On Wall Street, you often hear people say that “the trend is your friend”. Jerry Parker, the Chairman and Founder of Chesapeake Capital, has made that idea his life’s work. His investment strategies, including a newly launched ETF, track different trend following techniques and he joins the ETF Think Tank to discuss how this could integrate into investors’ portfolios.
Parker’s strategy places a significant emphasis on trading as many markets as possible. The core of his approach involves taking positions in equities, both long and short, while extending to bond markets, currency markets, commodities, and others. This multi-market approach is designed to optimize the benefits of trend following. Because of certain market rules, Parker notes that launching his ETF probably would have been difficult 3 years ago, but he’s happy it’s available now because he believes that adding trend following is a good way to create alpha.
To Parker, trend following involves a systematic approach based on research and backtesting. His team has created systems that have historically done the best job of making money within specific parameters. If the computers say that there’s still some potential in a trade, he can hang on to it even if the market might be suggesting otherwise. He also notes that the more pain you’re willing to put up with, the better you’re able to do. If you can ride out the volatility, you tend to have greater overall profitability.
Parker emphasizes that he ultimately wants a broadly diversified portfolio covering many markets and trades each individual position according to his set of rules. He doesn’t really take into consideration anything going on with the broader markets. In the end, he wants to stay within the framework. If he starts making changes where his team starts tolerating 25 or 50 basis point losses instead of 12, he can run into trouble. Discipline is paramount – following your rules and trading small is key.
Parker has borrowed a quote that says ‘Risk-adjusted returns are deceptive’. What he means is in a trend following approach, you’ll take small losses and preserve your capital, but you’ll let your profits run. That can make things look a little crazy. Traditional metrics will make the strategy look riskier and may not work for non-traditional strategies.
Parker notes that they’re trying to carve out a new sector for blockchain & crypto. With regard to the latter, it’s just Bitcoin and ethereum futures contracts, but they work great for trend following because they’re much easier to trade and they’re liquid. He’d like it better if the two were a little less correlated, but he looks at correlation a little differently. He wants to keep daily volatility low. We’ve seen environments where heating oil doubles and crude oil is stagnant, for example. These are correlated, but they’re different markets. We could see another similar disconnect at any time.
Other key takeaways:
- Where does this ETF fit? Parker believes it can provide value during stock market downturns. It’s ideal for someone who likes trend following, the idea of smaller losses or just a systematic process.
- Parker actively trades in over 300 markets and has a fairly healthy stop-loss, an “optimal” loss level typically around 12 basis points. If it’s a losing trade, he gets out before it becomes big. If it’s a winning trade, he’ll give it a chance to run. Investors are generally satisfied with results over the long-term. Short-term trades and positions are often noisy.
- Noting that he’s currently long high yield into a tough credit environment, Parker reiterates that he just goes with the trend and aims to be highly diversified. He says he’s close to going long on some interest rate sensitive securities right now, but they follow multiple systems with multiple entries & exits.
- Parker’s conviction is the same for every market. If it’s volatile, they trade it small. If volatility is lower, they may take larger positions.
- On a typical day, Parker’s team gets the new data, runs his systems and gets his trades ready for tomorrow. The team may make 4-5 trades a day, sometimes there are none. He tends to let the portfolio run and follow the trends.
You can watch a replay of this virtual happy hour on our YouTube channel here. While there, subscribe to our channel to stay up to date on our latest content.
Disclosure
All investments involve risk, including possible loss of principal.
The material provided here is for informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Toroso nor any of its affiliates guarantees any rate of return or the return of capital invested. This commentary material is available for informational purposes only and nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security and nothing herein should be construed as such. All investment strategies and investments involve risk of loss, including the possible loss of all amounts invested, and nothing herein should be construed as a guarantee of any specific outcome or profit. While we have gathered the information presented herein from sources that we believe to be reliable, we cannot guarantee the accuracy or completeness of the information presented and the information presented should not be relied upon as such. Any opinions expressed herein are our opinions and are current only as of the date of distribution, and are subject to change without notice. We disclaim any obligation to provide revised opinions in the event of changed circumstances.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Toroso or its affiliates or any of their officers or employees of Toroso accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Toroso. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of and observe such restrictions (if any).
