Unearthing Alpha with a Metals Hedge Fund, with Matt Heap

[Music] Welcome to the HC Comortis Podcast, a podcast dedicated to the Comortis sector and the people within it. I'm your host Paul Chapman. This podcast is produced by HC Group, a global search firm dedicated to the Comortis sector. Today we return to the subject of hedge funds and hedge funds in commodities and hedge funds in metals and mining in particular. How have hedge funds evolved with respect to commodities? What do investors and allocators think about with respect to commodities exposure and the types of investments they want to make? How do hedge funds go about building a book that can deliver a lasting edge in the Comortis sector and then why commodities and why in particular metals and mining? Our guest is Matt Heap, founder and CIO of fourth fund management, a sector specialist hedge fund dedicated to metals and mining, launching in Switzerland in the next month or so. Matt has had a phenomenal career in metals trading both in hedge funds, at Orion, resource partners and then prior to that as Louis Dre first where he was global head of metals proprietary trading. As always you can really support the show by leaving a positive review on the platform you're listening on and I hope you enjoy the episode. Matt, welcome to the show. Thank you. It's a real pleasure to be here Paul. Glad to have you on and that sort of a sad, unrecorded episode of the H.C. commodities podcast where we had you on a panel with Bloomberg Intelligence which was a great discussion. We're taking little bits of that but actually leaning a bit more into what you're currently doing and a kind of real relevant information and that is essentially talking about being a hedge fund, a sector specialist in metals and mining and so the first part of the discussion is going to be very much about setting up a hedge fund. What are they, the wise, the hows, challenges and opportunities in commodities and then the second half is going to be talking about why metals and mining now and your thesis there which I found fascinating at that panel. Let's just start with the basics which is what do we mean by hedge fund? Is that now just a catch all in the relevant term and no longer applies to what they originally set out to do and what are the different types of funds that are now kind of swept up in that one umbrella? Sure, well yeah I think a hedge fund is still a very relevant asset class let's say. I'm really a hedge fund is simply a pool of private capital where the manager has authority in the investment mandate to manage that pool of capital. One way to also think about it is a focus on absolute return so very often I present that our job is really to make money if markets are going up, down, left, right or sideways and I'm often asked what our strategy is and really I answer it's to make money and not lose it. Another way to think about the the history of it it goes back to just after the Second World War you have a famous gentleman called Alfred Winslow Jones and he really started the first hedge fund. He also introduced the 20% performance fee that's back in 1949 and for anyone who likes to read a good book certainly can recommend there's one called More Money Than God which is a good overview of the hedge fund industry and then another seminal one is the reminiscence of a stock market operator which is over a hundred years old now and those two books really give you a good history into some of the origins of how the hedge fund market started. Incredibly they I mean like my remembering you know they could go short as well as long right and going short was quite the innovation back then. There's exactly right that's really what was unlocked is how you can have both a long position as well as a short position and in an ideal situation both legs make money and therefore you've effectively increased the return by reducing the risk and that's really that's really our job of risk adjusted return. Now that sort of that that original start is proliferated into many different types of funds and anagrams and so forth. Can you just give us some what are the big sort of buckets of different types of funds? I know we covered this a couple three years ago now actually on the part but it's good to go through it again and how do they distinguish themselves from one another. So I brought you speak let's say about the commodity sector and some of the words we use so CTA is a common one which is a commodity trade advisor that's really now a catch all for the trend following community which is yeah really an old strategy. We know some of the richest people in the world have really achieved that by by riding some very long trends and that's really what those strategies continue to do with some additional elegance these days. The systematic strategies that's really a let's say a data driven and it's model based as an example a super simple one of if inventory goes up maybe it'll encourage it to have a bear bias maybe with some mean reversion and it's trying to remove the human emotion from the trading and then lastly the discretionary managers which is what our strategy is which is really combining let's say the human brain is still a very powerful instrument and combining that with technology to yeah to help adjust and to see turns in the markets the brain is still very good at consciousness and therefore yeah it's to really adapt with with the information. Yeah and just just going back to the CTA's versus systematic. Are there CTA's out there that are using a systematic approach to deliver that trend following you know what's the blurred lines between the two and can you just talk about sort of why sort of you'd be sort of a bit old fashioned. Yeah so I think it comes back to almost the commoditization of it that a pure trend following strategy is now let's say quite commoditized and the key doesn't command a hedge fund fee and the systematic strategy is probably leaning a little bit more on the quanticide where there's a plethora of information and data science that's gone behind it to come up and utilize specific data sets to create models and that's probably really the adaptation of the systematic side is into the quant space. And when we talk about trend following are they doing on a different timescales or are we talking sort of generally they build on momentum in the course of a couple of hours just let me understand that of vanit fascinating. Yeah so without giving too much away of a secret source on the trend following side one way I like to think about it is the short medium and long term models and the super high level way of looking at this anyone who enjoys technical analysis is really looking at a daily chart, a weekly chart and a monthly chart and that can often just give you that high level view of where the short models the medium term models and the long term models may be active. Yeah and then where do the sort of the high frequency traders and market makers and so forth sit in that kind of categorization they're talking about? Yeah great question so the market makers and high frequency traders I remember let's say 10 years ago there was quite a little lamenting about the strategy. One of our views is everyone has a right to their strategy it is a extremely short term strategy where really it's a technology race to be both co-located and have speed of market but ultimately the market makers are attempting to find short term fair value are taking liquidity or taking on the other side and warehousing risk but then maybe using other markets through statistical arbitrage or even yes playing with times out in timelines to try and exit that position liquidity. Yeah so this is sort of I'm dealing with I'm not making these at this game this wrong but co-mex and the LME or something right or London versus New York or trying to capture a localized bidar spread just through the speed at which you can operate because of that that would use latency because of proximity and so forth. Yeah that's right there's a great book called Flash Boys would recommend anyone to read it about the innovative thinking of trying to reduce latency but yes at the origins indeed it's a mix of both warehousing risk and then having models that determine the fair value to exit it in a expedited timeline. It's the automation of what the bank desk or the floor has done for decades but then that's also evolved into some statistical arbitrage where you may look at highly correlated instruments to also use the liquidity to exit. Yeah okay we're going to come on to you know how you went through your decision process with respect to metals and minerals and mining but obviously been in and around funds for a long time in it when the leading forefront of innovating how funds operate in this space. Can you just give us a sweep of kind of the what you've seen over the last decade or 20 years in your career in this space just the key trends that you've seen both I guess from a capturing opportunity standpoint but also from an investor preference standpoint. Indeed so yeah there's over my career there's been three very distinct evolutions of the hedge fund world I would say the style the hedge fund allocators are investing through and I think we can define that as the pre global financial crisis that was largely what we call a co-mingled master fund world and the master fund is where you have one pool of capital which the manager owns and all investors are contributing to that that master fund is cash so if you win a hundred million dollar investment someone will wire one hundred million dollars to your fund then the global financial crisis happened that all so uncovered some leverage in the system and there's often no places to hide and Mr. Bernie Madoff was uncovered and yes, approximately $40 billion plus was on in a vertical as lost through Bernie Madoff's investment scheme and that was because it was behind the curtain of where you could look of what he was doing. So that was actually quite a created a new phase of hedge fund investing where investors wanted transparency and it was such a big blow up that there was a huge demand from institutional investors to really have higher degrees of transparency, potentially liquidity, insight and due diligence. So from 2010 until COVID was really the second phase where we have the emergence of managed accounts and our defined them as dedicated managed accounts and these are really what we would explain as a fund of one which means that actually the investor owns the vehicle and gives the power of attorney to the manager to trade and they could then choose how much cash they put in that fund and control the leverage and because they own the fund they get the bank statements every day they get to effectively see your trades and they have a much higher degree of transparency to solve that issue that occurred and then more recently on the post COVID world we really have the rise of SMAs separately managed accounts which is an enhanced evolution where that one fund that the investor may create instead of having just one manager trading it they may allocate to say 10 managers to trade that same pool and if your strategy only requires say 25% initial margin to trade that strategy the investor can leverage the vehicle and create their own volatility and it's really a DIY multi-strat multi-strat use the same financial engineering to over allocate the capital and the super sophisticated larger allocators enjoy the same business model of the multi-strat but really rather than outsourcing it for the manager selection they also do it themselves and that model has become very popular in the post COVID world and it assists the speed to market too. So doesn't that sound like a bit of a recipes disaster in the sense that I'm hearing you correctly I've got a hundred bucks in my account dollars not millions or billions but someone's using that same 20 bucks in it to be the margin for 20 different trades or something so that's the leverage isn't that quite risky in that sense? So it's really solving an unencumbered cash situation whereas if we had a hundred units and only 20 is going to be used for initial margin you're sitting on 80% cash which is a drag to the vehicle and it's actually a drag to returns and so one of the elegance is to utilize that cash more actively and to allocate it to another manager. But is it but no no working cash is used twice? No no chunk of cash is used twice. Okay, okay. But every chunk of cash in the entire account is used as opposed to just sort of yeah I understood. Okay. It's used a little less conservatively but ultimately it's being sent to the clearinghouse and the clearinghouse is still calling the margin and these are largely sophisticated conservative counter parties but yes it is an elegance of the current strategy. And are the big multi-strats that we all know of now offering similar products to their large investors? So it's actually the same model as a multi-strat they're collecting assets from investors and then they're leveraging it up with all of their knowledge on risk management and allocating to talent and so do I mean do I get a separately managed account I can get to see sort of you know in that sense I'm not exposed to a if you're a portfolio manager at a large multi-strat you effectively have a portfolio you're managing and that almost is an account. However the multi-strats are now also allocating externally through separately managed accounts the same way the investors are. Yes they're sending it off to another you know a couple of guys want to sell for fun the multi-strat can invest in that. Exactly. Yeah. Okay and then so that's kind of the I guess how the money is managed you spoke earlier about those different types of funds is there is there a vote out for a particular element of that or is it kind of all morphing into one of you want that combined you know human consciousness the brilliance of the human mind plus all the technological tools you know or are they still quite distinct you're sitting in front of whomever and there'll still be quite a distinct strategy play. Yeah so I think as a discretionary manager our job is to be constantly curious it's to constantly evolve it's to be humble reflect on our job as being the greatest entrepreneur because we're wrong a lot and we have to rebuild ourselves and have confidence that we're going to continue to be successful. So I think it's the greatest entrepreneurial pursuit is to be a trader a particular discretionary trader and then secondly I often think we're engineers make very good traders because your natural skill is to convert logic or research like a physicist would create and put it into practice really taking theory and putting it into the real world. And then this comes back to sort of scale right and I want to come to the lens of the allocator at this point right or the investor like the question out there and you know it's become ever more sort of prevalent is 20 years ago you would kind of invest in this amazing trader right and I think I think we can all agree that there are sort of this weird sort of 5% of traders who are just unbelievable risk managers great traders who can kind of they kind of seem to make money come what may that might be an unfair percentage and it might be bigger than that but you know generally speaking and the rest live in some kind of a great using an aspect of a system an aspect of a company or whatever you know that that enhances their capabilities they say they're very good at managing X in Y environment investors today they've had enough of the big multi-strats tell them that you need to have a banker quants you have the best in class technology and you need to have XYZ and we heard Sebara Constay is talking about the edge and the competitive advantage Citadel had built over time through their analytics and I'm mentioning candidly that you know they've got to keep innovating because widely available subscription services are now catching up with some of the tools that they built a decade ago. Just kind of keen to get your thoughts on that is is this still that a unique human pursuit or do you need to be able to demonstrate to have best in class technology and all the costs and the challenges that brings with it as well. Yeah absolutely so it's very important it really comes down to investment and I think the question is also about research research driven investment processes are typically very strong strategies so high levels of investment into research and then research is now with the advance of AI becoming almost a deflationary in the sense of access to research and access to manipulating that research in the way of data science but the human element which may technology and computers may may be soon on the horizon I think is still process as a research driven investment processes are still very very successful ones where the investment process can compute can challenge investment process that's where the systematic and the quant shops have been effective and then the human element is still I would maybe imagine the psychology of markets and of the world the consciousness and then where the hardest things which is still let's say a touch or an art is the turning points of markets that's still maybe a human element but indeed we can all philosophise when AI will come for our jobs and indeed it's making tremendous headways into trading too. When the animal spirits kick in you need a human to recognise them and you're the perfect person to ask this in some ways because you sat absence a large trading house platform and one of the biggest challenges is kind of going back to that 5% is kind of making that switch from a high physical highly physical merchant into a trading seat that's absent all of that how are you going to and how have you maintained an informational edge or some kind of that edge in the absence of all of those that physical flow that you get from emerging the deep insight that ultimately is kind of the raison d'etre of those guys being successful. So this is an allow me to favourite question I'm very fortunate because I started my formative years in a physical trading house which was a wonderful experience fantastic places to learn how the world works and how physical trading works I moved away from that in 2015 and then I spent the last 10 years in the headland industry. Indeed I actually didn't find my job too different I was a prop trader in that physical trading house. The physical information is very rich indeed but really the skill is in the processing of it and understanding what's relevant what our financial market is sensitive to and then it's really about again it's back down to process and with regards to access to information fast forwarding 10 plus years. A lot of information is now available through third parties or research services. So the access is no longer the problem. There's still a host of proprietary information in many businesses, but it's whether there's a process that's actually utilizing it. But the way the analogy I think of is a chef where we could put all of the ingredients on a table, but it still takes skill and artistry and experience to make a Michelin meal or whatever equivalent. So actually the access to the ingredients is there for everybody, but the knowledge of what to look for and how to put it together is really what our careers I think are about and that comes back to the process. Yeah, interesting. And then I'm an investor and allocator and I've got the choice between a, you know, and we're going to come onto it at a moment. I'm sort of bearing the lead intentionally here, but you know, I recognize the need to have commodities exposure. And you're going to tell us why in a couple of minutes. There seems to me to be quite a difference between a fund that is a multi-strat and has commodities that are a pod or whatever it might be, focusing on commodities versus a dedicated commodities fund because it trades so distinctly as an asset class and has different requirements in terms of capital periods, margin calls at periods, you know, is that an old trope? Is it a fair assumption and why go down the route of being a dedicated sector specialist versus being part of a broader group? Indeed. So there are many great ways and seats to have in the industry. And I think it's almost to think a little about the maybe the commoditization or the freedom and access to set your own path within a, you know, within a multi-strat. And certainly I've built extremely impressive businesses with fantastic diversification effects where almost like a bingo scorecard, if you can fill up every different sector and have a super high quality individual, each one of those sectors of the market, you're going to achieve fantastic diversification. And the risk management of those businesses is extremely impressive because they also run on leverages we mentioned. For commodities, I think there is maybe a bit of a truth that it doesn't always fit the mold. That's because we do have cycles. We can have boom bus cycles, but also some of the fantastic opportunities can be in the asymmetry and in warehousing risk. And that's where I think maybe sometimes the single managers have set up their businesses in a way that they can warehouse some of those, the risks and the larger opportunities. And then ultimately I think it is the same job of being a sector specialist often you're able to invest to create resources. I think we can maybe do that as a different scale, em single sector specialist manager where the job of our management fee is to reinvest in our team and our research. So we may have a different resource than a roller, say, that a multi-strap. But then it's also the flexibility of structure that if you were to think of a physical trader versus a hedge fund, a pure hedge fund is chasing, let's say the same liquid alpha. Whereas a physical commodity trader has various entities all over the world and they have a access to China on shore and they have lots of trade financing lines and the structure actually gives you optionality. And that comes with a cost and it comes with investment. So you mentioned Citadel, they've done a lot of that work and they have fantastic elegance in their structure as to trade houses. And I think being single manager you can also make those investments into the structure of your business to give yourself optionality for some of the opportunities that come your way. Whereas the layman's view of what you've just mentioned is that you're sharing those resources in a multi-strap and then secondarily or more importantly potentially when those opportunities come along, again, you don't have the same capacity to accept that the big warehousing risk that might be required to support those long-term views and we will see that in the current volatility and so forth is that fair assessment. Yeah, I think that's one of the many reasons. Okay, let's talk about then you're in front of an allocator nearly 20 years ago, right? Again, it was a period when talking about commodities probably fell on quite soft ears when it was about why you should have exposure to commodities in your portfolio. It would seem that's been the case at least that sort of the COVID era up until 2024, let's say, when actually results have been declining a bit. Beyond that sort of like cyclical trend in your mind when you're talking to investors to allocators, what is the clear compelling case for why outside of absentee, the cyclical nature of the market, why you need exposure to commodities in today's world? It's a great question and a big question. Yeah, yeah. I mean, it's the fundamental question of this entire 300 episodes of the podcast, but yeah, have a crack. So I think diversification is a great starting point. Most allocators or some allocators get to a size where they are seeking uncorrelated returns. Commodities can often be a very interesting addition to a portfolio because of when their cycles are happening. They're often, for example, in boom times in late economic cycles and then they're often great buying opportunities into the role over a cycle. I think there's been a great evolution as well into the style of trading. So again, pre-financial crisis, there was some fantastically large hedge funds with extremely impressive returns that also did it on quite high volatility. So investors got used to commodities being a high-vol asset class because the returns of those funds were also quite punchy in both directions. In 2008, we also hit zero interest rates, which compressed volatility globally. And that also from the macro community made a hard decade. And the same for commodities where we moved into a much lower-vol environment and we were forced to be much more nimble in our trading strategies. Those trading strategies or trading houses have been doing for decades, if not centuries, which is why there are some trading houses that are as old as they are. And so I think now we've got to almost a graduation where there's a skill set of people who can be nimble and trade a lot of relative value, as well as the directional strategies. And I think investors' memories have kind of got over those super high-vol businesses and are now looking for more accretive, consistent returns, which is really the job of the hedge fund community to institutional allocators. Yes, okay. So the thesis there would be, okay, so you've got that classic portfolio theory diversification. But in a larger talent pool of people who've been trained up in a world of, as you say, trading relative value of actually being good risk managers, coming from the physical merchant world, you can start to overlay some of the objectives of the investors by not having kind of the wild ups and downs of the mid-2000s and some very famous blowups and so forth in natural gas, because you've got a more sophisticated approach. And so you can kind of draw those Venn diagrams together, both it has that portfolio theory effect alongside more stable returns. Is that the analysis? Yeah, I think we always like to be humble that we, it's an evolution, I think, and I think investors are seeking good risk adjusters. Isn't that a bit tepid? I mean, like, sure, it offers diversification. Maybe this is where you're in naivety. Is there not kind of a screaming compelling case of like, we're way beyond portfolio theory here, we were actually saying that there are key trends in place, we believe over the next decade, two decades, where actually two things are happening. One is you've got a sort of structural shift up in value of, think, hard things and maybe I've been drinking too much, Jeff Kerry Kool-Aid. But at the same time you've got an entire sort of technological revolution going on that means that some, a suite of commodities, and we're about to argue that it's definitely metals, you know, have a rising value in the economy, a core role to play, a global competition around them. At the same time, oil is, you know, hydrocarbons are going through a challenging, you know, a more volatile period as those markets degrade. I mean, always that just, you know, you can append any kind of thought piece to a reason the way you should allocate to commodities. It doesn't really matter. You need exposure and the portfolio effect to kick in. This is about cycles as well. So there's many ways to answer this. One thing that comes to mind is really alpha versus beta. So as a hedge fund, as I mentioned, our job is to make money, not lose it. And it's a very hard place to be because you have to be perfect. You have to have high returns on moderate good volatility and have managed draw downs if at all and catch those good, good moves. So directional strategies, the most meat on the bone is in the type of market that we're for seeing, which is where we do have strong tailwinds behind a sector where they're there is a good argument for a meaningful repricing over a meaningful time period. And that gives us more meat on the bone for directional strategies. But actually that has to be balanced with posting performance every month and wanting it to be positive. And the alpha generation where we have to be in the trenches and grafting on the relative value side as well to generate positive returns. So if investors want to have a long-term exposure, there are probably other products for that. And that's really the back to the history. It's mutual funds versus edge funds. And also there's a liquidity thing here where my prior business was also a private equity business where if you want to invest into having meaningful exposure to the asset side with the potential liquidity constraints that a private equity vehicle gives you, but that also gives you the staying power to be in a trend. And as we mentioned, one of the best ways people have got rich is to stay in trends for meaningful amounts of time. So then there's really a product selection assessment there, I think. So in your conviction or let me say my conviction that commodities are going to have a period where the cyclical nature is going to probably be more within intra commodities rather than inter commodities and other asset classes because of what's going on, that conviction is expressed by how much the percentage you allocate to commodities as part of your overall portfolio. Is that how it's expressed and therefore are we seeing increases in percentage allocated commodities in general? Yes, the one way we think about this in our strategy is there's really three modes of investing in my mind or three modes of markets. There's directional opportunities, which is the probably the more glorified way of trading and investing. And there we think about our net-notional exposure as a strategy. And we're certainly not shy to take some directional bets. But then when direction isn't an opportunity, we may be looking at mean reversion, which is typically the relative value strategy. And we have to duck and dive and adapt to recognize if we're in a mean reversion period. And then thirdly, value investing, which is often considered, let's say at the bottom of the cost curve or something that's meaningfully mispriced against a forward expectation, we typically find those in the troughs of markets. And I think what we can identify about 2025 was it was such a fantastic trading environment because you had extremely strong directional opportunities with the trade war and geopolitical situation, the relative value opportunities were extremely high. And then we had some real laggards where the value was very clear because they were leading indicators of other commodities where you could see a laggard was presenting opportunity and a value. So it was a very, very high opportunity set as a year. I guess you're talking about it from a methyl's perspective, though. That's correct. Yes, there's a methyl's sector. The themes were extremely strong. And we believe will continue to be strong, really because of the geopolitical environment, and we can maybe touch on that. Yeah, just to nail it down, though. Going back to that portfolio theory, used to be 5% were being commodities in general on average from a serious investor. Has that now crept up at all you seeing? Are they now talking more like 15% because of these mega trends and the understanding of the ruckians the world economy is going through? No, I would say that commodities is still an extremely under-allocated sector. I think something about a bear market is it often fins out talent as well. So there's a thinning out of the talent pool, which often has decreased. There's a supply and demand and balance of commodity traders because there hasn't been your industry knows better than any, but the pool of talent coming through the ranks. So there's one, there's a supply and demand and balance of talent. And then there's two types. We've seen the GCSI or other large indexes. They peaked in 2007, I believe. And indeed, that has not kept up proportional to passive investment. There's an industry, it's very under-allocated. And you can see that if you just. I mean, it looks great the last five years, but if you click the all tab on your stock market chart, it's a bit more of a depressing picture of a commodities. And as you say, you've got the tyranny of the S&P 500 to beat, which has done exceptionally well over the last decade in a period of free money. And we had Edward Chancellor on talking about that and people should go search that episode. Well, those two episodes on what that did to economies and the carry trade and all the rest of it. Right, okay, you make your compelling case to the investor understands that they need some exposure to commodities. They might be under-allocated to it. There is absolutely a. That talent gap, a missing generation in commodities. So there's few firms out there, few individuals out there, money managers, investors, traders out there who kind of have the track record that convinces them that this is the right place to put their money. Both of us would argue you're one of them and that's proven in the case time and time again. What is the case for metals? It to your mind now to say, actually, do what you want on the hydrocarbon side. But when we talk commodities, we need to talk intracomodities and here's the compelling case for metals. So I think there's two ways to answer this. One is commodity markets have a natural elasticity and that's really the speed of the cycles. So one way I like to think about it is back to first principles. And if we think of the state of matter, you have solids, liquids and gases. And we can actually define the commodities industry by those states of matters. And they have different speeds or velocity of cycle. So gas cycles, as we saw in 2022, where the prices ended up lower within one year of the energy crisis was very fast cycle. Liquid, which we're probably in just now with the current energy shock, typically liquids have a, say, a two-year cycle. And solids, which are metals, we could also use the analogy of coffee and cocoa. If you have a frost in Brazil and we lose a coffee crop, it takes five, six years plus for a tree to grow and to have a new fruit. And we've seen coffee and cocoa prices over the last 12 to 18 months. And metals is very much the same. It just takes time to bring on new supply relative to price. It takes six to 10 years to build new mines. It's kind of common statistics now. They're just very large infrastructure projects. And regardless of price, you can't necessarily solve these. So I think it's a very kind of first principle's answer of why cycles exist in commodities and metals were certainly coming to that part of the cycle. Yeah, yeah. Historically, in your comment there on actually the Robert Freeland, there's no NPV on the mine. Right? The math don't work. And there's no amount of price signals that you can give effectively in a short term changes that equation. So it takes a lot of belief to do these mines. Then it takes a lot of time to build them. Historically, your return on oil production is somewhere sort of IRR or whatever. It's typically been double that of getting into mining in general on average, et cetera. It's always been a richer space than the metals and mining space. Is that a dynamic you see? Well, that's always been a challenging competition there. Do you see that dynamic changing at all? Yeah, so I think we really think about cost inputs and then the nature of deflationary assets. And commodities are historically deflationary assets because we have technological advance. Capitalism is an amazing thing. It's like water. It will find the path of least resistance. So we all innovate in times of crisis and we find ways to produce more efficiently whether it's crop yields, oil production or even metals. But then I think we're moving into an inflationary world anyway we cut it so we can maybe talk about it. But all of that's being undone from a deflationary cost input perspective and we're moving into structural inflationary kind of from a macro perspective. We've got an amazing confluence of a few mega trends and inflation is certainly one of them where from a timing of the market this is likely to be running at a higher margin than history. And if we think of gold now, gold miners are probably 150% margin businesses willing gold out the ground for $200 and ounce, $2,000 and selling it for $5,000 and ounce. So that shift there, what is that? The mega trend behind that shift. I get the point of elasticity and so forth. But could you sort of tease apart for us from your perspective? I'm conscious I don't sort of frame this too much. Like do you see that structural shift up in the value of these mind assets over a period and is so why? If we think about mega trends, and if you were to think about industrial revolutions, you can typically break it down into three big mega trends. So you have a step change in communication, transportation and power. So if we think of the first industrial revolution for communication, maybe have print and the telegraph and transportation, you maybe have steam and then power, coal and the steam engine, steam power. And then for this one, we relieve for communication. We've got AI. transportation, its autonomous vehicles and electric cars and power, we've got renewables and batteries. And each of those sectors are all now the raw input is the metals sector, whereas historically the raw input has been fossil fuel-based hydrocarbons. So that's one big step change that the world is shifting to. Yeah, but the way I've sort of been thinking about it is, and I've forgotten who told me to think of it this way. But like the, this we're shifting from a fuel to technologies, right, the renewable power, whatever it might be, right, instead of the fuel for this future age is going to be sort of in time, is whether it's going to be nuclear, or whether it's going to be renewables, whether it's going to be, obviously there'll be transitions. But over time you're moving towards technologies than you are fuels, and those technologies all consume ultimately metals as they're sort of in quotes fuel rather than hydrocarbons. And once you sort of turn them on, then actually they're very efficient at producing, in the case of low cost power, whatever it might be. But in that electrified age, whether it's, you know, at some point the cloud is just someone else's computer, all of it requires its hardware, which is just going to consume a hell of a lot of these metals. And then you throw in the mega trend of deglobalization, so everyone's going to want their own computer. It's going to be, you know, we're talking about a step change in certainly a suite of metals and minerals as demand requirements. Absolutely. It's about zero marginal cost if we put solar panels on our houses and batteries in the basement. If you're fortunate enough to have that set up, then you have a zero marginal cost. And if you have an electric car, again, integrated, it's a zero marginal cost. Whereas the typical, it's almost molecules to electrons, the molecules you have to keep feeding and you have to keep consuming. So I think just the margins of the electron world are just far more efficient. And so exposed to all of those different metals and their different relative values is going to be, uh, directionally valuable as well as relative value, be valuable. I guess the one challenged back to you would be, this is all really great assuming the world continues to kind of operate just about on the edge of being a global sort of, you know, market and all the rest of it. And government intervention is kept at a minimum. The problem is obviously the moment the day or a year in, in every polity around the world is security of supply is critical minerals is all this kind of stuff. And suddenly metals is ground zero for government stockpiling, government intervention for export bans and all the rest of it. Is that a good thing or is that a really challenging thing? Or is it both? That's why commodities are so interesting because it's the real world, it's real things and it's constantly changing with geopolitics. The geopolitical shift is very significant that we've experienced recently. I think we've closed a chapter and opened a new one. And yeah, you mentioned Edward Chancellor and his podcast and his book The Price of Time. And it's a fantastic read because it's all about sort of our interest rates and ultimately inflation. And I think that's really the answer here that we're moving into an inflationary world whether government stockpiling is inefficient. It's not inefficient, but it's taking more material out of supply chains. We're losing the just in time nature and also adding inventory, whether it's in supply chains, whether it's at the government level. We also have a touch of de-globalization, which is also supply chain, linked. We have fracturing, we have high inventory at consumers because of that, maybe movement of people. And then I think a really under-discussed one is the defense dividend. So we've probably spent two decades plus of government being able to reduce their spending and reduce their deficits during peace times. And all of that's being undone. And that's also inflationary to government deficits. It creates a challenge because the last number of decades they've been able to cut that defense spending and put it into social programs. So that's all being undone as well. Yeah, there's going to be some tougher, tough choices ahead globally on that element. But it's any, yet it all points to whilst the market, the market has become more volatile as a result of policy. But in general, it's going to be inflationary, which in general commodities are a solver for or at least in part a solver for. We're going to talk about the mega trends and so forth. We talk as you know, that decarbonization, which essentially is a proxy for the energy transition, that move to a technology from a the marginal cost production of energy goes to pretty much zero. The de-globalization, which is the fracturing, the nature of the world we're talking about, you mentioned earlier on digitization, is that sort of the, you know, is that the other piece of the thesis and AI and so forth? When you're talking to investors and to allocators, is there some other bit that we sort of miss in general that supports the metal thesis over perhaps other commodities? Yeah, I think there's one, maybe one thing we think about and look for. And again, this is back to process. We look for formulas and in trading, I often describe that our process is like a childhood school you're taught in a science experiment to come up with a hypothesis, look for the method, analyze the data, find results and come up to a conclusion. And that's really trading. We're just doing that iteratively all day long. And then the other thing we look for in process and formula is if we look back at the big, let's say successful reprisings in markets, which can get named a super cycle, really there's three core ingredients into a super cycle. And arguably, these are starting to be ticked for a forward looking view. And number one thing you look for is commodity guys. We love fundamentals. So we look for supply and demand. So we spoke about the mls density of supply, but we've also spoken about the mega trends and the matrix for demand. So you need a new step change in demand. And I think that the market's broadly aligned, recognizing we were having a step change in demand on a forward looking basis. So the next part is new investment flows. As we mentioned back in the China super cycle, I think we're under appreciated element of it is the self-fulfilling nature investment flows. And the passive indexes went from 15 billion in 2003 to 200 billion in 2008. And that's the investor flow. I think we're starting to see that again now, whether it's the equities, the mining equity space, which has probably doubled from one trillion to two trillion in the last number of years. But also the rise of ETFs. We've got the Uranian ETF. We've seen cobalt and nickel and copper ETFs coming back. So I think the access to investors is another thing. And then the third missing piece is the macro side, which is really a bear US dollar environment. And this becomes self perpetuating, which is really most emerging market economies are natural exporters of commodities. And as the dollar weakens, they get more, most commodity prices rise. They get more dollars for their exports. That stimulates the local economy. Then that allows them to serve as their debt better. That boosts their trade and their balance of payments. And then you get the investment community searching for yields, whether it's typically a higher interest rate as well as a tailwind behind their currency. And you get the self perpetuating kind of petro dollar emerging market commodity-led US dollar tailwind. And I think that's arguably something that will start to see his commodity prices continue to rise as well. Yeah, invest in Brazil, you know, or enough away in all the commodities, right? It seems to me. But fascinating. Well, it'd be great to just hear a little bit on fourth fund and what stage you're at with it and kind of the thesis of and then who should and when should give you a call. It's true. That's very kind. So as a hedge fund, we're not allowed to advertise, but certainly happy to to mention what we're doing and how we're doing it. So we are hoping to launch in about a month's time with close to a year of planning. We've recently received our Swiss regulatory approval, which is a very big milestone. And we have some fantastic LPs lined up to participate in our business to support us, which we're very excited to work with. And really, the strategy is a sector specialist. Metals and mining is what we know and what we do. We have a very broad mandate, which is really to look at anything that's a metal or mind. If you dig it out the ground and if it's on the periodic table, our job is to really have a view and to be monitoring the market. And yes, ambition is to build a strong research team, to have sector specialists within the business too and to provide our limited partners, our investors with some fantastic, some fantastic returns. And we're really looking to be a consistent product. That's really our job. Yeah, well, I wish you all the best. And obviously we know you're very, very highly thought of by the by the metals community. And hopefully we can have you back on in a year or so and improve a lot of what we've been discussing here about the way the markets are, both trending but also trading. So Matt is always a pleasure to catch up and thanks for your time on the show. Likewise Paul, it's been a real pleasure. Thank you so much. Thank you for listening. To find out more about HC Group, our global offices and our expertise in search within the commodities sector, please visit www.hcgroup.global.