TTU Podcast Episode #057. Tim Pickering, Auspice Capital Advisors. Show notes at:

TTU Podcast Episode #057 Tim Pickering, Auspice Capital Advisors Show notes at: http://toptradersunplugged.com/057/ Tim: One of the things we really try to focus on with clients is that, look, don't pigeon hole CTA's as only making money when there is a financial crisis or when there's a big equity selloff - that sort of crisis alpha type concept. At the end of the day, CTA and just quantitative agnostic trading in general is going to take advantage of market movements, no matter what the reason, no matter what the driver. And in 2014 we got the opportunity to prove that. Hi, this is Tim Pickering, founder and president of Auspice Capital, and you're listening to my year and review on 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. Niels: Welcome back Tim for this review of 2014, where we look at the big events from the point of view of your trading strategy. I want to explore both the ups and the downs, as well as the big takeaway from what can only be described as a great year for systematic trading strategies in general. But as you know, because you're systematic in your trading, it doesn't mean necessarily that your strategy deals with the market events in a similar way. So it'll be very interesting to hear how you found 2014. So let's just jump into it and tell me from your perspective how did the year evolve both for your firm and for your strategy? Tim: Yeah, so thanks for the opportunity! Yeah, the year ended up very good. It wasn't a straight line by any stretch. 2014 really started as a year that again, was testing us, testing our strategies, testing our fortitude with those strategies, and testing our business model. It started if we think back, as a very low "vol" year and wasn't just a low volatility year in terms of say... the VIX or some measure like that. But if you looked across many asset classes, the volatility was very low: commodities, currencies, as well as the financial markets in general. You know, that first half of the year really tested our resolve and even the resolve of our investors. So, you know, it surely wasn't a straight line. Niels: Yeah. When you look at the year and you try and break it down, and if we just start by breaking it down by markets, what would you say were the biggest contributors for you in 2014, both on the upside, so to speak, but also on the downside if there were any? Tim: Yeah, I mean, the markets, that contributed most for us, were FX, currency markets, and the energy sector within commodities were the standouts. There were other contributing Copyright 2015 TopTradersUnplugged.com (CMC AG). All rights reserved. 1

marketers for us and our attribution. We did well additionally in soft commodities, in grains, in interest rates, and in metals. The most challenging market for our strategy was definitely the equity index market. We don't currently trade single stock futures. Which may have been more beneficial last year, but equity was a bit more challenging. Niels: Yeah, no, that's very interesting. And I hope I'm not revealing too much by saying that if I'm not mistaking, the two top performing sectors you mentioned FX and energy were actually probably the most difficult ones the year before. And I think that just goes to show how unpredictable things can be. But also more importantly, how important diversification really is. Tim: Yeah, I think so, and I mean... I guess every strategy has its edge whether that's designed, or sort of comes out by accident. Our strategy seems to do exceptionally well in times of volatility expansion and in times of downside or short opportunity. And that's definitely what we saw in currencies of energies. So, it was a good environment for us in that regard. Niels: Sure, sure. Now, you know, we certainly had a year with some big moves. People will remember some of them, oil dropping 45%. Maybe not so much people noticing that coffee went up by 52% and a lot of other commodities had big moves as well. It doesn't necessarily mean that trading models can capture these moves as well as you would think. So, when you look at the year as a whole, are there any markets that stand out to you where you say, "Actually we should have done a little bit better considering the move that the market had?" Tim: Oh, there's always a long list that you hope that you could have done a bit better. I think that, you know, the year again started out, I guess what I'd characterize as choppy volatility. It was low volatility, but it was choppy as well. And we did make some gains in the first half of the year that we were happy with. As you mentioned, coffee. You know, we had both long and short gains throughout the year in markets like corn, soybeans; some of the metals like nickel, platinum, platinum; soft's like sugar. But you know I guess, not any individual market stands out. I think it just stands out as that first half of the year where our quest is to do better in those environments. And you know, that's always our driver. We feel fairly confident that when the volatility or the momentum does come, that we'll be able to capture it. As I said, especially, we feel very confident on the short side. It's those times when things are muddling about; it is our quest to do better. Niels: Sure, absolutely. Now, I don't know if this is entirely true, but I'm going to try to ask the question anyway. If you look inside your portfolio of models so to speak, or strategies, and obviously I don't remember from our recent conversation everything you do. But, were there any particular strategies or types of models, if you look away from the markets but just look at those just kind of you know... that side of the strategy? Were there any of those that kind of stood out during the year, you know, positively or negatively? Copyright 2015 TopTradersUnplugged.com (CMC AG). All rights reserved. 2

Tim: That's a good question. Our portfolios, we combine... obviously momentum and trend following is a key part of what we do. Term structure: where you're going to place yourself on the curve comes in, in a number of ways. We do trade some shorter term strategies and some pattern recognition type of concepts to a lesser allocation. But at the heart of it, it is a trend following approach. I guess when I think of our strategies in a year like 2014, why did we do very well as the market started to experience a period of opportunity, like from June on? I would say the reason is our strategies are in that shorter to medium term variety, and they are quite agile and the agility, especially we find in short opportunities, is of great benefit. That comes at a tradeoff: agility in times when it's choppy; it comes at a cost. So the question is, have you designed strategies that evolve and adapt to those different environments? Again, that's kind of always the quest. But that agility is really what stands out to me. If you had strategies that could adapt quickly to changes in momentum for markets, as I said, markets are traded both long and short successfully. That's what stands out to me as necessary in a slightly more volatile environment. We're quite happy with our results. Our core strategy which has been around for a long time in the life of Auspice, and its genesis goes back before Auspice, really made the bulk of the gains in 2014. Niles: Sure, absolutely, and as you've alluded to a couple of times the year really was a year of two tales. We had three very difficult months for the industry as a whole. A lot of people wrote off trend following as a strategy, in the media. Then it took off. We had eight out of nine months with positive returns for the industry as a whole. But here's the thing, the year will be remembered for certain events: Ukraine, Russia, oil obviously. With your location, you practically have oil in your veins I imagine. But people will normally associate... I think most investors will associate these crises with something negative, "Oh, we lost money on our oil stocks because oil went down, or the volatility from Ukraine caused us to lose money." But that's not necessarily the case with these kinds of strategies. If you were going to visualize to investors listening right now, how those kinds of strategies... Obviously we don't wish anything negative for people generally because we know these events often are not necessarily productive for people. But it could be productive for opportunities in the market. How do we visualize Ukraine or Russia, or oil in terms of how you manage to navigate that scenario? Tim: Yeah, when I think of the year, those are all real stories, fundamental stories, things that happened in the world and in the markets. And at the end of the day they're not the things I think of or describe in terms of what contributed to the environment and the result of 2014. To me it comes down to one thing, which was that we had a volatility expansion that occurred starting in June. It started in equities. It moved into currencies and rates and into the commodities obviously. We were able to take advantage of it. One of the things we really try to focus on with clients, whether they're retail right up to institutional clients, is that, look, don't pigeon hole CTAs as only making money when there is a financial crisis, or when there is a big equity selloff - that sort of crisis alpha type concept. At the end of the day, CTA and just quantitative agnostic trading in general is going to take advantage of market movements Copyright 2015 TopTradersUnplugged.com (CMC AG). All rights reserved. 3

not matter what the reason, no matter what the driver. In 2014, we got the opportunity to prove that this is an absolute return strategy. It is non-correlated to the traditional markets. Even in a year like 2014, when you look at the end of the year, equity had a fine year. It wasn't exactly a smooth ride, but equities are up globally. If you picked different sectors within it, you probably got beat-up. But in general it had a good year, and we had a good year too. In fact, we had a much better year than the equity benchmark. So that's what I want people to remember is that this is a non-correlated absolute return strategy. It takes advantage of movement and volatility. And don't just hire a CTA, or put a CTA, or weight a CTA in your portfolio because you think there's going to be an equity sell-off or crisis, because that is not the only driver to our returns. Niels: Very well put. I appreciate that, thanks so much. Now the end of the year is often a time where we sit back, and we look at the good and the bad that we've gone through during the past twelve months. When you do that, what is the highlight for you of 2014? What challenges did you have, and what did you learn from them? Tim: Are you talking about market challenges, or just in general? Niels: It could be in general. If we look at it from... maybe not too personal here, Tim, but it could be related to trading perhaps. Tim: When I think about a year like 2014, it obviously ended up with a good year in performance and, for us, company growth. That included new clients, even new client types, institutional clients that we've been working with for many years. So we're very happy with that growth result for us. But it was a year that I can tell you in all honesty, that tested your resolve. It tested your resolve to not fade, in terms of the strategy. We experienced some pressure in different aspects of our business in terms of... I'll give you an example. In our managed futures index strategy, why we don't include equities. The first half of the year it was an "all equity going up" story, low volatility, us not including equities, and that caused a bit of a drag in that strategy. In the latter half of the year, not including equities, we feel really vaulted us ahead in that strategy and that strategy outperformed for the groups that are invested through it. So it really was a year that tested our resolve. At the end of the day, I guess I come out of it... we just don't get all that phased anymore. What we signed up for, and this goes back a long time in our careers - we've been trading this way for an awful long time, it's kind of a million paper cuts. We have a million little paper cuts and it kind of wears on you, but then you get these great gains. That's the long vol. concept versus this human need for constant gratification which we all have in us, and then a blowup. At the end of the day, even though it was a tough start to the year and a tough few years and it tested out resolve, I can sleep good at night because I know that when opportunity does arise I feel very confident that we're going to be there. I hope that our investors have that same confidence in us, and that's ultimately our goal to communicate. Copyright 2015 TopTradersUnplugged.com (CMC AG). All rights reserved. 4

Niels: Sure. You've touched on it a little bit before. You mentioned some new products. What else changed on your side during the year, anything on research you found, any upgrades, or any other changes you'd like to highlight? Tim: Yeah. It's just constant research process around here. We did make a lot of headway from a research perspective. We've been digging very hard in the last few years. Again, it's not so much to say that when these good times come about, how do we do better, because we've done very well in those times and continue to. It's looking for edge in terms of the tough times. We feel we've done very well in terms of growing from a research perspective not having tunnel vision, looking at new ideas and being open-minded and it really comes down to a really simple concept and that is to evolve and improve. It starts with analytical thinking, and that's based in replication, and every successful initiative and project starts from a place of replication. But if you want to adapt and evolve, that requires new thinking. It requires intuitive thinking, and it requires curiosity. Just because we're systematic traders doesn't mean we don't have that new intuitive thinking curiosity. So that innovation and that concept is something that I impress upon my team here, and it really is the heartbeat of what we do at Auspice. It's to grow, to innovate, to improve, to be better. That's what gets me up out of bed every morning. Niels: Sure, absolutely. I want to quote Mohamed El-Erian because he was on CNBC a couple of weeks ago, only. And he said something along the lines of if he had to sum up the world right now in one word it would be divergence. We know, of course that a lot of traditional hedge fund strategies are not particularly well-suited for a world with divergence. They prefer a more convergent environment. I just want to ask you... just for you to put your spin and your words on that. When someone like a Mohamed El-Erian, who's obviously been right about a lot of sort of big themes like new normal and what have you. If he's right about this, we're going to go into a world of divergence for a period of time. Not just in the markets, but structurally, politically, economically and so on and so forth. What does that do to you when you think about that? Tim: In a nutshell, to respond to that, I would say I have seldom been this excited about a market environment. When you go through periods of quiet whether we're calling it convergence or what not, it tests you. This is a strategy that needs movement. I agree, I think we are in an environment where it's going to be more volatile, whether we call that divergence. But I think that's going to create opportunities for those that are agnostic, for those that are disciplined, and those are the hallmarks for what we do in this industry and what we do at Auspice. I kind of laugh, because the words hedge fund come up and I think hedge fund... most aren't. They're tilted long. They've got a convergence type of approach, whether it's a short volatility approach. They do well when things are status quo. At the end of the day, the true value and the true hedge fund concepts come out of groups like CTAs that can take advantage agnostically on the short side. Look at us. We made more money being short this year. And we are... historically we've done just as well being short. I think that ability and that Copyright 2015 TopTradersUnplugged.com (CMC AG). All rights reserved. 5

real dedication to that short side philosophy is really what separates strategies and managers. If you say, well, we'll trade short, but we won't trade short energy. Well, tell you what, that's illogical, and that's based in some emotional concept and we really think that this concept of divergence and the opportunity going forward is massive. Niels: Yeah, very true. Unfortunately, not so many investors thought that twelve months ago. I noticed that Morgan Stanley just revealed their survey for 2015. But they revealed that from the 2014 survey where they were asking people, so what's going to be the best strategy in 2014, only 2% answered CTAs or systematic traders. With such a surprising outcome, what do you think that means for the industry? I want to maybe phrase it a little bit differently, because in 2009, we had a massive inflow into these kinds of strategies following a very strong year in 2008, which was a little bit similar, although without the crisis that we saw last year. But we also know that a lot of these investors probably were chasing performance for the wrong reasons. They didn't necessarily appreciate why they were investing in these strategies and they, to a large extent, left the industry a few years later. So how do we avoid 2015 and 2016 to be a repeat of that, do you think? Tim: Yeah, and I even said it to some of our colleagues here, I want investors to invest in 2015 with us for the right reasons not just chasing returns. We all want to grow our assets, and that's fine. But at the end of the day we're trying to build a long term business model here. I look back at the year, and you're right. We had investors that grew impatient with the industry, with us let's say. But we did experience a lot of investors that did see the opportunity. So I'll kind of take the other side of that. I read the same reports where nobody thought or predicted CTA would be on anybody's radar. We've had our largest institutional deals done and inflows, relationships grown, in 2014 than we have in any year in our history. So we feel that there is a group that is looking a few steps ahead. Unfortunately, not all groups think that way. They are going to chase returns, and they're going to do that human thing that constant gratification thing. That's just life. It reminds me of one thing, and that is whenever... and this kind of goes way back in my career, it reminds me that whenever people say something won't happen, it will. The first time that experience came about, and I think I mentioned it in our past talks, is natural gas. "Well, it can never go beyond $2 to $5; it can never go from $5 to $7," and it got as high as $10 or $12 and, "it could never go back down to $2," and all those things happened. But people said they couldn't or wouldn't happen. The same thing happened with CTAs. "CTA is dead." Well, no it's not. "FX or currencies won't move anymore because of intervention." Well, that's not true. "Volatility is gone. It's high jacked by the Fed forever." No, that's not true. And so I see this as such a great opportunity. And I think there's a lot of smart investors that see the same thing. I think the last point, I would make, is 2014 again becomes very valuable because CTAs, quantitative traders, agnostic traders, whatever this whole bucket is had a chance to prove that they didn't just need that equity selloff or financial crisis to make money. I think that is going to be extremely important for investors of all types, whether it be retail, high net worth, financial advisors or institutional type investors. Copyright 2015 TopTradersUnplugged.com (CMC AG). All rights reserved. 6

Niels: Yeah, I think that's very true. The solid performance without a world crisis really makes it stand out compared to 2008 that's for sure. Now, originally I wanted to ask you what you would advise people to do when you sit in front of them looking into 2015, but I want to rephrase it given what you just answered. When you look at that inflow you mentioned, and when you look at that different approach that an institutional or however many institutional investors we were talking about that took the leap and actually went into your strategy during 2014, again going against the mainstream, what do you think convinced them to do it? Because that will be the key, I think, for many institutions listening to us talking today, or at a later date, what do you think convinced them that this is the right thing to do? Tim: Oh, that's a really tough question. I think it just takes the market experience and really, call it a maturity or just been around a long time, to see that look, if it ever gets too good in something, in life, in whatever, it probably is. I went through a period when, in the energy trading business when I was working for a big oil major that it was all about Enron and it just sounded too good to be true to me, and sure enough, as one simple example. I really believe in that philosophy. I think certain institutional investors look, said this has been a great few year run. We've made great gains in many traditional strategies. It's time to start thinking about what are those alternative strategies. And they bulked up on things like infrastructure, real estate, private equity, and then when you're really breaking it down in the alternative world, what are the strategies that can really do well at times of volatility expansion, at times of momentum shifts, all those things? It comes up with the same answer, and that is CTAs and quantitative strategies. So I think that... I don't have an answer in terms of why they did it, or what that key driver is, but I think experience told them that things have been really good, we better dig deep and look at this. And just because something hasn't done extraordinarily well for a few years, doesn't mean it's not valuable. The last thing I would add is, again, non-correlated strategies like CTAs while they haven't performed at their top level for the last few years, when everything else is doing well, given they're non-correlated in a portfolio, they're surely not hurting a portfolio very much. A true asset allocator understands that. Niels: Yeah, absolutely, very well said. I have only got one question left, actually, but before I do so I just want to give you a chance to maybe highlight something that I haven't touched upon, something that you might want to just bring to everyone's attention. So if there's anything let me know. Tim: Oh, I don't have anything that really just pops into my mind. We consider this an environment that's going to be a great opportunity. And, at Auspice, again, we look to innovate. We're launching an index based on the price of Canadian crude oil here in this year. So a beta type product. People again may question why a group like us would do that? We feel there's an opportunity to get a product out there that doesn't exist, allow investors to have access to a market that is challenging to gain access and transparency to - that is the Canadian crude oil market, and so that's one of our projects in 2015. At the end of the day, we're just very excited about where we are. We've made great strides from an institutional Copyright 2015 TopTradersUnplugged.com (CMC AG). All rights reserved. 7

perspective and feel very positive about the year. I think there's a lot of energy in this space, and we're really excited to be here. Niels: Yeah, absolutely. In a sense, I guess my last question maybe is a little bit related and that is, if you could make a wish for the New Year, whatever it might be, what would you like to happen in 2015? Tim: I think it goes back to the previous question you had. I would just like the opportunity to meet with investors that have the similar mindset in terms of them focusing on the asset allocation, judging strategies on their merits, and really let's not just talk about the last month, or three months, or year of performance. Let's talk about what the strategy contributes to a better portfolio for the investor, and that investor could be retail, high net worth, right up to the institutions. It's the same or very similar conversation. So my goal in 2015 is to focus on that conversation. Niels: That sounds very good. Well, unfortunately, our time is up for this short episode, Tim. I want to thank you again for being on the podcast and sharing your insights. Also, I want to congratulate you on a very solid year. And I want to wish you and your firm all the very best for the coming twelve months, and I look forward to catching up in 2015. So thank you so much. Tim: Thank you for the opportunity, and we wish you all the best as well. Niels: Alright, take care, Tim. Tim: Bye bye. Ending: Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to itunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you, and to ensure our show continues to grow, please leave us an honest rating and review on itunes. It only takes a minute, and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged. Copyright 2015 TopTradersUnplugged.com (CMC AG). All rights reserved. 8