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TTU53: Trend Following vs. Trend Capturing ft. Tim Pickering of Auspice Capital Advisors – 1of2
22nd December 2014 • Top Traders Unplugged • Niels Kaastrup-Larsen
00:00:00 01:05:36

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What is the difference between simply following a trend and capturing it? Why is growth not consistent and gradual and why do we want it to be?

Learn answers to these questions and more in this week’s episodes. Niels chats with the founder of a seasoned trend-follower in Canada, who knew he wanted to go into the financial markets since his university days. His story of working for large investment banks to starting his own firm will inspire current managers and hopeful managers alike.

Thanks for listening and please welcome our next guest, Tim Pickering.

In This Episode, You’ll Learn:

  • Why Tim tries to get away from being labelled as one thing or another.
  • About growing up on a farm in Canada.
  • How he knew he wanted to be a trader.
  • How his experience in the energy markets affected the way he ran his business when he started it.
  • Why discipline is so important for the kind of manager that Tim is.
  • Why he has stuck with the theme of trading commodities.
  • What Tim does when he is not running Auspice.
  • The difference between following a trend and capturing a trend.
  • How growth is not slow and steady.
  • An overview of the products that Auspice runs.
  • Why they launched a beta product after launching their flagship product.
  • The history of how Tim grew Auspice with his business partner.
  • How he chose to structure his business.
  • How a small team can deliver the same value as a larger manager.
  • What people should notice when looking at the track record of Auspice.
  • What the Diversified Program does.
  • How many markets he actually trades.
  • Why position resizing is important.

Follow Niels on Twitter, LinkedIn, YouTube or via the TTU website.

Follow Tim Pickering on Linkedin.

IT’s TRUE 👀 – most CIO’s read 50+ books each year – get your FREE copy of the Ultimate Guide to the Best Investment Books ever written here.

And you can get a free copy of my latest book “The Many Flavors of Trend Following” here.

Learn more about the Trend Barometer here.

Send your questions to info@toptradersunplugged.com

And please share this episode with a like-minded friend and leave an honest rating & review on iTunes so more people can discover the podcast.

Transcripts

Welcome to Top Traders Unplugged, where my goal is to give you the clarity, confidence and courage you need to invest like, or invest with one of the top traders in the world. It is the stories you never get to hear, set out as the most honest and transparent account that I can make of what goes on inside the minds of some of the best investors in the world delivered to you via a one-on-one conversation. Today you're listening to episode 53. If this is the first episode you've heard, you might want to go back and listen to all of the earlier conversations. Before we go any further let's find out who is on today's show.

Tim

Hi, this is Tim Pickering from Auspice Capital. You are listening to Top Traders Unplugged.

Niels

Thanks for doing that, Tim, and by the way, if you want to read the full transcript of today's episode, just visit the TOPTRADERSUNPLUGGED.COM website where you'll find lots of details about today's guest. Now let's get started with part 1 of my conversation. I hope you will enjoy it.

Tim, thanks so much for being with us today. I really appreciate your time.

Tim

It is my pleasure.

Niels

Great. Tim, now you've been around for a long time and you've been able to experience and make friends with many of the first generation of managed futures firms, but you've chosen to take a step further and, if I recall correctly you consider your firm and approach as the next generation of managers. So I'm very intrigued to find out more about this and what this really means. You've also developed some new types of products to help bridge the gap between what investors need and what we as an industry have been providing. So I think this would also be a great talking point when we dive into the details later today. Before we jump into that, I just want to start out by asking you a simple question which I try to ask all of my guests because I appreciate that there are many different answers to this question and it goes something like this: when you meet people for the first time, say at a social event, who don't know you and who don't know your industry, if they ask you what you do, how do you explain that? What's your response?

Tim

That is a... you're starting with a very tough question. Generally the way I approach meeting people, especially people I don't know, it depends really on the context of the person and the environment. Sometimes I just feel like answering, "well, we're a hedge fund," because that makes them go away. If I say we are a CTA, that also often makes them go away depending on the context of the meeting. At the heart of many people that I meet from an entrepreneurial perspective, often my answer is, "I'm a financial entrepreneur. I have a background in investing, institutionally, and I've now started a firm that manages products for investors of all types, from retail to institutional." I generally try to get away from a label: I'm a this; I'm a that. At the end of the day, and I think you touched on it in your intro, we've tried to approach being a CTA or being a manager a little bit differently and really view ourselves as entrepreneurs more than anything. Managing money is one thing, managing a business is very challenging and so I really try to talk about the relationship and the business side and those challenges because those generally are things that everybody can relate to.

Niels

Sure, no I like that. I appreciate that. Anyway, we're not going to let you off that quickly so... My philosophy here, Tim, is that if you don't know the story you don't really understand the numbers. So what I really would like you to do is tell me your story. Put as much color on that you think is relevant as possible. Even from when you were growing up as a kid, what was influencing you to eventually end up taking the path that you did. So I'll leave it with that and let you dive into that topic.

Tim

t when we moved to Calgary in:

Niels

Where did that fear come from, if I may just interrupt you?

Tim

Calgary, in:

Niels

Sure.

Tim

Yeah, so I went to school at the University of Calgary, and took a business degree. I was given the opportunity to work at the Alberta stock exchange. It was a small regional exchange here in Calgary that was eventually enveloped into the Toronto Stock Exchange Group. That's what we call a venture exchange. I had a great experience on the floor of the exchange, and I'd already decided going into undergrad what I wanted to do for a living and that was trade. But I didn't really know what that meant. Of course, your first stop is equities. You think about stock trading or stock brokering, and it all sounded fine and dandy. I went to school with that in mind and had a stroke of luck. I was given the opportunity to join the Toronto Dominion Bank Trading Development Program as I graduated. That was really a gift. I was not always the strongest student, but I was very focused on what I wanted to do with my life, and that was trading. I just needed to figure out what that exactly meant.

At TD... so I moved to Toronto from Calgary. TD was a wonderful experience. You were given the opportunity to rotate through various trading desks, through sales and trading, to figure out what your aptitude is. Through just luck and hard work I guess; I was given the opportunity to join the Energy Derivatives business which was a part of proprietary trading. It was really to focus on my own trading development. The path at TD was really about discipline and capital allocation, and it really taught me that base. Having said that I was looking for more. Looking to develop as a trader from a proprietary standpoint and ultimately left TD.

I went to Shell and Shell really taught me about taking the strategies that we had developed at TD and trading with more size and dealing with markets that are volatile like focused in the commodity and energy space. I would say that despite the TD experience, or in addition to the TD experience and the Shell experience the learning to trade came from the opportunity in those organizations to try. I wasn't a person who walked in and knew exactly what I wanted to do or what type of a trader I was: discretionary, non-discretionary. I was given the opportunity to try different things and out of that ability to try I figured out who I was. I continued to have interest in the area and pursued that really as my own driver. Again, I look at those institutional opportunities as really just that, they were opportunities to try, to learn, and once I was ready, about a decade ago, I decided to go off on my own. It's really this next step that is probably the most rewarding period of my life

Niels

Yeah. We will certainly hear much more about that, but I thought you managed to do your whole life's story in a very short space of time. So let me just ask you a couple of follow-up questions. Two things that are interesting to me, one is it's rare that you meet someone who hasn't left school who says, "I want to be a trader." So I'm a little bit curious about the inspiration for that. Even though you didn't necessarily know what it meant. The other thing I think could be quite interesting to know is what was the reaction from your family, from friends, from whoever you were surrounding yourself with at the time when you told them, "I'm going to go and be a trader." How did they take that?

Tim

That's a good question. I guess a part of my personality that I'm extremely determined and once I decide what I want to do I find a way to put a square peg in a round hole, as I often describe it. It's kind of an unfading determination. I think the thing that people could do with me is say no, and if you say no, I'm going to find a way to make it happen. It's just part of my personality. It's obviously something I have to manage as well. I was given a lot of encouragement. My Mom worked for a Canadian Bank from the time she was 18, and the opportunity to go to work for another Canadian Bank was something my family was very proud of. None of us really knew what it meant. It meant that I was moving to Toronto to a big city in Canada and the heart of Canadian banking. They were just very proud of that. For me, it was a really life changing experience.

Niels

I can imagine that. Now, you mended your time at TD Securities and then followed up by another 5 to 6 years at Shell, so as far as I can tell, your trading experience and market universe, up until starting Auspice, was really focused around the energy markets, which are certainly known as some that can produce some wild swings from time to time. I wonder, what do you think your exposure to this particular market sector so early on gave you in your future career path? What do you think you learned just from that particular area getting into the business that you're into today?

Tim

This is really a great question because given an exposure to many markets then focusing early in my career on energy, really again was another gift because when I started trading on the proprietary trading desk at TD in the energy space, there were a lot of successful traders there. Energy was one of those things that people knew as an opportunity, but it scared people and in the context of a conservative Canadian Bank, you needed to exhibit discipline. The first systems I ever developed; the first trend following, and we'll get to the details of that later, but we were trying to find ways to trend follow volatile markets like natural gas. It's quite a task in that natural gas will trade at a 30 volatility, and then it will be at 130 volatility. If you blink, it will change significantly where it is. So what we tried to do is develop essentially trend following strategies that could take advantage of and take into consideration volatility and volatility in the sense of how we adjusted our entry points, our exit points, our capital allocation. This just became all so paramount. It's one thing to trend follow; it's another thing to actually take your money off the table and to say that the risk/reward of that trade has changed.

Really, the energy markets give you that opportunity. "A" their volatile and can become very volatile - they go someplace, and I believe paramount to success in those markets is the discipline to knowing when to take your capital off the table by whatever definition you have I fully believe in that. This deviates significantly from some of the opinions of traditional trend followers, some of which I respect very much and am very close with. My own experience taught me something different. It always comes up to a discussion about, well, if you take your capital off the table when something's in a very volatile trending environment, what about that opportunity loss. We're obviously aware of that and balance that, but we believe it is very important to being successful in volatile times. Really knowing when to hold them and knowing when to fold them.

Niels

Sure. You've mentioned the word discipline a couple of times and you and I have mutual friends from the group of Turtles who clearly were taught to trade in terms of certain rules, but can you actually teach people discipline, do you think, or do you have to be born with that?

Tim

That's another great question. I think you can try to learn discipline. I think, like anything, you can make efforts towards this, but I think like anything you're born with certain attributes and certain DNA and I think certain people just have maybe a little bit more in them or this is the nature versus nurture discussion, did their experience take them down this path. I think I don't know which combination it is for me, but I think it's probably both. This part of it, it's like a self-discovery process. What type of trader are you? If it is a type that needs to discipline, you learn quickly that you either do that, and you accept that, or you fight it and those that fight it don't have a long career in it and those that don't it's not even a question. So for me and my partner here at Auspice, Ken Corner, this is something that is not even a question for us. It's never been a question. It hasn't been a question in 15, 20 years so it doesn't even get discussed. It's about the discipline.

Niels

Yeah, and maybe also an important point to make to the audience is that you and Ken actually worked together for a long time before you even started the business. I think that's also quite...

Tim

That's right; it was five years at Shell prior to starting Auspice.

Niels

Yeah, now you've kept the commodity theme at the forefront of your product development, why is that?

Tim

Yeah, it's a great question. Well because commodities we believe are a great opportunity, meaning commodities have different volatility characteristics and different trend type experiences and we believe that if you are disciplined and you've got your risk management and capital allocation approach down and solid, commodities are a very important diversifier within the portfolio, and very opportune. Again we started there.

We started within this conservative bank on the commodities side. So we're very comfortable in that space. It is a differentiator. We don't force commodity exposure, but we are absolutely happy to focus on it. Some of the products that we've developed including the pure beta ETFs like the natural gas ETF and about to launch a Canadian Crude Oil ETF. Some of these products are based on our experiences and looking at what the market's demanding. But we are very comfortable in the commodities space. The one thing I would say is we don't like to be pigeon-holed that that's the only thing that we do. It's based on opportunity. If it was somewhere else, then we'd focus somewhere else. So we feel that's the best opportunity for our skill set. At least to have it as a possibility.

Niels

Sure, absolutely. Now before we jump further into sort of the more specific topics, I just wanted to ask you sort of a personal question and that is when you're not busy doing research and running Auspice what do you like to do?

Tim

My focus in life is my friends and my family. So that is a big part of what I like to do. We live here on the edge of the Canadian Rockies and spend a lot of time in the mountains. In the winter, I'm a skier - a snow skier, and in the summer I'm a water skier, so I've got that down. Those are things that keep me busy. One thing that's interesting about our office is we have a small music studio in our office. A lot of us come from a background where we played music and maybe aspired to something in that when we were young. So we've got a little studio here in our office where some members of our team go down and put on headphones and play music. It's something that's a great release, but interestingly it's a very similar thing. It's about discipline, it's about practice, it's about patterns, it's a very similar type of passion that we have (compared) to participating in the markets.

Niels

So when I need a new jingle for my podcast you're the guy to call, right?

Tim

(laugh)

Niels

You've already alluded to it a little bit, but I think this is something that we need to talk about some more. We often hear about trend following and how it's been the most successful strategy over many decades and in many market cycles, but following a trend and capturing a trend is not really the same thing. How do you explain the difference and why is it important to make this distinction do you think?

Tim

Another really elemental question. I think it just comes back to that experience I had very early on that it was fine to define that trend and participate in the momentum of something, but when that asset has the ability to get very volatile very quickly, reverse direction, we believe the best way to participate in that market was to have some way of defining that risk and adjusting our positions quickly such that when the probability of continuing to make mark to market gains was diminishing that we would make an adjustment and we really believe that trend following is fantastic. It's the base of returns, but trend capturing is where you're humble enough to say, look something has changed. The risk has changed and maybe the risk of keeping these mark to market gains has changed. We're OK with that, and we'll take our capital off the table to keep those gains. It really comes down to eating some humble pie and saying look; I don't know where things are going to go. They've been really great; the risks have changed, and I'm willing to move along.

Niels

And maybe just to clarify, Tim, so what you're really saying is that often changes in volatility can be a precursor of change of direction in markets is that how you see it?

Tim

ate. If you think back to say:

Niels

Absolutely. There's one thing I wanted to ask you and maybe expand upon a little bit because I've heard it mentioned, I think even also mentioned by you and that is the difference between capturing closed equity and open equity. We've already touched upon trend following versus trend capturing, but I think a lot of people are a little bit confused when we start talking about closed equity and open equity, what does that really mean? Do you have a simple way of explaining what this is?

Tim

My analogy would be explaining to an investor that we've been doing very well. We made these mark to market gains. We've made a bunch of returns and then you get to a period at the end of the year, and all those returns disappear except for say, whatever, 10% let's say. You've been up 25%; you've lost 15% and you're still up 10% you should be very happy you had a positive year. To me explaining that outcome to an investor,,, and I think back to explaining that outcome possibility to an institutional team like I had in my previous life - that's bad on two levels: one you lost a bunch of the money; two, and very importantly, you've increased the volatility of your returns. So you've changed the profile of your investment and so really we looked at that combination as really key to what we needed to provide to our institutional relationship, and now as we've built Auspice, let's look at those mark to market gains and let's judge them. Do we have a good chance of keeping those mark to market gains, or is that probability of keeping mark to market gains diminishing? If that probability is diminishing because we have defined risk in a certain way, then we are only too happy to take those off the table and to take profits. This does go against that traditional trend following approach where you ride the volatility for a very long period of time and come hell or high water.

So we've tried to, in our own experience that wasn't the way to manage a book, and it comes back to looking at who is your investor and what are they trying to accomplish. I think it's one of the things that, again, this gets to the business side of being a fund manager. I have had many a debate with people in our industry about this. What is the right thing to do from an investment perspective and what is that combination of the trade, the investment for the investor, and the business? We believe there's a right combination of those things. I don't think it's any surprise that some of the biggest funds in this space in the world have made adjustments to their volatility profile, the markets they trade, the leverage they employ to make things more palatable for whatever their investor type is. They've been some of the most successful. That has to be acknowledged in this industry. It's something that when we started Auspice we felt was critical to growing a different type of CTA business and long term success.

Niels

during those periods back in:

Tim

I would add to that, in the real world, and this goes for if you are any type of an entrepreneur. We could call that an investor in the way you're invested in a business. Investment returns don't come in straight lines. They don't come in nice weekly, monthly, quarterly, yearly blocks. People that have made extraordinary business gains, whether it's the UBER’s of the world, this didn't come in a nice 45-degree line. When you look at what we do any one of those individual components: pick an equity market we trade, pick a commodity market we trade, the returns don't come in a nice 45-degree line. When you combine them in a certain way, and this comes down to really the part of the science of it. When you combine these non-correlated assets together, you have a little bit more of a chance of smoothing it out a bit.

I think that recognition that there's this human need for something more consistent has served some of the managers who have led the forefront of that very well, being more consistent. It's the biggest challenge to what we do because, again, investment opportunity does not come in a steady drip. It comes in bursts. That becomes the challenge, and that's why, I believe, one of the challenges in marketing CTA type strategies to the general investor is the human side of an investor wants constant gratification. That's a human element. We simply don't provide that as an industry. Those that can do better at that have clearly... have done better at marketing the product.

Niels

Sure, and in a sense it goes back to the fundamental discussion about convergent risk-taking and divergent risk taking. There is a reason, I think, why most people probably would prefer a convergent strategy where you have lots of small gains and suddenly you have a big crash, rather than what we do where you probably have a lot of flat and negative periods and then suddenly you have the big burst to the upside. But anyway, that's obviously a big topic which we could spend the next hour talking about. Before we dive into the first real specific topics about your firm, I just wanted to ask if you could give a very brief overview of the products you run. I know we'll probably talk mostly about your Diversified program, but you've got a couple of different products, and I'd love to just have an overview of that.

Tim

ntastic years and years, like:

fter starting the business in:

We wanted to learn about ETFs and indexing, which we felt were important in traditional asset allocation, asset management, but that would eventually become important in alternatives. I think we've seen that develop. By starting with natural gas, which we were very familiar with from our Shell days, we could learn about how to develop indexes, how to partner with index distributors, index publishers, exchanges, and also partnership with companies like ETF and mutual fund companies. It was a learning process. So now we had alpha at one end, and again, I'm taking some artistic license. Our product tilted to alpha and a more beta natural gas product.

After:

So with that suite of products we felt that we could meet the needs of different types of investors. This really goes to a couple of things: it goes to transparency; it goes to liquidity needs, and it goes to cost. Each one of those things is priced differently. Once you're able to identify the return drivers in a simple way we have this edge in being systematic non-discretionary traders, and that's easier to do. Once you can do that you can more easily price the product appropriately. What is that return driver? What value does it add? What distribution channel does it fit in? What's the right price for that product? This is where we... the business side comes in. It's the right product for the right investor from an investing standpoint at the right transparency, liquidity, and cost element as well. It kind of went from there.

the mutual funds side back in:

Niels

Sure, absolutely. I may want to circle back on this because I think, actually, these product suites I see more and more of this and I think it's becoming more and more important actually. So maybe we circle back and talk a little bit more about that later on.

Let me ask you a little bit about how you structured your business because I think that's also important. When people hear all the things you do, all the markets you track, trading different models, and so on and so forth then obviously technology and how you structure your business is quite important. How have you chosen to do it in your case?

Tim

It comes back to the sort of advantage we have as systematic non-discretionary traders in that I don't need 17 analysts telling me what way to think on a stock. We have our methodologies. We embrace technology, so that is key and elemental to any quantitative trader and CTA. By virtue of being nondiscretionary - let's just call that rules based, I don't need a massive, massive infrastructure. You need to have all the bases covered most definitely, but as you're growing your business, you can accomplish a lot through the efficiencies of technology. So we focus here at Auspice on what we're good at and that is rules-based strategy development and research and product creation and, in general, we partner with people good at distribution and sales, and those things that can really bog you down.

Look at the regulatory environment. If you wanted to be in every market: U.S./Canada are even very different, and you want to be in different markets within Europe, as you know, there's a lot of different regulatory regimes and it can be very consuming, very costly, and by building up partnerships as a boutique firm, we can consider those things much earlier than we would have otherwise. So it really boils down to creating partnerships so that we can focus on what we do best and let other people, our partners, focus on what they do best. This really goes down to even meeting an individual investor, a high net worth investor, a family office; it's the same thing. They've made their money in a certain way. They're good at doing that thing. They're probably good at investing in that area, and we look to forge partnerships with them so that we can bring them something that they're not good at and bring them something else. It really comes down to these partnership elements.

I'll make one other side point. I was a proprietary trader. I didn't have experience with clients. I didn't have experience with relationships in general. This has been sort of the transition is building partnerships is really the key to any business. Why would we think, being a CTA or running a fund management business was any different? People always talk about; it's all about the numbers. Of course, that's important. That's first principles, but building partnerships is how you grow any type of business, and this business is no different.

Niels

I completely agree with that, but it does leave a challenge for all of the people who are trying to do it this way and that is how do you convince an investor, and I guess in this case probably an institutional investor, that a team of four or five or seven can compete with a team of fifty? How do we give people that comfort that there are ways to essentially deliver the same rigor, the same robustness, the same diligence? Have you found the magic way of overcoming those kinds of questions which I guess we all get as we talk to the larger types of investors?

Tim

Yeah, what you're talking about is obviously a huge challenge in making the jump from a certain size to another size and you get asked those questions. Here's the challenge I would give many to think about. So many of us come from some sort of an institutional trading background. Think back to when you were on a bond desk or currency desk or an option desk at some bank or some oil company and you probably ran a very large portfolio, and how many people were there with you doing that?

In my case I had one other second in command. We had sort of a person and a half, or a couple of people in dedicated back office. So you were three or four people, right? You weren't a team of fifty, and again I'm speaking on a quantitative side, I'm not speaking on an equity sort of storage, but you didn't need fifty people. What you needed was your discipline, your strategy, the infrastructure, yes, and that organization provided you the regulatory possibility to do that thing and the efficiencies, but it didn't take that many people. This idea that you need a hundred people to do what we do is, in my mind, it's just not needed.

Maybe you'll grow to a certain size where you've got so many distribution channels and regulatory challenges that you'll need more of that. As you grow you'll need execution elements dealt with and that'll take more people, but again, most of these things come at such a much higher level that we just choose not to focus on that right now. We hope to grow like everybody else. Probably every business of any size has that goal, but this mindset that you need a hundred PhDs to compete against another firm I think is just an excuse and I choose to not... to just ignore it. I can't fight it; it is what it is, so I just move along. If that's the difference between somebody investing with us and not then we don't need to waste each other's time.

Niels

Sure that's fine. Incidentally it's quite interesting because often you see that very small teams of people at these institutional investors are managing billions of dollars, so it's kind of contradictory to say that we couldn't do the same. But anyways, that's maybe for another discussion. I want to move on to the next topic which is really the track record because, as I said to you early on, if you don't know the story you don't understand the numbers, so let's talk about the numbers a little bit. Track records can be very difficult to fully understand and appreciate because we know that there is innovation, changes, updates, research findings, involved in looking at a track record. So when people look at your track record for the diversified program, how should they read it? How should they understand it?

Tim

Well, I guess there's a few things, one, is it any good and do we do well in critical times? That's a key part. It kind of comes down to this philosophy of what job are you hiring somebody to do? Whatever thing you have, whatever widget it is, what is the job? What is the purpose of that thing? Our role is to be a diversifier. Our role is to make absolute returns, and part of that absolute return story is to make returns at times that are challenging to other strategies, meaning traditional asset allocation in general. We're not going to change the mind of the world's investors that these stocks and bonds are the way to invest any time soon. But alternatives are obviously becoming more and more accepted. Institutional on down to retail: can we do our job at that key time?

So immediately:

not to consider periods like:

sting things that happened in:

If you fast forward to:

It comes down to we've had a period of volatility expansion, you've had some trends come back into different asset classes. Did you do your job in that timeframe? Then you can do the peer to peer comparison, and that's up to all investors, they will do that. That's their job, but I guess it comes down to why pick an Auspice over somebody else? Of course, returns are important, did you do your job in the key times, and really what is that relationship with the investor and what are you doing to continue to grow the business? Are you going to be around in another 3, 5, 10 years, or whatever your number is. We're very committed, not only from a return perspective, but from a business perspective and a partnership perspective. At the end of the day, those are some of the key decisions that people will make in terms of if they are going to trust you with their capital. So it really boils down to one thing… did you do the job you were hired to do?

Niels

of:

Tim

t that time of crisis. Again,:

Niels

So let's move to the heart of the strategy, namely the program itself. Before we go into all the details, maybe you could share a little bit about sort of from a 30,000 foot point of view what it is the Diversified program does.

Tim

OK, well, at its heart it's a trend following approach. We employ various return drivers including trend following as well as term structure, as well as some pattern recognition, short-term trading strategies, and a number of things that combine to create the opportunity in the Auspice Diversified. Again, at its heart it's a diversified trend following approach. I think some of the oldest strategies in there, as I explained earlier, come from my days at a Canadian bank where we were looking for ways of trend following, or what we called trend capturing, volatile energy markets like natural gas. So we believe that not only the strategy, but most importantly the risk management and the capital allocation methodologies that came out of those experiences and continue to develop for the next ten, fifteen years provide us an edge in capturing market opportunities specifically in volatile times for those assets. It doesn't have to be 100% volatility, but when things get more volatile, they move and go somewhere and also tell you something about the risk/reward of staying in those investments. So really those things combined: there's the return, the trend side of it, and the strategy side of it, and then there's importantly the risk management and capital allocation side which we believe is probably the biggest edge.

Niels

Sure, so essentially you're saying you have sort of two groups of models, and please correct me if I'm stating something which is not correct. Do you treat both models the same when it comes to markets? Are they both allowed to trade all markets in the portfolio, and, by the way, how many markets do you actually trade?

Tim

We look from a basket of over 100 and focus down on a more condensed group of approximately 50 so there is diversification across what we call seven sectors of four commodities sectors: energies, metals, grains, and softs, and then the financial side being rates, currencies and equity indexes. So kind of a classic basket of things but at maximum total risk, so let's say the whole portfolio had a position on, the tilt would be to commodities. There would be more commodity risk by a slight amount than financial risk. We don't force that, but again, there is that opportunity if the market opportunity presents itself.

Niels

Does that mean you trade both models, the short term and the long term, across all markets, or does your extra risk towards commodities come from one model being focused on, maybe only commodities since it has a slight edge or?

Tim

In general our philosophy is that all models have the opportunity to cover all asset types. However, we have developed models that are more appropriate in specific types of assets like the volatility in the energy markets as a simple example. It seems there are definitely certain characteristics of the different asset classes that lend certain approaches to have a better probability of success, long term.

Niels

Sure. Now, people often focus on any one part of a strategy. It could be entry point, it could be the exit point, it could be the position sizing, what do you think is the most important of the three and once you've answered that I would love to know if you've done anything in particular in that area that you find important to distinguish your program?

Tim

So I think your most important part of that combination is the point at which you decide to adjust your risk. So you've decided you're going to resize a position based on your definition of risk. Whether it's to resize it or completely capture that mark to market gain. That is really one of the key drivers or the key edges we believe we have. So it comes down to what we believe is our proprietary definition of risk.

Niels

And so it's a combination, if I understand you correctly, of the position sizing and the exit, so you regard those maybe as more important than the entry itself, and I guess many people say, we're all looking to get into the same trends and we're probably not getting into them at very different times, is that kind of the thinking?

Tim

It's exactly the thinking. Trend following as a whole isn't a very hard thing to do, to identify trends or momentum. What is hard to do is 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...

Ending

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