Wayne Penello

Wayne Penello spent 40 years as a commodity trader: 10 years on the floor of the American Exchange as ring chairman of options, then upstairs advising global trading companies like Vitol on managing portfolio risk. Around 2000, he started a consultancy to design hedge programs for companies, eventually patenting his methodology called the Performance Risk Management System. His clients were paid over $13 billion for successful hedging. Forbes Books published his methodology in a book called "Risk Is an Asset." He sold the company to a competitor, looked around at the equity space for someone to manage his winnings, couldn't find anyone he trusted, and spent four years building his own approach.

On this episode of Behind the Ticker, Wayne walks Brad through EMPB, the NextGen Efficient Market Portfolio Plus ETF. It's a long-short equity fund that uses a proprietary statistical algorithm Wayne describes as a "foggy ball" to actively manage systematic risk rather than diversify it away.

The Charles Ellis Insight

Wayne's investment thesis starts with a specific passage from Charles Ellis's book "Winning the Loser's Game." Ellis, who chaired the Yale Endowment Fund, pointed out on page 25 that if you bought and held the S&P 500 over a 10-year period, your dollar grew to about $5.59. If you missed the best 90 days out of roughly 2,500 trading days, your dollar shrank to $0.78. Ellis used this as an argument for buy-and-hold, since you can never predict which days will be the best. But then he added what Wayne calls "the most astounding thing": if you missed the worst 90 days, your dollar would grow to $43.

That asymmetry is the low-hanging fruit. Wayne's approach doesn't try to be smarter than the market. It tries to be less stupid. He can't figure out which specific days will be bad. But if you think of the S&P 500 as a horse race and try to identify which industry sectors will be in the back half of the pack, "the nags of the market," maybe you can do something with that.

The Crystal Ball to Foggy Ball

Wayne ran what he calls a "crystal ball analysis." Take oil and gas (XOP) as an example. If he had a crystal ball and always knew whether XOP would outperform or underperform the S&P 500 next month, always owning the winner regardless of whether it made or lost money, the results were dramatic. Buy-and-hold XOP from 2013 to 2023 produced a compounded loss of 2.5%. With the crystal ball, the return was 63%.

So he invented the "foggy ball." It's not perfect. It uses momentum indicators and edge-of-the-envelope indicators (think Elliott Wave analysis across multiple timeframes). Applied to XOP, it raised returns from negative 2.5% to about 24%, capturing roughly a third of the crystal ball opportunity. Across a portfolio of 16 sector ETFs, all running foggy ball analysis, the combined result targets a Sharpe ratio in excess of 2 and returns that beat the S&P 500 with significantly less risk.

First 88 Days: The Proof

The numbers from the fund's first 88 trading days tell the story concretely. On the S&P 500's winning days, the index gained a cumulative 40%. EMPB captured about 24%, roughly two-thirds of the upside. But on the S&P's losing days, the index lost a cumulative 54%. EMPB lost only 22%. "It's not that we're making more money, it's that we're losing less money," Wayne explained. The result: no six-month period with a loss on a pro forma basis, and the biggest drawdown less than 10% from peak to trough.

Trusting the Algorithm

Wayne was candid about the hardest part: getting out of his own way. During beta testing, there were many times when his fundamental instincts or news headlines swayed him to deviate from the algorithm's guidance. "In every case, we paid the price. After about 10 in a row losses, we don't do that anymore. If the algorithm says we're supposed to do that, that's what we do."

The fund goes long strong sectors and short weak ones. Because it's net long (roughly 100% long, 50% short in highly correlated positions), it can be held in IRA accounts. The ETF trades at about $25.50 per share. Wayne lives on a ranch between Austin and Houston called Brushy Creek, where he breeds longhorns and practices ranch-to-table. The ranch's golf course was recently ranked the best new golf course in Texas and top five overall.

Risk First, Returns Second

Wayne made his investment philosophy explicit: "Whatever you're investing in, you have to think about how much money can I lose. Most people start with how much money can I make. Don't start there." He shared a story of working with a woman who was 90% in bonds because she was terrified of equities. He got her to put 15% in EMPB by showing her the risk profile: what the maximum drawdown looked like, what the worst-case scenario was. His plan was to revisit in three to six months, and if comfortable, gradually increase to 25-30%. The approach reflects his commodity trading roots, where risk management is existential, not optional.

Key Takeaways

• EMPB is a net-long equity fund (roughly 100% long, 50% short) that uses a proprietary "foggy ball" algorithm to go long strong sectors and short weak ones. IRA-eligible because it's net long.
• In the fund's first 88 days, it captured two-thirds of the S&P 500's upside gains but suffered less than half of its downside losses.
• The thesis comes from Charles Ellis: missing the worst 90 days out of 2,500 grows a dollar to $43. The algorithm doesn't predict winning days; it identifies and reduces exposure to the worst sectors.
• Wayne Penello spent 40 years in commodity trading. His clients were paid over $13 billion for successful hedging using his patented methodology.
• Pro forma results show no six-month losing period and a maximum drawdown below 10%. The algorithm uses momentum and edge-of-the-envelope indicators across 16 sector ETFs.

Listen to the full conversation on Spotify, Apple Podcasts, or YouTube.