Building an Inflation-Proof Portfolio | Systematic Investor | Ep.384
Summary
Market Outlook: The discussion highlights a breakdown in global trust and rising deglobalization, creating persistent inflation pressures and larger, more frequent market dislocations.
All-Weather Construction: The guest pitches a defensive core of 50% bonds and 50% commodity trend to target CPI+4% across inflation regimes, reducing reliance on forecasting.
Commodities: Supply constraints and secular shifts are driving trends across natural gas, carbon emissions, lithium, and ags; commodity trend strategies can capture these moves in both high and low inflation periods with better carry dynamics.
Precious Metals: Gold and broader precious metals are emphasized as hedges amid eroding confidence in fiat currencies, supported by notable investor endorsements and recent price action.
Fixed Income: Bonds face challenges in rising inflation (higher correlation to equities, CPI-minus returns), yet remain a core component when paired with commodity trend for resilience.
Japan: A sharp move in JGB yields and shifting carry dynamics are influencing global flows, pressuring U.S. rates and the yen while reshaping cross-border fixed income trades.
FX and EM: EM FX and selective DM FX have strong trend and carry opportunities, though advantages may fade as rate differentials compress; careful regime-aware allocation is stressed.
No Stock Picks: No specific public companies or tickers were pitched; the focus remained on macro strategies and portfolio construction.
Transcript
Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence or investment career to the next level. Before we begin today's conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. Here's your host, veteran hedge fund manager Neil's Krup Larson. Welcome or welcome back to this week's edition of the systematic investor series with Yorov Git and me Neils Castro Larsson where each week we take the pulse of the global markets through the lens of a rules-based investor of it is wonderful to be back with this with you this week in the new year. How are you doing? Have you had a successful start to 2026? >> Happy new year Neils. Uh yes, trend has been actually quite good this year this year or started at least this year. Um and we're going through, you know, a couple of big projects um in in in Gresham and it's it's it's a very very busy. So it's a very busy start for the year, but a very good one. >> Yeah. Always exciting. Excellent. Good. Well, we have also uh quite a few um wonderful uh topics to discuss thanks to uh what you brought along. Um so we'll be tackling them um in a few minutes. part before as usual we do that. Um I'm curious to hear what's been on your radar the last uh few weeks since uh since we caught up last time. >> Well, actually I'm going to talk a little bit about work because um inflation has been on my radar. So I'm going to plug I'm going to plug TTU. Um so wow >> I've been listening to uh Mark BL on um interviewing with Alan >> and also Bill White who spoke previously >> um and actually to be honest it gives me uh a bit of trepidation because following them these these are two beautiful podcasts really really good uh both talking about inflation about structural problems with US debt or UK debt in the case of Mark um and two very different uh points of view one of them is a much more social um what is the social impact of inflation uh from Mark and a much more conservative sort of uh Fed type of outlook on inflation from from Bill White. Uh but really really really interesting. So in fact I ordered um I listened to it last week. I ordered um inflation um a guide for users and losers by by Mark Ble and I've been reading it all night until about 3:00 a.m. last night. So, uh, a lot of fun there and it's it's really it's really enjoyable. >> Yeah. No, I mean I completely agree. Uh, I think Alan did a wonderful job. Uh, and the guests were just superb. I mean, Bill White, I I knew of, of course, we've had him on before. Mark was new to me. I have to say I really enjoyed it. And when I look at the comments that uh we've had uh and the engagement we've had on that episode uh that is just a sign of uh how much I think it uh kind of touched and how his um style actually touched uh people. Absolutely. So so I completely agree. These were wonderful conversations. We've got a lot of really great guests coming up by the way uh in the next uh few months that I already know of. So uh I would say stay tuned. >> Yeah. my do my daughter studies economics and maths and she was listening to him and she said he's really good and I said you know maybe I should adopt a a Scottish accent and and and my daughter bless her said maybe you should start learning an English accent first >> oh the kids they will they will tell us the truth right well I mean she's she's a she's a first class student so I really don't I really don't complain >> no absolutely well I mean I have to say that uh all of the talk about Greenland has taken up a lot of the space on on my personal uh radar in the last uh couple of weeks uh especially the last week or so. And you know on one side um you have the politics of the situation which is I think in a sense very regrettable to see how seemingly allied nations are just moving further apart. Um, of course this is somewhat emotional when it's Denmark on one side of the battle, but perhaps the bigger issue is that um, you know, when you look at it in and and we're seeing this in in front of our own eyes, we're just seeing a breakdown of trust. We're seeing a breakdown of tr what truth is. Um, and this is going to have a huge impact, I think, especially on the younger generations who may not have the same reference points as you and I have. >> So, I mean, this really feels like the fourth turning that Neil How has been writing about and who has of course been a guest on the podcast in the past and I'm happy to say that we're bringing Neil back in in early March um to see or or to hear what he sees uh now. Um, but then if I put on my purely uh, you know, investor hat and specifically my trend following hat, I can't help to be a little bit optimistic in terms of the opportunities that this fraction of the world may lead to in terms of market moves. And I really think that we may see many many unimaginable moves in the coming years where we of course have already seen a taste of this in recent uh years um maybe mostly in the commodity space but who's to say that we can't see huge move in financial markets if the world order really is breaking down. So, we're kind of back to what uh I said a number of years ago um and I said it many times that we as investors, we need to imagine the unimaginable um and that focusing on building robust portfolios that may not give you the highest returns but will give you um or will get you through the next five, seven years safely will be the key thing to focus on. And as I'm sure people listening to us today already know, I believe this can only be done by combining truly uncorrelated strategies and assets. So that's really what what I um sit back with and of course we know the the um the news flow is not over. Uh we don't even know where whatever we got from Davos last night uh where that's really going to land. These were just like headlines that sounded great and the markets reacted positively. But once they need to get down to the detail, who knows where this will end. But it doesn't change the fact that I think we unfortunately are are just witnessing um something really really negative for how the world operates. Um so um we'll we'll see how that plays out. >> Yes, indeed. Now, speaking of um trend following, um I think it is to fair fair to say that this week um has been a bit of a roller coaster um thanks to the uh geopolitical uh noise uh that we've been receiving. Um but I think for longerterm managers um that don't react on every single news item, it's probably been an okay week. Um, and then depending on how much you have exposed to markets like gold and silver in particular, but even also equities and perhaps the JDBs, that probably determines more or less how much you've been able to extract from these markets. But, you know, there are a few market events I think that are worth highlighting. Um I maybe u not everyone follows all the commodities but this last week net gas futures up 71%. Now this is purely driven by the fact that the US expects a massive cold weather front coming across uh the US starting in Texas and sweeping across to to the east. Um so nothing geopolitical about that. This is just how commodity markets tend to to move when there are some some big events. Um and that changes the supply and demand demand balance. Uh which this certainly uh will do. And then of course on the other side of the uh Atlantic um and maybe you know more about this than I do of course as with your focus on on fixed income but it feels like we've had like a little mini truss moment in Japan where yields really spiked up and suddenly we had 10ear JDBs at 241. Now, this is still far off the 7% that we saw back in the um in the 1990s before they dropped to about 1 and a half 2% I think in 1999. But you know this have an impact really big moves and you know not just in the JGBs but also in the yen. Um really big moves um actually can I add for to commodities like um carbon emissions have also been a a very very volatile market in in recent times. So commodities for different reasons as you said for different reason different risk factors um you get some really big moves and of course there's also gold and and precious metals as well. >> Yeah >> the usual suspects >> the usual suspects at the moment but but for very different reasons. I mean in the case of gold it's really the breakdown of uh the breakdown of trust in in fiat currencies. I mean if you look at Ray Delilo coming on like an interview and he says you've got to have gold in your portfolio. It's really quite uh really quite impressive. >> Yes. But as I said, I think this could also lead at some point to um to big moves in the financial markets if we really see a breakdown of some of these uh historical alliances and ties. Um so um watch this space I would say. Anyways, uh my trend barometer is picking up um a little bit of uh better conditions. It's uh finished yesterday at 50 which is uh a good um reasonably strong reading. Um and I think it ties in pretty well with what's going on in the um in in the in various indices. Um I have got some numbers as of Tuesday. Um but I think yesterday was a pretty good day uh from what I can tell from the early numbers. But anyways as of Tuesday the Btop 50 index was up 3.18% uh in January and therefore for 2026 uh stockg index up 3.46% 46% sucked in trend up 3.78% and the short-term traders index up 1.07% 07% and actually I also tend to follow I never talk about it I actually do follow also the sockgen trend indicator that's just flying I think it's up like something like that it's although it has had a rough time you know >> it's it's not particularly risk managed but so um it's a little bit all all over the place but it's having a hell of a day >> it is uh it's having a good time at the moment um anyways Msei World up one and a half uh% thereabouts so far this year Um and the US uh aggregate bond index pretty flat uh so far this month and then you have the S&P 500 total return is up about half a percent. So interesting start to to the month. Um now before we go on I just wanted to maybe ask you how markets trends look from your different lens than mine um so far this year. >> Oh I mean this year this year has really started well. I think um Japan is obviously a big story but there's you know there's trends in small countries like Taiwanese Taiwanese dollars interest rates there are trends in the US market actually you know but there's also trends in uh Turkish lera there there are a lot of trends everywhere so FX um FX EMFX has been very very good um and um credit has been choppy a little bit of course it rose a little bit at the beginning of the of the month. Um and then um there's been a small reversal and then it's coming back again. Uh all based on Trump news on this one. Um but uh the bond market is actually where there's a lot of interesting a lot of interesting issues. So you have the issue of debt and as you say in Japan there's there's concerns about the spending plans for the government um about the budget. So you see you see almost like a a route in the Japanese bonds and then you see uh rrooting because Japan holds a lot of US debt. So once the the gap between Japanese yields and US yield is closing it becomes actually better to that carry trade is kind of disappearing and you you see flows from US bonds back into Japan and that of course puts pressure on the US market. So you see the US tenure crossing 4.2 too. Um you see a little bit of a downtrend there as well. So um so it's very interesting at the moment for um in terms of debt management. Um and then of course the second question is inflation. Exactly what you said as you have a breakdown in trust between different parties. You see each country becoming more interested in securing its own supply chain >> and you see, you know, talking in the UK, we need to spend more on, you know, on on on on military >> on everything really. >> Yeah. But on everything. Um and and I think I think actually that's that's something that um that Bill uh Bill White spoke about in terms of we have a structural secular uh trends at the moment which are away from globalization uh structural trends which which will support inflation. You have a huge like transition from carbon based carbon based economy into metal based economy uh energy market. were talking about electricity and storage and and metal and um Bill was saying well it takes 20 years to build a mine >> and that that sort of uh impact basically means that price needs to do a lot of trend you know to to do a lot of the work so you will get start seeing a lot of trends in in commodity prices um all over the place um and that's one of the reasons for inflation right so if you look at what Mark Ble was talking about we tend to think about inflation as being driven by demand by just too much money chasing too few goods. Uh but actually it's a lot of it is at the moment it's being supply right in terms of uh gas in from the Russia um stopping in terms of um in in terms of supply chains being compromised um and we'll see a lot of the countries are sacrificing sacrificing the efficiency of of uh really super tight supply chains to try to a little get get more security because as you say trust is gone. >> Yeah. No, no, absolutely. I should know this Y, but do you trade in your product both fixed income and currencies or is it just the fixed income? >> So, so I I view I trade curry. So, I trade things. So, I well I try to I trade quite a lot of things but um >> uh I was responsible for both fixed income and um I'm trading in the portfolio of fixed income which which is like interest rate swaps, bonds, inflation linked bonds um but also FX. I think I view it as a almost a carry trade and uh also um credit. >> Okay, cool. Yeah. No, that's kind of what I gather from what your comments uh were. Okay, cool. Now, before I get to your first topic, let me just pluck something uh on my own and that is that we have just uh very recently published the 2026 version edition of the ultimate guide. Now, for those who don't know what the ultimate guide is, it's actually a kind of um uh a little booklet which has become pretty large now because uh what I've done is I've gone out and found uh along with my uh co-workers here uh 800 uh book titles uh sorry 600 book title. It's the eth edition but it's 600 book titles um that I think might be useful for people um for to read on different topics, different uh se categories. So, um, and there are essentially two ways for people to get, uh, the guide. Um, and it's a free, of course. Um, either if you're subscribed to my Sunday emails, you'll get it automatically, or uh, you can basically just go to the website toptradersunplug.com/ultimate and then there is a way for you to opt in and get it um, free of charge, of course. Anyways, speaking of great content free of charge, you should go to Y's LinkedIn profile because there's another good article from him. Uh, in corporation, I think with someone called Adam Pedal this time. Uh, I hope I pronounced that correctly. >> No, you pronounced perfectly. So, you know, Adam, Adam is a commodity side. So Gresham has got a a fixed income uh focused fund which is which is run by me and then on there's a commodity um there's a commodity fund. >> Sure. >> And Adam is a is a senior senior researcher there. >> Sure. Fantastic. >> So let let me tell you let me tell you what we did because I'm very excited. >> I was just going to say I I can't wait to hear what what it's all about. >> Right. So it's called the eras tool and you can tell that I'm a swifty. What we're thinking about is is inflation is precisely what Bill White is concerned about, what Mark BL is concerned about and I think a lot of investors are concerned about because that will really affect their bond their bond portfolio. And um they've taken a very economic, you know, an economist's view of what the problem is, but we kind of want to think about the solution. And we're trying to think about um sort of how does an allocator approach the problem of constructing a portfolio which will be robust in all weathers. And what we mean by all weathers, we think about regimes. We talk high inflation regime, rising inflation regimes. Okay, I don't think people are particularly concerned about falling or um low low inflation errors. I think that's that's that's not a problem at all. I do know someone who lives in a a house that is painted white that is very concerned about low inflation and um >> that's very true. That's very true. So um no but as as an investors I mean there are a few reasons why you're concerned about bonds at the moment in terms of debt of the US debt in terms of um but also in terms of inflation and what we what we try to do is to say okay let's look at um how do you construct an all weather portfolio uh and what I mean by all weather is a portfolio that will be consistent over different inflationary periods okay so um and the problem that you have is normally you would think okay my bu best building blocks, you start with equities and you start with bonds. And what you find is equities is is a great all weather growth portfolio. Uh the idea behind it is that um it will essentially return to you CPI plus something and that something varies depending on the you know conditions the growth of the economy. Um it will give you 0% essentially 0% in high inflation environments. So CPI plus 0 and it will give you CPI plus 10 or 12 or even 15. um in low um low CPI environments. So that's great and in between rising or falling inflation, it will give you just a little bit. But the problem that a lot of allocators have is with bonds because although bonds are great, you know, in in the periods that we've seen where um interest rates have been falling and interest rates are very low at zero and suddenly bonds are really doing great and also of course they've got negative correlation to equities. So it's it's a really great it's a really great idea to put them in your portfolio. And the problem is once you start looking at rising inflation, bonds start to underperform. They don't they no longer give you CPI plus, they start giving you CPI minus. And as you reach proper inflation, and I mean by proper inflation, I mean just 4 and a half%. you have a situation where bonds are not only negative quite quite strongly negative CPI minus big numbers but also they become much more correlated to equities so um so putting that in the portfolio actually makes it very difficult now obviously you don't really want to throw away bonds from your portfolio but how do you create a component which is stable over over different inflationary periods and what is very interesting is that the like commodities ities act as almost the negative the the mirror image of what bonds are in a sense that this is this is an asset class which does very well in inflationary time. Uh but commodities of course do very very poorly in environments of low in inflation. Uh but commodity trend actually is a great strategy for both inflationary times for the obvious reasons like what we see at the moment but also during low inflation times it has a little bit less drag a little bit of less of a negative carry. So what you do is if you put if you put like a a portfolio like simply a 50% commodities 50% bonds you get something which is truly all weather. What it does, it gives you CPI plus 4% in all environment regardless of whether what it's high inflation, low inflation. So in some sense, you don't have to worry about what is going to play out. It's very difficult to guess what the exact environment as you said events, random events can happen, lots of things can happen. You don't really know what you want. So you want a sort of a defensive portfolio as a starting as a building block, which is I don't I don't know if inflation is going to spike. I don't know if inflation is going to go down. CPI plus 4% all I need is like a 50% bonds and a 50% of commodity trend and that is really really quite interesting. It's a as a it's a tool for an investor. So normally we we try to sell you know we try to market uh to our uh investors uh CTAs as a truly diversifier um or maybe a little bit of convexity and a little bit of uh crisis alpha. Uh but that's sort of an equity story. I'm here trying to think about how can we create a defensive portfolio and it turns out that CTAs and in particular commodity CTAs really play into into bonds create a really nice building block for your allocation. So that's what the paper is about. >> So I have a couple of initial observations and you can dive dive dive deeper. Um the first thing I noticed uh in your um in your in your post was you have this chart that shows the different eras of inflation. You know the the low and the rising, the high and the falling. >> And I don't know what people think is the norm. Um but actually when I look at your data, it almost seems like they're equal in time. meaning that you have in the last 70 years or so you've had as much of rising inflation as you have had falling inflation even though we may not really remember uh much of that except for a short period of time uh after co most people will remember kind of falling or low inflation right um but it is interesting um and I guess it goes to your point about um how to build portfolios for for all environment environments because they they should I I well we don't know about the future but certainly historically in the last 70 years or so they tend to have uh as much uh of of one as they have of the other. So that's kind of one thing uh I wanted to touch on. The other thing I wanted to just touch on before I forget and that is you mention I I heard you say well uh this is kind of uh why we see commodities go up right now but people most people will say well hang on we don't have inflation right now of any significance so I just wanted to touch on that a little bit. No, absolutely. So the first point is that that we kind of cook the books a little bit. So we chose the boundaries for low inflation and high inflation. So that the the data spends 25% of >> the time like roughly 25% of the time below 2% and roughly 25% of the time below four and a half. We needed like round numbers. So that's that. And actually what you find is interesting is that it spends more time coming down. Even though like it's a symmetric, you know, it should be once you've once you've declared both upper and lower bounds, inflation spikes much more quickly and um and then takes a little bit longer to come down. So it actually spends a little bit more time coming down. It's it's stickier and that kind of translate into different economic policy as well. So what we've seen since the 70s, we've seen um the Fed essentially overshooting um having a much more um much higher real borrowing rates. So borrowing Fed funds less inflation on the way down because it's trying to control inflation. Um so but but but that's that's less less less of an issue. So in a way we cook the book. In fact, we can go back all the way to 1920s. There's there's good data um for this going back all the way to 1920s. then you have to start dealing with like slightly dodgier data and slightly World War II and so forth. Uh but yes, absolutely people don't appreciate that you know um that nice era from Paul Vulkar in sort of the early ' 80s all the way to Gellen. Um you know that has that has been an interesting period but it's it's not necessarily the you know it doesn't cover the full history. uh I think Jem uh always talks about you know when you look at equity returns when you look at bond returns you really need to start thinking about what what it looks like what it looks like in a in a deep past the second point is yes that in fact one of the reasons why we haven't seen necessarily commodity trends uh strong commodity trends is because we've been between COVID and the Ukraine we've seen falling inflation and falling inflation is actually kind of bad for uh commodity trend um And you know that that's going historically and and we can see that in the data as well. Uh but we are beginning to see trends and these are to do with the way that inflation is coming online and what and it is about it is really about um supply supply constraints and supply shocks um which which induce which induce uh trends. So if you talk about if you talked about natural gas um if you have less storage and if you have a constraint supply of natural gas suddenly when there is a cold spell in the US suddenly you're going to start seeing big big trends in in natural gas for example. So, if I understand you correctly, what you're saying is, or maybe you're not saying it, but what I'm hearing is um that inflation actually, unlike what some um people want, um is actually not going to come down. Um and what we see in the commodity markets is kind of the pre-warning that inflation should inflation numbers, I should say, should be picking up. Um, is is that what you're saying that we're that the markets are ahead of time here? >> So, I I'm saying that there are multiple reasons why you should be concerned about inflation. I I really we're not economist and even if we were economist, I think trying to make a prediction is always difficult. As you said, it's the events overtake events really overtake your your your what you think is going to happen, right? Um but there are certain certainly issues in terms of um quite a relaxed monetary policy actually in it in a sense that um real rates are at 1% or so. So so CPI is is nowhere near is nowhere near what the the Fed target is at 2%. And yet we see uh we've we've seen drop in uh the Fed rates over the last over the last year. So the Fed has started as like has ended it the cycle. sort of thing, you know, it took it it took rate from zero to four and a half and now it's been taking it down consistently even though inflation is really not not uh not a target. So certainly um the Fed is very accommodating. Certainly US debt is sitting at 30 trillion. Uh financing that debt is now costing the US about a trillion a year which is enormous. I mean 10 years ago it would have been like 250 billion. It's it's it's one of the big ticket item at the moment for um the US balance. You know, it's it's it's insane. Um so there are many good reasons why we are likely to see inflation coming on. But on the supply side, all the all the things that we discussed in terms of um secular trends in each country like del globalization, tariffs, all of those are things that drive um sort of supply shocks on, you know, on the commodity side and yes, these are drivers of inflation. So these are things to be concerned about but like you know I'm not saying they're going to to to to happen but what I am saying is if you were to look at a mixed portfolio of bonds and commodity trend what you get is something which is resilient to either environment so that if what happens you know everything is everything is hunky dory and that's and and maybe inflation is coming down and I'm completely wrong then great bonds will do well for you. Conversely, if inflation is going to be picking up and you're going to get high inflation, great. Commodity trend will do well for you together. You have a portfolio which is actually quite resilient to all environment and that's what I call all all weather defensive portfolio. when you talk about commodity trend because I know this first came up in a paper um a few years ago uh and uh the author uh name escaped me well-known uh volatility uh manager um who um uh who later uh closed down his fund um but he wrote some really great papers um and and he building this 100year portfolio if you couldn't change your portfolio for 100 years how would you build and he introduced this commodity trend but I've never never quite fully understood whether when people talk about that do they mean trend following only on commodities because you are not going to find many maybe with the exception of your firm that does only commodities as trend following I mean we all try to combine it with some trends in financial markets that seems to work better as a as certainly as a standalone portfolio um so when you say commodity trend in your paper are you meaning trend following on just commodities or you >> Yes absolutely so so and and actually very standard become um type of commodities I mean it's absolutely true right if you are managing a a standalone fund >> Mhm. >> then it may be easier for you to put together both financial assets and commodities and because from your perspective you're going to get you might think that you get a better diversification. In fact, that's not necessarily the case. I mean, I think we all know that commodities are a great diversify and you can create a very diversified commodity standalone um trend and but the way you think we think about it is in terms of what is the utility that we give to the allocators, right? So, it might be that you from your perspective you think oh it will be better to shove it all together and some investors want that. They want just give me the best version of trend. So you can combine the you know both financial and the physical trend. >> Um but some investors really appreciate a lot of the people that's um allocate just to the commodities they think about inflation and about real assets and about how that kind of combines in the sort of asset class universe. So they really appreciate our different risk factors. Um and also we kind of train trade it slightly differently. So each each asset class we kind of think about exactly how it does. So you know the way I trade fixed income is slightly different to the way um we do things commodity because you have to think about the physical attributes of the asset class um in terms of what you know supply shocks in commodity is not really relevant in in in fixed income. What springs to mind when I hear you talk about that and obviously these this is uh your analysis and um and you come up with this idea of saying well actually if you combine commodity trend with uh with fixed income um then this is really a great um a great combination and I'm immediately thinking about a country that I've been trying to um get interested in trend following for a long time and where they have a lot of fixed income and that's Germany but at the same time most institutions will not invest in anything that has commodities in it. >> Oh. >> Yeah. So, so it's it's very interesting that you might have a country in here in Europe where they really should be thinking uh about combining what they have with commodities yet um for many different reasons which we don't have to get into right now. Um most of them say no, can't do that, won't do that. >> Yeah. Um I think the usage regulation and actually the aversion to commodities in general um rooted in the past. Um but uh >> no I'm not even talking about usage. In usage you can use commodities. That's not the problem. It's actually investing in anything that has commodities inside it. >> Oh my god. Yeah. Yeah. Well um what can I say? Um I completely agree. I I think commod I think commodities are a beautiful diversifying asset class. >> Yeah. Uh and I think that the dynamics are very very different to the dynamics in the financial universe. Um and and you're talking about diversification, it's a really true diversification and it's really nice to see a portfolio which you can get diversification both in terms of what type of commodity uh you know things are not funible. So oil this year is not the same as oil next year. Um you know um the crop this year or the crop next year are affected by different things. So you can you can get uh temporal um dislocations, you can get different geographical um differences, you can get uh you know you can get a 61% iron ore trading differently to the 65% iron ore. So there there's a lot of there's a lot of fun in commodities really a very great diversifier and it would be a shame not to not not to allocate to it. No, it will be a shame. And a lot of these um how should I say push backs comes from um philosophical beliefs is the best word I can come up with in terms of what um we as managers may or may not do to commodity prices um and and therefore they can't support it. Um but it's a little bit like the discussion um that you see from time to time about people investing in the green transition where a lot of pension funds have um did well initially when green was um you know very popular uh the last two or three years that's not been the case and so those portfolios have certainly been underperforming more traditional portfolios and and I heard the discussion once with the um uh the CEO of the largest uh public pension plan in in Denmark actually where he was asked but what really is the mandate is the mandate for you to be investing for the green transition or is the mandate for you to get pensioners in Denmark the highest possible return and I think from memory he said well when you put it like that it is our job to get people the best possible long-term return for their pensions and so you could kind of argue the same maybe uh when it comes to German investors who say no we won't do that um if you can you know show evidence that actually no you should do this because it will give you uh a better outcome at the end of the day I >> I think it's yeah I think it's not necessarily just that I mean if you think about okay we we're trend followers so we're quite agnostic the way the price goes >> but what we do we do provide liquidity in markets which are just emerging >> uh and are part of that green transition So if we think about the lithium contract right so there used to be some lithium contracts in uh the US uh in Europe uh there was no there was no liquidity there and the reason why there was no liquidity is because the the type of lithium that it was trading was nothing to do with the type of lithium that was used for batteries. So the physical players didn't really use that those those contracts in the US and then suddenly you see the Chinese market there was a lithium contract and you know an explosion in in volumes because hedgers really needed somehow to pre-sell essentially the the lithium production and we as as trend followers I mean we don't really um we don't really determine the price but what we do do is we provide liquidity in the market. So we do actually got involved in that market very early on um and and that's sort of a positive thing um in a way. So I think that trend followers as as uh market participants in and providers in liquidity in markets which other funds might be more reluctant to get involved in um and where we kind of try to give those risk factors because these are very diversifying right sort of greenification is is a different risk factor to the rest of the economy. Um I think I think it is actually contributing. I mean actually to give a practical example for those who are new to the show um we discussed it back then but but just to to remind people I think a lot of people had the impression that when cocoa prices exploded a few years ago um systematic managers and hedge funds we were to blame um and we bit up the price uh in 2024 and and and and so on and so forth. Um, but just as a reminder, actually CTAs, there will be a few exceptions, but most CTAs, I would argue, first of all, got long cocoa uh in early 2023, I think from memory, and they were um they were they had all the exposure they needed before prices really took off uh in 2024, and as the market exploded higher, they were the ones selling Absolutely. >> into the rally because of of of risk management. Exactly. >> Exactly. So Yeah. But but even even without this argument, I think it's important to appreciate that the CTA industry is actually not that big. It's not big enough to really do that. So um we're trading the sort of the CTA industry is like what 300 billion uh give or take um at the last count a little bit higher now because the trend has been doing very well for the last 6 months. But also you have we have to remember that a lot of things that do use trend like for example the QIS desks uh that Nick Bolters run they don't report their AUM. So I think I think it is bigger than than what we think it is. >> That that is very true. So um so there is a well first of all don't blame us for the QIS right clients want that. No but but you're absolutely right. There's like maybe 300 to another 300 or so in the Q universe or thereabout. Um but you know if you think about the S&P market it's it's like 50 50 odd trillion 56 trillion I think. So um you know a little bit of perspective in this we are we are significant players in some commodity markets and I think one that is an issue >> um and I think the the careful CTA manager will try to take that into account and actually try to be um to be less present in the market because we actually don't like to trade against ourselves. uh one of the big indicators for poor performance of trend is actually oh you're trading against yourself that's always a bad that's that's always a disaster happening so generally we try very hard to avoid market where where we are the like the only players in the market >> speaking of Nick Balters uh I spoke with him recently and I think we may have put a little bit of remark out there um that you might have said well this concerns me because I I think we we we said something like you know the last couple of years must have been really difficult to be a trend follow in fixed income simply because when you look at the uh the way at least the exposure that that I see in in our portfolios how they've gated from being very long to very short to being very long again um anyways um in in no means meant against you but no >> you may have felt it >> no so I actually really enjoyed that one so it is you have to articulate by the way to to um to your clients also. Why do you have just a fixed income focus? Right. Right. >> And of course um uh I think we'll come to Rob Carver. So I'm kind of a big believer in fixed income market. Um and of course you can um you can blame me because up until 3 years ago fixed income really was the best asset class in terms of performance and the last three years has been a disaster. So like the la the last three years >> in um trend in general was not particularly strong and fixed income in particular within that was even worse. >> Okay. And I and I'm not going to I'm not going to take a uh it's not a huge bet for me to take that I think you are probably down last year in fixed income. In fact I suspect most most managers are. Um but I think it shows the testament that what what specialization and attention to detail and trading different asset classes slightly differently in taking into account what's actually doing there um actually um can do so you know Safi has been trading for three years three positive years I mean we haven't done spectacularly well over three years we're like up 12% after fees but um uh but you know very few managers who have like a more generalistic and and and trend trade trend the same way across asset classes um would have had these numbers and um I think it's sort of it's kind of nice to launch a fixed income fund right when the tide goes out and you see people who are swimming without the swimming trunks on so I really don't mind and you know if that's the worst performance that we we have seen on fixed income then I'm fine with that and I'm looking forward for better times in in just in fixed income but to come to your question. It is about it is about providing the the allocators a better way to allocate, right? Again, you can just put the commodities together, you can put the bonds together, you can get something which is more diversified. Um, but different different investors are more interested in let's say global macro opportunity and that's kind of what Safi is doing. That's what they value. So, giving them different risk factors and the ability to allocate separately I think that's very valuable. We we may come to this point about uh whether you should trade this all markets the same or not uh later in our outline. Is there anything else you want to say about your uh own blog post? Um is there anything um that we can take away from it? Um you know inflation is uh persistent. Is that why the edge is following it and not trying to forecast it or you know um >> I I think >> or is it the acceleration that really is the key not necessarily the So, so let let me let me um let me uh talk about allocation in general, right? So, one of the problems that you have in allocation is that a lot of allocators try to time their allocation to the strategies. So, they say, "Oh, this is happening now. So, we allocating this, we're starting to, you know, it's very difficult. Um maybe if we have time, we can talk about a paper by Guppy um um Jose Pogo. he put out a way to maybe you can actually time your own strategies. Um it's just very difficult and it's very difficult for allocators to do it. I think stability and and offering something which is you know CPI plus 4% which should as as a sort of a building block for covering pretty much all historical situations like in the last 70 years with very little correlation to to equity in all CPI in all inflation environments. I think that's a very valuable things for for allocators and you don't have to worry anymore about whether you're going to predict inflation next year or not. >> Yeah. No, no, I completely agree. Now, you mentioned uh one of our other good uh co-hosts uh namely Rob Rock Rob Carver. Um ex I was I was I was going not going to say ex-friend of yours, but >> friendly friend >> ex-colague of yours and a good friend. No, it's >> and um and um he also put out a blog post that you wanted to uh um touch on. So I will hand it over to you. >> Yeah. So so so Rob put out a blog post because we've we've had a quite a few heated discussions about fixed income. What a surprise. He used to be a fixed income trader. I think it was in city before he went dark and went to the systematic university. So he was like a >> and um and in fact I followed in his footsteps. In fact our wives share birthdays. So it's like it's really kind of spooky a little bit and um and and I say well I think actually I can do better in fixed income than if I concentrate on on that then I can do better than just than just doing the full CTA. And and Rob of course is doesn't do doesn't do that. Rob trades sort of 200 futures and so forth. um and doing very well as well. So, you know, full kudos to to Rob. Um and he's he's always trying to to challenge me. Um so, he put out this this paper which is really really nice. And um an amazing thing about Rob is the speed at which he does research. He's like, and that was in the NHL. It took him, you know, he can he can prototype something very very quickly and get get to the heart of the problem. So, um so the the he does two things in this blog. The first bit is is he it he looks at carry and he says does carry add value you know how much carry does add value in into the asset class because of course I I like to trade fixed income I like to trade effects especially now when interest rates are you know there's a gradient of interest rates across different economies um and he says like how valuable is is carry historically and he he plots plots lots multiple asset classes and multiple markets and what he find is that uh if you were to look at the sharp of spot versus the sharp of what we trend follow is doing the sharp of the spot doesn't really explain what we what we get. It's a sort of it's a flat it's a flat feet and then it does the same thing for the carry returns and again it doesn't explain particularly well what we do and then you look at the sharp of the underlying asset total return series. So both carry and spot moves and trend obviously you get this smile effect that if the sharp of the underlying market is plus one you will get maybe point8 sharp into your um into your P&L of your trend following system and the same if the if the sharp is minus one you will get again 8 or thereabout and and in the second part of the paper he also observes that different asset classes do actually um perform differently. So if you have a if you have a sharp of one in your underlying asset, bonds and FX and metals seems to be actually producing very well and actually able to get 08 whereas equities are unable to essentially to harvest the underlying trend in the asset. So um and and both observation by the way I completely agree with um and I think is just in m like the first interpretation that I would like to put is is in terms of um the spot versus the carry. It's precisely what I say. What I say is that if we have an asset class which is essentially has got very little curry or it doesn't have curry at all then the spot doesn't really explain our on sharp and it's not a particularly good you don't actually perform particularly well. Um and I'm not saying that carry is like the be all and end all and if you have curry in your system you'll get a sharp 7. That's not the case. What we are trying to do is we're trying to take a market right if you think about what a CTA does this this sharp of a of a single market that we have maybe somewhere between 2 and 3 and then we diversify across our portfolio and that gives us a reduction of volatility of say 3 and a halfx and that gives an increase in the sharp of the overall portfolio. So my 02 sharp asset, if that's my average sharp and I multiply it by 3 and a half, I get a 7 sharp CTA. And that's that's that's really the mathematics of what what is going on here. And what I'm saying is carry just gives you this little extra, right? In terms of instead of the average being 2, the average is.3, right? I mean, and that when you multiply it by 3 and a half now gets me from, you know, to 1.05. 05 sharp and I kind of like that. So um so the question is you know do you want to tilt your portfolio to assets which are high carry in does carry explain this in the same way that I would might ask do I want to tilt my location to markets which right now are in uh supply shock or supply demand or the structural reason why why they they they are more likely to trend. Maybe there are more more physical players in the in the market. various reasons why we might think about it and the aim is not to get to say oh I'm taking my sharp from 0 2 to 7 the aim is to say can I tilt do we have historical reasons or fundamental under underlying reasons why we understand why there is why there is a trend and I think what is nice about his is his his his blog is that the answer is yes if you put if you if you look like just a spot market you get a you know you get a relatively mediocre sharp but if you do um if you have if you put the carry into the price time serious then you get a slightly higher one. So that's the first part of his paper and it's a really nice one. Uh the second one is even more interesting because he he just makes this observation and he doesn't he says well I don't really understand why equity seems to have trended worse right long only equity has been on on a tear right so if I look historically in the last I don't know I can't remember 30 years that he's looked at really nice sharp but trend hasn't performed that well and I think here is where a lot of people miss out in terms of the mathematics so first of all let's do the math mathematics and then we can talk about the fundamental reasons why different asset classes have it. So um I put out another paper with Adam Pedle about the mathematics of of trend following and you know most people say oh if there is a trend in the market you should be able to make money but actually the trend quality the autocorrelation of the underlying price is really important. trend is about auto positive autocorrelation and you will have markets where this autocorrelation is very muted in in equities it's actually negative um well at different times at different times and a different and a different horizons um but that negative autocorrelation translates into a lower performance so you're not able to harvest as a trend follower necessarily using a generic trend following m machinery you will be able to get less trend Right? Because the autocorrelation will basically means price goes up, you put in a position and then you suffer a day later when price comes back down. That's what negative autocorrelation means is like on a short-term basis up down up down up down. That's not particularly good for trend. Okay. And what is observed which is true is that in in fixed income we see in we see actually a much higher autocorrelation and that means that we're able to harvest it. So the the paper we put with Adam and and myself we actually did the mathematics for that and we kind of can calculate what is the worth what is 1% of a positive autocorrelation worth to you as a trend follower and then there's the second question which is a much more deeper question is like why are different markets you know different autocorrelation uh and I think here is uh is really a structural question which requires you to understand what's going on in terms of for example rebalancing inequities is in terms of value traders in equities in terms of day traders or zero day to expiry the option market in in so you have you have you have different players and they will have different dynamics that will feed into the price and once you understand that you can think about oh how do I modify my trend to be able to address the structural nature of the market and by the way the structure can change over time so it's not It's it's not it's a moving target but I think it's really important from our perspective is when you look at different asset classes like you know you can close your eyes and say yes I'm going to have an inventory system on the side but if you're saying I'm committed to trend I really want to trade trend then it's really important to you for you to understand okay what are the things that are structural in this market and how they play and how can I combine them into trend in a way that I'm still got this positive convexity, this trend dynamics, this beautiful risk management system and at the same time takes into account the physical nature of what the actual thing is and who the other players in the market are. So I think um it's a really great paper by Rob. I really enjoyed that. Um and I think I'm looking forward to uh another coffee with him uh later on um where we can discuss this build. >> So I have a question for you. It may sound very naive when I when I ask this um but I know I can ask it of you. Um so you say bonds have a higher autocorrelation. So I'm thinking well over what period because haven't we just had 40 years of falling interest rates and isn't that really the explanation as to why quote unquote the autocorrelation seems to be higher question. >> No absolutely. So um it varies over time. Okay. It it's it's as you say it varies over time and I think here is what um the alternative quote unquote comes into play is the idea um is you know safi trades about you know let's say north of 100 150 um markets but at any one time we will actually allocate only to meaningfully to only about 50 of those and the idea behind it is that when you know there certain characteristics of the market like curry where which contribute So for example, if you look at DM DM FX, okay, for many many years, it was doing really badly both as trend and as a carry asset because interest rates were zero. There was nothing there was no there was no what I would call like a a temperature gradient in that really caused prices to drift. Um you know if interest rate in the US is zero and in Europe is zero then really it's just sort of tenomic news sort of noise. But you know certainly in Ean market if I look at Turkey I think interest rates is like 38 or something percent. Okay. But let's we don't have to go to that extreme. Once you have different um different even in the DM space once you have different economies with different uh central banks who are trying to solve different for different things then you start getting this temperature gradients and suddenly it's becoming interesting and suddenly autocorrelation picks up and suddenly there's also drift and you can see why this is happening because you know Japanese investors would like to take their money and and and park it in the US and by the way this this is going away right so if we're looking at Japan There is no like the we started the year and we started 2025 with maybe 3% between 10 year or 20 year JGBs and USD and we finished the year with like one and a half% difference. So that is going to disappear and that's going to be less exciting to trade it to trade. So it's it's a training it's it's over time and different players and you just have to you know it's not that bonds are always going to be better. bonds are about fixed income right the bonds are about the coupon about carry about positive carry so I suspect there will be carry for many many years to come um but uh so they're not and they're not the only asset class that has carry um but I think it's important for us as investors as as as trend followers to recognize the different things which are very salient for each asset that we trend and to understand how that affects the dynamics and maybe you know don't you don't have to do like a different model for every market but broadly to understand what are the important characteristic of each one of your asset classes. >> Yeah. No, I like that you brought up the uh the Japanese example again towards the as we wrap up our conversation because actually I think uh Japan and what's happening there and the changes there is actually much more important than people uh may realize. Um this is a topic that we started talking to our good friend Dave Dredge about um uh two or three years Gemini and uh ago and um and it's actually even becoming even more important uh as time um goes out and and those conversations really people should go back to listen to that we had one out um not that long ago uh where where Dave and Jim uh talked about these things and uh super important um and hopefully we'll get him back uh again uh in the not too distant future to talk more about it. So anyways, I think um I think you have this is a perfect place to to wrap up for for today. Uh we just hit uh you know almost the hour mark and um super exciting to uh to dive into some of these topics that you found. I really appreciate all the hard work to uh uh that goes into uh the preparation of these conversations. Um, so thank you so much and actually I want to say to all the listeners um that if you uh if you want to show your appreciation um to Yo and to all of the other co-hosts um please go uh to your favorite uh podcast platform and leave a rating and review and also of course share the episodes with your friends and colleagues because it really does mean that more people discover the podcast and and benefit from uh these really super experts and and and experienced people uh who come on every week and and talk about these things. And actually just to reiterate what you started out by saying, you are you really should go back and listen to Bill White. Absolutely. And and Mark Ble uh speaking to uh to Alan because they were really outstanding. >> Much more eloquent than than than myself. >> No, it's always a pleasure. >> Yeah. No, absolutely. Thank you so much. Um next week I'll be joined by another expert um another fan favorite. Uh Katie Kaminsky uh will be back. Um, and I'm sure that will be an interesting uh conversation. Uh, it'll be timely. It'll be fun, insightful. Maybe she has another paper she's been writing since we last spoke to her. You never know. But you have a chance to answer to ask her questions and you can do that by emailing me at info@ toptradersunplug.com. And I'll do my very best to uh bring them up to uh Katie. So from your me, thank you ever so much for listening. We look forward to being back with you next week. And in the meantime, more important than ever, I think in this time we live in, take care of yourself and uh take care of each other. >> Absolutely. >> Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you. And to ensure our show continues to grow, please leave us an honest rating and review in iTunes. It only takes a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.
Building an Inflation-Proof Portfolio | Systematic Investor | Ep.384
Summary
Transcript
Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence or investment career to the next level. Before we begin today's conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. Here's your host, veteran hedge fund manager Neil's Krup Larson. Welcome or welcome back to this week's edition of the systematic investor series with Yorov Git and me Neils Castro Larsson where each week we take the pulse of the global markets through the lens of a rules-based investor of it is wonderful to be back with this with you this week in the new year. How are you doing? Have you had a successful start to 2026? >> Happy new year Neils. Uh yes, trend has been actually quite good this year this year or started at least this year. Um and we're going through, you know, a couple of big projects um in in in Gresham and it's it's it's a very very busy. So it's a very busy start for the year, but a very good one. >> Yeah. Always exciting. Excellent. Good. Well, we have also uh quite a few um wonderful uh topics to discuss thanks to uh what you brought along. Um so we'll be tackling them um in a few minutes. part before as usual we do that. Um I'm curious to hear what's been on your radar the last uh few weeks since uh since we caught up last time. >> Well, actually I'm going to talk a little bit about work because um inflation has been on my radar. So I'm going to plug I'm going to plug TTU. Um so wow >> I've been listening to uh Mark BL on um interviewing with Alan >> and also Bill White who spoke previously >> um and actually to be honest it gives me uh a bit of trepidation because following them these these are two beautiful podcasts really really good uh both talking about inflation about structural problems with US debt or UK debt in the case of Mark um and two very different uh points of view one of them is a much more social um what is the social impact of inflation uh from Mark and a much more conservative sort of uh Fed type of outlook on inflation from from Bill White. Uh but really really really interesting. So in fact I ordered um I listened to it last week. I ordered um inflation um a guide for users and losers by by Mark Ble and I've been reading it all night until about 3:00 a.m. last night. So, uh, a lot of fun there and it's it's really it's really enjoyable. >> Yeah. No, I mean I completely agree. Uh, I think Alan did a wonderful job. Uh, and the guests were just superb. I mean, Bill White, I I knew of, of course, we've had him on before. Mark was new to me. I have to say I really enjoyed it. And when I look at the comments that uh we've had uh and the engagement we've had on that episode uh that is just a sign of uh how much I think it uh kind of touched and how his um style actually touched uh people. Absolutely. So so I completely agree. These were wonderful conversations. We've got a lot of really great guests coming up by the way uh in the next uh few months that I already know of. So uh I would say stay tuned. >> Yeah. my do my daughter studies economics and maths and she was listening to him and she said he's really good and I said you know maybe I should adopt a a Scottish accent and and and my daughter bless her said maybe you should start learning an English accent first >> oh the kids they will they will tell us the truth right well I mean she's she's a she's a first class student so I really don't I really don't complain >> no absolutely well I mean I have to say that uh all of the talk about Greenland has taken up a lot of the space on on my personal uh radar in the last uh couple of weeks uh especially the last week or so. And you know on one side um you have the politics of the situation which is I think in a sense very regrettable to see how seemingly allied nations are just moving further apart. Um, of course this is somewhat emotional when it's Denmark on one side of the battle, but perhaps the bigger issue is that um, you know, when you look at it in and and we're seeing this in in front of our own eyes, we're just seeing a breakdown of trust. We're seeing a breakdown of tr what truth is. Um, and this is going to have a huge impact, I think, especially on the younger generations who may not have the same reference points as you and I have. >> So, I mean, this really feels like the fourth turning that Neil How has been writing about and who has of course been a guest on the podcast in the past and I'm happy to say that we're bringing Neil back in in early March um to see or or to hear what he sees uh now. Um, but then if I put on my purely uh, you know, investor hat and specifically my trend following hat, I can't help to be a little bit optimistic in terms of the opportunities that this fraction of the world may lead to in terms of market moves. And I really think that we may see many many unimaginable moves in the coming years where we of course have already seen a taste of this in recent uh years um maybe mostly in the commodity space but who's to say that we can't see huge move in financial markets if the world order really is breaking down. So, we're kind of back to what uh I said a number of years ago um and I said it many times that we as investors, we need to imagine the unimaginable um and that focusing on building robust portfolios that may not give you the highest returns but will give you um or will get you through the next five, seven years safely will be the key thing to focus on. And as I'm sure people listening to us today already know, I believe this can only be done by combining truly uncorrelated strategies and assets. So that's really what what I um sit back with and of course we know the the um the news flow is not over. Uh we don't even know where whatever we got from Davos last night uh where that's really going to land. These were just like headlines that sounded great and the markets reacted positively. But once they need to get down to the detail, who knows where this will end. But it doesn't change the fact that I think we unfortunately are are just witnessing um something really really negative for how the world operates. Um so um we'll we'll see how that plays out. >> Yes, indeed. Now, speaking of um trend following, um I think it is to fair fair to say that this week um has been a bit of a roller coaster um thanks to the uh geopolitical uh noise uh that we've been receiving. Um but I think for longerterm managers um that don't react on every single news item, it's probably been an okay week. Um, and then depending on how much you have exposed to markets like gold and silver in particular, but even also equities and perhaps the JDBs, that probably determines more or less how much you've been able to extract from these markets. But, you know, there are a few market events I think that are worth highlighting. Um I maybe u not everyone follows all the commodities but this last week net gas futures up 71%. Now this is purely driven by the fact that the US expects a massive cold weather front coming across uh the US starting in Texas and sweeping across to to the east. Um so nothing geopolitical about that. This is just how commodity markets tend to to move when there are some some big events. Um and that changes the supply and demand demand balance. Uh which this certainly uh will do. And then of course on the other side of the uh Atlantic um and maybe you know more about this than I do of course as with your focus on on fixed income but it feels like we've had like a little mini truss moment in Japan where yields really spiked up and suddenly we had 10ear JDBs at 241. Now, this is still far off the 7% that we saw back in the um in the 1990s before they dropped to about 1 and a half 2% I think in 1999. But you know this have an impact really big moves and you know not just in the JGBs but also in the yen. Um really big moves um actually can I add for to commodities like um carbon emissions have also been a a very very volatile market in in recent times. So commodities for different reasons as you said for different reason different risk factors um you get some really big moves and of course there's also gold and and precious metals as well. >> Yeah >> the usual suspects >> the usual suspects at the moment but but for very different reasons. I mean in the case of gold it's really the breakdown of uh the breakdown of trust in in fiat currencies. I mean if you look at Ray Delilo coming on like an interview and he says you've got to have gold in your portfolio. It's really quite uh really quite impressive. >> Yes. But as I said, I think this could also lead at some point to um to big moves in the financial markets if we really see a breakdown of some of these uh historical alliances and ties. Um so um watch this space I would say. Anyways, uh my trend barometer is picking up um a little bit of uh better conditions. It's uh finished yesterday at 50 which is uh a good um reasonably strong reading. Um and I think it ties in pretty well with what's going on in the um in in the in various indices. Um I have got some numbers as of Tuesday. Um but I think yesterday was a pretty good day uh from what I can tell from the early numbers. But anyways as of Tuesday the Btop 50 index was up 3.18% uh in January and therefore for 2026 uh stockg index up 3.46% 46% sucked in trend up 3.78% and the short-term traders index up 1.07% 07% and actually I also tend to follow I never talk about it I actually do follow also the sockgen trend indicator that's just flying I think it's up like something like that it's although it has had a rough time you know >> it's it's not particularly risk managed but so um it's a little bit all all over the place but it's having a hell of a day >> it is uh it's having a good time at the moment um anyways Msei World up one and a half uh% thereabouts so far this year Um and the US uh aggregate bond index pretty flat uh so far this month and then you have the S&P 500 total return is up about half a percent. So interesting start to to the month. Um now before we go on I just wanted to maybe ask you how markets trends look from your different lens than mine um so far this year. >> Oh I mean this year this year has really started well. I think um Japan is obviously a big story but there's you know there's trends in small countries like Taiwanese Taiwanese dollars interest rates there are trends in the US market actually you know but there's also trends in uh Turkish lera there there are a lot of trends everywhere so FX um FX EMFX has been very very good um and um credit has been choppy a little bit of course it rose a little bit at the beginning of the of the month. Um and then um there's been a small reversal and then it's coming back again. Uh all based on Trump news on this one. Um but uh the bond market is actually where there's a lot of interesting a lot of interesting issues. So you have the issue of debt and as you say in Japan there's there's concerns about the spending plans for the government um about the budget. So you see you see almost like a a route in the Japanese bonds and then you see uh rrooting because Japan holds a lot of US debt. So once the the gap between Japanese yields and US yield is closing it becomes actually better to that carry trade is kind of disappearing and you you see flows from US bonds back into Japan and that of course puts pressure on the US market. So you see the US tenure crossing 4.2 too. Um you see a little bit of a downtrend there as well. So um so it's very interesting at the moment for um in terms of debt management. Um and then of course the second question is inflation. Exactly what you said as you have a breakdown in trust between different parties. You see each country becoming more interested in securing its own supply chain >> and you see, you know, talking in the UK, we need to spend more on, you know, on on on on military >> on everything really. >> Yeah. But on everything. Um and and I think I think actually that's that's something that um that Bill uh Bill White spoke about in terms of we have a structural secular uh trends at the moment which are away from globalization uh structural trends which which will support inflation. You have a huge like transition from carbon based carbon based economy into metal based economy uh energy market. were talking about electricity and storage and and metal and um Bill was saying well it takes 20 years to build a mine >> and that that sort of uh impact basically means that price needs to do a lot of trend you know to to do a lot of the work so you will get start seeing a lot of trends in in commodity prices um all over the place um and that's one of the reasons for inflation right so if you look at what Mark Ble was talking about we tend to think about inflation as being driven by demand by just too much money chasing too few goods. Uh but actually it's a lot of it is at the moment it's being supply right in terms of uh gas in from the Russia um stopping in terms of um in in terms of supply chains being compromised um and we'll see a lot of the countries are sacrificing sacrificing the efficiency of of uh really super tight supply chains to try to a little get get more security because as you say trust is gone. >> Yeah. No, no, absolutely. I should know this Y, but do you trade in your product both fixed income and currencies or is it just the fixed income? >> So, so I I view I trade curry. So, I trade things. So, I well I try to I trade quite a lot of things but um >> uh I was responsible for both fixed income and um I'm trading in the portfolio of fixed income which which is like interest rate swaps, bonds, inflation linked bonds um but also FX. I think I view it as a almost a carry trade and uh also um credit. >> Okay, cool. Yeah. No, that's kind of what I gather from what your comments uh were. Okay, cool. Now, before I get to your first topic, let me just pluck something uh on my own and that is that we have just uh very recently published the 2026 version edition of the ultimate guide. Now, for those who don't know what the ultimate guide is, it's actually a kind of um uh a little booklet which has become pretty large now because uh what I've done is I've gone out and found uh along with my uh co-workers here uh 800 uh book titles uh sorry 600 book title. It's the eth edition but it's 600 book titles um that I think might be useful for people um for to read on different topics, different uh se categories. So, um, and there are essentially two ways for people to get, uh, the guide. Um, and it's a free, of course. Um, either if you're subscribed to my Sunday emails, you'll get it automatically, or uh, you can basically just go to the website toptradersunplug.com/ultimate and then there is a way for you to opt in and get it um, free of charge, of course. Anyways, speaking of great content free of charge, you should go to Y's LinkedIn profile because there's another good article from him. Uh, in corporation, I think with someone called Adam Pedal this time. Uh, I hope I pronounced that correctly. >> No, you pronounced perfectly. So, you know, Adam, Adam is a commodity side. So Gresham has got a a fixed income uh focused fund which is which is run by me and then on there's a commodity um there's a commodity fund. >> Sure. >> And Adam is a is a senior senior researcher there. >> Sure. Fantastic. >> So let let me tell you let me tell you what we did because I'm very excited. >> I was just going to say I I can't wait to hear what what it's all about. >> Right. So it's called the eras tool and you can tell that I'm a swifty. What we're thinking about is is inflation is precisely what Bill White is concerned about, what Mark BL is concerned about and I think a lot of investors are concerned about because that will really affect their bond their bond portfolio. And um they've taken a very economic, you know, an economist's view of what the problem is, but we kind of want to think about the solution. And we're trying to think about um sort of how does an allocator approach the problem of constructing a portfolio which will be robust in all weathers. And what we mean by all weathers, we think about regimes. We talk high inflation regime, rising inflation regimes. Okay, I don't think people are particularly concerned about falling or um low low inflation errors. I think that's that's that's not a problem at all. I do know someone who lives in a a house that is painted white that is very concerned about low inflation and um >> that's very true. That's very true. So um no but as as an investors I mean there are a few reasons why you're concerned about bonds at the moment in terms of debt of the US debt in terms of um but also in terms of inflation and what we what we try to do is to say okay let's look at um how do you construct an all weather portfolio uh and what I mean by all weather is a portfolio that will be consistent over different inflationary periods okay so um and the problem that you have is normally you would think okay my bu best building blocks, you start with equities and you start with bonds. And what you find is equities is is a great all weather growth portfolio. Uh the idea behind it is that um it will essentially return to you CPI plus something and that something varies depending on the you know conditions the growth of the economy. Um it will give you 0% essentially 0% in high inflation environments. So CPI plus 0 and it will give you CPI plus 10 or 12 or even 15. um in low um low CPI environments. So that's great and in between rising or falling inflation, it will give you just a little bit. But the problem that a lot of allocators have is with bonds because although bonds are great, you know, in in the periods that we've seen where um interest rates have been falling and interest rates are very low at zero and suddenly bonds are really doing great and also of course they've got negative correlation to equities. So it's it's a really great it's a really great idea to put them in your portfolio. And the problem is once you start looking at rising inflation, bonds start to underperform. They don't they no longer give you CPI plus, they start giving you CPI minus. And as you reach proper inflation, and I mean by proper inflation, I mean just 4 and a half%. you have a situation where bonds are not only negative quite quite strongly negative CPI minus big numbers but also they become much more correlated to equities so um so putting that in the portfolio actually makes it very difficult now obviously you don't really want to throw away bonds from your portfolio but how do you create a component which is stable over over different inflationary periods and what is very interesting is that the like commodities ities act as almost the negative the the mirror image of what bonds are in a sense that this is this is an asset class which does very well in inflationary time. Uh but commodities of course do very very poorly in environments of low in inflation. Uh but commodity trend actually is a great strategy for both inflationary times for the obvious reasons like what we see at the moment but also during low inflation times it has a little bit less drag a little bit of less of a negative carry. So what you do is if you put if you put like a a portfolio like simply a 50% commodities 50% bonds you get something which is truly all weather. What it does, it gives you CPI plus 4% in all environment regardless of whether what it's high inflation, low inflation. So in some sense, you don't have to worry about what is going to play out. It's very difficult to guess what the exact environment as you said events, random events can happen, lots of things can happen. You don't really know what you want. So you want a sort of a defensive portfolio as a starting as a building block, which is I don't I don't know if inflation is going to spike. I don't know if inflation is going to go down. CPI plus 4% all I need is like a 50% bonds and a 50% of commodity trend and that is really really quite interesting. It's a as a it's a tool for an investor. So normally we we try to sell you know we try to market uh to our uh investors uh CTAs as a truly diversifier um or maybe a little bit of convexity and a little bit of uh crisis alpha. Uh but that's sort of an equity story. I'm here trying to think about how can we create a defensive portfolio and it turns out that CTAs and in particular commodity CTAs really play into into bonds create a really nice building block for your allocation. So that's what the paper is about. >> So I have a couple of initial observations and you can dive dive dive deeper. Um the first thing I noticed uh in your um in your in your post was you have this chart that shows the different eras of inflation. You know the the low and the rising, the high and the falling. >> And I don't know what people think is the norm. Um but actually when I look at your data, it almost seems like they're equal in time. meaning that you have in the last 70 years or so you've had as much of rising inflation as you have had falling inflation even though we may not really remember uh much of that except for a short period of time uh after co most people will remember kind of falling or low inflation right um but it is interesting um and I guess it goes to your point about um how to build portfolios for for all environment environments because they they should I I well we don't know about the future but certainly historically in the last 70 years or so they tend to have uh as much uh of of one as they have of the other. So that's kind of one thing uh I wanted to touch on. The other thing I wanted to just touch on before I forget and that is you mention I I heard you say well uh this is kind of uh why we see commodities go up right now but people most people will say well hang on we don't have inflation right now of any significance so I just wanted to touch on that a little bit. No, absolutely. So the first point is that that we kind of cook the books a little bit. So we chose the boundaries for low inflation and high inflation. So that the the data spends 25% of >> the time like roughly 25% of the time below 2% and roughly 25% of the time below four and a half. We needed like round numbers. So that's that. And actually what you find is interesting is that it spends more time coming down. Even though like it's a symmetric, you know, it should be once you've once you've declared both upper and lower bounds, inflation spikes much more quickly and um and then takes a little bit longer to come down. So it actually spends a little bit more time coming down. It's it's stickier and that kind of translate into different economic policy as well. So what we've seen since the 70s, we've seen um the Fed essentially overshooting um having a much more um much higher real borrowing rates. So borrowing Fed funds less inflation on the way down because it's trying to control inflation. Um so but but but that's that's less less less of an issue. So in a way we cook the book. In fact, we can go back all the way to 1920s. There's there's good data um for this going back all the way to 1920s. then you have to start dealing with like slightly dodgier data and slightly World War II and so forth. Uh but yes, absolutely people don't appreciate that you know um that nice era from Paul Vulkar in sort of the early ' 80s all the way to Gellen. Um you know that has that has been an interesting period but it's it's not necessarily the you know it doesn't cover the full history. uh I think Jem uh always talks about you know when you look at equity returns when you look at bond returns you really need to start thinking about what what it looks like what it looks like in a in a deep past the second point is yes that in fact one of the reasons why we haven't seen necessarily commodity trends uh strong commodity trends is because we've been between COVID and the Ukraine we've seen falling inflation and falling inflation is actually kind of bad for uh commodity trend um And you know that that's going historically and and we can see that in the data as well. Uh but we are beginning to see trends and these are to do with the way that inflation is coming online and what and it is about it is really about um supply supply constraints and supply shocks um which which induce which induce uh trends. So if you talk about if you talked about natural gas um if you have less storage and if you have a constraint supply of natural gas suddenly when there is a cold spell in the US suddenly you're going to start seeing big big trends in in natural gas for example. So, if I understand you correctly, what you're saying is, or maybe you're not saying it, but what I'm hearing is um that inflation actually, unlike what some um people want, um is actually not going to come down. Um and what we see in the commodity markets is kind of the pre-warning that inflation should inflation numbers, I should say, should be picking up. Um, is is that what you're saying that we're that the markets are ahead of time here? >> So, I I'm saying that there are multiple reasons why you should be concerned about inflation. I I really we're not economist and even if we were economist, I think trying to make a prediction is always difficult. As you said, it's the events overtake events really overtake your your your what you think is going to happen, right? Um but there are certain certainly issues in terms of um quite a relaxed monetary policy actually in it in a sense that um real rates are at 1% or so. So so CPI is is nowhere near is nowhere near what the the Fed target is at 2%. And yet we see uh we've we've seen drop in uh the Fed rates over the last over the last year. So the Fed has started as like has ended it the cycle. sort of thing, you know, it took it it took rate from zero to four and a half and now it's been taking it down consistently even though inflation is really not not uh not a target. So certainly um the Fed is very accommodating. Certainly US debt is sitting at 30 trillion. Uh financing that debt is now costing the US about a trillion a year which is enormous. I mean 10 years ago it would have been like 250 billion. It's it's it's one of the big ticket item at the moment for um the US balance. You know, it's it's it's insane. Um so there are many good reasons why we are likely to see inflation coming on. But on the supply side, all the all the things that we discussed in terms of um secular trends in each country like del globalization, tariffs, all of those are things that drive um sort of supply shocks on, you know, on the commodity side and yes, these are drivers of inflation. So these are things to be concerned about but like you know I'm not saying they're going to to to to happen but what I am saying is if you were to look at a mixed portfolio of bonds and commodity trend what you get is something which is resilient to either environment so that if what happens you know everything is everything is hunky dory and that's and and maybe inflation is coming down and I'm completely wrong then great bonds will do well for you. Conversely, if inflation is going to be picking up and you're going to get high inflation, great. Commodity trend will do well for you together. You have a portfolio which is actually quite resilient to all environment and that's what I call all all weather defensive portfolio. when you talk about commodity trend because I know this first came up in a paper um a few years ago uh and uh the author uh name escaped me well-known uh volatility uh manager um who um uh who later uh closed down his fund um but he wrote some really great papers um and and he building this 100year portfolio if you couldn't change your portfolio for 100 years how would you build and he introduced this commodity trend but I've never never quite fully understood whether when people talk about that do they mean trend following only on commodities because you are not going to find many maybe with the exception of your firm that does only commodities as trend following I mean we all try to combine it with some trends in financial markets that seems to work better as a as certainly as a standalone portfolio um so when you say commodity trend in your paper are you meaning trend following on just commodities or you >> Yes absolutely so so and and actually very standard become um type of commodities I mean it's absolutely true right if you are managing a a standalone fund >> Mhm. >> then it may be easier for you to put together both financial assets and commodities and because from your perspective you're going to get you might think that you get a better diversification. In fact, that's not necessarily the case. I mean, I think we all know that commodities are a great diversify and you can create a very diversified commodity standalone um trend and but the way you think we think about it is in terms of what is the utility that we give to the allocators, right? So, it might be that you from your perspective you think oh it will be better to shove it all together and some investors want that. They want just give me the best version of trend. So you can combine the you know both financial and the physical trend. >> Um but some investors really appreciate a lot of the people that's um allocate just to the commodities they think about inflation and about real assets and about how that kind of combines in the sort of asset class universe. So they really appreciate our different risk factors. Um and also we kind of train trade it slightly differently. So each each asset class we kind of think about exactly how it does. So you know the way I trade fixed income is slightly different to the way um we do things commodity because you have to think about the physical attributes of the asset class um in terms of what you know supply shocks in commodity is not really relevant in in in fixed income. What springs to mind when I hear you talk about that and obviously these this is uh your analysis and um and you come up with this idea of saying well actually if you combine commodity trend with uh with fixed income um then this is really a great um a great combination and I'm immediately thinking about a country that I've been trying to um get interested in trend following for a long time and where they have a lot of fixed income and that's Germany but at the same time most institutions will not invest in anything that has commodities in it. >> Oh. >> Yeah. So, so it's it's very interesting that you might have a country in here in Europe where they really should be thinking uh about combining what they have with commodities yet um for many different reasons which we don't have to get into right now. Um most of them say no, can't do that, won't do that. >> Yeah. Um I think the usage regulation and actually the aversion to commodities in general um rooted in the past. Um but uh >> no I'm not even talking about usage. In usage you can use commodities. That's not the problem. It's actually investing in anything that has commodities inside it. >> Oh my god. Yeah. Yeah. Well um what can I say? Um I completely agree. I I think commod I think commodities are a beautiful diversifying asset class. >> Yeah. Uh and I think that the dynamics are very very different to the dynamics in the financial universe. Um and and you're talking about diversification, it's a really true diversification and it's really nice to see a portfolio which you can get diversification both in terms of what type of commodity uh you know things are not funible. So oil this year is not the same as oil next year. Um you know um the crop this year or the crop next year are affected by different things. So you can you can get uh temporal um dislocations, you can get different geographical um differences, you can get uh you know you can get a 61% iron ore trading differently to the 65% iron ore. So there there's a lot of there's a lot of fun in commodities really a very great diversifier and it would be a shame not to not not to allocate to it. No, it will be a shame. And a lot of these um how should I say push backs comes from um philosophical beliefs is the best word I can come up with in terms of what um we as managers may or may not do to commodity prices um and and therefore they can't support it. Um but it's a little bit like the discussion um that you see from time to time about people investing in the green transition where a lot of pension funds have um did well initially when green was um you know very popular uh the last two or three years that's not been the case and so those portfolios have certainly been underperforming more traditional portfolios and and I heard the discussion once with the um uh the CEO of the largest uh public pension plan in in Denmark actually where he was asked but what really is the mandate is the mandate for you to be investing for the green transition or is the mandate for you to get pensioners in Denmark the highest possible return and I think from memory he said well when you put it like that it is our job to get people the best possible long-term return for their pensions and so you could kind of argue the same maybe uh when it comes to German investors who say no we won't do that um if you can you know show evidence that actually no you should do this because it will give you uh a better outcome at the end of the day I >> I think it's yeah I think it's not necessarily just that I mean if you think about okay we we're trend followers so we're quite agnostic the way the price goes >> but what we do we do provide liquidity in markets which are just emerging >> uh and are part of that green transition So if we think about the lithium contract right so there used to be some lithium contracts in uh the US uh in Europe uh there was no there was no liquidity there and the reason why there was no liquidity is because the the type of lithium that it was trading was nothing to do with the type of lithium that was used for batteries. So the physical players didn't really use that those those contracts in the US and then suddenly you see the Chinese market there was a lithium contract and you know an explosion in in volumes because hedgers really needed somehow to pre-sell essentially the the lithium production and we as as trend followers I mean we don't really um we don't really determine the price but what we do do is we provide liquidity in the market. So we do actually got involved in that market very early on um and and that's sort of a positive thing um in a way. So I think that trend followers as as uh market participants in and providers in liquidity in markets which other funds might be more reluctant to get involved in um and where we kind of try to give those risk factors because these are very diversifying right sort of greenification is is a different risk factor to the rest of the economy. Um I think I think it is actually contributing. I mean actually to give a practical example for those who are new to the show um we discussed it back then but but just to to remind people I think a lot of people had the impression that when cocoa prices exploded a few years ago um systematic managers and hedge funds we were to blame um and we bit up the price uh in 2024 and and and and so on and so forth. Um, but just as a reminder, actually CTAs, there will be a few exceptions, but most CTAs, I would argue, first of all, got long cocoa uh in early 2023, I think from memory, and they were um they were they had all the exposure they needed before prices really took off uh in 2024, and as the market exploded higher, they were the ones selling Absolutely. >> into the rally because of of of risk management. Exactly. >> Exactly. So Yeah. But but even even without this argument, I think it's important to appreciate that the CTA industry is actually not that big. It's not big enough to really do that. So um we're trading the sort of the CTA industry is like what 300 billion uh give or take um at the last count a little bit higher now because the trend has been doing very well for the last 6 months. But also you have we have to remember that a lot of things that do use trend like for example the QIS desks uh that Nick Bolters run they don't report their AUM. So I think I think it is bigger than than what we think it is. >> That that is very true. So um so there is a well first of all don't blame us for the QIS right clients want that. No but but you're absolutely right. There's like maybe 300 to another 300 or so in the Q universe or thereabout. Um but you know if you think about the S&P market it's it's like 50 50 odd trillion 56 trillion I think. So um you know a little bit of perspective in this we are we are significant players in some commodity markets and I think one that is an issue >> um and I think the the careful CTA manager will try to take that into account and actually try to be um to be less present in the market because we actually don't like to trade against ourselves. uh one of the big indicators for poor performance of trend is actually oh you're trading against yourself that's always a bad that's that's always a disaster happening so generally we try very hard to avoid market where where we are the like the only players in the market >> speaking of Nick Balters uh I spoke with him recently and I think we may have put a little bit of remark out there um that you might have said well this concerns me because I I think we we we said something like you know the last couple of years must have been really difficult to be a trend follow in fixed income simply because when you look at the uh the way at least the exposure that that I see in in our portfolios how they've gated from being very long to very short to being very long again um anyways um in in no means meant against you but no >> you may have felt it >> no so I actually really enjoyed that one so it is you have to articulate by the way to to um to your clients also. Why do you have just a fixed income focus? Right. Right. >> And of course um uh I think we'll come to Rob Carver. So I'm kind of a big believer in fixed income market. Um and of course you can um you can blame me because up until 3 years ago fixed income really was the best asset class in terms of performance and the last three years has been a disaster. So like the la the last three years >> in um trend in general was not particularly strong and fixed income in particular within that was even worse. >> Okay. And I and I'm not going to I'm not going to take a uh it's not a huge bet for me to take that I think you are probably down last year in fixed income. In fact I suspect most most managers are. Um but I think it shows the testament that what what specialization and attention to detail and trading different asset classes slightly differently in taking into account what's actually doing there um actually um can do so you know Safi has been trading for three years three positive years I mean we haven't done spectacularly well over three years we're like up 12% after fees but um uh but you know very few managers who have like a more generalistic and and and trend trade trend the same way across asset classes um would have had these numbers and um I think it's sort of it's kind of nice to launch a fixed income fund right when the tide goes out and you see people who are swimming without the swimming trunks on so I really don't mind and you know if that's the worst performance that we we have seen on fixed income then I'm fine with that and I'm looking forward for better times in in just in fixed income but to come to your question. It is about it is about providing the the allocators a better way to allocate, right? Again, you can just put the commodities together, you can put the bonds together, you can get something which is more diversified. Um, but different different investors are more interested in let's say global macro opportunity and that's kind of what Safi is doing. That's what they value. So, giving them different risk factors and the ability to allocate separately I think that's very valuable. We we may come to this point about uh whether you should trade this all markets the same or not uh later in our outline. Is there anything else you want to say about your uh own blog post? Um is there anything um that we can take away from it? Um you know inflation is uh persistent. Is that why the edge is following it and not trying to forecast it or you know um >> I I think >> or is it the acceleration that really is the key not necessarily the So, so let let me let me um let me uh talk about allocation in general, right? So, one of the problems that you have in allocation is that a lot of allocators try to time their allocation to the strategies. So, they say, "Oh, this is happening now. So, we allocating this, we're starting to, you know, it's very difficult. Um maybe if we have time, we can talk about a paper by Guppy um um Jose Pogo. he put out a way to maybe you can actually time your own strategies. Um it's just very difficult and it's very difficult for allocators to do it. I think stability and and offering something which is you know CPI plus 4% which should as as a sort of a building block for covering pretty much all historical situations like in the last 70 years with very little correlation to to equity in all CPI in all inflation environments. I think that's a very valuable things for for allocators and you don't have to worry anymore about whether you're going to predict inflation next year or not. >> Yeah. No, no, I completely agree. Now, you mentioned uh one of our other good uh co-hosts uh namely Rob Rock Rob Carver. Um ex I was I was I was going not going to say ex-friend of yours, but >> friendly friend >> ex-colague of yours and a good friend. No, it's >> and um and um he also put out a blog post that you wanted to uh um touch on. So I will hand it over to you. >> Yeah. So so so Rob put out a blog post because we've we've had a quite a few heated discussions about fixed income. What a surprise. He used to be a fixed income trader. I think it was in city before he went dark and went to the systematic university. So he was like a >> and um and in fact I followed in his footsteps. In fact our wives share birthdays. So it's like it's really kind of spooky a little bit and um and and I say well I think actually I can do better in fixed income than if I concentrate on on that then I can do better than just than just doing the full CTA. And and Rob of course is doesn't do doesn't do that. Rob trades sort of 200 futures and so forth. um and doing very well as well. So, you know, full kudos to to Rob. Um and he's he's always trying to to challenge me. Um so, he put out this this paper which is really really nice. And um an amazing thing about Rob is the speed at which he does research. He's like, and that was in the NHL. It took him, you know, he can he can prototype something very very quickly and get get to the heart of the problem. So, um so the the he does two things in this blog. The first bit is is he it he looks at carry and he says does carry add value you know how much carry does add value in into the asset class because of course I I like to trade fixed income I like to trade effects especially now when interest rates are you know there's a gradient of interest rates across different economies um and he says like how valuable is is carry historically and he he plots plots lots multiple asset classes and multiple markets and what he find is that uh if you were to look at the sharp of spot versus the sharp of what we trend follow is doing the sharp of the spot doesn't really explain what we what we get. It's a sort of it's a flat it's a flat feet and then it does the same thing for the carry returns and again it doesn't explain particularly well what we do and then you look at the sharp of the underlying asset total return series. So both carry and spot moves and trend obviously you get this smile effect that if the sharp of the underlying market is plus one you will get maybe point8 sharp into your um into your P&L of your trend following system and the same if the if the sharp is minus one you will get again 8 or thereabout and and in the second part of the paper he also observes that different asset classes do actually um perform differently. So if you have a if you have a sharp of one in your underlying asset, bonds and FX and metals seems to be actually producing very well and actually able to get 08 whereas equities are unable to essentially to harvest the underlying trend in the asset. So um and and both observation by the way I completely agree with um and I think is just in m like the first interpretation that I would like to put is is in terms of um the spot versus the carry. It's precisely what I say. What I say is that if we have an asset class which is essentially has got very little curry or it doesn't have curry at all then the spot doesn't really explain our on sharp and it's not a particularly good you don't actually perform particularly well. Um and I'm not saying that carry is like the be all and end all and if you have curry in your system you'll get a sharp 7. That's not the case. What we are trying to do is we're trying to take a market right if you think about what a CTA does this this sharp of a of a single market that we have maybe somewhere between 2 and 3 and then we diversify across our portfolio and that gives us a reduction of volatility of say 3 and a halfx and that gives an increase in the sharp of the overall portfolio. So my 02 sharp asset, if that's my average sharp and I multiply it by 3 and a half, I get a 7 sharp CTA. And that's that's that's really the mathematics of what what is going on here. And what I'm saying is carry just gives you this little extra, right? In terms of instead of the average being 2, the average is.3, right? I mean, and that when you multiply it by 3 and a half now gets me from, you know, to 1.05. 05 sharp and I kind of like that. So um so the question is you know do you want to tilt your portfolio to assets which are high carry in does carry explain this in the same way that I would might ask do I want to tilt my location to markets which right now are in uh supply shock or supply demand or the structural reason why why they they they are more likely to trend. Maybe there are more more physical players in the in the market. various reasons why we might think about it and the aim is not to get to say oh I'm taking my sharp from 0 2 to 7 the aim is to say can I tilt do we have historical reasons or fundamental under underlying reasons why we understand why there is why there is a trend and I think what is nice about his is his his his blog is that the answer is yes if you put if you if you look like just a spot market you get a you know you get a relatively mediocre sharp but if you do um if you have if you put the carry into the price time serious then you get a slightly higher one. So that's the first part of his paper and it's a really nice one. Uh the second one is even more interesting because he he just makes this observation and he doesn't he says well I don't really understand why equity seems to have trended worse right long only equity has been on on a tear right so if I look historically in the last I don't know I can't remember 30 years that he's looked at really nice sharp but trend hasn't performed that well and I think here is where a lot of people miss out in terms of the mathematics so first of all let's do the math mathematics and then we can talk about the fundamental reasons why different asset classes have it. So um I put out another paper with Adam Pedle about the mathematics of of trend following and you know most people say oh if there is a trend in the market you should be able to make money but actually the trend quality the autocorrelation of the underlying price is really important. trend is about auto positive autocorrelation and you will have markets where this autocorrelation is very muted in in equities it's actually negative um well at different times at different times and a different and a different horizons um but that negative autocorrelation translates into a lower performance so you're not able to harvest as a trend follower necessarily using a generic trend following m machinery you will be able to get less trend Right? Because the autocorrelation will basically means price goes up, you put in a position and then you suffer a day later when price comes back down. That's what negative autocorrelation means is like on a short-term basis up down up down up down. That's not particularly good for trend. Okay. And what is observed which is true is that in in fixed income we see in we see actually a much higher autocorrelation and that means that we're able to harvest it. So the the paper we put with Adam and and myself we actually did the mathematics for that and we kind of can calculate what is the worth what is 1% of a positive autocorrelation worth to you as a trend follower and then there's the second question which is a much more deeper question is like why are different markets you know different autocorrelation uh and I think here is uh is really a structural question which requires you to understand what's going on in terms of for example rebalancing inequities is in terms of value traders in equities in terms of day traders or zero day to expiry the option market in in so you have you have you have different players and they will have different dynamics that will feed into the price and once you understand that you can think about oh how do I modify my trend to be able to address the structural nature of the market and by the way the structure can change over time so it's not It's it's not it's a moving target but I think it's really important from our perspective is when you look at different asset classes like you know you can close your eyes and say yes I'm going to have an inventory system on the side but if you're saying I'm committed to trend I really want to trade trend then it's really important to you for you to understand okay what are the things that are structural in this market and how they play and how can I combine them into trend in a way that I'm still got this positive convexity, this trend dynamics, this beautiful risk management system and at the same time takes into account the physical nature of what the actual thing is and who the other players in the market are. So I think um it's a really great paper by Rob. I really enjoyed that. Um and I think I'm looking forward to uh another coffee with him uh later on um where we can discuss this build. >> So I have a question for you. It may sound very naive when I when I ask this um but I know I can ask it of you. Um so you say bonds have a higher autocorrelation. So I'm thinking well over what period because haven't we just had 40 years of falling interest rates and isn't that really the explanation as to why quote unquote the autocorrelation seems to be higher question. >> No absolutely. So um it varies over time. Okay. It it's it's as you say it varies over time and I think here is what um the alternative quote unquote comes into play is the idea um is you know safi trades about you know let's say north of 100 150 um markets but at any one time we will actually allocate only to meaningfully to only about 50 of those and the idea behind it is that when you know there certain characteristics of the market like curry where which contribute So for example, if you look at DM DM FX, okay, for many many years, it was doing really badly both as trend and as a carry asset because interest rates were zero. There was nothing there was no there was no what I would call like a a temperature gradient in that really caused prices to drift. Um you know if interest rate in the US is zero and in Europe is zero then really it's just sort of tenomic news sort of noise. But you know certainly in Ean market if I look at Turkey I think interest rates is like 38 or something percent. Okay. But let's we don't have to go to that extreme. Once you have different um different even in the DM space once you have different economies with different uh central banks who are trying to solve different for different things then you start getting this temperature gradients and suddenly it's becoming interesting and suddenly autocorrelation picks up and suddenly there's also drift and you can see why this is happening because you know Japanese investors would like to take their money and and and park it in the US and by the way this this is going away right so if we're looking at Japan There is no like the we started the year and we started 2025 with maybe 3% between 10 year or 20 year JGBs and USD and we finished the year with like one and a half% difference. So that is going to disappear and that's going to be less exciting to trade it to trade. So it's it's a training it's it's over time and different players and you just have to you know it's not that bonds are always going to be better. bonds are about fixed income right the bonds are about the coupon about carry about positive carry so I suspect there will be carry for many many years to come um but uh so they're not and they're not the only asset class that has carry um but I think it's important for us as investors as as as trend followers to recognize the different things which are very salient for each asset that we trend and to understand how that affects the dynamics and maybe you know don't you don't have to do like a different model for every market but broadly to understand what are the important characteristic of each one of your asset classes. >> Yeah. No, I like that you brought up the uh the Japanese example again towards the as we wrap up our conversation because actually I think uh Japan and what's happening there and the changes there is actually much more important than people uh may realize. Um this is a topic that we started talking to our good friend Dave Dredge about um uh two or three years Gemini and uh ago and um and it's actually even becoming even more important uh as time um goes out and and those conversations really people should go back to listen to that we had one out um not that long ago uh where where Dave and Jim uh talked about these things and uh super important um and hopefully we'll get him back uh again uh in the not too distant future to talk more about it. So anyways, I think um I think you have this is a perfect place to to wrap up for for today. Uh we just hit uh you know almost the hour mark and um super exciting to uh to dive into some of these topics that you found. I really appreciate all the hard work to uh uh that goes into uh the preparation of these conversations. Um, so thank you so much and actually I want to say to all the listeners um that if you uh if you want to show your appreciation um to Yo and to all of the other co-hosts um please go uh to your favorite uh podcast platform and leave a rating and review and also of course share the episodes with your friends and colleagues because it really does mean that more people discover the podcast and and benefit from uh these really super experts and and and experienced people uh who come on every week and and talk about these things. And actually just to reiterate what you started out by saying, you are you really should go back and listen to Bill White. Absolutely. And and Mark Ble uh speaking to uh to Alan because they were really outstanding. >> Much more eloquent than than than myself. >> No, it's always a pleasure. >> Yeah. No, absolutely. Thank you so much. Um next week I'll be joined by another expert um another fan favorite. Uh Katie Kaminsky uh will be back. Um, and I'm sure that will be an interesting uh conversation. Uh, it'll be timely. It'll be fun, insightful. Maybe she has another paper she's been writing since we last spoke to her. You never know. But you have a chance to answer to ask her questions and you can do that by emailing me at info@ toptradersunplug.com. And I'll do my very best to uh bring them up to uh Katie. So from your me, thank you ever so much for listening. We look forward to being back with you next week. And in the meantime, more important than ever, I think in this time we live in, take care of yourself and uh take care of each other. >> Absolutely. >> Thanks for listening to Top Traders Unplugged. 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