Tlaloc: A safe beachhead
If there is one theme that has permeated the managed futures world over the difficult period of the last three years, it is the importance of flexibility and solid risk management. Of course, a deep institutional-level knowledge of markets always helps.
Jean Beach, principal of Tlaloc Capital, epitomizes the knowledge and discipline it takes to perform in difficult market environments.
The Tlaloc program trades corn futures with a short-term fundamental approach. Beach was a proprietary trader at Enron and headed up risk management at Tyson Foods before launching her own commodity trading advisor in 2011.
Risk management has remained foremost in her approach as demonstrated by her solid risk-adjusted return numbers. While Tlaloc’s 10.71% return for 2013 may not seem so impressive, it comes with a worst drawdown of 3.58% over the worst period in the history of managed futures.
Key to Beach’s success is her knowledge of the fundamentals. “I trade off of a variety of different things; you have to have both the supply and demand side of the equation,” Beach says. “Weather is certainly impactful but you have to have a good grasp of what is going on with margins not only for ethanol producers, but at the same time what is going on with protein processors, what is going on with potential feed substitution. You need to take a look at both sides of the balance sheet in a very detailed fashion.”
Beach understands both sides of the equation and that her fundamental analysis could be off, or at least early, so she looks at different timeframes. “My trade philosophy is to have core positions but to also have intraday and intraweek trading to generate additional alpha,” Beach says. “If you look at the total trades in a year — let’s say 1,000 — about 60% of those trades are going to be intraday. The percentage of those intraday trades that are profitable is significant.”
This is simply an acknowledgment of the dynamic nature of markets. “I like having a core position but based on the information flows that come in, to be able to hit some singles and doubles to generate additional alpha and stay very nimble.”
In 2013 this meant understanding the choppy nature of the corn market and finding valuable short-term trades. “It was choppy downward and there was significant volatility, which helped because I have core positions but also like to do intraday and intraweek trading, and that helped me to maintain a program with relatively low margin-to-equity usage.”
Beach also likes to read the market to see where traders are leaning going into a report. “One of the things I look at when taking a position is to ask if the trade is overcrowded. For example, in the [January 2014] USDA [stocks] report even though you could be bearish, the expectations were so high relative to production you [had to ask if] it looked a bit overcrowded [and] may be better off staying flat.”
In 2013, Beach saw that there was greater risk to the downside based on a solid South American crop, feed substitution and the fact that prices remained elevated from the 2012 drought.
“These factors combined with the elevated price level as well as the macro environment, much had been priced in, [that] the higher potential for price risk for corn was to the downside,” Beach says.
She maintained a core short position but was disciplined with it. “There were certainly opportunities to scale in and out,” Beach adds.
It was this understanding of the fundamentals and nimbleness during the volatile growing seasons that allowed Tlaloc to pick up short-term profits while keeping risk low.
“Discretionary managers have the ability to price the relevant fundamentals that are driving the markets and also can adapt to changing trade environments,” Beach says. She adds that keeping her margin at risk low allowed her to “react to market changes quickly.”
By keep risk low, understanding the core fundamental drivers while also staying flexible enough to catch short-term moves, Tlaloc was able to deliver superior risk-adjusted returns in a difficult market environment.