In this episode, Jeff Malec sits down with Tom Holliday, founder and CIO of HIP Investments, for an in-depth conversation on reimagining multi-strategy investing in the commodity space. Tom shares insights from his distinguished career, from his early days at Refco to working with George Soros and launching both Titan Advisors and Hip Investments. Together, they explore the evolution from traditional fund-of-funds to collaborative, actively managed multi-strat funds, highlighting the advantages of diversification, portfolio construction, and innovative incentive structures for specialist traders. The discussion covers risk management tactics, the unique challenges and opportunities of commodity markets, and why institutional investors may be under-allocated to this asset class. Whether you’re an investment professional or passionate about alternative strategies, this episode offers valuable perspectives on building resilient, high-performing portfolios in today’s changing markets. SEND IT!
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Check out the complete Transcript from this week’s podcast below:
Building a Commodity Trader Multi-Strat with Tom Holliday of HIP investment
Tom Holliday 00:08
More of a qualitative thing, something that’s more, you know, a model driven strategy, than a fundamental strategy. It’s just trying to figure out, you know, it’s just been in my career, the simpler the strategy, the simpler the model, typically, the better
Jeff Malec 00:24
Welcome to the derivative by our Sam alternative send it Hi.
Tom Holliday 00:28
My name is Tom holiday, founder and CIO of hip investments. I’m here to talk about all things commodities on the derivative. You you.
Jeff Malec 00:51
How are you? Tom, thanks for coming on.
Tom Holliday 00:55
Thanks for having me. Great to be here. You look like you’re in
Jeff Malec 01:00
Tennessee or Illinois, where usually we’d say Norway or Alaska, but
Jeff Malec 01:07
somewhere right now, but right was that last week, or two weeks ago, the Northern Lights stretched all the way down into the the middle states there, which was exciting. We had. My daughter went out to Lake Michigan here and was sending all these pictures, and I was up in a building, and I’m like, looking out. I’m like, I don’t, what are you talking about? She’s like, Oh, it only works if you use this filter on your phone. You can’t actually see it with your eye. And I’m like, well, then did you actually see it? So we had this whole debate of, like, whether the
Tom Holliday 01:36
tree falls in the forest and no one hears it, did it actually fall? Right?
Jeff Malec 01:41
Exactly. So wanted to come, you have you come on, we were chatting at a conference and share a lot of similar ideas on commodities and multi strats and all that good stuff. But let’s start it out with a little background. You know, some of the old stalwarts in the commodity space as well.
Tom Holliday 02:02
Yeah, I do. So I started my career in in commodities in Tennessee, and
Tom Holliday 02:09
was at Refco and Refco office in Memphis, who was associated with sparks, commodities, with the the famous and notable Willard sparks, who had a very storied career in the commodity markets and did some really cool things with cook industries in Memphis, before he started sparks companies and then became of became an order of Refco
Jeff Malec 02:36
Willard sparks. And what was he like? I don’t think I ever got the pleasure to meet him larger than life, like I’ve known many people tell me about him, but what give us the background? Quick,
Tom Holliday 02:48
yeah, I think he was, he was larger than life, but he was also genuine. You know, he’s and, you know, he’s Oklahoma cowboy that got his PhD in agricultural economics and did a big thing, which was the first grain sale to Russia in the early 70s. And, you know, was just, you know, really, really, really smart, loved research, love the ag markets. And, like I said, you know, very approachable. So it was, it was a unique place to work,
Jeff Malec 03:24
yeah, and then Revco is another blast for the past. So, rev right, were you out of there before MF Global took over and all that? Yeah, yeah, I
Tom Holliday 03:35
was. I left in 9096, but listen, Refco was an amazing place as well. It was a very entrepreneurial firm. Allowed people to do some really creative things. They became the world’s largest Futures Commission merchant, like, I guess there’s nobody can actually claim that, but it was, yeah, they were the world’s largest FCM, and unfortunately, like a lot of firms, got into trouble in a 708 around re apothecating securities and some other things that unfortunately took them down. But what a terrific firm, what a cast of characters that came out of that place over the years that I still bump into a lot of them today. It’s, it’s kind of
Jeff Malec 04:16
crazy the I think, if you go on NFA, my I think I was actually registered for like, two months as a Revco broker before started my own firm
Tom Holliday 04:27
attain but the secret handshake and everything
Jeff Malec 04:30
I don’t, I don’t know the secret handshake, and then tell it. So you grew up in Memphis. I grew up in Memphis, and then got so I don’t think most people know, right. Like Memphis is a true commodity hub, mostly cotton. But, like, tell us the commodity connection with, with Memphis?
Tom Holliday 04:48
Well, yeah, I think it’s, it’s, it’s largely the Mississippi River in the cotton market. The to really be the two you know, Mississippi River being the main transportation system to take. Grains all the way down to the Gulf Coast for export. And then obviously the Cotton Exchange of Memphis, which is, which is, was, you know, the world’s largest cash cotton hub, and all the characters that kind of came out of that with Donovan Enterprises for years and and now Joe Nicosia, and what he’s done for the cotton markets.
Jeff Malec 05:25
Louis Dreyfus,
Tom Holliday 05:27
yeah, and then all the other really colorful personalities in the cotton market that came through there. And then, you know, the famous one in the hedge fund side is Paul Jones, who’s from Memphis, who started screw trading cotton. Billy dunovant was his. Is his uncle. You know he?
Jeff Malec 05:46
You know him. When you just call him Paul Jones, right? Paul Tudor Jones.
Tom Holliday 05:50
PtJ, I call him tutor. You know everybody else calls him Paul. I call him tutor. I don’t think
Jeff Malec 05:55
anyone’s called him just Paul Jones in 20 years, but it’s always to me, right? Like, New York had a Cotton Exchange. London had cotton right? So it was like, Why did, why did Memphis become such a thing? I guess just the river. But to me, it doesn’t seem like it made sense to get all this cotton from, right? Was it coming from the east, going west to the river?
Tom Holliday 06:16
Nah. So this is a cash Cotton Exchange where, in New York was a futures market. So in this is obviously the Mississippi Delta, which is where all a lot of the cotton was produced at the time right, which was up and down the Mississippi River from Louisiana up to the Boot Hill of Arkansas. You know, both sides of the Mississippi rivers where, you know most of the cotton was, was, was produced for years. And then California began, you know, producing a ton of cotton. And then, obviously, West Texas, where they just have, you know, just, you know, unlimited amounts of land that they can plant a bunch of scrubby cotton on, no, no water, but lot of disrespect to the Texas cotton guys. But no, but it’s, you know, it could really make or break the crop. Just given, if they get water, how much cotton it can make out in West Texas. But going back, you know, because all this cotton was, was, was produced in the Mississippi Delta, you know, pre Civil War, post it kind of became the cash cotton hub of the world.
Jeff Malec 07:24
And did you know, as like a kid, like I’m going to get in the in the futures business, in the commodity business,
Tom Holliday 07:30
had no earthly idea. So as a boy scout, I remember going to the Cotton Exchange as a little kid, and that’s where they still wrote in chalk on the walls, chalk walls, the price of cotton and different contract months. And it was right there on, on in Downtown Memphis, near the Peabody Hotel, which is a very famous hotel. But the the movie, the firm they were, went by the Cotton Exchange building. You saw big cotton Dale, kind
Jeff Malec 07:57
of one of the windows, he jumps out, yeah, into the jumps, into
Tom Holliday 08:01
a big bale of cotton. So that was the Cotton Exchange was still kind of doing its thing back then. But no, I mean, my dad was a doctor, and I was thinking about becoming a doctor, and I’d heard about Dr sparks,
Jeff Malec 08:19
different kind of doctor. Yeah,
Tom Holliday 08:21
yeah. PhD, Dr sparks about, you know, from his reputation and some family friends that overlapped, and some people I knew that worked at rough CO and when I decided I didn’t want to do the medicine route, I was like, well, this, this list looks pretty interesting. So I started learning a little bit more and talking to people, and decided to make the jump.
Jeff Malec 08:48
And what did, what did that jump look like? So Revco, and then how long before you ended up at at the next spot, which was a pretty cool spot, yeah.
Tom Holliday 08:56
So, you know, Revco was for six years. You know, fascinating times. I think futures trading, honestly, is probably one of the best training grounds for for markets. And why do I say that? I say that because, you know, futures, the contracts themselves, have embedded leverage in them, and therefore, from a risk management standpoint, you know, you better have kind of your your wits about you, as you think about, you know, the notional exposures you have, how you’re trying to position a portfolio relative to a view, whether it’s directional, whether, through spreads with relative value. You know, futures trading has a strong fundamental component to it, supply, demand, supply, demand really drives everything, and understanding, you know, how supply demand affects prices of things, and then substitution that comes along the way by, you know, this one’s too expensive on substitute for this, or regional and geographic arbitrages that happen because of that. And then
Jeff Malec 09:57
tough to substitute cotton. A
Tom Holliday 10:01
polyester. So then, so then, you know, and then, as you continue to think about commodities, you you have this, this, this technical component too, which is, you know, they’re traded a lot by CTAs. You have positioning, and you have flows, and you have all these other things. So fundamentals will get you from A to B over, over the time frame. But the path can be really, really bumpy, which which technicals and positioning of flow can kind of help you with and as you know, with futures trading, unlike stocks, stocks, you just buy and hold it forever, because there’s no there’s no expiration of a contract. In future trading, you have a calendar strip where you have expiration of a contract. You have backwardation and contango, which goes into a role yield or or not, and little nuances like this, which make it fascinating from a markets perspective, and a great training ground, just in terms of risk and fundamentals and positioning, which that think lead into every other kind of market that’s out there. And understanding those basic principles and how they apply to really, a lot of different markets. So ground for that.
Jeff Malec 11:09
And then, if you can trade natural gas futures without getting run over, taken out on a stretcher, you you’re good. You’ve learned risk, you’ve learned markets.
Tom Holliday 11:18
If you understand the Widowmaker, which is March, April. You’ve kind of got everything else under control, but, yeah, it’s but, you know, all these markets have different nuances in terms of what are their drivers? You know, in natural gas, it’s the injection and withdrawal, season and weather. You know, how much does it impact? Impact balances along the way, and it can be very acute in very short periods of time. And therefore you gotta, you gotta really be, be aware of how it moves those things, you know. And in the grain markets, it’s really a lot by the planting season and growing season, and what happens to, you know, those commodities during the key pollination periods with depending on whatever crop it is, and and and then the now, with Brazil coming on strong and planning everything, it seems like these days in the same crop year, then you got to kind of figure out how balances are affected by by those if you go to something like power and electricity, you know, it’s, it’s a whole different animal in terms of, you know, you really can’t store you can’t store electricity, so you use it or lose it. So, yeah, of that as well, relative to these other commodities. So it’s fascinating about all these. They have different return drivers. They have different things that affect them, which make them very non correlated, which is, which is pretty interesting.
Jeff Malec 12:43
And then, were you, did you trade yourself? Ever? Were you ever trading your own? P, L, well, everybody does a little bit, yeah, a little bit. But, like, I didn’t trade for anybody else. No, just myself. Tell
Jeff Malec 13:01
us about Titan, yeah. So I left.
Tom Holliday 13:06
So I actually got an opportunity to go to work for George Soros at Soros Fund Management in in April of 2000 so this was right after the tech wreck, which happened in March of 2000 Soros was a little bit in the was, I wouldn’t say, disarray. Stan had decided he wants to leave the firm, and he was the one running the portfolio. There were a lot of traders inside the firm at that time that that actually left as well. So we had four internal traders at Soros. At that time, we had a lot of excess capital because all these other traders left. So
Jeff Malec 13:43
what year is this? This is 2000 2000 so then we had to, so post the Bank of England.
Tom Holliday 13:54
Bank England was early 90s. Yeah, that was ancient history. But, but it was, it was, it was, it was really fascinating. I got very, very fortunate where I got to work with George Soros and an investment committee to help allocate some allocate capital to some external funds.
Jeff Malec 14:16
It was, let me interrupt you for a second. How does that work? How did you just did you was that luck that you just happened to be in the right place the right time? Was he actively searching someone with the skills you had or right but for people listening like, how can I get such a job somewhere?
Tom Holliday 14:32
I wish I could say it was not all because of me. Yeah,
Jeff Malec 14:35
it was all my zoom box.
Tom Holliday 14:36
And it’s, as you know, there’s, there’s, there’s a lot of good fortune in a lot of things we do in life. And I’m a big believer in the harder you work, the luckier get you put yourself in position, hopefully, to kind of get noticed. And there was actually a project I did with this other woman I was working with the time where they were looking at a potentially hiring someone to. Internal that was, that was based in San Francisco and and we, we did a project forum, and off the back of that project, I was, I was offered a position to come in internal
Jeff Malec 15:16
makes you wonder if it was a real project, or it was like they’re just putting it out there to see who could write, like the solve the chalkboard problem in Good Will Hunting,
Tom Holliday 15:27
yeah, well, I don’t know what. You know, it’s kind of weird, like I said, it’s good fortune. You don’t really know why these things happen. And I think these, these things that come up in life, you can look back and say, that was an important point, or this was important point, that was an important point as well. I’ve been coming to New York quite a bit before that, and knew a lot of people in the industry and and now getting up there to be with, you know, one of the top three funds in the industry, and working with one of the most notable managers in the hedge fund industry was was really interesting. So I had a, I had a really interesting, really interesting, you know, brief time there was Jim
Jeff Malec 16:08
Roger there, there at the same time. Huh? Was Jim Rogers there at the same time? Nah.
Tom Holliday 16:13
He left way earlier. He was, he was gone in the 80s. But no, it was, it was a whole collection of different portfolio managers. Scott Besson had just left as well, but he actually came back and was working with the Investment Committee as we were looking to allocate capital as well. So it was a it was a fascinating time, and some of the you know people that we met, or some of the, you know, stalwarts in the hedge fund industry today that that we put money with. So it was, it’s it was a once again, it was a fascinating time. But, you know, I knew a guy from from Nashville who was living in New York, and we began talking about starting a hedge fund of funds. And so I left Soros to help get that golden going. It was called tight. It’s called Titan advisors. They’re still around today. I was co founder and CIO of that for about 19 years. God. We launched it in 2021 and I left in 2019
Jeff Malec 17:22
I bet most people listen to this would take, if you said, Are there any fund of funds that lasted over 10 years? Most would probably say, No, right? So they’re still around
Tom Holliday 17:32
very competitive space. And, oh, wait, we, we built something really interesting and really unique. You know, we really, there are a few fun of funds out there, and a lot of them had money with all the tiger cubs. We didn’t really have a lot of money with the tiger cubs, not, not, not for any particular reason. They were, they were, they were phenomenal. As everyone knows. We liked a little bit more of an active trading approach. The Tiger guys were a little bit more fundamentals. We liked the combination of fundamentals and trading. So we had a lot of money with Steve Cohen in some of the proteges that spun out of SAC Capital. Then point 72 today. We did a lot of more things in the commodity space, in our macro bucket. So we were really early to some of the natural gas traders in the in the in the early part of the 2000 that had done really well. We’d had some money with some of the other big nodal commodity traders, like Michael farmer red kite capital, which is a huge copper trader that did exceptionally well.
Jeff Malec 18:40
Man Doran, do you have any money with him? We didn’t have money with
Tom Holliday 18:43
under on. We met with him when he was a Blue Gold we met from Subsequently, we didn’t, we didn’t put money there. He was obviously, you know, had an unbelievable reputation as just a, you know, a a fearless trader in the oil markets. We got that exposure to some other people. We had something with Clive capital, which is a guy named Christian Leavitt who spent out of more capital, which was phenomenal. He was based in London, and anyway, I could go down memory lane with all the
Jeff Malec 19:13
different guys, because you got a hell of a Rolodex. Is the end story, right?
Tom Holliday 19:17
Yeah, it was, well, it was, what’s interesting about the fund to fund seat, which I don’t know if people fully appreciate, and I probably didn’t as well in terms of looking back, but you know, in my career, we hustled at Titan, so we were, we were really involved in emerging managers and trying to find people that were New, that were just embarking on their career and starting up the funds who had great reputations, coming out of another notable hedge fund or a bank or some prop desk. So we met with a lot of people. So I don’t know, I probably met with three or 4000 hedge funds in my career, globally, from, you know, Asia to Europe. You know. We would, you know, go, go on a trip, and we’d have, you know, five back to back meetings with managers in that area for however long we were there, you know, three, four or five days, and we were always, you know, on the road trying to meet different fund managers. And you do that for 20 years. Just the breath the breadth of the things that you see are pretty interesting. And we looked at things across long term equity and credit and commodities and macro and event driven and multi strategy. So you get to see the process that all these people go through, and then you get to see the how they manage risk and all these different ways and how they execute and and all that gives you just a huge lens in terms of of of seeing all things. And then it presents like a muscle memory. It’s like, it’s no different, probably, than a private equity venture capital guy that sees a lot of things. And there’s a muscle memory, James of if I hear that and I see that, you know, it triggers a thought that I really want to pull on that thread and learn a lot more. Same thing in this fund management world where, you know, you meet with people and you hear certain things, and you start to connect dots, and there’s a muscle memory you’re like, This feels pretty interesting. I want to learn a lot more about
Jeff Malec 21:21
this person did you ever to me? I hear 5000 meetings, and I’d be like, I think I would have lost my politeness around 1200 or so. Did you sit me in
Tom Holliday 21:32
3000 I started losing my politeness, probably a little bit. And there’s no disrespect, I
Jeff Malec 21:37
mean, right? Just like, Hey, you can skip those first 10 slides. We’ve got that. Let’s just get to the meat of the thing here.
Tom Holliday 21:43
Yeah, and once again, it’s the business has changed so much in the last 30 years. And it is, once again, I mean, you know, all these, all these traders and these, these PMS that we’ve talked to, went to great schools, you know, had, you know, great careers at different places, and unfortunately, those things have come kind of table stakes, you know, I’m saying you have to have that. Okay, you’ve got what everybody else has now, it’s how you doing something differently than the person you went to school with, because they were trained the same way you are in this competitive space. And alpha is is actually a rare term. Not everybody can have it, and there’s only so much of it. So how are you going to get it and maintain it and keep it when everybody went to business school with that’s in the same industry is trying to do the exact same thing you are, and then it’s like, so then it’s the more nuanced things that that are really important in this business about, you know what drives a person? Number one, it’s like, you know what do you want to do? And you know, you know What’s your ultimate goal with the fund and in return targets. And you know who you’re trying to please with your returns. And you know, how much of your money do you have? And the other little nuance things is, like managing a lot of people? Do you like managing people? Do you not like managing people? How big do you want to get the team? Do you think you’re good at managing I mean, it’s all these little things kind of come into the soft part of it, and then you get to the hard part of it, which is they’re usually excellent at, which is tearing up our balance sheets and income statements and finding, you know, opportunities to be on the longtrade equity side or on the commodity side. You know, interesting networks with people in the field that help them to understand locally what’s going on with producers and when they want to let go of their crop or or interesting information in terms of, you know, flows of natural gas or demand or production, and what little things are they doing, just to try to get an incremental edge that then they can turn into a trade they can construct, and the duration of the trade to extract that value. So it’s all about, you know, starting with qualitatively, you know, getting comfortable with, with the person and what makes them tick, and then going into the process side of, tell me these big things, process, what do you do? The in what in that process is, maybe the incremental thing that’s that’s a little bit different. Number two is portfolio construction. How do you take that idea and then how do you express it the best way? So, is it flat price? Is it options? Is it spreads? Is it RV? You know, tell me how you think about that and risk as it relates to that. And then you go to risk management. It’s like, okay, end of the day, what is your risk management discipline, right? For me, it’s live to fight another day. Now that’s pretty fuzzy, but it’s the most important thing out there. What are you going to do to live to fight another day? And, you know, let’s, let’s, let’s hopefully have a P and L history. We can go through things. And I like to see poor periods, because they’re, they’re, they’re, they’re teaching moments, right? What happened? Happen, you know, what you get wrong? Had to turn it around to get to get it right. You know, was there one certain thing that kind of led to the to the poor performance? Was it an event? You know, I like to find people that are good sellers, and not just good buyers. Everybody can buy. Good selling is hard to find, right? Really, really hard to find. So it’s, it’s a maze of things.
Jeff Malec 25:26
I was gonna share it quickly, an option seller, guy we work with. He says it’s like being a pilot. He’s like no one. If you flew 9000 successful flights, 9999 and you crashed and killed everyone on the 10,000th flight, right? He’s like no one. Remember, remembers the other nine. Like, you have to get the plane on the ground safely every time. Like, it doesn’t matter. You can’t crash your last time out. Um, which is somewhat of like, yeah, just live to fight another day is, uh, get the plane on the ground safely,
Tom Holliday 25:56
yeah. And it’s for me. Then it’s, it’s looking at three key, risk factors. Because I think every strategy has these three and then probably two others. Those three are how much leverage is being used to drive returns. Is there any type of illiquidity, and what is the concentration? The other two things that could be added are complexity, and correlation complexity, like, if it’s a model, different strategy, you know, how complex is it? Or if it’s something that’s depending on a stability of a correlation holding up, you know, correlation is, you know, it’s not a number, it’s a pretty bumpy series over time. So it looks like behind you, right? Looks like the graph on your background, yeah, never fuzzy like that. But every strategy has got one or three of those. And I don’t like leverage and illiquidity, because that’s usually a game over event at some point, that’s when you don’t, don’t live to fight another
Jeff Malec 26:53
day. You don’t like them, get me, huh? You don’t like them together. No, I do not. Yeah.
Tom Holliday 26:58
So then it’s like, all right, with with futures trading, you get leverage through the instrument, not through financial leverage, term going bar and Capital in Excess of your capital. You just get it from this thing has got a notional exposure to it. So then it’s like, Okay, how much margin are you committing relative to your capital, which, which helps you understand the leverage component of it. And then, you know, illiquidity, you know, for futures, would be your amount of capital. You’re running relatively open interest in volume. We don’t really have that, that problem right there, but you don’t want to get to where you’re so big in the market, where now you are the liquidity, and you’ve got a problem. So that’s how a lot of futures trading.
Jeff Malec 27:40
What about the complexity? Do you kind of view it as just, if it feels too complex to me, that’s, I’m just putting up a little yellow flag, or do you have actual metrics on that?
Tom Holliday 27:48
Yeah, no, it’s more of a qualitative thing. It’s, it’s, it’s thinking about, yeah, how many inputs are used to create it? And that’s be, that would be more kind of on the quantitative side of things. So something that’s more, you know, a model driven strategy, than a fundamental strategy. It’s like, you know, how many things go in to try to create your model? Because the more inputs you have, then the more you know, wiggle room you have for mistakes in one of those and, and it’s just trying to figure out, you know, it’s just been in my career, the simpler the strategy, and simple the model typically the better.
Jeff Malec 28:31
So we need to get to hip, so we’re getting there, but before we get there. So the fund of funds model, like during your 19 years, it kind of had a boom and then a, can we say a bust, right? Like a lot of people, soured on it very quickly. Or maybe that was just the news. What’s your thought on why that model failed?
Tom Holliday 28:49
Or it’s twofold. I think number one, the multi strat model really became, you know, I guess the replacement for a fund of funds that you have better capital allocation because they have, they touch capital immediately. They have better risk control because they can, once again, manage it, you know, on an immediate basis. They’ve got better ability to pull levers in terms of concentration and leverage and all the other things in order to, you know, get get great return so that that model, really, I think, replaced the fund to funds model, all
Jeff Malec 29:27
while it’s being equal, huh? Some investors raise their hands. They’re like, wait this fun to fun thing is terribly capital inefficient, right? Essentially, it can be,
Tom Holliday 29:36
but, you know, not all you know, just like, I don’t think you put everything in one bucket, you know, there’s still some great ones out there. You know, one of my ex partners at Titan has got a great firm that he’s kind of evolved. It’s called old farm partners. It’s a, it’s a hybrid Fund of Funds model, but he’s done a great job because he’s evolved. So I think it’s, you know, you just have to figure out how you’re going to create value. Value and whatever model you choose. So I think the multi strats competed. And then secondarily, you know, after 2008 there were a lot of people who were in front of funds who then got locked up. And some people wanted the capital back. Some people didn’t want their capital back. And it just created this, this bifurcation and interest. And then the consultants, I think, who controlled the capital for a lot of these investors, started to take some of that control back themselves, and felt like, you know, they could allocate the capital, perhaps better than than a fund of funds model or or make it more direct. And I also think what’s happened is the managed account model has come on in force the last four or five years, where now people, you know, can kind of create their own multi strat by doing a bunch of managed accounts. And I think that’s also put a lot of pressure on that model. So it’s, I think it’s a few things that have kind of done it, but it’s not dead. It’s still out there, but you just have to figure out how to do it a little bit. A little bit better.
Jeff Malec 31:03
But nowhere in there. Did you say that? Like, if you put it into chat, GPT, it’d probably say, right? The fund of funds model died because of an extra layer of fees too expensive. It seems like that was in all the headlines, but
Tom Holliday 31:17
they may say that. But you know, the multi strats aren’t cheap either. That was
Jeff Malec 31:21
good. That’s what’s gonna be my next thing. They’re like, just shifted like, well, now you don’t pay an extra layer fees, but hey, by the way, you pay their signing bonuses and this and that and everything inside of their performance. So Right? I think there was an article find a link put in the show notes of like, the multi strats are way more expensive. It was like, 50% of performance or something.
Tom Holliday 31:41
They are much more expensive, but once again, they’ve delivered better returns, all else being equal. By the way, a general comment, but, but, you know, it’s, uh, it’s, it is an interesting conversation, though, when it goes to the fee conversation, and the replacement is a, is a multi strat where, to your point, they’re probably a lot more expensive than Yeah,
Jeff Malec 32:05
but maybe that’s because of the capital efficiency too, just it looks more expensive on your cash basis.
Jeff Malec 32:16
All right, let’s get into hip. Is it hip or hip? We call it hip, you
Tom Holliday 32:20
know what? What’s at stake? Whatever you like, but you know, I’m kind of hip, so, yeah, you can call it hip, yeah. So when I when I left, when I left, Titan, you know, I was, I was trying to think about my next endeavor. I wasn’t ready to quit. I had too many things in my head. I wanted to get out. Covid hit right there after so, you know, didn’t really, you know, couldn’t do a lot for two years because everybody was, was kind of shut down. But I was kept thinking about this commodity space and and, you know, back to your roots, yeah, my kind of been in the dumps, you know, as you know, you know, China consumed everything for 2009 to 2010 in what happens then is you get a lot of oversupply because you’re trying to meet the the demand from from China, consuming everything. And then things slow, and then you have us oversupply. You got to work out off over a long period of time. So from 2010 to basically about 2020 you know, commodity markets really weren’t that exciting. They, they, you know, went down a lot. We were still kind of working through the overhang of the financial crisis, and then covid hits, and the, you know, the economy shuts down, crude goes negative. You know, things you never thought would happen, ever and but you know, a lot of these commodity markets take a very long time to bring on new supply. So when you do have an uptick in demand, now you have the triggers to kind of set for the for the new cycle, which we’ll talk about in just one second. But I just kept thinking about the commodity side. And more importantly, you know, commodity managers are different. You know, they they like to be in a room with other commodity managers. The multi strats have been really the spot for a lot of these commodity traders to go. There been a lot of got out of the market in 2010 to 2020 but the ones that were left going to the multi strats. But you know, there’s been some challenges in terms of some of the commodity traders being inside multi strats, and just in terms of the volatility the commodity markets can sometimes Express relative to the tight risk management a lot of these multi strategy funds have have. Once again, they’re very different across the board, but in general, that’s a that’s a guess, a good generalized comment. So we thought, listen, won’t we, won’t we start a firm for commodity traders and create a multi strategy, commodity only fund? And I think it actually makes the most sense for commodities relative to. Every other asset class for these reasons, number one, in a single commodity market, you have a lack of breath in terms of how you express a trade, like, for instance, if you want to, usually, if you’re in oil or gas, you’re bullish or you’re bearish gas, right? Or oil. And so it’s kind of really one trade, and you can do it through a curve or whatever, but you’re really thinking this part is going to go up relative this part. It’s a trade. It’s expressed through a spread. But it’s really a view on one part, where in a long term equity portfolio, for instance, you could have 50 names long, 50 names short, and they’re all kind of doing different things, and get a lot of breadth in that portfolio. You really don’t have that in a single strategy commodity market. So breadth is can be a problem for commodities. Number two, scale. You know, a lot of these markets, you just can’t put a lot of money in softs or power or LPG or some of these more nuanced markets. If you’re a big allocator, and you love to get some money in some of these markets, but your minimum, you know, let’s say your minimum investment is $100 million based on the size of your pension, you have a real problem, because you can’t be the the the majority of their assets, right? You probably have some restrictions off of that. Well, if I can put a collection of 10 markets in our in our portfolio, now I have breadth, and I have scale, where now if, let’s say the average capacity of of somebody’s $150 million we have 10 of them. Now we have $1.5 billion of capacity or scale in a portfolio where, now someone could make an allocation and feel comfortable. And then last is volatility. You know, because the lack of breath if you get if you get the trade wrong, it can be kind of spicy. At times, people say they like volatility until they don’t, because it hits them in the face. Yeah, these commodity markets that we trade are also not correlated with each other, we get about a 50% reduction in volatility in our portfolio just because of the breadth in these different markets, which is pretty nice. So we can give an investor in one allocation, one allocation, one line item in their portfolio with a lot of different markets that that hopefully will give them a great risk adjusted return profile and give them access to a lot of different things. So that was the goal. Let’s start a commodity multi strat, because it makes the most sense in commodities for these reasons, and it actually helps investors probably the most for those reasons as well. You
Jeff Malec 37:39
and you envision it as a commodity replacement, like, instead of your passive 5% or whatever you’re doing with XYZ commodity fund, you should come in. This will give you some of that exposure, not directional, but some of that exposure.
Tom Holliday 37:54
Yeah, this is our belief. Is commodities are actively traded strategies number one, and the reason why they’re actively traded is because of the calendar strip right, because of the shape of the curves that give you either positive, Royal yellow times or negative, it gives you you have replacement or competition between commodities at certain times. So supply demand always has to balance. So they are not, in our view, buy and hold strategies. They are actively managed strategies, okay? And we should be able to, based on the specialists we have. If there’s a bull cycle, our traders should be able to see there’s a plot of buying and balance, and we’re going to be long now because of that. And you know, conversely, they should be able to get short if all sudden, we’ve reached a point where we’ve we’ve come to a price point where there is substitution coming in, or there are other alternatives, or people just step away because it’s too expensive, and now things have got to reset. We should be able to capture those as well. But if you look at our portfolios right now, they’re predominantly they’re predominantly relative value. Most of our guys prefer trading and spread because it’s a more fundamental trade than just taking a directional bet, which is higher risk. And you got to kind of be right. We’re spread. You can kind of be a little bit more fundamental. So our since our, since our, the since the hip commodity desk launched, it’s been about plus or minus 20% net exposure. But we’re not targeting that what comes out of a wash,
Jeff Malec 39:35
but different than trend following, right, like so the first part of what you said, hey, they can catch this when it’s going up. They can go short, right? So most people are going to think, oh, manage futures commodity exposure through trend following. I get that also. So how does it differ you’re saying right now, relative value?
Tom Holliday 39:54
Well, trend following, you know, kind of takes, you know, either a bull trend or a bear trend. But it’s usually, you know, it’s, they’re typically called long term trend followers. Now, the way, this is all very simplistic. Obviously, there’s great nuances to that as well, where they’ve employed shorter term systems on top of longer term systems to try to manage votes. But in Jim
Jeff Malec 40:14
had them all on the podcast. They know, they know all those nuances. The listeners go back and listen to episodes 100 and blah, blah, blah, sorry, go
Tom Holliday 40:22
for that right after this. So anyway, yeah, so you have trend following, which is, once again, just trying to capture the meat of the trade, right? That trend. Our guys can do that, but they also be more tactical, capture things shorter term that happen along the way. So like, for instance, our base metals and precious metals trader is a is a exchange arbitrage guy where he’s kind of got a a core two to three month view on on part of his portfolio where he thinks, you know, commodity on the trades on both exchanges is really mispriced and it’s going to have to converge. But then on a much shorter term basis, one day to five days, he trades short term volatility in those spreads along the way to kind of help manage that, that longer term trade that he has in his portfolio. Okay, some of our more fundamental traders on the fundamental side, the key is, is whether fundamentals are telling them, you know, this is going to go to this price or to this price, then it’s about timing and sizing of that right? Because sometimes they’re earlier those trades, because they’re fundamentals, they’re so, so convinced of that the path is is really needs to be focused on, and therefore, they kind of can get chopped around waiting for the turn in the marketplace. If that makes it makes sense. We’re trying
Jeff Malec 41:50
to think, you’ve told me before, the fundamental guys are usually early, right?
Tom Holliday 41:54
They typically are. This has been my experience, and they’re typically a little bit early, but they’re, they’re typically right. And the key thing is, is, you know, them kind of managing that being early, so then they can capture the trend that usually comes from, from, from behind that. So, so what? Where will be different? So an index is passive, long only. We are going to be active, long and short through a cycle, we will be, you know, a combination of short term to kind of medium term trades, where some of the index stuff is longer term trades, if it makes sense, from a tax perspective, you know, we’re 6040 they’re 6040 I mean, it’s, yeah, that’s
Jeff Malec 42:38
not even in terms of your right. You have the multi strat ethos of, kind of, hey, this is all going to come together and have very low volatility and draw downs right, like, if it’s
Tom Holliday 42:49
that the whole, the whole, the whole goal here is we have lots of ways to win a lot of different markets, and we have a lot of different ways to manage volatility because of all those different markets. Because, once again, what drives sauce doesn’t drive natural gas, what drive base metals does not, does not drive PJM, power. It’s there. They’ve got different drivers of returns now they can have that their correlations can cluster at any point in time for whatever reason. Tariff would be a fundamental clustering and be a spurious clustering, it’s from time to time. So our job is, let’s, let’s, let’s, let’s allocate risk, you know, equally across these these traders let their opportunity sets dictate whether they want to be more risk on or more risk off. Because, as you probably are aware, you know, there’s probably two to four great opportunities in the commodity market in a year, and outside of that as much noise. So probably try sitting on your hands as much as possible, waiting for those great setups. If you have your own standalone commodity fund, it’s hard to do that, because people are expecting you put up returns within our portfolio. We actually can encourage someone to say, Hey, don’t force something that’s not there. These other guys are seeing things to do, you know, wait, wait, wait for your fat pitch. And then when you see it, you know, take it. And then I’m sure at that point in time, maybe the other part of the portfolio is reducing the risk, because they’ve realized something in their portfolio. So that’s the whole goal. Is lots of ways to participate in different markets, lot the way, lots of ways to manage risk, hopefully, lots of ways to generate returns in different markets throughout different parts of the year, and gets it in a volatility profile that we think is, is is consumable for institutions.
Jeff Malec 44:41
Talk a little bit about, right? If I’m quote air quotes, normal multi strat, I’m looking for 234, sharps or something to all put together. Do you and you’re saying you’ve told me offline, you can share it here, right? Some of the guys you get is because they don’t fit into that nice picture, which isn’t in our both of our opinions. A bad thing. They serve a different purpose. But talk how it kind of differs from you guys, versus the normal multi strat, and just in terms of the risk controls, the expectations, all that good stuff.
Tom Holliday 45:12
Yeah, we’ll go back to like, ground, ground, ground zero. So if you took a 10.8 Sharpe ratio traders. So below one and all those different strategies, 10 individual point eight sharps, 10 individual point eight sharps, yeah, nobody outstanding point eight. That’s okay, point eight, which is about what a commodity trader is, always being equal, it’s usually about point eight, but all those markets are minus point two five. 2.25 correlate each other. So basically zero, right? Minus point two five. You put them together in a portfolio, you get a 2.8 sharp ratio. Okay, so this is where the portfolio effect has a great influence in terms of your overall Sharpe ratio at the very end of the day, in terms of how you can take some things that are below one, but because their correlation and their different return drivers, you can get actually to an exceptional Sharpe ratio. So we would love to have a Sharpe ratio somewhere between one and a half and two and a half with a with a volatility of somewhere between eight to 12. Okay, yeah. So we would love to, on a consistent basis, you know, put up mid teens returns with the opportunity to put up, you know, above 20 when the stars align in a few different markets. That’s kind of what we would like to do. Now, from a risk standpoint, you know, how do we manage the risk of these traders. Everybody’s got a VAR limit in terms of this is the maximum var you can run, and it’s 3% 9595 one day. Var that we that we use as our measuring stick. Okay, so they can go up until that most, most traders typically consume 40 to 60% of that var that’s kind of their, their, their, their running, constant running speed is somewhere in that in that area, if it makes sense, then we have levels at which we will, we will review With with the trader, kind of what’s going on their portfolio. So we’re down five. We have a conversation with them, say, Hey, what’s going on? So you’re down five, you know, you know, by the way, this, it’s not a surprise, just because we have daily calls with everybody. We have a global call across the board, and we have real time risk systems in our office, where we see live P and L, everybody gets to see everybody else’s P and L, so we everybody sees everything. So it’s not a surprise. It’s not like we wake up one day and they’re down five. We were watching it very closely along the way. So down five, we’ll have a conversation, and then if it continues to go down 10, we expect their risk to be cut by about 50% at that point, and if they continue to go down to 15, we want to be out at that point. The whole purpose here is to live to fight another day you can come back from those levels. But what we don’t want is someone to get stubborn and hard headed and really try to fight something that maybe clearly they’re either early to which same thing is being wrong, or they’re just wrong, or they’re sized incorrectly, or there’s something else going on that we need to talk through and see, see what’s going on. And then, and then a plan of attack to get, get back. PNL, so
Jeff Malec 48:41
and so those point eight sharps don’t make it at other multi strats. It’s not big enough. Who knows?
Tom Holliday 48:49
You know, I think the thing that’s in my experience, what has influenced the commodity guys, it’s at multi strats where they get fired is, you know, big draw downs, you know, they’ve, they’ve, they were given a lot of money, and they were, you know, encouraged to take a lot of risk. And it didn’t work out. They had a big draw down, and they blew through their limits, and they were let go.
Jeff Malec 49:17
But sometimes they, like, were forced to take rent. Like, I’m not seeing anything in this right now. I’m like, well, we need you to have this. I’m
Tom Holliday 49:23
gonna use a different word. I’m gonna say encourage take risks. Yes, I’ll let you use force. But they were encouraged to keep risk at a high level. And listen from the multi stress perspective, when you got it, you know, makes sense, $25 billion and, you know, 100 150 traders. I mean, you can, you can absorb, you know, a lot of noise. And you just want people to have risk on because it kind of comes out in the wash for them at some point. But they do have a level at which, most of them say, you know enough. And sometimes it’s, you know, it’s a number. It can. Move around. It can move around to some extent. And sometimes it’s, it’s the path. So, you know, some, sometimes it’s, it’s the path of returns being too volatile, versus just the absolute number being, being being negative. So you know, if you see a lot of volatility in in the P and L path, sometimes that can influence their decision in terms of they want to stay with it or not. So there’s just so many different things. But you know, from my perspective,
Jeff Malec 50:33
and to me real quick, while you’re thinking that, like the trend following, sort of inside the portfolio exhibits the same thing, right? You’re in this silver loses 10 times in a row, stopped out, stopped out over like nine years. Why would anyone keep that in the portfolio? And then the 11th year, it makes 50x or whatever on it’s when silver makes a run so similar thing of like, maybe they need, in this case, weeks or months instead of years, but still, too long for the normal multi strat to endure, right? They want the profits now. Yeah,
Tom Holliday 51:09
it’s hard Listen, we’re all we’re all learning the performance game, and it’s hard to be patient, sometimes very hard. I mean, we all have behavioral biases. We all have, you know, pressures from investors and things that we have to do in order to hit our goals, they’re just like the rest of us. So I think that you know, what we just want to do at hip is is have a culture where we can let these things breathe enough with live to fight another day still being the thing we have on our wall, right? Yeah, so we have to let them breathe, but we can let them breathe within a portfolio of a lot of different strategies. So that one shouldn’t, you know, dictate what’s going on with the rough portfolio. So we limit the amount of risk any one strategy could have, so it can’t submarine everything else, and then you hopefully let the opportunity set the experience of the traders, the risk management oversight that we have in the diversification of the portfolio now help, once again, limit the downside, hopefully and skew the upside. Is obviously the goal is trying to keep that that that that profile,
Jeff Malec 52:23
and then you guys also do a little bit something different in how you incent these guys, right?
Tom Holliday 52:29
Yeah, this is the other big thing about our firm, it’s that’s that’s different that a lot of traders have been interested in. So Jim Simon said it best. He said, If you want to create a great firm. This is a secret. You hire great people. You have a great infrastructure. You collaborate and you share the profits. Okay, so we’re hopefully trying to do the first two now, collaboration and sharing. What did we do in order to help help that number one, collaboration? A lot of people talk about, yeah, we want our people to collaborate. Well, how do you get people to collaborate? If there’s no incentive to do it? Charlie burger said it best you show me the incentives. I’ll show you the outcome. So the way we’ve done it is we’re not a pot shop. Everybody that’s trader comes as a partner, so it’s a pass through model, but every trader earns 20% 15 of that 20 they get that is not netted against anybody in the firm. So it’s what they kill, they eat. 5% goes to the house, their partner in the house. So why would you want to collaborate with the other nine traders in the room, if there was no financial incentive, well, there is now, because now you have a piece of their PNL, they have a piece of your PNL. So if you see something in their market, if they see something in your market, if there’s something that overlaps, you know we should be talking, and we have a call every day, a global call to go over all the markets together, by the way, this is what happened at Refco. Willard would lead this meeting back at ref Co. I think it started at 730 in the morning with our meteorologist and went through every market. It’s kind of what we do. Here we go.
Jeff Malec 54:14
Called the sparks. Call the spark call, huh? You should call it the spark. Call the 10am spark. Call, we should call it the spark call. Did anyone go debate that and be like, we need the call before the markets open? Or can we do it after lunch? Was there debate on the
Tom Holliday 54:29
time? Oh yeah, oh yeah. And it’s, and it’s, it’s probably going to move around some more, yeah, because it’s, it’s never perfect for everybody at a certain time in a certain place, but we decided on this time. My guts tell me it’s probably go. Go a lot earlier, but we have calls with individual team members usually before that call to kind of go for markets as well. But the whole purpose is get everybody talking. Get everybody talking and hearing what’s going on in their market. It’ll trigger a thought. It’ll trigger. A conversation, but we force that collaboration through the call and then want them talking, obviously with each other afterwards is people that are part of the same team financially incentivized as well, so the collaboration and sharing are tied to each other through, through the incentive structure that we think helps. And you know what, I think at the end of the day, you know, a lot of our traders have been in the business for, you know, 20 years. And you know, at this point in their career, they want to build something they want to build something together, and they want to work with a group of people where they can, you know, build something together, and, once again, not, not be isolated by themselves, trying to figure out everything, because it’s hard, right? If you’re in a room with other people, then it’s got a different energy to it. It’s got a different flow to it. It’s just got a different atmosphere and and it’s it’s resonated.
Jeff Malec 55:55
How do you guard against like group think? Because they’re not trading the same things anyway, so even if they all have the same idea, it’s not going to exhibit itself the same.
Tom Holliday 56:05
It’s exactly right. So, you know, we have one crew trader. We don’t have five. We have, we have one gas trader, right now, we don’t have five. The fear is, yeah, if you get five gas traders and one’s got the hot hand and, you know, the all the fundamentals are pretty obvious, then you just got one big gas bet on rather than a bunch of diversified gas bets on. So if we were able to find another trader within a within a market, we’d really want something with a different approach that that gives us diversification of approach versus just that. So if we had a fundamental guy, and we had a quantum mental guy, or a quantitative strategy that we thought was different and complimentary, that would be interesting, right? Be very, very interesting. But having two fundamental crew traders, I mean,
Jeff Malec 56:52
yeah, but if you found it’s more so of like, oh, you should check the volatility on that, on that option spread, or something like, I just saw it spike in my corn. You should check it in oil or right. It’s more comments like that. Of like, here’s what I saw in my space. Make sure you’re looking at it in your space.
Tom Holliday 57:10
Yeah. Or that. Or even, like, like, like, LPG, it was pretty interesting. So about a week or so ago or LPG, guy was like, Listen, I’m hearing out of
Jeff Malec 57:19
the LPG for my my friend George, it’s
Tom Holliday 57:23
liquid petroleum gas. So just think propane. So there are a bunch of associated gasses that come from crude oil production, natural gas production, and it’s butane and propane and all these other other gasses. And by the way, we don’t, we don’t drill for that stuff. We just get it from from fracking. So in the United States, the huge producer Middle East is a huge producer, obviously, because of their production over there. But, you know, our LPG guy was, was talking about, what he was was hearing was maybe a lot more production of LPG, which, by the way, comes from crew production over there, right? Once again, associated gas. And he was like, you know, I don’t know if you guys are hearing this as well on the crew team, but y’all should probably look into this to figure out what you’re seeing in terms of your balances, in terms of the Middle East, which is pretty interesting. The other thing the LPG guy said was, man, this guy’s been in the markets for 25 years, and he’s, you know, and demand has been pretty, pretty soft and, and LPG in general, it’s used to make plastics. And he’s like, when it’s this soft, and I’ve seen it this soft historically, it usually tells me we got a wobble coming in the economy, because it’s such an important petrochemical. It’s a feedstock to so many things. And you know what it’s like? Okay, that’s an interesting kind of macro thing to keep in the back of your head. Because obviously petroleum and a lot of stuff is tied to GDP growth and in demand and things of that nature. So it’s just, you know, you just hear comments like that in the room, and you just kind of, you know, sometimes I’ll stop the conversation. Say everybody just filed that in the back of your head. It may not immediately apply to what you’re doing, but just, just, don’t forget what that comment was, because it may be important to you at some point along the way. So those conversations bring up interesting things like that, that from a, you know, group of people that been doing it for a while, that that, I
Jeff Malec 59:17
think, like, literally, some of the smartest commodity people in the world?
Tom Holliday 59:21
Yeah, I mean, they’ve been really notable places so and been very successful at those places. So it’s, it’s, it’s great to hear the comments.
Jeff Malec 59:36
What’s happening, like the glencores and big commodity houses of the world, the banks, they’re all sort of getting out of commodity trading, or it’s been on a downtrend over the last 10 years.
Tom Holliday 59:47
Yeah, see, it seems like the banks in general, I mean, I guess two, two banks in particular, are getting out. I don’t want to name who they are, but, you know, they’ve kind of pulled back. I think, I think, you know, the Russia, you’re. Crane war. What happened on the LME really hurt some folks. And I think that really, you know, lessened the appetite for a few banks in terms of of their exposure to the space. Listen, I think the glencores, the trafies, the VTOLs, the mercurias, I don’t think they’re getting out of the business anytime soon. They obviously had banner years, 2020 through. You know, 2023 probably in the last year and a half or so, have not been that great. I think the tariff noise this year caused a lot of problems, just because, you know, a reciprocal tariff would have normally been. They tariff as 10% we’re going to tariff them 10% as a reciprocal but when you start looking at our trade imbalances with the measuring stick is, yeah, nobody knew what that meant, but boy, its impact on markets was pretty dramatic, pretty darn quickly. And I think, as you know, the combined markets you’ve been doing this long enough, usually, when you have things like that, they matter a lot the first time, and then they matter less the second time, and they matter less the third time, and then it resolves itself, and you get the more fundamental markets. I hope we’re past most of this, and now it’s going to be a little less so, and get a little bit better, as people can now, can kind of get their heads around what all this means.
Jeff Malec 1:01:31
And then how do you how do you get these guys? You got to throw them $30 million signing bonuses, or is it getting to, like,
Tom Holliday 1:01:37
100 million dollar bonuses at our place? So that’s how we get them.
Jeff Malec 1:01:41
That’s like nio system and college sports or whatever. Because you read some of these stuffs, of these large traders moving around between the multi strats, and the numbers are staggering. So to you for being brave enough to be like, Oh, I did this business and figure out how to sign these guys.
Tom Holliday 1:01:59
Yeah, I should have thought more about that, because it is difficult. I mean, I mean, it’s very difficult. They it’s very competitive out there. There’s only a small group of commodity traders. Number one, we’ve lost some to some, some firms because of the big bonuses that they’re able to sign to begin with,
Jeff Malec 1:02:23
and that’s all. You’ll be back. You’ll be back once they net you out and
Tom Holliday 1:02:28
listen, it’s fine. They’ve everybody’s got to do what they think is best for them. But you know, I think our value proposition is pretty clear. It’s pretty distinct. Yeah, okay, I can’t give you the pick signing bonus up front. I’m sorry, but if you want to be a part of a collaborative team where we’re all working together to bring a really unique, a very unique product to the marketplace, which is a commodity only, multi strat, which there really aren’t any of, I mean, there’s, when I say, aren’t any, there’s, there’s less than a handful in a marketplace of a product like this. So if you want to come here, be with other commodity traders, work to build a firm by being a partner, start with less and hopefully build with more over time. This is a great spot for you. You know we’re we know commodities. We’ve got risk systems that understand commodities. We have a great investor base right now. We think that, you know, we’re only limited by the capacity of earning like traders and the opportunity set in the marketplace. Can’t do anything about the market opportunities marketplace, but those come and go. But now it’s just about getting really, really talented, talented traders that want to be a part of this. And we’re, we’re getting a lot of traction and interaction with people we shouldn’t be because we don’t have the 100 million dollar check to write somebody up front. But they love everything else that the rest of the story. They
Jeff Malec 1:03:59
love it. How many do you have now? And how many is your ideal?
Tom Holliday 1:04:04
We have seven now, crude oil, LPG, PJM, electricity, natural gas, refined products, sauce and base and precious metals. What we would like to have over the next three months, and we’re in detailed conversations with folks grains and oil seeds. So, you know, getting someone in that in those markets we don’t have, right now, we’ve got a few different people that we’re looking at really different approaches in that market. We don’t have European power or gas, and we’re talking to a few folks in in that region that would give us exposure to that. And then in the United States, we have PJM power. We’d like to get ERCOT, which is Texas, and we’d like to get the West, which is Washington State, down in California as part of that. I
Jeff Malec 1:04:55
mean, no, Reggie, the east. Con Reggie. Huh? What? It’s the East Coast, is called Reggie? Or is that Reggie is part of that
Tom Holliday 1:05:03
PJM kind of core as well? That’s kind of more on the on the on the carbon side of things, we’d like to get an environmental credit trader. Obviously, they impact allized markets. I think there’ll be really interesting opportunities there. The power side of things. You know, we’ve all heard the stories. I mean the amount of money we’re going to invest in infrastructure and in power generation to meet just the data center demand is pretty profound. Ai eats data centers eat commodities. Infrastructure eats commodities. Electrification eats commodities. If you are big believer in that thematic, that narrative, that secular driver, that’s, by the way, government sponsored. I mean, we’ve got the government buying public companies that are in rare earth metals and things that this nature. Now it’s kind of interesting. So you’ve got, you know, government sponsorship for a lot of this stuff at a point in time, you know, our you just can’t create a new copper mine quickly. You know, new copper mine takes 16 years or so to make, and so if you have a really big
Jeff Malec 1:06:12
demand, made one in about 16 years, huh? And they haven’t made one in about 16 years,
Tom Holliday 1:06:17
yeah, it’s a bottleneck, for sure, and it’s, it’s concentrated in a few regions around the world. So you have supply chain potential issues here. You’ve got protectionism that could jump in. You’ve got all kinds of things that that could, that could really affect, you know, these markets. If you look at natural gas, which is the base load, kind of energy to kind of help get us to if nuclear is an answer, or whatever it’s going to be, you know, it’s not going to go anywhere anytime soon. We’re not going to get off a crude oil anytime soon as well. And we haven’t done a lot of, you know, exploration in the deep water stuff or the or the stuff that’s more durable, versus fracking, which has got really high depletion rates. And you always have to, you know, keep, once again, looking for that stuff. If you look at the grain markets, I mean, they’re the cheapest level they’ve been. I mean, land prices, fertilizer prices, fuel prices, labor costs all through the moon, and we got grain prices way down here, right?
Jeff Malec 1:07:21
Very Save the Rain Forest, maybe.
Tom Holliday 1:07:25
But I mean, you just have a collection of things across energy, across Ags and across metals that are very interesting right now and and all of them have different cyclical drivers. That, once again, help create a balanced portfolio within the commodity space.
Jeff Malec 1:07:48
Love it. No meats. A meats guy,
Tom Holliday 1:07:52
love to have some meats. You know, I feel like I’m gonna do Arby’s. We have the meats, right? We want to. We want to have the meats here. We want it as
Jeff Malec 1:08:00
well. And I’m looking at those trees behind you need some lumber too,
Tom Holliday 1:08:06
do they? Yeah, I guess, I guess we could do some lumber. Listen, we’ve looked at palm oil, we looked at milk, we’ve looked at, you know, some other really nuanced, really interesting markets. You know, the key thing is that we have enough liquidity to trade those markets, and they can, they generate some, some interesting p&l. We don’t need people that generate, you know, two, $50 million of PNL in their strategy. But, you know, we want a collection of traders that could do 25, to 50, you know, in their markets. And you, you put 10 of those together now you’ve got, once again, a lot of ways to kind of get to an interesting rate of return without depending on one to drive the whole thing and be right. So that’s the whole goal here is. And, you know, like any portfolio, like at Titan, when we had our fund of funds, portfolio, if we had 20 managers in the fund, you know, there’s probably, you know, six that drove returns in any one year. And then there’s probably, you know, seven or eight that were kind of middle of the road. And then you had a few that were there, were there were underperforming or losers. But that’s kind of the way it’s going to be here, the way anticipated that you’ll have, you know, 60% kind of drive the performance. You’ll have, hopefully, 20 or 30% that are kind of middling, and then a couple of couple of people that are maybe, maybe down on the year, and that’ll get you to an interesting rate of return. That’s kind of hopefully how it’ll work out.
Jeff Malec 1:09:32
And then, do you think this is a good compliment to an institution? And I’ve got a equity basically based multi strat, or I’ve got a, what do we call them? A traditional multi strat, to be like, Hey, you already know about multi strat. This is a great
Tom Holliday 1:09:46
tower this. This is the, I mean, we can go on this for hours, and I can get so excited about this conversation. Number one, commodities are woefully under allocated by institutions right now. Okay, tip. They’ve been between 10 and 15% right now, I think they have around 5% in terms of their allocation. I believe that’s because there’s not a lot of options for what they do and how they can allocate. There’s some passive indices, but I don’t think they’re great active management strategies for what they do. I don’t believe it’s my bias, so I’m gonna, I’m gonna stick with that. So I think, I think they’re woefully under allocated number one in terms of what they do for a portfolio. I mean, you know, history has shown and research has shown they are non correlated to stocks and bonds, so they’re naturally going to give you a great portfolio benefit, particularly if you’re a big believer in stagflation or inflation or de dollarization, or any of this stuff that really could affect, you know, bonds, in particular, commodities do usually do exceptionally well in that period of time. So if you got a 6040 portfolio, that 40 may have some noise in it because of all this stuff, where commodities would probably really shine from that. So I’m a big believer, you can’t eat non correlation, right? You got to have positive returns. I think we have offensively. We have great opportunities, data centers, ai de globalization, all the things that we’ve talked about, our offensive ways through commodities. You can, you can capture that defensively. If you’re worried about inflation, commodities are a great thing. You get for free. The non correlation, that’s free, you’re going to get that no matter what. But we’re hopefully we’re going to get returned from this, and that you’re just going to get a natural benefit from it at point in time that I think it demands a hard look, and it’s woefully under allocated.
Jeff Malec 1:11:40
That. I like that, because most people are selling the thing on the other side, they’re selling the non correlation and ignoring those pieces.
Tom Holliday 1:11:47
No, you have to. I mean, listen, we all have to make returns. You have to. So what is, what is it you’re going to make returns off of these things provide the opportunity, right? And by the way, we don’t need a market to go up. We just need volatility. Commodities are trading vehicles. They need
Jeff Malec 1:12:05
interest in those things. Yeah, huh? You just need interest in those things to be like, it’s a huge run up, it’s a huge sell off. Nobody wants it. It’s back, yeah.
Tom Holliday 1:12:14
We just need, we just need movement in the commodity is where we can make money throughout the cycle, is by having the volatility as a matter of fact, McKinsey wrote a report probably about a year or so ago and just talked about how commodities usually do very well in high volatility periods. And by the way, from my experience in my days at Titan, equities do terribly in high volatility periods, typically, and commodities have done better. And I was just reading something today, actually, that I think somebody from Bloomberg had put out, but a lot of people don’t want to invest in commodities, particularly if they think we’re going to recession, because they think it’s going to commodities are going to be affected. Actually, the research shows the opposite. Actually, commodities go up during recession, because they usually have gone down prior to the recession, and then when the recession hits, they’re actually going up while everything else is still going down. So it’s actually a really interesting dynamic where commodities actually can be that really unique thing in the portfolio in a recession, that can do well when, when other things may not be doing so well.
Jeff Malec 1:13:31
Any, any other thoughts? We’ve covered a lot. What else you got? Listen? I mean, I’m
Tom Holliday 1:13:36
super passionate about the space. I think that the next 10 to 15 years are going to be some of the most interesting. Most interesting of my career. I think that we just have a lot of a lot of things we have to resolve in the world. Commodities are at the center of a lot of that. I think this de globalization trend that we have is an underlying, you know, thematic that that affects commodities greatly. And then when you add all the other things on top of that, I think they’re going to there’s going to be that, that volatility environment to be able to trade underneath a very interesting fundamental backdrop, to be able to capture opportunities. So um,
Jeff Malec 1:14:20
any thoughts, just as you mentioned, de globalization, my brain went to each region will have their own Commodity Exchange, their own, which they already sort of do, but it might grow. You might get more liquidity in each region. If that
Tom Holliday 1:14:33
happens, you might and you know, the biggest one you know right now, which is a problem, is the chef exchange is in China, and it’s, it creates a lot of difficulty because, you know, sending money to a Chinese exchange, right? But outside of that, yeah, listen, I think that commodities should, should continue to grow here. They’re cheap, is. Is they’ve ever been relative to equities ever, which is really interesting,
Jeff Malec 1:15:05
if you look at what might be saying more about equities.
Tom Holliday 1:15:07
Well, it is more of an equity story, for sure. Yeah, we’re, you know, commodities have been kind of left for dead as equities continue to go up. But those things you know, typically resolve themselves. So, you know, 1970s they resolved themselves when equities came down, but commodities went up, as through gold and through oil. From 1999 through 2009 10, equities were dead flat. Commodities were up 300% at the top during that period of time. This once again, China was consuming everything. And I’m not making a call on equities. I mean, I have no roughly idea if they’re going if they’re going to continue to go up or not, but I do know that there are so many forces underlying this commodity, this commodity opportunity, that you know once again, I’ll say it again. It demands it demands attention, because I don’t think people are paying attention. It demands attention. What?
Jeff Malec 1:16:03
That’s a good one to close it out on. Demands your attention. All right. Tom, thanks so much for coming on. Best of luck with everything.
Tom Holliday 1:16:12
I appreciate it. Thanks so much, RCM for your time. Let me get my story out. I really appreciate it. Yeah,
Jeff Malec 1:16:19
we’ll talk to you soon.
This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.
