Ep. 1410: Trend Following via Canada with Michael Covel on Trend Following Radio

Please enjoy my monologue Trend Following via Canada with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive. --- I'm MICHAEL COVEL, the host of TREND FOLLOWING RADIO, and I'm proud to have delivered 10+ million podcast listens since 2012. Investments, economics, psychology, politics, decision-making, human behavior, entrepreneurship and trend following are all passionately explored and debated on my show. To start? I'd like to give you a great piece of advice you can use in your life and trading journey… cut your losses! You will find much more about that philosophy here: https://www.trendfollowing.com/trend/ You can watch a free video here: https://www.trendfollowing.com/video/ Can't get enough of this episode? You can choose from my thousand plus episodes here: https://www.trendfollowing.com/podcast My social media platforms: Twitter: @covel https://twitter.com/covel Facebook: @trendfollowing https://www.facebook.com/trendfollowing/ LinkedIn: @covel https://linkedin.com/in/covel/ Instagram: @mikecovel https://www.instagram.com/mikecovel/ Hope you enjoy my never-ending podcast conversation!

• 0:00Speaker 00

  One of my favorite people in the trend following world, a repeat play of an episode, but a mindset and a thinking, especially about being an entrepreneur and especially about being a trend following trader, a mindset that you want to have. Look, I can't predict a damn thing and you can't predict a damn thing. But let's say we are in the middle of AI bubble time. Are you ready? Are you prepared? Are you sitting there right now on a big nut, all time highs, feeling good, but are you imagining what could happen and

• 0:42Speaker 00

  how you would feel if it dropped 50% or 60% or 70%? You don't think that's possible? Have you looked at interest rates recently? Let's jump right into a blast from the past and get some of that mindset that keeps you ready and keeps you prepared for when the shit hits the fan.

• 1:20Speaker 00

  My guest today is Tim Pickering. He is the president, I believe, CEO, the main guy behind auspice capital, a trend following trader out of Canada. Tim was originally on this show in 2012. It's now 2024. What the hell? Time flies. A fun conversation. We dive into some detail that you might not be familiar with, talking about more complicated strategies where people try to replicate trend following traders. An interesting perspective. And without any further delay from me, let's jump right into my conversation with Tim Pickering.

• 2:08Speaker 01

  How's life over there?

• 2:10Speaker 00

  It's okay. No complaints. I've said this for years that if you took 25 Western guys aged 25 and you said, hey, you're going to Ho Chi Minh City, you're going to Sagon for a year, we'll pay your bills. You got to stay there for a year. Maybe the first seven or eight years I was here, I would say, well, at the end of a year, 75% of the guys would not go back.

• 2:31Speaker 01

  Wow.

• 2:32Speaker 00

  Yeah. Well, I've changed it recently. It's 100% would not go back.

• 2:38Speaker 00

  Now, of course, if people go down the track, they get married, kids. Okay, you can't make those decisions. I'm talking as a single guy, do not return, 100% guaranteed. It's just not even a question because we're men. So.

• 2:56Speaker 01

  Yes, we are. At the end of the day.

• 3:01Speaker 00

  That's how it works. 2012, I was in San Diego when we had that conversation.

• 3:05Speaker 01

  It's funny. It seems like a lifetime and it seems like yesterday by the same token. So, but I look at myself and I went and listened to a bit of the interview until I had to turn it off because I couldn't listen to myself. But 12 years, I'm over 50 now. And this is what inspired me when I listened to you and Eric. It's like, well, I'm on the north side of 50 and I'm gray and I wear glasses and I'm an empty nester. So life's different.

• 3:31Speaker 00

  Well, I'm over 52, but the way I look at it is I'm doing close to 40 inch box jumps. So F you 50 something.

• 3:41Speaker 01

  There you go. Right on.

• 3:43Speaker 00

  It is what it is. Time keeps moving. Everyone's going to learn this in the internet age that everyone's posting everything. And then one day they're going to realize I was a 25 year old influencer. I was a 35 year old influencer. Hold on, I'm 45. What the fuck? I'm 55. Everyone's going to deal with the same shit. It's the way it works.

• 4:01Speaker 01

  It's the way it works, man. We go off, we go down and that is the way it works. Various impediments I have, which is a long list. Trying to enjoy the moment is something I'm trying to do. I think it's hard as an entrepreneur. My personality makes it hard, but I'm trying to enjoy the ride more. I mean, we're doing okay. It's not as much of a struggle as it was 12, 15 plus years ago. So I'm trying to enjoy every day.

• 4:27Speaker 00

  Well, look, from my understanding is your assets under management have gone from a quarter billion to a billion or so over a decade. So without knowing much, that tells me you're good at the performance and you're good at the business. So there you go.

• 4:42Speaker 01

  It sums it up, of course, and it feels good and thank you. There's so many factors. You know, I've met a lot of CTAs like yourself that they're super smart guys or have a smart team, good numbers, maybe, but that doesn't mean success in this business. It's extraordinarily competitive. There's more to it than just the numbers. People used to say, well, you know, if you put up good numbers in any aspect of trading or investing, that'll sustain you, that'll be enough. It's not. It's a business and businesses need sales and marketing and you need some luck and you need incredible persistence. I didn't give that enough weight,

• 5:24Speaker 01

  how much persistence you need. It's not fair. Life isn't fair.

• 5:28Speaker 00

  Maybe if it was at a different point in time, I would have chased the exact same direction you've chased. But given to when I came along and the access I had and a little bit late to be learning what something like trend following was, and that I stumbled into the direction that I stumbled into. But I will say this, maybe the direction that I'm on can't make as much money as John W. Henry. However, I thoroughly enjoy the entrepreneurial side of it where I get to be, of course, there's all kinds of quote, people assisting me and contractors and stuff like that. But I enjoy the one man show. I enjoy the not responsibility. I enjoy that part of it. Whereas I know in your situation, without getting

• 6:12Speaker 00

  into too much of the details, you've got to take care of a lot of different things and a lot of different people to make it home.

• 6:18Speaker 01

  Even from a dozen years ago, it's come a long way in that regard. There's lots of things that get me out of bed in the morning, but there's lots of things that really suck as you grow in scale. Having said that, it's also relative. I came out of this, I was with one of the big Canadian banks, TD Bank, and then went to Shell. Shell's a massive organization, obviously, and started this with two men and a dog in an office, so to speak. And now we've grown, but it's all relative. Yes, there's a lot more to deal with. The business has evolved, compliance and the like, but it's still pretty pure. I'm still pretty motivated, let me tell you, versus when I left a big institutional organization.

• 7:00Speaker 01

  That was really soul robbing. This gets me up every day.

• 7:05Speaker 00

  Let me just get you into something which I think will get you up because look, you and I and many other people, we can talk trend following till we're blue in the face. But you were kind enough to reach out to me to say something to the effect of, we got to talk about something and it's not something that's in my wheelhouse. I listened to an interview with you and Niels at Top Traders Unplugged and another gentleman. I don't know if you ever played baseball or you know anything about American baseball, but there's a term for baseball nuts if they're talking amongst each other and other people don't understand it. It would be like they're talking inside baseball. And that conversation that

• 7:48Speaker 00

  I listened to, I listened to half of it and I read it all. And it was the most inside baseball conversation. I want to tear it apart though, because I think it's instructive. And I'm not so sure the instructive part that you wanted to get out there, got out there was the way I read it.

• 8:04Speaker 01

  That's probably accurate. It turned into something different than I'd hoped it would.

• 8:11Speaker 00

  Let me set the stage though. As I talked about in this podcast and my books, there's been a lot of interesting people around this world that decided they wanted to be trend following traders and they essentially cobbled together some money, friends and family eventually got bigger. And they were all the names that people know and they did their thing and they made performance. And if people liked them, they stayed with them. But they didn't like them, they left. And maybe if somebody had enough cash as an investor, they'd invest in two traders or three traders, or they'd spread their wealth around, or maybe somebody just kept all their money with Bill Dunn for 40 years. All kinds of choices. In that conversation, you were bringing up something that I would hazard a guess that 99.9% of

• 8:55Speaker 00

  the population had no earthly idea what you guys were talking about when you went into, for example, the replication of trend following traders. Is that a fair assessment? 99.9% of the population had no idea what you're talking about?

• 9:08Speaker 01

  I think even amongst a lot of CTAs, I think it got pretty opaque pretty quick because it talked about replication.

• 9:16Speaker 00

  Let's stop there though, because I don't want us to get opaque. Define it. So if someone's just tuning in and they hear replication. Okay, let's break that down. So we've established there's trend following traders out there. Everyone knows how that works. You got a strategy, you do it. Replication.

• 9:31Speaker 01

  We've got some benchmark indices in the industry like the SocGen CTA Index.

• 9:37Speaker 00

  And it's comprised of what?

• 9:39Speaker 01

  Comprised of managers and the results in the space. So actual results of managers.

• 9:45Speaker 00

  Taking how many managers to make that index?

• 9:47Speaker 01

  They range depending on the index. Some of them, like the B top 50 isn't 50. I think it's half of that. I can't remember the exact number, but in general, I guess the bigger point is that you're taking some of the biggest CTAs by AUM, by assets, making a benchmark index and saying this is how CTAs are doing.

• 10:09Speaker 00

  How useful is that?

• 10:10Speaker 01

  Well, this is the thing is we all have to use benchmarks. How are you doing versus the industry? We talk about these things ad nauseam. It's month end here. I'll start to, with my team, craft our monthly summary tomorrow and we'll mention how we did versus those benchmarks. But we have to recognize and we have to tell the story or make it clear how auspice in our portfolios are different than those benchmark indexes.

• 10:35Speaker 00

  But that becomes part of the issue though, because ultimately if you're taking disparate managers, let's say 20 of them, 50 of them, whatever, you take disparate managers that could have a similar strategy, but different technique, different portfolios, and you average them together. I'm trying to figure out what the benefit is.

• 10:50Speaker 01

  I think in that conversation, part of it with replication is what they're trying to do is-

• 10:55Speaker 00

  We haven't, we haven't defined replication yet, though.

• 10:57Speaker 01

  Okay. What they're trying to replicate, we'll get to that definition, that benchmark index, whatever that benchmark index is and its pluses and minuses and its benefits and its drawbacks. Overall, I think we can agree and we are students of trend following. We recognize the benefits of trend following. You can go through all the lists of trend following and CTA attributes and say, these are the good things and we can list the bad things. So overall, if you look at those indexes, they're good. They've done a good thing. They are non-correlated to stocks and bonds. They may have elements of crisis alpha to some degree. Those are the accretive benefits mathematically to a portfolio. The replication

• 11:37Speaker 01

  concept says, how can we create that return stream without owning all those managers? A la a fund, a fund type concept.

• 11:48Speaker 00

  Replicating an index return stream.

• 11:50Speaker 01

  Correct. Yeah. And so that in itself is not a new concept and that's been around for some time. It hadn't really been done, I guess, much in the CTA space. That gentleman, his firm is based on that. At the end of the day, replication in itself, it's interesting. It's a way of going about it. That in itself isn't so bad. That's not my issue. And part of that conversation, we'll come back to ETFs.

• 12:17Speaker 00

  Let's keep it a replication for a second, though, just because you are very wise to all these issues. So we've got this index out there that takes the actual return streams from assorted trend following traders that people know the names, et cetera. You get this index. Other folks say, well, gosh, that index is a very valuable piece of information. We like that return stream. Let's see if we can replicate it without owning these managers. How are they doing the replication exactly?

• 12:47Speaker 01

  There's various mathematical techniques, so that would be a whole discussion, but needless to say, it can be done. One of the easiest ways to replicate what those managers are doing, Michael, is most of those managers, you can now, given the transparency of CTAs and products out there, could be 40 act mutual funds, you can see the positions. So we can figure out what those managers have on in terms of positions in general. And generally, there's a lag in that. You may not see it day to day. Maybe you're looking on a weekly basis. And I think the premise-

• 13:22Speaker 00

  Not unlike seeing Buffett's positions later than they happened or whatever, that same kind of thing.

• 13:27Speaker 01

  You can look at filings and I remember reading something or hearing something you had said about going back and looking at filings and you can actually see positions. This is the same concept. So if we say, look, we can try to approximate what is creating those returns by having some combination of positions. And in the case of that particular product, they use a certain amount. It's not that many that they deem the right number. And I'm not trying to be critical of that. If that's the number they deem is the right number, that's great.

• 14:03Speaker 00

  I got one more question, though, just so I make sure I understand the audience understands. So they are at their root, a firm that wants to replicate the index of these managers, these other traders, they've got to roughly determine, for example, what they think are the techniques of a trans-trend of an auspice, of a Dunn Capital individually, and then they are combining their own index, once they think they have replicated these particular traders.

• 14:32Speaker 01

  Yeah, I don't think it's as deep in general as trying to replicate strategy. It's simply trying to understand enough about the positioning so they can reconcile the returns that are coming out the other end. It's really that math. They're not dissecting the strategy and trying to replicate the strategy. They're simply trying to replicate the positions that would generate that return stream by looking at the positioning post with some lag and then adjusting it. In the case of that product, and again, I don't want to quote verbatim factual because I'm 100% sure, I can't remember to be honest with you, and then adjusting it on a weekly basis. Here's an issue with that. What is

• 15:14Speaker 01

  one of the core aspects of trend following? It's capital allocation and specifically risk management. This is a risk management effort. True and true, it's a risk management. I risk as a, for a living, I risk one to make three in general. It's a discipline. It's a process. I never want to be off on that. That's the part that can't deviate. One of my biggest concerns was how do you manage risk if you only adjust the trades once a week? When you're looking at these managers that make up this index and you're guessing them, you make these adjustments. So on any given day, at any given moment, if something happens in the market, auspice will adjust our positions. We are very responsive in

• 15:59Speaker 01

  terms of that. And we have to be, because to meet our capital allocation and risk management criteria, which is our religion, we need to be responsive. I can't wait a week. If I get into crude oil trade, over the next X days, it drops by 50% and I wait and wait and wait to get out of that trade. Well, that's now an outlier negative trade in my portfolio. That can't be. That doesn't work for me. That doesn't work for other CTAs. And that is one of the risks of this strategy is that risk management side. As I see it, this was part of the debate. This is one of the things I wanted to debate. I'm sure maybe there was good answers for this, but it was one of the things I wanted to

• 16:44Speaker 01

  bring up in terms of you're out there saying, as a replicator, you are a CTA, which I disagree with, by the way. They may be registered as one. You are not a CTA. You didn't put in 20 or 30 years, developing techniques and strategy and building a track record. You figured out how to replicate people who do that. That's different. So you call yourself a CTA. You've got some concerns in terms of the risk management. That was one of my concerns, is that by replication, it's an interesting idea, but there is a concern from a risk management perspective.

• 17:21Speaker 00

  For those particular types of operations that are doing the replication, is it important about the risk management part if they are staying close to the index? So I guess that's my question. Is there enough data over time historically to show, because what you're speaking of is essentially the outlier events, the unexpected happening, and then you're ready to go because you can take action. You manage your risk daily.

• 17:48Speaker 01

  Yeah, moment to moment. That is the issue. Well, what are we doing? We're looking for outlier trends in the way we want. We, it looks like cocoa is going up. I should be long. Looks like cocoa is going down. I should be short. You've got some method of identifying trend and then you overlay that with this religion of risk management and capital allocation. And that's what starts to separate managers, the portfolio, the risk management techniques, how responsive are? Are you quick? Are you slow? Those are the key things. Every strategy has a plus and a minus. There's good and bad about everything. I can list all the great attributes of CTA and trend following, and I can list a bunch of challenges. Nothing is perfect. What I was trying to do is just point out, hey,

• 18:30Speaker 01

  let's have a debate about some of the concerns about this area. You can surely point out the concerns about an individual CTA. Let's have that debate.

• 18:40Speaker 00

  In terms of historical performance data, the replication strategies, given that you've got this concern about risk management, how closely over time have the replication strategies stayed to the index?

• 18:54Speaker 01

  I don't know if there's enough data to really make that judgment. This particular product has been around, I believe, since 2019.

• 19:04Speaker 00

  That's not enough time to tell anything.

• 19:06Speaker 01

  It's a fart in a windstorm.

• 19:07Speaker 00

  And trend following with the Dunn Capital track record for 45 years, five years means nothing.

• 19:12Speaker 01

  Exactly. So Dunn and the Jerry Parkers of the world, there are massive long track records and we've been at it for 18 years. We've been through a lot of different cycles. But even in that time, you start to notice outlier time. So I'll give you an example. That particular strategy, we all have periods where our strategy works better or worse. You can point out when we're going to struggle and when we're going to do better. We have a pretty good idea of that. But last year wasn't a great year for CTAs in general. You know what the indices are like. You know how people did. They were generally slightly negative. Neutral would be okay.

• 19:50Speaker 00

  Except some of those guys out there that are really high tech and big swings. I know one guy in particular, it's always going to differ.

• 19:56Speaker 01

  There's both. There's some that crushed it. There's plus and minuses to that because they're swinging the bat pretty hard and you can win and you can lose. And most of those managers have had bigger drawdowns. So again, this is part of the debate of where do you fit? Here was my other issue is that the overall pitch there was that I can replicate what the CTAs are doing and I can put it out in a low cost ETF product. We'll come back to ETF in a second, that by having a lower cost than those things that make up that index, i.e. these managers that charge, say, one in 15. Not many are charging two in 20, but maybe one in 15 or one in 10 or one and a half in something. I don't know.

• 20:40Speaker 01

  By only charging X basis points at an ETF, that's alpha.

• 20:45Speaker 01

  That I took exception to. I don't think it's alpha. I get the mathematics of lower costs could generate higher returns. I get the math quite well, but I don't believe that is what most people describe as alpha.

• 21:02Speaker 00

  The quote that you wanted to push back against was, quote, "Fee reduction is the purest form of alpha." Before I even get into that and alpha and let you define alpha from your perspective, I think this reminds me, though, of when we think of the big short movie. Okay, at one point in time, America, for example, had mortgages. You just go to the local bank, you get a mortgage, you try and pay it off in 30 years, whatever. At some point in time, Wall Street looks at all these return streams and says, "Ah, we can do fancy shit with this. We can carve this up. We can do things with this differently. We think we can repackage this. We think we can smooth the risk.

• 21:45Speaker 00

  We can do all kinds of interesting things." So I don't think it's surprising necessarily that after all these decades that people start to look at the trend following world and look at these return streams and start to rub their hands together and say, huh, what can we engineer out of this? And I think that at the root level, that might really be what you're getting at is you're saying to the investing community, "My name's Tim. This is my firm. This is what we do." Other traders are saying the same thing. And of course, as I said at the beginning of this conversation, an investor could say, "Well, I want some of Tim and I want some of these other traders, et cetera." But then it starts to get, again, if I use the big short parallel, it starts to get

• 22:26Speaker 00

  even more complicated because very bright PhD folks on Wall Street can engineer things. And then if things get too far away from the source, I think that's where you can start to get imbalances that build. And then one day, maybe the imbalances blow up and everyone goes, "God, trend following shit." And it wasn't trend following.

• 22:51Speaker 01

  So I like that you brought this up, and here's why. If everybody puts their money and all in auspice, there's a risk there. That's manager risk. And we go about it in a certain agile way versus a slower trend follower. Well, there's a time when I'll get more chopped up than others. So there's a plus minus. All I was trying to point out is you have to be careful with the narrative. If you say that a fee reduction is the purest form of alpha, you're saying this is alpha. And if you're out there telling that story, one, I disagree with that that's alpha. I think that's a manipulation. I didn't like that. I'm concerned about the risk management side. I'm concerned when somebody says, "Because I'm replicating the big boys and I'm doing it with less fee, I can pretty much guarantee you I'm going to outperform them over any significant time period."

• 23:36Speaker 00

  Just by fee reduction?

• 23:38Speaker 01

  Correct. I can tell you that the proof is in the pudding. Last year in 2023, we saw a big shift in bonds. What was it in March? And that particular strategy got creamed. I think it was down a significant amount in that particular month versus the benchmarks. And so to me, it's like, okay, well, wait a second. If you're just replicating the benchmarks, you shouldn't have a situation where you get completely on the wrong side of what most of the people you're trying to replicate are doing. How could that possibly be? I mean, I think that strategy was down 7% when the indexes were only down 5%.

• 24:22Speaker 00

  That could have been due to lag, et cetera.

• 24:25Speaker 01

  Exactly. And that's all I'm saying is because of that lag, here is something I see as a plus minus.

• 24:32Speaker 00

  From that standpoint, if you say, "We are exactly the same as these managers. We can replicate these managers. So therefore, we have a reduced fee. Therefore, we're giving you more alpha." But hold on, we're not being direct enough about the lag, which you are now pointing out and the data shows to be a problem.

• 24:51Speaker 01

  Yeah, that is my concern because I put food on my family's table, the food on a lot of families' table with my business. I take it very seriously. It's been a long road. We've built a great business and brand, I believe, and I want the industry to elevate. It's not about me. It's about an industry, and you've pointed this out for multiple decades now. This is a great area to be in, and it doesn't get its due, and we're all fighting for education, and we're trying to tell the story. And I don't want something to come along and be a black mark.

• 25:25Speaker 00

  Back to the big short example with all kinds of derivatives on top of mortgages, et cetera.

• 25:30Speaker 01

  Yeah. Look at Canada. We're a country of 40 million people. There aren't many CTAs, which is a good thing for me and my business, but there have been in the past. A lot of them didn't survive, and there were some black marks out there, and it really put a bad tone in the marketplace that my business had to fight against for a long time. We had to illustrate over a long period of time, now pushing two decades, of the valuable aspects, the accretive aspects, and get rid of some of those misnomers. And what I don't want is things coming along and putting a negative on that. One of the first things we talked about in that discussion immediately set a bit of a bad tone, and that was this idea that I was against ETFs.

• 26:13Speaker 01

  Because that is an ETF that that was a problem, that he had a perception that I had a problem of ETFs. I'm going to make one thing clear. We are the first CTA anywhere in the world to launch an ETF. We did it in 2008. We did it before anybody, a lot of people didn't even know what an ETF was and how it would relate. Why would a CTA care about an ETF? We launched our first ETF in 08 with Claymore on the Toronto Stock Exchange. We did our second one in 2010 and went from there. We've been in that ETF space. I have no problem with ETFs. There's a plus minus there, too, as a delivery mechanism. But I think ETFs are a great vehicle. You have to accept some of those aspects. There's a good and there's a bad. As a manager, there's reasons they're good and they're a narrow margin business.

• 26:59Speaker 00

  Just to add also, too, so people follow this. When you talk about an ETF, you're talking about the average person, the average retail trader can go to Schwab, whatever, they can buy an ETF comprised of one or multiple trend following traders. And people might be saying, "Well, why do I want to do that? Why can't I go directly to the trader?" Well, my friends, often some of these famous trend following traders have limits and they don't want your money unless you are loaded to the gills.

• 27:25Speaker 01

  There is that.

• 27:26Speaker 00

  ETFs give the average retail person access. The only issue, though, and I'm sure you're going to go into this, is over time now, if I was to go back, and I've not done this, if I was to look at all the ETFs and I was to look at all the mutual funds, how well have they done over the last 10 years if I'm comparing to the source material, the source traders?

• 27:46Speaker 01

  There's a lot to unpackage there. Here's what I would say about ETFs. They're a delivery mechanism. That's all they are, Michael. I mean, it's just a tool, and they are a very popular tool, especially for retail investors, but not just retail investors. ETFs are easy to buy and sell. We've got institutional investors in the ETFs that we manage. The vehicle itself is not the issue in general. As a manager, as a business person, I have to accept that the ETFs that I do manage are a very narrow margin business. They're low cost. ETFs are low cost. So if they're low cost and I have to pay a distribution force to sell them, I have

• 28:27Speaker 01

  to pay all the legal and regulatory, the amount that flows to me is now basis points. So I've got to look at it and say, "Am I willing to give away my skill set for those basis points? Can I reconcile that?" And so in certain things, and this is part of the auspice business model, and what we went down this path and pioneered back in 08, was certain types of things we're willing to put in that low cost ETF structure. But is it going to be the best of what we bring to the table, our alpha, so to speak? No, it's not.

• 29:01Speaker 00

  Back to the replication part. An enterprising entrepreneur says, "Hey, I can replicate this index. I can reduce fees." As an outsider, me, I say, "Well, that's pretty clever." Now, I would think, because I've got to compete with guys like you now, that I've got to be transparent. So, for example, the folks that are replicating index funds, are they not being as transparent as you would like on something like the lag?

• 29:37Speaker 01

  That is all I'm pointing. They have all the transparency. You can see the positions in these type of products. I think, especially if they're ETFs, you can generally see them moment to moment. However, I think you're getting to the core of the issue. Are we being transparent about the risks? Are we being upfront about the pluses and minuses of any strategy? One of the things the CTA community has had to do is fight all these negative narratives that were generally not true. For example, we're a black box. We can't tell you what we do, and it's really opaque, and we're playing with voodoo. Well, nothing could be further from the truth. My clients can see the bulk of my positions, depending on the product, on a moment to

• 30:22Speaker 01

  moment basis. Our main fund is now a public fund in Canada where people can go to our website and see our core positions. That's not it. But we have to fight against these things, and I'm concerned when a narrative comes out that I see as a risk to all the community has worked for, the CTA community, the trend following community. Because a lot of people have been in this space a long time, and we've gone through those dark times. What does my opinion matter? But when I see something that's throwing out words and promises that is too much, I feel compelled to comment.

• 31:04Speaker 00

  So for example, let's say we got an index out there, trend following traders, CTAs. Let's say that index includes 10 traders and is following 20 billion AUM. So then the replication guy says, "Oh, we figured out how to replicate that return stream of that index, but now we think we can raise 40 billion."

• 31:25Speaker 01

  Yeah, maybe that's the game plan, or maybe that's the business model.

• 31:30Speaker 00

  But I'm just saying, I can see where that would be. Well, hold on, if the managers that comprise the index are at a certain level of AUM, Asset Center Management, and then you replicate it, which I think the whole replication thing is very clever, you can see, back to my big short description, where if Wall Street starts to carve up this original source return of these CTAs, of these trend following traders, they start to carve it up in a way where it just looks like an unlimited money spigot, it might not be an unlimited money spigot.

• 32:03Speaker 01

  Look, there's lots of discussions, and you've had them, about capacity in the industry, and things getting watered down, and people chasing the CTA story, and there's more and more CTAs, and is the industry changing, and is it going to put up the numbers? I mean, how many times have we heard, even in the last couple decades, where trends dead, CTAs are dead, commodities are dead? I've heard this so many times, it just cracks. But we're hearing it again right now. We got the Mag 7 ripping. Commodities have been generally a push or down for almost two years since Russia, Ukraine, and people are saying, especially the media, commodities don't matter. Come on. You hear this narrative over and over again.

• 32:45Speaker 01

  CTAs, ah, they're never going to make money again. They've been quiet for a year. Okay.

• 32:51Speaker 00

  If I'm on their side, and I run a mutual fund, and all I'm doing is an index of the S and P, I don't want anybody to take my lunch money. So I'm going to say Tim is running Voodoo and Black Box, and he's going to blow up, and I'm going to say that all day long.

• 33:06Speaker 01

  Yeah, sure. And they're going to point, we hear this all the time. Look, you guys, as a community, did not perform from, let's say, 2011 to 2019. You really didn't do much. You've performed well the last four years here, but the 10 years before, you didn't. So maybe this is the anomaly. You really don't make money. Okay, well, let's go back further. How about let's go back from the late 80s to, say, 2010, your annualized return of the BTOP 50 index, if we want to pick an index, is over 9%. It's got a negative correlation to equity. So it made money for a heck of a long time. So what is the outlier? What is the anomaly? And, but we fight that narrative. And I guess it comes back to this, we want

• 33:50Speaker 01

  to pick on replication. It could be anything. I'm just saying, let's make sure we are responsible in the community about the narrative and the message, now that everybody can go buy these things through something as simple as an ETF. Let's be very direct about the truth.

• 34:07Speaker 00

  Something is, we compare, let's say, the trend following world to the rest of Wall Street, so to speak. There's this natural human tendency, condition, this desire that I want consistency. And even the people that work for the big sovereign wealth funds, the people that work for the government pension funds, we really have to remember who these people are. And these people have been educated on a certain style of thinking. Most of it has been disproven by now, but they're in this efficient world. Everything's efficient. Somehow or another, we can magically conjure the markets to deliver this magical Bernie Madoff 1% a month. As you point out with history, there's enough historical evidence

• 34:52Speaker 00

  to show the strategy like you employ, the strategy that I've written about and I've helped to make popular, is it's not about consistency. The world is not consistent.

• 35:02Speaker 01

  No, that's exactly right.

• 35:04Speaker 00

  You've got to be ready for the, back to Nassim Taleb, why the hell did that Black Swan book? That Black Swan book sells so many copies. People think they get it, but they don't get it.

• 35:14Speaker 01

  What's interesting about what Nassim and the Black Swan stuff is, and why the book is popular, because it makes sense to them. The question becomes, can they stick with that strategy? Here's part of the problem. I look at most strategies that we see out there are what I call convergent strategies. So it's a convergent return stream. They grind higher, low vol, and then they correct. So many small gains. It's a human strategy. It makes you feel good. It could pay you dividends and yields.

• 35:46Speaker 00

  You could say correct, could be crash.

• 35:49Speaker 01

  Yeah, crash. So they correct, they crash, yes. There's these occasional devastating losses, big downside vol, negatively skewed, but positive returns over time. And most strategies are like that. That's how the equity market pays off. That's surely how private equity, it's no different. It's just a bit of a masking. That's how most even alternatives pay off. That is a reality. Most strategies are convergent in that. Grind higher slowly, negative skew, big vol on the downside, big crashes. We can rationalize them. We can come up with all these reasons. Ultimately, I believe those strategies are a human strategy, because they're based on constant gratification.

• 36:30Speaker 00

  Not human like me, you're not human like you, some kind of odd human.

• 36:34Speaker 01

  Remember, 90% of people are following the rest. We're not. And CTAs go against that grain. So the bulk of people want that. Most institutions want that. We want constant gratifications and all those good things. Whereas, look at what CTAs do. It's divergent. So it's paper cut, paper cut, paper cut, paper cut. God, are these guys going to ever make any money? Hop, bam. They go up. So it's that positive all, positive skew, occasional big wins with some very important points. Those occasional big wins typically occur, and we got lots of data, at the times when those other things are selling off. If there is an investment holy grail, that is it. Put convergent and divergent strategies together.

• 37:18Speaker 01

  Okay, so which are the divergent strategies? It's a bloody short list. It is really CTA trend following. Then you've got all sorts of spectrum there. Well, are you short? Are you long? Are you a commodity? Or blah, blah, blah. We can go on. We can dissect. Pick your horse. But that is the key thing. But here's the thing, and I say this in all sincerity when I sit down with a client now, it's an inhuman strategy, because you as a person and an investor want constant gratification, and you want to see that everything in your portfolio every year is green. It's up. But if everything in your portfolio is green every year, one, that doesn't happen. But if that's what you're gunning for, that's living in la la land. It's not reality. You have to have yin and yang.

• 38:03Speaker 00

  Those outliers. The one comment, I'm paraphrasing a little here from memory, but you were saying, well, maybe the efficient folks will rationalize away the outliers or whatnot. I think it was Benoit Mandelbrot that said, they just sweep them under the rug. It's like they don't even deal with it. It's under the rug. They're going, hey, we're starting over. Let's go.

• 38:22Speaker 01

  Reset and go again. Yet every time, we're feeling it right now. Like I said, CTAs as a whole benchmarks down last year a little bit. We were down, our main fund did 13% annualized for three years with a negative correlation to equities. And then last year, we're down 4.8. Is there something wrong? I'm not saying we felt a lot of pressure, because we haven't. But in general, people are going to look at this area, and financial media is going to look at this area and say, what's wrong? What I'm pointing out, we don't have to belabor the replication thing. It's a great, very clever idea, as long as it doesn't produce a problematic, overpromised return. That's my concern as somebody who's made, is living

• 39:05Speaker 01

  in this area, that has a series of families, that has a lot of clients, and has fought for this area for so long.

• 39:13Speaker 00

  On the flip side, though, somebody might say, well, Tim, I respect your business acumen. I respect that you've got a workforce that's loyal, and everyone's there, and you're doing all this great, fine job. But other people might say, well, I'm just worried about the performance. If somebody else can replicate Tim, they don't need Tim's staff, and they're going to charge less fees than Tim. Some people are going to say, well, that sounds like a good deal.

• 39:37Speaker 01

  It sounds great. So riddle me this. If it's so great, and most CTAs were down a little bit last year, and the benchmarks were down a couple, why was that strategy down 9% then?

• 39:50Speaker 00

  You attribute that to lag.

• 39:52Speaker 01

  I'm saying that's one attribute that I think we all just have to be transparent about. That's all. There's pluses and minuses here. This pitch that because you're charging less, and you're replicating what the big boys are doing, these long time effective funds, is always going to be better, is not true. We saw it last year as a whole. We saw it within last year at times when the market had an event, when fixed income changed, we saw that strategy underperform.

• 40:22Speaker 00

  You're welcome to all kinds of innovation and whatnot. I think it's just a matter of everyone seeing clearly what's on the table, because ultimately, we talk about how it's against human nature to go with trend following, or to go with the Black Swan thinking. But then what's so damn funny is, I think to the Big Short movie, everybody loves the movie that then explains exactly all this crazy human nature. Everyone loved the idea of looking back retrospectively to say, oh, wow, look how stupid we were. Look how crazy we were. A stripper in Miami was buying 17 condos. This is so funny. Ha, ha, ha. Everyone thought it was great. But the most interesting thing, I still think about the Big Short

• 41:05Speaker 00

  film, too, is that we were essentially talking about

• 41:10Speaker 00

  October of 2008 and wham bam, thank you, ma'am. Who was the group? They weren't supposed to come up in that particular film, but they could have. Michael Lewis could have written it about trend following traders during that same time period. But instead he wanted to find the one off guys that ultimately could be argued to be the lucky monkeys who had fundamentally figured out that the big short could be profitable and was about to happen. Whereas there was this whole collection of people in our world that, no surprise, another crisis event, we made money, they lost money. But that was not part of the film. It was like, no, there was these magical Christian Bale with one eye who did one trade.

• 41:53Speaker 00

  Look, I'm not knocking, I would love to be in this position. Great. I know people that know him and I like a lot of things he says. But ultimately he doesn't have a track record like the ones that you and I have seen. Doesn't exist.

• 42:05Speaker 01

  What's interesting about those movies and some of the books, maybe this book is sold a bunch and yet has that strategy proliferated and done really well. And the tail risk, black swan stuff is one of those examples. Here's one of the reasons I think that exists is we're all in it for entertainment, whether it's a movie or a book. Most people use the markets as an entertainment device. That is society. It's a casino. They're not a hardcore investor willing to do what it takes to be successful. I run a firm and happen to be an individual, and there's lots of us, who don't get entertainment value out of what I do for a living. It's a craft. It is like laying bricks.

• 42:49Speaker 01

  I know the process works. That is not my entertainment. That is not the exciting part of what I do for a living. Maybe some people view it differently. The trading isn't it. Losing more than I win, we're only right about 42% of the time, but we pay winners to losers. In general, we lose, so that doesn't sound very fun. You know what's fun? This is what gets me out of bed every morning is we've innovated some interesting stuff like ETFs, like public funds in our jurisdiction. Doing those interesting things is pretty fun. I've got to meet great people. When I was a prop trader at Shell or TD Bank, I had a fairly myopic living and existence.

• 43:29Speaker 01

  And now I get to meet interesting entrepreneurs, people that run businesses in this space and every other space. That is interesting. It's not the entertainment value because what I do as a living isn't that entertaining. It's boring.

• 43:43Speaker 00

  A lot of traders might think, what's the value to having these kinds of conversations? Because sometimes people, and I'll see this with authors too. The first thing they want to do is pump something or promote something. You haven't done that in this conversation, other than to say you like what you're doing. You're hardworking at it. But something that people don't get about these long form conversations is that whatever we do in life, if we go share with people and we expose our thinking, we expose how we look at the world. We expose how we assess, how we analyze. Then people listen to that and they say, ah, I like that guy. He's got an interesting perspective. Let me go check out what he does. Maybe I'll buy his book. Maybe I'll invest with him.

• 44:26Speaker 00

  And I got to tell you, for anyone that does a podcast, this is the number one thing you should do. But I tell you, so many folks, they don't understand that clearly you do, you've done this enough. You want to be out there and just say, hey, this is my perspective. This is how I am and let the chips fall where they may. People like you, they don't like you.

• 44:42Speaker 01

  That's exactly it. And this is where it's a funny tie back to the original part of this conversation. All I know how to do is be authentically me and represent the firm that I co-founded. And that's an authentic story. I can only tell that story. I can only honestly tell it because it is my life. It is my living. It is my everything. That's an authentic story. But the irony of this is, is replication authentic? It's just replicating something out. How do you tell that story? Other than fees are great, lower fees are the best form of alpha. Okay, so what? Who cares?

• 45:19Speaker 00

  I guess if the story though exposes what the pitfalls might be, then fair enough. But then as an investor, if you are running a replication strategy, you tell me about it. You say, hey, we're going to replicate Tim and all these other trend following traders. But, but then you say, what are the pitfalls? That as an investor, if I know what the pitfalls are, then I'm like, hold on. I don't know how to assess these pitfalls. Maybe I should be dealing with the source guy to begin with.

• 45:47Speaker 01

  A hundred percent. And I think that comes back to this authenticity. As I reached out and we chatted, I really enjoyed your conversation with Eric recently, Eric Crittenden. A very authentic conversation.

• 46:00Speaker 00

  No trend following almost.

• 46:02Speaker 01

  Trend following almost, which was great. You didn't talk about replication, but I'm ADD, so I start a lot of books and I start a lot of podcasts. I don't finish a lot. I just don't have the bandwidth and I listened to that tip to tail. I just thought it was great. It was a great, authentic conversation about all sorts of really interesting things. I don't know, maybe it's because I'm Gen X and over 50, I identified with the conversation. But it truly came back to an authenticity. I mean, Eric's got a great background in this space. I know what he's invested in terms of time. I don't know him well at all. I mean, we crossed paths, but I believe he's invested a lot in this industry and this space and his time as a portfolio manager.

• 46:43Speaker 00

  It's fun and those are the things that I enjoy these days. I'm finding myself, I get pitched. I find people to come on the podcast that I like, random things. I'll reach out to people and then I get pitched by publishers and PR people. And sometimes those pitches are really interesting, like Howard Marks or the guy that started Paycheck, so the guy that started Dunkin' Donuts. I'm in Vietnam and I get to talk to the guy who started Dunkin' Donuts. How fabulous is that? Now, however, though, I find these days I'm getting a lot of leadership pitches. And I'm like, fuck, I can't make that work. Again, it's the authentic thing. I'm looking for something authentic in every conversation. I have a gut level of feel that it's going to be harder and harder to find good conversations in the future. In the grand scheme of things, you and I are not very well known,

• 47:27Speaker 00

  but there's plenty of people that are not very well known. That if you put a microphone in front of them, they're the most interesting person in the world. It's just a matter of finding them.

• 47:36Speaker 01

  This is part of the great positive benefit of the internet and the advent of podcasts, of which you were pioneering in this space, in our industry. That's a great thing, but now you got to sift through a lot of bullshit. Books, that's one thing, but there's so many podcasts, I don't even where to start. What I won't do anymore, and I learned this actually from my co-founder, business partner, Ken Corner. Why finish the book if it's not appealing to you? What do you owe it something? I'll start a podcast and if I don't like what they're talking about or the tone, or even be the host, ah, I can't listen to that whiny voice. So I just can't do it. My life's too short. I got shit to do.

• 48:15Speaker 00

  I hear you on that. I never know if my voice is good or bad or this or that. But I know if I bring a little bit of passion or piss and vinegar very quickly, at least that captures people's attention. Whereas if I just wander into some conversation. Hey, I got one final question for you. I was thinking about this venture capital, Silicon Valley worshipped and adored. But at a base level, the conceptual strategy is not dissimilar to trend following. It's strategy based on, we don't know what's going to happen. So we're going to take a lot of shots and many of those shots are going to fail. We're hopefully going to get some big winners. But it is quite interesting that trend following doesn't have the acolytes worshiping such as venture capital,

• 49:00Speaker 00

  where venture capital is just assumed to be the perfect strategy. And no real criticism, frankly, that I know of.

• 49:07Speaker 01

  So here's what I would say to that. You're not wrong. I was thinking back to one of my original investors in auspice, a very successful person and investor. Investing in us was very new to him. We managed to convince him to give us a shot. But I asked him how he invested and it was all private equity in a certain area that he was familiar with. And he just basically said, look, I'm just tons of darts, small bets in his world. And I know that this many are going to be losers and these men are going to be pushes and a nothing. One or two are going to win. And that's the strategy. To me, that was a lot like what I did. And when we raised the original money for auspice, I sit in Calgary, it's an oil town.

• 49:51Speaker 01

  And I remember sitting in a room of people, an old oilman, very successful said, Tim, it's great that you crushed it. No eight, this was right after and, but I just don't understand what you do. And I said, well, Mr. So and so, what did you do for a living? And he said, well, I was in the oil business and I drilled wells. And I said, well, how did that work? He said, well, I'd raised some money and we do a bunch of seismic. And we look around and we look at the probabilities. We had to be very careful. We had to manage the bankroll and we had to look at that. And we'd know that one's probably not going to be good, but we can't waste too much money there. We move to the next thing because one of these has to pay off. Because if we don't pay off, we're out of money. It's really managing the bankroll. And I said, Mr. So and so, we do the same thing for a living. I'm just expressing it in a different way.

• 50:36Speaker 01

  And so I think you're right on the venture capital side. So then this becomes, why has that become so accepted? Why are the pensions investing in that way? You're not wrong, but here's the counter to that. The largest hedge funds in the world and most successful, most tenured, longest standing are quantitative hedge funds. They're CTAs by any other definition, whether it's Renaissance, there's a list of them. These are CTAs. That's what they are. They may be capacity constrained versus those other areas because of commodities. For example, it's more capacity constrained. They're now difficult to get into because they're capacity constrained. They can't take any more money and it's a very competitive space.

• 51:21Speaker 01

  So I don't want to just throw this down the road and say this area hasn't been successful. Because I argue the most successful hedge funds in the world are really just CTAs.

• 51:32Speaker 00

  Yeah, Jim Simms is a great example. The book that came out a couple of years ago, I love, there was a page in there where he basically was like, how was this guy, Richard Dennis, making? Money, I gotta figure this out. Of course, this guy's one of the most brilliant mathematicians in the world. He is not sitting around making fundamental macro bets. That's not what he's doing.

• 51:51Speaker 01

  But interestingly, did Jim Simon say, you know what? I'm gonna go replicate Dennis. That's the strategy. That's not what he did.

• 52:00Speaker 00

  Tim, where can people find you? Where can they go to check you out? Maybe invest with you, maybe send nasty emails to you. I don't know.

• 52:08Speaker 01

  I'm sure I'll get some. I got some after that 2023 discussion. More easy to find. Google auspice capital. It's auspice capital.com. Google my name. We've been around a long time now. We've got funds in Canada, funds in the US, retail product, institutional product. There's lots of delivery mechanisms. Anybody can buy an ETF. One of my chagrins down the ETF space, and again, we've been in that space so long is I've been on calls with pensions that I'm trying to get interested in the auspice funds. And the guy's tapping away on his computer and buying our ETF. For his personal portfolio, it happens all the time.

• 52:47Speaker 00

  I'll leave you with this. There's only one word you said today that gives you away as being Canadian.

• 52:53Speaker 01

  Okay.

• 52:54Speaker 00

  Do you know it?

• 52:54Speaker 01

  What was that?

• 52:55Speaker 00

  Okay, as an American, I say process.

• 52:58Speaker 01

  And I said process?

• 52:59Speaker 00

  There you go.

• 53:01Speaker 01

  There you go.

• 53:01Speaker 00

  That's the only one that gave you away.

• 53:03Speaker 01

  My whole life has been just so back and forth. I lived in Houston. My daughter was born in the States. She lives in America. There's so much back and forth, probably some big mosh pit of weird dialects.

• 53:15Speaker 00

  My ear would not initially say Canadian, but I heard process, process. I was like, ah, there we go. We got the distinction.

• 53:22Speaker 01

  Well, if you look at the pack northwest of the US and into Western Canada, it's pretty similar zone. You get out east, well, it's a bit different in terms of dialect.

• 53:31Speaker 00

  Tim, cool stuff. Don't wait 12 years or whatever it was. Let's do this more often.

• 53:37Speaker 01

  Now you gave me the impetus. I'm very interested in Asia from an investment perspective. I've spent time over there and I think I'm gonna have to get over to Vietnam and come knock on your door sometime.

• 53:45Speaker 00

  Let's do it.

• 53:46Speaker 01

  All right, man.

• 53:53Speaker 00

  I see a time when those awake will understand how to make money in up, down, and surprise markets. Whether a new trader or experienced, college student or financial advisor, protecting against a crash or just trying to make a lot of money. Trend following offers everyone an answer in uncertain times. To get started immediately, send me an email. [email protected]. I will send you the right trend following steps to take along with my free video.

• 54:29Speaker 00

  But if you want to buy and hold, trust the government and trust Wall Street. This is absolutely not for you.