The Strategy That Thrives When Markets Panic | Systematic Investor | Ep.403

Summary

• Managed Futures: Extensive discussion on why managed futures belong in portfolios as “second responders,” delivering diversification and crisis alpha across prolonged dislocations.
• Trend Following: Emphasis on the adaptability, diversification, and no-bias design of trend strategies, particularly effective amid shifting macro regimes.
• Geopolitical Risk: Evidence-backed link between rising geopolitical risk and subsequent inflation, with managed futures benefiting as multi-asset trends emerge.
• Commodities & Energy: Repeated focus on commodity-led moves (especially energy) during shocks; these markets often drive CTA gains when inflation pressures surface.
• Fixed Income Headwinds: Ongoing uncertainty around “higher for longer” complicates bond trends, yet contributes to the broader opportunity set for trend systems.
• Short-Term Trend: Shorter-term trend can complement long-term systems by offsetting early transition losses, but demands heavy execution investment to overcome costs.
• Portfolio Construction: Avoid performance chasing and fragile mean-variance optimization; prefer diversified multi-manager, equal-risk, and volatility targeting approaches.
• Market Context: Correlation structures are atypical (AI growth vs. higher rates, energy strength), creating a dynamic environment where trend models can thrive.

Transcript

[music] Welcome to Top Traders Unplugged. In markets, success doesn't come from predicting what happens next. It comes from being prepared for what you can't predict. In each episode, we [music] go deep with some of the world's most thoughtful minds in investing, economics, and beyond to understand how [music] they think, how they prepare, and how they decide, and the experiences that shaped how they see the world. No noise, no shortcuts, just real conversations to help you think better and invest with confidence. [music] Welcome and welcome back to this week's edition of the systematic investor series with Katie Kaminsky and I, Neils Castroen, where each week we take the polls of the global market through the lens of a rules-based investor. This week we have a very special guest, namely Marat Mulliba, chief risk officer, director of research at efficient capital management, who is here to discuss some of his recent papers as well as some of Katie's recent papers. So uh there will be lots of things to dig into, but uh first of all, Katie and Morat, it's great to have you both here. How are you doing? Is is summer starting to set in where where you are? >> Sort of. I mean, we're we're getting there. We've had a very cold year this year in Boston. We had lots of snow and for some reason it rains every weekend, but you know, it's beautiful on a It's Thursday today. So, [laughter] >> yeah. Remind us, Morat, where you uh where are you based? >> Uh Chicago land. And and as you know, in Chicago land, the weather is very volatile. It gets really cold in the winter, really hot in the summer. So, we're fortunate to enjoy uh the nice two weeks of the year. [laughter] >> That's good to hear. Now, Morat, since it's your first time on the podcast, uh probably no surprise, I would love to uh see if you could just share with the audience a little bit of your journey into the CTA world. Uh what kind of caught your interest back then and also um how you ended up at Efficient Capital and put a few words maybe to what you focus on in your current role. >> Sounds good. Well, as you mentioned earlier, uh my name is Morat Moly Boga. I'm the chief risk officer and director of research at efficient capital management. Uh the company's been around for over 25 years and we have been specializing in building customized multi-manage solutions for institutional investors. We allocate about three and a half billion dollars to primarily commodity trading advisors and uh as a firm we believe that investment decisions that are based on rigorous research will lead to better outcomes. We also believe that we are human beings just like anybody else and we are susceptible to behavioral biases uh such as performance chasing and hindsight bias. Uh and therefore our CIO uh Chad Martinson designed an investment process that is supposed to mitigate a lot of those biases. So let me give you a couple of examples. uh one for every single manager we have an investment thesis that is regularly tested. Uh another example is that we measure record our decisions and we measure their effectiveness and we also rely on data to determine whether we have edges in certain areas. Uh for example, we've been selecting managers for over 25 years. At the same time, we recognize that we have no skill in predicting which one of 10 constituents of the seg trend index is going to outperform everybody over the last of the next 12 months. Uh we also very competitive because we care about the performance of our investors and uh Chad Martinson or our CIO, he always preaches about the importance of precious basis points that can help us improve performance for our clients. Uh a couple of things about myself. Uh you might have noticed that I have an accent. Uh it's because I grew up in Ukraine. Uh so if I say something funny, it's just because I'm a foreigner. [laughter] That should be normal. Uh my background is in applied mathematics. Uh I am a nerd just like Katie and I love talking to people like Katie and you Neil's because you guys are always asking deep questions about what investors truly care about. So I I love learning from people like you and I also I feel very fortunate to work with people at efficient because uh everybody on the investment team is very competitive but also very competent and also very humble at the same time which is a pretty unique uh combination. >> Absolutely. Yeah. No, good stuff. It's great to have you here. It's great to hear a little bit of the background um as we get into uh a lot of uh hopefully um detailed and deep dives um today. Now, before we get into any of this good stuff, um as as Katie knows and and I know Morat, we we spoke about it just a few minutes ago, I actually love to start with something that has nothing to do with the topics that we're going to talk about. and that is kind of things that might have come on your radar in the last few weeks or something you're looking forward to or whatever it may be. So since uh yeah, since Katie have and and I've done it many times, I'll I'll give you the floor first if there's anything in particular that you're finding interesting um as as we start the the month of June. >> I mean, this is a good question. I know we always talk about soccer, so I guess we can go there. But I was thinking about something funny that we were talking about yesterday over the lunch table at at Alba Simplex is that we were talking about the World Cup and everybody in Boston is talking about the World Cup and all the crazy things that are going to happen. Um, and one of my colleagues was mentioning that they're trying to extend the bar hours until 3:00 a.m. which, you know, I don't know about you guys, but that basically has zero impact on my life. But um what was funny to me is that I was immediately thinking like who is going to work those hours because everybody keeps talking about supply, you know, supply crunch and the job market and all this stuff. So um sort of a combination of things. I think things are going to get a little exciting here in Boston and everybody is sort of wondering what the impact of this big event is going to be. >> Absolutely. I I have a feeling, Morat, that you probably were also thinking a little bit about uh soccer as as you would call it um as we head into this uh exciting time. So, uh what what what are you thinking here? >> Well, as somebody who grew up in Ukraine, I have to be a fan of soccer because uh outside of studying, everybody just goes outside, kicks a soccer ball. Uh unfortunately, I did not spend a lot of time as a kid. I don't think I was uh coordinate coordinated enough, but I really fell in love with soccer. My own kids started playing in kindergarten and uh we've been following soccer since then. Uh two of my girls have already retired at the ages of uh seven and 10 when they got reached those ages. Uh but my son who is 16 is still playing and as a family we love watching watching soccer. Uh I think the reason I'm really excited about uh uh the World Cup is because um it's pretty amazing to see uh so many talented people who are taking pride in representing their country and uh they really care about the result. I think that sometimes when you watch uh professionals it's not the same level of uh uh passion that you see in the World Cup. It's just such a passionate uh such a passionate environment. I think there are some very unique things happening this this time. For example, there are three players uh Lionel Messi, Cristiano Ronaldo, and also the Mexican goalkeeper who are playing in their sixth World Cup, which is pretty phenomenal. And the Mexican goalkeeper is so good that there's a rumor that he has six fingers. And I decided to fact check that yesterday. So, looked it up and I found out that was actually a false rumor. Uh so, I need to apologize for bringing this up. But he's just so good that people come out with all sorts of rumors about him. >> That's amazing. >> Um and uh I am pretty excited to watch uh you know the US of course, but also there are so many fantastic teams uh like Spain and Portugal and France and Brazil. I'm pretty excited about uh Morocco because they made it pretty far last last time and I'm hoping that this time like an African team will make it further. But my biggest concern about this World Cup uh to be frank with you is that um I think that it could have been so much better if two teams made it. I think that uh Ukraine and Denmark would have made all the difference. Uh so I'm really hoping that they're going to join the World Cup next. Yes. >> So my household is happy. I think Neil didn't want to talk about this, but that's fine. [laughter] >> Yeah. No, of course we feel very uh you know disappointed that we didn't make the World Cup. >> Norway is in it, too. Don't forget Norway. >> Yeah. >> Yes. >> Yeah. Yeah. We'll find other teams. I mean, I guess that's the beauty of also being Swiss is that I have another team to in my backup to support. So, um so it helps. But I was more interested actually. I mean, um there are two things about the World Cup uh that I when you talk like that, Amarat, that I'm interested in. Um, one is I I don't know at what age you moved to the to the US, but I'm just thinking was it a difficult thing to learn to call it soccer when you when we all know it's called football? >> Yeah, it took me a while. Uh, so I think actually I came to the states when I was in high school. It was a high school change program and I remember going to high school and using the wrong words for everything and one of those was football. >> And so when I say hey I like playing football uh people looked at me like crazy because I was this skinny kid who was 135 pounds and they could not imagine me enjoying playing the game. So yeah, it was quite quite an adjustment for me. >> Yeah. The other thing when you bring up the World Cup, the one thing and I I I don't know the details of it, but from what I hear and I was in the States only a couple of weeks ago and and you know people talk about it uh at least sort of um the the the man on the street so to speak and that is the ticket prices. um it just seems like they're completely uh out of reach for many people. And I think that's a shame because I feel that these big events that kind of brings together the the whole world should be accessible for as many people as possible and not just in front of their television. So, but you know, for whatever reason. Now, >> I appreciate you both thinking about the World Cup in your what's been on your radar recently. I was I I found a couple of other stories that I thought was kind of interesting because, you know, for example, AI is still uh something many people talk about and I just read that apparently Amazon's voice AI shopping assistant running on Alexa is converting now shoppers 3.5 times better than if they were doing traditional search. I thought that's quite interesting that they're apparently >> because nobody wants to spend time doing that. >> Interesting to be to be converted like that by an AI bot. Anyways, >> can they can they make a bot to make our email more searchable? I don't know for Microsoft. >> I think AI should do the pitching for for managed futures going forward if it can convert people at three and a half times uh the speed. Um that would be interesting. The other thing I I found was interesting just just these are just headlines. Um, this is more kind of some of the maybe macro stuff we're going to be talking about. But I saw that Google has gone from a company that used to do stock buybacks and now they're issuing 80 billion worth of um stock to fund AI capex. So that's a big shift. Um, you know, it might be a subtle thing, one company doing it, but you know, one factor of keeping equity markets going has been certainly stock buybacks, I would imagine. And then the final thing um actually two things more that I three things more that I saw. Uh one is that again these are just headlines but I find them interesting and that it it says here for this is I think for Bloomberg or someone like that for the first time ever wind and solar generated more electricity worldwide than natural gas. I think that's kind of that was for the month of April by the way. Um I thought that's kind of interesting. Suddenly we have something that is an alternative perhaps. And then uh last uh a couple of weeks ago I had a really interesting conversation with Harry Kristen and Jim about passive um and the impact of passive based on a new paper that Harry wrote um uh with Mike Green and another gentleman and um and I noticed that now 10 companies in the S&P 500 uh make up 40% of the index. Um so I thought also wow that I mean that is definitely a lot. And then of course the other thing I was been vaguely following, let's put it that way, is just this space X IPO and [snorts] and the headlines and the stories and and all of that good stuff that comes out from the um from people who read the perspectives, I guess. Um all very interesting stuff. Anyways, um let's talk about something that is even more riveting and that is trend following. So [snorts] let's do a quick update and see where we are. So we're recording in the very beginning of June. So I thought maybe we just focus on uh initially the month of May. So the month of May was uh quiet um but positive. Uh beta 50 index was up 31 basis points. Um the index is up 10 and a quarter for the year so far. Sockt index up 23 basis points up 10 and a half for the year. Stocken trend 26 basis points up 10.4 for the year. And the short-term traders index is up five basis points in in May up 5.3% so far this year. all very aligned, not a lot of uh d um divergence there and um it's all very well. Now, of course, within that kind of performance, there were certainly some um you know, different contributors. Uh some sectors did a lot better than than others. Equities the clear leader I think if well you should you you probably know this much better than I do, Morat. I I have a much narrower lens lens than you do. But anyways, it looks like um uh equities were the the main winner with a little bit of base metals, a little bit of currencies perhaps, but there were also some some losers uh mainly from energies of course that uh that that sold off during the month and and maybe also some of the bond markets and and and maybe even some of the soft. So looking at 2026 so far this year, what are your key takeaways from the kind of CTA space as a whole? what what what have you found interesting, encouraging, surprising, disappointing? Anything um that stood out to you? >> Yeah. No, this year has been super interesting to be a CTA. I mean, wow. Like we, you know, it's always these really difficult environments where things are good for trend, right? And what was really cool to me was that in the first quarter of the year, it was a risk-on trade where it was equities, it was a, you know, FX trade. Those are the two things. And then boom, we have a massive geopolitical shock uh with the conflict in Iran. And during that environment, you saw sort of a de a deescalation of those trends that had been previously profitable and a turn into the inflation uncertainty and energy crisis possible like higher commodity prices uh trend that was extremely strong. I mean, one of the big trends we haven't seen since uh 2022. We also saw this in 2014 to date myself. Um and you know, you're kind of seeing this really extreme environment play out to trends morphing over time. But the last thing that I saw that's interesting is that at some point the world started to see through the conflict and the equity risk on trade came back. And so you started to see equity trends profitable again uh particularly in April. May has been a little bit back and forth. Um and then you saw the energy trade start to fall apart and come back in. And then I'd say the thing that has been the most annoying asset class which is typical is fixed income where we've kind of had stops and starts where the question is really going to be about hey do we really have higher for longer um and we can talk about that a little later because I'm very fascinated by that but it is not an easy asset class to trend because there's too many dimensions. Last point I will point out given where we are right now it is very interesting that the trends are sort of at odds in a way right you have this AI growth trend combined with short views on fixed income aka higher for longer because of the inflation uncertainty due to oil prices and a potential pass through of energy shocks and you still have long views in energies base metals so it feels a little bit like a hedge trend environment like they're a little bit offsetting. And um the correlation structure we're seeing right now is very different from typical environments where energy is negatively correlated on average with equities and bonds are positively correlated with equity. So we're in a very weird macro environment and trend just loves that like because it's wild, it's moving and things are changing. So I think that's my kind of synopsis of where we are as of year to date. Yeah. So, Morat, what what what are your thoughts? >> Yeah. I want to put it in perspective a little bit because uh if you look at June of last year as an industry, we experienced the worst draw down ever. And it was really brutal. It was really difficult. Uh but I think we've seen a pretty incredible runup since July of last year. And uh I think I've been very encouraged and it's really nice to see that investors are finally talking about uh manufacturers potentially being a bigger portion of their portfolios. I think there's a bit more excitement because it was was really challenging to go through that tough period. Um and uh I completely agree with everything that uh Katie said about this year and and and and May. Uh but just to kind of give you a little bit more of a broader perspective on the CTA universe, well, we tend to look at uh CTA universe in terms of three groups. We're looking at long-term trend followers and actually we have a couple of subgroups uh that we use internally. Uh then we have short-term managers and then we have diversifying strategies. And what we find is that those three groups actually tend to perform pretty differently in different environments. uh like for example last year was a pretty bad year for short-term managers. Uh but what we're seeing this year is that all three groups are performing well and actually they're pretty similar behavior overall. I think they're all the groups are benefiting primarily from equities and commodities and fixed income tends to be a more challenging uh a more challenging uh sector. Uh so a couple things about May. So in May uh our experience was that we saw that short-term managers were actually the best performers and uh uh whereas trend and diversifying managers kind of struggled a little bit versus in ter relative to short-term managers. Um I have a thought about why fixed income could be so challenging Katie and I think that it's really it's the challenge of uh the Fed being in a difficult situation. >> Yep. I was >> yeah if you go back about like six seven months ago there was expectation of multiple rate cuts this year and now the Fed is talking about potential even hiking rates because of inflationary concerns and I think those are pretty difficult factors for trend followers to digest when you look at the fixed fixed income market. >> I would agree. I think there's this pushpull between sort of Fed wanting to have lower rates and there's a push for that versus the inflation uncertainty and the risk that the bond market could really sort of be at risk because of inflationary pressures. >> Let me just quickly mention also that um so now we're only a couple of days into June. Um but so far so good actually. Uh my own trend barometer has recovered quite a bit but was a little bit weak towards the end of May. Um went down to I think to the early 30s. We finished yesterday at 50. That indicates a better environment. Um and if I look at the numbers for the indices as of the 2nd of June and I think yesterday was a fairly quiet day by the way. Uh the BTU index is already up one and a quarter in June. Uh subj index up also one and a quarter. The same for the trend index by the way. Um, and the short-term traders index up about seven basis points so far in June. On the traditional uh in the traditional world, MECI World is down in June, 34 basis points so far as of last night. Uh, still up 10.32% so far this year. Um, and um and the S&P 500 down 34 basis [music] points and still up 10.89% so far this year. [music] Before we jump to um um our topics, uh just a little bit of housekeeping in the sense that we did actually receive um a long question to today for today's conversation specifically for Katie. Rod wrote in and that's very kind. We appreciate that. But unfortunately, Rod, these questions aren't are too specific. They're too product oriented for for us to be able to deal with uh for regulatory reasons. So, um I will find another way to uh perhaps help you out with some answers. But in any event, um we do appreciate uh you taking time to write in. All right, let's jump into some of the main points uh that we've been going to be covering. And as I mentioned, it'll include both um papers that um and [snorts] I should say interviews and papers that you've been involved in, Morat, and also papers you've been authoring, uh Katie. So, it's going to be super exciting. Um the first one I think um that we wanted to discuss uh was not so much of paper but actually an interview um that um that you were involved in um Morat uh with um uh that relates to uh uh Frank Fabosi from JP Morgan if memory served me right here. What I'd love to do uh is if you could give us kind of a little bit of a short rundown in terms of what are what are the topic what were the topics um that you discussed um why are they important um how did it even come about that he you know wanting to interview about this um and then I might have one question or two Katie might have one question or two I don't know we'll see but let's start let's start with that and then we'll see how we go >> sounds good Neils uh I I want to go back in time a a little bit. Uh I consider Frank Boise to be a good friend. Uh he and I wrote a couple of papers together. We're actually working a couple other papers right now. And a couple of years ago, I wrote a book about hedge funds. It's called Your Essential Guide to Quantitative Hedgeon investing. It primarily covers uh portfolio construction and fund selection, but also it had several chapters about diversity inclusion where I interviewed thought leaders who are either women or minorities. And when it came to thinking about somebody to write about uh manage futures and crisis offer, Katie was the obvious choice. So I'm really grateful that she helped me with that. Uh but at the time I needed somebody to write the forward. So I asked Frank and he kindly agreed to write the forward and we've been talking a lot over the years and last year he approached me. He told me that he was working on the special issue uh for the journal portfolio management and he's the editor of the journal portfolio manage man management and uh the special issue was supposed to be about multiasset investing and he said morat I think that investors would benefit learning about how trend following and managed futures can help their portfolios and I quickly agree to me it was a no-brainer I think there's such a huge gap between all the potential benefits of manage futures. Uh Kat wrote the whole book about those benefits. Uh there's pretty attractive long-term performance of the asset class, but a pretty significant crisis alpha that's very unique to managed futures. But the gap is despite all those benefits, we're seeing that the AUM of happy investors and managed futures is still relatively small when we look at relative to other hedge fun strategies. And as I was thinking about it, I I was I realized that I think there are some three main obstacles to why this gap exists. And one of those is that I think investors don't always clearly understand the role of trend follow in their portfolios. And the second reason is that unfortunately investors make some common investment mistakes which could be uh and the problem can be fixed. And finally uh it's important to understand what is the optimal way of accessing the asset class. So in my interview I try to address all three areas. Uh so let me jump into the first one. I think that uh generally people understand that tran phone provide crisis alpha but in my opinion the best way to understand this asset class is in terms of the risk mitigation framework introduced by Makita. Uh this framework recognizes the growth factor is the most significant factor that drives performance of institutional investors and they suggest mitigating this this risk factor uh with a so-called risk mitigation strategy which has three components. It has first responders, second responders and third responders. So the first responders are strategies such as um tail risk or loan ball strategies that are supposed to quickly respond to sudden market uh drops like for example if there's a 10 to 15% market drop in equities those strategies are going to benefit from this environment. As you know, trend followers are the second responders and as such they benefit from prolonged uh uh periods of market dislocation that last quarters to years. And finally there there are also diversifiers and those are the strategies that tend to provide uncorrelated returns with a goal of improving long-term performance of risk mitigation strategies. So what I see sometimes which is really frustrating is that investors get so disappointed with CTAs where they don't perform great during the weekly market selloff but they're not designed for that. This environment is perfect for the first responders whereas CTAs are going to help during periods that last uh quarters to years. And therefore I find Makita's risk mitigation strategy is very very effective at explaining the role of trend following and managed futures into in uh in global portfolios. So the second issue is uh common investment mistakes. We're all humans. Uh we're all susceptible to behavioral biases. And what I find as the two main mistakes that investors make is performance chasing at both manager level as well as the industry level. At the manager level, I think it sounds very reasonable to look at which managers have done well over the last three years and make sure that their assets are large enough and that strategy seems reasonable. I'm going to sort all the CTAs, pick the brightest and uh and the and the largest and I'm going to invest in one or two of those MA managers. uh but uh we've done a lot of research on that and two of my colleagues uh Joel Handy and Lauren Mexi wrote a paper that was published in the journal wealth management that shows that when this strategy is followed using the constituents of the suggest index the performance is poor because of low performance persistence of CTA returns and therefore performance chasing at the manager level is a poor strategy as you well know another typical mistake is that investors often get really excited about CTAs right after a crisis and it takes time to make in investment decisions. It might take a year or two to finally make a decision to invest in CTAs and then since environment is pretty normal. CTA's performance is just okay. It's not great. They're not expected to make uh double digits every year and therefore over time investors get disappointed and they conclude they did not need managed futures in their portfolio. Their portfolio is fantastic without the protection of managed futures and they decide to deallocate right before the next crisis. And because of this unfortunate pattern of performance chasing, I don't think our industry has as many happy investors as we could have. And finally, the last question is what is the best way to access our asset class? Uh we've done a lot of research on that and we believe that a multi-manager approach that's diversified across managers and time frames and access through managed accounts is the optimal way of accessing our asset class. There are many reasons for that. We we've done a lot of research that shows that uh diversifying portfolio across managers using equal risk allocation and also trying to diversify it across time with volatility targeting it improves risk adjusted performance. It also provides more consistent crisis alpha. So let me give you one example of why uh a multi-manager approach is important. uh uh on any given year there's a pretty significant return dispersion between the best and the worst manager in the Saken CTA index and if you look at 2022 that return dispersion was around 80%. So if investor decided to only invest in one manager who ended up losing more than 30% that year in 2022 that investor would have been disappointed with both the manager as well as the asset class although the asset class itself was up more than 20%. And by going with a diversified multi-manager approach, investors are able to overcome this high idiosyncratic risk and get more consistent crisis alpha. Uh what's also special about our asset class as you know is that managed accounts allow scaling high higher sharp ratio portfolios up to accomplish high returns at the desired level of volatility. And this is very different from the typical funds of hedge funds that deliver fantastic sharp ratio but are unable to scale those up to deliver attractive returns. uh we've done a lot of work with Makita. I think we're very aligned conceptually about the best way of accessing uh our asset class and also they like the research we've done to see how it adds a lot of value to the investors. So because of that we've been partnered a lot with with them. So kind of to summarize the three main points we're trying to make in this paper is that one it's important to understand the role of managed futures as the second respon responders within Makita's risk mitigation strategies framework. Two it's important to overcome the common mistakes of chasing performance at the manager and the industry level. And finally, we believe the best way to access managed futures is through multi-manage your portfolio uh with managed accounts. Katie, I'll I've got a couple of things, but I want to let you go first if there's something that um you wanted to to um probe in a little bit in the paper or if there was any other things, thoughts you had. >> I mean, I I don't have anything to to argue against in this paper. I just loved it because honestly I I haven't seen such a very concise and structured overview of our entire industry and sort of things that we do and expectations and so I thought it was it clearly was well thought out and and very inclusive of all the key topics. So I mean I think I just hope that more investors read that and sort of get some more background on managed features. I also love um I guess you can tell like Mara and I you know have known each other for a long time and so like a lot of things that he says just resonate with me in so many ways and um you mentioned one of my favorite points and I think Neil is probably going to ask something similar to this but I love how you talk about the concept of approximately right and precise as opposed to precisely wrong. It's something I actually say to some of my my colleagues all the time. I'm like, you can get the nerdiest formula and do everything uh but you'll be precisely wrong. Uh as opposed to as a CTA, it's really about finding the approximately right solutions and well thought through decisions and everything we do. Um and so I I just I think it's a great article and so I hope everyone reads it. >> Um yeah, no, absolutely. People should read it for sure. Now, a couple of things I wanted to ask you a little bit and and maybe um you know, and and by all means, correct me if I I read the the interview wrong, but you seem to take a little bit of a a swipe at QIS strategies if I'm not mistaken, mentioning that they're often just based on back tests and as soon as you start running them, the performance is not quite the same. But I'm sure and and may may maybe you could even say the same about replication strategies that they kind of come up with an algo and they replicate and they back test that and they say oh yeah this is how we're going to do it. Um maybe um you could even say that about multi-manager firms saying oh we take all these managers we do a back test and they look good together. And maybe you can even say it about the managers ourselves where we say well we try these models and and we we we we back test them and we we see if they work and so on and so forth. So what was your was there a specific point that I didn't catch that makes for you QIS stand out a little bit more than others or or how should I read that uh part of the conversation? >> Well, thank you. That's a fantastic question. Um, so I've been at officially for a long time, but for about four years of my career here, I actually was working for a subsidiary of the firm which was a short-term trading strategy. Uh, and uh, I spent many years working developing trading strategies. uh I learned a lot about the challenges of in sample out of sample back tests and I have a lot of empathy for managers because I think it's very very difficult to develop strategies that are going to perform well out of sample and uh I think it's very easy to come up with a back test that performs well but as you know it's really unlikely that that back test is going to perform well going forward and to me the biggest difference between asset managers and QA strategy is that asset managers have to put their stamp of approval on the given strategy and they put their reputation on the line. >> Mhm. >> Whereas with QS strategies, banks typically offer hundreds or maybe even thousands of strategies and they let you pick any one of them at the same time. The reputation is not on the line. Therefore, I think that QS strategist are more much more susceptible to overfitting issues than uh asset managers. Got it. Okay. Okay. Cool. Thanks for for clarifying that. The the other thing that um I took away from the con from the article or the interview was that you mentioned some concerns uh that you have um if I remember correctly about using mean variance optimization and I was wondering if you could explain what that is for the in the first part just so so that all our audience uh follow what you mean maybe briefly mention what the alternative to using uh a mean variance optimization would be and then why you um why you're skept if I read it correctly why you are skeptical about that methodology versus the alternative so to speak. >> Uh so I call minus optimization a beautiful theory with ugly results. I've spent a lot of time trying to make it work for our portfolios. >> Uh when I was right out of school, I really liked that optimization because the approach seemed very obvious to me and it seemed really powerful. And the reason why I liked it so much was because it takes a very complex problem of building a portfolio into just having to estimate the vector of expected returns in the corance matrix. So for me as somebody who was a mathematician that sound really exciting because it was an easy problem to solve. At the same time what I found was that it just did not work. And at a high level, the reason why it doesn't work is because it heavily depends on your ability of predict the future. And as you know, the future is impossible to predict and because of that it falls apart. Uh out of sample performance isn't good. portfolio weights are very unstable and therefore for all practical purposes I don't think that minus optimization can be successfully used to manage portfolios. I think there are a lot of the lot there a lot of other approaches that are would be much more promising. I do believe that the best principle to use in finance is the principle of diversification. I believe it it truly is the only free line free freelance in finance and therefore I think using equal risk approaches is much more attractive. Uh sometimes you may want to make some adjustments when you recognize there could be different clusters of strategies. So you might need to tweak this eco- risk approach with some maybe top down frameworks. uh at the same time I believe that those techniques are much more promising than any extensions of minor optimization. Uh I also believe that uh what investors often also miss is that you can also diversify it across the dimension of time. Uh for example, when you develop trading strategies, it seems obvious that you may want to use um volatility based position sizing, right? And what it does effectively you are volatility targeting those positions right and by doing that you're able to diversify your bets across time and what we show in our research that those same ideas can be applied at the portfolio level and they can further improve performance. So kind of like summarize it. I don't believe that minurance is a good approach. I think it's a beautiful theory without the results and I think equal risk allocations that are intelligently tweaked are much more promising than invariance optimization. >> Katie has another quant. Um any thoughts on this? I was so excited because there's a very famous paper that he mentions the one overn paper and just for some context um this paper was an operations research paper that came out around 2000 something >> um and I was a PhD student at the time and essentially this entire literature in the finance space which is called portfolio choice which is all this complex math to like show how you can have these perfect portfolios and all these academics at big conferences this paper come out and basically said, "Sorry, one overn wins." I was like, "Yes." So, it was it was the greatest paper ever. So, I love that you brought that up because to me it it was very fascinating coming from academia where it's like all these complex stoastic calculus models and like none of them actually worked for real people. And so, I think that's why I think this is very important when you're thinking about portfolio construction. But that paper was really a seminal paper to say hey uncertainty in finance is too high for the complexity and the precision that we have to estimate a lot of these things. So we need to focus on what we can estimate and we can estimate correlations a little bit. Maybe on the margin we can estimate volatility pretty well but that's it. So use that and use it with caution. And so I think that that um I like that you brought that up in the article as well. Super good. Well, let's uh let's pivot a little bit. Um although we're going to stay with trend of course. Um but I would say even though I um have been doing this for a long time and uh so have you guys um I think probably most of our careers um we haven't really thought about how does this strategy how does this industry get impacted by what goes around in the world because generally speaking was a pretty peaceful world with sporadic and very precise um risks uh from a geopolitical point of view. Now that's all changed in the last five years. So I love the fact that UKD has um been busy at the typewriter and uh produced another paper um about geopolitical risk and managed futures. My only disappointment is when I prepared for our conversation I looked at the wrong paper. So, I'm completely in your mercy for you to take us through um the gists of the paper. Um and uh and and Morat will actually probably have some some some points and and questions, but and I'll do my very best to catch up along uh with all the audience. So, >> no problem, Neil. Like, honestly, I always say this, but I really like this paper the best. Like, I loved it. It's so fun. And it's basically it's called navigating geopolitical risks and sort of you know perspective for managed futures. But let me tell you why I wrote the paper. So I had this client and this client said to me, Katie, we really want you to give a talk in Portland, Oregon on managed futures and geopolitical risk. And I was like, oh that's a hard one. Sure. Because when someone asks you to give a talk and it's like you go back to the drawing board and you answer it, right? So what happened was is that I actually have been working with some research and following some of the geopolitical re risk research and I just dived in and I was amazed by some of the cool things we can do. And I think this paper is really exciting because a it tells us about what to expect and b it gives us some data and tools and things to measure like how much geopolitical risk matters for us and is it changing. So this paper is like I said one of my favorites because it is so relevant right now and all of us are thinking about geopolitical risk. What is hard about geopolar political risk is what does that mean, right? We talk about it, we read articles about it, but when I turn to the academic literature, they of course have been thinking about it as well and they have come up with some tools and some ways to measure and understand geopolitical risk. So I want to just give you a quick summary of that literature because it is so relevant. So first of all, there was a seminal paper published in 2022 by Calder I'm going to get these wrong calara and I'm going to get this wrong too Illa from the Fed uh where they actually define geopolitical risk as the following the threat realization and escalation of adverse effects associated with wars, terrorism and ongoing tensions among states and political actors that affect the peaceful course of international relations. Wow, that's a very long definition but it it is what it is. Um what's interesting is that they have also started a literature of measuring geopolitical risk and how they do this is using LLMs and using dictionary methods based approaches and then there was even a paper that came out in March that hasn't been published yet that uses AI to not just measure these these geopolitical risk events but also to classify them more in sort of spec specific context by reading millions and millions of periodicals over time. So what is really cool about this database or this data is that it's on the web. So anybody can download it and play with it and look at it. Um so it was great for me because as soon as I saw it within five minutes I could download the data and I've said oh wow look at geopolitical risk in March it's so high etc. Um, and so I want to just give before I go into the results when we messed with the geopolitical risk data, one other point about this is that this data is very granular. It's not just a series. It covers all different countries around the globe. It covers the difference between the type of geopolitical event, whether it's oil-based, whether it's a threat or a realized action. So the threat of an action is very different for example than the actual action an invasion for example. Um so if you go and you Google this you can figure out you know in five minutes you can download the data. So I just want to summarize some of the findings in the current literature that I think is important. Um and I can take a breath for a second if you want to ask me a question before I talk about our analysis. Um so here's the three main uh corlaries that I have found or at least are summarized in the literature. So when you use geopolitical risk data which is basically a measure of how often terms related to geopolitical risk are mentioned in the media. Okay? And when I say media it's print media. It's Wall Street Journal etc. It's you know the the Washington Post etc. What they find is that when we have higher geopolitical risk, there is a heightened perception of disastrous outcomes. We have a increase in risk aversion uh which can make risky assets seem more risky than they usually would be. And finally, there is generally lower consumer confidence um which could potentially reduce growth. So all of these seem very very consistent um with you know what what we're thinking about today given how much all of us who read the news are feeling about this as well. The one other research area which is I was shocked to see that this actually published in January. There was a paper um also including AO Cavello who has the data on his website um with three other co-authors in January this year where he looks at uh geopolitical risk and it's linked to inflation. This is extremely important to all of us today because you know this data goes back to you know early because periodicals have been around right so we can they can do the data back to then um and basically what they were trying to understand is what is the macro effects of geopolitical risk after the fact. So like when you have increased geopolitical risk like World War I, World War II, other events um in history, what happens? and they show that geopolitical risk and increases in geopolitical risk is often followed by an increase in inflation. Um, and sometimes historically that's two to three years of height in inflation. So they also show that this eventually is often paired with lower growth, supply disruptions, increased military spending, growth in money supply, and decrease in international trade. This is their findings. It felt like I was reading today's newspaper. That's what we're dealing with right now. Um, so this literature was just very interesting to me because it it gives us an idea about history rhyming, right? Because I think as trend followers, we often say history doesn't repeat, but there's a lot of rhyming. And I think when you look at this literature on geopolitical risk, which is much more analytically driven, of course, I like a data study, not just a qualitative statement. Um, it gives you an idea of what kind of things we might expect. And I I really do think we all know it intuitively, but we know that during a period with increased geopolitical tensions and geopolitical risk, we're going to expect very different asset class behavior, we're going to have different levels of risk aversion. And so, I think for me, this paper was a great road map of how to think about investing over the next three to five years. >> Um, >> yeah. >> Any questions before I go into the results? because I just talk for a long >> Well, I'll give the opportunity to Morat if he has any question at this point. Do you have anything you want to >> Well, I'll make a couple of comments. Uh, so one comment is that like I love talking to Katie because I think she's always trying to answer tough questions that investors are really wrestling with and she's very brave. I think those are really difficult questions to answer. Um, and two, it's clearly it it we live in a crazy world. I think even this year uh all the conflict that's happening with Venezuela, Iran, potentially Cuba and I saw in the news just last week the US and Chinese Chinese militaries held a meeting in Hawaii because they talked about how to improve communication to avoid miscalculations. So I think that there the largest militiers in the world are worried about potentially going to war each other. uh but I think what's also interesting about this particular paper is that uh it gives new insights about trend. We all know that trend performs well during periods of financial crisis. But to me, it's not really obvious why trend would perform so well during periods of high geopolitical risk. And and to me, this whole link that Katie is making geopolitical risk leads to inflation. To me, that's a really interesting link that can explain why trend following would perform well during those environments. So, I'm I'm really fascinated by that. >> Yeah, let's jump into that. So maybe let me tell the results and then we can kind of circle back to some of the other work that people have done related to this. >> I mean clearly this paper was focused on understanding what is geopolitical risk, how can you measure it and sort of what strategies and asset how do strategies and asset classes respond to it. I mean it's not a long paper but it gives a road map to perhaps further uh research. And what we did find um during the largest increases because geopolitical risk is funny. It's not very stationary, right? Like it's low and then it blows up, right? So, you know, nothing is going on and suddenly you have an invasion, right? So, um and it's so it's a complicated time series to deal with. And so what we what um Ying Sean and I ended up doing is we looked at okay so when there is the biggest increase in geopolitical risk meaning like we went from things are good to oh this is really bad. Um we found that you know equities tended to be down fixed income tended to be down energy tended to be spiking oftentimes during those times like um and the US dollar was generally up for the last 25 years because we focus on the period since the SG trend. So if you look over a longer period, you might see something different for the dollar. You might see something different for energy. I think equity and fixed income that makes sense because that is consistent with an inflation shock coming, right? Um and then when we looked at investment strategies, interestingly enough, we found and not surprisingly hedge funds tended to struggle a little bit during these periods consistent with the literature on you know beta expansion etc. Um, equity market neutral was pretty much neutral, which would be consistent, but managed futures tended to have very positive returns during higher geopolitical risk. Um, and that to me is very intuitive because if you know things are changing and there's stress in the system, um, because we're multi-asset is not necessarily an equity story per se. It could be commodities. Um, the strategy has tended to adapt well to a stressful environment. So that was very consistent uh with what we found. And the last thing I'll point out and then you know that's sort of the last conclusion in the paper is we looked at um periods we looked at sort of a sorting of geopolitical risk like biggest increase biggest decrease in the middle and you actually see that CTA smile right when nothing interesting is happening managed futures is kind of flat when something interesting or is changing either getting much better or much worse then we tended to do better. So it it was consistent with that sort of crisis alpha type story, but it's not really a equity focused strategy, right? It's like there's geopolitical risk. It's ex it's expanding or it's contracting and changing things. Then we like that. It's everybody's happy and we're all buddies, you know, go by your equity portfolio, right? Um and so that was interesting. And when we looked at the extreme moves, you found that equity actually wasn't one of the bigger contributors during these periods. So like timing the equity moves during these geopolitical events is hard. And that would make sense right now. Look at try and think about trading equities in the the recent conflict. That would be difficult. Um it's been not a clear trend per se. Um and so that was interesting to see as well. This isn't just like an equity timing story. When geopolitical risk hits, it's really about, you know, the big moves in commodities and fixed income likely due to the increased probability of inflation around geopolitical risk. >> Super interesting. Um, when we think about what makes then kind of trend following um this perfect u well we know it's it's a good crisis alpha strategy. Um, but now we could also add the term uh geopolitical risk strategy maybe. Um but what is it specifically that we think that makes it that so to speak? meaning is it the because I remember the original definition um that that you came up with Katie um which I think a lot of people have forgotten actually but is it the adaptability of the strategy is it the fact that it's so diversified had lots of commodities in it as well um you know is the fact that it has no bias in these are kind of some of the the original themes that went into it and um and I don't know if you looked at it whether there was one theme that um was more dominant than than others. But the reason I asked that is that and I I don't have this kind of um I don't have any evidence of this because it's something I remember um hearing and I wonder I I might attribute this to the wrong person but I I wonder whether it could have been your co-author Katie Alex that Alex Grman that that may have done the research once. I don't know but I seem to remember someone saying that oh if you go back and look at crisis in general and um you know we have to uh we have to say that a geopolitical risk doesn't necessarily mean we're going to get an equity crisis. We haven't had one this time around so far, but I seem to remember that when you go through the data and you look at at at real equity crisis, you already alluded to the fact that yeah, we're probably going to lose money on equities, but actually the most consistent sector or sectors um that seem to perform well during these uh crisis comes [snorts] from the commodity side of the portfolio. So anyways, I'll throw out the question again whether you looked into why you believe um and I also also love to hear your thoughts about why you may agree with with Katie's findings in saying that geolitical risks and trend following on managed futures um are kind of an interesting um match. >> Yeah, this this is a good question and that's kind of why I did look at the asset class um contribution in this paper. One of the challenges with any sort of crisis alpha or sort of drawdown analysis is going to depend on the time horizon, right? So >> yeah, >> I think you know and and it's interesting Mark and I were talking about this a few maybe a few weeks ago because he had asked me a question about this paper. >> Since this is a monthly frequency, you know, you're not going to see trend being able to capture that tech bubble, right? um you're going to see a shock or a move in certain asset classes that would be commisserate with the type of risk that a geopolitical risk induces. And that's why the research was interesting because it gave me some fundamental thoughts on like why what trends might occur during a geopolitical risk, right? So when there's a geopolitical risk shock usually you end up with supply or demand shocks or different shocks specifically supply probably as well in some area of commodities and we can compare you know what happened the Ukraine invasion versus say this particular shock in the sense that that was a shock but it was more in gas and food and etc. The shock this time has been an energy shock. Um, but commodities is a place where we feel that pain during a geopolitical because it's something we all share, >> right? And so I think that's why commodities is a place you're going to see. Um, I do think fixed income is also interesting because fixed income is very vulnerable to inflation induced commodity shocks. [laughter] So, so those two are more obvious. Uh, currencies, it depends. And for equities, it's going to depend on whether or not these shocks are enough to affect growth. And that's why the market this time hasn't hit growth. So I think trend as a strategy is well positioned to deal with change in the macro environment. Geopolitical risk is just an indication that the macro environment is changing. Um, and I think I kind of had the same view as when you have equities down, it's also kind of a a different macro environment where it shows that things are changing and reconsolidating. Um, and it's a period of stress. So, those are stress, but a different type of stress, I'd say. >> Mhm. Okay, cool. What about you, uh, Meritt? What are your thoughts about this? >> Well, I think what Katie is says makes total sense. I think that the inflationary story I think it's very intuitive. Um I think gibbleical risk causes inflation and inflation causes most of the markets tend to be profitable for trend. Uh for example, you know when prices go up, inflation is high, commodities go up. So there's going to be trend in commodities in you know fixed income goes down because of inflation. So you can try to capture those uh capture those trends. So we actually done a similar I mean not similar study but we've done a study uh a couple years ago they had somewhat similar results. Um and just to remind you at the time uh we were trying to caution investors like around 2022 about overreiing on the 60/40 portfolio of stocks and bonds and the reason for that is because uh if you look at the previous 30 40 years a 6040 portfolio of stocks and bonds was incredible. both had really great individual returns but also they were negatively correlated. Um and therefore like why would you have anything else outside of 6040 portfolio? And uh what we tried to do in our paper tried to caution people to not over rely on past performance even over a 30 40 year period and instead trying to look back to those periods in history uh that had high inflation periods which would be more similar to what what investors exper would experience in 2022. And uh and as we did that we had similar results. We found that uh there were very mixed uh results for stocks and bonds. You couldn't really know there were not really great environments and there were mixed for a lot of hedge fun strategies but there were two strategies that stood out. One was lonely commodities and the second one was um trend following. Uh so even though our studies were done I guess for different horizons I think that uh I guess in our case we're seeing that inflation whether it's driven by geopolitical risk or some other factors they they those environments going to be profitable for trend following strategies. I I guess my my question is is for Katie. I I wonder whether she would get even stronger results if she goes beyond one month horizons and look at quarterly but maybe even annual horizons in her research because I think uh trend is not as good necessarily at capturing quick events but if jibolical risk induces new trends in the markets it might take a while for the strategies to capture those. So I'll be really I would like to see the >> You just gave us a new paper to write Morat because you know I think we'd have to look at a Here's my problem with quarterly. We did look some at it but if you're doing SG trend as an example it starts in 2000. So you're going to have to use time series momentum. So maybe we could you and I can offline talk about that because I think a longer term study of looking at this data because this data actually exists you know since 1900. So we could start in 1900. Um, but we need to have TS mom data to do it. Um, so we can talk offline, but I do think you would see that. And so difference between a shock and a persistent event. You're going to include things like, you know, the World War I, World War II, you're going to the Great Depression. Um, it'd be very interesting, but you know, you definitely need long time series if you're going to talk about those horizons. >> Yeah. But you know frankly I feel like even at with what you've done already I think the implications for investors so obvious I think pretty clear that trend is their friend whether they're worried about the crisis whether worried about inflation whether worried about geopolitical risk and I think also from an allocator perspective I see huge case for diversification I think that I think Neil's mentioned this the importance of commodity trend I think that is so true >> if if you are worried about geopolitical risk that commodity trend is actually going to help you a lot during those environments. So you need to be well diversified. So I think that the implications of your research are really important. Thank you for your work. >> That was a fun one. It [clears throat] was a fun one. >> [laughter] >> Well, let's uh before we wrap up, let's let's let's dig into one more important point and that is actually that you you know if we try and connect kind of uh Katie's world with the geopolitical risk world meaning crisis alpha and geopolitical risks. You actually kind of addressed this in a paper that I think is very recent published uh last month in pension and investment uh Morat um and that specifically uh suggests that um shorterterm strategies uh I think specifically you mentioned short-term trend following might actually also be worth uh considering now that you mentioned earlier uh that you have been working on short-term strategies for quite a while I I'll be careful with my push back, but I I might have a little bit of a push back. We'll see. Um and uh but do you want to do you want to um do you want to briefly uh talk a little bit about what uh what you what you found and what you looked at? >> Absolutely. And Neil, I want to be careful because I don't want to overstate uh our findings because I think that you know even in our paper we talked about some of the areas that we need to be careful about. Uh I want to give you a little bit of a story behind this paper. uh as I mentioned earlier a lot of the times we see that investors have one or two trend following managers and uh and we believe that if we make a case for an investor to diversify to maybe six to 10 managers that's huge huge success because I think they're able to overcome so many potential issues and they're going to capture crisis alpha more consistently At the same time, what we've seen over the years is that even 10 years ago, we would have clients who come to us and say, "Well, can you actually increase our crisis offline?" And we say, "Well, you might want to consider short-term managers." And there was a really fun project I remember tackling about 10 years ago was about what is the optimal allocation between long-term trend and short-term trend if you try to maximize crisis alpha. Uh so we had to deal with those questions a lot over the years and then a couple years ago we ended up writing a paper academic paper uh in the journal of portfolio management and then we wrote a piece uh this month or last month to talk about the importance of short-term trend. So let me just talk about like three main findings of the paper. So the first finding was that we found that short-term trend is able to increase the long-term performance of trend following strategies. So if you add them to long-term trend, medium trend, short-term trend improves long-term performance without sacrificing crisis alpha, which is a really important finding because I believe that most investors choose to invest in our asset class because of crisis alpha. But then we wanted to understand why is that why is it the short-term trend is able to improve the performance of trend strategies without sacrificing crisis alpha and what we found was that short-term brand short-term trend was really effective at offsetting some of the losses that were experienced by long-term trend strategies during early transition periods. So if you're thinking about uh February of 2020 when markets quickly reverse in response to COVID 19 and trends struggle during those periods but it was an amazing environment for short-term short-term trend strategies. Um so and therefore it gives gave us a bit more confidence in knowing that there is a reason why short-term trends and long-term trends can be combined together to produce better crisis alpha. But then we also need to be realistic and as you know when you look at uh short-term strategies the impact of transaction costs, [snorts] market impact and all execution related and implementation related issues is so significant and therefore in our paper we wanted to understand how sensitive our conclusions to implementation costs. And actually what we found was that the results are extremely sensitive. Okay. So if you don't invest in execution, if you don't choose to invest in colloccated servers, if you don't invest in specialized algos, the edge that the short-term trend can provide can quickly go away. And therefore the only way to it to provide an edge in short-term trend flowing if it's complemented by very significant uh investments in execution infrastructure to reduce execution costs. So kind of to summarize we believe that short-term trends can improve the performance of trend strategies without sacrificing crisis alpha. It's really driven by their ability to offset early losses of trendformance strategies during transition periods. But execution is essential in order to capture the potential benefits of short-term strategies. >> Yeah. No, that's great. Now, as I said, um I did have some thoughts about it uh when I read it and um I think it all depends on kind of what eyes you um you look through. And of course uh I am completely biased since my my career has been spent in the long-term trend following space. So that's kind of the first disclosure I should make I guess. But nevertheless um here are my thoughts about it. I've always felt and I'm said this many times on the podcast that um I think when we when we use the word trend following especially the word following I have struggled to find any managers and even when I look at internal research data that supports the fact that it's profitable over time um certainly when we just change the look back period on on on a basic trend model um that from a research point of view uh we find that generally they end up losing money over time. I completely agree with you that uh around the year 2020 um after co there's a lot of interest in surge namely because although longerterm trend models were kind of flat uh during co shorter term managers did very well and and I can't say whether they were following or whether they were just what I would consider kind of trading the expansion of volatility meaning they would there were other ways they got out of these positions uh not waiting for the markets to turn which is what I tend to uh think of when I think of the word following um however what I've also observed and this is a you know just observation uh objectively I guess maybe also inspired from my recent conversation with Toby CrarAel uh that we interviewed maybe also conversations uh with Nicole from Quest Partners. Um whether it's a whether it's because of that success and the massive inflows that you saw in shorter term strategies following that time. Um those kind of strategies have not really done so well in the last 5 years or so. Um and we've seen again that you know AUM has adjusted down as a consequence. But then I was also thinking has the crisis quotequote the things we talk about when we talk about crisis have they changed? So we know that 2022 was not really a big crisis it was a slow well it was a crisis if you're only invested in stocks and bonds but it was a kind of a slow one. So even the strategies like long vault that also became popular right after co because it did so well actually didn't perform in 2022 neither did short-term from memory at least uh compared at least compared to long-term trend following. So I was kind of thinking as you were talking right now, hm, I wonder if it's because the crisis have become different because oddly enough, if the crisis is too short, right? Like a V-shaped rec like a um like a liberation day for example or something like that, then the short-term guys can't handle it either, right? maybe it's actually better to be like a replicator who's so slow um if I can put it like that that they don't even blink um and the crisis is over and they just stay with the position. So, so I cannot say exactly why I make the observation uh about this um but some things changed in my mind uh about the effectiveness uh or maybe just the challenge of being short-term uh in recent years. Um so so those were the those were kind of my observations uh Mar so I'm not not disputing your findings. I'm just saying I from a practical nonquant point of view I I see other things happening around me in the space and when I talk to uh people I we have a lot of respect for in that short-term space they they acknowledge the the challenge that they have faced um in recent years >> uh Neils I think you are raising really important points and uh you might be surprised I'm not going to push back on a lot of what you're saying >> no [clears throat] no no >> uh so I want to be uh and and frankly I wrestle with a lot of the questions that you're asking like at some point I remember thinking about hey >> does it even said make sense for us to invest in short-term managers and the reason for that because I remember looking at the performance of the subgeni index and it was it wasn't great right >> right >> and uh and I had to wrestle with the question well if you look at the performance of our short-term managers they've done so much better thani >> is it just luck right so we had to like wrestle with those questions. Um, so I want to uh I want to say a couple of things. So one, I do believe it is extremely difficult to make money. >> Okay. And uh so what we find in our studies is that the more different managers are from being long-term trend following, the higher their mortality is going to be. >> Okay. Short-term managers have higher mortality than long-term trend followers. What we also find is that if you look at diversifying strategies, mortality there is even higher. Okay. And it doesn't necessarily mean that we should not invest in in those uh segments of managed futures. We actually find that we're able to build much better portfolios because we leverage those. But those are not easy categories to find good managers. They're very very difficult. So I would say it's hard to find good short-term managers and it's even more much more difficult to find diversified strategies. Okay. So another point is uh when you look at short-term managers, your point of them not just having uh not just running a short-term trend, it's a completely valid uh point as well. uh so a lot of uh a lot of managers use some for example pattern recognition techniques to generate returns right so it's not just purely short-term trend so I would say when you're looking at uh short-term traders trying to build successful businesses they have to constantly innovate they have to constantly look for ways to make money >> because it is so challenging >> and I know that you mentioned Toby Cra He probably talked about the challenges of decay, right? Signal decay. >> Actually, one thing Toby said was quite interesting and I'm going to quote him incorrectly. So I apologize for that but people can should go back and listen to the conversation that we published I think uh last month uh with Toby and but what he was saying was um his observations were for example that um and I think he was referring to if in the old days when a market opened higher it usually finished higher like 64% of the time >> and now he says it's like 56% or 58%. and he said that's percentage-wise seems like a small difference but it makes a huge difference if you're trying to be like a short-term breakout and and of course he's he wrote the book on on on open breakout and he says there's not even an open anymore I mean so it things have changed right so so maybe it's all part of small uh things Katie in in in in being conscious of time I still would love to hear your thoughts quickly but but um we have gone long because we've had great things to talk about, but but I'd just love to hear your thoughts maybe on on this topic. Um, before we wrap up, >> I don't think anybody is disagreeing because I think short-term is such a broad term that it's just defined so differently. I mean, we talk about trend falling being defined differently by different people, but once you go to short term, there is so many different things you can do and the shorter short short terms that you go, the >> um the harder it is because the transaction costs and other things. And I think you know what I did appreciate with this paper is it is consistent with something that Alex and I found where we're just looking at you know the reactivity question right and so when you're trend following even if you're following you're more reactive at following when you're faster so I think what we had found is that reactivity helps in certain types of crisises so something like a covid but on average it's good to have that toolkit um for different types of crises because 2020 20 was an example where you know a really really slow trend follower would have had a harder time. Um and I think you know so I don't think anybody disagrees. I think there's a lot of dependency on what you define of trend falling for short term um because it's a huge space. So it has a lot of things to offer but it's also hard to navigate. Yeah. >> Yeah. Well, yeah. Well, on that point, I will just say that in the short term, we have to wrap up our conversation, but in the medium and long term, we'll be back with more conversation uh as we uh continue to explore this wonderful world of uh CTA and trend following. Now, um before we wrap up, um I hope that a lot of people got uh really a lot from Morat's work and the paper that Katie just uh published. Um, and to show your appreciation, uh, head over to your favorite podcast platform, leave a rating and review. It's so important that we get more people to, um, understand the space, and that's one way of helping us, uh, do so. Um, next week I will be joined by Andrew Beer, um, as well as a guest we've had on a few years ago, namely Eric Critan from Standpoint. That's going to be a fascinating conversation because we're going to um address different type of of of things, but I think we might also touch a little bit on maybe some of the challenges about um transaction cost and how we think about these things. So, I really do hope people will um show up and uh and maybe also send a question um to Andrew or Eric. Um they're are wonderful people to um to answer uh whatever question you may have. uh info@ toptradersonplot.com is the um where is the email to send it to, but maybe be careful making it too product specific because we may run into some compliance um concerns as we did today with the question we got uh from Rod. Anyways, from Katie Morat and me, thanks ever so much for listening. We look forward to being back with you next week. And until next time, take care of yourself and take care of each other. >> [music] >> 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 your [music] favorite podcast platform and follow 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 [music] rating and review. 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. This podcast expresses the views of its hosts [music] and the guests appearing on the podcast as of the date of its recording and such views are subject to change without notice. Top traders unplugged do not have any duty or obligation to update the information contained [music] herein. Furthermore, Top Traders Unplugged make no representation to its accuracy and it shall not be assumed that [music] past investment performance is an indication of future results. Moreover, wherever there is a potential for profit, there is also the possibility of loss. This content is made [music] available for educational purposes only and should not be used for any other purpose. The information contained in this podcast does not constitute [music] and should not be construed as investment advice or an offer to sell or a solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein [music] concerning economic trends and performance is based on or derived from information provided by independent third party sources. Top traders unplugged [music] may believe that the sources from which such information are obtained are reliable. However, Top Traders Unplugged cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information [music] or the assumptions on which such information is based. This podcast, including the information contained herein, may not be reproduced, copied, republished, or posted in whole or in part in [music] any form without the prior written consent of Top Traders Unplugged.