Serving up success: Crabel Capital Management’s evolution

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Peter Sughrue: Hello, you are listening to Market Matters, our Market Series on J.P. Morgan's Making Sense podcast channel. I'm Peter Sughrue, Prime Financial Services Sales at J.P. Morgan. And today I'll be speaking with Michael Pomada, president, CEO and portfolio manager at Crabel Capital Management. Crabel is best known as a pioneer in managed futures and CTA strategies, having been founded in 1987 and today manages over 5 billion in short-term systematic and quantitative strategies. Michael, welcome to the podcast.

Michael Pomada: Thank you, Peter.

Peter Sughrue: We're thrilled to have you here today. So let's dive in. Michael, you joined in 2008 as a portfolio manager, a title that you retain today in addition to your role as president and CEO. In between, you also served as COO. So tell us what Crabel looked like when you joined in 2008 and who you are today.

Michael Pomada: Well, we were just talking off air. I think it's really funny to think back to that era, seems like so long ago. But when I joined the firm, we had 37 people on the trade desk. It was mostly manual. We were in the middle of that transition between manual trading and systematic automated trading. And so a lot of noise, a lot of, you know, breaking of keyboards and yelling on the trade desk. And that's, you know, that's all gone today. And so while I joined an interesting time in the CTA space, it also was a time of big change. Managed accounts weren't really a thing before that, suddenly it became a thing. So it's been an interesting period. Crabel's assets dropped as low as $600 million in management. Today we have, sit at 5 billion, above 5 billion. And so, it's been a, a crazy transition period, let's put it that way.

Peter Sughrue: That's great background. Let's dive into the industry landscape. So, a trend we see today is the largest alternatives investment managers expanding their investment product offerings. Like Ralph Lauren starting with neckties, or Jeff Bezos with books, the product that initially builds a brand gets leveraged to apply to a broader product universe. So my question is, what has the evolutionary path looked like for Crabel? From managed futures pioneer to the diversified Quant manager you are today.

Michael Pomada: Well, first of all, I, I hope that we're, I hope we end up being like Jeff Bezos and Amazon. But, uh, you know, the, (laughing) the truth of it is that, um, you know, back in the olden days, it was like some simple alphas, some simple strategies, they all seemed to work. And I'm not trying to say it was easy back then. It was hard for its time. But you know, the industry has changed a lot. Here we are sitting here, if you think about the millenniums of the world or the big platform shops of the world. But you know, you have to adapt. And I think that from Crabel's point of view, if you look back at that time, a lot of the simple strategies worked very well for 20 years, and those have continued to work well, but they've only worked well with additional research and adding in alpha around them. It can't just be one idea anymore. You really need more than one idea. And I think, uh, I think that's gonna be a big key for us, has been expanding the number of alphas and anomalies that we're taking advantage of in the marketplace.

Peter Sughrue: That makes sense. So nothing's simple anymore. It has to be more complex by definition. And you guys are leading the charge. Let's stay on that for a moment, looking at some of the winning strategies that we see in alternatives today. So Crabel Capital Management launched in 1987, by the eponymous legendary investor Toby Crabel, just having one of the longest track records in alternatives. Can you tell us what parts of your program have stayed consistent over that time and what has fundamentally changed? How do you stay true to your knitting while catering to the demands of sophisticated institutional allocators today?

Michael Pomada: Yeah, I think there's a, maybe a few parts to that thing, but you know, one, a very, very important part of it is that the original Toby Crabel ideas that we take advantage of, they're still in the portfolio and they really create the, hopefully unique, in the hedge fund space, certainly unique return stream that our clients have come to love, which is having this quality of being long vol while also not bleeding all the time, like most long vol strategies. I think that it's a testimony to Toby's work that we still rest on, you know, on his shoulders when it comes to the alphas that we take advantage of. But I think that, you know, per your point, really, there's been a dramatic change in compliance and the operation side of the business to today being, you know, institutional quality is a really important part of who Crabel is not just being around. And you know, I think that that's probably the most important thing is that, and that's a mantra at Crabel, which is continuous need of improvement. You know, get a little better each day. And there is no magic unicorn, Peter, where you're just gonna wake up and you're gonna solve the markets and suddenly you're renaissance technologies. That's just not the case. The case for us, you know, humans, is that we can get a little bit better, a little bit better, and a little bit better. And if you keep that mindset and that process in place, not only does it create a culture that always tries to get better, but it also means you're never resting on your laurels. You're not, you're not hoping that it's gonna be better tomorrow because the markets change. You, you are going to get better. So if you face a tough market environment, next time you'll do better at it.

Peter Sughrue: So if I'm summarizing there, a lot of hard work goes into this, there's no shortcut, but if there's a secret sauce, it, it's a lot of hard work. And, and we're gonna touch on some of that in a little bit as well. If we were doing this podcast a little over five years ago, we might be discussing how the lack of market volatility and the low interest rate environment were impairing hedge fund returns. But today, the opportunity set seems so much richer. And, you know, if we look back to 2022, long-term trend followers had one of their best years ever. While today we see commodity markets exhibiting sustained trends, discretionary macro traders have no shortage of opportunities with inflation, geopolitics, more persistent volatility. So my question is, if macro is great again, how is Crabel positioned to capture the upside?

Michael Pomada: Yeah, I think one phrase is that volatility begets opportunities. You know, if you think about anomalies in the marketplace and what they are, the reality is, is that they are created by people making mistakes. And quantitative, systematic, short-term trading like ours is there for those moments. However, if a market's not moving at all, part of your point about five years ago, if the market's not moving at all, there's just not that many mistakes to take advantage of. But when markets are moving, there's uncertainty in the marketplace, it does create a lot of opportunities. I do think it's a rich time now. We, for basically my entire time at Crabel, we've had interest rates at zero. And I don't forget, right? It's like, I think people sometimes forget. It's like, this is the first time we've had 4%. That's a miracle. I mean, uh, you know, it used to be normal to have interest rates this level, but interest rate volatility and being not zero, and also not predicted to be zero in the future where there's an uncertainty. What's Jerome Powell gonna do? We don't know. You know, I, shoot, I wish I knew. But what, what happens there is that it creates unpredictability in the marketplace, and that creates opportunities for us to come in and, and take advantage of those small anomalies that occur.

Peter Sughrue: Great. So normalized interest rate environment and people making mistakes with this persistent volatility, so a lot of upside for you guys. That makes sense. Another trend we are seeing is the growth of customized investor mandates. So we know that managed future managers, commodity trading advisors are no strangers to facilitating managed accounts. And today the growth of separately managed accounts has bloomed as the sophistication of administering them has increased and the costs have come down. So how is Crabel catering to investors who are looking for customized or bespoke solutions through managed accounts?

Michael Pomada: Yeah. Short answer is that today's Crabel is all in for an investor looking to exploit a certain weakness or to shore up a certain weakness in their portfolio with something that Crabel does well. You know, inside of our, our world, you know, you, we think of it as our three big funds, and that's fine, but in, in real life there's 3,000 unique alphas beneath those, all those systems helping us make predictions. And so, per your point, it is a really important part of a pension fund or a fund of funds or other investors that are sovereign wealth or endowments who are looking to deal with a specific type of problem in their portfolio. They're looking for something uncorrelated, they're looking for something that's going to make money, that has a track record of making money 20, 30 years. And also taking care of a problem in their portfolio. And I think we've had more and more demand today, frankly, the most we've ever seen for unique solutions, sometimes at different price points, also an important part of it, to solve the problems in their portfolio. And from the standpoint of Crabel, our job is to deliver the alpha that the client needs. We're not just doing this an absentee like by ourselves and in some black box room. It's, you know, the reality is if a client needs a particular type of exposure, we're happy to provide it within the context of the alphas that we do know.

Peter Sughrue: Got it. So it's being responsive to the investor's problem statement and taking your, your products and custom fitting to solve those problems.

Michael Pomada: Exactly right.

Peter Sughrue: Okay. So you don't get to have a track record as long as Crabel's unless you are focused on risk management, and I know you are. Can you talk about the ethos of your risk management philosophy and how do you fine tune it over time to make it better?

Michael Pomada: Great question. It's an important question. It's funny, I think sometimes people miss this in the general scheme of things. It, you know, if you think about sharp ratio or something like that, sometimes sharp ratio doesn't tell you about the hidden risks, right? We know there are trades out there that make money seemingly every single day, and they're, and they're, they're so easy. Think Berger Arbitrage for a second. Like, isn't it so simple? You're just betting the difference between these two stocks, and they should always kind of work themselves out, except for they blow up in 2020, they blow up in a, you're like 2028, 2008, good God, that's a long time ago. But I think for us, it's one of our mantras, which is, and it's a Toby Crabel mantra, and I learned it from him. And that is “live to fight another day.” Conceptually our edge is small and it's fleeting, and you have to be very good at exploiting it. However, there always are gonna be unique situations that come up in the marketplace that are very different than we've ever seen in the history of markets. This is one of the problems with, why hasn't AI taken over all of our jobs in quant investing so far? Well, AI has a hard time because there's, it doesn't have the ability to model things that might happen that it won't know about, because even in the long history of data, it's not quite there. And so for us, we spend an inordinate amount of time thinking about our risk management and making sure that we try to keep our drawdowns as small as possible. And Toby's famous part about the rest of it is “keep the drawdowns small and the upside will take care of itself.”

Peter Sughrue: Makes sense. So I wanna dive a little bit deeper into something you talked about earlier related to finding new sources of alpha. We know they are the key to enhancing returns and attracting new investments, so how does Crabel balance giving transparency to investors without giving away the secrets to your success?

Michael Pomada: I think relative to most sophisticated quant managers, I think that Crabel is a lot more transparent. Um, I think it's one of our beliefs that you can really, you know, be honest and let people in a little bit more maybe than some of our competitors or some of the other players out there, say in the, the quant equity space. But, but for us, we really try to bring them into what we do. And I, and I'll tell you why. The most important reason is because then they understand when you make money, they understand when you lose money, they can understand a tough period, low vol. We know that, you know, 2021 or 2023, which basically stocks went straight up and it was just boring all the time, you know, that, if they understand us and we let them into what we do a little bit, then it won't be such of a, as much of a question because they've, they have experienced from us in conversations before they are an investor, what kinds of things are gonna be a problem, what kinds of things are gonna be great, what should we expect from you in this environment? And I think letting people in more has been very important part, you know, I think of Crabel's history and it really started with Toby. Toby really does, is very honest and very direct with all of our clients. And we, we follow that history and, um, I think it's benefited us a great deal.

Peter Sughrue: We talk about that a lot, uh, when we talk about capital raising with clients, taking investors along for the ride, educating them, explaining what their return distribution should look like, will keep clients more well informed and keep them around longer.

Michael Pomada: Well, especially when you can't just walk, you know, open the Wall Street Journal and say like, Hey, how did Crabel do today? Or --You know, how did XYZ fund do today? It has to do with more understanding the environment, the market environment. You have to explain that.

Peter Sughrue: Right. Okay. We also talked about some tech transformation. We talked about you joining in 2008 and how different the firm is today. We know that having best in class tech stack is key to driving investor returns for the shorter term alpha generation. So how is Crabel directing its investment dollars today? Is it towards pure research? Is it speed and quality of execution? A blend of both? I'm sure it's the latter, but you tell me.

Michael Pomada: (laughs) You know, the short answer is, it's actually a blend of both. But let's talk about speed and quality of execution just for a second. What, what a crazy, you know, 18-year-period now that we've gone through, you know? In the olden days, if you had a few seconds of latency, who cared? No big deal. But today's world, if you're the slowest player, if you're the sucker at the table, I can promise you HFT, the high-frequency trading crew that are the current modern, the modern market makers, they will come and find you. Trust me, they're looking for you. And you know, this is not to say that the olden days when there was floor traders was all puppy dog tails and, you know, ice cream cones and cotton candy. You know, the reality of back then was those guys on the floor were also trying to figure you out and pick you off. And, you know, this idea that HFT is some kind of evil giant or something that's taken over the world, it, it's absolutely nonsense to me. Those guys weren't that nice, these guys aren't that nice. It's buyer beware. And so, you know, to that point, if you're not spending money on execution, and new technology and getting faster and becoming more random and hiding your size, hiding your intentions, while still getting the size on that you want to express the alphas that you have. If you're not working on that and spending time and effort and energy on that and money, well then you probably are the last dog to the bowl, and we know what happens to the runt.

Peter Sughrue: Yep. That's perfect. So you're obviously spending time and energy and focusing your investment dollars to improve and constantly improve. How do you measure that impact? Like, what are the ways in which you go about looking at your returns and how past investments are, are bearing fruit?

Michael Pomada: You know, I think, um, on the execution front, we tend to think about it in terms of slippage. If you're not improving in slippage, then you're probably getting worse because someone's gonna try to come and find, someone is going to come and find you, full stop. So from our standpoint, we want to that, that the slippage number, right? The differential between the price I wanted and the price I got, that's slippage.

Peter Sughrue: Mm-hmm.

Michael Pomada: You want that differential to hopefully be coming down if you're getting smarter and better at it. Um, improving speed, et cetera. That's the most, that's the most common way, and it's the way that we think about it.

Peter Sughrue: Staying with this topic, just for one more question. We have heard from our clients that with advancements in AI and LLMs as it relates to hiring talent for hedge funds, the relative weighting of coding skills is declining while market's knowledge is deemed of higher value. So at Crabel, with so many employees having practiced both discretionary and systematic trading styles over many market cycles over many years, what do you look for in the talent you are trying to attract to Crabel today?

Michael Pomada: Yeah, I think, uh, to your point there, you know, you're right. The blend of, of markets knowledge and technical expertise, first of all, it's taken for granted these days. That's just a statement. Um, but I would say that much more important than say maybe those two is, is someone who's creative and persistent. When we think about talent and we think about alpha, you know, alpha discovery is very, very hard. Like otherwise, everybody would be doing it and everybody would be run tech, you know? But the reality is that's not the case. Um, and so you have to be dogged about your pursuit. You have to be very creative in your, both your, your thoughts about what could be interesting, but also your ability to put together, together data that maybe has never existed before. I mean, we are an information, you know, age and, you know, people thought that was the 90s. Let me tell you what, it was, reality is it's today, you know, in terms of generative AI and utilizing those tools better to create data sets or do, do research that uncover things that maybe no one's ever found before, which is, you know, this is the first time we've had these powerful tools.

Peter Sughrue: Right.

Michael Pomada: That's exciting.

Peter Sughrue: Right. Okay. I'm gonna jump to a topic about cultivating culture. There's been a lot written on which ingredients are essential to creating a winning culture and how that manifests itself in the bottom line. What first principles does Crabel follow to cultivate a culture of excellence?

Michael Pomada: The short answer to that question is that, first of all and foremost is that you think about the number of hours and time we all spend with our coworkers. We spend more time with our coworkers than with our children. We spend more time with our coworkers than our spouse. We spend more time with our coworkers than our parents. We spend more time with our coworkers than our friends. We spend more, more time with our coworkers than every single other person, maybe combined, you know? So when you think about that, I think one important thing is to, you better have an environment that people want to be in. That makes them excited to come to work where they can be given both freedom, can be compensated reasonably well for, you know, the industry we work in, but, but a, an environment where they're excited to be there, they're proud and motivated and inspired by their teammates. And also I think that, I think that's something we do at Crabel is we try to give people room to explore ideas maybe outside of their small, the small piece that they do for us. And that's a very important part of our culture. The second part is holding people accountable. I think that we are a firm and we do have a, a mantra for this one too. And, uh, when the question is, you know, if we are losing money today, who's faulted it? It's my fault. And you have to – every person in the firm has to own that statement. Because if you're wondering about whether or not there's a secret team on some of their floor working on this problem, well, there's not. This is it. This is the small group that's working on all the problems to create the best returns for our investors. And so I think we try to create a culture, not only that where people can thrive, they love their coworkers, but also a culture in which they all feel accountable themselves for what we're trying to do and accountable to each other. And I think, it makes it a compelling place to make your career.

Peter Sughrue: I think, uh, it resonates with us making it fun, holding everyone accountable. I mean, these are some of the values that we share here, certainly, uh, that keep up that sort of intensity that you want every day, uh, where people are having fun, people are winning, and also doing their best. Okay. You and I could be chatting here all day.

Michael Pomada: (laughs).

Peter Sughrue: So, but I do wanna make sure that we leave some time for our lightning round. So in our lightning round, I'm gonna give you two options and I'm gonna ask you to select one of those options. Are you ready to play?

Michael Pomada: I'm ready. Let's go.

Peter Sughrue: East Coast or West Coast?

Michael Pomada: Obviously West coast, including rap.

Peter Sughrue: Obviously. Discretionary or quant?

Michael Pomada: Well, you know, given what I do for a living, definitely quant.

Peter Sughrue: Tennis or golf?

Michael Pomada: Oh, we're a tennis firm.

Peter Sughrue: I know this.

Michael Pomada: (laughs)

Peter Sughrue: I knew you'd answer it. Uh, long vol or short vol?

Michael Pomada: Well, we're uniquely long vol, right? I think that's, uh, it's an important part of being Crabel.

Peter Sughrue: Lit markets or dark pools?

Michael Pomada: Oh, we're, we're really all about lit markets. Let's go.

Peter Sughrue: Two books. A Random Walk Down Wall Street by Burton Malkiel, or The Intelligent Investor by Benjamin Graham?

Michael Pomada: I think it's a data guy, I gotta go Random Walk here.

Peter Sughrue: Good choice.

Michael Pomada: (laughs).

Peter Sughrue: And final one. Ketchup or mustard?

Michael Pomada: Oh, I like both, but you gotta go with the zero calorie, very flavorful mustard with this one.

Peter Sughrue: A great West Coast answer. Michael, it has been a real treat to speak with you today. Thanks for pr- providing so many insights to our listeners on our industry today, and best of luck on your continued success.

Michael Pomada: Thanks, Peter.

Peter Sughrue: And to our listeners, thank you for joining and we hope you tune in for future episodes.

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