Salem Abraham, Abraham Trading Company - Managing Risk Starts With Imagining the Unimaginable | #282

Episode Summary

Executive Summary: Salem Abraham traces his path from a math-driven college trader to a long-time managed futures manager, emphasizing systematic trend following, ruthless risk management, and diversification beyond equities. He recounts early lessons from Jerry Parker, his evolution into electronic trading, and why he now favors a broader portfolio mix through Fortress Fund, including stocks, treasuries, gold, and non-stock-like hedge funds. He also argues hard assets like farmland, oil/gas, and real estate better protect against fiat debasement than Bitcoin or cash.

Main Topics: Early origin story and introduction to trend following: Abraham explains how meeting Jerry Parker at a family gathering in Canadian, Texas, introduced him to systematic trading and set him on a quantitative investing path after studying finance at Notre Dame. Building a managed futures business and electronic trading: He describes trading futures with paper charts and early computers, then scaling into 90 markets, 24-hour trading, and later pioneering electronic arbitrage and order routing at CME. Risk management and tail-risk thinking: A central theme is that markets produce rare, extreme moves that invalidate normal assumptions; he stresses diversification, position sizing, and preparing for unimaginable events. Fortress Fund and holistic portfolio design: Abraham explains the evolution from a stand-alone CTA to Fortress Fund, which combines indexed equities, high-quality treasuries, gold, and carefully selected hedge funds that are not equity proxies. Hard assets, energy, farmland, and fiat skepticism: He argues that land, farmland, oil and gas, orchards, trailer parks, and other productive real assets are more durable stores of value than fiat currency, bonds, or Bitcoin. Behavioral mistakes of investors and institutions: He criticizes performance-chasing and rearview-mirror investing, noting that clients often abandon strategies at the wrong times and that institutions mis-handle alternatives by loading up on hidden equity beta. Memorable trades and crisis opportunities: He shares standout trades including a COVID-era put trade that turned $200,000 into $6 million in 37 days, illustrating the payoff of anticipating extreme outcomes and acting decisively.

Key Arguments: Systematic, quantitative trading suited Abraham’s math strengths and provided a durable framework for decision-making. Meeting Jerry Parker early was pivotal; brief mentorship and follow-up created a lifelong career direction. Risk management must begin with accepting black-swan events; standard deviation thinking is insufficient because extreme moves happen more often than models imply. Diversification should include asset classes that do not move like stocks, especially in portfolios meant to survive crises. Most hedge funds are misclassified and many simply embed equity beta; true diversification requires looking through labels to exposures. The best portfolios for foundations, endowments, and retirement accounts should preserve the ability to provide support during downturns, not just maximize upside in good markets. Real assets and productive land are superior long-term stores of value versus fiat money because they have intrinsic utility across time. Investors repeatedly make the same behavioral mistake: they buy after strong performance and sell after underperformance, which is the opposite of good allocation discipline.

Data Points: Years at Abraham Trading / track record: 31.5 years - He says the CTA/trend-following business produced an average net annual return over 31 and a half years. Average net annual return: 13.1% - Reported average annotated return net to clients over the firm’s long track record. Trading markets: 90 futures markets - He says the firm eventually diversified across about 90 futures markets. Peak assets managed: just over $600 million - He notes assets managed at one point in the CTA business. Ending assets managed: $206 million - He says the business still had a couple hundred million when it was wound down. Commodities Corporation test account: $200,000 - Initial test account after a nine-month conversation with Commodities Corporation. Early institutional growth: about $100 million - He says Commodities Corporation added roughly $100 million by the early-to-mid 1990s. High-frequency trading volume: 20,000 trades per day - He describes the electronic trading operation as doing about 20,000 trades daily. CME market share: over 1% of total CME volume on some days - He says their program could account for more than 1% of Chicago Mercantile Exchange volume. Electronic volume share: 4% to 5% - He says they represented 4–5% of CME electronic volume on some days. Fortress Fund equity cap: 45% equities - He says Fortress caps equity exposure below traditional allocations and holds about 45% equities. Fortress Fund fixed income: 20% - He says the fund holds 20% in treasuries, specifically seven-and-a-half-year Treasuries. Fortress Fund hedge funds: 35% - He says 35% is allocated to hedge funds with no long/short equity exposure. Fortress Fund drawdown: down 1.5% at worst in March 2020 - He notes the fund’s worst point during the pandemic selloff. Fortress Fund annual performance: about 12% - He says the fund was up about 12% for the year at the time of the interview. Peak relative to college endowments: roughly equal or better returns with about half the risk - He compares the foundation strategy favorably versus top 10 college endowments. COVID trade entry date: February 10, 2020 - He says he bought pandemic puts on this date after observing the first death in a first-world country. COVID trade outcome: 30x in 37 days - He says $200,000 became $6 million through airline, cruise, and China-related puts. Trading account in 1987 crash: $50,000 to $33,000 - He lost roughly half his account on the October 20, 1987 Eurodollar move. Recovery by end of 1988: more than doubled - He says the family/trading account recovered and ended the year materially higher. Position sizing rule: never more than 25% - He states he would never bet more than 25% even when highly confident. Foundation contribution: $2 million each - He and Boone Pickens each put in $2 million to start the foundation structure. Community scale: 4,500 people and about 1,000 kids - He cites Hemphill and Roberts County totals to show the local impact of the foundation.

Pivotal Quotes: "“The unthinkable can happen.”" — Salem Abraham: Used to explain why risk management must account for extreme tail events like crashes, pandemics, and dislocations. "“If you’re in the crowd, it’s usually not good.”" — Salem Abraham: His crowding/contrarian analogy for markets and investor behavior, illustrated by the boat and nude-beach story. "“You’ve got to be the lifeboat and be ready to be the lifeboat.”" — Salem Abraham: Explaining how endowments and foundations should structure portfolios to remain able to help others in downturns.

Implications: Listeners should think beyond stocks, backtest for extremes, and prioritize survival over returns. The interview argues for diversified, non-correlated assets, disciplined sizing, and skepticism toward fiat, crowded trades, and hidden-beta hedge funds.