In this episode, we dive deep into the world of commodity trading with Stephane Bernhard, CEO/CIO of CAM Multi-Strat Asset Management. Drawing from his 30+ years of experience starting at Louis Dreyfus through commodity trading house ETG, Stephane shares how commodity trading has evolved from pure fundamental analysis to today’s complex intersection of physical, financial, and systematic trading.
The conversation explores the world of commodity houses and physical trading of commodities, before diving into CAM’s unique approach to building a commodity-focused multi-strategy fund that bridges physical and financial markets. Stephane details their innovative risk management framework that gives commodity traders more flexibility than traditional pod shops while maintaining portfolio stability. You’ll hear why VAR doesn’t work for commodity risk management and how they’ve developed an anti-fragile approach to drawdown management.
Throughout the discussion, Stephane weaves in fascinating historical perspective – from his early days in the Madrid sovereign debt crisis to parallels between the end of Bretton Woods and today’s shifting monetary landscape. Whether you’re interested in commodity markets, multi-strategy fund construction, or the intersection of physical and financial trading, this episode offers unique insights into an increasingly important corner of the investment world – SEND IT!
________________________
________________________
Follow along with Stephane on X @TCS_Trader and LinkedIn, and be sure to check out ETG and CAM on LinkedIn as well for more information!
Check out the complete Transcript from this week’s podcast below:
Podshops, Prices, and Physical Flows: A Commodity Trading Framework with Stephane Bernhard of CAM/ETG
Stephane Bernhard 00:00
In Commodities, especially, you go from under investment to over investment, and typically, periods of low volatility are followed by periods of high volatility because of under investment. I think that’s a real theme investment in commodities in general, which has laid ground for what we’ve seen for the last few years. And I think it’s actually only starting.
Jeff Malec 00:30
Welcome to The Derivative by RCM alternatives, Send It.
Stephane Bernhard 00:35
Hi. This is Stephane Bernhard. I’m the CEO, CEO of CAM Multi-Strat Asset Management part of ETG group, and I’m here to talk about commodities, podshops and more on the derivative.
Jeff Malec 00:58
Thank you, Stephane, now let’s start. What’s the proper pronunciation? Stephan, Steven Stephane. You get it all
01:06
you got it.
Jeff Malec 01:09
And you we were just talking before we started. You’re in a hotel in London. But where are you usually posting up?
Stephane Bernhard 01:16
Yeah. So I live in Paris, but we have our headquarters, ETG headquarters in Amsterdam, in the Netherlands. And I spend a fair bit of time in New York, where we have the headquarters of our asset management firm, commodity asset management, and we’re based in in New York on Sixth
Jeff Malec 01:37
Yeah. What’s
Stephane Bernhard 01:41
it like always it’s been, it’s, I’ve lived outside of France for 20 years, a long time in Spain, in Madrid, and when my kids were at the age of getting to University, was the time to get back to Paris. But I must say, it’s, it’s been very exciting. You know, this city has something special,
Jeff Malec 02:01
enjoying it. Now, I’m torn whether to come visit you in Paris or in Amsterdam. Never been to Amsterdam. I’ve been to Paris, yeah?
Stephane Bernhard 02:09
Well, you know what Amsterdam is, a really lovely city. I actually listened into the pod you did with the founder of trans trend, which,
Jeff Malec 02:18
yeah, testing, yeah. We’re doing, like, a tour of of Holland here, right? Yeah, I can
Stephane Bernhard 02:23
see that. And he was mentioning that Amsterdam is the place where the Dutch people spend the money and, and that’s true. It’s, it’s a very,
Jeff Malec 02:31
do you know him personally or No, no,
Stephane Bernhard 02:33
unfortunately, not. It’s already something you need to organize maybe through, yeah,
Jeff Malec 02:37
yeah. Is there an Amsterdam versus Rotterdam? Is there, like, so,
Stephane Bernhard 02:40
you know, in, actually, on in Rotterdam, you you got, really the commodity hub, the historical community of many commodity firms are there and, and I guess Amsterdam is more the, you know, the tourist city. But,
Jeff Malec 02:58
so, yeah, let’s start with a little bit of your personal background, and then we’ll dive into what you’re doing on the commodity side. But yeah, how’d you get into this crazy business? Yeah, so
Stephane Bernhard 03:10
I actually started my career as a fundamental grains and oldest trader with Louis Dreyfus in 94 and I was very lucky to start in Paris, in in that firm, learning, you know, surrounded with a lot of talented people in a moment that was quite special. The mid 90s was a period where, you know, you still had, in those places, big firms, an information age. And so it was really interesting to see that. And but the same time, it was the start of a transition in the commodities world. And that then pushed me into looking to many different ways into commodities, not only the supply demand driven fundamental view, which was the backbone of what I learned in rich Dreyfus, really. And so it’s been a very interesting
Jeff Malec 03:58
period. And was, was Dreyfus mainly cotton, still at the time, or they had expanded. Cotton
Stephane Bernhard 04:03
was very big with Johnny cousy, obviously, but it was grains in all seeds, you know. And the very big ingredient in all seeds actually bigger in terms of size than in cotton. But cotton, yeah, sugar, coffee, so all the eggs, really. And then the group diversified in other stuff, including energy and and it was a very lively place. And I was with them between 94 and 2007 and then, you know, was doing a bit of a round, started in Paris, and I was in Germany, in Hamburg for a year. And then they sent me to Madrid as the head of trading for the office there. That was in 98 and that was really super interesting, because I was a very big office, very complex trading, many, many different commodities, agricultural commodities and and another say that was at times where things changed quite fast. In those. Years. And that’s, that’s when China came in, in our market, in the commodity markets, has been a very big factor. And as well CTAs, you know, CTA started to really be a very important in in agricultural commodities at the end of the 90s and and so. And then I think, you know, one of my best experience back then was actually for two years to be in the dry burger trade, which is probably one of the most exciting commodity volatility complexity, with a very strong team back then, you know, we drive first and there, you know, it opened my eyes to to the macro, really. And, you know, coming with a different angle to commodities,
Jeff Malec 05:41
one of the most volatile markets, too, right? Yeah, when the Yeah, what was the average volatility event you know you’re in? I
Stephane Bernhard 05:52
mean, still today. So what happens in freight is that you have to nearby that the cash positions that are extremely volatile. For Cape sizes. You have daily moves of 20% and then the curve, you know, is less volatile. But still it’s, it’s very trendy, very volatile. And so Cape size are most volatile. The smaller sizes are less volatile. But, you know grain houses and freight traders that typically trade in the so called Panamax size, which is maximum size that vessels can cross the Panama Canal, and Cape sizes, which are able to go around the Cape. And those sizes, yeah, you have to be, well, learning risk management. Really, it’s about, you know, risk management and respecting the volatility in market, which is, it’s always a good thing to learn as a commodity trader.
Jeff Malec 06:51
And the idea there is the next week I might decide I’m not going to make that shipment, or whatever, and the price is very volatile on the short term versus longer term. We know we’re going to have to ship this stuff eventually,
Stephane Bernhard 07:03
right? I think the longer term, it’s very interesting. It’s, it’s been used historically and still today by macro trader and directionally driven people that express a macro view freight. You know, we always mention Dr Cooper as being the commodity that reflects more the macro environment, yeah, Dr Cooper, is, is, is important for to understand macro, but probably freight is more so, in my view, you know, it really reflects where the tension in terms of global flows and what the world needs, and, you know, do We have enough transport for to respond to the growth of global commodity flows. And so freight is a really, really interesting I learned a lot in that those years, and we actually still trading it quite actively nice.
Jeff Malec 07:53
And I can’t let you go on Louis Dreyfus without mentioning, for our listeners who don’t know that in America, the Louis Dreyfus. Same is famous from Julia Louis Dreyfus, but she’s, she’s a heir of that fortune, right? She’s related,
Stephane Bernhard 08:09
daughter of William that was the chairman and major shareholder when I started my career there.
Jeff Malec 08:14
Yeah. Did you ever meet her? No,
Stephane Bernhard 08:16
no, all the members of the family, but not Julia.
Jeff Malec 08:20
Yeah, so all you Seinfeld Veep fans, she’s commodity Old, old, old commodity money. Never had to work a day in her life, probably, but she’s done well, alright, so you’re Louis Dreyfus. Then where’d you go? Then?
Stephane Bernhard 08:35
Then I, I’ve been, you know, was 47 had quite a bit of an active career. And then I thought, you know, it’s time to do something else. I was for seven years. I wasn’t working for anybody. I was really running my own businesses, investments, as a business angel. Was living in Madrid back then, 2007 to 2014 it’s been quite a rocky period in the history of Spain, with quite a bit of, you know, almost a depression, really. And so it’s been a very steep learning curve to be an entrepreneur in that country, in that time,
Jeff Malec 09:13
you know, and that’s like the sovereign debt crisis, and huge, like 30% unemployment. What did Spain have something huge. It’s
Stephane Bernhard 09:21
been huge, and it was really on the bottom for an over leveraged banking system in Spain back then. And you know, some things that are still today. You know, the Germans not spending enough money, but happy to lend to Spanish banks that were over leveraging the property market, so and, but the birth of that was quite intense. And there again, you know, you go through very interesting period as a macro trader, commodity trader. You recognize some, some tensions there that can be helpful in your decision making. But nevertheless, when you’re in an environment like that of a depressing account. Me, you know, it’s, it’s been a challenge being an entrepreneur, and, yeah, then by 2014 I had to get the job again after not being extremely successful as an entrepreneur. And and came back in the commodity industry as the managing director of in vivo trading in vivo are the French agricultural cooperatives, quite a big entity, and that I was running the trading arm, and was a very complex space, very different from my natural space, I would say, you know, cooperatives is a different setup than a commodity firm or a fund. And so I brought a lot of trading skills, I guess, and risk management, and we try to turn this thing around. It’s been quite intense. Learned again, a lot, but the most important thing I learned that that’s the only thing in my life where I was not a full time trader or aiding manager. And being a CEO, you know, was something that was very interesting, but that, I think the biggest learning for me in this period was that I realized how much I was missing trading and the love of trading the process. And so when I left in 2019 that’s when I had the great opportunity to join forces with an excluded drivers colleague who’s the CEO of ETG commodities, an ETG commodities, part of ETG group, a conglomerate that is with African footprint and Around 8000 employees in 42 countries active in fertilizers, seeds, logistics in Africa, fast consumers, goods, specialty commodities that commodities that don’t have a futures market, they’re relatively attached to them, like cashew nuts, those type of specialities. And then the commodity division that we run. So our CEO, Ronald jet, and myself realized we share a vision. And when we met in June, 19 and and we we were very lucky to have our shareholders that fully, you know, back that vision, an ETG group is it reminds me a lot of drivers. You know, our shareholders, they are traders themselves. They’re deeply knowledgeable in trading and risk management. And another thing that is interesting this group, 35% of the group is owned by Mitsui, the huge Japanese conglomerate, and that brings a lot of structure as well. So we have, in my view, a bit the best of both worlds, having shareholders, majority shareholders, that are traders. Reminds me, again, a lot of the we drive with genetics, and at the same time, I mean, to we and in ETG, it’s really been fascinating, you know, because it’s we trade all the commodities, you know, agricultural commodities, industrial metals, energy, freight, and we highly diversified, but our edge is Africa. And out of that vision was to say, how do you connect global prop trading, so derivative based with physical footprint, and how does those you know, what’s the synergy there, from the bottom up, from the physical into the derivatives, and derivatives into the physical to take the best decision in terms of risk for the firm and and that’s been five years.
Jeff Malec 13:38
Back up for a second, describe whether it was Louis Dreyfus or right? People are familiar with Glencore and some of the big commodity train firms. Like, what? What are they trying to do? Right? Everyone here is commodity trading, but in our world, people are trading on the screen and getting in and out of corn features or options. But what are these commodity houses trying to do at the end of the day? At the end of the
Stephane Bernhard 14:01
day. You know, if you really think about that, those firms, they build a bridge in time between commodity producers, whatever type of commodities, and industrial end users that need the commodity. And why, I’m gonna say bridging in time. Agricultural commodities get harvested during a short period of time, and then they need to be supplied to the global market every month, obviously over
Jeff Malec 14:32
the year, before they spoil or whatnot. Yeah.
Stephane Bernhard 14:35
And then, even for industrial commodities, the same story, right? If you you have to give an instant incentive to producers to pull kundal, all you know, out, refine it and then bring it to market. And those commodity funds, what they do? They take decisions based on the assessment of supply, demand and and in a way, build that brand. In time, and without the bridging time, you know, you don’t have the ability for producers to sell when they want to sell, or to, you know, to secure, to secure their margin. And at the same time, you wouldn’t have the ability for industrial users to get a coverage of commodities that are not even produced yet. Yeah, breeding time. That’s the first function. The second function that it’s so
Jeff Malec 15:28
And real quick on that. So there that’s via forwards and just contractual like, okay, am I letting you buy this that hasn’t been produced yet? Into forward in time. Here’s what our pricing is going to be absolutely and then, so they have huge risk based on that alone, because if the price spikes and they’ve locked in here, so now the game is to manage that risk Absolutely.
Stephane Bernhard 15:50
So that’s where derivatives come in place, or those commodities, as you know very well, Chicago Board of Trade was created on the back of agricultural commodities and the derivatives market. The root of derivatives market, it’s not the standard impulse 500 or bonds for that matter, right? It’s agricultural commodities, because you need those derivatives to hedge and to re to manage the risk of those inventories, or forward contracts that you sold for a commodity that isn’t even produced yet, right? Yeah, the bridge in time. It’s critical function without those commodity firms, you the world economy could not function. And then the second function is a fine financial I mean, you know you’re financing inventories. You’re financing you take risks on on counter parties, and you have to know both producers and end users. And so there’s a financial risk that is requires a fair bit of complexity and expertise. You deal with difficult countries, different currencies,
Jeff Malec 17:02
regulations? Yeah, regulations,
17:05
absolutely. So
Jeff Malec 17:06
that’s great to me, and it just popped in my brain, of like, wasn’t Bitcoin supposed to solve all this? Right? Like, the blockchain of because to me, it’s like, Why don’t some of these largest producers? And maybe they do, and I think they do, go direct to the, rather the largest consumers, Alcoa, or something I’m thinking of, I don’t know if they have their own aluminum mines or what, but why don’t they go straight to the producers and cut out these commodity firms?
Stephane Bernhard 17:31
Because the probability that when Alcoa wants to secure its aluminum matches precisely the moment where the procedure is willing to sell is very low that, you know. So the commodity firm in the middle takes a view and creates that bridge. So it kind
Jeff Malec 17:49
of makes a market right? It’s like a big physical market maker, essentially, in a way, yeah,
Stephane Bernhard 17:54
in all the risks attached to them. Again, it’s the price risk with that. We’ve mentioned the financial risk and then the logistical risk, right? You still move commodities that are physical goods, and the complexity of storing, transporting, you know, it’s an expertise by itself. So those are the different elements and many, very often, in the commodity business when, at least when I started, you actually start your career by spending a fair bit of time in the logistic department and operational department. You have to know your contract. You have to understand the footprint, the logistical footprint. So it’s a very, it’s a very interesting space because it’s multi dimensional, and it, you know, and for a risk taker, I guess it gives you a different genetics than if you start trading ethics or bonds, where, in a way, you’re in a world that has a certain dimension. If you start to carry in the physical commodities, it’s one of the things that I find is useful is that you have to think in multi dimension. You cannot just focus on one single dimension and and that’s been I’ve seen very good commodity traders. The best commodities are people that have been embracing those multi dimensional aspects of the commodities. And which
Jeff Malec 19:21
is odd, because you’d think it’s simpler, right? Of like, Oh, they’re just growing this grain, and you buy the grain and ship it here, and it’s like a simpler thing than owning a stock or analyzing future cash flows or whatnot. But
Stephane Bernhard 19:31
I think everything is complex. You cannot I’m not in the statement, it’s more complex. I think what it is, it obliges you for certain plasticity, mental plasticity, and because you have so many dimensions to take into account so, and
Jeff Malec 19:48
you’re saying, like the trading house also might be right, our Alcoa example, cool, we did this contract. We owe them this aluminum, right? You say it better aluminum. However. Say that in my European English the now I could, now there’s a trade there, like, Okay, I could deliver it from this hub and pay X, I could deliver from this hub and pay y, wise, cheaper. Now, let’s switch around all the logistics, so the logistics becomes part of the trading as well, right? Not just that. It’s not just we need to get it there because we have this contract. How do we get it there as cheaply as possible? And
Stephane Bernhard 20:27
that’s, that’s what some you’ve probably heard the story of those soy beans cargo that have been shipped from Brazil to China, and by the time they reach China, they’ve been sold to a few times. And why is that? It’s because when you have a commodity book, you create optionality. And you actually acquire optionality by having sales purchases. Then you can start to turn around and depending on what your derivatives do certain commodities, then the basis risk is very high, but the basis create an optionality. So yeah, it’s, it’s, it has that multi dimension that is and still today, you know, we probably will get back to that. But in the derivative space today, in commodities, you know, this the impact of the physical, distortion, in a way, in price discovery is still sometimes the most important driver of price, not always, you know, sometimes the physical side. And I think it’s what was the vision we had with the ETG, is to say, you know, how do you connect that, right? How are you able to both understand the financial side of derivatives, what is most screen traders would look at, but at the same time, understanding when the physical may be the main driving force or not when you know and that data find is a very fascinating Do
Jeff Malec 21:59
you think those are the three big basically, supply, demand, transport and financing. Those are the three big movers, price movers.
Stephane Bernhard 22:09
No, that’s one on the physical side, right. Price moves globally. I would call that the cash, the so within the what moves the cash? Those are the three elements. But then on the overall price discovery on crude oil or copper, you have the physical but then you have all the rest right, which people typically screen traders would track and macro the dollar sentiment, you know, geopolitics and CTA, systematic strategy. You have all those drivers. And what is very interesting in commodity, and think that’s the difference if you trade stocks. You know, at the end of the day, if you think about it, what you have to you have to have an micro expertise on that particular stock. You probably have to have a view on the sector, and then, okay, the macro, you know, it can have a systemic impact, but you could be a stock picker and still hedge out the macro through the index, or at the very least, you just take the macro as your background picture. But you can trade your stocks just focusing on the micro. The problem with commodities, again, is that sometimes it’s the physical the micro, the idiosyncratic variables of the commodity itself that drive sometimes it’s totally overrun by the dollar or geopolitics, or actually, CTA CTAs are, you know, our friend from trans friendly, those people can have a very significant impact on especially in turning points and acceleration points, right? And so you cannot really separate them. I think
Jeff Malec 24:02
last bet, then we’ll go into camera. How, how directional is ETG, or any of the larger firms, as far as you know, like, how much directional risk are they actually taking on? Or do they prefer to have zero directional risk and just earn the spread when they can? In
Stephane Bernhard 24:18
an ideal world, those firms, and for many of them, you know, if you look at the biggest so called ABCD in the grain and the traffic guru, etc, you know, you would in an ideal world, they wouldn’t. They would like to be able to hedge out their direction risk and capture those relative value and, you know, and cash the carry, for example, or just secure the industrial margin, transformation of storage, etc, that’s, I mean, that’s the ideal world. No, the real world doesn’t allow for that. You know, you don’t have to learn. Everybody,
Jeff Malec 25:00
it’s too hard or it’s too quick, it’s too all the above, yeah, I
Stephane Bernhard 25:05
think it’s you know, you have to have a view on the market and be able to express it, to bring down the risk to acceptable levels that are, you know, that fit the mandate that you get from your stakeholders. But the reality is that so many firms, they just try to pretend they don’t trade. That’s it’s not the reality. The reality is that you have to take a view, and you have to manage risk, manage by using all the possible tools. And that’s why, you know, at the end of the day for commodities in the derivatives space, hedges and the commodity firms still play a big role, because you cannot do you cannot do without the risk management. And so I would say it all depends which firm to answer your question. I think some and some commodities allow for a lower price, directional price exposure to take, for example, coffee, you know, yeah, okay, last year was a very special year direction in coffee. But for many years, you know, because there’s been a downstream effort with, you know, quality and sustainability, etc, etc. You came to a point before the rally last year. And probably that’s one of the reasons as well, why the rally was so intense that the basis volatility on the basis, or the size of the basis, compared to the total price was was quite high, and, and, and I think what we see the last few years, what I find very interesting as well, is that there is a bigger there’s the convergence of the physical commodities with the derivatives, is, has, has lowered. So what I mean with that is the world got more complex and, and that that creates a very interesting environment as well. If you are positioned as is, come on trading purely derivatives. You know, if you, if you, if you want to get an exposure on the derivatives, in commodities, and you don’t have the link to the physical, it’s actually more challenging today than 10 years ago, 15 years ago, because the physical side of the equation is actually more volatile than it was in the past.
Jeff Malec 27:28
And per your coffee example, we’re saying that people want Sumatran GMO, non GMO beans, blah, blah, blah, and that doesn’t tie directly to the futures contract. And then how do I hedge it? How do I absolutely
Stephane Bernhard 27:42
so when the prices were low and derivatives were not as volatile as the recent environment, the price that you were paying for that coffee was maybe three times or two times, at least two times the price of the of the derivatives, yeah, whereas if you trade porn US corn, it will be a fraction. The basis will be a fraction of the derivatives. So some commodities have, have, have decommodized in a certain way during a period of time when, when commodities were less volatile. What I find, again, very interesting, is those, those are cyclical things. And, you know, in commodities, especially, you go from under investment to over investment. And typically, periods of low volatility are followed by periods of high volatility because of under investment. I think that’s a real theme. You know, we’ve been cooking an environment, say, between 2014 and 2020 21 21 we’ve been an environment of gradual under investment in commodities in general, which has laid ground for for what we’ve seen for the last few years. And I think it’s actually only starting. And I’m not saying by that statement that commodities are bullish. That’s not the topic bullish and bearish,
Jeff Malec 29:04
although there’s a lot of good literature out there that malinvestment is, like, extremely bullish, but we’ll leave that B for now. And what’s interesting to me, along these lines, you’ll see CME comes out with like the pork cutout future or the new southern pine future, because lumber was mostly Canadian this and they’re like, well, all these us builders are using southern pine, so the basis, what I feel like, if the basis gets too big, they’ll launch another futures contract. But with coffee, how do you do that? There’s 700 coffee contracts. Yeah. Yeah,
29:38
absolutely. So uh,
Jeff Malec 29:47
awesome. So let’s get into you touched on it there. So all this ETG background, then you guys did a deal with cam to start trading a model that’s informed by the. Physical explain what cam is the vision
Stephane Bernhard 30:03
when we kicked off, when he took over the management of ETG commodities in 2019, we’ve with the senior management team, and especially with Ronald and myself, we had this food that you know, as a firm, based on everything we said so far as as a commodity firm, you run so many risks right, and you have to deploy so much resources to trade and to perform a function and and you do that with a mandate to protect and to deliver the best possible risk adjusted return to your shareholders and to make sure the you know, the that you mitigate as much as you can the risk, because banks don’t like to fund you if you take wild risks, in terms of, you know, speculating on commodities, so that no role that was the core of the novel that I’ve learned in Lewis drivers as well. And when you think about it, what it means is that, you know that expertise, we apply it to a restricted pool of resources within ETG, even though it’s a big firm, but there are so many different businesses. Yeah, the shareholders can only allocate a certain part of those resources to us, but the expertise, we can actually leverage it off and us. Remember one of the big edge we need to dig out is the tracking the supply demand of each commodities, the tracking the ability to deploy and be aware of what the commodity environment is on the physical side. So that requires resource. So we thought, you know, if we would. So we are not the first ones to do that. Actually, Louis Dreyfus and Cargill were running their own asset management businesses. Louis Dreyfus was in this yard. That was the name of the hedge fund, and Cargill was black Weaver. They were running asset management businesses, allowing external investors to get exposure to their no hope to this expertise and that edge.
Jeff Malec 32:07
What? What’s that word? I’m missing that word you’re saying no hold. What is it? The
Stephane Bernhard 32:11
no hope, right? Your expertise got it all right, no hope. That’s my bad accent. Yeah. And and so when, when we kicked off five years ago, commodities, each commodities managing or expanding the footprint, we thought, you know, it is important for us as well to bring the ability to get more resources to spend on analytics, on developing that edge and that we will only be able to capture by managing third party money. And so that’s how we came to four years ago, actually, for your firm, we got into, you know, we’ve been helped by some of your colleagues into scanning in the CTA space. And we thought, you know, the best way for us to get into that business is actually look for a platform. This is a business that is new to us. We’ve always been managing our shareholders money, our own money, managing third party money requires a normal and so we started to scan the CTA space in the US and, and luckily, got connected to Jonathan to look off, the founder of commodity asset management, a great metals specialist. And and John realized, so we actually started by investing as an investor into camp. And then we realized that, you know, we are very much aligned in how we see the opportunity and the vision very fast was to say, you know, we want to have these platforms. We acquired commodity Asset Management was acquired by ETG two years ago with a view to use it as a platform to offer what we think is the first existing multi strat commodity fund and SMA. And when we say multi strat, let me you know, because that’s a very hype world
Jeff Malec 34:19
loaded term. It’s
Stephane Bernhard 34:20
loaded and hype. And I just want to make sure, you know, I think it’s one of the thing that is interesting to discuss around the commodity space and derivatives. It’s multi strat. Means you have a diversification in the number of assets you trade, but that statement, you can make it for any CTA they paid all the possible markets, right? So diversification is not in in what you trade is not sufficient to describe it when we say multistrat, we wanted to inspire ourselves of what we’ve been doing on behalf of our shareholders for a long time, and what multistrat firms are doing for their in. Assets, which is essentially to create a product that that resolves some of the issue that people have had historically with commodity funds, which are, which is the volatility, the profiles of risk adjusted returns. And so, you know, when you employed by the Cargill free drive, etc, at the end of the day, you know somebody is watching over his shoulder to make sure you don’t blow up the firm, right? Yeah, and you are dealing with highly volatile commodities, we discuss trade, but coffee is another one that’s really volatile. So
Jeff Malec 35:38
that, in practice, that you’re given a budget, you get to trade this much, and you can only lose this much exactly.
Stephane Bernhard 35:43
So the only way to approach that is to say, you know, you’ve given a budget in terms of maximum losses. And then the know who, I guess, that we’ve developed over the years of managing so many different traders, is to realize that, you know, you have to give them the room, and probably that explains why some of the big multi strats are sometimes turning a little bit with commodity traders, because you cannot expect the same volatility profile in commodities than you have from an FX arm strategy. And but at the same time, at the portfolio level, you do want to have that profile of stable, volatility and risk adjusted return. So multi strat, in the sense of having what we build is is, so it was our internal desks that we ring fenced to offer them as a product to investors, and where we bring both fundamental discretionary trading in all the commodity groupings, so grains, all seeds, Soft Commodities, energy, metals, freight, those are specialists. So real people that are experts, coming from the physical background, understanding the optionality and the complexity of the physical commodity and bringing and then a lot of analytics, internal and external analysts, a fair bit of money that we spend on that to get a view on each of those commodities in terms of supply, demand. But then we add hybrid pods that I actually I oversee and trade directly with my team’s hybrid port. So one of them is that we take all those models, and, you know, analysts, brokers, in some cases, but let’s say, in the vast majority, being our internal analyst and some specialist externalists that create those fair value models on each commodities, and we’ll take them through a systematic process and algorithms that rule based that use price triggers and different temporalities to then deploy risk, then macro we’ve discussed a little bit in commodities. I think one of the thing that has changed in the last 30 years is, well, actually it’s not true. Because if you look at the 70s, you know, the rallies in in crude oil and corn in 73 were driven truly by, you know, fundamentals, but as well, a lot by the end of Breton moved in 71 right? And inflation cycles. So macro can always be a significant travel. But I would say, I you get the sense that the macro input into commodities has has grown over the last few years, and very clearly during COVID period, and most recently, you know, the inflation round, and then the geopolitics, tariffs. Tariffs, are we big driver of
Jeff Malec 38:48
right? We’ll stick a pen and that because I want to write tariffs, you could argue might de important as macro, right? If, like, it’s less of a global trade,
Stephane Bernhard 38:57
yeah. But at the same time, what? Remember, commodities, there’s a lot with substitution in commodities. What happens is that if tariffs are put on certain commodities certain countries, what will actually happen is you radically change the supply chains and the flows overall as a planet, you most probably will still consume maybe a little bit less because you push demand a bit lower. But the most critical thing you do, you change the flows, and that has a very direct impact on spread and on relative value, and that has a big impact on then the derivative. So I think macro, you know, we try we approach it with that’s what I’ve been doing for 30 years. It’s really since I was in freight and dry physicist. You know, how is macro playing out into the specific commodities? And so that part, then, as well, has this macro view, and then there’s a systematic process to define which commodities. And you know, directionally, what we do, and then we have allocated. We worked for a long time. I’ve been very lucky in my career to, since the end of the 90s, to work with very bright mathematicians and systematic people. So actually, you know, I know very well that space actually, even though I’ve never fully myself, embraced a career into it. But I’ve been coding, personally, more than 1000 strategies in my life. So a little bit about that. And most important, have been lucky to to have partners that with whom I’m working since, in some cases, more than 15 years, actually, even 20 years in the meantime.
Jeff Malec 40:50
So you’re you use the word pod, right? So multi strat pod shop. Do you consider them synonymous? Same thing, exactly.
Stephane Bernhard 40:57
So we have a pod currently, which is four pods of the main commodity groupings and specialist fundamental. Then two ports hybrid the model based in the macro. And then two ports, fully systematic, one internal, which is mostly driven towards quantum mentals. So what we do there is we use, and that makes it a bit different, a lot of fundamental data to turn them into inputs to deploy into the different commodities using some price elements, but mostly fundamental data in a non linear way. So you know as well, that’s maybe something always interesting to note is that commodities, distribution of pricing, commodities actually different than financial markets. You tend to have fatter tails, more kurtosis. You tend to have those drops in liquidity or burst in correlations that you don’t have into modern markets and and that creates a very interesting profile in terms of how you approach risk management. And so we do use that into our fundamental analysis, and that’s fully systematic. And then we have a pod that is a partner of ours. It’s actually a partner of mine for a very long time, probably 18 years. We go back and he’s very famous, or is very well known in the CTA space. Been around a long time. Rafael Molinaro. Molinaro, capital, he’s been a painful work traditional with Rotella, and I think Rafael reversed the last few years, we’ve worked a lot on research, shared research, so that he’s still a pure CTA, but let’s say that maybe, when we started working with Raphael, he was Monero, there were, like, I don’t know, maybe 75% trend followers or 80% trend followers. And today, I think in his portfolio, it’s maybe down to less than 15% I think 10% trend and the rest. So we tried, and we worked together to adapt a CTA model into the idiosyncrasies of commodities, because they have a different behavior, right as a group, without falling into the pitfalls of data mining and optimization, not at all, but, but nevertheless, there’s different behavior, and we think that’s very interesting approaching commodities. So in that sense, we are multi struck, because we do approach it all commodities. So we trade all the major commodities and the major exchanges for three or four different approaches, right? Purely discretionary, fundamentally driven, then model based, macro and systematic. And I think for us, you know, in my having been in commodities for 32 years, it’s I’ve realized that you, if you, if you focus your attention to just one type of commodity, you may suffer from long periods of times where there are essentially no trading opportunities,
Jeff Malec 44:01
yeah, or you force it, and then you’re trading when you shouldn’t be. Yeah,
Stephane Bernhard 44:05
exactly. That’s one thing. The other thing, what I’ve learned over the last four years, and I think this movement is increasing, is that for the years of you, you could say there’s no reason to trade commodities with any other approach than fundamentals, because there was an informational edge, if you were sitting in the big firms, that informational edge has reduced because, you know, for example, the impact of weather on agricultural commodity today, Most funds or market participants will have the same information and squeezing out an edge on whether they either is super highly costly, or, you know, the edge you create is so marginal in terms of your peers
Jeff Malec 44:54
that you know costly in a different way. Yeah,
Stephane Bernhard 44:57
yeah. So I think what the other. Vision we have is that we’ve learned that you never really know what will be the next big mover in a commodity. Is it your fundamentals? Is it your Is it your politics? Is it macro? Is it the impact of CTAs, Moon, linear models, and, you know, all the space of sentiment driven we’ve seen, it was two years ago, something like that, the type of memes that we saw in GameStop. I remember for a few weeks some of the same crowd getting really excited with corn on the ether. Yeah. Oh. How do you deal with that, right? So I think what is very interesting is like putting together those different layers and dimensions, and then, of course, multi strat as well, because on top of it sits a very structured risk management so that we are on, more or less on a constant volatility, and more importantly, we have a defined maximum drawdown. So to go back to our initial conversation, the mandate we had for our whole professional life, but the same mandate, you know, we are building the machine, or the system, the overall system, so that we don’t break a maximum drawdown. And I think that makes us different, and I believe it makes us different. And as we are launching, it feels that people are interested by that. And we, I think we solve a little bit of an issue right in the industry, when if you are a big institution, and if you want exposure to commodities, you have to invest in many different commodities funds with their own volatility, and it’s complex,
Jeff Malec 46:44
and what, but what is the So, what is the profile you’re trying to get, like a commodity profile that should do well in inflationary times, that kind of thing, or just an absolute return,
Stephane Bernhard 46:56
absolute return, we, we don’t really, I think you know, having started our careers in many of us in agricultural commodities, some of us in energy metals, but many of us in our commodities, we realize that now this idea of supercycle in commodities, we kind of struggle to buy into that, Yes, there are some super sizes and commodities, especially in industrial commodities, due to under investment. Yes, you do have periods in history where, if the dollar gets debased, by definition, you create an environment that is highly bullish for commodities. But as well, you do have, you know, human ingenuity and productivity means that our yields are constantly Yeah, and and, you know, the the usage of commodity in the economy, the impact of, say, crude oil in the production of one point of GDP in developed economies today is a fraction of what it was in the 70s, right? So we have, you know, everything in economy is transformation of energy, so, so, but nevertheless, we’ve been able to create more GDP out of a single unit of energy, right? And so overall, commodities have those cycles. But what, what we think is very interesting for the next 10 years, compared to the, say, a difficult period for commodities in general, was, say, 2014 again, 2020 and that was a period where, you know, there was no real story. Fundamentally, there was no real story, Mark wise, etc, and there was a big cycle of under investment. And then since COVID, there’s a bit of a different shift. But I think what people must realize as well, and what makes what’s we like a lot in terms of potential opportunities going forward is there are a few things that are significant. You know, we have a change in the global monetary regime, and that has an impact on the dollar. We have, obviously, big shift in geopolitics and for commodities. That’s very major. You know, if you go from a world that is US centric to a polarized world with, say, in the future, free blocks, the US, Europe and Asia, Southeast Asia. It has very significant impact in terms of commodity flows. Then there’s something else which we find, and we track very closely, of course, and it’s very complex. It’s the impact of weather change on commodities. And, you know, last year was a very good example where Soft Commodities, so essentially, coffee, cocoa, sugar, in a lesser manner, but as well, you know, they are produced. Essentially, think of those commodities as COVID. Of these that are produced in a relatively narrow band of the planet, right between the tropics, or a bit more than, yeah, tropics and and then you have your grains and also that are essentially, for most of it, produced outside of the tropics, right above and below. So what seems to happen for the last few years is the viability of weather. And again, it’s not bullish or bearish, it’s the variability heat and and rainfalls within the tropics has increased dramatically, whereas variability of weather outside of the tropics has not increased. But on the contrary, has kind of front so. So what does it
Jeff Malec 50:42
do? And on the whole, maybe it’s net even, but it’s concentrated in the tropics, right?
Stephane Bernhard 50:48
The viability has increased there. So what does it mean last year? Well, you have quite exceptional the last two years of weather conditions that have affected coffee, co op in a lesson matter, but still in sugar. And you look at those charts, you know, the
Jeff Malec 51:05
cocoa is amazing. Yeah,
Stephane Bernhard 51:08
coffee, it’s actually amazing as well. It’s been and even sure, you know, has arrived quite a bit. And on the other hand, look at soya beans and corn, those those markets have dropped because those crops at the end were quite good globally, wheat and so the weather viability within the tropics clearly has increased. Outside it has decreased. Now. How stable is that you know anything weed through all that material, you know, it’s, it’s very much, has a lot to see with, you know, the sea currents, on the global level, in the planet, it’s, we have turned into a more unstable environment. That’s my point. And you know, if you are able to understand what it means and track,
Jeff Malec 51:58
yeah, that’s, that is you’re saying whether weather has become more volatile, basically, well,
Stephane Bernhard 52:03
I’m actually, well, I’m not saying that it’s within the tropics, yes, but outside with tropics, actually, no. That’s why we don’t have, you know, when I started my career as a wheat trainer drivers, the Russian winter kill was a topic, almost every year you had most a fair chunk of the Russian wheat crop was affected by winter kill, or very soon, heat in June. The last few years, look at those crops. I mean, you know, you don’t have almost any winter kill anymore. Yeah, that means a much more stable wheat production in Russia. Same story in in corn. You know, it seems now, with technology and the way we produce, you just need the right amount of rain at the right precise day you need it and you make your crop right. Sort of the viability of yield has actually decreased in grains, in old seeds. So that’s my point. The last few years, whereas had increased dramatically in Soft Commodities, and that’s due to the change. So what
Jeff Malec 53:07
does it mean? Are you and I could also argue the Soft Commodities has less tech, less investment in the yield increase? I don’t know if that’s true, but from my I would say so. I think yeah, it might be part of the equation as well, right? Yes, yes. Let’s take two steps back. Why is, why does ETG, why did Dreyfus, before want these groups just to add another, some more profit to the bottom line, or to diversify their revenues, like, what’s the end game for them?
Stephane Bernhard 53:39
Yeah, yeah, I think so obviously it’s having a fee based business is an interesting mix to the quality of your earnings. But honestly, most important driver is that, remember, we are belonging to groups that are highly diversified, that are present in so many jurisdictions and so many businesses that we have a limited pool of resources to allocate, and especially it’s not the purpose of the firm to be not speculating, right? You cannot avoid it. You have to risk manage. But it’s not the end game, right? So for us on the pop side, the reason the main driver is that by raising third party money, we can spend more money in analytics, in having more talents, in being able to better understand each commodity, giving a better return to our shareholders, a better synergy, but at the same time, by doing so, you increase the diversification for investors. So so it’s very much of a of a positive feedback loop, right? Yeah.
Jeff Malec 54:41
So you’ll get two way flow. So ideally, the pad shop’s going to give flow to the physical traders of like, Hey, here’s where the systems are lining up. Here’s what we’re seeing from our models, exactly.
Stephane Bernhard 54:52
So we obviously, it’s a Chinese wall on the trading side. Yeah. Traders have no clue what the fund does, and the fund has no clue about the physical I mean, uh. The Chinese worlds are very strong on that, but on information, on intelligence sharing, it’s fully transparent. The guys that sit on the pods understand and have the same information, on analytics. And to give you some example, I mean, you know, we last year was a really, really interesting year, and we did quite well last year, because we we are as a firm, ETG is one of the top 10 global coffee trading firm on the physical side, and our traders, they, they have a the ability to understand much better the pricing of the physical commodities than if you sit in a bank or a hedge fund, because you actually deal with those big consumers, and you realize you can develop some models to understand the supply, demand of pricing right of the physical pricing. And if you and then, if you identify an imbalance there, which was the case last year, plus you have, you have our internal agronomists and agronomist models, you identify the viability in the Brazilian weather after a year that was bad in Vietnam for robusta Coffee. If, on top of it, you see that the spec community doesn’t pay attention to coffee because it was trading low prices, low volatility, then you have a very interesting configuration that, and that explains really a lot of how powerful that trend was. And it’s the same story in cocoa, but cocoa is a very small commodity, right? So coffee, robust habit is actually already a little bit bigger. It’s been a bit the same story in sugar. And I think you know by having so for us, we need to be making the best out of the physical footprint. But by managing third party money, we can add capacity in terms of analytics from a top down approach. And of course, the end goal is a multi strat strategy. It’s a bit of a big world to describe yourself as a multi strat with eight pods. I’m sure that if some of your listeners are working with the great multi strat, they say this guy, what is he talking about, quality strategy? So that’s why I’m stressing that it’s the philosophy of multi strat in terms of risk management and diversification. But of course, our end game, what’s our end game to raise to get to our maximum capacity towards 25 ports, 30 ports, I don’t think you can go beyond 30 ports. Being a pure commodity player, just there’s only that many ways to to to
Jeff Malec 57:56
read. I don’t know. I see groups that have like 20 power traders, just themselves, so you could do it, but it would start to get specialized. Yeah, and
Stephane Bernhard 58:06
I think it’s a good point that made there the only thing we want to make sure, because you can go really big just essentially being an energy trader that does a little bit of of the rest. Yeah, keep it balanced between ads, metals, energy, freight and some Mark holding effects, you know, especially a few currencies that are actually driven by commodities or that have a very big impact on commodities, and you need to have that in your portfolio. So we want to be balanced. Now for us, it’s not about, you know, the privilege of being backed by a brig group like ATG is that maybe, you know we are, we are less in a hurry to get any mandate to go real fast and then, and then you realize you need to hire more energy traders to be able to manage your book. You know, we have a very clear, defined strategy. We have a clear view of where we want to go, which is having a very balanced overall commodity exposure to offer to our shareholders and investors, without being just a mode of promote energy fund that does things right. That’s
Jeff Malec 59:17
not what we want. And talk two more questions, just on the on the pod structure, the multi strat structure. One, how do you compete with these huge firms you just sort of mentioned to get this talent? Or do you think like there’s maybe talent that’s not getting put into those shops because they’re commodity focused?
Stephane Bernhard 59:36
I think you know we can. It would be arrogant on our side to believe we can compete with those great, sharp structures, because they have resources we cannot have. They have technology that we don’t have. So we, I think, try to displace the in a way, the the battle, I would say. And. By, by, by making sure that we offer a place to commodity traders that is more commodity traders friendly, that makes sense in different aspects, right? So the first one is that from a pure commodity trader that has his background and in physical commodity, even if you’re on one of those very big shops, and with all the resources they have, at one stage, you kind of start to lose a little bit your edge, because to get this physical feel, you need to be active in the physical side, or at least very directly connected to it. And just out of some, you know, information flows that it’s not by paying physical brokers that will get the information. Yeah, so I think it’s the first thing,
Jeff Malec 1:00:53
right? It seems like they could buy their way into that, but you’re saying, No, it’s like dozens of years of boots on the ground of figuring out logistics and contacts and, yeah, yeah. And,
Stephane Bernhard 1:01:03
you know, it’s just, it’s a give and take. It’s you still need to be, you know, involved in the physical side. I think that’s our pop trade. So we offer them a platform where they have this connection to the physical. I can give you one example that’s quite interesting. We have a very talented grain trader with us that has been for 15 years in hedge fund, but a hedge fund run by our ex mentor from Louis Dreyfus, so a no sprayer, wingspan hedge fund, and he’s been with Bruce Ritter for a long time, and I think then he’s been involved in some other big funds. And I guess for him being with ETG, he again finds this edge of the physical driver. And I can give you an example where, in the last few weeks, at one stage, if you remember, after the Zelensky Trump meeting and the tension that came out of that, and we had a very steep sell off in corn futures Chicago. Yeah. So one of the thing that happened there is that the physical corn, and it was the tariff, the worries around the US tariffs as well, obviously. But one of the things that happened is that our traders were able to track in real time very, very aggressive offers on the physical cone into destination countries that were a reflection of the worries around the conflict and Ukrainian sellers dumping their phone and that undercut, then the US crown competitiveness, and then also those moving parts, sometimes they’re really the trigger on top of it. You had the CTAs that were quite long, then the tariff discussion came in. So you get those little moments where the tipping point can be actually the physical pressure. So if this very talented grain trader would be sitting at, I’m not giving name, but one of the big pods Sure, he would not have this information. There, you see the value of that. So that’s the first one. The second point, as I mentioned initially, I think we’ve seen quite a bit of churn in those big historically, you know, in those big multi strats. And I think the reason for that is that it’s very hard for commodity trader to be able to fit within the risk mandate that that you have in most of those shops. And I think where we are different is that say they have a tighter leash and point speed, yeah, the leash is really only too tight for commercial traders. And I think the art of what we do, having managed traders, you know, and myself, I have been a trading manager for 26 years, you know? So you learn to say, Okay, I know the profile. Now. How do I by binding them together, and that’s the idea of the multi thread, different approaches, etc, by putting that all together, how do I make sure that at the portfolio level I have the type of stability I’m targeting, even though I gave at the single dimension a bigger leash, right, and more so we have a different approach in that. I guess that is some very senior commodity traders realize that, you know, it offers a space for them that is more favorable for for commodity traders.
Jeff Malec 1:04:40
And you touched on. My next question was going to be, how important is that center book, for lack of a better term, right of the big multi strats will say, hey, it doesn’t quite matter what all the pieces are doing, our total our risk management, our center book controls all that. I think there was a paper out we’ll try and remember and put it in the notes that basically. Said you could put all these bad strategies together, but if you have this risk management is where the the key is more so, even than the talent underneath. Yeah.
Stephane Bernhard 1:05:09
So we don’t have a central book. We don’t believe in a top down approach, but what we do is that we we have assumptions of the training profile and personality of traders, right? A fundamental trader, you have different types of fundamental but say you have a value trader, somebody that has this decision making is driven by value. You can describe them in some aspects, as deep pocket traders. Obviously, if you have a value driven approach, the cheaper something you get, the more bullish you have to go. And if the higher goes, the more sure that has obviously a certain profile of risk to return. And you can make assumptions on that person, so we screen them, we know them, we manage them. And I feel that there’s something else which I’m not here to sell camera. My idea is really to discuss commodities and trading but, but I think we do something unique income, which is that we actually have an incubator whereby, with our ETG money, we have those pods trading ETG money for at least one year before they actually can join. Why do we do that? We know when we hire those people or they are with us. We already know their trading personality profile, but we want to see them during a full year of actual trading, how that fits to the portfolio. So we have assumptions on a trading personality so deep pocket type of value traders, very different profile of relative value commodity traders, traders that trade mostly calendar spreads, right? And that’s actually calendar spreads are probably a more pure way to trade fundamentals than flat, because flat and be able to advise so many things, Relative Value spread traders, they would be sitting almost in terms of trading personality profile. On the other side of the spectrum, they are your grinders. They tend to grind constantly. They don’t shoot for the stars profile. They’re not gamma short, but they have more of a profile where you need to be careful that they don’t get overrun by a big systemic wave, the very opposite of so we make these assumptions on that personality, and that means that all in the overall portfolio, it gives us an optimal allocation in terms of drawdown right now. That sets an a basis of 100 for each of the pods, then we have developed tools to identify market regime. So if you are a trend follower, a value trade directional you to you tend to do well when the market was in low vol, starting to have going to a more volatile environment with a direction, so linearity, that’s what they tend to do. Well. They tend to do poorly when the market is shrinking, vol constantly in range bound environment. So you make those assumptions, and you identify those regimes, and that’s a quantitative process, and that means that you have a first rebalancing on a monthly basis, where you can go from the initial 100 you can go as low as 50% or as high as 150% of the initial allocation. So it’s a dynamic risk allocation. We that’s doubled up with P and L management. So we have a very simplistic approach, which I’ve done for 30 years or 28 years, managing commodity traders. It may be simplistic, but it works, which is say, if they lose money, you cut the risk. If they make money, you may increase the risk. But we have an anti martingale approach, so we blend that together with the market regime, or that it’s not disconnected. They work together. And then that gives you, on a monthly basis, your, you know, is now your trade, trading risk 100 or 110 120 or 8070, based on those, those things. And then, super important, because, you know, we’ve seen in our world of the physical commodity, we’ve seen firms blowing out. I mean, I’ve believed the end of Continental Grain there was a big firm or group, Andre some maybe less known name, but those firms blew up, not necessarily because of their commodity business, but because they were leveraging themselves up into other things, and they blew up. But
Jeff Malec 1:09:43
we amaranth and the hedge fund span
Stephane Bernhard 1:09:47
absolutely, you know, you you just dig a hole by not respecting the risk, right? And so what we do as well, I think, you know, as as an overall design, and think it’s very important. For people to realize that in commodity, the way to approach risk is you cannot. Var will not help you. That’s a backward looking way to look at risk, and especially commodities having this characteristic in volatility. You know, var is essentially useless, to be very honest. What we is drawdown management. So we allocate a budget and remember, it’s it can navigate from 50 to 150 but then you have your budget of risk. If you draw down a third of that budget, we have a risk committee, and we discuss with those commodity traders, why is it concentration risk? Is it we don’t challenge our traders or strategies say, why are you long or short? So we don’t have a central book that say, I know the market goes up, so I’m overriding the short. Yeah. Conversation, it’s well, why are you there? If they draw down 60% then the risk committee has actually the authority to cut the sizes. Because very often for commodity traders, especially for value driven and fundamental traders, they can start to be a little bit sticky
Jeff Malec 1:11:03
married to the position, yeah, exactly.
Stephane Bernhard 1:11:06
So the risk committee is then cutting the sizes. They can still be sticky, but not really the same size. So, and
Jeff Malec 1:11:13
what is it hard for them to ever bounce back, then, to ever get back in the green, or because they have these outlier moves Okay,
Stephane Bernhard 1:11:21
- And the other thing is, remember, we are very dynamic in that if they start making money, we then re increase their risk, you know, if we realize so, we measure a lot the quality of trading. Now, I’ve been very much influenced in my life by a few books. And there’s one book that is not directly I’ve read many, many trading books like I know you do, and you did, and you’re extremely knowledgeable and but there’s one book in decision making that I find fascinating. It’s and it’s actually not written by a trader, and the book by Annie Duke
Jeff Malec 1:11:51
thinking in bed. Yeah, I mean
Stephane Bernhard 1:11:55
exactly, thinking in bed. I need you. I think for me, that’s the essence. You know, it’s helping because, remember, commodity trading, it’s like any other type of markets, but in commodity trading, you really have to build a view, right? And so, you know, for me, there is a very smart guy in Europe. He’s a macro guy that is running hedge fund, and he’s always saying, you know, trading is opinion strongly held? No, you have to have strong opinions, and you have to hold them weekly, right? Yeah, not strong that’s, and that’s the thing, is super smart, because in commodities, that’s the issue is that I’ve seen in my career, commodity traders having doing a lot of work to build a strong view and then being too loyal that,
Jeff Malec 1:12:51
you know, like, under on right? Like, would you have him in your book if he’s, like, that profile, it’s too all or nothing, right? Yeah,
Stephane Bernhard 1:13:01
no, that’s not what we do. I We, and maybe because of lack of talent. You know, I don’t think any of us is as smart as clear on your own, for surely not. And maybe, you know we, we see ourselves more as grinders. You know, we ourselves more as being in every day’s grind and not the big view that will make you the year. It doesn’t mean we cannot capture some more clients. Again, we had really an exceptional year last year, and it was on the back of our soft group parts doing exceptionally well in coffee. So but not because we bet the host, not at all. It’s just that they’ve been able to deploy very nicely into that theme, riding with it and very good to us, but not because we are betting the house from one view. Or,
Jeff Malec 1:13:57
how do you keep everyone happy? Like, if you’re cutting someone’s risk, is there income going down. You don’t have to get into specifics, but, like, if I’m a trader and I like, Well, my income just went down. How do I deal with that? Sure.
Stephane Bernhard 1:14:08
So, you know, remember, in the multi strat world, one of the very essential component is that each pod has to be ring fenced. You have a pass through cost to your investors. Us as it you cannot bear the risk of the of the netting risk between the pods. I mean, you cannot attract a great trader by telling him, You know what your bonus will be dependent on your colleague making money just doesn’t
Jeff Malec 1:14:31
if, then that’s what happened at banks, where all these traders left the banks because they were getting netted out and they got upset.
Stephane Bernhard 1:14:38
You cannot. So how do we attract I mean, we, you know, the netting risk lies with the investor and and so a trader that doesn’t do well by cutting his risk, we actually protect him to limit his drawdown. So that’s they understand that quite fast as you know, if you, if you draw down 50% you have to return 100% you. You only draw down 25% you only have to return 30% to get back. So it’s we are absolutely not in a linear world when it comes to draw down. So our aim is to make sure we give them the ability and the leash not being too tight, but at the same time helping them to say, hey, you know, let’s work it out so that you don’t draw down more than 50% of your risk, because you can come back and we’ll be increasing your risk as you do well, etc. So we had a few pods we’ve have. So by launching cam, we actually ring fenced those pods internally with ETG so that we can show a track record. We have our own four years of track four or five years of track record that we can show. And some of those pods have actually drawn down 50, 60% everything, one, even 70% nevertheless, they are still there. That’s still part of the structure, and they are coming back. So for me, this is really the essence, how do you help commodity traders to navigate the volatility markets? How do you give access to investors to this very nice, uncorrelated revenue stream? And today, I think, probably something that would be more important in the next few years, that it’s been in the last few years, just because, and maybe I’m wrong, but I get the sense that we are ending the financialization of the economy that, you know, Main Street will take the revenge on Wall Street in a certain way, not only in the US, but globally. And that means commodities. You know, at the end of the day, we transform still stuff into other stuff into other stuff, right? So, so think for us, we want to be able to offer that to the our vision and vision of our shareholders is, you know, commodities provide an opportunity, and you can do good to your farmers in Africa. That’s the mission of ETG. And the is a fantastic story in that sense, and very inspiring, you know. And we try to do the same as come you know, we are connected to this philosophy, okay? How do we bring a risk adjusted return on product to the investment community. So we target, you know, institutional clients, you know your pension funds, your investment platforms, big family offices, but, and as well, we know, and we thought as well, you know, we launch, we have a hedge fund, retirement fund that allows for smaller tickets for wealthy people or people that want to diversify. So it’s really this idea, and again, the more we raise, the more we can invest. That’s that’s the idea, the more we can have a stronger analytical framework. It’s money, it’s resources.
Jeff Malec 1:17:58
And where you get, yeah, you got a fan in US of going to be cheering on the commodity pod shop right? To combat with all these big equity pod shops, or what would we call them, financing page? Yeah,
Stephane Bernhard 1:18:13
exactly. And I think, you know, it’s very clear that, you know, we can prove it. You it is totally uncorrelated to the other asset classes. It’s more uncorrelated what we do to your bonds and equities than CTAs. Such CTAs are exposed to same asset classes, right? So even though they provide great diversification in moments of stress at the end of the day for us, we have gnostic, bullish, bearish, and again, most of the times, we are both bullish and bearish. I mean some static, because we trade all those commodities for those different layers and dimensions, right?
Jeff Malec 1:18:58
Let’s finish it off with a little bit of fun here and ask with, what are we asking? Oh, yeah, if you could go back in time and trade one sort of major market event, what? What would it be? And why?
Stephane Bernhard 1:19:14
Yeah, I was born in 70, 1970 and I wished I was already adult when Nixon came out on TV saying that it’s the end of better mood too, and but that Unleashed right as a trader. Then you know the dollar, and then you know the the OPEC suspending, cutting the quotas, and then the disaster in Russian grain crops in 73 and the Russian stealing us grain, so between 70 and 73 but it kicked off with this moment where Nixon comes out on TV and tells the world, you know what the world you know is gone. And it’s a new world, and I would love it, because, you know what? I mean, I’m a trader, so me, I’m driven by the next trade, and I believe we are back in a moment like that. You know what? I
Jeff Malec 1:20:11
don’t know the history of that of, like, what was their electronic trading? No, so, like, how did that first trading day react? I don’t even know. Like, in the dollar and gold and all that stuff.
Stephane Bernhard 1:20:21
Yeah. So obviously gold popped up immediately, right? So you debate your currency immediately, the dollar got debased in one shot, and that started then that it needed, then all the but
Jeff Malec 1:20:34
it was, it like, 5% 10% I don’t know what that next is. We’ll look it
Stephane Bernhard 1:20:39
- Yeah, I think I have it still here, I can tell you that. But it’s it was a quite a significant event indeed. So they came out essentially adjusted by inflation. Okay, so if you take gold adjusted by inflation, it went from $295 in September, 70 up to 1200 in April, 74 so it kicked off. It kicked off a movement, right? Or initial movement was maybe price going up by 20% off a trend that lasted into the peak of of of the 80s, right? For me, it’s not that much the impact of one day.
Jeff Malec 1:21:27
It’s what it started to snowball. Right?
Stephane Bernhard 1:21:31
Exactly? What does it mean in terms of, then the world changing? And as a trader, I you know, if you read those great books and and stories around great traders, some of the most iconic traders were actually born as traders in a certain way. Yeah, 70s, like Ray Dalio is an example. And you know, that’s really when Warren Buffett in equity, but equities was the same approach at the end of the day. It’s if you understand those moments in history where history changes and you’re able to adapt, you know, you can really do well and and we get the sense that we are in some kind of similar moment where Bretton Woods has been killed by the US two years ago, essentially when the US sees the assets of the Russian Central Banks. That was a message will say, you know, the US Treasuries is not the safest asset anymore. And now you see the pinpoints the last few weeks, with all the evolution of the US policy, and people starting to freak out, say, hey, you know US Treasuries is not it’s a fact. It’s not anymore asset in the world. So which is,
Jeff Malec 1:22:41
yeah, add to me the big, huge bounce back when, like, a little bit the genie is out of the bottle, right? Of like, things have been said, things have been done that you can’t just undo. No,
Stephane Bernhard 1:22:51
you cannot undo, right? So you get that sense that we are living for historical moments. And as a trader, I would have loved, I’ve studied that quite a bit. I know my sequence on crude oil, corn and the whole story and, and, and Breton would end in, etc, but one thing is to study, look at, you know, study them and, but as a trader, I know that it’s when you feel it in your bones that really, you can really understand. And I wish I would have been alive. But then, as a trader,
Jeff Malec 1:23:23
what were you feeling in your bones last week when silver was down 15% and then rallied? Were you earning your risk management? Yeah, I
Stephane Bernhard 1:23:33
have no stress when I’m trading. People that know me, my team knows I’m I literally I’m not, don’t stress when I trade, and it’s maybe because we are so structured in how we do things. But the last time I could not, it’s not that I could not sleep, but where my brain was so excited that was waking up at two o’clock in morning, checking out things and sleeping again, and, you know, just to feel the huge of being understanding, connected to it, that the last time it happened was October, 2008
Jeff Malec 1:24:06
Yeah, we were saying in the office, this was ranking up there with the flash crash. Oh, wait, yeah,
Stephane Bernhard 1:24:15
absolutely. I think it was for me, at least last week was more intense and COVID Clearly, and and then, you know, you have multi strat, you have multiple pods as the CEO CIO, and you just want to make sure everything, everybody is fine, and etc. And you know, I’m, I’m super proud of my team, because we actually made money last week. We had low volatility and made money, which is, for me, what I think is most important is when you have stress this concept of mass in Taleb, anti fragility. Yeah, we were driven by that. We want to be not being resistant. We want to be able to strive when things get the. Stressed out so. So, for example, as a firm, that was the genetics I got into Dreyfus. We do the same in ETG, and we do same cam. None of our pods is has a gamma short profile. It’s not, it’s not a load. I will not have been asking about the volatility of on Durant. You know, I, I believe the most important thing is that you need to understand where your edge is. And you know, we want to play in a structurally inefficient space, right? And the structural inefficient space for us is the connection between the physical and the financial side of commodities. You know, we want to make sure that what we do is, you know, uncorrelated, you know, for structural reasons with the rest of the environment. So we try to approach it with a way that is, you know, we don’t do the type of strategies that you would the banks would do, or most hedge funds would do. You know, you need to make sure you’re, you’re uncorrelated. You know, you clearly, my focus of attention is making sure people have an expertise. There’s just no shortcuts. You cannot think. You can approach the commodity space by just doing a plain vanilla rule that works on average, it’s you have to have domain expertise, and then, yeah, you know understanding the risk, and you know how to articulate the risk around that portfolio, and and, yeah, so that’s really what. And so last week for me was really, if you put that all together,
Jeff Malec 1:26:39
it was, I can’t sleep.
Stephane Bernhard 1:26:45
My co CEO of cam, Jonathan Turko, of the founder of cam. It’s funny because, you know, he’s he was telling some investors that it wasn’t a week or business as usual, you know, it was quite for us. And it’s true, it was quite PNL wise, yeah, me, of
Jeff Malec 1:27:06
your brain that happens to me in Las Vegas, not because of the gambling, but like, the math of it all. I like, sit there, and then I get back and I’m asleep, and my brain’s like, seeing all the cards and the numbers and doing math. And
Stephane Bernhard 1:27:18
you, yeah, and you, you get that excitement and, and for me. So last week was really that, and, and, you know, I’ve think from for us, and for me, in particular, trading commodities, physical commodities and derivatives, for such a long time. You It’s a passion around human behavior, really. And so last week was one of this moment, where, as well, you know, by having the ability to understand, you know, behavioral biases and how to mitigate the impact on our trading, I find that fascinating. I think that’s when you feel you alive, you know, and in the zone, and you connect those thoughts,
Jeff Malec 1:28:03
and it’s more fun. We’re beating the robots. We’re beating the AI when we get to feel something right,
Stephane Bernhard 1:28:09
yeah, but that’s, that’s a topic for another discussion, Jeff, because AI that has a lot of many things to say on that.
Jeff Malec 1:28:18
We’ll do that on our next one. All right, Stefan, thanks so much for coming on. We talked through the darkness. It got dark in London from when we stopped, from when we started, to when it’s done. So we’ll talk to you soon.
Stephane Bernhard 1:28:31
Thank you very much. Thanks for the invite. Yes. Thank you.
This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.
