Chesapeake’s Parker on Pure Trend Following

Even if you strip out the MAC seven, it's also about double sales has similar beats you know, we're paying very close attention to margins with tariffs and everything like that, but the margins are holding in very well. We also look at the price reactions of these stocks, you know, I would say generally they're a bit more volatile than average,

meaning that they're been moving more. The misses have been punished more than the beats when you look at historical so it they skew to the downside a little bit as far as the excess returns after the earnings. But generally earnings continue to be very strong and seem to be continuing to you know, charge this bullmarket forward.

can occur as well. So some CTAs will introduce other strategies, mean reversion and recognition, carry trade other strategies along with the trend following in order to smooth things out. And we just don't add any of those ideas and just do the do the trend following only. And then another way to look at it would also be it's sort of real trend following. There is no way some CTA is trend following CTAs. They may have algorithms that in

order to smooth it out. Once again, they'll alter the trend following a bit like don't let the profits run. Get out of something if it has a big profit, just get out at the very highs, which is one of the opposite of the way that I was raised to do trend following. So trend following plus nothing is very unique. There's not many CTAs or certainly in the ETF world that do both of those things.

fifth sector after those other four. So we build the portfolio trying to maximize diversification. We're going to have longs and shorts, and then we're going to not base any of these struct the addition the markets that are in the portfolio. None of that's going to be based upon historical returns. It's just you know, some of the market have performed great in history, so maybe not so well.

And that's sort of a trend following philosophy. If you can't predict these markets the past, you shouldn't pay too much attention to the past except trying to uncover good places to buy and good places to sell using your back test, but don't rely too much on the historical performance to build the portfolio. So we you know, like like in the past few years when Coco was this big mover, everybody wants to use Coco right as an example for almost everything to do with trend following, So

I'll do it as well. Coco hadn't made money in ten or fifteen years, but the good trend followers are going to have it in the portfolio and office diversification. So we do care about smoothness if we can get it from the portfolio and trying to diversify it as much as possible. And when you're trying to find these outlier trades and just maybe five or ten percent of the trades are going to be responsible for all the profits, it's really helpful to trade hundreds of markets because it's

sort of is the bad luck factor. If you trade twenty or thirty markets, you know, you could go if you have a great year because a couple of those had really big moves, or a zero year because you didn't have coco in your portfolio or coffee and gold or silver. That would be unlikely. But that's sort of the reason that we build it the way we do.

smooth fakes out a bit. And I think it's also important for clients to realize that this type of strategy can underperform. When stocks are doing really well, bounds are doing okay, the trend following, especially like this year, has not really helped very much. It's kind of caused issues, especially in a time like April where there was a lot of whip saws and getting out of the lungs, going short and getting back into the lungs, and the

long only indexing just stayed long all the time. So that was kind of the worst case scenario for trend But it's just always important not to get rid of your diversifiers because once again, it can't predict when you're going to need them and when they're going to do well.

in tradition. It's managed futures is what a lot of people call it. So these are not futures, but they can add a lot of diversification. And once again, the indices are going to be it's going to be difficult to get a really big outlier trade in an index. It was in the S and P right now. You know, some of the stocks are in an up trend, some are in a down trend, and some are flat. But if you look inside I did SMP at the five hundred stocks, for instance, you know you can really have

positions in both. It can be long some and short some and playing those trends and not just sort of relying upon this index approach. No CTA which trade the dollar index only or a commodity index only. No. No, they're going to trade the metals and the grains and the softs and the energies, and they're going to trade all the different currencies because there can be different moves. You know, the big move recently in the end, I guess short short the end was a big move for

CTAs over the past few years. And so it's the same thing with stocks. There's no justification for not adding those stocks in there. And we could be client related for clients or discouraging that you're CTA saying your lane and we have people trading stocks. But I think a CTA trend following stocks brings a new way of looking at stocks. It's not going to be the same performance. Sometimes it's going to be better, sometimes it's going to

be worse. Taking small losses and letting the profits run and like I said, getting out when there's having to get out when there's a big crash or a V top and a V bottom and getting whipsawed around. You know, it's going to look a lot different for good or for worse. But it is much different than just to buy and whole strategy.

algorithm that we all have. And then I just find it difficult to own the S and P because it's an up trend, but a lot of the components of the S and P could be in a down tread and so I yeah, it's really a no brainer, and I'm not really sure why it hasn't been adopted more. It's really trying to put what t TFPN does is say, you know, this is putting trend following in a situation

where it has the highest likelihood of success. All of these different markets, all of this diversification, long and shorts, even the stocks fixed income ETFs, and we tride a few of those that meuni bonds, mortgage backs, high yield, the markets, the interest rate markets that don't exist as futures.

Of course we're going to go there. We're going to go everywhere all around the world, in all the different in Europe, Asia, South Africa, all the small commodity markets, sunflower seeds, palm oil, everything, and so of course the next stop has to be It was just drilled into my head and when I learned from Richard Dennis in the eighties, you diversification was so important, especially in a strategy like this, and so where you're going to go

if you don't go to the stock market. This is a very logical and easy, low hanging fruit as relates to building the portfolio.

If there was a thousand commodities or five thousand commodities, then that would be fifty percent of the portfolio or greater. So I think what people, especially CTAs, who don't look at stocks, they only look at these indices. They don't really realize what's going on in the market. If the market is the S and P and then let's close

our eyes to everything else. No, no, no, the market is not just the S and P. Right now, we monitor hundreds of different stocks, some that we trade and some that we don't, and we apply our systems to those stocks just to see, you know, what's going on in the in the individual stocks, and I'd say right now about sixty percent of them are long and about thirty percent or short, and so we have a meaningful

short position. So when we have a period like April, when all health breaks loose very quickly and stocks get crushed, you know, we have a chance to come in with shorts. We're not just sitting there with one hundred percent long. Indices are all very correlated unlike the individual stocks. Sometimes you know, sometimes the stocks are very cool and they

go to one. We know that. But that's why it's so important to trade the individual ones, because you're increasing your possibility of having some shorts on when the general markets in an up trend, which is what happened in April. You know, we didn't come in one hundred percent long. We actually did have some shorts on because we were

following those trends. And it's I really get a kick out of hearing about how hard it is to short and how shorting is not that't profitable, which I agree with all of that, but it really is easy to short if you're shorting highly lifquid stocks that are easy to borrow and are cheap to borrow, and you're just selling the breakouts and the down trends, and you're doing

it from a technical trend filling point of view. You can add these stocks to the portfolio and maybe they'll help in a period where the logs don't do so well.

I've even heard things like the argument that let's say, non traditional markets or illiquid markets, things like carbon credits or even like synthetic spreads between different securities could potentially trend better than the more traditional stuff. I feel like a lot of that is just a reaction to what was recently in the past. I mean, what is your

thoughts about that stuff? Or are we getting too cute and we should just trend follow everything because we don't know what's going to be the winner.

no such thing as a superior market. All the markets can trend, they have trended, and probably over a long period of time, they're all going to look for similar to each other in the stocks and the commodities and the currencies and the interest rates will probably all look a little bit look very similar the performance of all

of those who looked similar over time. I don't think it's proper trend falling philosophy to sort of think of the markets in those terms that some would trend better than others, because you know, we've seen a lot of great trends in the stocks. I mean, they've trended the best recently, right, And some of these moves are just gigantic and outstanding, and they will have some crashes sometimes and some big sell offs, but they also have some really big outlier moves.

into trying to choose the perfect stocks. All these markets have trends over time, and you just need to kind of have a good diversified portfolio so you can participate when they actually do occur.

do you revisit your trend length? Do you have different trend lengths for different markets? How do you kind of approach that question?

same systematic approach. That's been the big change over time since the eighties has been the need to linkeen the parameters and be longer term and have a look back. It used to be twenty days, Now it's hundreds of days, and so that's sort of made trend following even more bumpy and less of a you know, a worse sharp ratio, let's say, because in order to hang into the hang on to the trends, you need to have longer parameters

so you don't get bounced out so quickly. And then you have to sort of walk that fine line of not having the parameters be too long term so when it does reverse, you don't give back all that profit two or three years of profitsing Coco. You've got to be careful, you don't give it all back in a few weeks. So you do the back test, and the back test says, yeah, this long term parameters. They seem

to work pretty well. They've always worked well. Even when we were trading shorter term, the longer term stuff worked better. But I think that's sort of normal for the industry now for all the CTAs and trend followers to have systems that are a little bit longer term. Maybe due to more people trend following more computers. Hard to say,

but the trends are there. We see them all the time, and you just have to sit back and get ready for some that are going to last a year or two or three, and much different than the early days of my training when we were in and out pretty quickly.

but it always performed really well. So it wasn't like we were using part of the data, the most recent data. That we always use all of the data looking back, and that makes it difficult to change, because if you're using data that goes back into the sixties and seventies, you know, it's hard to change. But we do review our systems and we do embrace the idea of more data is better, but we look at the systems at least annually to make sure that they're behaving the way they need to.

of this is psychologically difficult to sit through. Periods where you're making lots of money, then you start giving a lot of it back gold silver, recently huge charts that we didn't even think about getting out. That's how long a term we are then. Also, I think it's recommended to have a stop loss, so you know before you even do the trade, if the trade gets elected, you know where you're going to buy and then where you're

going to get out with a small loss. So I think that's those three components, the entry, of the exit, and the stop loss. That's sort of the core of a trend filing approach. Adding more parameters and rules on top of that, which is very tempting because it makes the back tests look better, but I have a doubt it's going to make the real time performance look better.

in different places. And so that's a number. One of the keys is making small bets in many different markets and having multiple markets, many many markets, and many different

trees and exits. Once the trend gets going, and like gold and silver, you want those different systems to be one hundred percent correlated because you know, you don't want one system to not be engaged with the trend and not making money in these So there's a limit to the diversification at individual systems you can expect from them.

But on some big trades like the gold and the silver and cocoa, having different exit points will give you some good diversification in your profit and loss on any individual trade, but not so much on a daily basis. You know, they're all going to be making and losing at the same time. And you know, I don't really deviate from it for many years, but when I first started trading, like most people, just got to get used to hating your fate over to a set of rules

and following those rules. And I had a difficult time. I was a slow starter, and just following the rules was very difficult. And the very first turtle trade that made a lot of money was February heating or on nineteen eighty five, nineteen eighty four. And so we left the training and we were told, don't miss these trends. If you don't take a trade, if you miss a trade, if you don't buy the breakout, you're going to probably miss a big trade. And half the room probably miss

that trade. I don't know what we were thinking. Two weeks after the class, and it wasn't January heating on, it wasn't March heating on. It was all February heating oil. Just so how idiosyncratic the heating off and be to cha crude. The different months of heating off can be different than each other. So it's so important to have that diversification and follow those rules. I think what I wasn't it wasn't so hard for me, I think to

get out of a losing trade. I think what was hard for me was to anticipate this trade could be a loser. Thus I didn't want to do the trade, and that's just a real bad idea. It's probably worse the worst idea ever is to miss a good miss a trade. You can't you won't know if it's good or bad, but more than likely if you don't take the trade, you'll be you will regret it. And then, of course the other big problem is not taking losses, but also the one thing that everybody suffers from is

desiring to get out of the profits too quickly. It really, the market really is testing us all the time for can you do what the back test says is optimal. It's pretty difficult hanging on to these profits. It's just so hard to see all that money you're making, and it's still a lot of it. It's going to be at risk because the back test says, be strong, be bold, hold on as long as you can, or at least as long as the back test is telling you to

do that. And I think that's just another learning part to be a trader is that you have to suffer and make those mistakes in real life and say, yeah, this is really a big mistake that's at least what I had to do. I talked a big game. I was going to be one hundred percent disciplined. I told Richard Dennis that I'll follow the rules all the time and just not work for me.

of a typical managed futures product. That's because some people will will prefer that it will and We'll be very happy with the indices, no matter what I say, and no matter how bad I talked about indexes, and that fund has been around for a long time, so we're not interested in kind of changing it too much.

them trade hundreds of markets. They can replicate them with ten markets, and they're doing a pretty good job of doing that, so I can see the benefits of it. I think that once again, it's probably easier to replicate that type of trend following, which is not which doesn't have a tendency to let profits run like we would.

I think we'd be harder to to replicate us with ten markets, because you know, we may get a big outlier in a bunch of individual stocks or some of the markets that are that the replicators don't don't trade, don't try to, they don't use to replicate. So yeah, I think that it's a good way for the industry

to evolve and get more people interested in it. And it's I think it's going to be great for our fund and grow the pie, and who likes to talk about growing the pie, So I think it's definitely helping.

the trader experiment is so legendary. Do you think we you know, do you think there could be a trader experiment in twenty twenty five, Like you do you think that would work or was that kind of like a you know, time and place, a very special thing that that might have passed us by.

can be taught. If it's going to be based upon just rules based trading, of course you can do that. I think these days, though, a proper turtle experiment would be to hire qlots who knew how to program and knew about math, and maybe give them some training like we had, but demand from them more. We want you to give back. We're giving you something. The turtles really never gave back very much. We just traded the money.

The whole environment was not conducive to original thinking, and let's go tell rich how we can improve this strategy. It was that never occurred once we got out of there and didn't work for them any longer. We got more creative on our own, but the environment didn't produce a lot of creativity. I think now you would just man from people, smart young people, like we've given you the basics of trading or the basis of bread. Now you go out and you do your research. You're good

at math, you're good at programming. Come back and tell us how we can make things better. I think that's the way it would be now. But I get a lot of calls from people or messages saying, look how great your life is. Look how Richard Dennis changed your life. You should do that for other people. You should hire me, sort of like morally, like you owe me, you owe us this to hire us and teach us about trading. And so the turtle rules and trend following rules are

in the public domain, they're on the internet. So the basics. I think people need to read up on the basics of what we were taught in nineteen eighty three and then go out and improve upon it themselves or use that as a starting for their job. But yeah, I don't know why the turtle telling these giving us all these great ideas and rules and money to trade, a million dollars to trade and big salaries and bonuses. They probably wondering why the hell they did that.