Diversification is more important than ever! | Systematic Investor | Ep.385
Summary
Metals Momentum: Extensive discussion of strong trends in precious metals (gold, silver, platinum, palladium) and broadening strength into base metals (copper, aluminum).
Commodity Supercycle: Potential for a renewed supercycle tied to monetary system shifts and deglobalization, with metals likely key beneficiaries.
Weak Dollar: A structurally weaker USD was highlighted as a tailwind for commodities and FX trend opportunities, including short dollar exposures.
Managed Futures: Positive outlook for diversified, rules-based trend following given multiple concurrent trends across sectors and robust January performance.
Diversification Edge: Emphasis on breadth across commodities versus narrow, replicator-style allocations that may miss non-core markets during broad trend regimes.
Risk Management: Volatility estimation speed materially affects outcomes; faster cuts protect in shocks while slower estimates can capture more of enduring trends.
Geopolitical Risk: Rising geopolitical and trade frictions seen as supportive for trend strategies that adapt to macro regime shifts.
No Single-Stock Pitch: No specific public equities or tickers were advocated; the focus remained on commodities, currencies, and managed futures allocations.
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 Katie Kaminsky and I Neils Castro Lassen where each week we take the pulse of the global markets through the lens of a rules-based investor. Katie, it is wonderful to have you back this week. How are you doing? What's going on where you are? >> Hey Neils. Yeah, um I'm doing good. A little snowed in but otherwise good. You know, it's it feels like winter but that that's where we are. >> I was going to ask you about that. I mean, we hear a lot about this winter storm, but uh how how affected have you guys been? >> Well, I'd say like in Boston, we're basically just snowed in and there's just like mounds of snow that may be here forever, but I think I've been more following the ice storms cuz I'm originally from Tennessee and millions of people have been out of power and dislocated. So, it's been, you know, we're complaining about the snow, but like I really think it's been a serious issue for a lot of people dealing with power issues and, you know, having no heat. So, it's pretty pretty extreme January so far in many ways. >> Yeah. >> Yeah. For obvious reasons work-wise, I usually travel to Florida, so I've never really been caught in a winter storm in the US, but of course, you have the hurricanes. Um, and it's always puzzled me a little bit why the US when they know these things happen almost every year, either a winter storm or hurricane, why they don't dig down in the ground the uh the electrical cables. I I've never thought of it. >> You just read my mind cuz I'm from Tennessee and they have all all the trees are down because the the ice is so heavy on the trees >> and I just think like in Europe like they always dig them down and then it doesn't matter if a tree falls. I mean, yeah, it might hit your house, which is bad, but but it it's a really big, you know, logistical problem. >> Yeah. No, absolutely. Well, I'm sure people didn't tune in to hear about the weather, but I always ask you um and all the other co-host um what's been on your radar? I know literally weather has been on your radar, but is there anything else you've been sort of finding interesting in the beginning of 2026? um if we stay away from politics and stuff like that as as we normally do, but um anything else? >> I mean, I think for me it's been just following what's been going on in, you know, the silver markets for example, gold. I mean, those are not new trends, but like >> just the extremity of of moves in certain things where you think it's never going to end. Um it's pretty pretty interesting. So, it's an interesting world. 2026 is interesting. >> Oh, for sure. actually um you kind of read my mind about uh what's been on my radar. Um gold has been but not maybe for the reason that um that that that you have. It's because yesterday I saw an article about how Tether is becoming like as big a holder of gold as some of the so you know sovereign wealth funds but also some of the central banks. So that is really interesting and it kind of begs the question well how long can this go on because you're it's kind of a big change to maybe the monetary system and of course we know that the US are pushing for um new kinds of of um currency system or however we define it. Um so a lot of money has flown in you know flooded into these uh type of products and if they're then in the background buying gold and maybe other precious metals who knows then clearly we can understand better maybe why we see these extreme moves. And by the way, I was just looking at uh Margariminsk's um blog post and he did a a post about um gold and central bank holdings and it looks like there's been a positive buying of gold uh every single year since 2011 by central banks whilst in 2000 through 2009 they sold net gold every single year. So that's obviously also a big change. >> Yeah, that's interesting. I mean, it's just it it just shows you people are looking for value and they're going back to basics, right, in some sense, you know? >> Yeah. Yeah. Speaking of value in a different kind of way, a former chief economist or chief strategist, I'm not entirely sure, but Stain Jacobson, who used to be at Sax Bank, um he sent something out um this week that I thought was quite interesting. He sent out a chart where it basically shows that the US dollar is flirting with its 200 month simple moving average trying to penetrate it to the downside and I found that very interesting. Um and and he makes some points in in his uh in his material uh why this is important which I I fully agree with. we don't have to to go through this um now. But it is true that if that kind of relationship changes and we start seeing structurally kind of a a weak dollar world that has implications and I was thinking well maybe that's also part of the commodity story right I mean we know that commodities tend to do better in nominal price uh when when the dollar is weak um not always but but um often um I have had um Adam Rosenwag um on many times on the podcast and he's obviously a commodity expert and he talked about that usually you see a commodity super cycle really take off when you have some kind of change in the monetary system. So all of these false starts we've had in the last few years was really because there wasn't a major change in the monetary system but you could maybe argue that this time is different uh in that sense and therefore there could be some very sustained trends in commodities in general. We've already, as you alluded to, we've already seen them. Um, and and even this year, I mean, you you mentioned silver. Uh, I was just going to look at this uh on my screen. I mean, silver is up 68% so far, uh, this year. Platinum 35% uh, and gold is only up 27% so far. But here comes my my question to you. you know, CTAs, we kind of been known for having commodity exposure as a meaningful part of of the diversification that we offer. But in recent years, of course, some of the most popular CTA products have not been the underlying CTAs, it's been the replicators who tend to have much less exposure to commodities. Now, I'm not saying this that this means per se that they will do worse, but um it is a little bit interesting to me because it might remove some of the benefit that CTAs offer uh if you go into a product that trades much fewer markets and all the action and I'm not saying that that's where it's going to be, but what if the what if we are moving into a commodity super cycle and most of the action going forward will be um in commodities. Of course, some of it could spill over to financials like the dollar, like some interest rates, etc., etc., but still couldn't help make that kind of connection between where people are investing their money in CTAs right now and kind of the structural differences between say a replicator and and a very fully diversified CTA. I don't know if there's a question in there, but I'd love to hear your thoughts. Well, this is a really interesting question and we looked a little bit at this um in in the you know in some of our research recently just like the biggest markets and you know which markets have done the best and you know obviously if you look at the bigger markets and the commodities you start immediately with gold and >> perhaps you know energy right and so you do get you know as you build lower and lower into the pyramid of these typical assets you will see big differences in return but if you see some of those assets that are not in the typical, you know, sort of smaller portfolio. So, silver is a good example of that, right? So, like a lot of people, if you're just looking at one asset, you'd buy gold uh in futures. The second would be silver, and silver has outperformed gold, although gold did very well last year. So, you see depending on your asset set, you can have very different return profiles. And that's a big driver. One of the main drivers of return dispersion in our space is that posit positive returns come from big trends and you need to be exposed to these big trends and it's how much risk allocation you have to them that differentiates relative performance. So it turns out and we'll we can talk about this a little bit more later. Last year it was a very narrow band of assets that actually did well in trending. So if you happen to be in that narrow band, you look very good, right? Versus um right now what we're seeing is a much more broad um you know range of trends. So let's say copper, >> we're talking about copper, we're talking about aluminum, we're talking about >> silver, gold, platinum, palladium. Like you're seeing sort of really interesting trends across a wide range of different um assets. And you just have to ask the question is does gold represent all of those? And you know to some degree yes but to some degree no. Um and so I think that will just create some different return dispersion which is why you know every approach is not sort of giving you the index. It gives you sort of an one approach to to the CTA space. >> Yeah. No absolutely and we will come back to that I'm sure. Um I'm going to put you on the spot but it's fine if you don't know the answer. Um, do you know, and I don't know how you would even define it, but what's the liquidity difference really between gold and silver? Would you, if you had to say, okay, gold is 100% liquid. How liquid is silver comparably? Do do you have a feeling for? >> I don't have that off the top of my head, but the the two of them, you know, gold is obviously much more heavily traded than silver, but silver is also um heavily traded. We do also look at the volatility of those contracts and we have seen that silver volatility has increased last year for example. Um but I don't have those numbers off the top of my head but gold would come up first right it's as more more traded. >> Yeah. So, so, and I'm sure people will uh or maybe people don't know this, but I would hazard to guess that um because people might often say that when a market really moves in a big way like Koko did a few years ago, etc., etc., it's very easy to blame the CTA say, "Oh, they're the ones pushing the price higher. They're trend followers." But I think I I think I'm I'm I'm pretty correct when I'm saying that most of our friends in this industry probably got long gold a long time ago and we're not the ones buying gold right now. If anything, we're probably the ones selling into this rally because of expansion of volatility. So just to put that out there. >> Exactly. And I think the way you have to think about um CTAs tend to risk manage this approach, right? So as the V of assets go up, using a traditional CTA approach, you would actually reduce your positions. I think you talked a little bit about replication as well. If you're using one asset, you might end up with really large positions, for example, but in a typical diversified CTA program. Silver positions would be growing as V expands. There would be some profit taking in a sense where you kind of reduce positions as a function of V. Um, so I think you'll have much more evenly distributed positions across multiple metals in a CTA program right now. Um, that's capturing multiple themes instead of just maybe one, right? Yeah, if that makes sense. >> Sure. No, absolutely. And of course, for those who don't volatility adjust their positions, they're having a incredible maybe a worldbreaking uh month of January. Um, but we'll see that uh as the numbers come out. Anyways, trend following update. Um, we've already kind of touched on it. Um, it's been a great start to uh 2026. Now, I meant to look this up and I'm not entirely sure uh about what I'm saying. Now, we still have a day and a half left of the month, so anything can happen, but I wouldn't be surprised if the gen trend index is getting very close to getting back at new all-time highs. I wouldn't be surprised uh if that's the case. Um, and that also means that a number of CTAs uh might be coming back uh to uh to new all-time highs uh as we speak. Um, and that's going to drive some interest, I'm sure, once again. Um, uh, I I by mistake send you a link yesterday to a Wall Street Journal article that I thought was new. It turned out it wasn't. It was from last summer. And of course it's fun to read that article now because it was not a very um pretty picture they were painting of the uh trend following index or industry among other firms that was mentioned. Um they mentioned man group they're often uh referenced it's a great firm of course and they were talking about how um they had like called all men on deck you know have sent out an email to like 150 of their people like now you have to work really hard as if that makes any difference to how markets are trending that you can just put more manpower on the case and then suddenly whoops you start making money. Um, I don't think that made a difference, but performance uh for them and for for everyone else certainly picked up in the second half. So, so maybe uh a little bit of um negative press is not the worst thing we can get. It's usually a good sign uh and buying opportunity. Um but yeah, you mentioned it already. When I look at the data that I have access to, you're absolutely right. medals are doing uh the heavy lifting so far this year. But we're also seeing um some opportunities uh in cocoa um I would say and also something that hasn't moved um as much I feel for a while except maybe for the yen but some of the other currencies are giving some interesting opportunities. Um and coming back to this dollar theme and what if it does break the 200 month moving average whatever I mean could currency as a sector come back and really um help out so to speak and and support long-term performance uh once again because we know that once we get the bigger sectors like currencies like equities uh which actually have done pretty well and still doing well this month uh and fixed income of course then it does make a difference to our ability to deliver really really strong returns. There's no doubt about that. So anything that you've seen um on your side? >> Well, so far >> I think January has been very interesting because the profitability of trends has been diversified across multiple sectors. >> So it's this sort of multi- trends at bat kind of situation which is where we do best and where we're the least exposed to reversal. And you have definitely saw this on these riskoff days. And let me just explain. So you know equities have continued to be a positive trending contributor. Uh short US dollar and that sort of theme has extended and also worked very well. Uh certain places like the Aussie dollar have been very good for example. Um and then if you look in the commodity sector everything but energies I think energies have still been tricky a little bit. They've been up this month, but the the direction of those and the overall magnitude over the last year or so has been hard. But precious metals, base metals, and a few idiosyncratic uh commodities have just been really moving. And so why this is important is I always find it useful when there's a day where the S&P is down and you see that the trends diversify. So you don't just have that equity exposure. And so I think >> like this diversification of the different trends both the weak dollar theme combined with >> prog growth uh pro metals is is something that says things are moving and could are working very well for any sort of momentum trade this month and it's not just one theme it's multiple. >> Okay. Well let me quickly run through some numbers then. Um and these numbers well my trend barometer yesterday finished at 59. So that's a strong strong reading. Um and it's in line with the uh performance. Um I think uh the well I know the numbers I'm going to quote now is as of Tuesday night because it takes a little while um for for the numbers to be uh published. Um and we're recording early afternoon on Thursday. So they're not live yet. Anyways, I think yesterday was a good day for the CTA industry anyways as far as I can tell. Um, but before I get into the usual numbers, there is one other number I'd like to mention, and that is that our good friends over at Social, they have this wonderful trend indicator, which for the longest time actually didn't necessarily do fantastically in terms of performance, but the information they put out is very useful for people if they want to understand how managers might be positioned. That's the first thing I would mention. And then I was looking at it uh today, the trend indicator, I mean month to date up 19.27% as of probably uh last night. I mean that's extraordinary. That could also be a record in its history. I don't know. We'll have to ask Tom when he comes back in a couple of weeks. Um so lots of interesting stuff um for people to uh to dive into. But anyways, as usual, Btop 50 index up a whopping 5.41% so far. Sockchen CT index up a whopping 5.94% and the trend index topping that out with 6.13% as of Tuesday not even including yesterday and the even the short-term traders index up 2.56% which is doing pretty well and let me also mention the bridge alternatives index I did check it uh just to give them a little bit of a spotlight uh up and that's a pure trend five managers um for all I know you might be in it actually Katie but 7.26% 26%. Um, it's up so far this month. So, all indices all around doing well. And as I mentioned last week, we also did well in January of 2025. So, I'm not I don't want to jinx it too much, right? Anyways, Msei World up 2.8 uh 82%. S&P US aggregate bond index pretty flat, up 19 basis points. And the S&P 500 total return up 2% as of yesterday. Um, now before we jump into Katie's wonderful topics, I will just um mention that only a couple of weeks ago I published the eighth edition of the ultimate guide to the best investment books of all times. And so we now have and this is thanks to the incredible uh group of people that works with me on the podcast. We now have more than 600 titles in the book uh and or in the guide. And it is giving you lots of options to um educate and and learn uh from different sources on different topics, not all finance related frankly. Um and you can get it by going to toptraders onplot.com/ultimate or if you're on my Sunday update uh email, you'll get uh links to it. Anyways, so back to you, Katie. you brought along a few different things. Uh the main feature I think is fair to say is your own paper which I'm excited to dive in. But beforehand um and it's funny every time I see a story about trend following and managed futures at the moment it's either you Andrew or both of you being quoted. Um and I think in this Bloomberg article you're also both being quoted along with a few other friends uh from the industry. and Jerry too. There was Jerry was there too. >> Jerry, our good friend Jerry is there as well. Wonderful. So, um why don't you uh tell me about the highlights from the article? >> Well, I think it was, you know, it's always fun because when Bloomberg or Wall the Wall Street Journal, anyone is sort of starts profiling trend falling, that's usually a sign that things are going really well or things are going really bad. So, >> you know, um and you mentioned that. So um they you know they were reach they reached out to talk to us a little bit about um what was going on and so of course we shared this paper we're going to talk about um and it just was an interesting sort of shift of themes where you can kind of see that last year was very challenging but we've seen the aftermath of such huge shifts in fundamental relationships that are now sort of coming to a fruition and becoming really strong trends. and you know trend falling is kind of off to a roaring start at the beginning of the year. So I think the article kind of highlights that and it also uh featured one of the plots from the paper that that we kind of recently published and just kind of this idea of you know what was going on and what how different this year could be from last year for example. >> Yeah. And do you remember just on top of off top of your head um kind of what the various people were I know you know you're going to be commenting on kind of the same that's in your paper for sure but do you know how the other friends we have who were a part of the article what they were kind of focusing on or their angle to to what's going on right right now when when asked by journalists >> well I think you know the general theme is that there are very strong themes and trends in the markets that are easy to discern concern um that you know the aftermath of the massive change from last year is resulting in a great environment for trend. Um, I'd say that, you know, there wasn't anything sort of earthshattering in anyone's comments as as, you know, as usually it would be, but wouldn't be. But I think the general theme is, and I felt this way as well, is that going into this year, we have such an extreme environment and we still have a situation where the US growth has still been very strong. So, you know, it feels like all systems go until it's not. Um, and I think for us this is great because we're ready to roar upwards and then of course we'll pivot and if we do have sort of a boom bust type of cycle, which is what it feels like, >> uh, we can be part of the boom, but we can also participate in the bust in a in a positive way. So that that's a very positive environment for trend. steady as you go is not good for us and shocks are not good but you know booms and busts are great. >> Yeah, I'll I I have a thought. I'll try and remember it in a few minutes because I do want to dig into uh and let you talk about the paper you uh just released. Um so why don't you tell us a little bit about what you and your colleague Ying Shan Shiao, is that correctly pronounced? >> Yan. Yeah, >> she's written a bunch of papers with me. Um, we have a couple on on the in the pipeline as well. So, >> which we will talk about, >> we can talk about later. But, um, yeah, so we usually every year we try to do a synopsis piece where we look at things that happened and it's it's quite a lot of fun. uh where we kind of look at things that we notice through the year and then document them and then talk a little bit about some of the dispersion choices or things that cause dispersion in our space every year. Um and every year is different. So we kind of you know highlight what we found interesting in that year. Um and we kind of started off this piece um by kind of one of the big things that's been really notable in the previous year was just the difference between sort of pure trend and sort of the aggregate SG trend index. So for example, trend really struggled in 2025 whereas macro strategies and sort of more fundamental approaches or perhaps economic trend and things that kind of looked through the prices and focused on the fundamentals were a little bit better positioned for a year where there was a lot of headline risk and a lot of shock. Um what we're seeing already this year is that's not as much the case. So macro has been lagging trend now that the fundamentals are kind of much more clear. Um and so that kind of is one thing you'll see in in our space is a sort of debate of you know at what point do you see through the price moves and you look at sort of the fundamentals and that relative difference was large last year and it was persistent across every quarter. They were somewhat similar in Q4, but the difference in terms of how macro and trend reacted to the first part of the year in liberation day and how it recovered post liberation day um was very different. So we kind of highlighted that one point. Um >> can I interrupt you here and just ask you on that specific point? Have you uh ever looked back in time because economic trend became popular only a few years ago, right? But um have you looked back in time and and found similar periods where really uh these two kind of approaches uh differ a lot? >> So economic trend and and price-based trend are highly correlated. Um they use different inputs to determine what the trend is but they both are create you know trading a trend in an asset right and the difference is really in that input. And so when you look at uh economic trend signals, it's really about, you know, measuring things like growth and is growth accelerating, is inflation changing and sort of using that to kind of determine where the trend should be in economic in based on economic fundamentals, right? And if you look at those strategies compared with price-based strategies, they're roughly, you know, 40 50% correlated because they end up in the same trends, right? So if growth is positive, trending will eventually be in equities. If growth is positive, macroeconomic trend will be buying equities. So the timing of the two different strategies is slightly different, but they do end up in some of the same trends over time. And so they're naturally sort of complimentary. And in extreme years like last year where prices um were much more affected by sort of headline risk, sentiment risk change uh versus macro um they they had a harder time to follow. Whereas at the same time um price trends can better capture some of the themes at different points and more aggressively than say a macro trend which can sometimes be slow or get the macro wrong when things change. So they naturally complement each other. >> I can't help ask you do you think economic trend benefited last year from no economic data from the US for a while? I mean I don't know what do they put into their model if there is no data being released. This is a very good point. Um, but I think that's a US I'd say for the US numbers perhaps, but you know, a lot of economic trend is really global data across multiple different regions. So, you know, you had a little bit of nans probably in some of those, you know, in some of those data arrays for a little while, but you know, there's also other methods and other data sources that people can use that are not necessarily the official. I think those official numbers are important because they, you know, they kind of are a signal for the market. So, especially for us, we care a lot about CPI and PCE and things like this because >> they are a focal point for price trends as well. So, they do kind of >> show or confirm or not confirm general themes. >> Yeah, interesting. Also interesting timing by the way this week where yesterday pal was out talking about the latest decision from the Fed not to do anything but uh certainly deflecting a few questions about his uh you know the the one who will follow him. Um it'll be interesting to hopefully we'll learn soon. Um okay so that was a little bit of a detour. I I kind of interrupted your flow a little bit but I think >> no but it was a good question. >> Okay. Um certainly it was an interesting question for me personally but um so yeah we talked about the the um kind of the asset cloud theme and and and differences and you can and and the difference between macro and price based trend following. Um and then there was a second kind of stream you went down in your paper as far as I uh remember. Um so talk talk to us about that and we can dig deep into some of this where you find the most um interesting parts. So the other thing that we we always like to do is we like to kind of distill down decisions that people make into >> different decisions and how they performed in a given year. Um because these decisions that each individual CTA makes, you know, the speed you trade, the number of markets you trade, the risk allocation, your volatility sizing, position sizing, all of these are sort of idiosyncratic decisions to individual managers. And a lot of this is an art. There's no right answer, right? But in a given year, you can have very very different results depending on how the trends evolve and how markets move. And I think that's what's tricky about trend is you end up with very high correlation across managers, but you don't end up with the same returns. >> So you kind of because we're doing similar things, you have similar correlation. But when you look at different performance, a choice of which market set or what speed you use can create very different results in a year where you know things were definitely very extreme. uh you'll see perhaps even more variations in those choices. And so these choices are tricky because in one year one the choice might look very smart and then the next year it could look not so smart. Um and there's a lot of noise around those. So that's why we like to look at those just to kind of show how those different decisions affected returns in 2025 but how they may have like affected periods in the past as well. So, you know, a lot of us focus on 2022 because that was also a very important diversifying event for CTAs. So, we actually looked at three things, Neils. >> We looked at speed, um, how fast you're trading and sort of your typical like data window for how you're taking in price trends. We also looked at market size and concentration. >> Um, and finally, we looked at volatility adjusting. Um because in a year like last year where we had such a big turbulence event, so the liberation day event, you kind of that shock if you think about a databased approach, how does that permeate through all the decisions you make? And so a big shock can definitely adjust different things and create very different returns depending on how you uh react to that shock. And I think that's something that you know causes very very different results. So maybe I can just go through each of these three and we can talk about it because it's kind of interesting. Abs. >> Absolutely. And I I actually just want to say that I really think when we get to the volatility estimation um that that's something we rarely talk about uh on the podcast. We always talk about speed and market selection. So we'll start with that. But I think people should pay really close attention when we get to the the third one. >> Yeah, definitely. Because I mean that's something I' I follow and think a lot about. But I mean that's like a nerdy like CTA thing. I love to look at like Vault estimates and like I've cross different Yeah, we'll get there. But so we first looked at speed and what was interesting about our estimates for speed for this year. It turns out that shorter windows and longer windows work the best. So, for example, if you had say a 12-month window, so you were looking at 12 months of data, you kind of were able to navigate some of these big shocks and and and do well last year or at least flat. Um, and the same thing is the case with the shorter windows. And that may make sense, right? Because if you have this liberation day event, if you have a shorter window, you get out, you get back in, you keep moving, and you don't get rattled as much by sort of this extreme V-shaped move that that you had perhaps um in liberation day. So, the worst time horizons are around 7 to n months or 4 to 9 months. So, right in the sweet spot of many CTAs where you're kind of looking at that medium horizon. So you can imagine that you know shorter term which is a very small group of people not that many people do shorter term and long-term which is more consistent with like replication and sort of slower moving strategies that looked a lot better last year. Um last and then the year before you saw the opposite that fast was really hard and slow again was better. So, you know, it really really varies a lot given the this individual year, but it kind of showed you how you could have had quite a big difference between returns just given the overall speed that you traded the markets in 2025. >> Maybe I can add one thing actually. We talk often about speed as being the look back period that we use and that's absolutely correct. Um, I remember one of my very very early interviews on the podcast, so this is more than 10 years ago. Um, the manager actually said, "Well, we only trade once a week. First of all, we trade weekly bars, not daily bars." And of course, we know that our friend Andrew only trades once a week. So, that's another way of I mean, speed is kind of affected by your trade frequency as well. Um and um and I've even heard uh some people talk about maybe not publicly where they say well we get the signal today but we we actually wait 3 days before we change uh positions based on that signal we kind of delay the so it's so speed is an interesting thing even though I completely agree that the most common way of thinking about it is just the look back period of the model um but there's a couple of small um intricacies uh as well that last year if you only adjusted position once a week and you didn't you didn't really you know you didn't panic let's you know quote unquote panic uh during liberation day clearly that that is where some differences or the biggest differences happened among managers was just in April >> yeah and I mean but I think you would see very different results in a year like co we definitely saw that as well being faster was better there >> uh we wrote some articles about that as well but You're right. It's just it really depends on what happens and your approach and it's not just the window size. It's you know how you adjust your trading. It's how you smooth your signals. Um all of those things combine which gives a much more complex definition of speed. And I think we use sort of common metrics to think about speed. But there's also if you're using nonlinear approaches or machine learning, you kind of your speed actually may be time varying. Um, so I think it's more as a benchmark to understand sort of where the frequency of the market was as opposed to kind of get into the nuance. >> Yeah, I remember speaking with I think it was with Nick Bolters uh was it last week or the week before, can't remember now. Um, where they had also done an analysis talking about speed. Um and and I I actually brought for our conversation today also some analysis that we've done on speed and just looking at what's the what was the best if you had to pick like the the best uh look back period anywhere between say zero and 300 days look back what would have been the best for each of the calendar years in the last 25 years and and what is interesting is that first of all I think that at least in our findings uh I'd love to hear what you think we do find that most years probably um eyeball bowling it now maybe 70% of the years it's kind of 200 days upwards. Now there can be other uh factors involved here but the way we analyzed it it was that kind of look back period but then you can have um a period where uh it's completely different and you have like three or four five years in a row and where it's completely different. Doesn't mean that in 2008 you couldn't have made money with 200 days. made money regardless of what time frame you used even though the best time frame uh according to our analysis was actually 56 days in 2008. Um so uh so it is interesting and I think according to Nick's data that what we have seen in the last few years like two or three years where um and and we'll talk about that in a second I'm sure where where a narrow universe um in so a super liquid markets um and kind of choosing a certain time frame worked really really well. But when you look at, you know, the 10-year period in 2000 2009, it would have been completely opposite. Something like from from memory. >> Yeah, that's what we and actually Nick and I were discussing that a little bit and it was very interesting that he had very similar results as me. Um, and you know, it just was confirming like, oh, I'm not just like, yeah, this is not just a data, he's seeing the same in his data. Um, but you know, it's interesting you say that because we wrote this really cool paper and this is I'm really dating myself, but it was called CTA style analysis and we did this really neat decomposition of the CTA space by speeds and by different design decisions and we did it over the history of the SG trend index going all the way back. And what we showed was a few key themes. One of them, and I really have to redo this paper, Ying Jang and I were talking about it actually. it's on the to-do list, but it's such a hard paper, so >> it's a lot of work. Um, but what we found is that early on CTAs were a lot faster than they are today. >> Um, and so if you think about an allocator who's looking at the CTA index as their actual input for what they're actually trying to get, they're getting a very different CTA in today's world than the return series of the index over time. And this is why we were interested in this analysis because we showed that more risk premia was coming in different strategies carry other sort of approaches are coming in. So more diversified approaches from historically and then also that models had slowed down quite a bit. Now we know why. I mean slower had been a little bit better but you know some of that reactivity is still very very important for sort of these crisis alpha or dislocation periods. You don't feel it when you you know haven't had a crisis recently but definitely um we highlighted that like the industry had gone slower had become more diversified. Um that means that the actual return series that you're using isn't necessarily the same managers and same approach. um that you would see today if we repeated 2008. >> I think another thing that maybe getting into a little bit too much of the secret source, so I don't want to put you on the spot. Um and that is uh because you mentioned it briefly. Um it's what we do with the data before we we generate our signals. I don't think we were that sophisticated 20 years ago as as we are now. Uh but I do think it's actually very important point that we don't really want to talk about frankly. I think um but um it is part of the secret source. >> Well, I think there's a lot of nuance I think in the approach and I think that that's what's fun. I think why I love this space is that you know when you look at it from the outside and then you actually implement it and like deal with the day-to-day details. There's like a lot of nuance of of details that different decisions that you make. And I think that's what makes it fun and especially for those of us that like to geek out on it, I guess. But but um there are a lot of details in how you're trading, how you're thinking about rebalancing and you know that that make it interesting. >> Yeah. Sure. Okay. So we talked about speed but there are a couple of other things that you looked into. Um so why don't we look at the next uh area. >> So the next area and this is something that you know I think you had mentioned Nick I I shared this with Nick because he had found some interesting. So we took like the 10 most liquid assets out there. Um and that's going to be things like gold and you know crude and and you know the yen bonds. Yeah. So >> tea bills. Um, and so if you take the 10 largest assets and you look at the difference like how trend falling on those 10 assets compares to a wider set of of assets, you'll see that there's sort of a weird pattern in the very recent uh period. And this is has to do with what those assets are pretty much right as well is that like that narrow asset was actually positive for 2025, very positive in 2024 and also did well in 2021. Um whereas if you look historically there's actually a 10-year period where those 10 assets underperformed a diversified basket for 10 years in a row, >> right? And so I think that that just kind of shows you that you know if you have a very concentrated approach it can be right and right even consecutively if those assets are the right ones. >> Um but they can also be wrong for long periods of time. So I think >> it was interesting to us because just simple things like if you had just picked gold like you looked really smart in 2025. Um, and it's not necessarily the case in every year for for CTAs. Um, just something to kind of food for thought, something interesting because we really believe in a diversified approach to um, we do also do replication. Um, but replication needs to be diversified enough to capture um, to capture general CTA moves. Um, but there is also value in diversification and you're going to get different return streams from both of them. Now, the star of the three in my opinion that we rarely talk about um, enlighten us on what something as benign as volatility estimation can do for a CTA or not do for CTA. Well, so I was interested in volatility estimation because if you think about what volatility and it's so nerdy like when people ask me about CTAs and how we build our portfolios and if I give a talk like at the university I always tell people we don't we don't talk about dollars we don't talk about notional value we talk about risk and we allocate risk and they often look at me especially if I'm speaking to people from the more classic economics and finance person I'm What do you mean? Like we think about every asset as a unit of risk and then we size our positions as a function of how much risk we think those assets are and then you know obviously that's a function of the signal strength as well. But you know that volatility estimation is not really an alpha signal but it's a calibration. It's the way that we think about how much of each thing should we have. And so when you look at volatility estimation, it's really sort of can create very different return patterns for trend depending on how fast or slow you adjust your volatility and depending on what happened in the market. So let me give you two examples, right? So if you take let's go back to 2022, okay, in 2022 I we noted this in our notes as well. bond volatility more than doubled. So volatility went up quite a bit because it was a stressful year for most of us. But bond volatility went from like an average of about four to an eight. >> And that's a big big big move for fixed income. And so if you are doing volatility sizing and you do it very slowly, then your volatility estimates will slowly get up to that 8%. And if the the big trend was in fixed income, you actually have a you know, you maintain a bigger exposure to the actual trend and capture more of it, >> right? Um if your volatility estimates are fast, then you sort of naturally constrict your positions faster even though you you're kind of risk managing that and that can go either good or bad. And what you see is in a year like 2022 having slower volatility estimates >> was very beneficial because trends were working. So you kind of capture more of the trend before your VA estimates say hey there's too much risk in all these assets. Let's cut cut our positions. And where you see the opposite is true is you know if you look at the second part of this year um and parts of this year it was very different. We saw in the first half of the year it was better to um have slower volatility and then it was better to be faster. So in some sense it's like faster volatility also allows you to adjust to a change more quickly. Um and that can create very different returns but both positive or negative depending on sort of how extreme and how much uh those those particular trends expand. Was that too clear or not? >> I mean it makes it makes sense. I obviously want to make sure that everybody um listening kind of captures the importance of it. But it basically means in in a in a an easy way to understand perhaps is that for example if we take either liberation day or maybe COVID 2022 um that we can if we have very short-term volatility estimation we can reduce our risk very quickly which for example uh let's call it say um Silicon Valley Bank uh I mean that was an event uh where um I think a lot of risk was taken out pretty quickly um but as you rightly and and and also it can also O mean that we can resize if we have kind of a linear approach to that. We can resize our risk pretty quick but we don't necessarily always have to have um the same speed uh for resizing that we have for for managing uh or reducing risk. And so there are as you rightly say there are so many decisions we have to take and and we will not get it perfect for sure. And we're trying to find kind of a m a happy medium in terms of how we want to do that. But it's something that is perhaps becoming more important in an odd way as the world gets more delobalized and more independent in the way market behavior uh shows up. >> Yeah, this is a good point. I mean I think why this is interesting is if you look at last year it would have been painful in liberation day to be faster adjusting your volatility but if you adjusted the vault back down quickly again then you would be able to capture the second half of the year better. >> So I think that you know it just shows very different paths. So you'll have different return paths depending on how you think about V. And in some years it would be for the better and some years for the worst. But it's sort of part of the art of risk management for CTA that everything to us is v sizing. You know how how much risk are we seeing in each individual asset that we trade? Um, and it's something like I actually look at a lot just kind of what are the VS of you know the different assets and how are we seeing those change over time and silver is like a fun one to look at this year right >> but you're seeing sort of huge changes in terms of how um those assets volatility has changed just because risk has changed. >> Yeah. I I'd like to leave the kind of 2025 review uh with a couple of thoughts and then we'll jump on to another paper that we will pick a few highlights from. But you know when I think about 2025 I think most of us and I've said this I think last week as well that most of us would say that was really an unusual year in so many respect. Yet in other respects when you're a pure trend follower actually the year wasn't that unusual. It was pretty familiar. meaning there were like a handful of markets that did all the work and then there are lots of markets that didn't really do so well and and one or two that was really difficult for sure. Anyways, but when when I hear you talk um and um knowing everything you've done and written about and so on and so forth, I I I can't help thinking about 2025 as a year of maybe kind of regime change kind of thing, which straight away leads me to the whole crisis alpha and the original definition of what you discovered, what you the answer you came up with when a pension fund if I remember correctly asked you many many years ago why do you think these strategies do well and I don't remember exactly how you phrased it when when I when I spoke to you about it a few years ago but you mentioned like three or four things um and and those things actually ties in pretty well with this idea about regime change feel free if you remember them to to repeat them you might have them like you can say them in your sleep um I don't remember the exact wording but but they were like three or four things that are really important for why this strategy actually is super beneficial to have in the portfolio when you go through um a regime change as I think we are doing right now. So, I mean, I think you're hitting at the original paper on crisis alpha where we talked about >> and sometimes I definitely get and you you're you included in this like we sometimes banter about this um you know this concept of crisis alpha. >> No, actually let me just let me correct you here. Let me just correct you here. Your definition is actually the correct one. What I feel is that unfortunately people are misusing it because they call everything a crisis. That's my point just to put it on on the record. That is correct. So my original argument was you know crisis alpha is finding >> our opportunities during periods of market dislocation and distress >> right and so then you have to define what that is right but for me when you think about being able to capture a challenging environment in the markets it's about being adaptable >> it's about being liquid and avoiding bias >> and so I think you know if you take those three characteristics ICS you want to look at strategies that may be able to have some of those features. So trend is a strategy where you know intrinsically it shouldn't have a bias if things are going up or things are going down it it's going to follow that particular theme and 2022 reminded us of that right where we were able to short bonds which people have a hard time to understand. And then being liquid is also important and we forget about that because we haven't had a liquidity issue since 2008 but you know just wait till we do and then we'll remember. >> Um and also credit right is also part of the liquidity issue. Um and so you take that and then finally you also take opportunistic right so adaptable >> trends and opportunities during crisis are very different from crisis to crisis and a strategy that can capture some of those by just doing different things um can can be beneficial. I mean and I think a good example I use with that is a 2022 crisis was very different from say a COVID crisis and they had the exact opposite trends. So >> right >> co was long bonds short energy and 2022 was long energy short bonds. So you know if the crisis movements are something outside of what we trade then it's going to be hard for us to capture something like that. But I think the point is that you know having a strategy that's adaptable that changes over time and tends to do better when things are disruptive or moving a lot. Um it means our strategy is very cyclical as well but just on a different cycle. And so what you'll see is, and that's why even though Liberation Day was very challenging for the strategy, to me it was a catalyst of change in fundamentals that people were not sure what those fundamental changes meant. But now we're in a period where we're seeing the ramification of those changes, the deglobalization. We're seeing sort of the macro impact of changes in policy of diff of divergence across views globally and sort of potential geopolitical conflict and I think that creates macro change and themes and trends which we tend to benefit from. So it's cyclical but on a different cycle. So we tend to be mean reverting as a strategy as well. we'll have a great year like 2022 and it's been trickier since then and then you have you know then you'll have periods where the strategy works very well again it's been like that for decades. So >> yeah know and and to that point let me just remind um myself maybe you and certainly our audience that we talk a lot about 2022 one of the greatest periods um in the CTA industry really. However, it all started with Thanksgiving 2021 and and managers losing a ton in one single day when they came out with this news about the Omicron virus was going to come back and have after a day like that the best period uh for decades really. And I wonder if Liberation Day, when history books are written about our industry, will say, "Wow, do you remember that day? That was really bad." But then, wow, what a what a comeback. Um, I'm hoping, I don't know, but I'm hoping that's how we're going to see it uh at year's end. >> I think it's so funny, Neils, because we have these days that I remember and they're just like CTA days that you remember and other people don't share them, and you and I do, but like you'll be like, "Lack Friday. Oh, no." You know, or what was it? Italian bonds in 2019 or something like >> there's always something >> there's something that happens that you kind of go wow that was insane. Um, sure. >> Yeah. Yeah. Yeah. >> But let's jump into the last uh well, let's jump into the paper you brought along. I think I touched on this slightly, but I do want to just for for for the for the benefit of of of people, they can obviously download it themselves, but it is written by Mikita and maybe there's a couple of highlights and then I want to make sure before we finish today, I want to hear about what you're working on because I know there's a bunch of interesting papers uh lined up from your side. So, but from the Makita paper, was there anything um you thought, wow, this is actually worth mentioning? >> No, I just this is a new paper that just came out by Makita and I just really think they do a very very good job of summarizing so many interesting insights from across the industry. Um they kind of distill down sort of the changes in the industry and sort of what trend following really captures its its role in the portfolio, the dispersion in the space. So I think um you know probably one of the interesting ones that comes up also is just they talk a little bit about the AUMUum and sort of how in relative sense AUM for CTAs isn't that much larger. We always get this question, right? And I think even the Bloomberg article, crowding of of CTAs, and you know, I think the truth is is we trade in some of the most liquid assets out there. And, you know, the the idea that we're going to revert the yen trade and have more power than sort of the PM of Japan, I think, is is hard. Um there's definitely a concern to think about crowding, but um in general, these are very liquid markets, so they do highlight that. How about you? Did you see anything? >> Well, I mean, I I met with one of the authors last year at the um I Connections conference in Miami. Uh and I'm heading back to that conference uh next month and uh hopefully I'll run into to Ryan again. I will, if I was going to put one little um finger on it, u because I agree with you, it's a great paper and people should read it. Uh it's actually on the mckites.com uh web page and then I think it's under leadership, but their data is a bit out of date. they could because they didn't get published until I think December 2025. Some of the charts actually stopped like a year before. Would have been nice with some updated data. Um but of course I'm being very picky now and and very um you know self- serving saying oh it would have been nice to see uh completely updated data but but there we are. I will say one thing that you just touch on but just to visualize it for people um they have this wonderful chart where they show the percentage of the total hedge fund universe that uh manage futures actually uh you know is and back around after the uh great financial crisis where CTAs and crisis alpha thanks to you um became very popular a lot of money uh went into the industry and by 2020 uh sorry not by 2012 um the um uh the industry the CTA industry according to this chart uh was about 20% of the total hedge fund universe but now I think we're below 10%. >> Looks like you're at eight something like that. >> Yeah, something like that. So and and this is at the Q2 2025 number so it might be percentage bigger now um because of the uh recovery but it just to showcase that we are very small really as an industry and we've been pretty um constant in terms of official AUM. I know a lot of strategies like QA strategies and maybe uh individual pension funds are doing trend following uh or something similar. So it doesn't tell you all all you need to know about AUM but but um as an industry as a public industry we haven't really grown a lot. Um now maybe we will thanks to all the efforts of of Andrew um and all of that. So we'll we'll see. Um, so anyways, let's wrap this up by going into um something we rarely do on the uh podcast and that is looking into the future because of course as trend followers we never look into the future with any confidence but I think we can be a little bit confident about your research publishing uh plans in 2026. So I'm excited to hear about them and uh and what uh our listeners can expect during the next few months maybe from you and and your colleague. >> Well, I think you know we've been interested in a lot of different topics. So you can kind of hear a little bit in the theme. So we've been looking a little bit at macro strategies and trend and the relationship between those. That's something we're interested in and and sort of working on publishing some articles on that. Another one that's come up that I think is cool and I can highlight a a friend of mine's paper that I think geopolitical risk is very interesting to people right now. And what's so cool is, you know, there's a lot of academic research out there that does different ways of measuring it because geopolitical risk is like in in a vacuum is hard to define, right? But there's all sorts of LLM type, you know, sort of sentiment type indicators that one can build and look at sort of measuring using publicly available news data that kind of measure like how much geopolitical risk is perceived in s current news data. And so one thing we have been looking at as an interesting question and this actually came from a client asking us this question is like how does trend perform or how does you know how does trend perform based on polit geopolitical risk or trade war discussions. I'll highlight there's a there's a really good paper from some authors from UC Irving that actually did something this is what inspired me like their paper it's called geopolitical risk and stock returns and they kind of focus on not just geopolitical risk but they also look at trade wars and kind of trying to understand trade because I think we're in a period right now where trade trade negotiations trade balance the dollar effect is going to have a huge impact on some of the macro themes over the two years. So I think that is an area where we're going to continue kind of we need to think about but I you know just stepping back all of the research I've done on trend it likes disruption change and difficulty so increased geopolitical risk uh so as a preview to some of the things we found increased geopolitical risk and higher levels of geopolitical risk is generally positive. So the the answer is probably the same as you know higher inflation and things like this but this is kind of where the market is going and the things that people are concerned about. Um and the academic literature is definitely covering a lot of stuff on geopolitical risk and the value of you know diversifying for it and hedging it and things like that. So that's exciting to me. Uh fun stuff. Um and then of course you know we also other evergreen topics related to using managed features for retirement and stuff but so hopefully next time I come I'll have some of these papers so that I can share them with you. >> Yeah. No, absolutely. Absolutely. And um and and it it it sounds like unfortunately that that the only light at the end of the tunnel when you have geopolitical risk is is managed futures. Um not not many positive things come from from that. That's for sure. But uh if we can be that little light, I guess we'll take it. Um anyways, we'll see. We have no idea. Now, most importantly, let me just say to everyone listening that, um it takes a lot of work for Katie and all the other co-hosts to prepare for these conversations. So, uh if you wouldn't mind, go to your favorite podcast platform, leave a comment, leave a rating and review, and just a show of appreciation uh for all the hard work that goes into all of this. And of course, while you're there, uh, make sure you follow the show, as they say, because that's what the ALOS really like. Now, next week, I am joined by, uh, another author, Rob Carver, uh, who, uh, I'm sure will have some, uh, fun insights to the current environment as well as some other themes that he will bring along. Um, so if you have a question for Rob, you can send it to me, info@ toptradersplug.com, and I'll do my best to get it answered by Rob. That's it for today from Katie and me. Thanks ever so much for listening. We look forward to being back with you next week. And until next time, as usual, take care of yourself and take care of each other. 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.
Diversification is more important than ever! | Systematic Investor | Ep.385
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 Katie Kaminsky and I Neils Castro Lassen where each week we take the pulse of the global markets through the lens of a rules-based investor. Katie, it is wonderful to have you back this week. How are you doing? What's going on where you are? >> Hey Neils. Yeah, um I'm doing good. A little snowed in but otherwise good. You know, it's it feels like winter but that that's where we are. >> I was going to ask you about that. I mean, we hear a lot about this winter storm, but uh how how affected have you guys been? >> Well, I'd say like in Boston, we're basically just snowed in and there's just like mounds of snow that may be here forever, but I think I've been more following the ice storms cuz I'm originally from Tennessee and millions of people have been out of power and dislocated. So, it's been, you know, we're complaining about the snow, but like I really think it's been a serious issue for a lot of people dealing with power issues and, you know, having no heat. So, it's pretty pretty extreme January so far in many ways. >> Yeah. >> Yeah. For obvious reasons work-wise, I usually travel to Florida, so I've never really been caught in a winter storm in the US, but of course, you have the hurricanes. Um, and it's always puzzled me a little bit why the US when they know these things happen almost every year, either a winter storm or hurricane, why they don't dig down in the ground the uh the electrical cables. I I've never thought of it. >> You just read my mind cuz I'm from Tennessee and they have all all the trees are down because the the ice is so heavy on the trees >> and I just think like in Europe like they always dig them down and then it doesn't matter if a tree falls. I mean, yeah, it might hit your house, which is bad, but but it it's a really big, you know, logistical problem. >> Yeah. No, absolutely. Well, I'm sure people didn't tune in to hear about the weather, but I always ask you um and all the other co-host um what's been on your radar? I know literally weather has been on your radar, but is there anything else you've been sort of finding interesting in the beginning of 2026? um if we stay away from politics and stuff like that as as we normally do, but um anything else? >> I mean, I think for me it's been just following what's been going on in, you know, the silver markets for example, gold. I mean, those are not new trends, but like >> just the extremity of of moves in certain things where you think it's never going to end. Um it's pretty pretty interesting. So, it's an interesting world. 2026 is interesting. >> Oh, for sure. actually um you kind of read my mind about uh what's been on my radar. Um gold has been but not maybe for the reason that um that that that you have. It's because yesterday I saw an article about how Tether is becoming like as big a holder of gold as some of the so you know sovereign wealth funds but also some of the central banks. So that is really interesting and it kind of begs the question well how long can this go on because you're it's kind of a big change to maybe the monetary system and of course we know that the US are pushing for um new kinds of of um currency system or however we define it. Um so a lot of money has flown in you know flooded into these uh type of products and if they're then in the background buying gold and maybe other precious metals who knows then clearly we can understand better maybe why we see these extreme moves. And by the way, I was just looking at uh Margariminsk's um blog post and he did a a post about um gold and central bank holdings and it looks like there's been a positive buying of gold uh every single year since 2011 by central banks whilst in 2000 through 2009 they sold net gold every single year. So that's obviously also a big change. >> Yeah, that's interesting. I mean, it's just it it just shows you people are looking for value and they're going back to basics, right, in some sense, you know? >> Yeah. Yeah. Speaking of value in a different kind of way, a former chief economist or chief strategist, I'm not entirely sure, but Stain Jacobson, who used to be at Sax Bank, um he sent something out um this week that I thought was quite interesting. He sent out a chart where it basically shows that the US dollar is flirting with its 200 month simple moving average trying to penetrate it to the downside and I found that very interesting. Um and and he makes some points in in his uh in his material uh why this is important which I I fully agree with. we don't have to to go through this um now. But it is true that if that kind of relationship changes and we start seeing structurally kind of a a weak dollar world that has implications and I was thinking well maybe that's also part of the commodity story right I mean we know that commodities tend to do better in nominal price uh when when the dollar is weak um not always but but um often um I have had um Adam Rosenwag um on many times on the podcast and he's obviously a commodity expert and he talked about that usually you see a commodity super cycle really take off when you have some kind of change in the monetary system. So all of these false starts we've had in the last few years was really because there wasn't a major change in the monetary system but you could maybe argue that this time is different uh in that sense and therefore there could be some very sustained trends in commodities in general. We've already, as you alluded to, we've already seen them. Um, and and even this year, I mean, you you mentioned silver. Uh, I was just going to look at this uh on my screen. I mean, silver is up 68% so far, uh, this year. Platinum 35% uh, and gold is only up 27% so far. But here comes my my question to you. you know, CTAs, we kind of been known for having commodity exposure as a meaningful part of of the diversification that we offer. But in recent years, of course, some of the most popular CTA products have not been the underlying CTAs, it's been the replicators who tend to have much less exposure to commodities. Now, I'm not saying this that this means per se that they will do worse, but um it is a little bit interesting to me because it might remove some of the benefit that CTAs offer uh if you go into a product that trades much fewer markets and all the action and I'm not saying that that's where it's going to be, but what if the what if we are moving into a commodity super cycle and most of the action going forward will be um in commodities. Of course, some of it could spill over to financials like the dollar, like some interest rates, etc., etc., but still couldn't help make that kind of connection between where people are investing their money in CTAs right now and kind of the structural differences between say a replicator and and a very fully diversified CTA. I don't know if there's a question in there, but I'd love to hear your thoughts. Well, this is a really interesting question and we looked a little bit at this um in in the you know in some of our research recently just like the biggest markets and you know which markets have done the best and you know obviously if you look at the bigger markets and the commodities you start immediately with gold and >> perhaps you know energy right and so you do get you know as you build lower and lower into the pyramid of these typical assets you will see big differences in return but if you see some of those assets that are not in the typical, you know, sort of smaller portfolio. So, silver is a good example of that, right? So, like a lot of people, if you're just looking at one asset, you'd buy gold uh in futures. The second would be silver, and silver has outperformed gold, although gold did very well last year. So, you see depending on your asset set, you can have very different return profiles. And that's a big driver. One of the main drivers of return dispersion in our space is that posit positive returns come from big trends and you need to be exposed to these big trends and it's how much risk allocation you have to them that differentiates relative performance. So it turns out and we'll we can talk about this a little bit more later. Last year it was a very narrow band of assets that actually did well in trending. So if you happen to be in that narrow band, you look very good, right? Versus um right now what we're seeing is a much more broad um you know range of trends. So let's say copper, >> we're talking about copper, we're talking about aluminum, we're talking about >> silver, gold, platinum, palladium. Like you're seeing sort of really interesting trends across a wide range of different um assets. And you just have to ask the question is does gold represent all of those? And you know to some degree yes but to some degree no. Um and so I think that will just create some different return dispersion which is why you know every approach is not sort of giving you the index. It gives you sort of an one approach to to the CTA space. >> Yeah. No absolutely and we will come back to that I'm sure. Um I'm going to put you on the spot but it's fine if you don't know the answer. Um, do you know, and I don't know how you would even define it, but what's the liquidity difference really between gold and silver? Would you, if you had to say, okay, gold is 100% liquid. How liquid is silver comparably? Do do you have a feeling for? >> I don't have that off the top of my head, but the the two of them, you know, gold is obviously much more heavily traded than silver, but silver is also um heavily traded. We do also look at the volatility of those contracts and we have seen that silver volatility has increased last year for example. Um but I don't have those numbers off the top of my head but gold would come up first right it's as more more traded. >> Yeah. So, so, and I'm sure people will uh or maybe people don't know this, but I would hazard to guess that um because people might often say that when a market really moves in a big way like Koko did a few years ago, etc., etc., it's very easy to blame the CTA say, "Oh, they're the ones pushing the price higher. They're trend followers." But I think I I think I'm I'm I'm pretty correct when I'm saying that most of our friends in this industry probably got long gold a long time ago and we're not the ones buying gold right now. If anything, we're probably the ones selling into this rally because of expansion of volatility. So just to put that out there. >> Exactly. And I think the way you have to think about um CTAs tend to risk manage this approach, right? So as the V of assets go up, using a traditional CTA approach, you would actually reduce your positions. I think you talked a little bit about replication as well. If you're using one asset, you might end up with really large positions, for example, but in a typical diversified CTA program. Silver positions would be growing as V expands. There would be some profit taking in a sense where you kind of reduce positions as a function of V. Um, so I think you'll have much more evenly distributed positions across multiple metals in a CTA program right now. Um, that's capturing multiple themes instead of just maybe one, right? Yeah, if that makes sense. >> Sure. No, absolutely. And of course, for those who don't volatility adjust their positions, they're having a incredible maybe a worldbreaking uh month of January. Um, but we'll see that uh as the numbers come out. Anyways, trend following update. Um, we've already kind of touched on it. Um, it's been a great start to uh 2026. Now, I meant to look this up and I'm not entirely sure uh about what I'm saying. Now, we still have a day and a half left of the month, so anything can happen, but I wouldn't be surprised if the gen trend index is getting very close to getting back at new all-time highs. I wouldn't be surprised uh if that's the case. Um, and that also means that a number of CTAs uh might be coming back uh to uh to new all-time highs uh as we speak. Um, and that's going to drive some interest, I'm sure, once again. Um, uh, I I by mistake send you a link yesterday to a Wall Street Journal article that I thought was new. It turned out it wasn't. It was from last summer. And of course it's fun to read that article now because it was not a very um pretty picture they were painting of the uh trend following index or industry among other firms that was mentioned. Um they mentioned man group they're often uh referenced it's a great firm of course and they were talking about how um they had like called all men on deck you know have sent out an email to like 150 of their people like now you have to work really hard as if that makes any difference to how markets are trending that you can just put more manpower on the case and then suddenly whoops you start making money. Um, I don't think that made a difference, but performance uh for them and for for everyone else certainly picked up in the second half. So, so maybe uh a little bit of um negative press is not the worst thing we can get. It's usually a good sign uh and buying opportunity. Um but yeah, you mentioned it already. When I look at the data that I have access to, you're absolutely right. medals are doing uh the heavy lifting so far this year. But we're also seeing um some opportunities uh in cocoa um I would say and also something that hasn't moved um as much I feel for a while except maybe for the yen but some of the other currencies are giving some interesting opportunities. Um and coming back to this dollar theme and what if it does break the 200 month moving average whatever I mean could currency as a sector come back and really um help out so to speak and and support long-term performance uh once again because we know that once we get the bigger sectors like currencies like equities uh which actually have done pretty well and still doing well this month uh and fixed income of course then it does make a difference to our ability to deliver really really strong returns. There's no doubt about that. So anything that you've seen um on your side? >> Well, so far >> I think January has been very interesting because the profitability of trends has been diversified across multiple sectors. >> So it's this sort of multi- trends at bat kind of situation which is where we do best and where we're the least exposed to reversal. And you have definitely saw this on these riskoff days. And let me just explain. So you know equities have continued to be a positive trending contributor. Uh short US dollar and that sort of theme has extended and also worked very well. Uh certain places like the Aussie dollar have been very good for example. Um and then if you look in the commodity sector everything but energies I think energies have still been tricky a little bit. They've been up this month, but the the direction of those and the overall magnitude over the last year or so has been hard. But precious metals, base metals, and a few idiosyncratic uh commodities have just been really moving. And so why this is important is I always find it useful when there's a day where the S&P is down and you see that the trends diversify. So you don't just have that equity exposure. And so I think >> like this diversification of the different trends both the weak dollar theme combined with >> prog growth uh pro metals is is something that says things are moving and could are working very well for any sort of momentum trade this month and it's not just one theme it's multiple. >> Okay. Well let me quickly run through some numbers then. Um and these numbers well my trend barometer yesterday finished at 59. So that's a strong strong reading. Um and it's in line with the uh performance. Um I think uh the well I know the numbers I'm going to quote now is as of Tuesday night because it takes a little while um for for the numbers to be uh published. Um and we're recording early afternoon on Thursday. So they're not live yet. Anyways, I think yesterday was a good day for the CTA industry anyways as far as I can tell. Um, but before I get into the usual numbers, there is one other number I'd like to mention, and that is that our good friends over at Social, they have this wonderful trend indicator, which for the longest time actually didn't necessarily do fantastically in terms of performance, but the information they put out is very useful for people if they want to understand how managers might be positioned. That's the first thing I would mention. And then I was looking at it uh today, the trend indicator, I mean month to date up 19.27% as of probably uh last night. I mean that's extraordinary. That could also be a record in its history. I don't know. We'll have to ask Tom when he comes back in a couple of weeks. Um so lots of interesting stuff um for people to uh to dive into. But anyways, as usual, Btop 50 index up a whopping 5.41% so far. Sockchen CT index up a whopping 5.94% and the trend index topping that out with 6.13% as of Tuesday not even including yesterday and the even the short-term traders index up 2.56% which is doing pretty well and let me also mention the bridge alternatives index I did check it uh just to give them a little bit of a spotlight uh up and that's a pure trend five managers um for all I know you might be in it actually Katie but 7.26% 26%. Um, it's up so far this month. So, all indices all around doing well. And as I mentioned last week, we also did well in January of 2025. So, I'm not I don't want to jinx it too much, right? Anyways, Msei World up 2.8 uh 82%. S&P US aggregate bond index pretty flat, up 19 basis points. And the S&P 500 total return up 2% as of yesterday. Um, now before we jump into Katie's wonderful topics, I will just um mention that only a couple of weeks ago I published the eighth edition of the ultimate guide to the best investment books of all times. And so we now have and this is thanks to the incredible uh group of people that works with me on the podcast. We now have more than 600 titles in the book uh and or in the guide. And it is giving you lots of options to um educate and and learn uh from different sources on different topics, not all finance related frankly. Um and you can get it by going to toptraders onplot.com/ultimate or if you're on my Sunday update uh email, you'll get uh links to it. Anyways, so back to you, Katie. you brought along a few different things. Uh the main feature I think is fair to say is your own paper which I'm excited to dive in. But beforehand um and it's funny every time I see a story about trend following and managed futures at the moment it's either you Andrew or both of you being quoted. Um and I think in this Bloomberg article you're also both being quoted along with a few other friends uh from the industry. and Jerry too. There was Jerry was there too. >> Jerry, our good friend Jerry is there as well. Wonderful. So, um why don't you uh tell me about the highlights from the article? >> Well, I think it was, you know, it's always fun because when Bloomberg or Wall the Wall Street Journal, anyone is sort of starts profiling trend falling, that's usually a sign that things are going really well or things are going really bad. So, >> you know, um and you mentioned that. So um they you know they were reach they reached out to talk to us a little bit about um what was going on and so of course we shared this paper we're going to talk about um and it just was an interesting sort of shift of themes where you can kind of see that last year was very challenging but we've seen the aftermath of such huge shifts in fundamental relationships that are now sort of coming to a fruition and becoming really strong trends. and you know trend falling is kind of off to a roaring start at the beginning of the year. So I think the article kind of highlights that and it also uh featured one of the plots from the paper that that we kind of recently published and just kind of this idea of you know what was going on and what how different this year could be from last year for example. >> Yeah. And do you remember just on top of off top of your head um kind of what the various people were I know you know you're going to be commenting on kind of the same that's in your paper for sure but do you know how the other friends we have who were a part of the article what they were kind of focusing on or their angle to to what's going on right right now when when asked by journalists >> well I think you know the general theme is that there are very strong themes and trends in the markets that are easy to discern concern um that you know the aftermath of the massive change from last year is resulting in a great environment for trend. Um, I'd say that, you know, there wasn't anything sort of earthshattering in anyone's comments as as, you know, as usually it would be, but wouldn't be. But I think the general theme is, and I felt this way as well, is that going into this year, we have such an extreme environment and we still have a situation where the US growth has still been very strong. So, you know, it feels like all systems go until it's not. Um, and I think for us this is great because we're ready to roar upwards and then of course we'll pivot and if we do have sort of a boom bust type of cycle, which is what it feels like, >> uh, we can be part of the boom, but we can also participate in the bust in a in a positive way. So that that's a very positive environment for trend. steady as you go is not good for us and shocks are not good but you know booms and busts are great. >> Yeah, I'll I I have a thought. I'll try and remember it in a few minutes because I do want to dig into uh and let you talk about the paper you uh just released. Um so why don't you tell us a little bit about what you and your colleague Ying Shan Shiao, is that correctly pronounced? >> Yan. Yeah, >> she's written a bunch of papers with me. Um, we have a couple on on the in the pipeline as well. So, >> which we will talk about, >> we can talk about later. But, um, yeah, so we usually every year we try to do a synopsis piece where we look at things that happened and it's it's quite a lot of fun. uh where we kind of look at things that we notice through the year and then document them and then talk a little bit about some of the dispersion choices or things that cause dispersion in our space every year. Um and every year is different. So we kind of you know highlight what we found interesting in that year. Um and we kind of started off this piece um by kind of one of the big things that's been really notable in the previous year was just the difference between sort of pure trend and sort of the aggregate SG trend index. So for example, trend really struggled in 2025 whereas macro strategies and sort of more fundamental approaches or perhaps economic trend and things that kind of looked through the prices and focused on the fundamentals were a little bit better positioned for a year where there was a lot of headline risk and a lot of shock. Um what we're seeing already this year is that's not as much the case. So macro has been lagging trend now that the fundamentals are kind of much more clear. Um and so that kind of is one thing you'll see in in our space is a sort of debate of you know at what point do you see through the price moves and you look at sort of the fundamentals and that relative difference was large last year and it was persistent across every quarter. They were somewhat similar in Q4, but the difference in terms of how macro and trend reacted to the first part of the year in liberation day and how it recovered post liberation day um was very different. So we kind of highlighted that one point. Um >> can I interrupt you here and just ask you on that specific point? Have you uh ever looked back in time because economic trend became popular only a few years ago, right? But um have you looked back in time and and found similar periods where really uh these two kind of approaches uh differ a lot? >> So economic trend and and price-based trend are highly correlated. Um they use different inputs to determine what the trend is but they both are create you know trading a trend in an asset right and the difference is really in that input. And so when you look at uh economic trend signals, it's really about, you know, measuring things like growth and is growth accelerating, is inflation changing and sort of using that to kind of determine where the trend should be in economic in based on economic fundamentals, right? And if you look at those strategies compared with price-based strategies, they're roughly, you know, 40 50% correlated because they end up in the same trends, right? So if growth is positive, trending will eventually be in equities. If growth is positive, macroeconomic trend will be buying equities. So the timing of the two different strategies is slightly different, but they do end up in some of the same trends over time. And so they're naturally sort of complimentary. And in extreme years like last year where prices um were much more affected by sort of headline risk, sentiment risk change uh versus macro um they they had a harder time to follow. Whereas at the same time um price trends can better capture some of the themes at different points and more aggressively than say a macro trend which can sometimes be slow or get the macro wrong when things change. So they naturally complement each other. >> I can't help ask you do you think economic trend benefited last year from no economic data from the US for a while? I mean I don't know what do they put into their model if there is no data being released. This is a very good point. Um, but I think that's a US I'd say for the US numbers perhaps, but you know, a lot of economic trend is really global data across multiple different regions. So, you know, you had a little bit of nans probably in some of those, you know, in some of those data arrays for a little while, but you know, there's also other methods and other data sources that people can use that are not necessarily the official. I think those official numbers are important because they, you know, they kind of are a signal for the market. So, especially for us, we care a lot about CPI and PCE and things like this because >> they are a focal point for price trends as well. So, they do kind of >> show or confirm or not confirm general themes. >> Yeah, interesting. Also interesting timing by the way this week where yesterday pal was out talking about the latest decision from the Fed not to do anything but uh certainly deflecting a few questions about his uh you know the the one who will follow him. Um it'll be interesting to hopefully we'll learn soon. Um okay so that was a little bit of a detour. I I kind of interrupted your flow a little bit but I think >> no but it was a good question. >> Okay. Um certainly it was an interesting question for me personally but um so yeah we talked about the the um kind of the asset cloud theme and and and differences and you can and and the difference between macro and price based trend following. Um and then there was a second kind of stream you went down in your paper as far as I uh remember. Um so talk talk to us about that and we can dig deep into some of this where you find the most um interesting parts. So the other thing that we we always like to do is we like to kind of distill down decisions that people make into >> different decisions and how they performed in a given year. Um because these decisions that each individual CTA makes, you know, the speed you trade, the number of markets you trade, the risk allocation, your volatility sizing, position sizing, all of these are sort of idiosyncratic decisions to individual managers. And a lot of this is an art. There's no right answer, right? But in a given year, you can have very very different results depending on how the trends evolve and how markets move. And I think that's what's tricky about trend is you end up with very high correlation across managers, but you don't end up with the same returns. >> So you kind of because we're doing similar things, you have similar correlation. But when you look at different performance, a choice of which market set or what speed you use can create very different results in a year where you know things were definitely very extreme. uh you'll see perhaps even more variations in those choices. And so these choices are tricky because in one year one the choice might look very smart and then the next year it could look not so smart. Um and there's a lot of noise around those. So that's why we like to look at those just to kind of show how those different decisions affected returns in 2025 but how they may have like affected periods in the past as well. So, you know, a lot of us focus on 2022 because that was also a very important diversifying event for CTAs. So, we actually looked at three things, Neils. >> We looked at speed, um, how fast you're trading and sort of your typical like data window for how you're taking in price trends. We also looked at market size and concentration. >> Um, and finally, we looked at volatility adjusting. Um because in a year like last year where we had such a big turbulence event, so the liberation day event, you kind of that shock if you think about a databased approach, how does that permeate through all the decisions you make? And so a big shock can definitely adjust different things and create very different returns depending on how you uh react to that shock. And I think that's something that you know causes very very different results. So maybe I can just go through each of these three and we can talk about it because it's kind of interesting. Abs. >> Absolutely. And I I actually just want to say that I really think when we get to the volatility estimation um that that's something we rarely talk about uh on the podcast. We always talk about speed and market selection. So we'll start with that. But I think people should pay really close attention when we get to the the third one. >> Yeah, definitely. Because I mean that's something I' I follow and think a lot about. But I mean that's like a nerdy like CTA thing. I love to look at like Vault estimates and like I've cross different Yeah, we'll get there. But so we first looked at speed and what was interesting about our estimates for speed for this year. It turns out that shorter windows and longer windows work the best. So, for example, if you had say a 12-month window, so you were looking at 12 months of data, you kind of were able to navigate some of these big shocks and and and do well last year or at least flat. Um, and the same thing is the case with the shorter windows. And that may make sense, right? Because if you have this liberation day event, if you have a shorter window, you get out, you get back in, you keep moving, and you don't get rattled as much by sort of this extreme V-shaped move that that you had perhaps um in liberation day. So, the worst time horizons are around 7 to n months or 4 to 9 months. So, right in the sweet spot of many CTAs where you're kind of looking at that medium horizon. So you can imagine that you know shorter term which is a very small group of people not that many people do shorter term and long-term which is more consistent with like replication and sort of slower moving strategies that looked a lot better last year. Um last and then the year before you saw the opposite that fast was really hard and slow again was better. So, you know, it really really varies a lot given the this individual year, but it kind of showed you how you could have had quite a big difference between returns just given the overall speed that you traded the markets in 2025. >> Maybe I can add one thing actually. We talk often about speed as being the look back period that we use and that's absolutely correct. Um, I remember one of my very very early interviews on the podcast, so this is more than 10 years ago. Um, the manager actually said, "Well, we only trade once a week. First of all, we trade weekly bars, not daily bars." And of course, we know that our friend Andrew only trades once a week. So, that's another way of I mean, speed is kind of affected by your trade frequency as well. Um and um and I've even heard uh some people talk about maybe not publicly where they say well we get the signal today but we we actually wait 3 days before we change uh positions based on that signal we kind of delay the so it's so speed is an interesting thing even though I completely agree that the most common way of thinking about it is just the look back period of the model um but there's a couple of small um intricacies uh as well that last year if you only adjusted position once a week and you didn't you didn't really you know you didn't panic let's you know quote unquote panic uh during liberation day clearly that that is where some differences or the biggest differences happened among managers was just in April >> yeah and I mean but I think you would see very different results in a year like co we definitely saw that as well being faster was better there >> uh we wrote some articles about that as well but You're right. It's just it really depends on what happens and your approach and it's not just the window size. It's you know how you adjust your trading. It's how you smooth your signals. Um all of those things combine which gives a much more complex definition of speed. And I think we use sort of common metrics to think about speed. But there's also if you're using nonlinear approaches or machine learning, you kind of your speed actually may be time varying. Um, so I think it's more as a benchmark to understand sort of where the frequency of the market was as opposed to kind of get into the nuance. >> Yeah, I remember speaking with I think it was with Nick Bolters uh was it last week or the week before, can't remember now. Um, where they had also done an analysis talking about speed. Um and and I I actually brought for our conversation today also some analysis that we've done on speed and just looking at what's the what was the best if you had to pick like the the best uh look back period anywhere between say zero and 300 days look back what would have been the best for each of the calendar years in the last 25 years and and what is interesting is that first of all I think that at least in our findings uh I'd love to hear what you think we do find that most years probably um eyeball bowling it now maybe 70% of the years it's kind of 200 days upwards. Now there can be other uh factors involved here but the way we analyzed it it was that kind of look back period but then you can have um a period where uh it's completely different and you have like three or four five years in a row and where it's completely different. Doesn't mean that in 2008 you couldn't have made money with 200 days. made money regardless of what time frame you used even though the best time frame uh according to our analysis was actually 56 days in 2008. Um so uh so it is interesting and I think according to Nick's data that what we have seen in the last few years like two or three years where um and and we'll talk about that in a second I'm sure where where a narrow universe um in so a super liquid markets um and kind of choosing a certain time frame worked really really well. But when you look at, you know, the 10-year period in 2000 2009, it would have been completely opposite. Something like from from memory. >> Yeah, that's what we and actually Nick and I were discussing that a little bit and it was very interesting that he had very similar results as me. Um, and you know, it just was confirming like, oh, I'm not just like, yeah, this is not just a data, he's seeing the same in his data. Um, but you know, it's interesting you say that because we wrote this really cool paper and this is I'm really dating myself, but it was called CTA style analysis and we did this really neat decomposition of the CTA space by speeds and by different design decisions and we did it over the history of the SG trend index going all the way back. And what we showed was a few key themes. One of them, and I really have to redo this paper, Ying Jang and I were talking about it actually. it's on the to-do list, but it's such a hard paper, so >> it's a lot of work. Um, but what we found is that early on CTAs were a lot faster than they are today. >> Um, and so if you think about an allocator who's looking at the CTA index as their actual input for what they're actually trying to get, they're getting a very different CTA in today's world than the return series of the index over time. And this is why we were interested in this analysis because we showed that more risk premia was coming in different strategies carry other sort of approaches are coming in. So more diversified approaches from historically and then also that models had slowed down quite a bit. Now we know why. I mean slower had been a little bit better but you know some of that reactivity is still very very important for sort of these crisis alpha or dislocation periods. You don't feel it when you you know haven't had a crisis recently but definitely um we highlighted that like the industry had gone slower had become more diversified. Um that means that the actual return series that you're using isn't necessarily the same managers and same approach. um that you would see today if we repeated 2008. >> I think another thing that maybe getting into a little bit too much of the secret source, so I don't want to put you on the spot. Um and that is uh because you mentioned it briefly. Um it's what we do with the data before we we generate our signals. I don't think we were that sophisticated 20 years ago as as we are now. Uh but I do think it's actually very important point that we don't really want to talk about frankly. I think um but um it is part of the secret source. >> Well, I think there's a lot of nuance I think in the approach and I think that that's what's fun. I think why I love this space is that you know when you look at it from the outside and then you actually implement it and like deal with the day-to-day details. There's like a lot of nuance of of details that different decisions that you make. And I think that's what makes it fun and especially for those of us that like to geek out on it, I guess. But but um there are a lot of details in how you're trading, how you're thinking about rebalancing and you know that that make it interesting. >> Yeah. Sure. Okay. So we talked about speed but there are a couple of other things that you looked into. Um so why don't we look at the next uh area. >> So the next area and this is something that you know I think you had mentioned Nick I I shared this with Nick because he had found some interesting. So we took like the 10 most liquid assets out there. Um and that's going to be things like gold and you know crude and and you know the yen bonds. Yeah. So >> tea bills. Um, and so if you take the 10 largest assets and you look at the difference like how trend falling on those 10 assets compares to a wider set of of assets, you'll see that there's sort of a weird pattern in the very recent uh period. And this is has to do with what those assets are pretty much right as well is that like that narrow asset was actually positive for 2025, very positive in 2024 and also did well in 2021. Um whereas if you look historically there's actually a 10-year period where those 10 assets underperformed a diversified basket for 10 years in a row, >> right? And so I think that that just kind of shows you that you know if you have a very concentrated approach it can be right and right even consecutively if those assets are the right ones. >> Um but they can also be wrong for long periods of time. So I think >> it was interesting to us because just simple things like if you had just picked gold like you looked really smart in 2025. Um, and it's not necessarily the case in every year for for CTAs. Um, just something to kind of food for thought, something interesting because we really believe in a diversified approach to um, we do also do replication. Um, but replication needs to be diversified enough to capture um, to capture general CTA moves. Um, but there is also value in diversification and you're going to get different return streams from both of them. Now, the star of the three in my opinion that we rarely talk about um, enlighten us on what something as benign as volatility estimation can do for a CTA or not do for CTA. Well, so I was interested in volatility estimation because if you think about what volatility and it's so nerdy like when people ask me about CTAs and how we build our portfolios and if I give a talk like at the university I always tell people we don't we don't talk about dollars we don't talk about notional value we talk about risk and we allocate risk and they often look at me especially if I'm speaking to people from the more classic economics and finance person I'm What do you mean? Like we think about every asset as a unit of risk and then we size our positions as a function of how much risk we think those assets are and then you know obviously that's a function of the signal strength as well. But you know that volatility estimation is not really an alpha signal but it's a calibration. It's the way that we think about how much of each thing should we have. And so when you look at volatility estimation, it's really sort of can create very different return patterns for trend depending on how fast or slow you adjust your volatility and depending on what happened in the market. So let me give you two examples, right? So if you take let's go back to 2022, okay, in 2022 I we noted this in our notes as well. bond volatility more than doubled. So volatility went up quite a bit because it was a stressful year for most of us. But bond volatility went from like an average of about four to an eight. >> And that's a big big big move for fixed income. And so if you are doing volatility sizing and you do it very slowly, then your volatility estimates will slowly get up to that 8%. And if the the big trend was in fixed income, you actually have a you know, you maintain a bigger exposure to the actual trend and capture more of it, >> right? Um if your volatility estimates are fast, then you sort of naturally constrict your positions faster even though you you're kind of risk managing that and that can go either good or bad. And what you see is in a year like 2022 having slower volatility estimates >> was very beneficial because trends were working. So you kind of capture more of the trend before your VA estimates say hey there's too much risk in all these assets. Let's cut cut our positions. And where you see the opposite is true is you know if you look at the second part of this year um and parts of this year it was very different. We saw in the first half of the year it was better to um have slower volatility and then it was better to be faster. So in some sense it's like faster volatility also allows you to adjust to a change more quickly. Um and that can create very different returns but both positive or negative depending on sort of how extreme and how much uh those those particular trends expand. Was that too clear or not? >> I mean it makes it makes sense. I obviously want to make sure that everybody um listening kind of captures the importance of it. But it basically means in in a in a an easy way to understand perhaps is that for example if we take either liberation day or maybe COVID 2022 um that we can if we have very short-term volatility estimation we can reduce our risk very quickly which for example uh let's call it say um Silicon Valley Bank uh I mean that was an event uh where um I think a lot of risk was taken out pretty quickly um but as you rightly and and and also it can also O mean that we can resize if we have kind of a linear approach to that. We can resize our risk pretty quick but we don't necessarily always have to have um the same speed uh for resizing that we have for for managing uh or reducing risk. And so there are as you rightly say there are so many decisions we have to take and and we will not get it perfect for sure. And we're trying to find kind of a m a happy medium in terms of how we want to do that. But it's something that is perhaps becoming more important in an odd way as the world gets more delobalized and more independent in the way market behavior uh shows up. >> Yeah, this is a good point. I mean I think why this is interesting is if you look at last year it would have been painful in liberation day to be faster adjusting your volatility but if you adjusted the vault back down quickly again then you would be able to capture the second half of the year better. >> So I think that you know it just shows very different paths. So you'll have different return paths depending on how you think about V. And in some years it would be for the better and some years for the worst. But it's sort of part of the art of risk management for CTA that everything to us is v sizing. You know how how much risk are we seeing in each individual asset that we trade? Um, and it's something like I actually look at a lot just kind of what are the VS of you know the different assets and how are we seeing those change over time and silver is like a fun one to look at this year right >> but you're seeing sort of huge changes in terms of how um those assets volatility has changed just because risk has changed. >> Yeah. I I'd like to leave the kind of 2025 review uh with a couple of thoughts and then we'll jump on to another paper that we will pick a few highlights from. But you know when I think about 2025 I think most of us and I've said this I think last week as well that most of us would say that was really an unusual year in so many respect. Yet in other respects when you're a pure trend follower actually the year wasn't that unusual. It was pretty familiar. meaning there were like a handful of markets that did all the work and then there are lots of markets that didn't really do so well and and one or two that was really difficult for sure. Anyways, but when when I hear you talk um and um knowing everything you've done and written about and so on and so forth, I I I can't help thinking about 2025 as a year of maybe kind of regime change kind of thing, which straight away leads me to the whole crisis alpha and the original definition of what you discovered, what you the answer you came up with when a pension fund if I remember correctly asked you many many years ago why do you think these strategies do well and I don't remember exactly how you phrased it when when I when I spoke to you about it a few years ago but you mentioned like three or four things um and and those things actually ties in pretty well with this idea about regime change feel free if you remember them to to repeat them you might have them like you can say them in your sleep um I don't remember the exact wording but but they were like three or four things that are really important for why this strategy actually is super beneficial to have in the portfolio when you go through um a regime change as I think we are doing right now. So, I mean, I think you're hitting at the original paper on crisis alpha where we talked about >> and sometimes I definitely get and you you're you included in this like we sometimes banter about this um you know this concept of crisis alpha. >> No, actually let me just let me correct you here. Let me just correct you here. Your definition is actually the correct one. What I feel is that unfortunately people are misusing it because they call everything a crisis. That's my point just to put it on on the record. That is correct. So my original argument was you know crisis alpha is finding >> our opportunities during periods of market dislocation and distress >> right and so then you have to define what that is right but for me when you think about being able to capture a challenging environment in the markets it's about being adaptable >> it's about being liquid and avoiding bias >> and so I think you know if you take those three characteristics ICS you want to look at strategies that may be able to have some of those features. So trend is a strategy where you know intrinsically it shouldn't have a bias if things are going up or things are going down it it's going to follow that particular theme and 2022 reminded us of that right where we were able to short bonds which people have a hard time to understand. And then being liquid is also important and we forget about that because we haven't had a liquidity issue since 2008 but you know just wait till we do and then we'll remember. >> Um and also credit right is also part of the liquidity issue. Um and so you take that and then finally you also take opportunistic right so adaptable >> trends and opportunities during crisis are very different from crisis to crisis and a strategy that can capture some of those by just doing different things um can can be beneficial. I mean and I think a good example I use with that is a 2022 crisis was very different from say a COVID crisis and they had the exact opposite trends. So >> right >> co was long bonds short energy and 2022 was long energy short bonds. So you know if the crisis movements are something outside of what we trade then it's going to be hard for us to capture something like that. But I think the point is that you know having a strategy that's adaptable that changes over time and tends to do better when things are disruptive or moving a lot. Um it means our strategy is very cyclical as well but just on a different cycle. And so what you'll see is, and that's why even though Liberation Day was very challenging for the strategy, to me it was a catalyst of change in fundamentals that people were not sure what those fundamental changes meant. But now we're in a period where we're seeing the ramification of those changes, the deglobalization. We're seeing sort of the macro impact of changes in policy of diff of divergence across views globally and sort of potential geopolitical conflict and I think that creates macro change and themes and trends which we tend to benefit from. So it's cyclical but on a different cycle. So we tend to be mean reverting as a strategy as well. we'll have a great year like 2022 and it's been trickier since then and then you have you know then you'll have periods where the strategy works very well again it's been like that for decades. So >> yeah know and and to that point let me just remind um myself maybe you and certainly our audience that we talk a lot about 2022 one of the greatest periods um in the CTA industry really. However, it all started with Thanksgiving 2021 and and managers losing a ton in one single day when they came out with this news about the Omicron virus was going to come back and have after a day like that the best period uh for decades really. And I wonder if Liberation Day, when history books are written about our industry, will say, "Wow, do you remember that day? That was really bad." But then, wow, what a what a comeback. Um, I'm hoping, I don't know, but I'm hoping that's how we're going to see it uh at year's end. >> I think it's so funny, Neils, because we have these days that I remember and they're just like CTA days that you remember and other people don't share them, and you and I do, but like you'll be like, "Lack Friday. Oh, no." You know, or what was it? Italian bonds in 2019 or something like >> there's always something >> there's something that happens that you kind of go wow that was insane. Um, sure. >> Yeah. Yeah. Yeah. >> But let's jump into the last uh well, let's jump into the paper you brought along. I think I touched on this slightly, but I do want to just for for for the for the benefit of of of people, they can obviously download it themselves, but it is written by Mikita and maybe there's a couple of highlights and then I want to make sure before we finish today, I want to hear about what you're working on because I know there's a bunch of interesting papers uh lined up from your side. So, but from the Makita paper, was there anything um you thought, wow, this is actually worth mentioning? >> No, I just this is a new paper that just came out by Makita and I just really think they do a very very good job of summarizing so many interesting insights from across the industry. Um they kind of distill down sort of the changes in the industry and sort of what trend following really captures its its role in the portfolio, the dispersion in the space. So I think um you know probably one of the interesting ones that comes up also is just they talk a little bit about the AUMUum and sort of how in relative sense AUM for CTAs isn't that much larger. We always get this question, right? And I think even the Bloomberg article, crowding of of CTAs, and you know, I think the truth is is we trade in some of the most liquid assets out there. And, you know, the the idea that we're going to revert the yen trade and have more power than sort of the PM of Japan, I think, is is hard. Um there's definitely a concern to think about crowding, but um in general, these are very liquid markets, so they do highlight that. How about you? Did you see anything? >> Well, I mean, I I met with one of the authors last year at the um I Connections conference in Miami. Uh and I'm heading back to that conference uh next month and uh hopefully I'll run into to Ryan again. I will, if I was going to put one little um finger on it, u because I agree with you, it's a great paper and people should read it. Uh it's actually on the mckites.com uh web page and then I think it's under leadership, but their data is a bit out of date. they could because they didn't get published until I think December 2025. Some of the charts actually stopped like a year before. Would have been nice with some updated data. Um but of course I'm being very picky now and and very um you know self- serving saying oh it would have been nice to see uh completely updated data but but there we are. I will say one thing that you just touch on but just to visualize it for people um they have this wonderful chart where they show the percentage of the total hedge fund universe that uh manage futures actually uh you know is and back around after the uh great financial crisis where CTAs and crisis alpha thanks to you um became very popular a lot of money uh went into the industry and by 2020 uh sorry not by 2012 um the um uh the industry the CTA industry according to this chart uh was about 20% of the total hedge fund universe but now I think we're below 10%. >> Looks like you're at eight something like that. >> Yeah, something like that. So and and this is at the Q2 2025 number so it might be percentage bigger now um because of the uh recovery but it just to showcase that we are very small really as an industry and we've been pretty um constant in terms of official AUM. I know a lot of strategies like QA strategies and maybe uh individual pension funds are doing trend following uh or something similar. So it doesn't tell you all all you need to know about AUM but but um as an industry as a public industry we haven't really grown a lot. Um now maybe we will thanks to all the efforts of of Andrew um and all of that. So we'll we'll see. Um, so anyways, let's wrap this up by going into um something we rarely do on the uh podcast and that is looking into the future because of course as trend followers we never look into the future with any confidence but I think we can be a little bit confident about your research publishing uh plans in 2026. So I'm excited to hear about them and uh and what uh our listeners can expect during the next few months maybe from you and and your colleague. >> Well, I think you know we've been interested in a lot of different topics. So you can kind of hear a little bit in the theme. So we've been looking a little bit at macro strategies and trend and the relationship between those. That's something we're interested in and and sort of working on publishing some articles on that. Another one that's come up that I think is cool and I can highlight a a friend of mine's paper that I think geopolitical risk is very interesting to people right now. And what's so cool is, you know, there's a lot of academic research out there that does different ways of measuring it because geopolitical risk is like in in a vacuum is hard to define, right? But there's all sorts of LLM type, you know, sort of sentiment type indicators that one can build and look at sort of measuring using publicly available news data that kind of measure like how much geopolitical risk is perceived in s current news data. And so one thing we have been looking at as an interesting question and this actually came from a client asking us this question is like how does trend perform or how does you know how does trend perform based on polit geopolitical risk or trade war discussions. I'll highlight there's a there's a really good paper from some authors from UC Irving that actually did something this is what inspired me like their paper it's called geopolitical risk and stock returns and they kind of focus on not just geopolitical risk but they also look at trade wars and kind of trying to understand trade because I think we're in a period right now where trade trade negotiations trade balance the dollar effect is going to have a huge impact on some of the macro themes over the two years. So I think that is an area where we're going to continue kind of we need to think about but I you know just stepping back all of the research I've done on trend it likes disruption change and difficulty so increased geopolitical risk uh so as a preview to some of the things we found increased geopolitical risk and higher levels of geopolitical risk is generally positive. So the the answer is probably the same as you know higher inflation and things like this but this is kind of where the market is going and the things that people are concerned about. Um and the academic literature is definitely covering a lot of stuff on geopolitical risk and the value of you know diversifying for it and hedging it and things like that. So that's exciting to me. Uh fun stuff. Um and then of course you know we also other evergreen topics related to using managed features for retirement and stuff but so hopefully next time I come I'll have some of these papers so that I can share them with you. >> Yeah. No, absolutely. Absolutely. And um and and it it it sounds like unfortunately that that the only light at the end of the tunnel when you have geopolitical risk is is managed futures. Um not not many positive things come from from that. That's for sure. But uh if we can be that little light, I guess we'll take it. Um anyways, we'll see. We have no idea. Now, most importantly, let me just say to everyone listening that, um it takes a lot of work for Katie and all the other co-hosts to prepare for these conversations. So, uh if you wouldn't mind, go to your favorite podcast platform, leave a comment, leave a rating and review, and just a show of appreciation uh for all the hard work that goes into all of this. And of course, while you're there, uh, make sure you follow the show, as they say, because that's what the ALOS really like. Now, next week, I am joined by, uh, another author, Rob Carver, uh, who, uh, I'm sure will have some, uh, fun insights to the current environment as well as some other themes that he will bring along. Um, so if you have a question for Rob, you can send it to me, info@ toptradersplug.com, and I'll do my best to get it answered by Rob. That's it for today from Katie and me. Thanks ever so much for listening. We look forward to being back with you next week. And until next time, as usual, take care of yourself and take care of each other. 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. 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