QIS & Trend Following in 2026 ft. Nick Baltas | Systematic Investor | Ep.401
Summary
The world of systematic investing is evolving fast, and in this episode Nick Baltas joins Moritz Seibert to explore the explosive …
Transcript
Welcome to Top Traders Unplugged. In markets, success doesn't come from predicting what happens next. It comes from being prepared for what you can't predict. In each episode, we go deep with some of the world's most thoughtful minds in investing, economics, and beyond to understand how they think, how they prepare, and how they decide, and the experiences that shaped how they see the world. No noise, no shortcuts, just real conversations to help you think better and invest with confidence. Welcome or welcome back to this week's edition of the systematic investor series with Nick Balters from Goldman Sachs and I, Morit Seabird from Tucker A Capital, where each week we take the pause of the global markets through the lens of a rules-based investor. Today I'm sitting in for my friend Neils Caster Larsson who would normally be recording this show with Nick but Neil is traveling this week and therefore unable to get it in front of the mic. So Nick Neils likes to start this show as usual with his what's been on your radar lately question and I'd like to pick this up and ask you well what's been on your radar lately? What's been keeping you busy? What's top of mind? Yeah, I know. Neil does that and you know it's good to see you more. It's been like what six months we're here together. Six months or so. Something like that. Yeah. Um so yeah, it's always a pleasure to kind of connect again with you. Um what's been on my mind frankly is very very busy. Um very busy with no client activity. Obviously the markets have you know keep have been keeping us uh um up on our feet for some time now. uh you know complacency and at the same time um eager to get at the next phase of this micro situation is um certainly takes a good amount of our time. Um I'm spending a good of my I guess quasy free time on exploring how uh all this AI frenzy uh is going to impact both the way that we do things on the day-to-day but also how research is going to uh change from this point onwards. So it's more of an exploration phase at the moment kind of ideas and and creativity uh comes into play. Obviously at the same time you know we try to make sure there is kind of an underlying process as to how we do things and how we would want to be doing things going forward. Um but I would say this is something that I'm spending a good good a good a good amount of my time. Um I know coding has always been part of my day. Um in the recent years bit less so. uh but now there was a chance of kind of going back to it and it's kind of nice to see how you can start building even tools for your own kind of personal life um through the new technology. So I think a combination of very busy client activity some travel uh there is nothing that is on top of my mind that I would just flag as one uh it's just a very very busy busy period. Uh thankfully in a few hours I'll be I'll be heading out for a week of a holiday. So, um that's basically what I have on my mind, baby, that I need like know this this one week uh to spend with the family and the kids. >> Yeah. Yeah. Welld deserved. You told me. Um I wish you a great holiday. And you know, like you, the markets are keeping us busy. I mean, not necessarily from putting trades on, but just, you know, the the ups and downs and all the volatility, especially in the petroleum markets, um continues to be a big theme. Luckily, trend following strategies are doing quite well this year in in light of the situation. >> True. >> And um as far as I'm concerned, I had a great day in Zurich yesterday with Inclines. I met a common acquaintance of ours as I've mentioned. We shall not mention his name, but it's been just a great day there. It's a great city. Everybody seems to be doing well. Um >> true, true. A very good friend. Very good friend. >> Very good friend. So, yeah, he definitely says hi. Um, now there's quite some interesting topics I'd like to um discuss with you today, Nick. But before we go there, there's usually a trend following update that Neils does and I just want to follow I just like to follow the same schedule. So, here's the performance update as of yesterday night, which is Wednesday evening, May 20th. Monthtoate and year-to- date performance number for the BTOB index, it's up 1.46% 46% for the month and more than 11% for the year. As I've mentioned, trend following is doing quite all right this year. The stockchain CTA index, similar numbers, 1.55% positive for the month and up about 12% for the year. Sockchen trend a little better, 2.11% for the month and up a little bit more than 12% for the year. The short-term traders index is up about a percent and up 6% for the year. Equities, MSCI World, up 2.4% for the month and 8% for the year. Bonds, they're down about 50 pips for the month and down about 25 pips for the year. And the unbeatable S&P 500 total return index is up 3.19% for the month and 9% for the year. Isn't that amazing? I mean, you just you just don't bet don't bet against the S&P 500 anymore. I mean every time I look at the performance and I report to somebody you know what's the performance of the S&P 500 it's always up it's hard to beat it is hard to it has become harder to beat uh but I guess eventually becomes a bit of concentration but not on S&P itself but you know the three four five six constituents within right >> something AI stocks and the magnificent seven maybe yeah >> precisely precisely >> and then you know there's the big event coming up with uh SpaceX um which will probably increase that concentration quite a bit. >> I mean, yeah, we're all kind of following the news over the last couple of days, right, with evaluations and so on and so forth. So, I think that's going to be quite a >> um quite an IPO to remember. >> Yeah. So as you mentioned Nick, we chatted about six month or so ago and when we recorded it was the topic was about the QIS space at large like you know how many assets are there? What types of clients do you have? How do you wrap the wrap the exposures into what type of like is it swaps or notes or options and these type of things and and maybe this is a good a good point to reconnect and catch up and ask you what's been happening lately in QIS land? What have clients been interested in? Is there any theme that attracts clients and grabs their attention? Anything that's, you know, standing out? >> So, generally in terms of themes, um, you know, you wouldn't hear something that is dramatically different. Um, I think the whole QIS space has become a vehicle of expressing specific micro views. Frankly speaking, um, it has departed at least for some time now. um you know the the premise of designing an uncorrelated stream of return that you know you're going to put on top of your SAA and it's going to do the job no matter what. I think has started being um being utilized to express micro views some of which can have a systematic expression. uh said differently, somebody could possibly argue that you know year-to- date know being long equities and maybe long oil uh on the back end of the macro dynamics or maybe shorting some bonds is a macro call that they would want to deploy which is not too dissimilar of arguing that hey at following expression of that is nothing more than what a QI solution could deliver in this regard. So um to go back to your question, the theme I think for the year or at least in the early days was more about how the whole AI capex is going to impact positively you know um profitability for for the equity market and more broadly for the economy and you know soon after that obviously with the geopolitics things turned quite substantially you know we're kind of pricing in rate cuts and now we're kind of debating how many of rate hikes we're going to see. So I think that pivot uh around March led to um memories of 2022 I should say. Um there has been discussions along the lines of you know is inflation picking up again you know clearly in the news and and in the in the in the public releases that's exactly what we're seeing. So the question then becomes is that going to be stick is it going to start impacting how know equity and bond correlation plays out. Is that a story that you know relates back to the days of dispersion dynamics of you know maybe interest rate volatility trend following to your point the good performance this year is maybe the consequence as well as the invitation of another good year in this regard so I should say if there's anything that I would basically kind of put forward as a thematic is around inflation >> and obviously pockets of of of inflation relate to maybe some equity hedging at times and obviously you look at the market and you're like, okay, do I actually need a hedge at this point in time? Um, it's actually the Vshape in March was very different to the ones before. It was the one that um kind of dropped at it didn't drop dramatically, but it did drop over the course of like, you know, a couple of weeks and then the recovery was very very quick. Uh, I think we have rarely seen this type of a dynamic. Typically, you see a fast way down and a bit more of a um kind of slow recovery was the other way around. So um so that's the main theme frankly speaking um you know inflation if you were to put like a tag on it um with all the small kind of subcomponents of it one being you know equity hedging the other one could be um maybe some opportunistic pockets um I think we're going to discuss later on for commodity curve you know there's a good question as to whe the commodity curve is in a mini reversion kind of dynamic at the moment so these are more like smaller pockets of expressing a macro view to my to my point at the beginning right so that's what we're seeing um but you know I would say you know quite busy >> what I forgot to ask last time we were speaking it's one of the questions left over but from a broader perspective um I'd be interested whether you see across your business any cyclicality in client interest is there like you know bursts of interests when you know risk is on or risk is off and they want to hedge or does it correlate with you know a bull market in the S&P 500 or is it more like constant flow of interest and and and also then transactions where it's kind of like yeah we're kind of like doing doing deals every month no matter what the markets are doing. So there is there is cyclicality in the interest uh but I would say there is generally stable flow of conversations and activity uh which obviously a good thing for the overall industry but the thematics or maybe that you know the I'm going to maybe again repeat myself the macro views that investors have could be expressed with a systematic solution so QIS becomes in the vehicle. So to your point, if there is a risk off mindset, you'll see more of a defensive tilting either of portfolios or reduction of risk on exposures or deploying some defensive components to it. Um, you know, if if the mindset is more of a recovery or maybe a normalization, um, you would see a bit more volatility selling, maybe some carry trades. um uh and and and and less so you kind of seeing as I said earlier on like know the the vehicle that will do the job no matter what like the alpha engine you still have those needs uh every now and then but the cyclicality I would say comes and goes more with the macronamics and then the QIO solutions just become the vehicles to express those those views. Um maybe the one thing that um I personally keep on use um keep on using as um as an anecdote um is that specifically when it comes to defensiveness um you end up seeing broadly speaking an act of regret and a reactive function rather than a you know a a proactive um so for instance you know we can we can speak about trend following because in 2018 involved did not perform obviously because of reversion 2020 wasn't a stellar year at least during COVID Um and and and and the reaction there was you know how about we know we end up buying some volatility as a defensive component and then you know obviously 2022 came about that you had the spot downvol down long vault did not deliver trend following did but obviously the micro environment was the one for trend following to deliver. So then post 2022, you kind of had the reverse. Okay, long vault was not the defensive trade at least for this market. Let's go back into trend following. But then some disappointment came because of some of the Vshapes we've seen the last couple of years. So I think this act of regret is not necessarily healthy from a from a product design standpoint when it comes to managing those portfolios. So if there's one thing that you know we typically try to bring forward is that specifically for some of those pockets of more strategic views know it's not let's let's follow what did well yesterday but rather let's kind of take a step back see what we're solving for and and and strategically kind of allocate to it. So that's maybe the only one that in addition to the cyclicality somebody should argue maybe let's let the cyclicality alone take a step back assess and allocate on a strategic basis >> could be easier said than done. >> Absolutely right. Absolutely. And you know it's uh nobody has an infinite horizon of investment and everyone is assessed on on on the basis of performance. So obviously career risk is the is a key consideration here that is not easily quantifiable. So I'm I'm with you on this one 100%. As you mentioned, we're going to be speaking about um commodity curve carry and how it has done in in the recent environment. But before we go there and also into some other details, I'd like to bring up um a very interesting article that I found written by Greg Zuckermanman from the Wall Street Journal. I think it was published about a month or so ago on the 20th of April. And its title is Wall Street brings sophisticated quan strategies to the masses. So let me you know maybe with with a within a minute or so frame um frame the discussion and let me cite some interesting parts from that article. Here we go. Quantitative investment strategies for clients are one of JP Morgan's fastest growing business. The bank has seen QIS revenue rise 30% so far this year from the same period in 2025 according to people close to the matter. That is an acceleration from the 25% growth seen in recent years making it one of JP Morgan's fastest growing businesses. Goldman Sachs asset management. So that is related to you for instance now manages about 175 billion in quantitative investment strategy funds which equates to about 5% of GSAM's overall assets under management. According to Premier app, the overall size of the QIS space is now about 1 trillion and about three trillion when you include leverage. And either way, the profits are piling up for the banks which charge investors depending on the complexity of their trades. QIS revenue is nearly risk-free. Something, by the way, I wouldn't necessarily agree with, but let me continue. QIS revenue is nearly risk-f free and generally reliable since the trades are preset. banks don't have to set set aside as much capital for these trades relative to other kinds of businesses they're doing. So, let me stop there. Just just some background. I you know, this was an interesting article about the QIS space, I thought, because it was, you know, it continues with pros and cons, but um it it kind of like looked at the space from a different perspective, I thought. Um is there anything you'd like to add to this? I mean QIS as an industry has been receiving progressively more uh more visibility right I it's not the first time that there is an article in um uh if you like know broader interest media um and and and that in itself is a data point that is worth obviously uh observing and um uh and acknowledging. you know some of those articles obviously come with catchy titles in one way or the other um and um now I wouldn't be able to comment too much on that uh otherwise we would have to make sure that everything exactly so I don't want to make any any specific representation here beyond the fact that it is a solution that in itself um has become of broader use because of the use of technology and data and trading capabilities at the end of the day Um banks do sit in the middle of buyers and sellers. Um they have the ability historically to deliver um if you like portfolios of stocks or commodity futures or um tradable assets uh in a variety of formats and I think the benefit of having a bank operating a QIS business is that there is also a structuring uh pedigree underlying it. So something we discussed I believe last time is that those profiles can be delivered in a co-op option in a in a capital protected structure in an OTC swap. Uh so the the access to it has become easier over the years. Some of those articles obviously come up and say you know the place is crowded. I mean my response to it is that it's always the easy way. >> Let me let me let me stop you there because >> I'm following has the same problem historically, right? It's always crowded, right? It's always like no let's point the finger. because there's pros and cons and I thought the the art the the article was actually quite balanced and well done because it because it does mention the pros and cons and so so the pros or the advantages um mentioned are for instance I'm citing again from the article for institutional investors and allocators QIS are very convenient uh it's outsourced infrastructure is essentially quant as a service bespoke implementations are possible they're operationally easy to access through swaps and other rappers like you've mentioned um you know, you have this easy go-to point to get the exposure that you want or maybe the hedge that you want. Um and you have it essentially outsourced um to some other trading desk and you don't have to do it yourself. And so this is the the good thing, the cons or the the disadvantages, the potential disadvantages that were mentioned is the flows may result in crowding and synchronized positioning. In practice, many bank QAS offerings look very similar, if not identical, and they of they often provide overlapping exposures. Too many investors doing the same trades can reduce the potential for profits. >> It's probably true. >> I mean, I would say that's a textbook definition of crowding. >> Um, so I don't think it's it's it's it's delivering anything new that we did not want did not know. Um I would I would say from designing systematic strategies whether we sit on the kind of the buy side or the sell side ultimately uh it is very important to be prudent on risk management and on how we consume market liquidity. Um so from that perspective um you know of course we can have the argument that there's more demand but I guess you know to the extent that you know somebody approaches the design of a strategy or an investment in a prudent manner you know they should account for incremental flows into uh a specific premium or um you know overlap of positions between different strategies. Um and then we tend to think or I tend to think of looking at the flow as a whole rather than strategy strategy by strategy in isolation. So that's important. Uh obviously the externalities are there and can be there but it's not dissimilar to you know any other type of investment type like know it can be a discretionary call that delivers too much of concentration. It can be no inflow into private equity markets for instance. um anything that has excess demand can lead to subdued returns. So the question then becomes is the market deep enough to consume the demand and that is something that you know we on the design side have to be very very focused on you know obviously working with trading very closely that's something we would always monitor and make sure that you know if a particular feature in the market seems to be crowded out then we should make sure that you know we look at our design better or maybe we we have a conversation with uh with our clients and frankly speaking these are all sophisticated investors looking into sophisticated designs. Um, and this whole exercise is more than just, oh, here's like a supermarket of possibilities. Let me just get one or two because they've had a good back test. I think the industry has matured substantially. >> Mhm. uh to design and assess those investment vehicles. And you know the last thing that I would also flag is that this flow that arguably has been growing um part of it is genuinely new but part of it is also um a replacement one. Um so if I were to say that you know there is a trend following strategy sometimes it could be a replacement of a different strategy or a city exposure or vice versa. And this is never quantifiable because it's it's it's impossible to track it down. Right. Um so that is another >> left pocket right pocket. >> Precisely. Right. Precisely. So >> and that was also how this business broadly speaking as an industry kind of came about came about what could be systematized and you know what is the value of systematizing a process visa v a more of a discretionary kind of allocation. Um I'm not sure whether I'm answering any question but I don't think there is a specific question to be to to be answered more than kind of giving my kind of remarks on this one. Right. So I mean it's it's a general it's a generality like you say the textbook definition too much money thrown at anyone thing uh will destroy or impact decay its return potential. Right? We can see this >> in all sorts of strategies. Um QIS should not be any different. I I have no reason to um to you know to back it up but you know when you look at some of the say more nichy QIS strategies say liquidity provision to the BCOM or GSCI roll window maybe there is some decay that you can spot maybe there is too much money chasing these opportunities I do not know you know that better than I do but clearly there there are impacts right it it doesn't go without side effects I think I that's why I think it's very important to look through the the details and understand the driving force of uh of any strategy. So you mentioned congestion. It's actually a very good example. So congestion shouldn't be there in the first place. In other words, there should be no reason why somebody is rewarded of pre or post rolling those commodity futures. >> Mhm. >> Aside from the fact that there is perhaps some passive demand for those benchmark roles because they happen to belong to commodity benchmarks. So if the market operates in a way that is creating an opportunity that can be harvested, it's actually the reverse that know there is an arbitrage that you know should be there. It is purely a consequence of supply and demand imbalance and obviously the more of that you do the less of the performance you should expect to have precisely because you're capitalizing on an arbittor that shouldn't be there in the first place. Yes, >> this is very different to arguing that selling volatility for instance could wipe out the premium. Perhaps the magnet can drop but nobody could argue that know being on the side of the insurer is now a um if you like a a non-rewarded trade unless somehow human beings become risk loving rather than risk averse but you know last time I checked those utility functions remain to being upward and concave rather than convex. So >> you don't sell insurance for free. >> Exactly. Right. So I think I think from that perspective um you know the crowding argument is perhaps an input into the time variation of riskreia. But could that be a reason for the wiping out? It depends. And the dependence has to go to the underlying reason why a specific investment philosophy has been successful. And if if there's an underlying source of risk that is captured and delivered, the reward for it should be non- negative more often than not. So that's that's how we kind of look at it. Um and that's how we typically approach it or I approach it in my search kind of focus areas. >> Very well. The the quote that I thought was most interesting and then we can we can move on but but this one I thought was really good. So let me let me read that. Aggressive hedge funds have been trying to profit from the growth of QAS programs by anticipating their traits, says Arnab Sen, who used to develop QAS products at Barclays before joining Paloma Partners as a portfolio manager. These funds try to act before the QAS programs can resulting in a cat and mouse game that can cause unusual movements in various investments. It exaggerates moves in the market. I I like this was the first time I heard that um hedge funds may be front running um the the QIS triggered trades and I'm not sure how they can like you know most of your index methodologies aren't you know you don't have the full detail you can't just download them on the internet and you know find find out what exactly is going on I think you have some redacted versions but the full technicalities aren't usually in the public domain are they? Um I mean obviously part of that is is is in is part of the IP and it's not too dissimilar to how a hedge fun would operate in in this regard right so obviously there are details that matter and these details are not the importance of those details ultimately protect the end investor like you know we we we owe to deliver what we feel is is to be delivered um and in this regard part of the IP has to remain with those that you know eventually uh allocates to Um, now could we argue that, you know, we can frontr run any strategy? I mean, again, that's a textbook design, right? That's a textbook. It's a textbook assumption. So, I don't know specifically what comment I could make on this one beyond the fact that, you know, it's put on a piece of like electronic paper. Could be the case and could not be the case at the same time. Like, I think it it can easily be put down as a claim in the same way as we can say, you know, CTAs have been crowded for the last 15 years. Um and therefore that's part of the reason of sometimes a good performance. >> Maybe we should reach out to Paloma partners and Arnaben specifically and and ask him to show the P&L of his front run QS traits. Um see how it's doing but yeah I guess he's going to decline the invitation. Anyway, let's leave that article from the Worer Journal aside and move on and speak about commodity curve carrier, which we agreed to do in our pre-call. Um the reason we want to speak about this is because it's one of the QIS strategies that shall we say has suffered some damage um this year in light of the curve dynamics um and the substantial increase in volatility in commodity markets across the board especially obviously in the in the energy markets where we've seen if not record backquidation but then close to record backquidation in WTI and rent um curve shifts in a very rapid um period of time very short period of time which has I presume cost some draw downs so why don't we just or Nick you specifically why why don't you just you know um respect or you know report from a broader perspective how these strategies have done how bad the damage is uh what the outlook is um why these strategies works I mean take it where you want to go >> so commodity curve is um probably the most longstanding systematic strategy um that has that has been designed in AQIS format you know probably goes back 15 years um I guess for those that are not very much aware just a very brief intro um this is about rolling commodity futures exposures on the back end of the curve and shorting the front uh typically the front um is very steep uh in a contango uh shape and therefore they're yield is very expensive. So by shorting the front um you end up kind of getting a differential yield versus rolling the back. Um so this differential return of the back versus the front across commodity markets is what we call commodity curve. It's a it's a carry trade and ultimately tries to achieve the yield differential from those um from those roles on the back and the front and that is done across you know a variety of commodities you know the benchmark universe of BCOM as well as kind of more frontier markets are now utilized for those trades. What is the primary risk here? The primary risk here is that you know by you shorting um the closest to be delivered contract you are exposed to what we call uh shifting to a backwardation uh which in in in layman's terms means that a commodity market uh with close to spot delivery is going to rally substantially. Uh in other words, for a commodity to rally um in the very short term, it's more likely that there is too too much of demand or too little of supply. Uh and most of the times uh commodity prices would shoot up because there's a supply shock. And that's exactly what happened in um uh that's exactly what happened in March. Uh obviously with um with the situation in the Middle East um and the straits of Hormuz and all that lot uh the price of oil as you just said more skyrocketed. So those curve positions that were shorting the front were significantly impacted. Um I should add to that that um year-to- date performance has also had another catalyst that didn't actually recover from from it and that was the kind of natural gas moves in January. Um so that was for those that remember there was like a weekend or so that um uh the weather forecast um became much more kind of negative in the US and and at the time the demand for natural gas actually increased uh in anticipation of cold weather. So that had the first kind of negative kicker into a curve strategy that obviously became significantly greater coming into kind of March uh to your to your to your earlier point. Um so draw down was quite significant. So if you look into kind of simple um implementations of um of a curve strategy you know we're talking about something like know 10% for instance um and this is certainly the largest we have seen um since you know we have data um >> is this is this the largest ever the worst draw down for these type of strategies right now? it it is indeed um let's say for the last 40 years um and if you were to kind of focus in the most recent period is possibly like not you know two times the largest we have seen so far um I think the previous one was in in 2018 >> quite significant >> uh so it is quite significant uh and 2018 was more of a of a natural gas uh shock um what I should say is that because the because the draw down came from a very well understood move that in itself is the number one risk factor when it comes to a curve carry trade. Uh possibly will connect it to the earlier point that there is no arbitrage here that is um um that is to be captured at at no at no risk. There is an underlying source of risk uh for which um investors are are rewarded. Um yes the draw down has been quite significant by all means I would say historically most of the draw downs have come either by weather shocks to my earlier point uh or from some sort of supply disruptions or like some outages uh or some geopolitical conflicts and it it looks quite similar to 2022 you know had a similar situation in Q1 2022 but at the time the impact of the move was less aggressive because you know if you remember it came obviously from from Russian oil the it was initially sanctions and then obviously uh self-imposed by by Russia themselves kind of cutting if you like the supply chain but also the production that was um kind of controlled at the time was a fraction of the one that we're currently kind of facing. So the impact was smoother through time and less aggressive on the downside. But that's maybe the closest in terms of fundamental dynamics of a draw down to the one we're kind of experiencing today. Um, and I think maybe a bit more technically now, not only the if you like the Russia situation was easier because of those dynamics, but because it was slower, um, you ended up kind of benefiting from a slight recovery, whereas now because you're rolling out of the current contract, you're almost crystallizing the negative P&L. It's a bit more of a technicality, but the way that the impact into the strategy happened back then versus now had less of a of an effect as it had today. So I can pause here if you have a link any any points to make. Right. >> Well, um, is this a good time to buy? Well, that is not the question you're going to answer, but let me rephrase it. Do you do you or maybe maybe you will answer it because there tends to be some mean reversion to this. Or I would have rephrased it and said, are clients calling you now to redeem and get out of the strategy because they can't stand the pain. they have that 10% draw down as you mentioned in that naive imple implementation or whatever implementation it is. There is going to be some draw down that is certainly inconvenient and it's very large relative or the largest relative to the history of the strategy or are they more like well this is a great time to buy because it's now probably or it might be relatively cheap now relative to the return expectation going forward. So two things I would say. So so curve carry um historically was the driving force of systematic strategies in the in the in the commodity space. But know in the year of 2026 there are other ways of extracting some positive returns from the commodity markets which had allowed the investor base looking into the space of diversifying the exposure across other type of premier. Um, and you know why I'm saying that is because the benefit of having diversifying sources of return in a portfolio context allows you to weather quite well the period through March and I would say perhaps because of that or perhaps because it's very well understood that this is the risk and therefore you know we're exposed to it and we're we're experiencing it. um you know the the reaction from the market has been much less aggressive than what was the case uh you know a few years back. So I would say in this regard there is more of patience in the sense that a recovery phase which would bring prices down will make the strategy benefiting from it and will benefit the strategy from it both because of the heel differential on the front and the back and the spot movement that is going to happen on the front. Uh now is that the right time to enter? My claim would be that you know obviously in the very short term risk is still there. No the situation is unresolved and as you said in the um in the beginning it is the theme that we're looking day after day where the oil price is going to go and sometimes it shoots shoots up sometimes it shoots down but no the news is driving the price more so than the supply demand dynamics. So I think there's much more of an implicit uh impact into um into the oil price itself. Um but I should say there is I mean there is certainly a future to the strategy. There's nothing fundamentally harmed by a risk realization. Of course at the same time you can have u you can have investors that you know hit specific risk limits and that can cause in itself uh a downsize. I mean that's that's that's that's by design. Um but I should say to summarize um I should say that client reaction has been relatively similar to what I have personally seen in the trend following space in the last few years. We know what we're exposed to. The ultimate risk is realizing. We're fine to take it because we're here to to to to harvest the premium in the medium term. And it is to mar your point the strategy that over the longer term has had very strong and positive returns for commodities without necessarily decaying in the magnitude and I think that also goes back to what are the principles that deliver the premium in the first place. Why is it there? The last point I should say is that implementation matters. There are implementations that beta heads the front and the back. There are others that are a bit more dynamic in the selection of the curve and the points of the curve that you know that they would roll. Some implementations would bring you very close to to to the spot price. So you'd close the spread so you're not exposed to the market anymore. Some of them would bet ahead the front and the back so they would be less impacted by the move because the front is more volatile so you reduce your exposure. Maybe too technical now but you know you get the point that there are variations that have actually been positive year to date. >> Oh really? >> Yes. So interesting. Think about it. Let's let's let's do the most basic one of them all. If you are dynamic in the selection of the back in a backwardation state, you'll come to the front. If you come to the front, you close the spread. So you're not exposed to the market anymore. And in that closing of the spread, if you're also bit adjusting the front, you're even less exposed to the front. So in this transition of closing the spread, you're also reducing the front exposure. And then the whole thing is um is substantially more diluted than obviously being like no I'm long the F6, I'm short the F-0 and I'm just stuck on it on a on a dollar neutral basis. >> Yeah. Or contract neutral basis. Um >> correct. Correct. >> Um yeah, interesting. Look, I mean, I I don't have any uh any, you know, detailed knowledge on this. I'm definitely not a forecast, but you know, that the backquidation that we're seeing in and and Brendon WTI, I mean, but >> yeah, but that that does not that does not mean that it couldn't get even more insane, right? I mean, this is this is markets. What is it about $20 now difference between front and whatever? Like, you know, 12 months out or something like this roughly. I I don't have the exact numbers, but I mean, could it become 40? Why not, right? I mean, if there's a complete crisis and people are like just scrambling for barrels and there's this massive supply shock and we don't have enough going around, the front can be bit up. I think the interesting thing is that um in the current macro dynamic with uh with obviously this uh shortage of supply that you know we observe and it's uh it's in the hard data as well um there are some snippets of uh of news that talk about how the production engine is now kind of almost like learning to operate with like with lower supply. So it's a good question whether the market can absorb the shortage um rather than you know the the fundamental exposure that the that the economy has on it is just nostatic >> hard to quantify. Yeah, I also I did speak with an old trader in in the Middle East. Uh he told me that there's there's big efforts being made of moving barrels by train um you know getting it to different offloading points and unloading points and even trucks are running uh to get to Oman and you know kind of like bypass the straight of you know the >> uh what is it the east west pipeline and Saudi is capacity. So >> it's fascinating though, right? It's fascinating because you know we talk about financial markets and then as soon as you started speaking about commodities, you're talking about like the actual physical. >> Yeah. The real thing, the real thing, right? So it's it's quite fascinating actually getting into this space. >> Yeah. Love these markets. >> Anyway, let's leave it there with commodity curve carry. Uh maybe in six months time we're going to reconnect and uh it'll be it'll be recovered. Who knows? Um but back to our most favorite topic uh trend following I guess is is is >> is something that goes with the systematic investor series at least this is how it started. So trend following performance in 2026 I think we've said is actually quite good. Um from your perspective you know one of the the questions that always came up is like alternative markets smaller markets versus standard markets more markets versus less markets. Um I think you've you have it all in your QIS suite of products. Uh what's been performing best? What's been performing worst? >> Let me start. Where should I start? If I start from the markets that perform the best. Um I mean alternative markets in my mind and you know we can disagree on the definition because you know there is no clear differentiation between what what makes a market alternative or or conventional beyond maybe just liquidity. Um the more kind of let's call it conventional markets I think they have outperformed. um you know we can look into maybe non kind of BCOM or non-benchmark commodities um you know year to date it hasn't been a specific good period for um for that part for the trend following space you know the the interesting thing is that you if you start looking into different premium like know reversion or skeess dynamics the exact opposite uh so the benefit of diversification of premium also prevails across all markets >> so specifically in the commodity space that we were kind of uh we were talking about um kind of benchmark markets have done very well capturing obviously the precious metals in the early days of the year and then in January y precisely and then kind of moving into the energy markets and benefiting very very strongly in the you know in the recent period so pretty much like in a straight lineup in a way on the commodity front um and the other asset classes obviously being long equities short the dollar short bonds you know I I I rarely remember a period whereby by all four major asset classes have been contributing positively. Um and this is one of the one of the few um we know interestingly in raids I know I remember kind of discussing year end with um with a with a crew here what would be my bet for the year and so far know it didn't start as I was anticipating it but you know since the beginning of March I think the the rate trend has picked up which is actually like an interesting observation to have you know haven't had it for like no two three years actually now since 2022 um so performance has been very strong I think benchmark markets have been delivering the principal components in all fairness. So the equity, the dollar, the the energy complex and the rates one. So the the whole spectrum has been delivering. Economic trends have done well as well frankly speaking um you know pointing into kind of rising or falling growth but you know certainly being helped by by some precious exposure and then obviously diversifying components to trend following like reversion like K things that have been very vocal about. uh for another year continually continuously uh adding performance. Um it's been actually quite quite a very strong year for the whole spectrum. >> Um I would say if I were to make a classification to your question as to how broad or how um centralized somebody should become when it comes to trend following program. In my mind, stylistically solving for defensiveness, somebody should go with a core market universe because all you're trying to achieve is the principal component moves. Maybe with a slightly lower long-term adjusted returns looking for long-term adjusted returns, I would go broader that perhaps will have a cost in terms of how much defensiveness you get. And I think this was in a in um also in a paper from man that was actually quite nice a couple months ago. >> Correct. They looked at different portfolio compositions uh with more like alternative markets, more markets, less markets. And that's exactly >> what they uh what they showed is like if if you have a smaller concentrated portfolio of macro markets, you have that positive skew defense uh especially during equity draw downs. But your long-term expected sharp ratio performance potential is maximized more when you add all these alternative markets because they're you know I use syncratic bets on something different. They materialize at some point in time >> precisely. But I I don't think this year it's necessarily the recipe for disaster nor for outperformance. Um yes fine if we just look into the non benchmark commodities maybe the trend following space has not been very lucrative but the reversion one has uh but that's a bit more of a kind of handpicked selection round rather than like you know >> um a bigger group of assets. >> No it it matches my observation. I mean, when we look at the stock CTA index, I mentioned the performance numbers earlier. It's up about 12% or whatever it is, right? So, that's the largest 20 CTAs. There's a big exposure to the big macro markets. So, they're doing well with these type of markets. Um, there are some CTAs out there trading concentrated portfolios that are up 50%, some are up 100%, they have these massive years. And then when we go down the list and we look at the managers that um are more in the alternative markets space or have a broader portfolio that includes smaller markets. Uh we at Tucker hey were one of them. Uh we're not really catching up with these or we're not there because the other markets have been a drag this year. Um you know we have allocated risk to them and they haven't been performing as well. Whereas if we had all the risk in you know silver and gold and the energy markets we would have done much better but that by no means says anything about what will happen next month >> after the fact between now and the end of the year right >> after the fact we always know >> exactly >> that's true that's true that's true >> hey there's a question and that relates um as we're we're closing down there's a question that came in for you Nick uh relating I presume to uh trend following so let me bring it up it's a listener question from Vladimir. So here we go. Researchers and practitioners in the rules-based investment community publish prolifically on the topics of the role of CTAs and portfolios, various signals and factors, portfolio construction, etc. There's little work and less less conversation about execution. So the question is is there alpha in execution? Is there discretion in execution? And when is that discretion exercised? What are the go-to and preferred execution strategies that minimize slippage? Is there a case for execution optimization per asset or asset class? And what percentage of time is spent on execution, R&D, research and development? Keep up the good work. Um, thank you flooding me for the question. So long question summarizing is there alpha and execution? How do you execute? How do you minimize slippage? And is it kind of like a market bymarket distinction that you could possibly make saying we're going to be executing the S&P 500 in a different way than we're going to be executing Coco? So I think the question can be answered very differently when it's posed to kind of a QS business versus you know some some uh kind of CTA that know are managing you know with the I guess with the fiduciary element following portfolio. So maybe my answer would be kind of perhaps different to yours, Morris, right? Because you know, we're kind of sitting on like the opposite um the opposite seats of um of that question. So broadly speaking, QIS would typically deliver on a guaranteed basis some closing price or some T-W. Let's put it this way. In this regard, the risk of achieving whatever price reference price has been quoted in the index documentation lies with the trading desk. But ultimately whoever is exposed to this systematic strategy will get whatever they can calculate effectively by to your earlier point doing the sum product of quantities and price changes. Uh so in this regard our attempt is to make sure that you know getting into the market is a passive exercise. um precisely because we would want to avoid having any impact whatsoever. And the way that you know both from a design standpoint but also from a requirement standpoint approach the problem is we want to deliver the strategy and the strategy just there is no execution alpha that in itself will become part of the return and therefore in this journey of delivering um as passively as possible the reference prices in the documentation of the index. The attempt is be passive, be thoughtful market by market class with the trading desk. they have the ability and the clarity to decide upon how and when they would execute into the market. I think this is very different to running the strategy yourself because in that case you can benefit from it and therefore your clients can benefit from it above and beyond a guaranteed closing price which obviously at times can work at your benefit sometime at your expense. So I think there is certainly value in doing execution research and by no means am I saying here that you know we should not focus on that. It is purely the if you like the boundaries that a QS business operates under that makes that more of an internal focus rather than if you like an externally deliverable profile in this regard. >> Fair fair enough. Um >> but to get your thoughts right because I think you are much more on that right than than myself. >> That's something no and you're absolutely correct to say that it is a different perspective that we need to take because through your index documentation you promise and you guarantee say a settlement price to the client and you're marking the strategy at exactly that price um and that is where it is transacted. Now if you trade at a different level to that price that is slippage and that positive or negative slippage it can be either direction is on the books of Goldman Sachs um you know with all the netting impacts that you have but it's essentially for you to manage that and it's your risk to manage that and it's not something that you're mirroring on to the client. In our case, that's different because every time we realize slippage, it is again either positive or negative, but it's directly routed on to the client because it shows up in the P&L. >> Exactly. >> And so to summarize, I think there is I'm not sure if alpha is the right word, but there is value in execution and executing efficiently. and all of these markets. Um, this is one of the questions Vladimir has is like, you know, is there different execution strategies per market? And my answer to that is yes, there is because all of these markets operate in a different way in the order book. They have different settlement procedures, different settlement windows, you know, different periods of time. Some have like 30 seconds, some have 30 minutes to settle. trading Brazilian live cattle has a very different settlement window than trading live cattle in the US on the CME. Um the liquidity profile and the liquidity concentration is very different. Um so there is value that you can extract and maybe an episode that Vladimir if you're interested in that's worth listening to is my conversation with Tom Babage from Gresham. Um and he did speak about so they they trade alternative markets. day trade markets such as you know propane and butane gas and you know um smaller markets and he has reported that you know these are markets where you would in expectation assume that the slippage is going to be much higher relative to if you traded the S&P 500 E- mini futures contract right which is very liquid and he reported that their slippage in the past year has actually been nil um and the way they do it they do a lot of R&D in execution um is they have a more kind of like patient approach to getting into the trade. They're not forcing themselves to immediately transact and consume liquidity from the order book. Um they sit there, they can wait. It's more like um he said it's still systematized and rules-based, but it's it's it's more like a human element to the execution process to get you to a trade. And he said there is value there. like if we didn't do it in that thoughtful way, they would probably pay 2 or 3% in slippage per year and and now they do not because they have a specific focus on doing it efficiently. So, and my like I can only echo that not to the same extent as Tom Babage, but clearly there is um missteps that you can avoid easily by executing poorly and there is value by executing efficiently. I I can only believe that. >> Yeah, I can only believe that. >> Nick, to wind it down, um a final question I'd like to ask you. Um and that is that is my question. It didn't come from a listener. Um do you have a QA index that does trend following on single name cash equities only? I think it's an interesting space, but as you know, I may have overlooked something, but I've never seen an index that does that. And I was wondering like with all the indices that banks come up with, why is it not there? If it if it is not there, I might be wrong. >> Yeah, I I don't think you'll find it on the street, but maybe I don't know the the industry um at um at that level of depth. Obviously, broadly speaking, the single stock space has always been thing thought as a as a cross-sectional space. There is a pocket I should buy, there's a pocket I should sell, and that's a relative trade rather than like a time series one. Um and obviously momentum is the better expression of trend following the single stock space but momentum is now buying the winners sorting the losers. Um and I think part of the reason why this is the implementation that you know you typically see more of um is because a more time series implementation would be probably like timing the market in a way like buying the stocks when the market is kind of rallying and then kind of selling them when the market is selling off. uh with a bit of cross-sectionality here. I don't necessarily think that this is a bad idea and uh I'm sure it's going to have positive return partly because of the market timing ability that it would have. Um there was no if I have good recollection on this one. I think there is a very interesting paper by maybe it's Jades and Goyel I hope I'm not wrong. um uh a couple of years back maybe three four five years ago looking into the difference between a time series implementation which is trend following and a cross-sectional implementation which is momentum um and the focus there was to look into single stock implementation because you have the breadth to do momentum cross-sectionally but also you can do a trend following strate point and what they show is that one is very similar to the other plus some market timing mechanism. If you have a 100 stocks and you go long 60 and you go short 40, it's almost as if you go long and short 40 as a cross-sectional momentum and then the remaining 20 will give a bit of a beta to the market. So what they're trying to show is that the two implementations are kind of sister implementations of the same premium with an additional market timing element. So the question then becomes where is my return coming from? How is that attribution of skills delivered from a market timing mechanism versus a cross-sectional premium? So to I guess to paraphrase all I'm trying to say here is that what you're saying is not I guess it's not it's not a it's not um a question that doesn't have any any value in it in the sense that I can see I can I can see the value it can bring. Maybe the one thing that has become more popular is something that came up few years back called factor momentum. >> Mhm. >> Which is looking into cross-sectional premier and allocating between value and quality and growth and so on and so forth on the basis of the relative momentum. But that in itself we will start picking up sometimes series trend on the factors that have performed. So indirectly maybe that's an expression in the single stock space of a trend following strategy which is doing trend following at the factor level which is long short in itself as a design. So the the vehicle itself is long short but the allocation is done on the base of time series momentum onto them. Um and that I think primarily comes from some of the uh kind of slowmoving flow uh in the equity factor space now that you know it's available in an ETF format and and and and other top kind of retail um retail rappers. Um so that's how I would look into this one. I have a feeling that there is an ETF in this kind of trend ETF space that does single names. Cannot recall who who that is. >> Yeah. Well, it's that that definitely doesn't seem to be a crowded space. um because we both don't know off the top of our heads whether it exists or not or whether there is an ETF. But so I you know maybe it's food for thought maybe something for your research team to look into at some point and and come up with an index. Um I definitely find it interesting. Anyway, it's been an hour. So on that note, Nick, it's been great to chat with you again about the QA space. Um Oh, you you you're raising your finger. You found something. I I yeah, you know, from memory, I think that was the the Chesapeake trend and I think that's the one that does the four asset classes and then single names. There you are. >> Oh, yeah. They Yeah. Yeah. So, so Jerry and the Chesapeake team, they have that on top on on top on top of the other things. But >> that's the one I had in mind was like, no, unless I check it. I don't want to put the name down. Uh that's the one >> for for sure. I I can confirm that that is the case. um they're trading uh single names but I was like but obviously on top of oil on top of rates on top of copper and so on and so forth >> and um but as a kind of like a standalone version just you know single name single name trend >> yeah maybe food for thought maybe at some point we'll have that index as well would be interesting to follow I guess and compared to the S&P 500 like everything is compared to the S&P 500 >> such an incorrect benchmark for long short strategy, but anyway. >> Yeah. Well, it's an incorrect benchmark for trend following strategies, too. But nevertheless, we're comparing it to the S&P 500. >> I know. I know. >> Anyway, let's wrap it up here. Nick, I hope listeners that you have enjoyed it as much as Nick and I um enjoyed chatting to each other and making the conversation for you. Um, next week, I think Neils will be back and hosting the show again. 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QIS & Trend Following in 2026 ft. Nick Baltas | Systematic Investor | Ep.401
Summary
The world of systematic investing is evolving fast, and in this episode Nick Baltas joins Moritz Seibert to explore the explosive …Transcript
Welcome to Top Traders Unplugged. In markets, success doesn't come from predicting what happens next. It comes from being prepared for what you can't predict. In each episode, we go deep with some of the world's most thoughtful minds in investing, economics, and beyond to understand how they think, how they prepare, and how they decide, and the experiences that shaped how they see the world. No noise, no shortcuts, just real conversations to help you think better and invest with confidence. Welcome or welcome back to this week's edition of the systematic investor series with Nick Balters from Goldman Sachs and I, Morit Seabird from Tucker A Capital, where each week we take the pause of the global markets through the lens of a rules-based investor. Today I'm sitting in for my friend Neils Caster Larsson who would normally be recording this show with Nick but Neil is traveling this week and therefore unable to get it in front of the mic. So Nick Neils likes to start this show as usual with his what's been on your radar lately question and I'd like to pick this up and ask you well what's been on your radar lately? What's been keeping you busy? What's top of mind? Yeah, I know. Neil does that and you know it's good to see you more. It's been like what six months we're here together. Six months or so. Something like that. Yeah. Um so yeah, it's always a pleasure to kind of connect again with you. Um what's been on my mind frankly is very very busy. Um very busy with no client activity. Obviously the markets have you know keep have been keeping us uh um up on our feet for some time now. uh you know complacency and at the same time um eager to get at the next phase of this micro situation is um certainly takes a good amount of our time. Um I'm spending a good of my I guess quasy free time on exploring how uh all this AI frenzy uh is going to impact both the way that we do things on the day-to-day but also how research is going to uh change from this point onwards. So it's more of an exploration phase at the moment kind of ideas and and creativity uh comes into play. Obviously at the same time you know we try to make sure there is kind of an underlying process as to how we do things and how we would want to be doing things going forward. Um but I would say this is something that I'm spending a good good a good a good amount of my time. Um I know coding has always been part of my day. Um in the recent years bit less so. uh but now there was a chance of kind of going back to it and it's kind of nice to see how you can start building even tools for your own kind of personal life um through the new technology. So I think a combination of very busy client activity some travel uh there is nothing that is on top of my mind that I would just flag as one uh it's just a very very busy busy period. Uh thankfully in a few hours I'll be I'll be heading out for a week of a holiday. So, um that's basically what I have on my mind, baby, that I need like know this this one week uh to spend with the family and the kids. >> Yeah. Yeah. Welld deserved. You told me. Um I wish you a great holiday. And you know, like you, the markets are keeping us busy. I mean, not necessarily from putting trades on, but just, you know, the the ups and downs and all the volatility, especially in the petroleum markets, um continues to be a big theme. Luckily, trend following strategies are doing quite well this year in in light of the situation. >> True. >> And um as far as I'm concerned, I had a great day in Zurich yesterday with Inclines. I met a common acquaintance of ours as I've mentioned. We shall not mention his name, but it's been just a great day there. It's a great city. Everybody seems to be doing well. Um >> true, true. A very good friend. Very good friend. >> Very good friend. So, yeah, he definitely says hi. Um, now there's quite some interesting topics I'd like to um discuss with you today, Nick. But before we go there, there's usually a trend following update that Neils does and I just want to follow I just like to follow the same schedule. So, here's the performance update as of yesterday night, which is Wednesday evening, May 20th. Monthtoate and year-to- date performance number for the BTOB index, it's up 1.46% 46% for the month and more than 11% for the year. As I've mentioned, trend following is doing quite all right this year. The stockchain CTA index, similar numbers, 1.55% positive for the month and up about 12% for the year. Sockchen trend a little better, 2.11% for the month and up a little bit more than 12% for the year. The short-term traders index is up about a percent and up 6% for the year. Equities, MSCI World, up 2.4% for the month and 8% for the year. Bonds, they're down about 50 pips for the month and down about 25 pips for the year. And the unbeatable S&P 500 total return index is up 3.19% for the month and 9% for the year. Isn't that amazing? I mean, you just you just don't bet don't bet against the S&P 500 anymore. I mean every time I look at the performance and I report to somebody you know what's the performance of the S&P 500 it's always up it's hard to beat it is hard to it has become harder to beat uh but I guess eventually becomes a bit of concentration but not on S&P itself but you know the three four five six constituents within right >> something AI stocks and the magnificent seven maybe yeah >> precisely precisely >> and then you know there's the big event coming up with uh SpaceX um which will probably increase that concentration quite a bit. >> I mean, yeah, we're all kind of following the news over the last couple of days, right, with evaluations and so on and so forth. So, I think that's going to be quite a >> um quite an IPO to remember. >> Yeah. So as you mentioned Nick, we chatted about six month or so ago and when we recorded it was the topic was about the QIS space at large like you know how many assets are there? What types of clients do you have? How do you wrap the wrap the exposures into what type of like is it swaps or notes or options and these type of things and and maybe this is a good a good point to reconnect and catch up and ask you what's been happening lately in QIS land? What have clients been interested in? Is there any theme that attracts clients and grabs their attention? Anything that's, you know, standing out? >> So, generally in terms of themes, um, you know, you wouldn't hear something that is dramatically different. Um, I think the whole QIS space has become a vehicle of expressing specific micro views. Frankly speaking, um, it has departed at least for some time now. um you know the the premise of designing an uncorrelated stream of return that you know you're going to put on top of your SAA and it's going to do the job no matter what. I think has started being um being utilized to express micro views some of which can have a systematic expression. uh said differently, somebody could possibly argue that you know year-to- date know being long equities and maybe long oil uh on the back end of the macro dynamics or maybe shorting some bonds is a macro call that they would want to deploy which is not too dissimilar of arguing that hey at following expression of that is nothing more than what a QI solution could deliver in this regard. So um to go back to your question, the theme I think for the year or at least in the early days was more about how the whole AI capex is going to impact positively you know um profitability for for the equity market and more broadly for the economy and you know soon after that obviously with the geopolitics things turned quite substantially you know we're kind of pricing in rate cuts and now we're kind of debating how many of rate hikes we're going to see. So I think that pivot uh around March led to um memories of 2022 I should say. Um there has been discussions along the lines of you know is inflation picking up again you know clearly in the news and and in the in the in the public releases that's exactly what we're seeing. So the question then becomes is that going to be stick is it going to start impacting how know equity and bond correlation plays out. Is that a story that you know relates back to the days of dispersion dynamics of you know maybe interest rate volatility trend following to your point the good performance this year is maybe the consequence as well as the invitation of another good year in this regard so I should say if there's anything that I would basically kind of put forward as a thematic is around inflation >> and obviously pockets of of of inflation relate to maybe some equity hedging at times and obviously you look at the market and you're like, okay, do I actually need a hedge at this point in time? Um, it's actually the Vshape in March was very different to the ones before. It was the one that um kind of dropped at it didn't drop dramatically, but it did drop over the course of like, you know, a couple of weeks and then the recovery was very very quick. Uh, I think we have rarely seen this type of a dynamic. Typically, you see a fast way down and a bit more of a um kind of slow recovery was the other way around. So um so that's the main theme frankly speaking um you know inflation if you were to put like a tag on it um with all the small kind of subcomponents of it one being you know equity hedging the other one could be um maybe some opportunistic pockets um I think we're going to discuss later on for commodity curve you know there's a good question as to whe the commodity curve is in a mini reversion kind of dynamic at the moment so these are more like smaller pockets of expressing a macro view to my to my point at the beginning right so that's what we're seeing um but you know I would say you know quite busy >> what I forgot to ask last time we were speaking it's one of the questions left over but from a broader perspective um I'd be interested whether you see across your business any cyclicality in client interest is there like you know bursts of interests when you know risk is on or risk is off and they want to hedge or does it correlate with you know a bull market in the S&P 500 or is it more like constant flow of interest and and and also then transactions where it's kind of like yeah we're kind of like doing doing deals every month no matter what the markets are doing. So there is there is cyclicality in the interest uh but I would say there is generally stable flow of conversations and activity uh which obviously a good thing for the overall industry but the thematics or maybe that you know the I'm going to maybe again repeat myself the macro views that investors have could be expressed with a systematic solution so QIS becomes in the vehicle. So to your point, if there is a risk off mindset, you'll see more of a defensive tilting either of portfolios or reduction of risk on exposures or deploying some defensive components to it. Um, you know, if if the mindset is more of a recovery or maybe a normalization, um, you would see a bit more volatility selling, maybe some carry trades. um uh and and and and less so you kind of seeing as I said earlier on like know the the vehicle that will do the job no matter what like the alpha engine you still have those needs uh every now and then but the cyclicality I would say comes and goes more with the macronamics and then the QIO solutions just become the vehicles to express those those views. Um maybe the one thing that um I personally keep on use um keep on using as um as an anecdote um is that specifically when it comes to defensiveness um you end up seeing broadly speaking an act of regret and a reactive function rather than a you know a a proactive um so for instance you know we can we can speak about trend following because in 2018 involved did not perform obviously because of reversion 2020 wasn't a stellar year at least during COVID Um and and and and the reaction there was you know how about we know we end up buying some volatility as a defensive component and then you know obviously 2022 came about that you had the spot downvol down long vault did not deliver trend following did but obviously the micro environment was the one for trend following to deliver. So then post 2022, you kind of had the reverse. Okay, long vault was not the defensive trade at least for this market. Let's go back into trend following. But then some disappointment came because of some of the Vshapes we've seen the last couple of years. So I think this act of regret is not necessarily healthy from a from a product design standpoint when it comes to managing those portfolios. So if there's one thing that you know we typically try to bring forward is that specifically for some of those pockets of more strategic views know it's not let's let's follow what did well yesterday but rather let's kind of take a step back see what we're solving for and and and strategically kind of allocate to it. So that's maybe the only one that in addition to the cyclicality somebody should argue maybe let's let the cyclicality alone take a step back assess and allocate on a strategic basis >> could be easier said than done. >> Absolutely right. Absolutely. And you know it's uh nobody has an infinite horizon of investment and everyone is assessed on on on the basis of performance. So obviously career risk is the is a key consideration here that is not easily quantifiable. So I'm I'm with you on this one 100%. As you mentioned, we're going to be speaking about um commodity curve carry and how it has done in in the recent environment. But before we go there and also into some other details, I'd like to bring up um a very interesting article that I found written by Greg Zuckermanman from the Wall Street Journal. I think it was published about a month or so ago on the 20th of April. And its title is Wall Street brings sophisticated quan strategies to the masses. So let me you know maybe with with a within a minute or so frame um frame the discussion and let me cite some interesting parts from that article. Here we go. Quantitative investment strategies for clients are one of JP Morgan's fastest growing business. The bank has seen QIS revenue rise 30% so far this year from the same period in 2025 according to people close to the matter. That is an acceleration from the 25% growth seen in recent years making it one of JP Morgan's fastest growing businesses. Goldman Sachs asset management. So that is related to you for instance now manages about 175 billion in quantitative investment strategy funds which equates to about 5% of GSAM's overall assets under management. According to Premier app, the overall size of the QIS space is now about 1 trillion and about three trillion when you include leverage. And either way, the profits are piling up for the banks which charge investors depending on the complexity of their trades. QIS revenue is nearly risk-free. Something, by the way, I wouldn't necessarily agree with, but let me continue. QIS revenue is nearly risk-f free and generally reliable since the trades are preset. banks don't have to set set aside as much capital for these trades relative to other kinds of businesses they're doing. So, let me stop there. Just just some background. I you know, this was an interesting article about the QIS space, I thought, because it was, you know, it continues with pros and cons, but um it it kind of like looked at the space from a different perspective, I thought. Um is there anything you'd like to add to this? I mean QIS as an industry has been receiving progressively more uh more visibility right I it's not the first time that there is an article in um uh if you like know broader interest media um and and and that in itself is a data point that is worth obviously uh observing and um uh and acknowledging. you know some of those articles obviously come with catchy titles in one way or the other um and um now I wouldn't be able to comment too much on that uh otherwise we would have to make sure that everything exactly so I don't want to make any any specific representation here beyond the fact that it is a solution that in itself um has become of broader use because of the use of technology and data and trading capabilities at the end of the day Um banks do sit in the middle of buyers and sellers. Um they have the ability historically to deliver um if you like portfolios of stocks or commodity futures or um tradable assets uh in a variety of formats and I think the benefit of having a bank operating a QIS business is that there is also a structuring uh pedigree underlying it. So something we discussed I believe last time is that those profiles can be delivered in a co-op option in a in a capital protected structure in an OTC swap. Uh so the the access to it has become easier over the years. Some of those articles obviously come up and say you know the place is crowded. I mean my response to it is that it's always the easy way. >> Let me let me let me stop you there because >> I'm following has the same problem historically, right? It's always crowded, right? It's always like no let's point the finger. because there's pros and cons and I thought the the art the the article was actually quite balanced and well done because it because it does mention the pros and cons and so so the pros or the advantages um mentioned are for instance I'm citing again from the article for institutional investors and allocators QIS are very convenient uh it's outsourced infrastructure is essentially quant as a service bespoke implementations are possible they're operationally easy to access through swaps and other rappers like you've mentioned um you know, you have this easy go-to point to get the exposure that you want or maybe the hedge that you want. Um and you have it essentially outsourced um to some other trading desk and you don't have to do it yourself. And so this is the the good thing, the cons or the the disadvantages, the potential disadvantages that were mentioned is the flows may result in crowding and synchronized positioning. In practice, many bank QAS offerings look very similar, if not identical, and they of they often provide overlapping exposures. Too many investors doing the same trades can reduce the potential for profits. >> It's probably true. >> I mean, I would say that's a textbook definition of crowding. >> Um, so I don't think it's it's it's it's delivering anything new that we did not want did not know. Um I would I would say from designing systematic strategies whether we sit on the kind of the buy side or the sell side ultimately uh it is very important to be prudent on risk management and on how we consume market liquidity. Um so from that perspective um you know of course we can have the argument that there's more demand but I guess you know to the extent that you know somebody approaches the design of a strategy or an investment in a prudent manner you know they should account for incremental flows into uh a specific premium or um you know overlap of positions between different strategies. Um and then we tend to think or I tend to think of looking at the flow as a whole rather than strategy strategy by strategy in isolation. So that's important. Uh obviously the externalities are there and can be there but it's not dissimilar to you know any other type of investment type like know it can be a discretionary call that delivers too much of concentration. It can be no inflow into private equity markets for instance. um anything that has excess demand can lead to subdued returns. So the question then becomes is the market deep enough to consume the demand and that is something that you know we on the design side have to be very very focused on you know obviously working with trading very closely that's something we would always monitor and make sure that you know if a particular feature in the market seems to be crowded out then we should make sure that you know we look at our design better or maybe we we have a conversation with uh with our clients and frankly speaking these are all sophisticated investors looking into sophisticated designs. Um, and this whole exercise is more than just, oh, here's like a supermarket of possibilities. Let me just get one or two because they've had a good back test. I think the industry has matured substantially. >> Mhm. uh to design and assess those investment vehicles. And you know the last thing that I would also flag is that this flow that arguably has been growing um part of it is genuinely new but part of it is also um a replacement one. Um so if I were to say that you know there is a trend following strategy sometimes it could be a replacement of a different strategy or a city exposure or vice versa. And this is never quantifiable because it's it's it's impossible to track it down. Right. Um so that is another >> left pocket right pocket. >> Precisely. Right. Precisely. So >> and that was also how this business broadly speaking as an industry kind of came about came about what could be systematized and you know what is the value of systematizing a process visa v a more of a discretionary kind of allocation. Um I'm not sure whether I'm answering any question but I don't think there is a specific question to be to to be answered more than kind of giving my kind of remarks on this one. Right. So I mean it's it's a general it's a generality like you say the textbook definition too much money thrown at anyone thing uh will destroy or impact decay its return potential. Right? We can see this >> in all sorts of strategies. Um QIS should not be any different. I I have no reason to um to you know to back it up but you know when you look at some of the say more nichy QIS strategies say liquidity provision to the BCOM or GSCI roll window maybe there is some decay that you can spot maybe there is too much money chasing these opportunities I do not know you know that better than I do but clearly there there are impacts right it it doesn't go without side effects I think I that's why I think it's very important to look through the the details and understand the driving force of uh of any strategy. So you mentioned congestion. It's actually a very good example. So congestion shouldn't be there in the first place. In other words, there should be no reason why somebody is rewarded of pre or post rolling those commodity futures. >> Mhm. >> Aside from the fact that there is perhaps some passive demand for those benchmark roles because they happen to belong to commodity benchmarks. So if the market operates in a way that is creating an opportunity that can be harvested, it's actually the reverse that know there is an arbitrage that you know should be there. It is purely a consequence of supply and demand imbalance and obviously the more of that you do the less of the performance you should expect to have precisely because you're capitalizing on an arbittor that shouldn't be there in the first place. Yes, >> this is very different to arguing that selling volatility for instance could wipe out the premium. Perhaps the magnet can drop but nobody could argue that know being on the side of the insurer is now a um if you like a a non-rewarded trade unless somehow human beings become risk loving rather than risk averse but you know last time I checked those utility functions remain to being upward and concave rather than convex. So >> you don't sell insurance for free. >> Exactly. Right. So I think I think from that perspective um you know the crowding argument is perhaps an input into the time variation of riskreia. But could that be a reason for the wiping out? It depends. And the dependence has to go to the underlying reason why a specific investment philosophy has been successful. And if if there's an underlying source of risk that is captured and delivered, the reward for it should be non- negative more often than not. So that's that's how we kind of look at it. Um and that's how we typically approach it or I approach it in my search kind of focus areas. >> Very well. The the quote that I thought was most interesting and then we can we can move on but but this one I thought was really good. So let me let me read that. Aggressive hedge funds have been trying to profit from the growth of QAS programs by anticipating their traits, says Arnab Sen, who used to develop QAS products at Barclays before joining Paloma Partners as a portfolio manager. These funds try to act before the QAS programs can resulting in a cat and mouse game that can cause unusual movements in various investments. It exaggerates moves in the market. I I like this was the first time I heard that um hedge funds may be front running um the the QIS triggered trades and I'm not sure how they can like you know most of your index methodologies aren't you know you don't have the full detail you can't just download them on the internet and you know find find out what exactly is going on I think you have some redacted versions but the full technicalities aren't usually in the public domain are they? Um I mean obviously part of that is is is in is part of the IP and it's not too dissimilar to how a hedge fun would operate in in this regard right so obviously there are details that matter and these details are not the importance of those details ultimately protect the end investor like you know we we we owe to deliver what we feel is is to be delivered um and in this regard part of the IP has to remain with those that you know eventually uh allocates to Um, now could we argue that, you know, we can frontr run any strategy? I mean, again, that's a textbook design, right? That's a textbook. It's a textbook assumption. So, I don't know specifically what comment I could make on this one beyond the fact that, you know, it's put on a piece of like electronic paper. Could be the case and could not be the case at the same time. Like, I think it it can easily be put down as a claim in the same way as we can say, you know, CTAs have been crowded for the last 15 years. Um and therefore that's part of the reason of sometimes a good performance. >> Maybe we should reach out to Paloma partners and Arnaben specifically and and ask him to show the P&L of his front run QS traits. Um see how it's doing but yeah I guess he's going to decline the invitation. Anyway, let's leave that article from the Worer Journal aside and move on and speak about commodity curve carrier, which we agreed to do in our pre-call. Um the reason we want to speak about this is because it's one of the QIS strategies that shall we say has suffered some damage um this year in light of the curve dynamics um and the substantial increase in volatility in commodity markets across the board especially obviously in the in the energy markets where we've seen if not record backquidation but then close to record backquidation in WTI and rent um curve shifts in a very rapid um period of time very short period of time which has I presume cost some draw downs so why don't we just or Nick you specifically why why don't you just you know um respect or you know report from a broader perspective how these strategies have done how bad the damage is uh what the outlook is um why these strategies works I mean take it where you want to go >> so commodity curve is um probably the most longstanding systematic strategy um that has that has been designed in AQIS format you know probably goes back 15 years um I guess for those that are not very much aware just a very brief intro um this is about rolling commodity futures exposures on the back end of the curve and shorting the front uh typically the front um is very steep uh in a contango uh shape and therefore they're yield is very expensive. So by shorting the front um you end up kind of getting a differential yield versus rolling the back. Um so this differential return of the back versus the front across commodity markets is what we call commodity curve. It's a it's a carry trade and ultimately tries to achieve the yield differential from those um from those roles on the back and the front and that is done across you know a variety of commodities you know the benchmark universe of BCOM as well as kind of more frontier markets are now utilized for those trades. What is the primary risk here? The primary risk here is that you know by you shorting um the closest to be delivered contract you are exposed to what we call uh shifting to a backwardation uh which in in in layman's terms means that a commodity market uh with close to spot delivery is going to rally substantially. Uh in other words, for a commodity to rally um in the very short term, it's more likely that there is too too much of demand or too little of supply. Uh and most of the times uh commodity prices would shoot up because there's a supply shock. And that's exactly what happened in um uh that's exactly what happened in March. Uh obviously with um with the situation in the Middle East um and the straits of Hormuz and all that lot uh the price of oil as you just said more skyrocketed. So those curve positions that were shorting the front were significantly impacted. Um I should add to that that um year-to- date performance has also had another catalyst that didn't actually recover from from it and that was the kind of natural gas moves in January. Um so that was for those that remember there was like a weekend or so that um uh the weather forecast um became much more kind of negative in the US and and at the time the demand for natural gas actually increased uh in anticipation of cold weather. So that had the first kind of negative kicker into a curve strategy that obviously became significantly greater coming into kind of March uh to your to your to your earlier point. Um so draw down was quite significant. So if you look into kind of simple um implementations of um of a curve strategy you know we're talking about something like know 10% for instance um and this is certainly the largest we have seen um since you know we have data um >> is this is this the largest ever the worst draw down for these type of strategies right now? it it is indeed um let's say for the last 40 years um and if you were to kind of focus in the most recent period is possibly like not you know two times the largest we have seen so far um I think the previous one was in in 2018 >> quite significant >> uh so it is quite significant uh and 2018 was more of a of a natural gas uh shock um what I should say is that because the because the draw down came from a very well understood move that in itself is the number one risk factor when it comes to a curve carry trade. Uh possibly will connect it to the earlier point that there is no arbitrage here that is um um that is to be captured at at no at no risk. There is an underlying source of risk uh for which um investors are are rewarded. Um yes the draw down has been quite significant by all means I would say historically most of the draw downs have come either by weather shocks to my earlier point uh or from some sort of supply disruptions or like some outages uh or some geopolitical conflicts and it it looks quite similar to 2022 you know had a similar situation in Q1 2022 but at the time the impact of the move was less aggressive because you know if you remember it came obviously from from Russian oil the it was initially sanctions and then obviously uh self-imposed by by Russia themselves kind of cutting if you like the supply chain but also the production that was um kind of controlled at the time was a fraction of the one that we're currently kind of facing. So the impact was smoother through time and less aggressive on the downside. But that's maybe the closest in terms of fundamental dynamics of a draw down to the one we're kind of experiencing today. Um, and I think maybe a bit more technically now, not only the if you like the Russia situation was easier because of those dynamics, but because it was slower, um, you ended up kind of benefiting from a slight recovery, whereas now because you're rolling out of the current contract, you're almost crystallizing the negative P&L. It's a bit more of a technicality, but the way that the impact into the strategy happened back then versus now had less of a of an effect as it had today. So I can pause here if you have a link any any points to make. Right. >> Well, um, is this a good time to buy? Well, that is not the question you're going to answer, but let me rephrase it. Do you do you or maybe maybe you will answer it because there tends to be some mean reversion to this. Or I would have rephrased it and said, are clients calling you now to redeem and get out of the strategy because they can't stand the pain. they have that 10% draw down as you mentioned in that naive imple implementation or whatever implementation it is. There is going to be some draw down that is certainly inconvenient and it's very large relative or the largest relative to the history of the strategy or are they more like well this is a great time to buy because it's now probably or it might be relatively cheap now relative to the return expectation going forward. So two things I would say. So so curve carry um historically was the driving force of systematic strategies in the in the in the commodity space. But know in the year of 2026 there are other ways of extracting some positive returns from the commodity markets which had allowed the investor base looking into the space of diversifying the exposure across other type of premier. Um, and you know why I'm saying that is because the benefit of having diversifying sources of return in a portfolio context allows you to weather quite well the period through March and I would say perhaps because of that or perhaps because it's very well understood that this is the risk and therefore you know we're exposed to it and we're we're experiencing it. um you know the the reaction from the market has been much less aggressive than what was the case uh you know a few years back. So I would say in this regard there is more of patience in the sense that a recovery phase which would bring prices down will make the strategy benefiting from it and will benefit the strategy from it both because of the heel differential on the front and the back and the spot movement that is going to happen on the front. Uh now is that the right time to enter? My claim would be that you know obviously in the very short term risk is still there. No the situation is unresolved and as you said in the um in the beginning it is the theme that we're looking day after day where the oil price is going to go and sometimes it shoots shoots up sometimes it shoots down but no the news is driving the price more so than the supply demand dynamics. So I think there's much more of an implicit uh impact into um into the oil price itself. Um but I should say there is I mean there is certainly a future to the strategy. There's nothing fundamentally harmed by a risk realization. Of course at the same time you can have u you can have investors that you know hit specific risk limits and that can cause in itself uh a downsize. I mean that's that's that's that's by design. Um but I should say to summarize um I should say that client reaction has been relatively similar to what I have personally seen in the trend following space in the last few years. We know what we're exposed to. The ultimate risk is realizing. We're fine to take it because we're here to to to to harvest the premium in the medium term. And it is to mar your point the strategy that over the longer term has had very strong and positive returns for commodities without necessarily decaying in the magnitude and I think that also goes back to what are the principles that deliver the premium in the first place. Why is it there? The last point I should say is that implementation matters. There are implementations that beta heads the front and the back. There are others that are a bit more dynamic in the selection of the curve and the points of the curve that you know that they would roll. Some implementations would bring you very close to to to the spot price. So you'd close the spread so you're not exposed to the market anymore. Some of them would bet ahead the front and the back so they would be less impacted by the move because the front is more volatile so you reduce your exposure. Maybe too technical now but you know you get the point that there are variations that have actually been positive year to date. >> Oh really? >> Yes. So interesting. Think about it. Let's let's let's do the most basic one of them all. If you are dynamic in the selection of the back in a backwardation state, you'll come to the front. If you come to the front, you close the spread. So you're not exposed to the market anymore. And in that closing of the spread, if you're also bit adjusting the front, you're even less exposed to the front. So in this transition of closing the spread, you're also reducing the front exposure. And then the whole thing is um is substantially more diluted than obviously being like no I'm long the F6, I'm short the F-0 and I'm just stuck on it on a on a dollar neutral basis. >> Yeah. Or contract neutral basis. Um >> correct. Correct. >> Um yeah, interesting. Look, I mean, I I don't have any uh any, you know, detailed knowledge on this. I'm definitely not a forecast, but you know, that the backquidation that we're seeing in and and Brendon WTI, I mean, but >> yeah, but that that does not that does not mean that it couldn't get even more insane, right? I mean, this is this is markets. What is it about $20 now difference between front and whatever? Like, you know, 12 months out or something like this roughly. I I don't have the exact numbers, but I mean, could it become 40? Why not, right? I mean, if there's a complete crisis and people are like just scrambling for barrels and there's this massive supply shock and we don't have enough going around, the front can be bit up. I think the interesting thing is that um in the current macro dynamic with uh with obviously this uh shortage of supply that you know we observe and it's uh it's in the hard data as well um there are some snippets of uh of news that talk about how the production engine is now kind of almost like learning to operate with like with lower supply. So it's a good question whether the market can absorb the shortage um rather than you know the the fundamental exposure that the that the economy has on it is just nostatic >> hard to quantify. Yeah, I also I did speak with an old trader in in the Middle East. Uh he told me that there's there's big efforts being made of moving barrels by train um you know getting it to different offloading points and unloading points and even trucks are running uh to get to Oman and you know kind of like bypass the straight of you know the >> uh what is it the east west pipeline and Saudi is capacity. So >> it's fascinating though, right? It's fascinating because you know we talk about financial markets and then as soon as you started speaking about commodities, you're talking about like the actual physical. >> Yeah. The real thing, the real thing, right? So it's it's quite fascinating actually getting into this space. >> Yeah. Love these markets. >> Anyway, let's leave it there with commodity curve carry. Uh maybe in six months time we're going to reconnect and uh it'll be it'll be recovered. Who knows? Um but back to our most favorite topic uh trend following I guess is is is >> is something that goes with the systematic investor series at least this is how it started. So trend following performance in 2026 I think we've said is actually quite good. Um from your perspective you know one of the the questions that always came up is like alternative markets smaller markets versus standard markets more markets versus less markets. Um I think you've you have it all in your QIS suite of products. Uh what's been performing best? What's been performing worst? >> Let me start. Where should I start? If I start from the markets that perform the best. Um I mean alternative markets in my mind and you know we can disagree on the definition because you know there is no clear differentiation between what what makes a market alternative or or conventional beyond maybe just liquidity. Um the more kind of let's call it conventional markets I think they have outperformed. um you know we can look into maybe non kind of BCOM or non-benchmark commodities um you know year to date it hasn't been a specific good period for um for that part for the trend following space you know the the interesting thing is that you if you start looking into different premium like know reversion or skeess dynamics the exact opposite uh so the benefit of diversification of premium also prevails across all markets >> so specifically in the commodity space that we were kind of uh we were talking about um kind of benchmark markets have done very well capturing obviously the precious metals in the early days of the year and then in January y precisely and then kind of moving into the energy markets and benefiting very very strongly in the you know in the recent period so pretty much like in a straight lineup in a way on the commodity front um and the other asset classes obviously being long equities short the dollar short bonds you know I I I rarely remember a period whereby by all four major asset classes have been contributing positively. Um and this is one of the one of the few um we know interestingly in raids I know I remember kind of discussing year end with um with a with a crew here what would be my bet for the year and so far know it didn't start as I was anticipating it but you know since the beginning of March I think the the rate trend has picked up which is actually like an interesting observation to have you know haven't had it for like no two three years actually now since 2022 um so performance has been very strong I think benchmark markets have been delivering the principal components in all fairness. So the equity, the dollar, the the energy complex and the rates one. So the the whole spectrum has been delivering. Economic trends have done well as well frankly speaking um you know pointing into kind of rising or falling growth but you know certainly being helped by by some precious exposure and then obviously diversifying components to trend following like reversion like K things that have been very vocal about. uh for another year continually continuously uh adding performance. Um it's been actually quite quite a very strong year for the whole spectrum. >> Um I would say if I were to make a classification to your question as to how broad or how um centralized somebody should become when it comes to trend following program. In my mind, stylistically solving for defensiveness, somebody should go with a core market universe because all you're trying to achieve is the principal component moves. Maybe with a slightly lower long-term adjusted returns looking for long-term adjusted returns, I would go broader that perhaps will have a cost in terms of how much defensiveness you get. And I think this was in a in um also in a paper from man that was actually quite nice a couple months ago. >> Correct. They looked at different portfolio compositions uh with more like alternative markets, more markets, less markets. And that's exactly >> what they uh what they showed is like if if you have a smaller concentrated portfolio of macro markets, you have that positive skew defense uh especially during equity draw downs. But your long-term expected sharp ratio performance potential is maximized more when you add all these alternative markets because they're you know I use syncratic bets on something different. They materialize at some point in time >> precisely. But I I don't think this year it's necessarily the recipe for disaster nor for outperformance. Um yes fine if we just look into the non benchmark commodities maybe the trend following space has not been very lucrative but the reversion one has uh but that's a bit more of a kind of handpicked selection round rather than like you know >> um a bigger group of assets. >> No it it matches my observation. I mean, when we look at the stock CTA index, I mentioned the performance numbers earlier. It's up about 12% or whatever it is, right? So, that's the largest 20 CTAs. There's a big exposure to the big macro markets. So, they're doing well with these type of markets. Um, there are some CTAs out there trading concentrated portfolios that are up 50%, some are up 100%, they have these massive years. And then when we go down the list and we look at the managers that um are more in the alternative markets space or have a broader portfolio that includes smaller markets. Uh we at Tucker hey were one of them. Uh we're not really catching up with these or we're not there because the other markets have been a drag this year. Um you know we have allocated risk to them and they haven't been performing as well. Whereas if we had all the risk in you know silver and gold and the energy markets we would have done much better but that by no means says anything about what will happen next month >> after the fact between now and the end of the year right >> after the fact we always know >> exactly >> that's true that's true that's true >> hey there's a question and that relates um as we're we're closing down there's a question that came in for you Nick uh relating I presume to uh trend following so let me bring it up it's a listener question from Vladimir. So here we go. Researchers and practitioners in the rules-based investment community publish prolifically on the topics of the role of CTAs and portfolios, various signals and factors, portfolio construction, etc. There's little work and less less conversation about execution. So the question is is there alpha in execution? Is there discretion in execution? And when is that discretion exercised? What are the go-to and preferred execution strategies that minimize slippage? Is there a case for execution optimization per asset or asset class? And what percentage of time is spent on execution, R&D, research and development? Keep up the good work. Um, thank you flooding me for the question. So long question summarizing is there alpha and execution? How do you execute? How do you minimize slippage? And is it kind of like a market bymarket distinction that you could possibly make saying we're going to be executing the S&P 500 in a different way than we're going to be executing Coco? So I think the question can be answered very differently when it's posed to kind of a QS business versus you know some some uh kind of CTA that know are managing you know with the I guess with the fiduciary element following portfolio. So maybe my answer would be kind of perhaps different to yours, Morris, right? Because you know, we're kind of sitting on like the opposite um the opposite seats of um of that question. So broadly speaking, QIS would typically deliver on a guaranteed basis some closing price or some T-W. Let's put it this way. In this regard, the risk of achieving whatever price reference price has been quoted in the index documentation lies with the trading desk. But ultimately whoever is exposed to this systematic strategy will get whatever they can calculate effectively by to your earlier point doing the sum product of quantities and price changes. Uh so in this regard our attempt is to make sure that you know getting into the market is a passive exercise. um precisely because we would want to avoid having any impact whatsoever. And the way that you know both from a design standpoint but also from a requirement standpoint approach the problem is we want to deliver the strategy and the strategy just there is no execution alpha that in itself will become part of the return and therefore in this journey of delivering um as passively as possible the reference prices in the documentation of the index. The attempt is be passive, be thoughtful market by market class with the trading desk. they have the ability and the clarity to decide upon how and when they would execute into the market. I think this is very different to running the strategy yourself because in that case you can benefit from it and therefore your clients can benefit from it above and beyond a guaranteed closing price which obviously at times can work at your benefit sometime at your expense. So I think there is certainly value in doing execution research and by no means am I saying here that you know we should not focus on that. It is purely the if you like the boundaries that a QS business operates under that makes that more of an internal focus rather than if you like an externally deliverable profile in this regard. >> Fair fair enough. Um >> but to get your thoughts right because I think you are much more on that right than than myself. >> That's something no and you're absolutely correct to say that it is a different perspective that we need to take because through your index documentation you promise and you guarantee say a settlement price to the client and you're marking the strategy at exactly that price um and that is where it is transacted. Now if you trade at a different level to that price that is slippage and that positive or negative slippage it can be either direction is on the books of Goldman Sachs um you know with all the netting impacts that you have but it's essentially for you to manage that and it's your risk to manage that and it's not something that you're mirroring on to the client. In our case, that's different because every time we realize slippage, it is again either positive or negative, but it's directly routed on to the client because it shows up in the P&L. >> Exactly. >> And so to summarize, I think there is I'm not sure if alpha is the right word, but there is value in execution and executing efficiently. and all of these markets. Um, this is one of the questions Vladimir has is like, you know, is there different execution strategies per market? And my answer to that is yes, there is because all of these markets operate in a different way in the order book. They have different settlement procedures, different settlement windows, you know, different periods of time. Some have like 30 seconds, some have 30 minutes to settle. trading Brazilian live cattle has a very different settlement window than trading live cattle in the US on the CME. Um the liquidity profile and the liquidity concentration is very different. Um so there is value that you can extract and maybe an episode that Vladimir if you're interested in that's worth listening to is my conversation with Tom Babage from Gresham. Um and he did speak about so they they trade alternative markets. day trade markets such as you know propane and butane gas and you know um smaller markets and he has reported that you know these are markets where you would in expectation assume that the slippage is going to be much higher relative to if you traded the S&P 500 E- mini futures contract right which is very liquid and he reported that their slippage in the past year has actually been nil um and the way they do it they do a lot of R&D in execution um is they have a more kind of like patient approach to getting into the trade. They're not forcing themselves to immediately transact and consume liquidity from the order book. Um they sit there, they can wait. It's more like um he said it's still systematized and rules-based, but it's it's it's more like a human element to the execution process to get you to a trade. And he said there is value there. like if we didn't do it in that thoughtful way, they would probably pay 2 or 3% in slippage per year and and now they do not because they have a specific focus on doing it efficiently. So, and my like I can only echo that not to the same extent as Tom Babage, but clearly there is um missteps that you can avoid easily by executing poorly and there is value by executing efficiently. I I can only believe that. >> Yeah, I can only believe that. >> Nick, to wind it down, um a final question I'd like to ask you. Um and that is that is my question. It didn't come from a listener. Um do you have a QA index that does trend following on single name cash equities only? I think it's an interesting space, but as you know, I may have overlooked something, but I've never seen an index that does that. And I was wondering like with all the indices that banks come up with, why is it not there? If it if it is not there, I might be wrong. >> Yeah, I I don't think you'll find it on the street, but maybe I don't know the the industry um at um at that level of depth. Obviously, broadly speaking, the single stock space has always been thing thought as a as a cross-sectional space. There is a pocket I should buy, there's a pocket I should sell, and that's a relative trade rather than like a time series one. Um and obviously momentum is the better expression of trend following the single stock space but momentum is now buying the winners sorting the losers. Um and I think part of the reason why this is the implementation that you know you typically see more of um is because a more time series implementation would be probably like timing the market in a way like buying the stocks when the market is kind of rallying and then kind of selling them when the market is selling off. uh with a bit of cross-sectionality here. I don't necessarily think that this is a bad idea and uh I'm sure it's going to have positive return partly because of the market timing ability that it would have. Um there was no if I have good recollection on this one. I think there is a very interesting paper by maybe it's Jades and Goyel I hope I'm not wrong. um uh a couple of years back maybe three four five years ago looking into the difference between a time series implementation which is trend following and a cross-sectional implementation which is momentum um and the focus there was to look into single stock implementation because you have the breadth to do momentum cross-sectionally but also you can do a trend following strate point and what they show is that one is very similar to the other plus some market timing mechanism. If you have a 100 stocks and you go long 60 and you go short 40, it's almost as if you go long and short 40 as a cross-sectional momentum and then the remaining 20 will give a bit of a beta to the market. So what they're trying to show is that the two implementations are kind of sister implementations of the same premium with an additional market timing element. So the question then becomes where is my return coming from? How is that attribution of skills delivered from a market timing mechanism versus a cross-sectional premium? So to I guess to paraphrase all I'm trying to say here is that what you're saying is not I guess it's not it's not a it's not um a question that doesn't have any any value in it in the sense that I can see I can I can see the value it can bring. Maybe the one thing that has become more popular is something that came up few years back called factor momentum. >> Mhm. >> Which is looking into cross-sectional premier and allocating between value and quality and growth and so on and so forth on the basis of the relative momentum. But that in itself we will start picking up sometimes series trend on the factors that have performed. So indirectly maybe that's an expression in the single stock space of a trend following strategy which is doing trend following at the factor level which is long short in itself as a design. So the the vehicle itself is long short but the allocation is done on the base of time series momentum onto them. Um and that I think primarily comes from some of the uh kind of slowmoving flow uh in the equity factor space now that you know it's available in an ETF format and and and and other top kind of retail um retail rappers. Um so that's how I would look into this one. I have a feeling that there is an ETF in this kind of trend ETF space that does single names. Cannot recall who who that is. >> Yeah. Well, it's that that definitely doesn't seem to be a crowded space. um because we both don't know off the top of our heads whether it exists or not or whether there is an ETF. But so I you know maybe it's food for thought maybe something for your research team to look into at some point and and come up with an index. Um I definitely find it interesting. Anyway, it's been an hour. So on that note, Nick, it's been great to chat with you again about the QA space. Um Oh, you you you're raising your finger. You found something. I I yeah, you know, from memory, I think that was the the Chesapeake trend and I think that's the one that does the four asset classes and then single names. There you are. >> Oh, yeah. They Yeah. Yeah. So, so Jerry and the Chesapeake team, they have that on top on on top on top of the other things. But >> that's the one I had in mind was like, no, unless I check it. I don't want to put the name down. Uh that's the one >> for for sure. I I can confirm that that is the case. um they're trading uh single names but I was like but obviously on top of oil on top of rates on top of copper and so on and so forth >> and um but as a kind of like a standalone version just you know single name single name trend >> yeah maybe food for thought maybe at some point we'll have that index as well would be interesting to follow I guess and compared to the S&P 500 like everything is compared to the S&P 500 >> such an incorrect benchmark for long short strategy, but anyway. >> Yeah. Well, it's an incorrect benchmark for trend following strategies, too. But nevertheless, we're comparing it to the S&P 500. >> I know. I know. >> Anyway, let's wrap it up here. Nick, I hope listeners that you have enjoyed it as much as Nick and I um enjoyed chatting to each other and making the conversation for you. Um, next week, I think Neils will be back and hosting the show again. And meanwhile, if you have any questions or if you'd like to submit a question for the next episode, please email us at info@toptraders unplugged.com and we will do our best to bring your question up from Nick and me. Thanks so much for listening and until next time on Top Traders Unplugged. Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to your favorite podcast platform and follow the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you. And to ensure our show continues to grow, please leave us an honest rating and review. It only takes a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged. 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