Coquest: 30 Years and Still Growing and Adapting
When John Vassallo moved to New York in 1988 to take a job on the trading floor with Rafferty Associates he had no idea it would lead to the launch of a company that would grow and expand for the next three decades. Vassallo was simply eager to learn trading and enter the entrepreneurial world of futures.
“I was hired by a guy who wanted me to learn what was going on from a hedging standpoint so I could go back to Texas and market it to the oil and gas producers,” Vassallo says.
Vassallo became quick friends with future business partner Dennis Weinmann and the two built a strong working relationship. Vassallo would move from the action of the floor to the upstairs office where he would market hedging strategies as well as the companies CTA program. Weinmann’s interest was more on the trading and risk management side. The two friends felt their complementary skills would make a good team in terms of both sales and servicing traders and started making plans to start Coquest.
“We talked about [John] just wanting to market and me just wanting to trade,” Weinmann says. “We talked to some clients, [to] see if they would stick with us if we opened [our own shop]. A few said yes, a few said maybe and a few said no and that was good enough for us.”
They packed up and moved to Dallas in 1990 to launch Coquest.
The plan was for Vassallo to continue building a brokerage business servicing energy professional needing to hedge their output, with Weinmann focusing on the trading side and eventually launching a commodity trading advisor.
“What made the partnership work over the years is our strengths are completely different,” Weinmann jokes. “It takes both [trading and marketing] skills to do it and neither of us wants to do the other guy’s job.”
Early on they became jack-of-all-trades working all aspects of the business. “We didn’t have money to hire a whole bunch of people. I waited tables at night and tried to get our futures business going during the day,” Vassallo says. “On the hedging front, my role was to go out and meet potential clients and try to get them interested to talk more specifics about the markets. At that point I would hand them off to Dennis to talk specifically about the markets and I went and talked to more people.”
It was not a case of homesickness that brought them to Dallas—though Vassallo always figured on going back — a customer they serviced while they were in New York was based in Dallas, so the new business did have one customer to work with.
“Our first client was an energy trader [who was trading through us] when we were in New York,” Vassallo says. “He [ran] small CTA Bishop Enderby. Dennis was taking care of the account and really thought the CTA was very good, so before we left New York we went to Dallas and met with him.”
They got the business, but despite trading success, the CTA had few assets under management.
“We came to them with the [idea] that we would raise money and clear the business,” Weinmann adds. “It is hard to dictate where money is cleared. Ultimately, we became partners in the CTA; John raised money and I executed all the trades. They were one of three [customers] that came along. It put us on the map and got us business early and quickly.”
This also introduced Vassallo to managed futures. While Weinmann worked on execution and trading, Vassallo entered this new world, attending various managed futures conferences to learn the business, which was just beginning to take off in the early 1990s. Some of the contacts made in those early years became and remain customers today.
“I raised $30 million for [the CTA] in the first year of our company,” Vassallo says. “We did a good job of that and they did a good job of trading, so we raised assets pretty quickly. Through that experience I began to get to know more and more people from the CTA side of the world and a lot of those groups are groups we still work with today.”
Back to Texas
Though not necessarily on purpose, the move was inspired. The center of energy brokerage was — and would remain for years— New York; but most of the crude oil, natural gas and the companies that produced it where in Texas and Coquest would have first mover advantage. It didn’t hurt that Vassallo was a native. Many energy producers were reluctant to trust New York brokers and bankers, but as their business grew and the need for hedging became more apparent, it was nice to have a familiar voice to provide assurance.
Being a native helped, Vassallo points out. “Especially when marketing in West Texas. They were very skittish about people coming from New York, with a New York accent talking to them about hedging their oil and gas production. It is a small community and you are either in that group or not. It takes a long time to break in,” he says. “The oil producers in Texas feel loyal to fellow Texans so it was an advantage for us to have that on our side; and to have the right accent,” he jokes.
Coquest took its next big step up in class when it got the state of Texas Treasury Department. hedging business. “Texas was doing a pilot program to hedge their oil and gas tax revenue to see if it was something they wanted to do [going forward],” Weinmann says.
Texas would set its budget every other year, based on their guess on the price of crude oil for the following year, which created huge swings in revenue, notes Weinmann. “At the time oil and gas [represented] 14% of the revenue for the state. Not knowing the price over a two-year period made for big swings in revenue and made for budget shortfalls,” Weinmann says. “We helped to design and execute a hedge program for the state to try to minimize the swings in their tax income from oil and gas production.”
The state also employed a larger brokerage firm, but Coquest had the expertise and was the main driver of the hedging program. This was in the early 1990s when Coquest was just getting started, so it didn’t hurt the new firm to be working alongside major players.
“It was important in two ways,” Weinmann says. It increased Coquest’s status working with the state of Texas, and helped to get others in the industry to see the value of hedging, adds Weinmann.
Though the Bishop Enderby CTA business fizzled after a couple of years, it did not dissuade Coquest from entering the field. Weinmann was building his own trading advisor, and Vassallo’s inroads into the business were beginning to bear fruit.
Contacts in the managed futures world would build brokerage business and with the field growing, Vassallo noticed that energy hedgers sought Coquest out because of its expertise in the field. The hedgers wanted to know what the CTA community was up to.
“Part of what assisted us in getting more oil and gas brokerage business was the fact that CTAs were becoming a bigger part of the trading world in the early 1990s,” Vassallo says. “A lot of oil and gas hedging customers were looking for some insight into what CTAs were doing and how they move in and out of the markets.”
Energy producers had always been suspicious of the impact floor traders had on price, but as systematic trends followers began to grow north of $100 million in assets, the producers wanted to know what they were up to. “Everyone wanted to know what the locals were doing, then everyone wanted to know what the funds were doing, then everyone wanted to know what the prop shops were doing,” Weinmann says. “We had our finger on the pulse because we did so much clearing, trading [and] hedging, we had a good feel on it all. That was always helpful.”
Being in the middle of information flow across different elements of the energy world allowed Coquest to grow. “It helps to understand market flows and how producers are hedging and transferring their risk,” Weinmann says. “It is always helpful to know what a majority of the trading world is doing.”
Over the Counter
In the mid-1990s more and more energy producers—particularly natural gas traders — left the exchanges and began trading bilaterally. Enron created a platform that allowed energy producers to trader away from New York, allowing energy hedgers to trade against each other. “Fortunately for a group like ours, when these different natural gas groups wanted to trade, they didn’t want people to know that they were looking to buy or sell, so they would shop the markets through brokers,” Vassallo says. “We were doing a lot of futures business and more and more of our futures clients started asking us if we did over-the-counter (OTC) brokerage because they were starting to move more of their volume to the OTC side.”
Coquest could see where the market was moving and knew they needed to be a part of it. In 1995 they launched Coquest Energy Services to broker OTC energy trades. “We went and hired a couple of natural gas traders from different oil companies. We didn’t have any expertise on the physical side of natural gas trading, we were guys from the trading floor,” Vassallo says. “We ended up getting a ton of OTC business. Five years later when Enron blew up, a lot of people started moving back to the exchange, we benefited from that as well because we had developed many relationships on the OTC side. When a lot of those groups wanted to transition to futures, we already had those relationships in place.”
Once again, Coquest’s proximity to the energy space in Dallas helped out. With the growth of natural gas trading and the expansion of bilateral trading, Coquest was perfectly placed in the energy hedging community that no longer felt a need to be anchored to the New York brokerage world. This growth would expand with the implosion of Enron in 2000, opening greater opportunities to support energy traders looking to hedge their books.
Acquisitions & Expansion
With the steady expansion of its energy hedging business, Coquest found it difficult to expand fully in the managed futures space so they were looking to buy as well as build.
“We had the desire to move more into the CTA side of the world, but we kept getting distracted because our energy business kept growing and kept taking our attention,” Vassallo says. “Ultimately, we got the opportunity to buy Mega Capital which was a managed futures fund of funds.”
Coquest initially contacted Mega Capital when it began taking a greater interest in managed futures in the early 1990s. Vassallo was consulting with the owner and believed Mega Capital could grow with the right leadership. Coquest over time, took control of the of the company that had more than $100 million in assets under management.
“That gave us a bigger step into the managed futures side of the world and accelerated what we were doing on that front,” Vassallo says. But that was only one part of the expansion. “I knew we needed to do a better job of evaluating, allocating and portfolio construction,” he says.
Coquest would not only need to expand its products, which the Mega Capital deal accomplished, but also its infrastructure to manage the complete investment process. With a plan to market to the core managed futures customers— family offices, pensions and endowments— Coquest needed a strong team.
This led to talks with Altegris in 2013. Vassallo had known the team from Altegris who had the precise expertise he was looking for. As luck would have it, Altegris was restructuring to focus on its mutual fund business and spin off its managed futures group. It was great timing for all involved. Max Eagye, who helped build and lead the Altegris Alternatives Group, came up with a plan for Altegris to continue to house its alternative funds but move the servicing to Coquest. The synergies created by working in the space made the transition easy and logical, and built the infrastructure for Coquest to expanded coverage in the managed futures space. The deal built additional brokerage business for Coquest servicing a large group of CTAs, as well as raising money for them. Eagye officially joined Coquest as managing director on Jan. 1, 2015.
The additional structure also helped with Coquest’s in-house strategies. In 2014, Coquest launched CTA Buttonwood Investments, LLC, led by Weinmann. The diversified discretionary energy program attempts to exploit opportunities in the energy markets using spreads, arbitrage and directional trading strategies. Weinmann had employed the strategy since 2008 in proprietary trading and codified into Buttonwood in 2014.
A significant part of the Altegris managed futures team came over in the transition, which completed the expansion begun with the acquisition of Mega Capital and the roll out of Buttonwood. “Putting [it] together allowed us to make something bigger and better,” Vassallo says.
Throughout its 30-year history Coquest has been able to leverage every aspect of its business. It’s execution and energy expertise helped to build the managed futures side and its expansion into OTC trading. Its relationships with the managed futures community, brought in additional hedging and execution business.
While Coquest is proud of what it has accomplished over the last 30 years, it is equally optimistic about the future.
Although, managed futures have gone through probably its worst decade in history, it is poised for growth and Coquest is uniquely positioned to exploit that growth.
“From a trading standpoint, most big CTA are trend followers, the advent of cheap money and zero interest rates made it really hard for markets to trend long term,” Weinmann says. “Markets grow and change and traders need to adapt and change with it.”
Coquest is helping the managed futures industry make those changes necessary to thrive in the current environment. “I don’t think there are groups that have continued to invest in the managed futures side,” Vassallo says. “I don’t’ mean investing with CTAs directly, I mean in the whole support and infrastructure—how to take care of managed futures investors. We have put a lot of work and effort into constructing portfolios and understanding traders and the nuances in their programs. We spent more time doing this than just about any group out there in the last decade.”
The expertise involves the ability to build, promote and distribute managed futures strategies in new ways, like Mutual Fund and UCITs structures that are gaining greater traction. “We are best suited for designing those [investments] for customers [and] will continue to grow on that side,” Vassallo says. “Institutional-type investors will continue to have some allocation to managed futures and I hope that we will be the ones they choose to work with.”
If Coquest is well-placed to take advantage of a resurgence in the managed futures space, they may be even better positioned when it comes to hedging for energy producers and brokerage execution. The industry has expanded unbelievably from the day when $25 per-barrel crude oil was viewed as expensive.
When Coquest started, energy hedging was the outlier, perhaps a luxury, but today it is essential.
“Hedging will continue to grow from the producer side,” Weinmann says. “Unless you are financing it personally, you can’t drill without hedging anymore. Private equity [and] banks all require it. When everyone requires hedging there is going to be more volume.”
Vassallo agrees. “There is a lot of money involved, and when banks have to lend a whole bunch of money for transactions to occur, they’re going to require hedging and risk management,” he says. “We are seeing banks increase the requirements when they lend money [and] increase the amount that they require to be hedged.”
So, with both sides of their business looking to grow, and Coquest’s history of leveraging their various strengths to ensure the whole is greater than the parts, the future looks bright.
“I am proud of the fact that with so many twists and turns that have occurred throughout 30 years that we have been nimble enough to navigate those turns and still be here and be a thriving company,” Vassallo says.
Coquest’s adaptability has been key.
“Our ability to stay nimble and change with the market has helped tremendously,” Weinmann says.
“If you asked me for a business plan 30 years ago, I couldn’t have written what we are doing because it didn’t exist. The ability to change with the market is what allowed us to grow.”
That adaptability and their broad coverage of the energy space has been a key to their success. “We do hedging, we do clearing [and] we do managed money, so we are A to Z in the marketplace. If there is something [new] going on, we should know about it,” quips Weinmann who adds, “We still get along.”
Vassallo says, “It has been a lot of fun, I just can’t believe it has been 30 years, it goes by fast.”