Portfolio management has been in a perpetual state of evolution and innovation through the efforts of investment managers that challenge traditional investment thinking, portfolio construction concepts, and deploy them in novel ways. As an example, the recently launched Blueprint Chesapeake Multi-Asset Trend Fund (TFPN) was purposefully designed and structured by redefining some established concepts on diversification, trend following, and even behavioral finance. Some clear signs that this ETF and its investment strategy pushes established boundaries are in the years of effort needed to build this vehicle and in unwaveringly having to disprove many industry players that kept saying that this ETF could not be constructed – you are trading too many markets, too many esoteric positions, you can’t combine equities and futures, it just can’t be done!
The range and depth of this ETF is truly ambitious through massive global diversification with long/short flexibility in trading 500+ securities and financial instruments across four macro asset classes - currencies, commodities, fixed income, and equities - including liquid alternatives, managed futures, and cryptocurrencies as further diversifiers. This vast scope of markets and investments is usually seen in a limited partnership, separate accounts, or hedge funds, not an ETF.
Another interesting element as to the innovation process behind the creation of this ETF is the clear need for strategic partnering to make this happen. Innovation is rarely a lone wolf in a secret laboratory making things. It takes the combination of different firms, specialists, perspectives, and strengths that can combine into motivated collaborators. In this case, it took two different investment advisory firms, Blueprint Fund Management and Chesapeake Capital Corporation, who had an affinity for trend following and a shared vision for the need for a more accessible, liquid, and expansive version of this investment approach – a next-generation liquid alt ETF.
We reached out to Jon Robinson, CEO of Blueprint and Jerry Parker, CEO of Chesapeake to ask them questions about the creation of their ETF and the thinking and experiences behind their innovative journey. This is a great case study on how advisors can work together to become disruptors and create innovative investment and business solutions together.
Hortz: You both have a strong kinship around managing money by sharing a “near fanatical” trend following and risk management investment approach. What is it about trend following that you both strongly believe in?
Jerry: I was fortunate to be given a set of keys to what I believe are the golden rules of investing very early on in my career when I was part of Richard Dennis’ 1983 Turtle Trading experiment. I took what he said to me very seriously.
To me, trend following is a set of broad rules that make it possible for you to stay alive no matter what the market throws at you. I have been at this for 40 years now. Enough time to see wild swings in market conditions, sentiment about all sorts of asset classes, and investor preferences. Trend following has been the consistent truth that, when repeated over and over and over, has allowed me to constantly adapt.
Jon: Exactly. The power of trend following boils down to adaptability for me as well. With trend following, there is no secret sauce. The rules we follow to make allocation decisions in Blueprint portfolios are not esoteric or complicated, in my view. They only become challenging when a financial advisor or investor must apply those rules in circumstances when every bone in their body is second-guessing the decision. The rules are relatively easy, but unwaveringly following them can be a difficult mental and emotional exercise.
I think a big reason the rules are hard to follow is because human nature seems to distrust simplicity. Trend following’s simplicity often causes other asset managers to add something to their decision-making system. They offer trend following PLUS something. The plus something is usually added with the goal of making the process appear more complex or to smooth rough edges that may be difficult for human nature to “stomach” during volatile times. The Blueprint Chesapeake Multi-Asset Trend ETF is different because it adds nothing. The ticker, TFPN, says it all: Trend Following Plus Nothing.
Hortz: What were your motivations in building this ETF? What industry investment problems or drawbacks were you trying to solve?
Jon: As a firm focused on disrupting the ordinary relationship between asset manager and financial advisor, we hear firsthand from our advisor partners about the challenges they face, and we seek to address their pain points with strategies and service that makes it easier for them to operate their practices.
As it relates to liquid alt and traditional alternative strategies, financial advisors have long pointed out their concerns about portfolio drag during bull markets, highly correlated return streams, tax inefficiency, lack of liquidity, or cost and accessibility. Given the time and expense associated with launching a new fund, we would not have embarked on this project with Jerry and Chesapeake if we did not think we had a strategy that could address those valid concerns.
Jerry: We think TFPN is a next-generation liquid alt because it combines the return streams of long/short equity and managed futures. Doing so allows for significant long equity positions during strong bull markets, particularly allocations to individual securities with strong momentum and trend characteristics. TFPN can also provide zero to low correlation due to its ability to go long, short, or neutral across four macro asset classes: equities, currencies, commodities, and fixed income.
The potential for massive global exposure is an important pillar of what TFPN offers. Our trend following process can be applied to as many as 500 securities, futures, and forward contracts. And it is the equities component that I have found a lot of people are excited about, because how we trend follow individual stocks is unusual. The typical managed futures fund trades in indexes only. Our idea was to go a step further, unwrap the index, and trend follow the individual stocks. A CTA would not trade the dollar index versus all these wonderful currencies, or a commodity index rather than grains, metals, and meats – so why trade stocks at the index level?
Jon: To add onto Jerry’s point about the depth and breadth of the pool we are fishing in, this was a key reason we faced some headwinds while launching this ETF. We had some trouble finding partners and were told several times that an ETF like this would not be possible due to it trading in too many securities and financial instruments, both long and short. The thing is, neither Jerry nor I are very good at accepting “no” for an answer. And here we are.
Hortz: Why did you design your portfolio strategy to have such massive range and flexibility? How do you look at diversification’s role in portfolio construction and management?
Jerry: If you are hunting for outliers, I do not think there is such a thing as too much diversification, so you need a big opportunity set and the ability to go both long and short. With CTAs, you saw that they had this lost decade, a 10-year period of not being long the best-trending sector: stocks. We think we can prevent this from happening again with the single stock component of our strategy. Indexes do not give you much of a chance to find a big outlier in the way that including equities – long and short – can.
Jon: In my mind, the power of trend following is that it can work so well across all these variables. It applies in currencies. It applies to commodities. And it works with fixed income and equities. At the end of the day, trend following is agnostic about the asset because it is rooted solely in price data. Price is price regardless of the security or financial instrument.
Hortz: How does an advisor or asset allocator best apply your fund to client portfolios? Where does TFPN fit?
Jerry: Although this strategy is newly packaged as an ETF, the underlying strategy has been traded by Chesapeake since 1994 and is offered as a private fund and separately managed account. We usually see the strategy leveraged as a complement to or replacement for other liquid alt strategies, such as managed futures and hedged equity.
Jon: Accessibility was critically important to us when launching TFPN. It was the main driver behind the decision to offer this strategy in an ETF wrapper, since ETFs can offer tax, liquidity, and cost benefits.
The financial advisors we work with are most often looking to use TFPN as a satellite allocation in an overall portfolio, as well as to complement or mitigate losses in traditional exposure. Since the ETF structure permits tax-friendly treatment, it is appropriate for both their non-taxable and taxable accounts.