Jerry Parker Discusses Avoiding Another Lost Decade in Managed Futures

July 31, 2023

Jerry Parker on the RCM Alternatives podcast

Jerry Parker, legendary Turtle Trader and Portfolio Manager of the Blueprint Chesapeake Multi-Asset Trend ETF (ticker: TFPN) appeared on RCM Alternatives’ The Derivative podcast with Jeff Malec. The pair discussed the new TFPN ETF that is sub-advised by Jerry’s Chesapeake Capital Corporation and Blueprint Fund Management, as well as Jerry’s perspective on trend following as an investing philosophy.

Below are some excerpts from the full interview.

An ETF that Brings Together the Return Streams of Long/Short Equity & Managed Futures

skip to 5:05 in the audio below

Jerry: “We had some really great ideas, we thought. Well, at least there were ideas that no one was doing. And when we approached the ETF people, some of them told us, ‘You can’t do it. If you could do this, it would have already been done. You can’t really accomplish this. I have no idea why the people you’re working with told you they could do it. They can’t do it.’

So, and ‘it’ was combining a lot of stocks with a lot of futures. That was the ‘it’ part for the execution – and market makers to be able to handle that, simultaneously making a market and hedging and all the things you have to do for an ETF, to do that in futures and stocks.

So yeah, there would be futures funds primarily that traded some equities or some ETFs. And there’d be stock, primarily stock funds, that traded some futures currencies or whatever, but the whole idea of 150 stocks and then 150 futures, long/short, all around the world – Europe, South Africa, Malaysia, Singapore, Brazil – that would be a difficult thing to pull off.”

Value of Global Exposure Across as Many as 500 Securities, Futures & Forward Contracts

skip to 10:22 in the audio below

Jerry: “Each individual position is kind of inconsequential most of the time and so if it does have a big drawdown, it doesn’t really devastate your portfolio. So, you have a better chance of kind of sticking with the traditional trend following formula the more markets you trade.”

Jeff: “Right. A few things to unpack there. It’s almost like traditional CTAs, who are just doing the indexes are short dispersion and long correlation inside the index, right? They’re inadvertently taking on that trade of that there’s not going to be any outlier moves in the underlying securities, that it’s just going to be highly correlated, moving at the same time. So, you’re saying that wasn’t a conscious effort to be like, I want to be long dispersion and get these names. It was just more of like, ‘Hey, I want as much diversification as possible. Where can I find it? Here’s 5,000 listed equities, that’d be a good place to start.’”

Jerry: “That’s right. And, of course a part of that too is the short part. You want to have some decent shorts as well. I would say that a lot of times, including now, the stock trade is long. It’s all the indices are pretty heavily correlated, and they’re going up. Probably hard to have a short index position now. But you can definitely find short positions in the stocks. And it’s multiple, multiple different trends going on in different companies and industries and company sizes.”

Hunting for Outliers

skip to 12:55 in the audio below

Jerry: “I do think that if you start analyzing the stock market and get away from the indexes and what drives the indexes, the large companies, and you really dig down deep and create a portfolio that’s primarily based on liquidity and diversification, you know, it’s shocking. To see how on a daily basis, you may have everything up and everything down based upon big days in the S&P. But over a certain period of time, you’re going to see a lot of different chart patterns, as you would see in all the other markets.

And you overlay the trend following. It creates more diversification. You’re not always going to be long. So yeah, I don’t think it’s, I’m really happy, though, to maximize – and you know you don’t just trade half your portfolio in stocks because it’s stocks, you allocate and weight the stocks based upon what they deserve. Is it real diversification? Do they deserve this? Now, if it was, if it was 5,000 commodities, we would probably have around 50% in the commodities because they deserve it. So that’s our idea.”

Jeff: “And deserve you mean both are they trending and then what’s the volatility? How am I going to size it?”

Jerry: “No, it’s basically are they diversified enough? Yeah, is it, are you having decent diversification? You know, so there’s like six or seven energy contracts; they don’t deserve half your portfolio. There’s like 50-60 currencies, you know, maybe give them 25%. Of those 5,000 stocks, now go out there and find some that are liquid, that give you some decent diversification. And I think for us, there’s more diversification in our stock portfolio than there is in the currencies and interest rates and commodities because there’s just so many more of them. They, all of these sectors, they all suffer from the same thing, which is they’re all down on the day, they’re all up on the day, or for the week, or for the month. Yes, that’s true. And then at some point in time, they go back to doing their own thing. And the benefits of this diversification, you start to see them. You can see this in the stocks as well, but it’s strictly a function of there’s just so many, and they don’t always look the same and act the same.”

Seeking to Mitigate Downside Risk

skip to 24:55 in the audio below

Jeff: “Part of me is like, the more of that diversification you have, the less each piece adds to the pie. And that’s where the other camp is like, ‘You know, it’s not worth it. Just make sure you hit the big, get the big moves and interest rates, and whatnot. And you’ll be covered. If you make 400% in cotton, it’s not really doing much to the bottom line.’”

Jerry: “That’s right. And then if you lose a bunch in cotton – or remember that big Swiss Franc – then you won’t get destroyed either. So, it does take a lot.”

Value of Individual Equities vs. Indexes

skip to 36:15 in the audio below

Jeff: “But then why not just do all 5,000 stocks? That comes back to liquidity? Are you still trying, you have a little bit of fundamental in there like, ‘Okay, I want this exposure?’”

Jerry: “Right, I want this exposure. I want, I’m heavily tilted toward smaller companies. I don’t want to trade a stock index because it’s going to, by definition, water down the outlier. I don’t want to trade Berkshire or Microsoft because they have too much diversification inside the company. I want companies that are $1 to $5 billion that have no diversification. They will get diversification if you give them enough time. That’s what they’re going to do. They’re going to seek it out, they’re going to buy other companies, they’re going to grow, they’re going to be less outlier-prone. So, I want something that has one line of business, smallish. If something happens, I may get a benefit of a buyout or a merger, of course.”

Avoiding Another Lost Decade in Managed Futures 

skip to 40:15 in the audio below

Jerry: “One of the things I don’t want to do is I don’t want to live through another period of a lost decade. Now, I don’t, I want to put myself in a situation where I’m trading individual equities that are going to have outlier trades, that are going to have outlier trades like the rest of my portfolio. And we’ve already seen that stocks are great trenders. In fact, we bemoan the opposite, that people think that they’re the best trenders, that stocks are superior to our other currencies, commodities, and interest rates.”

Non-Diversification Risk: Because the fund is “non-diversified,” it may invest a greater percentage of its assets in the securities of a single issuer or a smaller number of issuers than if it was a diversified fund.

About Blueprint Fund Management

Blueprint Fund Management designs, distributes, and manages systematic, process-driven, and transparent investment strategies for financial advisors and institutions. The firm aims to make trend following strategies highly accessible to advisors by offering and sub-advising investing strategies that are available as a mutual fund or ETF. Across the product offering, the firm applies a rules-based approach to both asset class and time diversification, instilling discipline and removing human bias during emotionally charged market environments.

About Chesapeake Capital Corporation

Chesapeake Capital Corporation is an innovative provider of systematic alternative investment solutions, including a limited partnership, separately managed accounts, and mutual funds. The firm was founded in 1988 by legendary Turtle Trader Jerry Parker, who continues to serve as the Chairman and CEO. The firm’s consistent, single-minded approach to managing client capital is trend following, and its client base includes private and institutional investors worldwide.

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