Doug King on Commodities, Risk Control & the Illusion of Trends | Open Interest | Ep.20

Episode Overview

• This episode features Doug King, the former Global Head of Petroleum Trading at Cargill, who now runs the Merchant Commodity Fund and owns the Coventry Football Club.
• Doug shares his motivation for leaving a high-ranking corporate role to launch his own hedge fund, citing inspiration from legendary traders he met during his time at Cargill.
• The discussion delves into his core trading philosophy, emphasizing a dynamic approach to risk management, the strategic use of concentrated positions, and the importance of physical market information.
• King explains his framework for analyzing market moves by distinguishing between "real" fundamental drivers and "not real" financial stress, like margin calls.

Key Concepts

• Career Transition: The episode explores the motivations behind leaving a secure, high-level position at a major trading house like Cargill to embrace the entrepreneurial challenges of starting a hedge fund.
• Physical Market Edge: King's strategy is built on sourcing information directly from the physical industry rather than the derivative trading community to gain a more accurate understanding of supply and demand fundamentals.
• Dynamic Risk Management: The fund employs a disciplined process of targeting a specific annualized volatility (around 21%) and actively reducing it by more than half during drawdown periods to preserve capital.
• Concentrated & Thematic Investing: The fund's approach involves taking concentrated positions but spreading them across several core themes, focusing capital only on markets with clear opportunities rather than being invested everywhere at all times.
• "Real vs. Not Real" Framework: A core analytical tool used to differentiate between market price moves driven by genuine fundamental factors ("real") versus those caused by temporary financial mechanics like margin calls ("not real").
• High-Conviction Trading: The discussion highlights the conviction required for certain trades, exemplified by a nerve-wracking sugar trade where the fund took physical delivery to test its bullish thesis on market scarcity.

Quotes

• At 1:26 - "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." - Niels Kaastrup-Larsen introduces the core philosophy of the podcast series.
• At 6:01 - "It sort of wetted my appetite for future career path as to, wouldn't it be cool for me to at some point get into the hedge fund world." - Doug King explains how his interactions with major hedge fund traders inspired him to consider starting his own fund.
• At 19:32 - "I'm talking about it and feeling nervous and sweating as I talk to you." - King reflects on the intense stress of the physical sugar delivery trade, demonstrating the emotional weight of high-conviction positions even years later.
• At 21:37 - "There'll be moments where we will have rocket ship moments where distortions come... 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." - King emphasizes the importance of being positioned for major market moves driven by fundamental distortions, as trying to time them perfectly is futile.
• At 22:54 - "We target vol in our hedge fund at around 21% annualized vol... If we're drawing down... we will run much lower vol than that, so more than half of that." - King details their disciplined risk management process, where they actively reduce the fund's volatility during periods of poor performance to preserve capital.
• At 25:13 - "We have a saying in our hedge fund of 'real or not real'... a large part of the final move of that will be margin call stress. And that isn't real. That's financial stress." - King explains their framework for analyzing market moves, distinguishing between fundamental drivers and financial mechanics.
• At 39:56 - "We don't talk to the derivative industry, we talk to the physical industry. That's what we... where we value the information." - King reveals a core part of their edge, emphasizing that their most valuable insights come from participants in the physical commodity markets.

Takeaways

• Prioritize information from physical market participants over financial speculators to gain a genuine analytical edge in commodities.
• Implement a dynamic risk management system that actively reduces portfolio volatility during drawdowns to preserve capital for future opportunities.
• Analyze the underlying cause of price moves to distinguish between fundamental shifts and temporary financial dislocations, preventing premature exits from sound positions.
• Position your portfolio to capture unpredictable, high-magnitude market moves ("rocket ship moments") rather than attempting to perfectly time market entry and exit.