Nick Leblebijian, co-founder of Lakefront, says Simpson initially was hesitant because of the headaches involved in managing money, but Leblebijian and Jon Marcus, co-principals with Simpson in Ceres, manage the business in Chicago, allowing Simpson to focus on trading and running his feedlots in Texas.
It has worked. Ceres has produced a compound annual return of 28.18% including a 104.56% return in 2010.
The CTA program mainly trades spreads from a discretionary outlook with a focus on the cattle crush, which trades feeder cattle and corn vs. live cattle. Simpson’s experience in the cattle business helps him understand the dynamics of the cattle crush.
"You can’t underestimate what the cattle feeding industry will do to the margins to keep their pens full. It is not a secret, but Cargill, JBS, Tyson, these huge corporations and packing houses will [take huge losses] buying feeder cattle to keep their feedlots and packing houses running efficiently," Simpson says.
The need for commercial enterprises to operate at peak efficiency at the cost of bidding up feeder cattle is an exploitable edge for Simpson. "The money they lose feeding these cattle is more than offset [by] their packing house profits."
In late spring, Ceres was long April feeders and December corn, and short April live cattle. It has been a profitable long-term trade, but Simpson will take a quick profit if a position turns. "It is better to take the money and regret it than to not take the money and regret it."
Simpson also will trade basic calendar spreads based on seasonality and attempts to exploit the movement of index funds.
He will exploit the Goldman roll, but says it has grown more difficult. "When I first started, the open interest was 75,000, now it is 175,000 but there are so many other funds."
He says the vast majority of the roll is no longer concentrated on the five-day period of the Goldman roll. Ceres experienced its worst drawdown as a result of what appeared to be an influx of assets into the long-only commodity space in January. The program dropped 40% on a series of bull spreads (such as long April/short June) in cattle and hogs in a bull market because of a huge influx of capital over fear of food inflation. April cattle was a record low $1.50 premium to June instead of the typical $3 to $4, but actually went negative. "That is what blew those spreads apart. The front end just sat there, but they bought the back end," Simpson says.
He learned a valuable lesson from that drawdown, which the program nearly has made up already. He sees a lot of opportunity in winter cattle spreads, and expects long April 2012 cattle and short December 2011 to be a long-term play.
We wouldn’t doubt him, as he knows his business. "I have been there and done it. I have been at the packing house, I have been at the feedlot, I have been on the backend of a working chute, if you know what end that is. I just know this business."