For as long as he can remember, South African trader Henk Grobler has been fascinated by markets and their movements.
"Even as a little child, I was always listening to the news, following politics and economics, and watching the way the market moved in response," he says. "Then, in high school, a local brokerage sponsored a trading tournament and I was hooked."
He even developed a board game that simulated market events, but his father, a bank accountant, steered him in a different direction.
"He was conservative by nature, but also had gotten burned in Krugerrands in the 1970s," Grobler laughs. "That turned him off on trading for life, and he convinced me to become an engineer."
But one year after starting his job, he opened an account and placed his first trade — long gold stocks. He then moved on to stock index futures and then agricultural commodities on the Johannesburg Stock Exchange’s (JSE) Commodity Derivatives Market.
"There are too many variables when trading individual stocks," he says. "I found that, in commodities, if you understand the crop cycle and keep an eye on supply and demand, you can get a good feel for the trend, and then you can use technical analysis within that."
He developed his strategy while trading part-time and keeping his day job. Then, in late 2002, he began taking time off from work to sit in his broker’s office.
"Watching the market in real-time, seeing the bids and offers on the screen, it only fueled my fascination," he says. "I realized quickly that I’d been trading on too-short of a time horizon for the distance I was away from the market."
Grobler understood this wasn’t a part-time job. Then he studied options, focuing on the JSE markets.
"We don’t have farm subsidies in South Africa, so farmers have to hedge," he says. "That means the commodity options on JSE are a lot more liquid than the ones on the European exchanges. You see the bids and offers coming in; you see the volatility increase as hedgers come in. You have a real market."
He’d found his true calling: Trading volatility instead of trading direction. So he studied to become a Chartered Financial Analyst, quit his engineering job and opened the Badger Quant Fund. Since 2003, he’s built an impressive track record — a 29.9% compound annual return with a maximum peak-to-valley drawdown of 16.7% and a Sharpe ratio of 1.26.
His approach to commodities is simple: Know your crop cycles, anticipate the hedgers and know what the volatility should be. Then, buy options before the volatility goes up and sell options before it drops. He uses a combination of quantitative analysis, technical analysis and intuition honed over 10 years of exposure to the markets to place trades.
"Seasonality doesn’t just mean looking at things that repeat and [anticipating that it will] continue," he says, "you have to understand what drives that seasonality."
Take white corn, for example. JSE’s flagship commodity product is a staple across Africa. Kenyans use its meal to make ugali; Ghanaians use it to make fufu; and every other country uses it for something. Indeed, the yellow ugali common at East African restaurants in the United States only shows up in Kenya when there’s a drought, and that dynamic influences volatility cycles.
White corn’s planting season runs from November to the end of December, so its volatility usually starts to increase in August, with spikes in December as farmers place their hedges. It then drops off in January as the crop becomes more certain and tapers off through July as crops go off the field.
Last year was different: Africa had a bumper crop, while other parts of the world suffered. That meant the local market traded at export parity, thus following Chicago corn.
"White and yellow corn aren’t exactly the same, but the white maize market still assumed the volatility cycle that you normally see on international corn rather than being driven by our own fundamentals," Grobler says. "If you’d gone in blindly following past cycles, you’d have gotten creamed."
In addition to commodities, he trades volatility on the JSE All Share Index, where he’s benefited from increased activity.
He says risk management is key. "Because my trading is highly intuitive, I need to make sure that I’m responding to a feeling about the direction [of] the market and not to fear or greed based on my own position," he says. "To achieve that, I use stops religiously."
But he also applies judgment instead of dogma.
"You have to apply market savvy to know when you’re seeing an overreaction in the market and not react to it," he says. "But, you also have to be willing to execute the stop if you realize that the ‘overreaction’ is something real."
He adds, that realization comes with time, experience and a healthy dose of curiosity.