when it was shifting from one contract to the next. And, and, and by the way, they published it to publish the dates at which they were rolling. So firms
Jeff Malec 11:58
do this now. And like, someone gets added to the s&p, and they believe it’s going to be this group, right, and they start to buy up that stock and sell the one that’s going to get dropped in.
Emil Van Essen 12:07
And that hasn’t worked so well over the last few years. And then being that the s&p inclusions,
Jeff Malec 12:15
and then why why commodities? Just that was your background? That’s what you knew? Well,
Emil Van Essen 12:20
no, I would say that was the whole development in the mid 2000s, was commodity started getting big, and people started using it as an investment vehicle. So it used to be something for producers and consumers, the commodities, but then all of a sudden, in the mid 2000s, commodities became like an investment tool, which is kind of strange, in a way. And it, it really made commodity prices go higher than they should have. Because all of a sudden you had hundreds of billions of dollars worth of investment capital, going into these commodities as an investment and basically driving up the price. And so we were just going with the flow, like following the money. And that made sense.
Jeff Malec 13:06
How much do you think that’s come off, you’d still come across investors who have like a stated 3% allocation to commodities or 5%, just along only commodities. It’s
Emil Van Essen 13:18
yeah, it still exists. What happened is a lot of pension funds, I think move to like, actual hard commodities or commodity assets, like land worth Ember, or even equities and stuff like that. I think there there was a big decline in the amount of money sitting in futures in a long only program.
Jeff Malec 13:43
And then somewhere along the way, there you guys started bringing in some other traders, doing some different types of trading in house. What did what it was that evolution? Brian, you are sorry. Go ahead. I mean,
Emil Van Essen 13:56
no, I mean, we we expanded what we were doing. I mean, we were doing well, and we were kind of a force in commodities. So we started doing market making calendar spread options. We started hiring people with fundamental knowledge of, let’s say, the energy market. You know, we were just building as a company. I mean, I think that
Bryan Kiernan 14:21
one of the one of the big things that we had going for us at the time was, you know, not only a good stable strategies, but, you know, operationally, we were, I think, you know, we we were best in class, you know, we were institutionally digestible. And with that, we could provide infrastructure to incubate other managers and then add that as diversification to the business. And, you know, for that made a lot of sense because it’s, as we know, it’s it’s not cheap to operate a business. And we had the infrastructure to do it. And so We wanted to incubate these managers and bring them to market and some were complementary to existing strategies and others were, you know, uncorrelated and could provide our investors with other uncorrelated asset streams.
Jeff Malec 15:14
So a pod shop before it became known as a pod shot of it, essentially. Yeah so, on the screen behind you Katona Eve, right, so the firm was for a long time, Emile van Essen, I don’t know where you came up with that name. And now Katona. IID. So, how did that go down? What was the logic behind that merger? Is it fair to say merger or joining whatever it was?
Emil Van Essen 15:49
Yeah, so,
Bryan Kiernan 15:50
so I had, I had been in touch with Alex Loureiro for a number of years at Katana Capital Partners. And, you know, they had a rip roaring, you know, track record for a number of years and, and had seen massive asset growth, you know, quickly to 600, much like we did. And so we had been sharing notes operationally, as to, you know, how to avoid certain pitfalls with that type of rapid asset growth, and became friends. And, you know, at some point in time, back in 2020 2021, you know, we started talking about maybe it had, you know, would make sense to get together and do something and, and in so the conversation started, you know, and I think that the first conversation that, you know, meal and vivan had given Oberoi, that was kind of where we thought that it really made a lot of sense, because, you know, those guys are the, the, you know, I tend to lend myself more to the business development ops side of things. And, and Emile is always kind of the mad scientist, if you will, and, and strategy guy, and vivan is, you know, the guy that is able to implement, implement these ideas via research. And so the ability for meal, and vivan to play in the sandbox together well made a lot of sense for for the firms to get together.
Emil Van Essen 17:31
Less, they lost, a ton of Capital Partners lost one of their partners say he was having, he was having medical problems and bowed out. So they were down to two partners, and they thought it was necessary to, you know, to expand a little bit by joining us, and then when we saw the synergies, we, we did it, we just put it together.
Jeff Malec 17:57
And it’s been good so far. Yeah, you get you get to play in that sandbox. How do you like the sandbox?
Emil Van Essen 18:05
Oh, for me, I like it. Because you know, Vivian’s really good at doing all the depth work, the quant work, and I come up with the ideas and he does the coding. And you know, it’s very productive that way.
Jeff Malec 18:20
There’s no cat dirt in the sandbox. Every now and then I’ll leave some behind. Right. But that leads me into well, first. Yeah, we’ll go there first, right leads me into I’ve always known you guys, right. I mean, we’re talking about a cocktail that you’re like, Well, I’m trying this thing in crypto, and, oh, I’m doing this thing and the energies. And so some of those ideas. You’re not just testing but you’re putting your own money into. So I’ve always kind of admired how you’re right, you’re running this business, you’re trying claim money, but at the same time you’re running your own money and try new things with your own money. So kind of how do you view that evolution of the right, it’s hard to get rid of the trader in you and the piece that wants to make money on your own with your own ideas, these new ideas, kind of before you put clients at risk with it.
Emil Van Essen 19:10
Yeah, so there’s a constant search for alpha. I mean, I’m kind of an alpha junkie. I’m always looking for stuff that’s sort of outside the box that generates a lot of alpha. So when you’re trading oil, you tend to look at a What are oil producers doing? Well, infrastructure in util. I was like, oh, oh, look at some of these companies look pretty interesting. So you start looking at the companies and then maybe buy some and do something or, you know, in the case of crypto I just saw a lot opportunities and just dove in and you know, eventually you see more and more opportunities and you say, Okay, I want to try something here. So it’s just investigated. And it’s the idea of just trying to find a haven’t used that has Have Sapir Alpha generation
Jeff Malec 20:03
with the goal of getting that into content portfolios eventually?
Emil Van Essen 20:07
Yeah. So when you’re trying to do is is is, is the alpha real? Is it sustainable? And is it scalable? And if it is, if it is all those three things, then you want to bring it to investors.
Jeff Malec 20:22
And so does it take a special mindset to be like, I’m fine risking my because you don’t know the answers to those three questions, but you’re putting your money to work. Right? So I don’t know if a lot of managers would do that. Or they just test it to death and then bring it out to clients to risk. Right, you’re doing the other method of like, I want to see it with my own money first.
Emil Van Essen 20:43
Yeah. So I think you got to test it out. And you have to vet it out. And then how do you know how it really works? Unless you put your own money first? And I’m perfectly comfortable with that. So and what helps to have
Jeff Malec 20:59
your own money first, right? Well, you guys starting out, might not have that luxury.
Emil Van Essen 21:05
Yeah, yeah. So maybe, then you use other people’s money? Right. You know,
Bryan Kiernan 21:12
I think it’s kind of always been that way. Right? I mean, I think that it’s even, even maybe, from the very onset. Right? When, when there maybe there wasn’t that much money. I mean, I don’t, I think it’s kind of tough to sell something. If you don’t believe in it, you don’t have enough conviction in it to kind of eat your own cooking. And I think Emil is always, you know, had that philosophy. And that’s kind of way he the way that he’s, you know, build the brand. And I think that that, you know, certainly from a business dev side, certainly makes it easy for me to pick up the phone and be like, well, you know, we’re, we’re trading it. It’s, and, you know, I don’t I don’t think that I don’t think that we’ve ever done it any other way. You know, and I don’t know how you can’t, I don’t know how you can’t really test something unless you’re really trading it. So I think that our investors that have been with us for a long time understand that. And that’s, that’s kind of always been the ethos for us. Yeah,
Jeff Malec 22:15
which I like, it’s not just that you’re eating your own cooking, you’re eating, like, junk you’re coming up with in the kitchen that gets burned. Right? So it’s like, There must be enough good stuff in there that you didn’t just burn all your fingers off and and your mouth is rotted out, right, that you’re finding enough good stuff and all that process to make it through and, and not blow through all the money that you’re using to test?
Emil Van Essen 22:40
Yeah, I mean, obviously, you got to use some passion in the early stages, and then you build it over time.
Jeff Malec 22:54
You guys have had a newer program, long, short commodity program that I wanted to talk about. We talked about commodities being big back in oh seven, they kind of got big again here in 2002. With the inflation specter coming around, so tell me what you’re doing with that newer program, and kind of what the philosophy is, and then we’ll dig into how it worked.
Emil Van Essen 23:19
That long, short commodities, was actually developed almost 10 years ago. And when we were doing all this work on commodity term structure, we realized that there’s this really critical relationship and commodities between term structure and the outright price. And that you could use the term structure to really predict what outright prices were going to do. So if you wanted to predict where crude oil is going, just look at the crude oil spreads. And so we had developed this 10 years ago, and we had traded it for some, some customers. It had a bit of a drawdown in 2019 2020. But I’ve traded it like I do with my own money, since inception. And we, it really shot the lights out, it was making all kinds of money and in 2021 2022, even in 2023, we’re now at high watermarks, but it’s very, it’s a very unique way of approaching the market that I don’t see other people using, and yet it’s systematic. So, you know, a lot of times, commodity traders are discretionary, fundamental, and they trade one market, and it’s kind of boom or bust. But this is sort of a diversified approach of trading many markets systematically using this sort of unique predictor of term structure.
Jeff Malec 24:55
I’ll throw in a quick past performance is not necessarily indicative of future results. Disclaimer They’re finding the difference between it and a normal trend following program that goes long and short, different commodities.
Emil Van Essen 25:08
Well, you know, we go long and short. But most people use trends. So if the markets going up, they get long if the markets going down, they get short. But we actually mostly look at the term structure behavior. So there’s certain patterns of the spreads, which tell you so like, tell you if a market is going to go up, or it’s going to go down, and those predictors are much better than trend. So while everybody is using Trend, we think trend is actually kind of a poor predictor. If you look at the tops and bottoms of the market in 2008, when crude hit its pop, the spreads, were telling you there was going to be a turn around like a month before the turnaround actually happen. And this is what we believe that, that the spread actually is a good indicator of the supply demand in the market. And so it’s the best way of of really getting a handle on what the supply demand conditions are. And then you use that to trade. So it’s something we’ve worked on for years, we really believe in it, it’s making money, it’s, it’s holding on to the gains that that it makes. And so we think it’s the best way of trading commodities.
Jeff Malec 26:26
And by term structure, or you’re saying when it shifts from contango, or backwardation, or you don’t really care about the shape of the curve, but specific time points on the curve,
Emil Van Essen 26:36
while we’re looking at the shape of the curve, and also the direction of where it’s going. So we look at the trend of of the curve, how it’s moving. So there’s shapes of curves, that when there’s a real shortage of commodities that that showed show up in the in the term structure, the spreads. And then there’s a different type of shape when a markets about to collapse. So
Jeff Malec 27:05
you came on our show, when crude oil went negative, you came on the pod, we’ll put that in the show notes. That was a good listen, but Right, that’s an extreme example of like, this supply demand is so out of whack, that the front month is actually going negative in crude oil.
Emil Van Essen 27:21
Right? So So you you had, you know, an extreme contango in that market. And it was telling it, and you had it long before that. So it was telling you that there was going to be a problem in that market. And when there was a massive oversupply, they couldn’t get rid of the oil. And that showed itself in the term structure.
Jeff Malec 27:45
What’s the risk profile look like? It’s a similar to a trend follower like is, is it going to necessarily be expected to capture trends like in Oh, eight and 22? Like even if it gets there a different way? Do you expect it to kind of have the same profile that investors expect out of managed futures and more specifically, trend following.
Emil Van Essen 28:06
So like, for example, in in, in Oh, wait, it was amazing at predicting the turn in the market. So trend followers kind of got their face ripped up when the market reversed. But this kind of model picked it up exactly. In 22, you see a lot of people made money with, you know, the war in Ukraine. And everything that happened, there was a lot of bull markets and people made money. But when they reversed, they gave it all back. But I think the term structure was able to predict that there was going to be a turn before it happened, and therefore was able to hold on to the gains. So very good returns in 21 and 22, when when there was a lot of two way action in the markets.
Jeff Malec 28:53
And Brian is it’s just commodities. Yes, there’s no bonds or currencies or so that is a differentiator between your classic trend follower.
Bryan Kiernan 29:03
Yeah, we’ve we’ve we’ve had investors that liked that return profile. And so we’ve kept it that way. And, you know, we’re starting to see increased demand and people looking for commodity only product. And and so, you know, we want to see that continue to grow we we feel that this product is going to be best in class for commodity only.
Jeff Malec 29:25
And is it always in the position or no, it could be long, short or flat?
Emil Van Essen 29:31
Correct? Yeah. So it, it has to have the right setup to have a position. So it can be long, shorter, flat, so probably, it’s about a third, a third, a third.
Jeff Malec 29:44
And if I had to summarize it in one paragraph, would it be fair to say it’s most likely going to give you most of a trend following exposure when there’s trending markets, but capture those turning points? Little more effectively.
Emil Van Essen 30:02
Yeah, it’ll it’ll capture the turning points. But it’ll capture the trend as well. Yeah. And so you don’t necessarily have it. If the market does a quick reversal, you don’t necessarily give it all back. You know, you can actually catch it right at the turning point. Not always, obviously, it’s the markets, but it’s much better than other programs.
Jeff Malec 30:27
The bad scenario is you kind of get these reverses down and back up versus down the backup. Rather you’d get whipsawed in that kind of scenario.
Emil Van Essen 30:38
Right. So to give an example, I believe in June, crude oil was heading down and a lot of people thought, you know, we’re going into a recession, proof is gonna go lower, lower, lower, and all of a sudden, there was a big reversal in July. And it was a big up move. And a lot of people in the energy space got hurt badly in July. And we picked up on that and actually made a new high watermark had a big up month in July, caught the move while a lot of people were getting hurt. So it’s actually a good diversifier for sort of a lot of traditional players in the mining space. Because it behaves so much differently.
Bryan Kiernan 31:20
We’d say that it’s a great complement to traditional trend.
Jeff Malec 31:25
Yeah, so put it in the portfolio, have it be a de diversifier cover those sharp moves on the other trend followers, the weird part in 22, right for trend followers, you’re saying they gave it all back? Yes, and commodity but right at that same point, they started making money in currencies and bonds. So as a portfolio level, it was kind of a smooth upward climb the entire year for, quote, unquote, trend followers. But yeah, if you look under the hood, it was commodities first, then commodities reverse, and then bonds kind of carried the baton from there, which was a type of year usually you get, it all reverses at the same time, and they give back all the gains.
Emil Van Essen 32:09
But talking specifically about commodities, the issue is, is there’s not very many good commodity systematic programs. And what you see in commodities is you get discretionary fundamental guys, so somebody trades now gas, or they trade grains, are they trading crude oil. And that is kind of a feast or famine approach. Like, sometimes they just hit the ball out of the park, and they make a fortune. And sometimes they blow up and they’re never heard from again. And it’s a tricky proposition to get this mix of discretionary fundamental guys. And it’s sort of a certain type of approach. So it doesn’t capture everything. So we feel like this is a a very different approach with they’re very different results, and often more diversified, and hopefully better results than you’ll see with discretionary fundamental. And and you just can’t get that it just doesn’t seem like it really exists in in, like, in a strictly commodity sense to have a systematic program that works.
Jeff Malec 33:15
And does it work, right, I think we’ll come full circle now back to those investors who wanted to own those long commodities in those products, right? Because it was a simple premise. There’s inflation super cycle in China, blah, blah, blah, when the commodity exposure as part of the portfolio, ignoring that commodities has huge drawdowns and tons of volatility. So I think all the investors would get Hey, this is a better way to access commodities, way less drawdown, way less volatility. The question is, can I still capture that? If there’s a supercycle? If there’s a inflation move? Am I still going to capture the upside in commodities? Right, that’s the trick with investors like, okay, I get it. Is this a? If I put it in my commodity bucket? Am I actually getting commodity exposure? Or is it just an alpha source that uses commodities?
Emil Van Essen 34:09
Yeah, well, I think it’s, it’s like, you know, drawing the analogy to Kryptos. Right? If the market has a huge bull market, you’re gonna you’re gonna profit from that. And that that’s probably where you’re going to make the most money. But if the market falls apart, you’re actually can make money as well. So
Jeff Malec 34:29
the mandate you don’t have there’s not 20% of portfolios long only, right by chance is the wrong word. But by right, just the profile is it should capture those commodity moves.
Emil Van Essen 34:43
And on average, over time, it will. And so that’s, that’s the idea that you make money in both directions that you’re not simply limited. Like some people might say, in certain asset classes, you’re better off just being only long. But I’m not sure That applies to commodities because you do get these boom and bust cycles,
Jeff Malec 35:04
or do you see a lot of these long flat in commodities like, Okay, I don’t want to try and make money when it goes down, but I want the exposure, right, instead of my three 5% commodity bucket, I’m going to have three to 5% of the long side. But that’s difficult to write with you. You might be flat at the wrong time, you might give up money. And when it when you should have insurance.
Emil Van Essen 35:27
Obviously, you’re gonna see, like all different styles. And the idea is to get the combination of managers that produces the best Sharpe ratio over time. And we just think that this is differentiated enough that it improves almost every portfolio. So there was actually somebody wrote a report on this, that, Brian, I don’t know if you recall the name of the report, but they they looked at the additive one. That’s it was it me. Now, they wrote about how additive programs are to a, a Managed futures portfolio. So that really goes to correlation and alpha, the combination, and this program was listed as the second highest in terms of being additive to the typical CTA portfolio. See more?
Jeff Malec 36:24
Oh, Chris Cole. See more. Yeah.
Bryan Kiernan 36:28
Our see work for this program is is a 27.
Jeff Malec 36:32
Nice. And I would argue, right, it’s improved the Maher ratio instead of the Sharpe ratio rather, that is more, especially for managed futures. And that kind of, right, like, I don’t think people care as much about reducing the volatility. They want when there’s a big upswing when there’s a big market crash, truncate my drawdown. Right. So if you improve that Mar ratio, drawdown, return over drawdown. But I’ll argue that all day and not get a lot of takers because everyone still cares about Sharpe the most. But I’m planting my flag anymore.
Emil Van Essen 37:09
Right, but sharp, sharp, usually you look at a manager by manager basis, but the idea is to create an efficient frontier that combines the right non correlated managers to give you the maximum return and the lowest drawdown and
Jeff Malec 37:25
those charts be the lowest volatility, not the lowest drawdown. Right.
37:30
Right. Right.
Jeff Malec 37:31
So that’s I’m saying, I want to do the efficient frontier with with drawdown. Yeah. So Tina, instead of instead of vol. I was kind of think of you as an energy guy. I don’t know if that’s fair or not. So just quick side note, what are you seeing energy prices, the energy environment, right, everyone seems to think this move to green inflation, right, that it’s actually causing energy prices to go up to get to where we need to be for all that stuff. Got any thoughts there quickly before we move on? Well, I
Emil Van Essen 38:11
- I do think that, you know, oil prices have been going up here. So we’re at the $90 area. So when you get above 7080, up to 90 $100. Essentially, you’re getting incentivizing a lot of development, in shale and what have you. And so it tends to breed a lot of overproduction in time, and then that causes the price to go down. So it’s just it’s just an endless cycle.
Jeff Malec 38:43
Will even with rates here will and banks willingness to fund those projects.
Emil Van Essen 38:49
Yeah, well, investors. I mean, the returns are there look at Warren Buffett, he’s putting his money behind some of these energy drillers so and the oil infrastructure I think is very good returns. So all that’s all that’s getting built. And it slowed down a little bit in this year. But I think with prices now going up, I mean, people are incentivized to do more. And eventually it takes its toll. And and then they shale starts taking market share from OPEC and then OPEC gets upset, and they flood the market with oil to kill shale and, you know, we go through the cycle again, round.
Jeff Malec 39:32
It seems that all seems too simple. But basically that’s, that’s what it is. Yeah. And then you mentioned crypto, tell us what you can what you’re kind of doing in crypto real quick. Well, we
Emil Van Essen 39:45
built a lot of trading strategies in crypto, but what we found is that there’s a lot of managers out there and with the government sort of declaring war on crypto and the United States a lot of these guys have lost their assets or are, you know a lot of their assets, but there’s a lot of good technology and a ton of alpha and crypto. So what I started doing is using my own money to allocate to managers who I thought looked good, doing managed accounts with them. So I can observe their trading, and trying to get a combination of traders that really produces high Sharpe ratios for institutions. So you want a combination of short term directional, which can make a ton of money in the right market conditions. And then market neutral, which doesn’t make a ton of money, but makes consistent money with virtually no drawdowns. So by having that combination, you can get like a five Sharpe type of return. The problem is a lot of these guys have no compliance, their operations are poor, they just have a good strategy. So our idea is to make sure their strategy is good, and then try to figure out how to put things together and get them more institutionally vetted out. So we can package it up for, you know, a pension fund or a big funder, or a big allocator of any kind. So you got to remember, this is early, it’s early stages in crypto. And it’s not a mature market yet. And that’s what you know, always in a growing market, that’s not mature, you get a lot, you get a big opportunity set a lot of risks, but a big opportunity. So you can make a lot of money with people who have the right technology and the right ideas. And that’s our job to find that and to allocate the money appropriately and, and make sure that they have the right operations. But But
Jeff Malec 41:51
do you think there’s like a halflife to that of like these, we can get these five sharps for the next X years, until it matures and it catches up?
Emil Van Essen 41:59
Well, I think you’re gonna you’re gonna get some high sharps, you’re gonna eventually get a bull market again. And the bull market is going to produce crazy sharps, high sharps, and people are going to make a fortune and then eventually everybody’s going to pile in. We already see Blackrock fidelity, a lot of big players lining up, and then probably it’s going to slip quite a bit.
Jeff Malec 42:25
So cause the most pain to the most people. And I take a little offense, not offense is the wrong word. But like it’s not that new of a mark. Right? It’s been around for how many years? 15 years now? More or less? So I get what you’re saying like it hasn’t institutional money’s not in there. And then trading isn’t as well mature as other markets. But like, it seems a little bit weird of like, okay, we’re still waiting for all this to happen. But we’ve been waiting for years and years and years.
Bryan Kiernan 42:57
Well, I think when we look at when we look at the way that the the infrastructure is set up, right, you know, and we compare it to Trad fi, yeah. You know, are there FCM homes? Is there banking? Is there, you know, administration, what is custody look like? All these things are different, and it’s all being built. And it also is difficult in the sense that when there’s unclear regulation, it does hamper the development and pace of development within those areas that I think that help make these these infrastructure components mature and in a more expeditious fashion. And that is what you that when we when we talk about maturity? These are the things that I’m referring to the markets themselves and the participants within the market. Yeah, well, you know, you have you have liquidity, and you have these, these, you know, coins that have been around for, you know, bitcoins been around for a long time. But in the end, you know, if you look at the age of the stock market, or the age of the futures market, and I mean, electronic trading is only 20 years old, right? So, I mean, in comparison, you know, there it’s, it’s, I would say that it’s still in, you know, very, very early days. And
Emil Van Essen 44:25
I mean, don’t forget, like, crypto probably in 2017 2018 was still absolutely in its infancy. But most companies were an absolute joke. So the institutional involvement is really only common last few years.
Jeff Malec 44:44
Right, but sort of a weird thing to be like, Oh, this decentralized thing is really going to be something when it gets centralized. Right? That’s essentially what we’re saying. Like once we put all these centralized pieces on top of this decentralized technology, then we’ll really have something
Bryan Kiernan 45:00
I think I think that it’s, I think that there there will be a happy medium there. Yeah, that’s, that’s what I think. And I just think that you need to have, you know, some clear guidance, you know, on both sides in order to to really have it, move to the space to where we would like to see it, you know, where you’d have, where you’d have a little bit less systemic risk.
Jeff Malec 45:23
Yeah. And then I’m going to finish my tangent section here with China. Yeah, no, I said that very Trumpian. There. So you guys are working with our team here at RCM to deploy some models in China, what’s your experience been? Like? What is the dataset look like? What do you guys think of those markets? And your thoughts? Yeah. You know, so
Bryan Kiernan 45:48
we’ve, we’ve been looking at China for almost a decade now. I feel like it’s one of those things where we, you know, it’s another, it’s another data stream, right. And it’s a another way for us to diversify our business and potentially develop another product and, and China is another market 10 years ago, that was, you know, a very immature, you know, term structure didn’t really quite exist. And we’ve been watching it grow. And now it’s, it’s the liquidity in these markets is, is incredible. I mean, it’s really something to see. It’s now globally, you know, opening it’s, the regulation is changing, and changed quite a bit within just the last year. So we’ve got more markets coming online. You know, we’ve got direct access via RCM, which is, which is pretty incredible. And, you know, we’re, we’re, we’re trying different things, to find different trades, within within a variety of different markets that are available, both both just direct to China or via, via RCM. And I don’t, you know, I see this as hopefully becoming a very big part of our business and you know, three to five years.
Jeff Malec 47:19
It’s fun, some of those markets, right, when you’re like building it out, and you’re like, Wait, what is this? Yeah, I don’t want pronounces Kinect.
Bryan Kiernan 47:27
Well, like, you know, we’ve seen, you know, agricultural markets, there are, are huge. The, the open interest in these markets is, is is, is, like I said, it’s unbelievable. I mean, it’s 3x What it is, and US markets. And, you know, some of that is, you know, I’m not sure who the big players are, a lot of it’s probably a lot of it is what I’ve been told is retail, a lot of its banks, you know, maybe some of it’s part of the government, but I do know that there’s huge liquidity and, and there’s good trend. And so for guys like us, that’s what we want to see, you know, so our, our systems have evolved over the past 10 years to start incorporating term structure, which did not exist 10 years ago, within the last five years, you know, the term structure within the commodity market was only in three months. Now we’re starting to see term structure starting to move into more something that we’re used to seeing within the United States. So the markets are becoming more mature. And that should allow our models to work a little bit better, as we believe that term structure is, you know, the better predictor of flat price movements. So we want to be able to implement those models in China. And then we think that that can be you know, should drive some pretty good returns.
Jeff Malec 49:00
Awesome, guys. Thanks so much. We’ll, we’ll talk to you soon. If I don’t see it before you had to. I wanted to say kartha hain. Yeah, but Nadine Medan Yeah, you told me how to pronounce it already forget. Meta gene, meta gene, meta gene. Have fun. Thanks for having thanks guys. Okay, that’s it for the pot. Thanks to Brian. Thanks to a meal. Thanks to RCM, China for supporting thanks to Jeff Burger for producing. We’ll see you next week with the rest colitis and week after that with our recording of our live Philly event. Peace.
This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.
