“Investing is a challenge. But the bigger challenge is running a business and managing people and relationships.” – Tim Pickering (Tweet)
In the second part of our talk with Tim Pickering, we dive into the details of his firm and the challenges that he has to overcome as a business owner and entrepreneur. Tim has some valuable life lessons for managers who are just getting started. He also dives into the different ways investors should carry out their due diligence and why he wanted to become a manager in the first place.
Thanks for listening to Part 2 of our conversation with Tim Pickering.
In This Episode, You’ll Learn:
- The details of Auspice’s programs and what makes them different from other managers.
“The goal of all the system development that we do is to develop strategies that adapt to the environment.” – Tim Pickering (Tweet)
- What discretionary traders are good at and how Tim captures lessons from them in a systematic model.
- How he implements the system in practice.
- How Tim measures risk.
“What is that risk you have to take to make a return?” – Tim Pickering (Tweet)
- How he copes with being in a drawdown.
- What he has learned from the drawdowns that Auspice has been through.
“You have to have a lot of fortitude and patience in a strategy like this.” – Tim Pickering (Tweet)
- What keeps him up at night.
- What questions he brainstorms with his research team currently.
“Basic trend following or trend capture, wrapped in rigorous risk management capital allocation works, point blank.” – Tim Pickering (Tweet)
- How to detect if a model is deteriorating.
- How meaningful are back tests?
- About the CTA value-added index that Auspice developed.
- The difference in investing through a fund, an EFT, or other options.
- What investors should be asking when they go through their due diligence with Auspice Capital.
“You always have these hopes and dreams when you go through a due diligence process that you get to talk about certain things, and often times you don’t.” – Tim Pickering (Tweet)
- Why he became an entrepreneur.
- The books Tim would recommend for traders and managers.
- What skill he would pass on to his children if he could choose only one.
Resources & Links Mentioned in this Episode:
Learn about the Barclay CTA Index that Tim mentions.
Tim recommends you read:
- Books by Jack Schwager.
- Simon Sinek’s Start with Why.
- How to Win Friends and Influence People by Dale Carnegie.
- The Prize by Daniel Yergin.
This episode was sponsored by Swiss Financial Services:
Connect with Auspice Capital Advisors:
Visit the Website: www.AuspiceCapital.com
Call Auspice Capital: +1 (888) 792-9291
E-Mail Auspice Capital: Click here for the web form
Follow Tim Pickering on Linkedin
“The ability to not fade and have fortitude is so important in life.” – Tim Pickering (Tweet)
Tim: You know, one of the things you have to decide when you're going to go off and leave an institution and start your own business...because we trade in a systematic way, it's a quiet thing. It's somewhat of a lonely pursuit. You have to be very comfortable in going down this path, and it's not for everybody. Because when you go down any entrepreneurial path, you're going to get told no, so you have to have fortitude, and it is a fairly lonely path being an entrepreneur in general. And you need to look inside yourself and say, "Is that the thing you want?"
Niels: Trading for a living is not for everyone. In fact, starting your own business can be a very lonely venture. When investors look at a manager perhaps this is one of the questions they need to ask, "are you happy doing what you do?" Having a clear purpose with your trading and your business and knowing why you do what you do, well that's what we're talking about in today's episode of Top Traders Unplugged.
Introduction: Welcome back to Top Traders Unplugged. Where the best traders in the world come to share their experiences, their successes, and their failures. Let's rejoin the conversation with your host, veteran hedge fund manager Niels Kaastrup-Larsen. Tim: ...when to adjust or take those risks off.
Niels: Speaking about these things, obviously without giving any of the secret sauce away, can you talk a little bit about what you've learned and how you've dealt with that in terms of adjusting positions, or even sort of exits, how does your program really differentiate at the end of the day? I know we can all use very find terms and say we have volatility, adjust, and so on and so forth, but it doesn't really mean a lot to many people so is there a more visual way that you can describe it without giving anything away of course?
Tim: We kind of touched base on this already, and that is really, what is at risk to an investor and this comes back to a philosophical approach: what's at risk to the investor isn't just one unit of capital when you put on an investment, it is the mark to market gains that they made. We really focus on that. When you make mark to market gains, it is our job to keep them. That doesn't mean we want to cut them off; that means we want to adjust them when the probability of keeping those mark to market gains changes.
Niels: Right. Correct me if I'm wrong, but I seem to remember that one of the things, and maybe it's part of what you just explained here, but one of the things that you're trying to do is take into account kind of discretionary trading elements but implementing it in a systematic way. Am I completely off base here, or how does that fit in?
Tim: You're philosophically bang on. It is creating, based on experiences in our trading careers and lives it boils down to figuring out what works and creating rules and process around it so you can be most effective. There're very effective discretionary traders if they have the discipline for a risk management and capital allocation process. We've tried to... our quest is to figure out what are the better ways to capture mark to market gains and do that in a rules-based way.
Niels: If you're going to describe it slightly differently. If I could ask something like, what are discretionary traders good at? Is there a way to describe that? I'll give you my own version afterwards, but what do you think discretionary traders are good at?
Tim: It's an important question. What discretionary traders have the potential to be good at is adjusting to the market environment. The pigeon-hole that CTAs and quants get thrown in is that we build strategies for a certain environment, and we can't manage the transition to another environment. So the goal of all the system development that we do is to develop strategies that adapt to the environment in various ways, and that could be definitions of entry/exit, risk, capital allocation, which strategies are employed at certain times. If you can make that adjustment. If you can adapt to that environment and wrap that in a rules-based mechanical element so that you get rid of the human emotion we all have, then you're better off for it.
You can look at simple analogies in business. The hand made cars of the day; there are not many that survived. The Henry Ford assembly line won the day. So it's about creating process, it's about making things repeatable, that doesn't mean you ignore quality. It doesn't mean you ignore what the right thing to do is. It means you try to be more disciplined about it. Here's my favorite analogy on this one and that is you get on a plane and the pilot says there's good news, and there's bad news. The good news is we're going to go to Zurich today from Calgary; the bad news is the computer systems are down on this plane. But no worries both myself and the co-pilot have 30,000 hours of flying experience, we will get you there safely without the use of computers on this flight to Zurich from Calgary today. Are you staying on that plane? I know I'm getting off that plane because you're embracing technology as a failsafe because we're human and it's not to say we don't know the right answers, it's to say we're humans, we get tired, we make mistakes, we get influenced, and so you're trying to take that element of humanness out of it and focus on the things that you are good at: yes, adapting to market environments. So this becomes the blend of rules-based trading or nondiscretionary trading with a discretionary philosophy that you have to adapt to a different environment. This is a very different environment in 2014 than it was in 2008, and we are being as effective as we were in 2008. It's a totally different environment. The strategies adapt to the environment.
Niels: I have two observations here. One, I would actually add to your plane analogy which I like very much that the flight from Calgary to Zurich is actually an overnight flight, so it's completely pitch dark, so when the pilots look out they see nothing. That's actually what we do in trading; we don't know what's going to happen tomorrow. We don't see anything. So to say to the passengers that, no worries, we're going to get you there. Essentially they're saying we're going to make sure we can adjust between all the other hundreds of planes that are flying over the Atlantic tonight without being able to see them. That's really what it's saying, while on the other hand, when we talk about systematic strategies, we're saying, actually, we have these wonderful tools, these computers that will automatically adjust the distance between the plane in front, the plane behind us, and so on a so forth and that's quite important to add.
Let me just give you my own observation about the discretionary trading in a systematic fashion. What I discovered, over time, was really what discretionary traders are good at. I agree discretionary traders can anticipate, which is something that trend following can't. What discretionary traders, in my mind, are all about is that usually a discretionary trader wants to be a little bit more certain before he gets it, so he might be a bit slower. He wants more confirmation. So if you're trying to mirror a discretionary trader in a systematic way, maybe you want a few extra rules, a few extra confirmations before you jump in. What is also to be said about discretionary traders is that they sometimes can be very quick to get out and maybe hence that's why you look for these things or changes in volatility as a sign of maybe getting out early to capture the open equity. So I think that's another difference between the traditional trend follower and the discretionary type trader. The third thing I would say that I've observed is that discretionary traders if they feel really sure about something, they're likely to take a bigger position. So that's the third element that I think if you can put that into an algorithm, which you can, those are the things that will differentiate slightly from a classical trend following model.
Tim: Yup and I think those are the challenges for this type of investing... what you're describing; those are the biggest challenges right there.
Niels: How do you implement the system? Meaning, how often do you run it? Do you jump in on a signal all in? Do you scale in? How does it work in practice?
Tim: You're getting into the nitty gritty! You know, in general... so in terms of information, we look at everything , intra-day information, to daily information; from a price perspective, volatility perspective... In general, our philosophy is to not scale in... to put the full risk on at time zero. That is in general a blanket statement, but that is the overall philosophy.
Niels: No, that makes sense. Now, just out of curiosity, because you obviously have much more experience with the commodities compared to many other managers... Do you find it much more difficult to actually do... get good execution when you're dealing with commodities versus the traditional financial markets?
Tim: Yeah, that's a good question. I mean, in some markets, yes, there's no doubt about it. So it can be a challenge; you definitely have to know your capacity and your liquidity constraints. And those are things that not only get dealt with from an algorithmic perspective for us, but that is where the judgment and experience comes in as well.
Niels: Sure. Now, I want to shift gear to another really important topic, which is... really sort of the risk management. And we've already touched upon it in certain ways, but I just want to ask you sort of a general question, and that is... because you mentioned you're kind of risk-averse person to begin with. But, when you look at a financial portfolio, what is risk to you? How do you... what is the measure of risk, in your opinion, that is most meaningful for investors? And for yourself?
Tim: It's interesting; this question literally came up last night with one of our advisers. And I had sent him something, sort of on a year to date update about how we were doing, and one of the slides in there was about the drawdown within the equity market. Here's the typical drawdowns of the S&P over eighty years. And he said, "well help me understand drawdown." And it really comes down to that as a key element. It's nice you can make a return over time. What is the path to getting there? What is that risk that you have to take to make a return? If, over time, the equity market gives you 5-7% return, but you have to risk 20-50% pullbacks every so period of time... that's a risky proposition. Then that comes to you better be very tactical and have your timing right. So that drawdown element is key to how we view risk.
Niels: And that being said, and I tend to agree with it, does that mean that you on a daily basis look at... you know... how much am I going to lose if I get stopped out of every position every day, or today? Or I mean, do you look at valued risk, is it meaningful at all? Or how do you sort of equate that sort of drawdown risk?
Tim: We look at value at risk. Certain people put more value in value at risk than we do, and it's interesting to look at. Our definition of risk on a daily basis includes the mark to market... the probability of losing our mark to market gains on a daily basis.
Niels: Speaking of drawdowns, since you brought it up... which was very good because that's my next sort of area of discussion. I'm not interested in specific drawdowns; I'm more interested in a couple of things regarding drawdowns. And the first thing is a little bit about the fact that such a big part of what these strategies experience. And I think that's why it makes it often a hard product for investors to be in, because you're often in a drawdown. How do you, on a personal level, how do you cope with the emotional roller coaster of being in a drawdown?
Tim: I mean I think that's the fight that everybody has to goes through. You've got to decide, is this style of investing for you? And it really goes back to what style of investing is. It's like a long option strategy, right? It's a thousand paper cuts with premiums paid, and bigger outsized gains. You have to have a lot of fortitude and patience in a strategy like this, but if you've got to that place not only as an investor, but a person, that is the right way to invest. Be patient, wait, don't fade. You just sit back and kind of watch the world happen. That doesn't mean you ignore it; that doesn't mean that you're not trying to improve. That means that you try not to get wound up about these aspects as much as the next person. I'll say this; investing is a challenge. You go up against everybody in the world. So it's obviously a challenge. But the bigger challenge is running a business, to be honest with you! And managing people and relationships. Once you get to that place of knowing what type of an investor you are, you have to decide if you're going to fade or not. And we simply don't fade. I've viewed the last few years as one of the greatest opportunities to get into the CTA space.
Niels: Indeed, from that point of view. And I want to touch upon that in a little bit later, on a slightly different way. But let me ask you this, sort of as a general observation, since you've been around for a long time. Why do you think that the recent drawdown of most CTA's has been the worst drawdown in their career? Because that's, you know, a little bit unusual that we saw drawdowns go from say, X to suddenly 150% of X. Even though people have been around for twenty, thirty years... why do you think that suddenly changed?
Tim: It's a good question. I think that ours are ever slightly more than they were historically, but not remarkably.
Niels: Yeah I know, this is generally about the industry, you know, specifically...
Tim: Yeah, I'm just thinking in this context. Are you asking what are the reasons for this particular situation?
Niels: I don't know if you have some observations about it, but I mean another question relating to that, as you mentioned, drawdowns can also be viewed as positive periods. But if we set aside the fact that they're the best time to invest in, that's for sure. But we also as managers, we often learn the most from being in a drawdown, that's kind of where we sometimes come out with the light bulb moment, and we say, "Wow, we could probably do it better this way." What have you learned from the drawdowns you've been in? Maybe I should ask that instead.
Tim: Well, we surely learned if we were committed to what we were doing. And that happens every time you're in a drawdown. So you come out stronger as an investment manager and a person. We have, obviously, like many managers, you're on a quest to do better. So what are those things? And you touched on them just moments ago. How do you focus more on the things that are working, and less on the things that aren't? How do you tilt your risk towards things that are working, and away from the things that aren't? Those are the challenges that we have. And you know, this particular environment has been interesting, in that, as I said earlier, there have been trends... they've been focused in certain asset classes. So, if you either had the ability to identify that or the luck to be equity tilted, you will have outperformed in that environment.
For us, we don't look at it as "hope we're lucky" type thing. How do we identify that environment? And how do we do better? In our case we focus on that unconstrained, multi-strategy type of approach. What strategies have an ability to do better in those environments? You know, I think the biggest thing we learned is, do we have a good business model? And you're going to... every strategy, whatever you are: long, short, equity, we could go on and on. Every strategy has a period that's good for it, an average period, and then it has a period where this is going to be the combination that is the challenge. Every business has that. And the only thing you can do is: your quest is to try to do better in those environments, not only for your trading strategy but for your business. In that time, we feel in general, that we've still grown our business, built our relationships, even though it has been a challenging period.
Some of our strategies have done better than others for different channels, different investor types. And in general we work hard to do better in that time frame. But if you look at this summer, I was challenged greatly when you have people saying, "Is this strategy type ever going to perform again?" And the answer was, "Yes it is!" And in fact starting June 1st, you can see some of those changes, you can see volatility picking up. If you had the right strategy and didn't fade and change everything, then you probably started to perform very well, and maybe even much better. because you've been working hard to improve and to add and to develop, just as any discretionary trader would. So that's where we are.
Niels: Sure, I mean it was almost kind of my next question. Because I think that what often happens at the time of the most distress, and typically at your worst drawdown, you get under this immense pressure from investors who will for some say, "Oh see, it's not working, it's never going to work again." And we all know that's the best buying signal you can get in these strategies, but it is very difficult. And I think you've answered it already, but I wouldn't be so sure, other to say that there must be people out there from time to time when they're put in that situation... you know, a little bit of doubt creeps into their mind and saying, you know, maybe these people are right, maybe these trend following strategies have had their... you know, the best times of their life, and maybe we need to do something different. But as 2014 has shown again, they seem to continue to do well. It's very interesting. I wanted to ask you a final question about these things. And that is, you clearly focus on risk, that's a big part of what you do... but I wonder, is there a risk somewhere that you know you can't control, and that kind of, not necessarily keeps you awake every night, but once in a while you wake up thinking, "Hmm, I don't really want this to happen?"
Tim: Yeah, it's a great question. We always came at the markets from the perspective of, you haven't seen everything, and if you dream it, it could happen. I mean, I think back to trading natural gas when it was at $1.85, and it could never get to $3 could it? And it was at $3. Or it couldn't get to $5? And then it explodes, and it gets to $12 or $15 years ago. And then what we'll never see cheaper than %7 gas again. Then you saw that in the summer of... right before September long weekend... 2001, you saw natural gas low back down in the below $2 area, but that shouldn't have happened. And we've always had this philosophy of if you can dream it, it could possibly happen. So what are the things that keep me up at night? It isn't the investment side of what we do, for sure. It is running a business, and the relationships is a very challenging thing to do. It's something I take very seriously, and take a lot of pride in. So, those things keep me up at night. The only things... we're comfortable with our investment approaches. Is it possible that the markets, the futures markets, the exchanges in general fail? Listen, anything's possible. That one I don't have a lot of control over, so I'm not going to lose too much sleep over it. But even then, we as quantitative managers sit in the best spot. Because even if the markets fail and the money disappeared for our investors, God forbid, you know, we're talking about a very small percentage of the capital. We run a margin to equity averaging at about 6-6.5%. So, we're in a strategy that is also very accommodative for that possibility. But the things that keep me up at night, again, are more of the business and people side of things.
Niels: Sure, sure. Let's jump to another area: namely research. And you know, often you could say that research is about, and progress is about asking ourselves the right question. So, I was just wondering, when you sit down with your research team, what are the kind of questions that you're brainstorming about, at the moment that interest you as concepts when it comes to how do we capture trends better?
Tim: We already touched on it, it's really how do you take better advantage of things that are opportune and risk less or lose less in things that aren't doing well? And that could go by strategy; that could go by asset class, sector, particular markets. How do you focus on what's working? And that is a really tricky and challenging thing to do. On the surface, it seems easy, but there are many, many black holes there. So that really is our quest. If it's... we believe we have good strategies and continue to develop good strategies as markets evolve for a number of environments, but how could we do better? How could we risk less, and capture more, do better? You know, this is how I start every weekly research meeting with our team is, that same topic to a point of that ad nauseam.
Niels: Sure. A question that I get often actually, from our listeners is: when you run all of these models, and you do your testing, and you do your research... but how do you discover, how do you detect if a model or it could be a market, model combination, is deteriorating, and perhaps is not any longer a strategy to pursue? How do you... what are you looking for in that respect?
Tim: I mean we've talked about a lot of the elements, it's where the risk/reward, or whatever your definition of risk starts to become disproportionate to the gains made.
Niels: Do you monitor that on a market by market basis, or is it more so of a gut feel, that hmm, maybe we need to look at this more?
Tim: No, it's a market to market basis, it's a strategy to strategy basis. We are trying to determine if these strategies are effective. Are they effective in the environment they were built to be effective in? And how do they do in the environment that's challenging for them? And you're constantly monitoring those things, and if they are not being effective in the environment that you think they should be effective in, or that they were in the past, what has changed? And do you need to make an adjustment? And I can honestly tell you, and this is... you know, not trying to say that we've figured anything out... but it's mostly making subtle improvements in things, risk management improvements in things, as opposed to, "oh that just doesn't work anymore." Basic trend following; trend capture, wrapped in rigorous risk management capital allocation works - point blank. And the question is, do you have the fortitude to have the opportunity come along? Or do you blow all your bullets in the challenging period of time for that strategy.
Niels: A big part of a research team is of course, you know, an output which comes in form of a backtest and there are many opinions about backtest, their validity and how much you rely on them, and so on and so forth. In your experience, how meaningful are they? Maybe more importantly, how should people go about performing a backtest so it does become meaningful?
Tim: It's a big topic, I mean obviously we look at backtests as a point of reference. You take them with a big grain of salt. And you then... whatever your methodology is to walk forward, or test beyond the backtest is important, in judging... you know, how did you think this was supposed to work? How did it work based on the backtest? And how does it work in reality? We obviously do, like many managers at this stage, many things to ensure we don't fall into backtesting pitfalls and over optimization pitfalls. And part of that is building strategies that aren't parameterized, for lack of a better term. They're not parameterized a certain, specific way. In general, our strategies are parameterized so they can adapt to the environment. So they're not stuck in a certain way, meaning, a parameter may be given the ability to float through a set of values. That accomplished a couple things: it makes it adaptive to the environment whenever that parameter changes by whatever function; and two, it doesn't force a particular parameter to be the Holy Grail so to speak. So it's again, it's allowing things to adapt and evolve.
Niels: I think that's a really important point you just brought up there, because I think that is one of the biggest problems we have in our industry, and that is, you do your testing you do your research, and you end up selecting a number of parameters that looks great over time. But as we know, markets and environments change... so having that particular process. Are you able to do that fully automatic so that the model itself picks whatever parameters it should do? Or is that part of the subjective part of research?
Tim: No, it's done on an algorithmic basis. We don't involve ourselves in that on a day to day basis. The parameter ranges come from the research process. So we look at what a range is that makes sense, that's a robust... again, picking one particular, very small nuance here, but those parameters adjust over time algorithmically, we do not do it with a push of a button.
Niels: Sure. Before we leave research, and I'm not sure whether this the right place to bring it up, but I do want to just allow you a little chance to talk about it. I notice in your... in the information that you shared with me, something called the CTA Value Added Index, and I wanted to ask if you could explain that, and how people might be able to use it constructively when they look at CTA's?
Tim: Okay, well I appreciate that opportunity. So, these CTA value add index is something that myself and my team developed here at Auspice. And it was in answer to investors in the last few years, and a similar topic to what we're having, who had this philosophy of why do I need a CTA in the portfolio at certain times when the equity market or other asset classes are doing do so well? Is it adding any value? And it also came to a question of are there times in the environment that you can identify that adding or over waiting CTA exposure makes more sense? And so we wanted to judge the value of CTAs, so we used a simple index, the Barclay BTOP50, and the idea was to look at the rolling five-year sharp ratio of the S&P 500.
So let's talk a very simple portfolio, and then what's the benefit of adding 10% CTAs? So this is a very simple exercise. We know there's a benefit. The question becomes, is there more or less benefit at times? So you take that same 90/10% portfolio with 10% CTA, in this case would BTOP50 index, look at that rolling sharp, subtract one from the other: the 90/10% from the straight S&P and say, "Is there a value added to CTA's over time?" And no shock to anybody in this space, on almost all time frames, there's an added value. But a few other things... so we could demonstrate that. So it's nice to demonstrate to a certain type of client, but there was some other things that we learned, and that is that that value added index that spread between the two, what we call value added index, goes up and down. So there's times when CTAs add more or less value. And once you determine that benchmark, then you can look at different timing aspects, different scenarios of when to add or subtract CTA exposure.
So we did a white paper; we partnered with BarclayHedge, they've published a white paper. If you go to barclayhedge.com you can see the index level on a monthly basis, you can... again the white paper is available, and it just gives you a window into, not only what is the value add, but when is the value add more apparent? So where are we in that? Well, obviously in the last few years with the equity market going straight up, very high sharp ratio even on a rolling five-year, versus CTA, those two things have spread apart. The value added index and the S&P. So what you can see over time is that when those things separate, if you look at it historically, and again, take that with a big grain of salt, that if you look at it historically, you can identify the time and the elements to it. There're no guarantees, there's no crystal ball, but it repeats itself over time, that when these things separate, it is a more opportune time to invest in CTA's.
This index went negative late 2013 or earlier this year, and that's a rare occurrence, these things are very separated, and that signals a possible entry in terms of when to add CTA exposure. And lone and behold, what did we see? We saw in the first part of this year, some retail investors pulling out of this market, CTA in general. And what did we see? We saw some institutional investors starting to weigh back into the CTA space. And it's obviously proved very fortuitous for one and not as fortuitous for another. And this is just a tool to identify that value in the timing.
Niels: Sure. I guess that's also what caught my eye looking at the chart, is part of this... essentially is saying there's never been a better time to invest in a CTA, which is...
Tim: Yeah, you take that with a grain of salt, but at the end of the day, can we identify sometimes where that opportunity may exist? You still have to pick your horse! As we say here in Calgary. You've got to pick a good manager; you've got to pick one that's evolving and adapting, but I think there are ways of identifying these opportune times.
Niels: Sure. I mean if you want, feel free to send it over, and I'll be happy to put it up in the show notes so that people can see it. It's an interesting read, and it's certainly educational, which is what we try to do here. But let me just go and ask you, a little bit on the business side... so we've got a couple of topics left, and one of them is just a little bit about the business, and then we jump to the fun part at the very end. And when it comes to the business side, I'm really intrigued about the way you've diversified your business into these new products and the approach that you take. But for people who are maybe not so familiar with it, can you explain what the difference really is between an investor choosing to invest through a fund, a ETF, a '40 Act, what's the pros, what's the cons, what's the fees, what's the difference? Because it's getting confusing: one, people have to choose between managers; now they have to choose between different products of the manager. So how do we deal with all of that?
Tim: So this is a really important question to our business as a whole, we believe CTA strategies are valuable. So we start there, we know they're valued to the investor. The question becomes, what is the delivery mechanism appropriate for the investor type? So really it comes down to, I view '40 Acts, ETF's, Indexes, funds, managed accounts, they're delivery mechanisms that's it. And the question is what's the right delivery mechanism for that investor that, again, fits need for transparency, liquidity, cost, performance, all those things? So it becomes... if it's a retail investor who's trying to buy an ETF well, certain things will fit into an ETF structure, and certain won't. And the question is, do you have a CTA approach that can have the elements necessary to fit into that delivery mechanism? So we evolved our strategies, such that we had a very good CTA approach that fit into that delivery mechanism. So it has certain different elements than say, our unconstrained fund structure, or managed accounts structure. What are the elements that fit into a '40 Act? It's really looking at those delivery mechanisms and then saying, "what is the combination of return drivers that we pick from that could fit into that world that meets that criterion?" Cost is obviously... cost is important, liquidity is important, transparency is important. So we have a range of all of those things, depending on what the need of the investor and the distribution channel is.
Niels: But if we can just be a little bit more specific here, because I think it's very important for people to understand, what is it you can do in ETF, or rather, what can't you do in an ETF? And what's the difference? How much does it cost to buy an ETF versus a '40 Act, or versus an offshore fund? What are really the specifics if people had to choose?
Tim: So, in general, where we started with the ETF path was you needed something that had an underlying benchmark, a published benchmark, that then the market makers of the equity ETF units could replicate. So that has to be something that's known or transparent. So if the market makers are going to replicate what we do, they need to know what we do. So we chose a path where we took a CTA strategy that we went as far as having a third party publish the weightings of that strategy on a second to second basis. We partnered with the NYSC. And then what can happen... is that becomes... it's our strategy, what we call a single strategy CTA approach that is published third party that can then be... that benchmark can be seen, replicated, followed by the market participants.
Those are some of the elements needed for an ETF, so we start there. What are some of the other elements? Well, there's not many two and twenty ETF's for various reasons, including regulatory, so you needed a strategy that fit, in our experience that fit less than an hundred basis points. You know, so I've had other CTA's say, "So you've got a ETF that's less than a hundred basis points with your managed futures index strategy, are you crazy?" And the answer is, no, I don't think I am, I built a product that is, yes, aggressively priced for a certain type of investor that would not otherwise have the opportunity to invest in the CTA space. They're not going to buy a fund structure.
Niels: Sure, forgive me for interrupting here, I just want to fully understand it myself... so essentially, where you make your money from in ETF is actually from the publishing of the underlying index?
Tim: So there's money made by us in certain ways, so like any other manager, we make money on management fee and performance fee. In the case of these products, you're talking about a management fee only product that we then split with the distributor of that product if there's a distributor in sales for selling that product. So we get paid a sub-advisory management fee for managing that product. Plus we could also gain a fee, depending on the situation, for the licensing of access to that strategy.
Niels: But if you wanted to have a performance fee, do ETFs allow you to do that, or is it just you choose to have just a management fee?
Tim: That's a whole nuance that is a big can of worms. What I would say, to answer that my own way is that we have chosen to separate those strategies that don't have performance fees, that fit into the ETF and '40 Act space. That is the approach we've taken at Auspice.
Niels: And the '40 Act, just to briefly for people to understand the difference here, is you have an ETF, everybody can buy it, it's exchange-listed I guess... and then comes something called a '40 Act. What do people do with that?
Tim: So again, you're talking about a mutual fund structure in the US that fits a certain delivery channel for wealth advisors - RIA's, very well, they're very comfortable with that structure, it has certain tax implications if it's structured a certain way, and it fits and is very familiar to that investor type. We use the same underlying strategies as our ETF’s in the '40 Acts, space with our partners in the US. Again, the strategy was developed with these type of vehicles in mind.
Niels: Right, OK I see. And of course you have your normal funds where I guess more people are familiar with that. Okay, that's excellent, I appreciate that. I just want to ask you a general question, which I try to remember to ask everyone, and that is... when you go through these due diligence questionnaires, or calls, or whatever it might be, and I'm sure you've been through a few quite a few of them over time... what do you think that investors really should be focusing on when they try to evaluate what you do? Maybe they don't ask you the questions right now, or maybe only a few people do that, but where would you suggest they focus in order to really appreciate Auspice Capital?
Tim: Wow, that's a great question. Of course you always have these hopes and dreams when you go through due diligence process that you get to talk about certain things, and often times you don't. You know, again, at this stage hopefully the reason somebody's there, from a diligence perspective is, you've already gotten past the numbers, the performance has been dealt with... talking about where we think the performance is coming from... on those edges is a key thing that we like to discuss. You and I have talked a lot about those today. But really, again, and we've touched on this, is... do they see us as a long-term partner, even if they're looking at it as a one and zero allocation: something very simple and binary?
We really look at these things as a partnership. And do they understand what we're trying to accomplish as a business? Are they investing for the right reasons, not just chasing returns? Those are things we like to discuss, and at the end of the day I want the best for my investors, so what we talk about, at Auspice, with these folks when they come into our building, is: are you looking at the right product? What are you trying to accomplish? What are your goals, your benchmarks? What are those things? If we can understand what those things that they're trying to accomplish as investors, we can help them find the right product within our suite, or tailor something to their situation. So it really comes down to the collaborative side for us at Auspice that becomes the bulk of the conversation. At least... most times that's my hope.
Niels: Okay, that makes sense. Now, the last sort of section that I wanted to talk about is just sort of general and fun I call it. But it's partly for people to get to know you better, because I think that's really at the end of the day what people are buying into. And I wanted to ask you, you mentioned the challenges of running a business, which I completely agree with. Did you always want to be an entrepreneur, or is that just what you had to become in order to become a trader? Do you know what I mean? You could have stayed with the bank, but you chose to do it your own way? Tim: Yeah it's a great question and those who do get to know Ken and myself, we'll have this discussion. So yeah, it was very nice and comfortable to work at a bank or an oil company: you walk in, you trade, you walk away. There was something inside of us... we had lots of ideas. And when you're within a large corporate structure, even that of a trading organization, there's just constraints, you fit in a certain way. And we had goals to take this skill set and do some more interesting things with it. In order to pursue that, I had to go off on my own. I looked at opportunities to join other big brand name hedge funds you'd know, but it just didn't fit me. I had my turn at being with large institutions; I fit in certain ways, I did not fit in other ways. And again, it really came down to the relationship side, the creativity side.
Ken and I are both, what I view as creative people. Again like I said, musical background, those are things that inspire us and secondarily or even more important, the relationship side with an investor or a client has been a game changer for me personally. I love meeting interesting people. I love meeting entrepreneurs that made their money a certain way by doing something interesting. Those things really get me up in the morning. Being a mechanical trader, a rules-based trader... it's like laying bricks. It's fairly... again, by everything we're talking about, it's process driven. But, meeting interesting people, the ability to... you know, sometimes it's the ability, sometimes it's the force to go travel to places to meet interesting people, is such an honor and such an opportunity. This has been sort of one of the big wins in my life, has been meeting these interesting people. People you and I know in common. I wouldn't have met them otherwise as a proper trader, at a bank or an oil company, you have a very square, myopic life.
This has been the most opportune period of my life. It's hard work beyond belief, but it has been the most rewarding period of developing who I am, in building this brand that is more than just Auspice as a label, it is... you know, we take it very seriously, we take a lot of pride in it, we're very proud of it. And we are very proud of the people who have let us into their world, whether it's a relationship or an investment relationship. So, those are the things that are very rewarding to us.
Niels: Sure. It doesn't have to be from your early days, but it could be from your early days, Tim. Were there any books that you read that influenced you heavily in terms of trading? But also, maybe a different book that influenced you in terms of your view on business or life for that matter?
Tim: That's a really great question. So, there's no doubt that certain books on trading definitely inspired me. That includes Jack Schwager's books. I have a ton of respect for what Mike Covel has shown to this industry. So that definitely made a bit of a difference to me. Having said all of those things, you know, I was sort of down this quantitative trend path far before I ever read one of those books. I think those things just spurred me on. Once I figured out there're other people doing this, and they've done it very successfully... and it's probably one of the bigger influences, to say go off and do it on my own. More so than from a trading development standpoint. It was more of a business, entrepreneurial perspective where those things influenced me. In terms of other things... books that have made a difference for me, I read, the book, "Starts With Why," by Simon Sinek. It's about why you do what you do. One of my favorites, it really impacted me. I really enjoyed that book. This is another one; it's a tough read and there's a little story that goes along with it. Dale Carnegie's book, "How to Win Friends and Influence People." Not so much because I liked the book, but the story is when I left Shell in 2005, their parting gift to me was Dale Carnegie training. So, that is public speaking. That was a polite way to say that I was not good at public speaking, could not give a presentation, and if I'm going off on my own to be an entrepreneur, I'm fairly ill-equipped... and it was probably one of the most humbling things I ever did, was taking that course and learning about how to speak in general, and presentations and that sort of thing. So those are the biggest ones; I'm going to add one more, there's so many, but... I would encourage everybody to read, "The Prize," by Daniel Yergin - Pulitzer-winning. This is an account of the history of the world according to the oil markets and why things happened, and how oil influenced things right down to the world wars, and right from the first well being drilled in Pennsylvania... I believe. It's a big, thick, heavy read. If you can get your hands on the PBS video series, I'd highly encourage it. I probably learned more about the development of oil companies, the Shell Oil Company in that than I did in any other source. So I encourage everybody to get in a perspective from that. Those are kind of the ones that come to mind.
Niels: I think that's great, and I think that actually the last one you mentioned is very, very interesting. Because at the end of the day, a lot of influential people would say that it all comes down to oil. Whatever we see happening around the world, oil has something to do with it. And you and I talking in December of 2014 is an interesting time to bring up oil I would say, so, there we are. On a personal note, I heard you earlier talk about family, so, I'm kind of assuming here that you have children, but correct me if I'm wrong.
Tim: Yeah, I do. I'm happily married for 18 years now, together with my wife for 21 years... that's half my life. I have two children, 9 and 11. We live just west of the city of Calgary, right on the edge of the Rocky Mountains, about an hour from Banff Canada. We highly encourage people to come... due diligence, come for a visit and go for a ski, and enjoy the Canadian Rockies. We love living here, and even from a business perspective, Calgary is the heartbeat of the Canadian oil business, and it's the third largest reserves in the world. It's an incredible place to be, and a lot of opportunity, and very proud to live in this part of western Canada.
Niels: I appreciate that, and here comes my question. My question is, if you could pass on just one of your skills to your children, what would it be?
Tim: It's so funny you ask this, because as you raise children, some of the things that develop, that challenge you as a parent, that you try to control, are the same qualities as an adult are encouraged. And I can say this as a parent, maybe someday my son will listen to this interview. That frustration in being a parent to a child who is very, in one way stubborn, but very perseverant, is very challenging as a parent. But I would encourage you to develop that skill with your child as opposed to stifling it. That perseverance and that ability to not fade is such an important attribute as an adult, in every walk of life. That if we stifle children who have a headstrong attitude, that may be the wrong approach. It's challenging as a parent that way, but the ability to not fade and have fortitude is so important in life. So think of that as you try to be a good parent.
Niels: Sure, no I think that's great advice. I've got two more questions Tim, and then I'll let you go. But I wanted to ask you, is there a fun fact about yourself, something that even that people who might know you may not know about you? And I've had some very diverse answers to this question over time, so, is there something that people don't really know about you, Tim, that you can share?
Niels: I guess you used the music thing already, so that doesn't count anymore.
Tim: That doesn't count anymore? I think, I don't know if this is a fun fact... I think that perhaps as people have met me in the industry, they know that I've been very dedicated to growing this business and very serious about the investing we do. I'm actually a pretty relaxed person outside of that. I take what we do quite seriously, but I think that people that get to know me, know there's a very emotional side... I hope I take time for the friends I have, I'm very dedicated to them, and really enjoy spending time with friends and family. It's hard when you're running a business, but I'm very approachable, I maybe don't seem approachable, but I am actually very approachable, and I encourage people to reach out to me. As I said earlier, this is the win in my career, and my life is meeting interesting people. As a prop trader, you don't. And as the founder of this firm, I've had the good fortune that's been part of my role is to meet people, and I consider it a great gift, so I highly encourage people to reach out to me.
Niels: Absolutely great stuff. Final question Tim, now, we've talked earlier about what you would like people to ask you when they come and sit down, and do they do their due diligence, so obviously I have to turn that question to myself in some way, and that is... or whether you feel that we've covered all the important points today, if there's something we've missed, something you want to add as we wrap up this conversation? So I just want to make sure I do justice to you and to your firm.
Tim: Oh! That's a great opportunity. I think we've covered... I think I've covered a lot of it. You know, I would add this... you know, it's hopefully not ending on a negative note, but one of the things you have to decide when you're going to go off and leave an institution and start your own business is... it ends up being, anyway you slice it, you build an organization. Because we trade in a systematic way, it's a quiet thing. It's somewhat of a lonely pursuit. You have to be very comfortable in going down this path. The amount of difference it is to trading for an established organization, and it's not for everybody. Because when you go down any entrepreneurial path, you're going to get told no, so you have to have fortitude. You're at times going to grow from some small level, and it is a fairly lonely path being an entrepreneur in general. And you need to look inside yourself and say, "Is that the thing you want?"
Now, I'll flip it around to the investor... for the investor, one of the most important things they could understand about a manager is, is that manager comfortable in the path that they're in? Are they comfortable being at a stand-alone, boutique quant shop? Do they need a bigger infrastructure? Do they need to be at an institution? Are they comfortable where they are? We started this company, leaving Shell... you know, I still joke two guys, and a dog, and an office... and had a lot of dreams about products and ETF's and all these things, and we've slowly built it up. But you have to be comfortable in that. So I would just add that little tidbit, it's not for everyone. You have to find the thing that fits your personality and your business model, to be honest.
Niels: No, I don't think it's negative at all to finish like that. It's just keeping it real, and that's what it is, and I think that's another important point to bring up. So, from my part, Tim, there's really only left to say, you know, thank you so much for sharing your story and the insights to Auspice. Tell me where's the best place for people to reach out to you and get to know even more?
Tim: Yeah, so if you just go to auspicecapital.com and reach out through the website, it'll filter to me, and I highly encourage people to do that. You can find me on Twitter; you can find me on Instagram. You know, I encourage people to reach out in any of those mediums. And again, if you've got something interesting to say, I'd love to hear from you. I'm interested in interesting ideas, and disruptive thoughts to be honest with you, so I highly encourage it.
Niels: Fantastic, great stuff Tim. And of course also, I would just mention to our listeners that they can find a lot more details about our conversation today in the show notes for this episode on TOPTRADERSUNPLUGGED.COM. So, anyways Tim, I hope we can connect at a later date, to get an update on the great work that you do and in the meantime, hopefully we will run into each other at one of the upcoming conferences, you never know. They're in the sunny parts of the world, so there will probably be a lot of people coming to that. So, I really appreciate it Tim, thank you so much, and I'll catch up with you later!
Tim: Yup, thank you for the opportunity, it was great speaking to you.
Niels: You're very welcome. Take care!
Tim: 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.
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Date posted: 29 Dec 2014no comments