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Long Vol: The Emptiest Room Around (Guest: Robert Mullin)

https://www.youtube.com/watch?v=pH6CR-5PclU

TLDR Marathon Resource Advisors’ Robert Mullen builds resource-focused portfolios to withstand market shocks, combining cash-rich energy and mining stocks with selective shorts and a small, diversified allocation to long-volatility hedges. He sees opportunities in an inflation-prone, more fragmented world where energy security and underfunded resource supply matter, but urges investors to stay selective, adapt to changing conditions, and avoid chasing crowded trades.

Key Insights

Build the portfolio around how assets behave in a crisis

Assess investments not only by their expected returns, but also by how they may perform during market stress. Combining resource equities with carefully sized short positions and long-volatility exposure can help diversify a portfolio’s behavior. Shorts may lose money in rising markets yet still reduce losses during downturns, while a strong long book can offset some of their cost. Judge these positions by their role in the overall portfolio, not by whether every component makes money on its own.

Keep a flexible plan for volatile markets

Avoid applying a fixed investment framework when market conditions and investor flows are changing. A flexible strategy can preserve capital during declines and allow investors to add exposure when volatility pushes a company’s yield or valuation to an attractive level. For dividend stocks, verify that the payout is sustainable before treating a high yield as an opportunity. Short sellers may also need tighter risk controls, such as cutting losing positions sooner and spreading exposure across a basket of companies.

Budget for diversified, affordable portfolio hedges

Set a defined allocation for protection before a market shock occurs; the manager discussed keeping roughly 1.5–2% in long-volatility strategies. A hedge may reduce returns in calm, rising markets, so evaluate it as portfolio insurance rather than a standalone source of gains. Consider diversifying across instruments—such as index options, currencies, commodities, bonds, or credit—rather than relying on one hedge. Check how each position might behave in different scenarios and whether its cost fits the portfolio’s risk budget.

Reassess traditional allocations as economic conditions change

Review portfolios built for an era of low inflation, low interest rates, and abundant global liquidity. Higher rates, government deficits, and shifts toward geopolitical blocs and secure supply chains may change the risks facing bond-heavy and long-duration portfolios. Consider whether real assets such as energy, gold, and other resources have a suitable role in the allocation. Treat proposed mixes, including a 60/20/20 portfolio, as starting points for analysis rather than universal prescriptions.

Research resource investments beyond the headline commodity

Resource companies can differ substantially even when they operate in the same sector. For energy and shipping, examine factors such as jurisdiction, taxes, debt, vessel type, operating routes, and forward bookings instead of relying on commodity prices alone. In mining, assess project quality, location, development stage, and the materials a deposit can actually produce. For rare earths, processing capacity may be as important as access to deposits, and rapid investment can eventually create oversupply.

Wait for evidence that an investment thesis is working

A long-term theme can be compelling without making every entry point attractive. Rather than repeatedly trying to call the bottom, monitor relative strength, company performance, and whether the market is beginning to recognize the thesis. Scale exposure in a way that matches your conviction and tolerance for losses. Revisit the evidence regularly, since a promising theme—such as strategic minerals or gold—can still face crowded positioning, policy changes, or a long wait for expected demand.

Questions & Answers

How does Robert Mullen build a portfolio to withstand market disruptions?

He combines high-dividend resource equities with short positions and a small allocation to long-volatility strategies. The goal is to improve the portfolio’s behavior across market conditions and generate “crisis alpha”—returns that are uncorrelated or potentially anti-correlated with markets during downturns.

Why does Mullen hold short positions, even when they lose money in rising markets?

Shorts are intended to protect the portfolio and improve its return path during market declines, not necessarily to make money in every period. A successful long book may more than offset losses on shorts, while the shorts’ protective value becomes especially apparent in major drawdowns.

How does Mullen adapt his short-selling strategy to passive and nonfundamental market flows?

He cuts losing shorts more quickly, targets companies less affected by index flows, and uses diversified baskets—sometimes around 10 names in a subsector—to maintain fundamental exposure while managing risk.

Why does Mullen recommend keeping a small allocation to long volatility?

He recommends roughly 1.5–2% in long volatility. It can weigh on returns in rising markets, but genuinely uncorrelated or anti-correlated volatility may help offset major losses during market shocks. He cautions against eliminating volatility indiscriminately.

What instruments does Mullen use to seek inexpensive portfolio convexity?

He uses VIX calls and spreads, along with out-of-the-money options across currencies, commodities, ETFs, high-yield credit, utilities, long bonds, and the yen. Diversifying across instruments helps avoid depending on a single hedge. He also holds TLT calls and long-yen positions as potential hedges against risk-off moves and credit stress.

How does Mullen describe his role as a portfolio manager?

He compares portfolio construction to architecture designed to withstand earthquakes: the portfolio should adapt to changing forces rather than rely rigidly on one framework. His aim is not only to maximize returns, but to help clients weather turmoil and emerge with uncorrelated or negatively correlated returns.

Why do the speakers expect inflation and resource investment to become more important?

They see a shift from global integration toward geopolitical blocs, national resilience, and secure supply chains, alongside large government deficits. These forces may keep inflation structurally higher than in the era of easy global trade. Meanwhile, years of weak capital spending have left too few resource projects to meet expected demand from 2025 to 2035, including demand from AI and technology.

Why do the speakers favor energy exposure and a 60/20/20-style portfolio?

They argue that structurally higher inflation makes traditional bond-heavy portfolios less useful and supports including gold and energy alongside conventional assets. Energy has been underowned, and its importance is increasing because of geopolitical disruptions, depleted oil buffers, data-center and AI demand, national security, and political stability.

Where does Mullen see opportunities in energy companies?

He sees potential in jurisdictions where policy may shift toward energy pragmatism. The UK North Sea is one example: high windfall taxes have harmed producers and the industry, but pressure over energy affordability could lead to more sensible policy. In Canada, he favors energy firms with high dividends, modest growth, and the ability to reduce debt.

What is Mullen’s view on copper and mining investments?

He sees opportunity in a small number of high-quality copper projects in good jurisdictions that could attract major companies. He is short some large diversified miners and is looking at a basket of promising junior developers after their weakness. Copper’s resilience may partly reflect US stockpiling, while data-center construction could add demand; China’s construction activity remains important.

How does Mullen view China’s role in commodity markets?

He calls China “the world’s largest commodity hedge fund,” citing its substantial control over physical commodities. He believes China has acted countercyclically—allowing excesses such as property speculation to unwind, then potentially rebuilding inventories and supporting activity when conditions improve. That could make China a stabilizing force and benefit resource companies.

What should investors consider when investing in tanker companies?

Tanker rates and cash flows have surged, but Mullen does not expect spot rates to remain at extraordinary levels. Exposure differs by vessel type, routes, and forward bookings, so investors should distinguish among operators. Tanker stocks may also hedge energy investments because higher OPEC production can pressure energy prices while supporting shipping.

What is Mullen’s view on rare earths and strategic minerals?

He has had some exposure to rare earths, tungsten, and gallium, and is more positive on nickel than some other metals. He sees rare-earth processing—not just finding deposits—as a key bottleneck, and emphasizes that deposits vary in their mix of light and heavy rare earths. Because investment is becoming crowded and capital inflows may eventually create oversupply, he urges selectivity.

What investing lesson did Mullen learn from reviewing his trades?

He learned to stop trying to call bottoms as a dip buyer. Instead, he now prefers to wait for improving relative strength and performance, entering when an idea is beginning to work—even if he believes the longer-term opportunity remains promising.

What does Mullen believe could drive gold’s next major move?

He believes gold’s next major leg depends on central banks—especially the U.S. Federal Reserve—changing course as economic and market conditions push them toward rate cuts. He thinks conditions may be setting up for such a shift.

What early-career act of kindness influenced Mullen?

When Mullen left Franklin Templeton at age 27 to launch a resource hedge fund, he resigned three days before bonuses were paid and expected to forfeit his bonus. Research director Ed Jameson paid it anyway, recognizing Mullen’s contributions and wanting to part on good terms. The gesture influenced how Mullen wants to treat his own partners.

Where can investors find Mullen and Marathon Resource Advisors?

Marathon Resource Advisors manages money for qualified investors worldwide. Mullen can be found on X at @MRAFunds, and the firm’s website is mrafunds.com.

Summary of Timestamps

Kevin Mure welcomes Robert Mullen, founder of Marathon Resource Advisors, and praises his fund’s performance and investor letters. Mullen explains that he builds portfolios around both investment ideas and how the overall portfolio behaves during market disruptions.

Mullen combines high-dividend resource stocks with short positions and long-volatility strategies. Shorts may lose money when markets rise, but their purpose is also to protect the portfolio during declines and improve its performance across market cycles.

He illustrates how a strong long book can offset losses on shorts: a short book equal to 75% of the portfolio that loses 20% would detract 15 percentage points, but successful long positions could still leave the strategy ahead of a long-only portfolio. The protection from shorts is most apparent during major drawdowns.

Mullen describes himself as a contrarian who chose real assets and resource companies despite growing up around Silicon Valley’s technology-driven wealth. He favors businesses with substantial free-cash-flow yields, including high-yield tanker stocks and a fertilizer company trading at about four times cash flow.

The speakers discuss why investors need patience with short positions and should not be distracted by the rapid rise of AI and technology stocks. Mullen argues that a flexible strategy can take advantage of volatility rather than simply reduce risk after markets fall.

Mullen says long-only managers can be forced to cut exposure after repeated declines, just when better opportunities may be emerging. His approach is to buy sustainable, high-dividend-yield stocks when volatility pushes their yields as high as 12–18%, while managing risk through shorts and diversified baskets.

Short selling has become harder amid passive investing and other nonfundamental market flows. Mullen adapts by cutting losing shorts more quickly and targeting companies less affected by index flows; he may use baskets of about 10 companies in a subsector to maintain exposure without relying on a single name.

He advocates keeping roughly 1.5–2% of a portfolio in long volatility. This allocation can weigh on returns in rising markets, but genuinely uncorrelated or negatively correlated volatility can help offset losses during shocks. Citing Cliff Asness, he cautions against eliminating volatility indiscriminately.

Mullen seeks inexpensive convexity using VIX calls and spreads alongside out-of-the-money options in currencies, commodities, ETFs, high-yield credit, utilities, long bonds, and the yen. Spreading hedges across instruments helps avoid dependence on a single protection strategy.

He discusses holding TLT calls and long-yen positions, including yen exposure against the euro and U.S. dollar. These positions are intended to hedge crowded funding-currency trades and help during risk-off periods or credit stress; he also consults volatility specialists when choosing how to use a fixed hedge budget.

Mullen argues that investors should adapt their frameworks as conditions change. He compares portfolio construction to Frank Lloyd Wright’s Tokyo Imperial Hotel, designed to withstand earthquakes by moving with surrounding forces, and says his aim is to help clients weather turmoil.

The speakers describe a market regime change after decades of low inflation, low interest rates, and abundant liquidity favored long-duration assets and heavy S&P 500 exposure. Although rates have risen, the leverage and allocations built during that era remain, potentially leaving investors vulnerable.

They see the global system shifting from U.S.-centered integration toward geopolitical blocs, national resilience, and secure supply chains. Persistent government deficits and less globalized trade could keep inflation structurally higher, supporting a diversified allocation that includes gold and energy alongside traditional assets.

The speakers see the possibility of a supply-driven resource bull market. Capital spending has fallen sharply since 2012–2014, leaving too few projects to meet potential demand from 2025 to 2035, while AI infrastructure and national supply-security goals may increase demand for materials.

Energy is gaining importance after years of being underowned. Recent geopolitical disruptions have depleted oil buffers and highlighted both the flexibility and limits of the energy system; energy is also essential to data centers, AI, national security, and political stability.

The discussion turns to a gradual move from anti-fossil-fuel policies toward energy pragmatism. Mullen sees potential opportunities in regions where policy may improve, particularly the UK North Sea, where high windfall taxes have hurt producers, employment, and government revenue.

In Canada, the speakers see scope for more pragmatic government-industry partnerships to strengthen energy resilience. They favor energy companies with high dividends, modest growth prospects, and the ability to reduce debt, while cautioning investors not to judge policy solely by political labels.

Mullen sees potential in a small number of high-quality copper projects in favorable jurisdictions that could attract major mining companies. He is short some large diversified miners and is considering a basket of junior developers, while noting that China’s construction activity remains important to copper demand.

The speakers describe China as a major force in physical commodity markets. They discuss how China has allowed excessive borrowing and property speculation to unwind, including the Evergrande episode, rather than risk broader harm to society.

Mullen says China has acted countercyclically: easing during an energy shock and potentially rebuilding inventories or supporting activity as conditions improve. If Beijing adopts modest pro-growth policies, China could help stabilize the global economy and benefit resource companies.

Tanker rates have surged, producing strong cash flows and higher charter rates, although Mullen does not expect exceptional spot rates to last. Investors should compare companies by vessel type, routes, and forward bookings; tanker stocks may also hedge energy holdings because higher OPEC production can support shipping while pressuring energy prices.

Mullen discusses strategic minerals, including rare earths, tungsten, gallium, and nickel. He emphasizes that rare-earth processing is a key bottleneck and that deposits vary in their mix of light and heavy rare earths, so investors need to look beyond the headline resource.

Strategic metals have become crowded as countries pursue self-sufficiency and may direct substantial capital into a small industry. Mullen warns that oversupply can eventually emerge, as it did after the late-1990s uranium boom, and encourages investors to be selective.

Mullen reflects on investing lessons, including the importance of staying open to new perspectives and not trying to call every market bottom. Reviewing his trades taught him to wait for improving relative strength and performance before entering an investment.

He explains how he has adjusted his gold exposure after sharp rallies and shifts in market enthusiasm. Mullen believes gold’s next major move may depend on central banks—especially the Federal Reserve—changing course and cutting rates as economic conditions evolve.

The conversation begins to turn personal, with a request for a story about someone who showed Mullen kindness early in his career at Franklin Templeton. The excerpt then explains that he left at age 27 to start a resource hedge fund.

Mullen resigned three days before bonuses were paid because he felt it would be wrong to accept a bonus and leave the next day. Research director Ed Jameson paid him anyway, recognizing his contributions and wanting to part on good terms; that generosity shaped how Mullen treats his own partners.

Mullen says he admires the Tiger Management principle of generating strong returns while conducting business as gentlemen. He now runs Marathon Resource Advisors for qualified investors worldwide and can be found on X at @MRAFunds or at mrafunds.com.