Lakefront Futures & Options, a Chicago-based brokerage and trading firm with 16 regional offices, recently launched a Trucking & Freight Derivatives Group to help its clients use trucking freight futures and other risk management tools, including fuel hedging, spot market pricing, and contract or ‘forward’ rates.
Gary Saykaly joined Lakefront to head up the new practice as senior vice president of Trucking & Freight Derivatives. Saykaly, based in Atlanta, is a former freight broker with 25 years of experience in commercial real estate and investment banking. Lakefront, founded in 1997, trades many classes of commodities and futures contracts, including currencies, energy, livestock, metals, grains, softs, and indexes.
Saykaly will help transportation industry participants and financial speculators assess the opportunity presented by trucking freight futures contracts traded on the Nodal Exchange.
FreightWaves spoke to Saykaly by phone.
Saykaly said that he left investment banking to look for another industry where market inefficiencies and a lack of transparency created arbitrage opportunities. Freight brokerage satisfied those conditions, so Saykaly opened up a Landstar agency, Phoenician Logistics, where he worked as both the owner and managing director of business development for three years in order to learn the business.
“I had to roll up my sleeves, looking at trucking rates and how supply and demand conditions change,” Saykaly said. “It was a good way to build deep relationships with carriers and shippers, by being in the spot market every day.”
While he was selling capacity to shippers and covering loads, Saykaly was waiting for the launch of trucking freight futures contracts, a joint venture between DAT, the Nodal Exchange, and FreightWaves.
In one market update email to his customers, Saykaly built a chart showing how falling spot rates and rising diesel fuel costs would put pressure on trucking carriers. Then he superimposed a graph of the Dow Jones Trucking Index, which perfectly mirrored the increasingly unfavorable market conditions faced by carriers.
“It was clear that this is a relatively unhedged industry,” Saykaly said. “If those large carriers were hedged, there wouldn’t be such a strong correlation.”
Lakefront is not focused on trucking freight futures, but instead will use a holistic approach to craft custom risk management solutions for its clients using a combination of information from the spot, contract, and futures markets.
“We are focused on providing shippers, trucking carriers and 3PLs with holistic hedging strategies to mitigate trucking rate and fuel cost volatility via engineered strategies in the spot, forward, and futures market – where trucking freight futures might or might not be appropriate,” Saykaly said.
Lakefront has a multi-pronged go-to-market strategy that begins with upper middle market commercial users. Educational outreach will play a big role in preparing shippers, carriers, and brokers to use financial instruments and explaining how the 11 geographically-based trucking rate contracts being traded correlate to the specific networks of Lakefront’s clients.
“We’re also going out there to build a base of counter-parties of people who want to take speculative or arbitrage positions, like private equity firms, hedge funds, and family offices,” Saykaly said.
Saykaly said that Lakefront is hosting educational webinars, both public and for one-on-one client presentations, and will release content to shippers and carriers as well as the investment community.
Lakefront is presenting trucking freight futures to the investment community as an alternative asset class that may help them hedge positions they’ve taken in companies exposed to freight markets. Imagine that an asset manager has taken a large position in a publicly-traded trucking company because it has a long-term thesis about the quality of the carrier’s management and its plan to drive down its operating ratio over time and generate free cash flow. Still, trucking stocks trade on spot rates, and the asset manager’s position is exposed to volatile freight cycles. By selling (or being short) trucking freight futures contracts, for example the national average contract, the asset manager could protect against downside risk when it thinks the transportation industry might be entering a down cycle.
Educating the sell-side analysts who cover trucking and logistics stocks is also one of Saykaly’s goals for the first six months of the Trucking & Freight Derivatives Group, he said.
“There is a risk mitigation tool available to hedge trucking rate risk which can provide more certain revenue and cash flow streams, and if used, the publicly traded companies’ P/E ratios might be higher,” Saykaly said.