Why Commodities Refuse to Trend Forever ft. Doug King

[00:00:07] Doug

But there’ll be moments where we will have rocket ship moments where distortions come and you’ve got to be in it. Don’t try and second guess when they occur because you won’t be able to do that, and you’ll come late because it’s all gone. And then you’ll wake up, and everybody’s making a load of money, and you’re deciding to come in at the wrong point of that cycle.

[00:00:29] Intro

Imagine spending an hour with the world’s greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level.

Before we begin today’s conversation, remember to keep two things in mind. All the discussion we’ll have about investment performance is about the past. And past performance does not guarantee or even infer anything about future performance. Also understand that there’s a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:01:24] Niels

Welcome to another episode in the Open Interest series on Top Traders Unplugged, hosted by Moritz Seibert. In life as well as in trading, maintaining a spirit of curiosity and open mindedness is key. And this is precisely what the Open Interest series is all about.

Join Moritz as he engages in candid conversations with seasoned professionals from around the globe to uncover their insights, successes and failures, offering you a unique perspective on the investment landscape. So, with no further ado, please enjoy the conversation.

[00:02:00] Moritz

Hello and welcome to the Open Interest series on Top Traders Unplugged. This is episode number 20 and I’m your host, Moritz Seibert. Today I have a very interesting guest joining me. A commodity trader, a hedge fund manager, a UK football club owner, and an all-around very fascinating person who’s not a regular guest on the podcast circuit. So, this is special, And the person I’m speaking about is Doug King, the former global head of petroleum trading.

Before we start, let me give you some background on Doug. Doug studied mathematical engineering in the UK and then joined Cargill as a graduate where his career quickly accelerated, and he became the head of the UK grain business. In 1997, he moved to Geneva where he became the head of gasoline and crude trading and subsequently the global head of petroleum trading. In 2004 Doug founded the Merchant Commodity Fund, which is a commodities focused hedge fund that operates out of London.

And in 2010, he and his business partner, Mike Coleman who, by the way, has been a guest on Top Traders Unplugged, and together they purchased the RCMA Group, a diversified physical commodities trading business based in Singapore. And in 2016, they built an oilseed rapeseed processing plant in the UK, which, at the time, was a greenfield investment and the first of its kind since more than 30 years. And today this plant processes about 25% of the entire UK rapeseed crop.

In 2023, finally, Doug acquired full ownership of the Coventry Football Club, which plays in the UK Championship League, which is one league down from the Premier League. And you would have guessed it, they’re on top of that league right now. So, Doug, let me bring you into the conversation.

Hi and welcome to Top Traders Unplugged. Thanks for joining me today.

[00:03:46] Doug

I’m calling in, good to be here.

[00:03:48] Moritz

Isn’t it a nice Christmas gift ahead of Christmas to finish the year with Coventry as number one.

[00:03:55] Doug

Wow. Straight onto the football. I like that.

[00:03:57] Moritz

Yes.

[00:03:58] Doug

Yeah, look what a season we’re having. Yeah, it’s one of those. It’s a standout one. It’s all ahead of us. Everybody’s excited up in the West Midlands, but our feet are on the ground until we get there. But we’re in an incredible position, best position we’ve been in for a long time. So, there’s a lot of excitement.

[00:04:18] Moritz

Great, we’re not going to make this all about football, but I remember when you and I had our prep call probably two or three weeks ago, we spoke about commodities and you running a hedge fund, and I asked you whether it’s okay to speak about your involvement with Coventry and you said, of course it is. It’s all public knowledge, so I hope I’m not reciting you incorrectly.

But you went then on to say, you know, in the hedge fund we trade commodities, and with the football club we trade players, it’s kind of all the same, but different.

[00:04:45] Doug

Something like that. Something like that.

[00:04:49] Moritz

All right, that was a cool statement. Now, looking back, you had this career at Cargill, joined them as a graduate, traded grains in the UK. You then moved to Geneva, where a lot of the Cargill traders, I think they’re still based in Geneva, it’s still a big trading program, right?

[00:05:06] Doug

Yeah, yeah, yeah.

[00:05:08] Moritz

And you ended up running their petroleum business globally. So, you have this background as a physical commodities trader. And then you decided to leave the group and start a hedge fund. What triggered that decision? Why not stay at Cargill in that big position, why start a hedge fund?

[00:05:28] Doug

I think when I went to Cargill in Geneva in ’97, into the oil business, I’d obviously been in the traditional Cargill businesses of grain and non-grain products, and to move into petroleum exposed me to, I would say the US hedge fund industry for the first time. I remember discussing trade ideas with great legends, such as Paul Tudor Jones about gas/oil cracks, and they were looking at getting involved in petroleum in their hedge funds. So, that was an eye-opening moment. And I think after those discussions it sort of whetted my appetite for a future career path as to wouldn’t it be cool for me to at some point get into the hedge fund world?

[00:06:17] Moritz

Right. And so you did. I think you started RCMA with a merchant commodity fund at that time, in 2004.

[00:06:23] Doug

Yeah, 2004 we kicked that off. Mike Coleman, who you mentioned in your intro. He was the one who put that together and asked me to come in and co-start that. And yeah, we did it. Obviously, we knew where we were in the cycle. Asia was booming or about to boom. And we felt that fundamental trading and looking at commodities as a merchant, rather than anyone else, would be advantageous at that point. Where there were very few, sort of, I would say companies or hedge funds that gave access to investors into the commodity world at that point.

[00:07:05] Moritz

That’s right, hence your name, the Merchant Commodity Fund, or MCF for short. If I were to ask you, how would you categorize that fund? Is that a 100% fundamentally driven discretionary commodities trading fund or are there some quantitative, systematic/maybe-repetitive elements where you’re exploiting inefficiencies in the market? How do you operate that thing?

[00:07:27] Doug

The former is where we are. I think, obviously, over the history of the fund, which has run for nearly 21 years, which is a long time, we’ve looked at obviously optimization and timing techniques where we were excited in potential fundamental strategies just to improve our execution and improve our ability to not leave too much on the table. But we’re very bottom-up focused.

We go and do the supply and demand work. We then look at the cash markets very carefully, so we’re never removed from reality. And I think when I go to conferences on commodities around the world, I reckon around 80% have never ever seen a commodity. So, we know commodities and we understand a futures derivative price and a cash market price can diverge, giving different signals. And they’re the sort of things that we look at to give conviction to our strategies.

[00:08:27] Moritz

Right, before we take that deeper dive. You only trade commodities or do you have some exposure to macro markets such as interest rates, and equities, and currencies, and stuff like that? Or is it purely commodities?

[00:08:41] Doug

It’s purely commodities. We do the full set though we do different, we call them buckets. So, we do oil, we do gas, we do industrial, we do softs, we do ags. We don’t do precious, we do base. Precious we don’t class as a commodity. And people can handle that themselves. They don’t need me to decide whether we should be long or short gold or silver when we’ve never done those. We do commodities that are really impacted by fundamental supply and demand, global movements, and substitution, arbitrage, that type of thing.

[00:09:17] Moritz

Well, maybe silver is at that point in time, especially where it is… So maybe something you should actually be…

[00:09:26] Doug

No comment on that. I wish I’d been on it of late. It’s been crazy.

[00:09:29] Moritz

It is what it is. So, you run all these different markets. You’ve mentioned the ag, soft, you know, the petroleum markets, crack markets. Do you have a large team that’s running all these S&Ds, the supply and demand analytics, I mean, because it’s so diverse? I mean, all of these markets are so different.

[00:09:50] Doug

Yeah, over the length of the fund, we run bigger, we’ve run a lot more assets. I think for sort of five, six years we ran a huge amount of assets, really, in commodity land, of around between US$1.5 billion dollars.

We’re a smaller fund today where we’ve been averaging, over the last probably five, six, seven, eight years, somewhere between US$200 and US$600 and so, on that basis, we are a pretty small team. And I mentioned all those buckets that we look at, but it just is our tool set. We look for the best opportunities across those and we may not trade those or any of those sectors for long periods of time, maybe even years if there’s no story that we think is relevant to giving us a risk/reward profile that we’re looking for.

[00:10:38] Moritz

What are they talking about, speaking about stories? What are the current themes and stories to get you guys excited?

[00:10:45] Doug

I was at a conference in Paris a couple of months ago. It’s always interesting when you go and do conferences because you have to give a presentation or a viewpoint of where we are.

And it was really interesting looking at commodity cycles and having been in commodities for a long time, you always, at certain points, feel that it isn’t going to be a cycle this time, but it always is a cycle or it seems to be a cycle. And why is that? It’s that there’s always huge innovation in commodity land.

I remember in 2006, ‘7, ‘8, everybody thought you would never be able to produce enough oil at the speed that we wanted to consume it with the industrial revolution in Asia. And people were talking, we got to US$150, and everybody’s talking US$200. I remember Goldman Sachs talking US$200 bucks a barrel. And then we get the innovation of shale which frankly, whatever anybody else says, that was a shock to see what could be done. And it happened to be in a country that was able to handle that. All the shale really or the only real shale of critical mass has been in the States.

And to add, in 15 years, 9 million barrels a day of additional oil production onshore in a safe environment. Wow, innovation wins again. So, commodities, I think, are quite disappointing in respect to constantly moving upwards.

So, it’s always cyclical. I mean I look at the price of oil today at US$55, I remember breaking US$50 in 2005, thinking here we go, we’re off on the revolution. It’s going to be scarcity. And here we are 20 years later and we’re at similar pricing because of, you know, the innovations and substitutions that we’ve chatted about. And I would give you the same story in grains with GMO.

You know, the GMO revolution, you know, any sort of weather you get, it seems around the world today just doesn’t affect these great seeds. And so, you seem to be way above the sort of population trend with how much you can produce food wise without you’re going to huge land grab.There is some land grab, but you don’t need huge land grab to manage your population growth. So, again, I think those are the things that have made and will always make commodities cyclical.

So, I guess where we’re excited today is in the electrification theme. You know, we do think that, you know, base metals, your copper, aluminum, lithium, this is not so straightforward, maybe, to find different production areas or to manage demand so easily. And obviously then it boils down to how quickly the electrification theme throws out.

Everybody talks about the data centers, everybody talks about the electric vehicle growth that certainly we’re seeing in China and even into the trucking sectors. So, I think that’s the area where we are now pivoting because the other broader commodity land looks, let’s put it like this, well supplied.

[00:14:07] Moritz

Yeah, I find the commodities very fascinating, personally. I mean, they always change. Like you say, they’re cyclical. Look at natural gas. I mean, you have Henry up, really not much happening. then LNG, because of the Ukraine war and Europe needing that gas, competing with China for it, driving up the price. Cocoa is a recent example of the past two years up and down. I mean, go through the list. Each of these markets are very cyclical. I find, like you say, the buy and hold approach is just nothing for commodities.

[00:14:38] Doug

I totally agree. And I’ve argued, I mean, maybe I’ve hit all the conferences over my time and all these passive index funds peddling their wares. It’s like, really, that’s how you lose all your money. I remember when they launched the USO and the UNG contracts to great fanfare in 2007.

[00:14:57] Moritz

The ETF, you mean?

[00:14:58] Doug

Yeah, the ETF. And, you know, if you’d invested there and just closed your eyes, you’d have lost all your money and then some more, all of it, everything gone.

[00:15:08] Moritz

Especially USO was impacted with WTI getting negative, I think the May contract, it was. And you know, they have this static role and exposure to these contracts.

Shifting gears with your hedge fund, you’re now trading futures. So, you’ve turned into a, let’s call it a paper trader, it used to be called a physical trader, it’s now futures only. If one of your investors asks you, maybe in a due diligence call or something like that, Doug, what is your edge? What would you respond to them?

[00:15:37] Doug

It’s a really interesting one because ultimately our approach to trading commodities has not changed in the 20 years that we’ve been doing it. And obviously, we therefore have a 20-year track record of doing that. And being in any business for 20 years means that probably you haven’t mucked it up too many times.

Obviously, there would have been some hiccups, but therefore you understand how to monetize, and manage risk, and get the necessary returns that you’ve been able to give to keep your investors with you. Yeah, they do like a story. Investors, they change. It’s a weird one for me. They get excited about commodities, so they try and find a commodity manager. And then they phone you up and they say, okay, you know, are you following all the ships or are you following all the tank tops of the oil? And for me it’s like, wow, if you trying to go that granular, you’re going to miss loads of stuff out of the situation.

And that isn’t, that isn’t how we work. What we look for is deep diving into a lot of theoretical work, a lot of demand stressing of what may or may not happen. And then we look physically. And I think you say I’ve gone from physical to paper, but all the major trading houses use physical really to then leverage paper. That’s what they do.

They don’t sit there and say I’m just going to move a million cargoes around and make a few pennies with all that risk. They get the physical information and then they trade derivatives on a highly leveraged basis to monetize great profits that you obviously saw in ‘21, ‘22, ‘23 from the majors (Glencore, Vitol Trafigura) of this world, who had an absolute bonanza with what they could see and how they could work those distortions in the market.

So, I say what makes a great footballer? Maybe they’re good at football and they stand out and it isn’t like because they’ve looked at something systematically that allows them to always be a good footballer. All the experiences that I have led, and my team has led, through all the cycles, all the moments, all the experience, and still being there, getting the returns that people want, that, to me, is where I would answer that question. I’m probably decent at what I do.

[00:18:12] Moritz

Yeah, I guess so. Look, maybe the one thing that you’re missing, relative to what you could do at Cargill, is playing that convergence of futures to spot all the way to the final end. Unless you take delivery in the fund, which I think you may have mentioned to me that you did once or twice just to figure out where prices or where cash prices actually were. But other than that, you say you could pretty much do what you did before?

[00:18:36] Doug

Yeah, I mean it’s really interesting, talking over a long period of time. We did take, and have taken fiscal delivery on a couple of occasions with the hedge fund. We took some natural rubber physical delivery, more on a cash and carry type of product where you could retender the physical commodity more than full carry the following month. So, it was a pretty straightforward physical to futures convergence.

The sugar, we did take delivery of some raw sugar at one point, which was exciting, to say the least. We were very bullish sugar at that point and we really wanted to see how much was there to be given at the expiry point just to ensure that we weren’t daydreaming about how scarce the market we felt was. And so, we did take physical delivery and we actually had to work with a major trading house to execute that.

Listen, I’m talking about it and feeling nervous and sweating as I talk to you. But we did do that. But that was a long, long time ago now.

[00:19:44] Moritz

Yeah. And it sounds like a lot of hassle, I’m sure when you have that physical position and you need to get rid of it at some point.

[00:19:52] Doug

And they’re coming.

[00:19:53] Moritz

Exactly. Look, when you have the fund, do you run concentrated positions? I know you said, If there’s nothing going on in the market, you don’t have a position which is like we trade. If nothing is going on, why would you have a position? Not having a position is having a position which is neutral.

But do you kind of like force the fund to at least be like in two or three things to have a little bit of diversification? Or could it be like, no, it’s LNG is all we’re doing, or copper is all we’re doing because we’re so bullish on it.

[00:20:23] Doug

We are okay being concentrated, but not just into one thing. We have limits. Obviously, we’ve got a pretty robust risk system and investment system that our investors are aware of, how much we can deploy in certain themes. We can’t make it just all in on one theme and I think that’s appropriate.

So, from any sort of given day, we would probably have somewhere between 5 and 20 strategies. We probably have two or three themes, maybe four. If there’s excitement everywhere, then we’ll be everywhere.

If there’s no excitement, let’s say grains for a period in say ‘17, ‘18, ‘19, the grain markets were just well supplied, full carry, nothing happening, spec comes in, spec goes out, nothing to say. So, we don’t want to be wasting any of our risk bullets in there. There’s no supply and demand story.

We really… I say to my investors, what we should be doing for you is in very boring, let’s say oversupplied, sort of lower vol years, we should be grinding out a good return or a decent return, certainly with the cost of money where it is today. But there’ll be moments where we will have rocket ship moments where distortions come and you’ve got to be in it. Don’t try and second guess when they occur because you won’t be able to do that, and you’ll come late because it’s all gone, and then you’ll wake up and everybody’s making a load of money and you’re deciding to come in at the wrong point of that cycle. So, as long as we don’t lose too much money in years where it’s difficult, choppy then that’s the sort of message that I would give to our investor base.

[00:22:13] Moritz

How do you figure out when it’s time to get out of a, say a loss? Like to stop out of position, close a position that isn’t working? For us, in the systematic world, it’s kind of like you have a stop loss, or you have a risk budget, and there’s a certain price level where the position just needs to go. How do you do that? Like, how do you figure out when you’re wrong?

[00:22:34] Doug

It’s similar to how you would do over a robust risk process that we’ve developed over the years; drawdown of risk budget, further drawdown of risk budget, and then full drawdown of risk budget and out. Then you’re sidelined for a period of time.

We reduce our risk envelope as we draw down significantly at portfolio level. So, we target vol in our hedge fund of around 21% annualized vol. If we’re drawing down and obviously out of step with markets, we will run much lower vol than that.

So, if we’re really out of step, we’ll be running vol no more than half of that until we’re able to show that we’re getting ourselves back towards a higher water period where we’ll expand the envelope again. So, we never have a moment where…

So for us, losing money is very poor because we have to grind it back rather than shoot it back with the target vol that we would like to work with. So that is always, I always think… You mentioned in the earlier discussion, cocoa goes up, it goes up and rockets up to US$10,000, whatever it did, coffee up to over US$4 and you think, wow, they must have made a lot of money in there. And the issue is we have to make make money the right way.

And when we have high vol in our strategies, that isn’t ideal for us just because we can’t maintain positions with that vol very easily with our risk process. So, you know, the WTI moving to negative, we made quite a lot of money that year, but we could not handle the vol. The position size was too small. I mean, it just couldn’t handle it.

[00:24:24] Moritz

You just stole the thunder of my next question. Because it would have been like, you know, on winning trades, I mean, yeah, getting out of losing trades is obviously important. At some point you’ve got to stop the bleeding. Right? But, on winning positions, be that in cocoa… I mean, let’s use cocoa, because you’ve mentioned it, it goes from whatever like US$3,000 to US$12,000.

It does a 4x kind of like performance move, but with your vol control you probably then, like you said, wouldn’t be able to keep the full position on because the thing is now just too big and it’s moving around in your portfolio too much.

[00:24:56] Doug

Yeah, it’s really difficult, the way we’re set up with our risk process and how we have always been in the fund with our investor base to handle that. The difficulty also, when you get markets like that, is, we have a saying in our hedge fund of ‘real not or not real’. And ultimately when you get stress in markets like cocoa or coffee or whatever, a large part of the final move of that will be margin call stress. And that isn’t real, that’s financial stress.

So, my viewpoint then is, everybody goes, oh, there’s no cocoa. I mean Jesus, the chocolatiers are all running around and say it’s US$10,000, go to US$20,000. But the issue is finding out what is real cash valuation of what people are really doing is the key aspect. And that gets really tricky in those high stressful breakout moments where you can get really hurt very quickly.

[00:26:04] Moritz

Yes, I think the squeeze is a real thing, and the financial margin stress. So, for instance, a year ago or 18 months ago when cocoa was doing the highs, the ICE exchange increased margin requirements for that market. And, lo and behold, the next day with no increased margin requirements, pop, there you go, positions need to be released. If you had a short position and it’s now costing you 20% more to hold on the exchange, some let it go the next day and that just squeezes the market even higher.

[00:26:35] Doug

Yeah, absolutely right. And we’ve seen it. You know, I did a presentation several years ago on the cotton market in Singapore where long-term cotton merchants have gone out of business through just running their business carefully, and they’re buying physical, and they’re hedging futures until they can unwind it the other way. And they are driven into huge margin call, futures short explosions that end the business of 130 year merchant. Which isn’t what they all derived, you know, they weren’t determined to do that.

And I think that a lot of the agriculture markets, especially, were very, very slow in changing their trading ranges. They had way too low limits and so you’d be lot-limit-gone, lot-limit-gone, lot-limit-gone, and it wasn’t even a big move. And this is, I’m talking 2007, 2008, 2009 and so it was untradable.

And then there was a synthetic option market that was trading outside of the lot limit that people were going, my God, I have to get out, I have to get out. And it was meant to be a futures market but you couldn’t see it, it was opaque. And so, these, for me, were extremely slow to work out where they were in that period of 2005 to 2008, widening the ranges, allowing people to trade in liquid markets. They made them very illiquid and that caused huge stress and a lot of people to blow themselves up in that period.

[00:28:14] Moritz

With your, and maybe also with respect to your vol target of around 21%, do you have a preference trading spreads, product spreads, calendar spreads, all that type of stuff, playing the curve? Or are you more, yeah, we’re keen to take the outright position, be that long or short, and go for the ride.

[00:28:33] Doug

Whenever I’m asked that, for me, we’re trying to find the solution and that’s it really. If the solution is flat price, it means that the price is, in our view, too low or too high and needs to correct to rebalance the supply and demand. At other points there’ll just be a period of scarcity or surplus that is not really the flat price of the commodity. It’s the fact that it’s got itself out of whack for a particular demand surge or supply surge. A bit like the, you know, let’s say the COVID and the huge oversupply. We needed to go, well, we had to force it back into the spigot. Ultimately it had to move into deeper levels of storage. And so, it’s not really a flat price curve, it’s a flat price trade, it’s a curve trade.

So, for me it’s just finding the right solution. Some of the best trades that we’ve had have been relative value trades, where, especially let’s say a full carry where you can leverage very highly on a very low downside trade with a level of storage that we’re aware that we’re going to hit. And then obviously we start to tighten up through either let’s say OPEC cuts or demand increases and we get a flip of the curve. We’ve suddenly got to move from carry, to inverse, to release more product to solve the short-term scarcity that’s been created. So, we try and find the right solution for the right problem in commodity land.

[00:30:13] Moritz

You mentioned, even looking back today, you’re still getting the sweats when you think about this sugar trade, this physical sugar trade you did in Brazil or wherever that was. But when you look back over the entire career, with the commodity hedge fund but also with Cargill, I mean, usually there’s like one or two trades that are like really standout trades in either direction. It could be a massive success, could be a massive failure. But is there one trade where you say, that’s the one that I’ll never forget?

[00:30:43] Doug

I’ll give you two on those. And maybe I shouldn’t be talking about these, but I will talk about them. We had a great year in 2014, against the curve. It was a difficult year, but we got really bearish on petroleum. I remember it was around June time. And the reason we got very bearish on petroleum, and this was when we were US$115, US$120, there was a lot of Middle Eastern action, everybody was talking very high elevated prices. I remember going to a conference and Gary Ross was super bullish.

And we got bearish because we felt that the shale growth, year, on year, on year, in the States was just eating OPEX pie. And we felt the global GDP, at these pricing points, was going to hugely disappoint. So, we did a lot of modeling on global GDP and what that meant to oil demand. And we just felt like global GDP, instead of being 3 or 4, was going to be more like 1, 2. And so with that, the ore demand growth, and with the shale growth, at the pricing point we felt it was hugely ready for probably a big curve change from inverse into contango and then a subsequent significant fall. So, we got excited and started putting the position on in June.

And then the whole of ISIS exploded in Iraq. And they were on horses riding around in Iraq, and everybody thought they were going to go to Basra and stop all the Iraqi oil. And so, we quickly got out of that position, licking our wounds, going, wow, okay, wasn’t expecting that.

But we came back in quite aggressively in, I think, July, August. And then we had a fantastic five, six months into the end of that year where we were right. Global growth did disappoint. Surpluses started to build meaningfully at high pricing points. And then OPEC, I guess, somewhat fortuitously for us, decided that they’d had enough of shale growth and we’re going to have a price war.

So, we went from about US$120 to about US$40 in five months. And I think we made 60% on the year. We were very, very standout on that year. I remember, I think I got a call at the end of that year from CNBC saying, you’re the top performing hedge fund of the year. We want to come and interview. And I went, whoa, really? Are we? So, we had an interview with CNBC and talked about the strategy and the trade.

And so that was a pretty interesting one that we did our own thing. We do like doing our own thing and not following sort of general situations. And I think that’s the right thing to do. And I guess the only other one was we were involved with that nickel excitement.

[00:33:38] Moritz

Oh, the LME trade.

[00:33:40] Doug

Yeah, the LME nickel excitement. We got bullish nickel, had a position on, obviously was moving quite well, and then it started obviously to move ridiculously out of control. Clearly something was up. And I remember getting up on that the morning, very early. We had a final bit of position we wanted to liquidate. I think it was up 100% on that morning. So, I did liquidate pretty much everything. And then, obviously, was shocked when the futures exchange decided that they would not honor the futures trades.

For me, that was absolutely horrific work from that exchange. They decided to open it. It was a futures exchange. I know there was a lot of legal antics against that, and rightly so. Obviously, I don’t think it came to anything, but that was a moment of excitement. And then huge, “It’s never happened before. How can they actually cancel a futures trade when they’ve opened the market?” But anyway, that was disappointing for us.

[00:34:50] Moritz

Awful, it was. You weren’t the only one that got trades canceled. There were quite a few and some have followed on to sue the LME, but they got out of it. You know, they kind of like said, oh, we were just protecting ourselves and the clearinghouse. Whereas, you know, you could also see this, that they bailed somebody else out who had the other position. So, I think that was a terrible episode in the long history of the LME.

[00:35:15] Doug

It was. And I do remember seeing the LME executives, I think at the Geneva Commodity Conference, and I did have a long, long discussion about that.

[00:35:28] Moritz

Yep. Well, there we go. It’s in the rearview mirror now. Hopefully that doesn’t happen again in the future.

Look, we’ve touched on the football, we’ve touched on your hedge fund, when you started the Merging Commodity Fund, RCMA was, at that point in 2004, not part of the group. It’s now the RCMA Merchant Commodity Fund. Maybe give us just five minutes on how did the RCMA thing happen?

[00:35:54] Doug

So, when we started the Merchant Commodity Fund, we actually had a fund manager name called Aisling Analytics was the fund manager. And we set up the Merchant Commodity Fund that has been constant over the last 21 years of existence.

And in 2010 Mike and myself felt that we wanted to diversify into a physical commodity sort of profile alongside it. So, we acquired the RCMA Group, which at the time was the largest distributor of natural rubber in the world, actually, the largest independent one. So, it used to buy a lot of natural rubber in, well, where it was created within the rings of the equator. So, a lot of it from Indonesia, a lot of it from Africa and we distributed it into Europe and to the US.

Obviously, that was being run on our behalf by an executive management team. And gradually we expanded that footprint of RCMA Group into other commodities: natural rubber, coffee, sugar, cotton.

And at its peak I think we had maybe 500 people in 30 countries trading. Yeah, basically it was a small trading house. It wasn’t that small. It was… We were turning over a few hundred million and it was being run. And what we felt was that the physical knowledge we were getting from that business was helpful for our derivative positioning within the hedge fund.

And I think, if you remember the time, I think Cargill had Black River and they were using their hedge funds of Black River which was linked, obviously, with Cargill. I think Trafigura had one. Ikos and Elena were linked together.

So, it was, to me, like we were sort of modeling the physical information, getting it directly from our own sources rather than having to rely on external sort of information flow. That was our logic and why we renamed Aisling Analytics to RCMA Asset Management. So, we linked the physical with the hedge fund manager at the time. That was our theory. It confused a lot of people, I have to say.

So, looking back, it probably wasn’t the right thing to do. But we built that to diversify into a different, let’s say, income stream for us personally, but also to support the physical information flow into the derivative business of the hedge fund. That was the logic.

But we were running with very low prices over that period, certainly ‘14, ‘15, ‘16. These were difficult years where wholesale margins became very poor. Credit exposure to a lot of countries where we were shipping products was high. You know, when you’re shipping and taking cotton to Bangladesh, or coffee or sugar into Sri Lanka, you’ve got to be really careful on your counterparty exposure. So, for me it was like, you know, I didn’t really fancy it after a while. And we basically disbanded it, apart from, as you mentioned, building the rapeseed crush in the UK.

[00:39:10] Moritz

Okay. So, it’s no longer operative today on all these markets except for the rape seed business in England.

[00:39:16] Doug

Exactly right. Yeah, exactly right.

[00:39:17] Moritz

Because I would have tied this back to the question I had, what is your edge? You know, that could be if you have that physical business, you get all that information flow from, you know, the physical businesses across the markets you’ve mentioned, from rubber, cotton, sugar, whatever you did there. Power trading, I think you also did.

[00:39:35] Doug

Yes, we did.

[00:39:36] Moritz

And that ties into your hedge fund, which can be a great advantage.

[00:39:42] Doug

You know, it can and it can’t. But it is helpful to know. Yeah. If you’re a fundamental trader, cash information is critical. We look really, really closely at basis, you know, the spread between cash and futures. We talk to people in physical. We don’t talk to the derivative industry, we talk to the physical industry. That is where we value the information.

So, for us, having our own commodity trading house, physical trading house, we felt will be very interesting. However, it can get quite micro. You know, it can be a bit heavy or it can be a bit tight, but then it solves itself rather quickly. You have to be careful.

And I always think the key thing in trading is, what’s your filter? What’s relevant, what’s not relevant is the key aspect of any very good trader, it’s the noise removal. Things that you might think are important are not important at all to me. Whereas other things that you might think aren’t, are critically important to me. So that, to me, is the skill set of the company or the trader, something that we have honed over many years, I guess.

[00:41:01] Moritz

And also, who do you speak to and who do you listen to? Even if you speak to fellow traders, they may be talking their book and not necessarily giving the information that is objectively right.

[00:41:11] Doug

You’re absolutely right with that. They know we’re a hedge fund. They may want to get us excited or not. Listen, we’re doing our own work which is that we’re more interested in how easy or difficult it is to move different things, or how heavy, or how much storage, that type of thing. We’re with the weeds. We’re quite a micro analyst sort of company where we want to find reality of commodities.

I remember a story, last year or two years ago, we had a lot of investors coming around talking to us about copper and the market in copper was, I think had gone up to US$11,000, at that point, a ton and they said, are you on the copper trade? I mean, it’s a copper trade, surely you’re on the copper trade. And we went, no, we’re not on the copper trade. Ah, why are you not on the copper trade? Well, we said, there’s a huge amount of derivatives, we’re hearing it everywhere, but the cash market hasn’t really moved. The basis has puked, has fallen massively. It’s just a demand for futures, it isn’t being driven fundamentally at this point. We like the S&D, we understand why people are doing it, but it’s way too early.

And lo and behold, I guess six months later we’re back at US$9,000 because the market was just excited for futures. Everybody hears the story and off they go. But you’re not getting the physical follow-through. Now if we had basis or fiscal follow-through matching that growth, or just being slightly behind it, we might have taken a different approach.

[00:42:40] Moritz

Right, well, great. Doug, I know this is a busy pre-Christmas period actually for both of us. You have a soccer game coming up, a football game, I should say, not a soccer game.

[00:42:52] Doug

We do, tomorrow.

[00:42:54] Moritz

Yeah. Is there anything you want to mention? Anything important that I forgot?

[00:43:00] Doug

No, I think that the hardest thing in any money management or business if you like, but money management hedge fund is you have to make money the right way. And everybody looks at high vol moments and think traders must be coining it and having a great time. But you know, it’s difficult. At times you want to stick with a very convicted position but you have to de-risk, and then you have to re-risk, and then you have to de-risk. You know, these things are quite draining in respect to a theme that you’ve invested a lot of time and effort into building.

And, that’s always a challenge for any money manager is, you’ve got to be disciplined enough to accept that you may have to do that several times, when your supply and demand or your story is so strong. But there’s noise, there’s a Liberation Day or something over here day, and people are just generally de-risking not for your commodity reason, but for global reasons or for other reasons. And that’s always a challenge for us, the noise around driving our themes. But I guess we’ve survived so far.

[00:44:18] Moritz

Yeah, it’s never easy.

I do have one final question which is like business and recruitment, like you know, these days, I mean commodity hedge funds, I think as you’ve said, they go in and out of favor sometimes. Nobody wants them. Sometimes they’re all the hype. Now, how difficult is it to find people? Are they showing up on your doorstep or is everybody just, I want to go to Millennium, and these pod shops, and they’re paying me these big salaries and guarantees, how attractive are you as a firm? Do you get a lot of interest from people?

[00:44:54] Doug

I think we do, we can always acquire people into our business. So, if we expanded our assets again, we would look at particular key people that we know have that skill set. I think that the difference of our company, let’s say to a Millennium is, you go to Millennium, as a hedge funder, you are on the tightest leash of your life. You better not have any slippage at all on any of your risk processes. And if you fail two, three times, you’ll be out the door in three months, six months, whatever.

Now look, that’s high pressure, that’s focused. We have very stringent risk processes because we have to. But the way I look at it is slightly differently to that. But when these big, large, asset gathering companies move into commodities, they’re going to have 20 or 30 of you in this method and they have to run it in a different way. We’re a different type of fund. So, people, I think, understand that. And there are always people who we can get into our door to who want to come into that environment rather than, here you go, here’s your three months, get on with it. Oh, didn’t work, and then you’re out. And why didn’t it work? And you can’t get another kick at it for another three years or so.

Yeah, it’s very difficult to get in.

[00:46:16] Moritz

Excellent. I think it’s one of the most interesting businesses in the world, to be quite honest. But you know, that’s me. That’s probably also you.

But hey, Doug, thanks for joining me on the podcast today. I really appreciate it. That was really great. I think it’s been a fascinating conversation. Thank you for sharing your insights.

Listeners, I hope you’ll find it interesting also. And as usual, I’ll put the most important takeaways of my chat with Doug into our show notes. And, as ever, should you have any questions, please reach out to us and send us an email. You can contact us at info@toptradersunplugged.com.

So, last but not least, this is the last episode of Open Interest, not forever, but for this year. So, let me say thank you for listening all like throughout of 2025. And let me also wish you happy Holidays, Merry Christmas, and all the best for the New Year in 2026.

[00:47:03] Ending

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