TTU Podcast Episode #053. Tim Pickering, Founder and CIO, Auspice Capital Advisors. Show notes at:

Transcription

1 TTU Podcast Episode #053 Tim Pickering, Founder and CIO, Auspice Capital Advisors Show notes at: Tim: 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, we don't need to waste each other's time. Niels: Trading for a living is not for everyone. In fact, starting your own business can be a very lonely venture, and when investors look at a manager perhaps this is one of the questions they need to ask, "are you happy doing what you do?" Having a clear purpose with your trading and your business and knowing why you do what you do, well that's what we're talking about in today's episode of Top Traders Unplugged. Introduction: Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their failures - imagine no more. Welcome to Top Traders Unplugged. The place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level. Here's your host, veteran hedge fund manager Niels Kaastrup-Larsen. 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. Copyright 2014 TopTradersUnplugged.com (CMC AG). All rights reserved. 1

2 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: Sure, well you can go back a long ways. I grew up... I come from a farming family. We moved from the province of Saskatoon, here in Canada to Calgary, Alberta. Calgary is the base for Canadian oil production in Canada, and Canada is the 3rd largest oil reserve in the world, so it's a very significant place to be. But when we moved to Calgary in 1981, this was at the height of what was called the National Energy Program in Canada. Interest rates were over 20%, and it was quite a chaotic time to move into Calgary. Probably the biggest influencing thing for me at that time that has filtered into my life and my business and thus my trading has been a fear of overleveraging oneself and debt. I'm very conservative in my investment approach. I'm very conservative with my own capital, my own money, and that Copyright 2014 TopTradersUnplugged.com (CMC AG). All rights reserved. 2

3 has really filtered into the investment approach that I've take. It's really been about discipline about minding the bankroll and that really has been an influencing thing to me. Niels: Where did that fear come from, if I may just interrupt you? Tim: Calgary, in 1981, 1982 probably every second house on our street was foreclosed on because you had collapsing oil businesses, a very high interest rate, extraordinary taxes at the federal government level in Canada. So those things really resonated with me in terms of discipline debt leverage and really being careful in terms of what you have. 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 Copyright 2014 TopTradersUnplugged.com (CMC AG). All rights reserved. 3

4 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 followup 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. Copyright 2014 TopTradersUnplugged.com (CMC AG). All rights reserved. 4

5 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. Copyright 2014 TopTradersUnplugged.com (CMC AG). All rights reserved. 5

6 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 Copyright 2014 TopTradersUnplugged.com (CMC AG). All rights reserved. 6

7 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: What you're bringing up is so timing appropriate. If you think back to say 2007, what did we see? We saw volatility in the fall of 2007 really start to pick up. This was nine months plus in front of anything known as the financial crisis. We had that precursor. Volatility was starting to gain. Did we know what that meant? Nobody has a crystal ball, but volatility tells you a couple of things. It tells you something about risk, obviously, but volatility has persistence and if volatility has persistence it doesn't just disappear then it becomes a great opportunity. So we really focus on that volatility component as a guiding light in terms of what is going to happen and what the opportunity is going to be. 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 Copyright 2014 TopTradersUnplugged.com (CMC AG). All rights reserved. 7

8 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: I agree with that. It's very interesting because in some ways you can say that investors on one hand may have some unrealistic expectations because they see all the markets that global macro CTAs are trading and inherently they are volatile markets, but they think that we have this magical formula that we put them into a system and away goes the volatility and we just come out with a 1% monthly return every time. Of course, that's not how it happens. I know that you're right about the people that have been able to reduce the volatility have certainly received a lot of the allocation in recent years. It reminds me of a presentation I saw just a few weeks ago here in Switzerland. It was a very, very large, very successful private equity firm talking about their process and the question came about, so how do you value your positions and they basically said, well, we just look at the EBITDA and we have some magic formula that comes after that. This essentially meant that they were marking their positions in a very non-volatile way because they were completely ignoring that equity markets during those periods back in 2008 were falling 30%, 40%, 50%, yet they were using a particular formula to value all their equities. In that way, you can certainly take out volatility of your returns and maybe that is why people are attracted to these type of strategies. In the real world, where we are mark to market as you say, every day, it's much more difficult. 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 Copyright 2014 TopTradersUnplugged.com (CMC AG). All rights reserved. 8

9 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: OK, so we built Auspice on a product suite type idea. So we look at returns as a continuum from alpha to beta. You know nothing is pure alpha, it's easier to identify pure betas, and we wanted to create a suite of products that met the needs of various types of investors depending on what their characteristics were and what they needed out of things. That really started with Auspice Diversified. So Auspice Diversified is our flagship, longest standing strategy. It is a,.. when I say multi-strategy, it's multi-strategy in that we employ various systematic trading methodologies within that. They range from short to long. It is unconstrained in our mind, in that we are always looking for different return drivers and improving what we do from a risk management and capital allocation standpoint. So it's the strategy that's been around the longest, and it's had fantastic years and years, like 2008, 2010, Once we started Auspice Diversified, after starting the business in 2006, we realized that we're going to need a few years to develop our track record. What are we going to do in the meantime? We went to the other end of the spectrum. We went right to the beta side. We developed a natural gas index and ultimately an ETF based on the price of Canadian natural gas. So this came out in early Why would we do that? Why would we want to launch a beta product? Ultimately we wanted to do a couple of things: we wanted to diversify our revenue streams away from just one type, we wanted to pay the bills while we were developing our track record on the alpha side of the business, and we also wanted to learn. 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. Copyright 2014 TopTradersUnplugged.com (CMC AG). All rights reserved. 9

10 After 2008 happened and we had really great results, one of our partners came to us and we started discussing what is the possibility of taking what we do in Auspice Diversified into this same space of ETFs and indexing. We realized that was a great opportunity and would probably take some time to develop, but we could do that but not with our flagship program the way it existed at that point. To fit into the ETF and index world you really have to have a different level of transparency and we felt, sort of a different kind of product, but a product with the same heart and the same focus and the overall same thesis would be there, but that we would develop a product that would be specific for that environment. So we developed two products: Auspice Broad Commodity, which is a long flat commodity approach; and Auspice Managed Futures, which is a long/short managed futures approach that includes commodities and financials. 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 nondiscretionary 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. We partnered with various CTF companies here in Canada. We have partnered with a company in the U.S. called Direction on the mutual funds side back in 2012 for the '40 Act space. It's looking at the product suite and saying, what is the right product for that environment, for that investor, for that cost point? Really building a business around that concept of product, partnership, obviously the third "P" is performance, that's kind of the given. You have to be able to perform. Those other elements matter and certain of these products fit better into different channels, like ETFs or indexes, or '40 Act mutual funds, than the others do. So we pick the right product for the right environment and find a distribution partner and hopefully... The hardest part, to be honest about what we do, is running the business and raising capital. 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? Copyright 2014 TopTradersUnplugged.com (CMC AG). All rights reserved. 10

11 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? Copyright 2014 TopTradersUnplugged.com (CMC AG). All rights reserved. 11

12 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 2008 gets picked on and says, how'd you do in 2008? OK, you did well, along with all other managers, great. I think most people, they need to dig in a bit to the story of 2008; not only just how well did you do, but what are the risk elements of that, by various measures: margin to equity, various other things. Then let's go to a different environment. Let's look at a 2010 when it's a period of recovery in these traditional assets, how did you do? So you did well? So that's great, but let's dig a little deeper. If you look at the returns of Copyright 2014 TopTradersUnplugged.com (CMC AG). All rights reserved. 12

13 your strategy in 2010, the stock market also performed very well in 2010, what is the correlation of those returns? Were you accretive to traditional asset management even in a good time like 2010? You'd be ignorant not to consider periods like 2011 through 2013; this so-called challenging time for CTAs. You need to look at if your strategy underperformed at that time - what were the reasons? We have all sorts of excuses that come up, or what I call "cop outs" that come up in that time period where people say, well, we didn't perform because there was central bank intervention, or we didn't perform because there were not trends in the market. In 2011 through 2013, there clearly was central bank interventions which can be a very good thing for trends as most of us know, so that can't be used. We'd say there was not trends; well there was. It was very focused in certain asset classes, like equities, but there were some great trends. So how did you do in that timeframe? For us, it was a challenging period for us. We performed well in those markets that trended, like equities, but we are slightly commodity tilted, and commodity was tougher to find trends in those times, so we didn't do as well. That becomes our quest to do better in those times, and that becomes the focus of our research: how do we do better in those times? But if you dig deeper within, say that time period, there were some interesting things that happened in 2010 and we had the Greek debt crisis, we had the Flash Crash, we had general economic slowdown. During 2010, the stock markets corrected twelve to thirteen percent in a short period of time. How did you do during that very aggressive correction? Did you provide some value? If you fast forward to 2011, we had the Euro debt crisis. The stock markets corrected anywhere from 15% to call it 17%, 18%. How did you do during that time? So it's dissecting the environments and saying, did you do your job during that environment? Now, I'll add in this most recent time period, and that is So 2014 kind of goes against what everybody has been talking about with CTAs. CTAs make money in times of financial crisis, when the equity market gets hurt, or this crisis alpha (whatever you want to call it). Well, if we look at 2014, the equity market hasn't corrected aggressively at all. There has been no crisis... financial crisis per se, yet, CTAs are performing very well. Why is that? 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? Copyright 2014 TopTradersUnplugged.com (CMC AG). All rights reserved. 13

14 Niels: Sure, I appreciate that and it's quite interesting and maybe not surprising that I think the surveys that were done by some of the large brokerage houses back in Q4 of 2013 asking so which alternative strategy do you believe will perform best in Only 2% said CTAs and here we are twelve months later, and we're knocking the ball out of the park, as they say. The other thing I thought was interesting in your comment and that is, I remember back in 2009 a lot of people came and said, oh, it's great to have CTAs in the portfolio, because they help when equities go down because they're non-correlated and essentially, in my view, that was a false statement because it's not the non-correlation per se, it just means that they're non-correlated, it doesn't mean that they necessarily make money when equities go down, but I sense from you that that may be part of what you're trying to do with your strategy to be maybe more sure to make money in times of equity stress. Is that the case? Or is it just that you want to be non-correlated and not necessarily... it doesn't really matter when you make money as long as you make money? Tim: So what's interesting about what you said to me is the difference between noncorrelated and negatively correlated. So we don't try to make money at times of equity crisis, i.e. negative correlation. We try to be non-correlated, that's our goal is non-correlated absolute returns. So it surely isn't just at that time of crisis. Again, 2014 is really an important year in making that point, because equity markets are doing just fine and it is more volatile and everything else, but it really shows that we bring more to the table from a non-correlation absolute return standpoint than negative correlation or crisis alpha. So that is our goal at Auspice is to be a diversifier, to be an non-correlated absolute return component as opposed to just this crisis alpha you only hire a CTA when you think the equity market is going to drop. I take an exception to that for the longest time, and we really encourage investors to not thing that way. Don't hire us just because you think that there's going to be an equity correction. 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 Copyright 2014 TopTradersUnplugged.com (CMC AG). All rights reserved. 14

15 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. Copyright 2014 TopTradersUnplugged.com (CMC AG). All rights reserved. 15