“It’s important to understand and to have this risk management baked in the cake before these things happen.” – Jerry Parker (Tweet)
Jerry Parker takes us inside 2014 for his firm, and how his models reacted to the Swiss Franc move in January of 2015. He looks at the year and makes a case for trend following as an asset class, as well as highlights what we can learn from a year like 2014.
Thanks for listening and please welcome our guest Jerry Parker.
In This Episode, You’ll Learn:
- How the year ended up for Jerry’s firm.
- The date when his system started getting short Crude Oil.
- What they could have done better in 2014.
- How he dealt with the Swiss Franc move in January 2015 and how many ATR he made and lost on 2 different CHF positions.
- The minor changes they’ve made to increase diversification of their trading systems.
“At the end of the day what trend following offers is the best type of risk control.” – Jerry Parker (Tweet)
- What he wishes for 2015.
Resources & Links Mentioned in this Episode:
This episode was sponsored by Swiss Financial Services:
Connect with Chesapeake Capital:
Visit the Website: www.chesapeakecapital.com
Call Chesapeake Capital: +1 804 836 1617
E-Mail Chesapeake Capital: firstname.lastname@example.org
Jerry: At the end of the day, what trend following offers is the best type of risk control. As long as it's reasonable leverage, reasonable 10%, 15% targeted return, but with a massive diversification, long and short, trailing stops in the stop losses and the determining your trades based on the price only. This is the best way to go to battle in these markets and try to make a fair profit and limit the drawdowns.
This is Jerry Parker, Founder and President of Chesapeake Capital, and you're listening to my year in review on Top Traders Unplugged.
Introduction: Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences their successes and their failures, imagine no more. Welcome to Top Traders Unplugged. The place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence, or investment career to the next level. Here's your host, veteran hedge fund manager, Niels Kaastrup-Larsen.
Niels: Welcome back Jerry for this review of 2014 where we look at the big events from the point of view of your trading strategies. I want to explore the ups and the downs as well as the big takeaway from what only can be described as a great year for systematic trading strategies, in general. But as we know, just because you're systematic, it doesn't mean necessarily that your trading strategies deal with market events in a similar way. So I'll be excited to hear how you faired. But let's just jump right into it. Tell me about 2014 from your perspective, how did the year evolve both from a trading point of view, and maybe from your firm's point of view?
Jerry: Thank you Niels, it's good to hear your voice again.
Jerry: Well 2014 was another nice year and the trends were there and persisted in a lot of the different sectors. It's always better to have a lot of nice small moves, or a lot of nice moves in lots of different markets that allows us to make a profit from our trading strategy; that trades over one hundred markets, and has relatively small positions on in lots of those markets, and we get the great diversification of on the upside and the downside. And so, great year in the dollar again, where we were ever to participate in a lot of the currency markets that better fitted our trend following. Our trend following approach benefited from the good move in the dollar.
We were able to do pretty decently in the stock market, trading sort of a medium to long term approach. We didn't get knocked out of all our stocks in the middle of October, so that was a contributor. The single stock futures had some diversification and some spice to the index trading as well. And, of course, crude, the interviews in general were fun markets to trade. It's always sort of fun to participate in markets where the popular press and the conventional wisdom is caught off guard with rates continuing to go lower. Those trends kept going, and then short energies caught everyone by surprise. I suppose I sold that crude heating oil, unleaded, etc., break out many times over the past four or five years. And well, I was surprised as anyone to see this one break from ninety to forty-something, so that was good. And then just to show that we are very intent on our diversification, we've traded cattle for a long time, and the cattle trade was… Feeder cattle were nice contributors to performance also.
Niels: Sure. Yeah, it's important to see these different markets kicking in at different times. And I do agree, certainly the energy sectors have been difficult for a long time, and finally we got a breakout. Just for the benefit of the audience, first of all, I know you're too modest to say this. So I'm going to remind people that I believe that this is actually your twenty-fourth, out of twenty-seven years of trading that was profitable, if my memory serves me right here. So, congratulations on that! But also, just for the benefit of investors, in general, do you happen to remember roughly where you started getting short crude oil, because it's been such a big theme? It would be sort of interesting to share roughly where systems like yours and probably all other trend following systems actually started to detect that this could be the beginning of a move. Obviously we don't know how big it was going to be but, certainly a beginning of a move to the downside.
Jerry: Yeah, well I'm just reminded of a Paul Jones quote about shorting the Japanese stock market or shorting the US stock market in 1987 - that it was a great trade but his fifth try. So, like I said, this is at least my fifth try over the past few years of getting the crude trade right, so I would say around October, the second week in October… I'm just looking at the crude chart now… October 7th looked like a likely place to start really getting interested in crude, nothing special about that breakdown and those lows, but it just kept going. And unleaded, and gasoline and Brent, and gas oil, and so we traded as many of those energies as possible, and yeah… great trade.
Niels: Were there any… Well, I guess it's not something that we obviously look at as such. But when you look at a year like that, and obviously in the years that are profitable, I guess that it's as equally important to look at things where you say, "Well you know maybe we could have done a little bit better here." So clearly there were a lot of trends that you captured well. Was there anything where you said, "Actually I'm surprised we didn't do better in this particular market?"
Jerry: Well I'm not surprised. I would say that I understand, but I'm continually surprised at the failings of our methodology, our systematic approach to how we've sort of decided to trade, which is the medium to longer term, which is just basically a choice of hanging in there and trying not to get whipsawed around too much and profit from the long term trends. I would prefer to trade very short term if I thought it was the right thing to do. I would absolutely do it, of course. But something like coffee, which I've heard you mentioned, had a fifty percent gain. That's just the type of trade that I think trend followers in general are not going to be able to get close to: a fifty percent gain. Because fifty percent from that low of October 13th, and then the big crazy rally up that got volatility going, and then the choppiness - it really wasn't a good trend trade for anyone.
Then natural gas is another one where a big spike in early '14, and is the crash down. We certainly, if you're going to be a longer term, we're going to look really poor on a trade like that, that had a lot of… a nice amount of open trade equity but was really just chopping around and not going to go anywhere. We're looking at trends that are going to last over multiple years or a year at least. So the recent Swiss franc trade that had a big huge move in one day is much different then… it would have taken a year or two to do.
Niels: Yeah, no absolutely. I want to talk about that in a second, but I think it's good that you explain the thing about the coffee and nat. gas, because often people will say, "Hang on, coffee actually moved up." And I think it actually moved up like one hundred percent at some point, and then it fell down… was up fifty-two percent for the year, and nat. gas also had a big move. But it's nice to hear from someone like you, explaining that just because it has a big move, it doesn't necessarily mean that we're able to capture it, and I appreciate that.
Now you did mention one of the themes that I wanted to just quickly ask you about. Although it's a 2015 theme, obviously 2014 was certainly going to be remembered by many people for the problems in Ukraine and the big oil trade that we've already talked about. And as often, investors will associate this with negative events, and I'm sure a lot of new stories will come out about the move in the Swiss franc only a few days ago. So, just from a trend following perspective, can you share a little bit about how you faired and dealt with a situation like that in the Swiss franc, both from a sort of specific Swiss franc point of view, but also from a portfolio point of view as a whole?
Jerry: Yes, well I think that that's a very good topic. I think what happened… A couple things come to mind. I've listening to your podcast: I've read some interviews of other people. I think on that particular trade, some people were sort of saying that they didn't trade the Swiss franc, and it was fairly obvious to them that with this intervention... That this would be something that proper risk management would dictate not to trade. So, unfortunately that was a surprise to me, so I was short the Swiss franc against the dollar, but long the Swiss franc against the Euro. So actually, I ended up making money net on that particular trade. I do think that there are so many markets now from what I read… I'm supposed to not pay attention to fundamentals of course but…
Niels: You still need to read to keep informed.
Jerry: Yes, that's right. There's so many… I mean which markets, which financial markets are not subject to government intervention these days? Should I quit trading the interest rates and not taking those trends? When is that big sell off going to occur? Well, if I just trade in fear, you know governments are always intervening. I know someone said it wasn't a natural state of affairs, it wasn't a pure market; government was involved. Well gosh, I mean you know, I'm not sure if I can objectively quantify which markets over my past thirty years have and have not had government intervention and when have they haven't had it. And a lot of people think the stock market is just a pretend trend also. So I think that a lot of the trend follower profits over the years have been on pretend trends, bubbles or whatever. But it's not a question... It's a question of getting in and riding the trend and then your trailing stop moves up, and you pocket some of the gains.
Niels: Yeah. But I mean it's interesting though as a theme isn't it? Last year systematic trend followers had a good year, but there were no disasters in other financial classes like in 2008 where we had a big disaster in the world economy. So last year, to me at least, was positive in the way that trend followers just proved they're good at capturing trends regardless of why they occur. Also, it's not just about making money when everything is falling apart. But then we go into 2015. We have this big Swiss franc event, and what it shows me, because of what I'm picking up from my guests, but also from reading and seeing the news stories coming out in the last couple of days: it's not the CTA's that seems to have any problems with dealing with what happened on Thursday. It would have seemed to be certain hedge funds, it would have seemed to be certain brokers, and banks perhaps. So to me, it just goes to show, again, going back to risk management. You and I spent a lot of time talking about risk management last time you were on the podcast, and I think it's nice to be reminded about how solid, how strong… and I know from having known you for many years, how much importance you put on risk management.
Jerry: Exactly, and I think it's important to understand and to have this risk management baked into the cake before these things happen. There's little that you can do sometimes, and in fact sometimes the risk management on a daily basis can really hurt. There have been times where reducing positions in the middle of a drawdown ensures that you have a big losing month. If you would have just waited a little bit longer, the markets came back. I think of 2011 where we had a big swing intra-month due to the Japanese nuclear disaster, only to see us recover.
So it's always important, and I think the lesson of the Swiss franc is trade at an appropriate amount of leverage in your portfolio. Your target rate of return needs to be reasonable. You trade as many markets as possible, trade the crosses. I know in research sometimes the crosses are not nearly as good as some of the other markets. I've had clients tell me over the years, "I just always appreciate when I open up the Chesapeake account statement on a daily basis and I see all these cross rates, and you're never having this sort of extreme hit or extreme win from just trading the outright"… the currencies that are just based on the dollar. And then another thing that we did was… You know you've heard all the CTA's will size their trades based on volatility, and we size our trades based on the average true range. And in the Euro Swiss, the average true range got very low. So what we do whenever we measure the market's volatility, and it just gets too low, we put in a minimum ATR.
Niels: Right. That's important.
Jerry: Yes. So if the ATR is too small, you could be wiped out. So this move when it happened, I think we ended up making on that one day sixty ATR in the Euro Swiss, and losing twenty ATR in the dollar Swiss. Now if we would have used the actual ATR at the entry point in the Euro Swiss, we would have made two hundred ATR in one day. And so you say, "Well that was bad, you left one hundred and forty ATR's on the table." And I'm like, "Yes we did." But it's not a healthy situation, and you're going to get your comeuppance one of these days if you take those kinds of risks.
Niels: But that's what I like about it Jerry, is that people often look at what this industry is doing, saying, "Oh, but it's all a black box, and it's just a computer doing the thing." But what you just described here, which I hope people will really pay attention to because this is gold for anyone to learn from you, explaining that. But I think also what it says is, there is always common sense. There is always someone behind the system that says, "No this is crazy, you would never want to do that, because this can kill you one day." And actually what's also very interesting, and correct me if I'm wrong here, because I can't imagine the Euro/Swiss has been a good trade for the last three years to have in the portfolio, but you kept it in. Then one day it paid off for you. And I think that's another interesting lesson to learn. Just because you have a market that doesn't profit or give you anything in return for a while, it doesn't mean that it's never going to produce for you.
Jerry: Oh it's funny because, well not that funny… but a couple of years ago, right before one of my clients fired me, I visited with them, and they really gave me the business over this Euro/Swiss trade. "Why do you have these trades? Why are you using margin? Why are you… It's not going to go anywhere; it's just a waste of your time and energy." I remember when I first started trading the currencies, the cross rates, many years ago. I would talk to the brokers at the banks and they would say, "Well there's no use in trading some of these European crosses, because the governments have a band." So I was just like, "Well watch me." I don't believe in these bands. So I think that I have to take a more moderate approach to these, that yes eventually the free markets will explode to where they need to go. I think we need to be a little more concerned… or I do, about these moves. This is by far the worst thing that could possibly happen to trend followers, because there's no way to defend yourself against these crazy… you know, twenty ATR, sixty ATR, whatever it is.
Niels: I was going to say from just having spoken to a couple of people over the weekend, and you and I are talking on a Sunday. But a lot of people have already done their calculations of how big a move we actually saw. Some of them have come back and said, "This in theory should never have happened, even if you go back to when the world was founded, or you know, the big bang, it just can't happen." But it shows us that these things do happen, and unfortunately they happen more often than people are willing to believe. Jerry: Another thing that was interesting is that I've heard some comments on the Ruble. The Ruble is, believe it or not, it is traded on an exchange, and we each traded the Ruble. We traded the Ruble back in September. So that was a nice downtrend also. I know that there should be, and there's some skepticism on the liquidity of the Ruble. From a long term trend following point of view, cattle, the Ruble, cocoa, these are things that, and dependent upon your asset size, these are things we definitely can trade. And it's just another kind of… disconcerting thing to realize that whenever I hear negative thoughts about some of these less liquid markets, I agree, they're less liquid.
My slippage, entering and exiting the trade is going to be a little bit more. Then all of a sudden, you take one of the most liquid markets in the world, and it does what it does. And I've seen this before where, "Let's just stay with the liquid markets." Oh, well sorry, sometimes that going to become very illiquid also. So that's why I think at the end of the day, what trend following offers is the best type of risk control. As long as it's reasonable leverage, reasonable 10%, 15% targeted return. With the massive diversification, long and short, the trailing stops and the stop losses, and determining your trades based upon the price only. This is the best way to go to battle in these markets and try to make a fair profit and limit the drawdowns.
Niels: Yeah, I couldn't agree more. That's great, thanks for reminding everyone about that Jerry. Now just jumping to another question I wanted just to review with you… Did you have any major changes last year in terms of research, in terms of new products? I seem to remember… I can't remember if it was the last time we spoke, you were looking at launching or had just launched a mutual fund version of your product. Where do we stand on these things?
Jerry: Well, we always do research and tinker with our systems a little bit every year. We made some minor changes basically to increase the diversification of our trading systems. I'm just a huge believer in risk control, but you need to get this risk control embedded in on day one, through multiple entries, multiple exists, lots of different markets, long and short. So most of the time our research continues to tell us that the trend... be a trend follower, be the biggest trend follower, pay attention only to price. We do that, and then we also change our methodology as much as we can to try to come up with different ways of entering… basically just space the trades out, adding to winners all the time, space the trades off.
So for instance, in October we had a very big selloff in the stock market. When it recovered we had reduced our positions, and we ended up with about half the position when the markets went back to new highs. So it's never supposed to be an all or nothing in a big bet. It's hundreds and thousands of little bets if you take into consideration the markets and the multiple systems that ensure the fact that you'll have different entries and different exits. So that's something we'll continue to do, and that is sort of… that sort of idea does not hurt performance, it just smoothes out the ups and downs.
Niels: Yeah, absolutely. In terms of… I'm curious about because not that many managers yet have entered into the mutual fund space offering their strategies that way. Mutual funds, certainly my understanding is it's more of a retail or private individual type product. Did you see, or have you seen any signs that given the strong performance, not just for you last year, but also the year before, you delivered very strong returns, not least in your equity only product… Are you seeing signs that the conversations are changing? Are people becoming more open to it now that you've packaged it in a way that they maybe understand better? Or is it still, you know you're competing with an equity market that's gone on for five years, and people are not really willing to listen just yet?
Jerry: I definitely see signs, and I talk to people, clients, potential clients, and at least on the retail side, I do think that they… The more the market goes up, the more nervous they get, and the more they're interested in diversification. Especially in something like managed futures mutual fund that has had competitive performance recently. I think stand alone, all of our programs need to have reasonably decent performance, and we just can't keep selling vastly subpar underperformance in hopes that people will just buy it due to the diversification.
So it's really nice as you were saying earlier, to see the stock market do okay, and then the managed futures do okay, this can occur. I think that at least the retail people are very interested in diversification. The key component, as you mentioned, is being able to explain, and for them to understand, what it's going to look like. The fees are good the leverage is good, and as I think as one of your guests mentioned last year, he said that people can open up the newspaper and probably figure out what my positions are.
Niels: Yeah, that was Martin Lueck from Aspect Capital. That's true.
Jerry: Yes, so that was a very good quote. I mean you know I'm not going to tell you exactly how to do it. We are going to not surprise you, and I think that's the key to sort of a longer term or medium term trend following is that the one thing that we want to avoid is having some reasonably nice trends, that may be a little choppy, and at least making some money in those trends, and not sort of getting whipsawed in and out a lot. That's why I sort of favor a longer term approach that keeps me in gear with the trend. At the very end, I might give back a little bit more, but at least I'll have made some decent money.
Niels: Sure. Now, if we do see a warming up to our industry from not just the retail client base, but also from the institutional. Which we saw last time in I guess 2009, 2010 with a big inflow of assets and also of course subsequently we saw the big outflow. Which many managers felt pretty hard. How do we as managers avoid a repeat of this? Do we need to become much more selective with the clients we take on? Or how do we better manage or educate investors so that the AUM becomes more stable, more sticky? Can it be done?
Jerry: Well, maybe. I think we have to do it and do the best job we can, and just see what happens. I do think that once you've explained how you trade, and you've demonstrated that there is an appropriate amount of risk control, diversification. It's really up to the clients to do the right thing and educate themselves. We can't do it all for them. I do think that we changed our program a few years ago to include twenty-five percent stocks. In our risk budget, it's twenty-five percent stocks, currencies, commodities, and interest rates, twenty-five percent each. So we went from a fifty percent allocation to commodities which I think we still have a fair amount of commodities, and we're going to increase our correlation to equities a little bit hopefully. Because once again, when equities are doing really well, we need to help the clients with a trading program that is not losing money all the time. It's maybe having some sort of positive contribution from the equities, and so equities are up thirty, we're up ten, you know that's great.
But if you're asking clients once again, to keep owning the diversifier that continues to underperform, I think that that is a tough sell. Every investment idea and strategy needs to stand on its own. And then I'm a big believer in the education, and I think that it's just difficult to educate people if you refuse to tell them exactly how you trade. And if you sort of brag about the fact that you're not trading a lot of trend following where it's not just trend following, it's all these other strategies that are there to smooth out the equity curve. I wonder, if we're one of the few hedge fund categories that really concerns themselves with that. Most people read about they just describe how they trade macro or value, growth, whatever and add it to your portfolio. I don't really understand why we need to sort of have this style drift idea in our permanent part of our trading. So that's why we just try to stick with the trend following. It's more of a purer, classic play on the medium to long-term trends, and it allows us to sort of describe to people exactly what we do, and yes in fact they can. They won't be very surprised with the positions.
Niels: Sure, and that's great, I mean that's the way it should be. I've only got one final question left really Jerry, in this short episode. But I just want to check in with you and see if there's anything else you want to bring up before we wrap up. Is there anything you feel is important to share from your point of view over the last sort of twelve months that springs to mind? Or any other thing that you want to bring up?
Jerry: Well I think that the future is good for our business, and I think that it's… And it doesn't have a lot to do with the past couple of years. It's sort of irrelevant. Performance to me is… My opinion, or my happiness or dislike of the performance is sort of irrelevant given the fact that like I said, we're trading so many markets, long and short, with our systematic approach, following these rules, keeping losses small, paying attention to price only and not taking small profits but letting the profits go. I think this is just an indispensable part of… all of those things are indispensable, you can't get rid of any of them.
There's not one thing that I would do. I don't care what the research says, or what performance says. I'm going to keep doing those things because it's the safest way to approach these markets. And I think inevitably as the CTA land gets more into the lower fees, lower leverage, retail products, more and more assets will come to us. Because our… The importance of all of these elements of our trading will continue to come forth and be evident to most everyone. So I think I'm very bullish on diversification and risk control, which is what CTA's major in.
Niels: Sure. But I would also add one thing from a personal point of view, is that I actually also hope that investors will start, not so much focusing on the fees, but actually look at the net returns, after fees. Because you know, with the kind of performance that is being delivered year in, year out, okay there's going to be one or two years where we don't deliver returns as an industry. You know people, I think, shouldn't be so concerned about whether you're charging 1% management fee or 1.5 percent. I mean I would just focus on the after-fee return, and if you're happy with that then that should be good enough. I mean we're all, more or less, in the same range, and I think there has been a lot of focus on trying to reduce fees to next to nothing, but I really don't think necessarily that that is fair either.
Jerry: True, I agree. We… And I think from most normal retail people, that's their opinion, and that's why I think, very bullish on the mutual funds. It seems to be a lot less… more acceptance of what it is and what it's not. It doesn't have to be perfect; it just needs to be…
Niels: Well thought and easy to access.
Jerry: Yes, exactly.
Niels: Final question Jerry, if you could wish anything for the New Year what would that be?
Jerry: Well I mean I think that not another Swiss franc like move. That was really disconcerting and not fun, and this is sort of that sort of move, and that's one of intervention… Or an unwinding of an intervention by government should scare everyone. And it's out there, and it's prevalent, and all that could be in any market in any sector at any time. So that, I'll take my drawdowns historically like I've had them, that's fine, but I think everyone should wish for less craziness. And in one day I'd love to make sixty ATR, but I'd like that spread out over a year.
Niels: That's a very good point! Thanks for that. Now Jerry, it's a short episode, so unfortunately our time is up. But of course for those who want to hear much more from you, I think they should go back and listen to episode thirteen and fourteen which is our previous conversation on Top Traders Unplugged. And I just want to round off by saying once again, thank you so much for your time, and for sharing your insights and experience. I felt you brought some really unique stuff to the table today, which I really hope people picked up on. And, of course, I want to congratulate you on another very solid year, and wish you, and your firm and your family all the best for the coming year!
Jerry: Well I enjoy talking to you. Thank you for your kind words, and I love Top Traders Unplugged, I mean it's the first thing I look for when I get on the treadmill. It's just so much fun, and I love agreeing and disagreeing.
Niels: Sure, that's what it's all about, absolutely.
Niels: Jerry, I know I'm going to see you very shortly, so I look forward to that as well, so take care and enjoy the rest of your Sunday!
Jerry: Thank you Niels!
Niels: All the best.
Jerry: All the best, bye.
Ending: Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you, and to ensure our show continues to grow, please leave us an honest rating and review on iTunes. It only takes a minute, and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.
Become An Insider
Subscribe for free and be the first to receive new and exclusive interviews with the world's top traders. As an insider we'll also send insightful bonus content direct to your inbox.Free Instant Access »
You might also like:
Date posted: 26 Jan 2015no comments