Tanyard: Bringing home the bacon
Tanyard Creek Capital’s Randall Cleland got a job as a meat buyer for Sara Lee in 1996 after earning his master’s in agricultural applied economics from the University of Georgia.
Sara Lee was one of the largest meat producers with a meat procurement block of about $750 million. "My title was trading manager, but that is a fancy way of saying meat buyer. My job was to buy bellies," Cleland says. He estimates that he bought between 800,000 and
1 million pounds of bacon per week.
In addition to buying pork bellies, Cleland helped Sara Lee customers — large grocery market and restaurant chains — with forecasting and forward pricing.
While enjoying his work at Sara Lee, Cleland saw the huge opportunities in trading these markets and wanted to take advantage of his growing expertise. In late 2000, he moved from Georgia to Chicago and became a member of the Chicago Mercantile Exchange to trade bellies.
Cleland did not have immediate success, but his trading improved every year. By 2003 he was making good money, but an opportunity to return to Sara Lee and run their hedging business was too good to pass up.
"I went back to Sara Lee as the risk manager for meats, which was about a $750 million per year procurement block. My job was to lock in forward pricing against the entire meat risk," he says.
After three years, he returned to Chicago to start his own livestock-based discretionary CTA.
"I wanted to get away from the corporate mindset that commodities were only for a pure hedge," Cleland says. "There were always opportunities for us to take advantage of inefficiencies in the market. And because of our position, we had a lot of information that wasn’t widely disseminated. But we never were able to use that advantage to increase our profitability. We were given the directive to be a straightforward hedging operation."
Cleland felt constrained and wanted to test his trading chops. "I respect that they were true to their mission, which was to manage a pure hedge. I just saw a lot of opportunities [ and thought] that if they are not willing to take advantage of these, someone should, [so] why not me?"
Cleland began trading customer funds in his CTA, Tanyard Creek Capital, in June 2008 and had immediate success, earning 164% for the year in his discretionary fundamental program.
"There is no system, there [are] no technical signals. When you do something so specific, you get a feel for the market. More importantly, you develop relationships with people in the industry that you are able to feed off of. You pick up tidbits of information and formulate opinions [on] the direction of the market," he says.
Cleland says 80% of Tanyard’s trades are directional calendar spreads, with 10% being options and 10% being outrights.
Cleland trades spreads to hold down volatility in big moves. "The reason is not because the outrights don’t move, it’s because [we] are able to sit during markets that are directionally volatile where [we] wouldn’t be able to with an outright long/short position," he says. "You might be 100 lower in [December] hogs today and if you are long you would be stopped out, but if you are long [December short February], the Feb might be 120 lower. The spreads allow you to stay in a market that is volatile when you otherwise wouldn’t be able to. That is why they work so well over an extended period of time."
Cleland’s use of options also allows him to maintain opportunity while holding down risk. "It is a way to get long or short a market that you think is close to a reversal but hasn’t reversed yet," he says.
He attributes his outsized returns in 2008 to this. Cleland understood that lean hogs spiked in the summer because of huge demand from China during the 2008 Olympics and expected prices to eventually collapse. He was long the near month and short further outs and purchased out-of-the-money options.
"You probably wouldn’t be able to take advantage of the entire move being outright short, but I was backspread and in the first week of August I bought (out-of-the-money) December puts and sat on them."
His returns, while not keeping up that 2008 pace, have been solid: 22.47% in 2010 after dropping 1.61% in 2009 and 26.13% year-to-date through August with a Sharpe ratio of 1.42.
"I understand the fundamentals that drive the livestock market," Cleland says. He has the track record to prove it.
For more on Tanyard Creek Capital including contact information, click here.
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