INTERVIEW: Trend May Be A Friend, But Risk Management Still Needed—Auspice's Pickering
here's a saying in the financial markets that "the trend is your friend" and the trend is certainly the friend for gold and a few other commodities.
Tim Pickering, president and founder of Auspice Capital Advisors, said precious metals, along with the Canadian dollar, are two markets that are showing strong long-term up trends while natural gas has been on a strong downward trend. Using quantitative definitions of what is a trend and then applying certain criteria has helped Auspice post a solid return on investments of 10% so far this year. They have a three-year average of 13% and ranks in the top 15 of all Canadian funds, with about $200 million under management, he said.
While some market participants dismiss trend-following funds, Pickering said the difficult part is not to pick the trend, but to know how to apply risk management.
"Risk management is knowing how to capture the trend. The tricky part is not finding the trend, but it's knowing what to do. You could have bought oil at $80 and held it to $140, but when do you get out? If the risk goes higher, we get out because we do the math and see the risk of keeping the gains is diminishing. As the market changes you have to change your view of it," he said.
Volatility has been the hallmark of trading during the past few years and it's something that Pickering and Auspice embrace. Knowing a market's volatility helps to set up a market moves on a defined basis. From there he uses criteria such as if a market is in an uptrend makes a series of higher highs and if the criteria fit the firm decides how to invest.
"We invest a certain amount based on that risk. We don't want a portfolio that's skewed one way or another. We don't want a book based on gold. We want a diverse book so we can normalize risk," he said.
A trend-following program is very passive, Pickering said, as they never deviate from their quantitative analysis. "We take a medium to long-term approach. Our average winning trade lasts 130 days, our average losing trades last 30 days," he said.
Like any firm, capital preservation is a top goal, and to that end, they keep most of their clients' money in cash. Right now they have 10% market exposure, but on average, since 2005, they will have about 6.2% invested.
Pickering said Auspice been long gold since February 2009, palladium since September and are also long copper. They were long cotton, but have cut back risk on that. They've been short natural gas for two and one-half years, but have cut back their position since originally initiating it.
While trend-following can be passive, there are two actions that can give these firms hiccups: a sideways trend, where prices stay within a range, and government intervention.
"The Fed and other government interjection in a market can be the Achilles heel in program because they do things that change the rules of markets. We had that problem in 2009, but if our clients were diversified in equities, which they probably were, they would have done ok. Also being a sideways market is a problem, but then that's a problem for anyone," he said. https://sites.google.com/site/goldandsilver2012/latest-gold-news/ff
By Debbie Carlson of Kitco News dcarlson@kitco.com
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