Get Think Tanked Distilled with Jerry Parker

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.


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