Redefining Trend Following | Systematic Investor | Ep.363
Summary
Market Insights: The podcast discusses the current state of trend following strategies, noting a positive momentum environment in August, with equities and select commodities like live cattle, gold, and silver showing strength.
Investment Strategies: There is a focus on the varying speeds of trend-following strategies, with slower strategies performing better in the current market environment, highlighting the importance of speed and structure in investment strategies.
Sector Performance: Fixed income remains challenging for trend followers due to large trading ranges, while the energy sector, particularly oil, shows limited follow-through in trading patterns.
Portfolio Construction: The discussion emphasizes the need for short-term risk mitigation to achieve long-term capital appreciation, suggesting that strategies like trend following can provide essential defensiveness in portfolios.
Benchmarking Challenges: The podcast questions the validity of current trend-following benchmarks, such as the SocGen Trend Index, as true representations of trend beta, due to survivorship bias and the inclusion of alpha-generating strategies.
Alternative Investments: The conversation touches on the importance of including strategies like long volatility and trend following in portfolios to enhance long-term compound returns and allow for higher equity exposure.
Investment Philosophy: The hosts discuss the philosophical aspects of investment strategy design, questioning whether changes in strategy speed are due to structural shifts or the introduction of new signals like carry or value.
Transcript
Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence or investment career to the next level. Before we begin today's conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. Here's your host, veteran hedge fund manager Neil's Krup Larson. Welcome or welcome back to this week edition of the systematic investor series with Nick Bolters and I Neils Castro Blarsen where we each week take the pulse of the global market through the lens of a rules-based investor. And let me also say a warm welcome if today is the first time you're joining us. And if someone who cares about you and your portfolio recommended that you tune in to the podcast, I would like to say a big thank you for sharing this episode with your friends and colleagues. It really does mean a lot to us. Nick, it's wonderful to be back with you this week. It's been a little while. Um, how are you doing? How was your summer? >> It's been a while. Good to be back, Neils. Good to see you. Um, the summer has been has been good. Um, you know, you can you cannot take a Greek out of Greece in the summer. Uh, I think I have um I have 43 out of 43 of my summers, 100%. Spent a couple of weeks there with family and friends. Um, you know, got back um over the past weekend. you know, we had a bank holiday here in the UK, so kind of not not very slowly picking up things actually. I would say quite aggressively. So, it's been a busy week so far, but yeah, summer was good. >> Summer was good. How about you? Tell me. >> Yeah. No, I was I was up north. Uh just got back a few days ago. Uh and um so our summer was not particularly hot, so to speak. Um but I do gather that in the south of Europe uh certainly when you see the the the weather forecast on the on the news uh um sort of southern Europe, Spain, Portugal, but I imagine Greece as well have been um you know once again hit by some some pretty nice but very hot weather. >> Yeah, there was there were like some some 40 plus days. Uh but thankfully on those days we happened to be in in an island. Um, when I was in Athens, it was actually around the 30 early, you know, um, small 30s. Uh, it was it was bearable. >> I think my jeans can survive that, but I can I can certainly gather that in some of the more northern kind of European tourists might might feel that the 30° is a bit suffering. >> Yeah, it seems like we see more uh people with number plates from really southern Europe coming uh to Scandinavia now uh each summer. So I think uh some people are really escaping the heat nowadays. >> I'm not I'm not surprised. You know, when I was in my in in my teens, we did not have that many days that the temperatures would go up there. I think I think part of the climate change uh is kind of impacting us in the same way that you know the the UK summer has had a number of >> 25 plus or 30 plus days this summer, right? You know, we did not have that not years ago. >> Yeah. >> So I think we do see the effect. >> Yeah. Yeah. Now, I did read an article about the the suffering people are are feeling when they take the tube nowadays during the summer in London. I remember my own 12 years in London on the tube. And back then it was probably cooler, but it still felt pretty hot in the summer. I have to say >> you need the air con. You need the air on his now. You need the air con. >> Um, you know, I don't know if you have anything on your radar other than something else from your holiday which you have feel free to share. But in the meantime, speaking of hot, um what caught my uh attention of course this week was that um the whole debate about Greenland is heating up again. Uh and of course as a Dane that does catch my attention and apparently now three people have been uh kind of identified as trying to specifically influence the relationship between Denmark and Greenland. Uh people uh related to the US administration, let's put it that way. So that that was a little bit interesting and and also tied to the US administration. I couldn't help noticing the fact that there now is a direct attack on another Fed governor uh Lisa Cook um and trying to essentially change the the composition of the board uh of the uh of governors and there's only seven of them and I think if they get uh Miss Cook or Mrs. you know, out of the of the the board and appoint another another one. I think they're pretty close to having quote unquote five uh of the seven. So, um interesting times ahead uh based on those two observations, I think. Now, um let's go to something that's been a little bit cool uh in the early parts of the year, heating up a little bit over the summer, and that is of course trend following. because July felt a little bit to me like kind of a turning point for CTAs and trend followers and there you know there were signs of a few constructive trends and uh we only have as we are recording only have today and tomorrow left to trade for the month of August. So you know it feels like August is a bit of a continuation uh with some better uh momentum environment for for our strategies. Now, you know, in fairness, probably not many managers knocking it out of the park. Maybe one or two, but still performance looks pretty solid uh when I look at the kind of early early numbers. Um and of course, let's cross our fingers that the next 24 hours will go without any big announcements um from Washington to to spoil the party as we saw at the end of July, of course, with the copper announcement. Um we do see or at least from my vantage point continued strength in um the equity part of the CTA portfolio. Um it's being supported by a few select commodities I would call it. Uh in particular of course the continued rise in prices of things like live cattle uh has been important. Gold, silver uh as well. Um and we do continue to also see some weakness in parts of the uh of the grains in particular wheat uh with a bumper crop being um expected in many parts of the world. So that's obviously weighing down prices but it's actually pretty good for for trend followers as far as I can tell. Now the tricky sector uh has been something like fixed income and I get the feeling that CTAs are not aligned here. I get a feeling that some people are short, some people are long. um when I look at the daily fluctuation sometimes and I look at what happened in fixed income um it seems like there are basically two camps at the moment um so it'll be interesting to see uh how it all turns out um and of course fixed income in general has been pretty horrible uh for for trend followers because they've been stuck in in large trading ranges for for quite a few months and similarly maybe you could talk about energies in the same way I'm not sure about positioning here. Um but certainly from a trading perspective, oil has kind of just been gyating up and down for for quite a while without too much of real follow through uh either way. So those are kind of my observations about uh August. Um feel I'd love to hear your experience in terms of either relative contribution or or changes in exposure that you've seen in your portfolios. I mean I think broadly I would be relatively in line with some of your comments. So yes, August has been a positive month broadly speaking um and that is across a variety of um of programs that we have um in terms of speed uh in terms of equity participation and so on and so forth. Um broadly speaking the slower the better for the month which seems to be the theme of the the last couple of years. um perhaps also related to the discussion we have had back in the days on the Vshapes that we saw in April, the Vshapes we saw last last August. So monthto date um the slower has been better uh but not substantially so to substantially change the overall profile of the ST. So we're talking about you know between two and 3% of positive returns um you know for a V of 10 to 15 depending again on the variation. um return drivers to your point are indeed quite similar um and partly reflecting also what we've seen year to date. I think equities obviously with a significant April impact have had um significant negative contribution at the time but have been now contributing capturing those those those positive trends as you as you nicely pointed out. Um, gold for sure. I think gold uh is probably the number one positive contributor year to date out of a universe of like know 80 plus markets. >> Mhm. >> Um and I would agree with you on the fact that the that the interest rate space is by far the most challenging um you know la last week um yo was speaking um and you know he actually made the point and I certainly agree with him. This is um very disappointing year for fixed income. realized that there's no particular trend. Uh it's it's it's it's really kind of going around and whipsing uh with no specific direction. If I try and see the difference between different speeds um monthto date on the fixed income front there's a bit of a discrepancy. I think the slower has done actually slightly worse than some of the faster ones but you know the absolute numbers are actually quite small. The contribution to the month performance from the fixed income components is very very muted in a way. Yeah. Yeah. No, I completely agree. >> So, not not not much to say about if I just literally look into the numbers. Yeah. We're talking about like a month-to- date contribution of negative 20 base points, but it's it's it's quite small. Uh primary primary drivers have been equities and and and uh and currencies actually. >> Okay. Oh, interesting. for for for this month. I mean some other reflections specifically in the CDA space for for the month of August has been very strong performance of um of Kerry components which again is sitting outside of of trend following but Kerry continues to have very very strong >> month or months or maybe year uh it's supposed to be one of the best years for um for carry across the classes but this is beta neutralized that's beta neutralized right >> that explains actually a little bit of some uh very early numbers that I've seen where I thought that's a little bit of an outlier uh in a positive way and that I think would explain uh that would explain that. >> Correct. >> Um >> yeah. >> Yeah. So so so those CTAs that deploy some of Kerry or perhaps stop loss or reversion exposures I would expect them to fare better monthto date as well as year to date and I think some of the some of the reasons uh could come from those components specifically the carry one. >> Okay cool. So my own trend barometer actually yesterday finished at 34. So that's still a weak reading. Um so from in from a trend perspective but also from a relatively short uh look back period which is what the trend barometer uses it hasn't been a great month and I think that's kind of confirmed when I look at uh performance uh numbers because the beta 50 index which obviously is a very broad index uh is indeed up uh 0.92% uh as of Tuesday down 3.29% so far this year. So, you know, not not a bad year really. Um, so NCT index up 1.3% um but still down 6.25%. That's fine. The trend index definitely stronger uh up almost 3% uh so far, down 7.39% so far this year. But then comes the little bit of the outlier and that's the short-term traders index. It's down one and a quarter% uh and it's now down 6.29%. Um and that's a very low volume index. So uh if we turn that into kind of CTA uh or trend index V uh it's actually suffering uh and by far the worst of these indices. So um so it kind of um speaks to this uh idea of of um how different speeds are behaving quite differently uh this year. >> Yeah. I think it also aligns to to my earlier comment that month to date the the faster you've been um the relative underperformance you've had. you know still positive but you know to to to your point faster signals this month have not actually delivered as much as uh slower ones so that's quite that's quite in line with my with my data. >> Sure. Okay cool. So in the traditional world, Msei World is up 3% as of last night for the month and up 14.3% so far this year. And the US aggregate bond index up about 1% uh in August up almost 5% so far this year. And the S&P 500 total return up 2.35% and up 11.14% so far this year. Okay. So, let's leave the usual stuff uh behind and let's um talk about two topics uh initially. Let's see how much we get to today. Uh but two topics init initially that you brought along which I find very interesting because on the surface they look like are we not going to talk about things that we've talked about before or is this or where's the new part? And actually when I when I saw your thoughts I thought this is interesting. This is kind of a new twist to uh an old uh narrative. And the and the narrative here is really that CTAs have gotten slower over the past decade or so, maybe even more. Um but you question whether that's really a shift in speed or whether that's a shift in structure. And I think this is interesting because I think most people will just by default say, "Oh, that's that's a difference in speed." Um, so I'd love to hear you lay this out. Um, and hopefully we can get into some some level of detail about this because I think investors need to understand this uh maybe a little bit better than the way we often just sort of casually talk about speed. >> Yeah, thank thank you Neil. So I mean this topic came to me maybe partly as a consequence of some of your discussions with the rest of the the speakers in the show. Um and you know we keep on talking about the characteristics of trend following strategies how you know fast the signals have been or have been shifting towards or maybe they become slower and how the industry is adapting and so on and so forth. Um and most of the empirical analysis to document those patterns um pretty much comes from let's build a set of bottomup strategies that go from a very fast signal to a very low signal and let's start doing some exposed correlation analysis maybe on a one-year rolling base or a two-year rolling basis and see what has been the shift in those correlations throughout the years. These are the correlations between those different speed programs and let's say the socks and trend index. Right? So if that is the benchmark and if that represents the industry which is in itself a question that maybe we'll address later and let's look into the correlation that this entity has had with those let's say proxy strategies with different speeds. And you know if you run this analysis maybe you can argue that over the recent 10 or 15 years the slower programs correlate more with the benchmark versus what was the case maybe in the in the in the in the years of 2000. And you know we keep on making those comments that you know some of the programs have become slower and so on and so forth. That pretty much comes from this type of an analysis. It's an expost analysis with those um kind of stylized simulated returns and how they correlate and how they cross-sectionally rank on the on the basis of that correlation to the benchmark. The point that I wanted to flag or maybe just bring forward without necessarily having specific proof about it is that purely by looking into a correlation metric beyond the fact that we can make the case that something is cool moving more than what it did in the past. I don't think we can necessarily argue that the speed of that program changed versus for example that program having had other features being introduced. Let me make a very basic example. If I'm a momentum investor in equities and suddenly I become faster or I introduce a value signal in addition to my momentum signal, it is highly likely that my correlation to some benchmark will shift very similarly. But the reason for the shifting is very different in those two cases. In one case I change the speed at which I'm following trends. In the other one I'm just interacting those speeds with a negatively cored signal and that's now a value signal. So it might appear as if I'm behaving slower or faster, but this does not come as a consequence of a change in my speed. It can simply come as a consequence of me introducing stop-loss rules, introducing car signals, introducing reversion signals, amending my program, amending the algorithm not at the speed of trend, but on other components around it. Maybe we're adding different markets and the different markets behave very differently with a given speed which in itself changes those correlations. So the fact that the so trend index in itself is a living creature of realized returns of real programs and it's not a simulated history of today's algorithms that in itself can put a question mark on this type of analysis. So to be clear and maybe I make a pause here to hear your thoughts, a shift in realized correlations is a necessary but not sufficient condition to infer that the speed has changed. We can maybe hypothesize it because the data suggests that this is the case from a correlation standpoint, but it could be other reasons that interact with trend in a variety of ways that make it look as if it's faster or make it look as if it's smaller, as if it's slower. So that's the point that I kind of wanted to bring and and discuss with you. I I think it's a super important point actually and um it it it also is something that relates very much to my my own day-to-day work because often at Don we're classified as a long-term trend follower uh which is true but only if you look at sort of signal generation right if you look at other things like risk management as you say you can have risk management filters that react much faster and it'll look like uh you have um you know short-term models in there but but you don't you just have more agile risk management for example. So I think this is high very relevant but it's also very difficult for investors to uh maybe fully uh get their arms around. I I also agree I don't have any experience with this really but I also agree that uh there is definitely an intro there has been an introduction we know that of of other strategies in the trend programs value carry other things. >> Mhm. Um I don't know if from your experience whether you uh have any um feel for whether say a carry or a value model actually makes a strategy looks slower to to your point. I mean have we become slower? Is it just that these extra factors that that are are playing that? And then the um the other thing uh that uh I was thinking of and the the the topic actually or the the question actually uh just escaped me. So may maybe I'll leave it at that. I'll try and and and think of what I was uh wanted to ask you as well. But those are the things that I I see as well. >> Um I agree with you also on the on the very smart mansment component, right? um even changing the way that volatility is estimated or the coverance is estimated or how you penalize some of your exposures might in itself appear exposed as a shift in the speed. Speaking from personal experience, you know, we do a lot of research on a continuous basis and I'm sure CTAs do the same if not more. That's their day-to-day as well. I cannot speak on their behalf but I cannot at the same time feel that know people go to bed and wake up and say let me make it make it faster let me make it slower let me make it much faster or much slower this is the anticipation that I'm having about the markets and the micro environment let me do this let me do that I think the response is more on the risk management side maybe let's reduce the level of risk we take maybe let's reduce the net or the gross exposure maybe let's have a more prudent way of diversifying our signals and less so let's become just faster for the sake of being faster or being slower for the sake of being slower. So I think some of that discussion as to what is the speed at which we can maximize the correlation might be masking other types of phenomena that take place in the model evolution and model design that we just shrink down to a single number and that's the speed right I could be completely wrong just to be clear right that's my disclaimer here but let's use another extreme example if I take a correlation of a moment momentum trader to a value investor, I can equally say that it's a contarian, but in reality it's a value investor. So it might appear as if they take negative return signals, but in reality they might take fundamental information to position themselves in favor of convergence back to fundamental value. So the correlation beyond just the statistical nature that it has cannot tell us necessarily what is the the behavior of um of of a particular program. Right? So I think we should look at it >> with a pinch of salt while acknowledging the deficiencies it can have like >> I can produce information I can produce variations of strategy that actually show that the socks and trend index has become faster not slower >> right and and that again depends on the markets that I can put together depends on how I calculate the signal depends on a variety of ways right if we use exponential weighted moving average with the same look back window the story might be slightly different right so I know remember this quant ICA paper like a couple of years back maybe two years back three years back that they did this maximization of correlation per year and identifying what's the halflife that does so so what is the halfife of a signal that achieves the maximum correlation to the soen trend index and I think they ended up with something like know 66 business days of halfife for the last like know 15 years >> if I were to claim that this is the maximum correlation and then we argue that we have become slower or the industry has become slower. I don't think that 66 business days of a halfife is what we consider as being slow. Right? So again, I'm just putting a bit of >> not doubt in a bad way, but you know, more like transparency and and scrutiny on how we feel about the speed and how active we feel the industry is when in reality I think the research direction moves more towards how can I protect my portfolio, how can be how can I anticipate the signal to noise dropping, how can I anticipate a micro environment that becomes less trendy or more trendy and less of should I make like a 3 month speed the four month speed or a fivemon speed but I could be wrong. I could be wrong. >> Okay. Okay. So, a couple couple of things. First of all, I'd love to know whether you think we should rethink how we define speed in a trend model. I mean it seems like what we are using is not necessarily a very good indicator and I'm not sure that there is really any universal definition of speed anyways frankly. The other thing is that I think a lot of modern portfolios uh CTA portfolios today you know the speed is not constant anyways. I mean we do dynamic select parameters on an ongoing basis and and therefore they will they will shift uh over time um quite naturally. Um but again if we don't really know how to define it what should investors do um because they love to put managers in buckets. Oh he's a short-term manager. Oh, he's a medium-term manager or whatever. Um, but then they may be surprised by the way they actually behave uh during a certain period of time. So, is there a way to define speed differently? >> I think there are classes of signals that in their ecosystem we can have some breadth of speeds. You know, if we look into the sign of past returns, that's the window of estimation. If you look at an exponentially weighted moving average at the half life, if you look at the crossover, that's the combination between the short and the long-term window. >> I do not think that there's a good answer to your question. Um I always however remember this um this nice paper um I think it was like Lassa Peterson and one of his colleagues at AQR back in 2016 whereby they made a point that different signals in a way um are functional transformations of each other. Mhm. >> So to some extent um too much research on the signal is possibly just a functional transformation what you already have and their point was like focus on portfolio construction focus on risk management. The signal in itself is a version of how trendy a market is and if you believe in dynamic risk scaling can also be an input into your relative risk scaling between the assets and that's about it whether it's slightly higher or slightly lower we can have the conversation so I don't think there's a unified way of defining speed but condition upon a single definition we can have a family >> as I mentioned I think a lot of investors like to classify managers in certain categories, >> which is fair and and speed is is one, >> but it reminded me about the conversation I had uh which you may have listened to or not with Rich a couple of weeks ago where we talked about well, you know, trend followers are often um you know, labeled the same because long-term their correlations is pretty high. Um, but really they're not the same. And you could probably define four or including my extra definition, five types or categories of trend followers. Uh, you know, the replicators, the the core diversifiers, the the crisis risk offsetters, the outlier hunters, and then I called I added one called the pure trend followers because I do think there's a little bit of a difference there. Um, and so firstly, I don't know if you listened to it. If you did, I'd love to hear your thoughts about this. But it does. No, but it does >> it does beg the question and that is um how can we help investors maybe look at the universe of trend followers in a different way in order to make sure that they actually get the right trend follower uh or CTA um for their purposes. Um, and of course I'd love to hear what you think your own strategies that you design. Uh, what kind of uh one kind of trend follower are you, Nick? Uh, but but I do think it's important. I actually think it's a conversation that we need to evolve a bit more uh if we want um a broader participation of investors in the space so that there are fewer of these quote unquote surprises, right? Oh, it didn't do exactly what I expected. Well, maybe because you were looking at it the wrong way, for example. >> Yeah. So, my immediate response or maybe my my impul response to to to your question is that trend followers or at least the strategy in a broad sense achieves two objectives. Uh some form of defensiveness in prolonged equity drawdowns or market macrodriven draw downs and some long-term positive returns. And this is achieved with some level of decorrelation to benchmark markets not locally but more longer term >> which to a certain extent explains why longer term CTA managers are more corrected than locally >> because locally the differences become more prevalent but long-term whether you are 10 out of the 12 months long equities or nine out of the 12 months long equities because you have had an equity rally at the end of the day is going to realize a positive correlation long-term. but not around those transition points. So I think what really matters is what trend following is used for is that used for a defensive mandate. It's a very different discussion to be had. >> Are they used for an absolute return vehicle as an overlay together with other absolute return strategies? No, maybe hedge funds, maybe private assets and so on and so forth. That's a different discussion as well. And and sometimes you ask the question and then the response you get is probably different to what you're expecting it to be cuz sometimes you know you get this question kind of posed to investors and say okay what do you needed that for? And and they might as well say you know what I actually care about that being my inflation hedge. I care about that being my prolonged draw down kind of defensive slave. And then year like 2022, sorry 2023 or 2024 comes up or 205 for the sake of argument and then you end up having questions why is it not working? And obviously you can have the arguments and you can explain what's going on. But then you can point to that kind of defensive objective, right? And and if that is the objective that should prevail, then obviously we do not want to have a draw down and we know it's painful to have to go through the draw down and explain what's going on, but it's a different objective. M >> and I think the more you can dilute trend following programs to make them absolute return, the less defensive by nature you're going to make them. >> But here's now the question. If that is what it's after, that is what it takes to maintain that exposure in anticipation of a repeat of 2022, then be it. Right? So, so I think to me a response to your question would go along the lines of how do we set the expectations with investors. How do we monitor those expectations and how we eventually manage them? Because on their side they have their own stakeholders internal and external to convey those points to convey those discussion points. Um and if it's a single line item, it is completely assessed in isolation and it has to be seen alongside the rest of the portfolios. Right? So that's how I typically go about when it comes to to to those strategies. >> Um that's why in the very beginning of our discussion I mentioned about carry I mentioned about you know reversion dynamics and I get you know I mentioned about beta neutral implementations. Why beta neutral? Because if beta is what you're getting from trend following and seemingly it's a good beta timer or maybe not we can again debate upon that you don't want to add more beta to it whether it's adding to it or maybe negating it you want to add something diversifying to it that in principle should help at the periods that is not performing like this year. But speaking of beta, actually kind of a nice segue into our next uh topic that we wanted to to talk about. Um, you know, we often talk about the trend betas if it's something we can just download from an index like the socken trend index, but you know, let's be clear, that's an index. It is, you know, that index isn't some pure representation of trend. It's a snapshot of the 10 biggest managers. that means that it's shaped by aumumumumumumumumumumumumumumumumumumumum by survivorship and by whatever model compromises came with that scale uh of the program. Um, so the real question, you know, are we measuring trend following uh or just what it takes to run a billion dollar plus uh CTA today? And uh again, I know you have some thoughts about this. Uh so I'd love to to dive in. Uh it's obviously something that when it comes to indexing and rep replicating uh CTA returns, it it comes up in in our wonderful conversations with Andrew and and Tom. So I'd love to hear your thoughts on this. >> Yes. And and in in reality, that's that's that's that's where this topic came from, by the way, those discussions. And I was like, okay, may maybe I share my thoughts here in um as as much um of an objective manner as possible, but everything is subjective clearly. Um I think the way that human beings behave and investors behave is is is in the form of dimensionality reduction. No, you know the fact that things like principal component analysis resonates quite well is because it allows us to reduce information to a few tangible items. Um so thinking of a benchmark is both allowing us to condense information into one or two items um but also in itself acts as a benchmark to bit maybe to track maybe to outperform and and and the point I was trying to make here is that what is really the trend beta um and I've heard obviously your discussions with with with um Andre and home speaking about the trend beta and replicating it and the trend alpha. Um I've had my personal discussions with um with investors that you know speak about what is the trend beta and while I do get the sense of what is the need here and that is a representation of what a trend following strategy would look to be defined somehow. I would suppose the question is the soen trend index a trend beta in itself. Um clearly I don't really have visibility on how this is put together beyond the fact that we have you know the average return of the largest and managers on an annual basis and so on and so forth. Um but that in itself entails some survivorship. So it's only the managers that stayed alive that can be used in that average. Um it is the mans that either outperformed so their assets grew by outperformance or they managed to attract capital so they grew by simply attracting capital and that aggregation of those 10 managers is now perceived as the industry. But is that the industry or is that perhaps the best 10 managers and the threshold to clear is actually quite higher than just a beta. So that's point number one. Point number two, if we think that this is a core trend exposure, we're implicitly stating that all the design choices beyond just a simple trend, which in itself is very hard to define. But any anyhow, let's assume that everyone has a transcript that says that's your trend thing. Do your risk management however you want, but this you keep as is. um all those design choices around risk management, maybe reversion signal, maybe stop losses, we make a supposition here that they average to zero because if they do not average to zero, the average of those 10 managers is now trend beta plus a bit of alpha or maybe a bit of negative alpha. I don't know if they add value or they deduct value, right? So where am I going with this one? Again, it's almost like a philosophical point that I'm kind of trying to bring up, but at the end of the day, a trend benchmark is different to a backtested performance of today's models. Statement number one. Statement number two, there is no absolute scrutiny on whether those 10 or 20 or however many managers are just core trend managers. That in itself is very hard to define. And maybe here maybe Tom has some some good good pointers to share next time around when he's when he's around because if they are not just pure trend followers but you know call out themselves call themselves as as trend followers uh at heart. Then I would question what is the impact of all the risk management features, the correlation adjustments, the volatility targeting, the gross and net leverage adjustments, whatever the features that come into play, how do they aggregate into an average? So that's basically a stream of thoughts that I have in the trend beta space because I also get the question, can you give me the trend beta? I'm like, okay, how do you define the trend beta to start with? You know, maybe it's the index. Maybe it is not the index. But if it is the index, then it's not even the historical performance of that because I'll get a model today and I'm going to back test that model and that's very different to the realization of that model if you were to kind of run it live. And obviously this is evolving through time. So that evolution in itself makes that index deviating from the sense of a benchmark because of all those active decisions that happen within it both in the composition as well as in each one of the components. So imposing >> well what I wanted to to try and also make clear to people listening to us today is that this may sound trivial right do we have the right definition of a trend index I mean but actually it's not that trivial there are there are big investors where they are paid bonuses based on their outperformance of these benchmarks right in terms of their own own portfolios. So these are not uh completely trivial questions. Um I'm sure you're also familiar with the other sochen index which is not based on managers but is the trend indicator uh that they do and I look at that on a daily basis just to get a feel for how that's behaved and although I don't know long term if it's you know the the proper design or the proper choices in terms of look back and so on and so forth. But in terms of the daily direction, it seems to align pretty well with what I see from kind of pure trend performance. Uh so that is interesting in some ways and and maybe we we can also obviously encourage our friends and peers in the industry to think about whether there should be uh a better benchmark for what we do that is not based on the commercial success uh of of companies. Um I don't I know there are lots of other indices that I don't track. Um I think actually you guys have a index. Credit Swiss has an index and and and I have no idea how they calculate these and and so on and so forth. So it's not like there's a lack of of indices and benchmarks, but the question is do we have the right ones and is there something again we can do to improve it. Um and in that way also perhaps help uh investors uh along the way. And and of course what would be quite interesting and this is maybe something we can throw back to Andrew and that is well if we did come up with a better index for trend following even if it's not based on managers could that be replicated probably could but again yeah uh that would be that would be interesting then you could maybe have a replication of a of a true index um so to speak. Do you have any thoughts on if if one were to put something together like that, what how would you even go about it? >> I mean, I think it would look um very similar to some of the some of the simple bottom up models that you see flying around in a number of academic papers for the last 1015 years, right? I I don't think it would be too dissimilar. Um and frankly I think what we try to do and I think the uh at least the QIA space across across all banks in a way is kind of following that path obviously with the nuances here and there on the design on the choices and so on and so forth but I think that's the principle here. There are some attempts by some third party um service providers in the QIS space to build aggregated strategies or aggregated uh representations of a specific strategy type utilizing um versions across different banks that you know in principle resembles what the so trend index does with with itself having you know its own survival biosis you can expect that some of the STRs that do not perform you know banks can decide to um to take them out or maybe replace them by um by new variations of their models. So very similar in in in um at least in uh in nature. Now could they be a good benchmark? Uh hard to argue right hard to argue at the end of the day what is a what is the best allocation benchmark? Nobody knows. I mean people use the 60/40 partly by convention rather than um academic prudence right or or or or economic sophistication in a way. So it's it's a matter of definition. Um I just find ourselves or at least I'm expressing here an opinion that calling it train beta something that in reality could be an aggregated performance of managers who are also trying to provide alpha could be an assumption that the aggregate alpha is zero or cancels out leaving the index just with a beta which can be a fair assumption simply by arguing that all those gimmicks in one way or the other just cancel out, >> right? >> Or you can make the argument that there is some alpha there and that alpha we're expecting it to see it performing but in reality these are programs that are put together today and are tracked going forward rather than backwards in time. So we don't have the back tested version of those models today. >> So although all these are nuances, right? So and I'm not really trying to make a point beyond the fact that I think these are important items. >> Sure. Fair enough. Fair enough. >> And and that's it. Right. I'm not saying it's a bad or a good benchmark, right? Just not to be um misrepresenting uh anything here. >> Okay. Well, let's uh let's dive into the last topic uh and spend a few minutes on that. It's something that um you know both you and I have tried to kind of um familiarize ourselves with because it's based by um the latest LinkedIn update by our friend Dave Dredge uh from Convex Strategies and he uh you know writes um wonderful update every month and this one I found uh particularly interesting. Um, I don't know exactly sort of what what what sort of caught my my my attention uh to to really dive in and and bring it up on this show, but uh shout out to Dave for for for putting it together. Now what it's all about is um you know uh the idea of short-term capital preservation which uh a lot of investors uh focus on versus how do you actually maximize your long-term compound returns when you build these portfolios and um and and of course is in his view you should defi you should build your portfolio very differently to the way portfolios uh are built today. institutional portfolios I'm referring to here and of course uh I I agree completely with that. But what's interesting about it is that uh the the starting point of this is from a uh report that came out recently from one of the sovereign wealth funds uh in Singapore GIC that published uh their uh review where they discloses their uh annual long-term returns and it kind of gives people a chance to uh look into this and to see if anything has changed. if they're starting to adapt some of the um ideas and proposals that Dave has come up with and so on and so forth. I I think for me to really dumb it down and then I'd love to hear you maybe talk a little bit about uh about it in in in a better way. I mean to really dumb it down um it kind of goes back to what what is it and again I hope I'm not misrepresenting Dave here but you know what are people really trying to optimize for often when when we look at these portfolios and they tend to to target some kind of long-term average return. Uh so they build the portfolios to to look safe to stay close to this long-term average return which often leads to slowing down the portfolio adding a lot of strategies that essentially are highly correlated. So they may look safe most of the time but when uh when when trouble uh comes they kind of all fall at the same time. uh what Davis is proposing is that actually if you want to build your portfolio um to have the highest long-term uh return a little bit like uh the race car analogy that he talks about uh and also has talked about on on on this podcast is you kind of have to build the car to have the best best brakes because if you have the best brakes and in this case the best strategies to help out when things get difficult ult in your portfolio if you have the best brakes um it allows you to drive faster um and basically win each lap instead of just get you know aiming for an average lap time uh so to speak. So not very elegantly explained but I think people would get uh the gist of that. So of course in his world which is not the sharp world uh we we definitely should stress that um you need to allow your portfolio to include some of these wonderful strategies like in his case longv but in our case say trend following that has the ability to really make a positive impact and difference to a portfolio when uh equity markets for example or even at 60/40 portfolio is having a a tough time like we saw in 2022 uh and the latest. Um so and and his view is that if you include these strategies, it actually allows you to own more equities. Um so you could have an 80/20 portfolio rather than uh a 60 2020 or whatever. So that's kind of the the the the gist of what he's trying to say. Um, and since you obviously come from a much more institutional world and you speak to a lot of the people who who sit with this problem, um, I'd love to hear what uh, what takeaways you have from this um, because I actually feel it's a really really important discussion we need to have, especially in light of the fact that given fiscal policy changes that we now see where governments essentially are really spending much more money than they can afford, we know that uh the issuance of fixed income products will just continue to grow. Um so that means that you may end up with a lot more of that in your portfolio, which is not necessarily something that's going to help you uh build uh the best long-term compound returns, even though people perceive fixed income markets as safe uh and probably well yielding at the moment. Well, on an emotional level perhaps, but certainly not on a real. Anyways, let me stop rambling here and let me bring you in, Nick, to hear what you thought of this. >> No, thanks. Thanks, Nas, a lot for for also um raising that. Um and it's a topic actually quite close to to my heart and and work that we've done over the last few years. You made some very very good comments here. Um I think you flagged the importance of uh cumulative returns and the importance of compounding returns. Uh just to make it super simple, losing 10% would require you an 11% gain to go back to flat. Um so uh precisely because arithmetic returns which are the ones that we realize and they're not logarithmic um um will get us into this disadvantage um when we lose x% and we need x plus something more just to bring us back to flat um and and I think that's the gist of it here like short-term losses um would hurt substantially the benefit of compounding returns over the longer term um and there are many directions actually we can take this discussion Um maybe we start from something very very basic right. So mean variance um you know the mark of its portfolio theory the one that obviously has been guiding all financial economics for years and years obviously has been evolved in a variety of directions that's a single period model right basically says investors observe today they care about a period they allocate they want to maximize expected returns for that single period they want to minimize risk or effectively they want to maximize sharp ratio that's to your point is not it's not um you know the articles points about get out of the of the sharp ratio maximization world and what really matters here is how we can compound returns over the longer term which however in itself brings the importance of short-term risk mitigation at the forefront. Um and I think here the difference to just a simple mean variance single period model is that we're focusing on different horizons depending on which part of the portfolio we're looking at. the expected returns is now a long-term capital appreciation whereas the risk that we want to minimize becomes more of a short-term risk mitigation and I think that's where the article goes in that is the direction that is kind of taking and if I kind of draw parallels it looks to me very similar to how a a a carry harvesting investor would perform or would operate like if I chase for yield the last thing I would want to happen is to have a spot impact in my um in my investment. Um like genuinely I should go and buy properties that deliver high rental income for low mortgage payments and hope that the prices of the houses will not change. So literally just get that yield, that cost of carry or that positive carry for whatever it's worth it, the the rental yield minus whatever the mortgage rate is and just live there for um you know for forever in perpetuity. The main issue that we would have there assuming all the rest is the same is that the spot prices drop, the house prices drop and then the capital gain losses would be more than what the rental hill would would would uh would bring to us. Right? So in that context, we would want to achieve this long-term capital appreciation, this long-term yield harvesting while having controls on those spot reductions or spot movements in a way. So for that to happen even visually or I guess mentally one can think of a path that tries to grow very smoothly and tries to moderate short-term drops because the short-term drop doesn't have an impact on the day but does have an impact on how the acrual or the accumulation of wealth will play out over the years and in reality I would even add to your point that it's not just the terminal wealth after 30 years that matters. I would make the problem even more important for investors that care about solveny on an annual basis. Like if you're a pension fund, yes, you care about 30 years of solveny, but you actually want to make sure that you can pay your pensions on an annual basis. So there are checkpoints of importance and the same thing, for example, would happen for income funds. They want to be able to finance that income while at the same time preserving the capital that will continue to acrue returns over the years to come for them to be able to sustain that payment that coupon payment out. So in this regard and that's why I kind of agree with some of the points made here is that short-term risk mitigation is very important for a longer term capital appreciation. M >> we've done back in the days some um Monte Carlo simulations that we basically say if you experience the weekly or the monthly returns of a particular strategy but you experience a sequence of those let's say 12 months randomly sampled or 52 weeks randomly sampled or 24 months randomly sampled so that you can form stylistically how an annual return or a bianual return would took from a specific investment and of course you can add some noise in those samples and so on and so forth. You can make it a bit more uh statistical. What you find is the following. A strategy or any investment that contains some form of downside risk mitigation for the very short term be long volatility be trend following some form of defensiveness would not necessarily have a significant difference in the average annual sorry in the average monthly or average weekly arithmetic return but the simulated compounded return would be substantially skewed to the to the right set differently a negative return if smaller when it appears in the first part of my random sample has more chances of being mitigated over the year if I accumulate returns if that return is actually quite smaller because of a risk mitigant that I have in my portfolio there's a lot that I'm basically saying here maybe some of that part is a bit technical but in reality you know we don't have to go down to the dynamic uh programming and and and sarcastic control and how some of those single period models became longer term and multi-period models and how we can um expand economic theory and and those portfolio construction mechanisms into those models. I think just keeping it high level the value that I see in this type of article and this type of discussions is the importance of short-term risk mitigation not for the moment >> but for what what is to follow not in a month but in a year in two years and that goes back to the point we made possibly in the very beginning whereby if a long volatility exposure or a trend following exposure is pure purely assessed in isolation, the whole purpose is actually completely missed, right? Because we have to see that in the context of what are we gaining at the times that we needed. There are many negative expected returns investments that we can have outside or maybe negative expected return costs that we incur as as as human beings. you know, we pay insurance. >> Like in reality, insurance is a negative expected return investment, quote unquote, right? You know, you keep on paying and you actually don't want that to pay anything back because, you know, if that were to pay something back, it's actually something bad happening, >> but you kind of have it there on purpose and and and I think that that's how we can circle the whole thing. And maybe I'll I'll make a post very shortly. That's how I can circle the information of that report or that article. some of our work, some of my work uh and some of the experiences that I have seen over the years in terms of importance of short-term risk mitigation, medium-term risk mitigation for trend following purposes for a long-term capital capital preservation. Pausing here. >> Yeah. No, absolutely well said. And uh yeah, I agree. It's definitely something that uh I'm sure we'll continue to to discuss. Everyone should go and read uh Dave's LinkedIn updates. uh not just the latest one but but all of them when they come out. Um and um he published them under his own name and also Convex strategies of course. Um and I think Dave will join the podcast in a couple of months. So I'm sure there will be a chance maybe to uh to dive into it uh even further. Um that's pretty much what I had on my uh on on in my notes uh today, Nick. Uh I think we uh I think we've done an okay job in trying to cover what we set out to do. Of course uh for people um who want to uh show their appreciation uh for the hard work uh you do in putting together these outlines uh feel free to go to uh the favorite podcast platform and leave a rating and review. Uh that really does mean a lot to us. Um next week I am joined by Morates. He comes back to the systematic investor as a guest. Um, so that would be fun. Um, and I know we're going to be discussing a new paper that's coming out in the next couple of days because it's coming out from the firm that I work with. Uh, which is a rare thing. We hardly write any papers. Um, but I don't want to set expectations too high. Um, but I think it'll be uh fun and we're going to be trying to uh answer the question, what is the best alternative investment really? So, uh hopefully you people will be back for that uh conversation. If you have any questions for Morris or me, um you can send them to info at toptradersunplot.com and uh we'll do our best to to discuss them. From Nick and me, thanks ever so much for listening. We look forward to being back with you next week. And until next time, take care of yourself and take care of each other. >> Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you. And to ensure our show continues to grow, please leave us an honest rating and review in iTunes. It only takes a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged. [Music]
Redefining Trend Following | Systematic Investor | Ep.363
Summary
Transcript
Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence or investment career to the next level. Before we begin today's conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. Here's your host, veteran hedge fund manager Neil's Krup Larson. Welcome or welcome back to this week edition of the systematic investor series with Nick Bolters and I Neils Castro Blarsen where we each week take the pulse of the global market through the lens of a rules-based investor. And let me also say a warm welcome if today is the first time you're joining us. And if someone who cares about you and your portfolio recommended that you tune in to the podcast, I would like to say a big thank you for sharing this episode with your friends and colleagues. It really does mean a lot to us. Nick, it's wonderful to be back with you this week. It's been a little while. Um, how are you doing? How was your summer? >> It's been a while. Good to be back, Neils. Good to see you. Um, the summer has been has been good. Um, you know, you can you cannot take a Greek out of Greece in the summer. Uh, I think I have um I have 43 out of 43 of my summers, 100%. Spent a couple of weeks there with family and friends. Um, you know, got back um over the past weekend. you know, we had a bank holiday here in the UK, so kind of not not very slowly picking up things actually. I would say quite aggressively. So, it's been a busy week so far, but yeah, summer was good. >> Summer was good. How about you? Tell me. >> Yeah. No, I was I was up north. Uh just got back a few days ago. Uh and um so our summer was not particularly hot, so to speak. Um but I do gather that in the south of Europe uh certainly when you see the the the weather forecast on the on the news uh um sort of southern Europe, Spain, Portugal, but I imagine Greece as well have been um you know once again hit by some some pretty nice but very hot weather. >> Yeah, there was there were like some some 40 plus days. Uh but thankfully on those days we happened to be in in an island. Um, when I was in Athens, it was actually around the 30 early, you know, um, small 30s. Uh, it was it was bearable. >> I think my jeans can survive that, but I can I can certainly gather that in some of the more northern kind of European tourists might might feel that the 30° is a bit suffering. >> Yeah, it seems like we see more uh people with number plates from really southern Europe coming uh to Scandinavia now uh each summer. So I think uh some people are really escaping the heat nowadays. >> I'm not I'm not surprised. You know, when I was in my in in my teens, we did not have that many days that the temperatures would go up there. I think I think part of the climate change uh is kind of impacting us in the same way that you know the the UK summer has had a number of >> 25 plus or 30 plus days this summer, right? You know, we did not have that not years ago. >> Yeah. >> So I think we do see the effect. >> Yeah. Yeah. Now, I did read an article about the the suffering people are are feeling when they take the tube nowadays during the summer in London. I remember my own 12 years in London on the tube. And back then it was probably cooler, but it still felt pretty hot in the summer. I have to say >> you need the air con. You need the air on his now. You need the air con. >> Um, you know, I don't know if you have anything on your radar other than something else from your holiday which you have feel free to share. But in the meantime, speaking of hot, um what caught my uh attention of course this week was that um the whole debate about Greenland is heating up again. Uh and of course as a Dane that does catch my attention and apparently now three people have been uh kind of identified as trying to specifically influence the relationship between Denmark and Greenland. Uh people uh related to the US administration, let's put it that way. So that that was a little bit interesting and and also tied to the US administration. I couldn't help noticing the fact that there now is a direct attack on another Fed governor uh Lisa Cook um and trying to essentially change the the composition of the board uh of the uh of governors and there's only seven of them and I think if they get uh Miss Cook or Mrs. you know, out of the of the the board and appoint another another one. I think they're pretty close to having quote unquote five uh of the seven. So, um interesting times ahead uh based on those two observations, I think. Now, um let's go to something that's been a little bit cool uh in the early parts of the year, heating up a little bit over the summer, and that is of course trend following. because July felt a little bit to me like kind of a turning point for CTAs and trend followers and there you know there were signs of a few constructive trends and uh we only have as we are recording only have today and tomorrow left to trade for the month of August. So you know it feels like August is a bit of a continuation uh with some better uh momentum environment for for our strategies. Now, you know, in fairness, probably not many managers knocking it out of the park. Maybe one or two, but still performance looks pretty solid uh when I look at the kind of early early numbers. Um and of course, let's cross our fingers that the next 24 hours will go without any big announcements um from Washington to to spoil the party as we saw at the end of July, of course, with the copper announcement. Um we do see or at least from my vantage point continued strength in um the equity part of the CTA portfolio. Um it's being supported by a few select commodities I would call it. Uh in particular of course the continued rise in prices of things like live cattle uh has been important. Gold, silver uh as well. Um and we do continue to also see some weakness in parts of the uh of the grains in particular wheat uh with a bumper crop being um expected in many parts of the world. So that's obviously weighing down prices but it's actually pretty good for for trend followers as far as I can tell. Now the tricky sector uh has been something like fixed income and I get the feeling that CTAs are not aligned here. I get a feeling that some people are short, some people are long. um when I look at the daily fluctuation sometimes and I look at what happened in fixed income um it seems like there are basically two camps at the moment um so it'll be interesting to see uh how it all turns out um and of course fixed income in general has been pretty horrible uh for for trend followers because they've been stuck in in large trading ranges for for quite a few months and similarly maybe you could talk about energies in the same way I'm not sure about positioning here. Um but certainly from a trading perspective, oil has kind of just been gyating up and down for for quite a while without too much of real follow through uh either way. So those are kind of my observations about uh August. Um feel I'd love to hear your experience in terms of either relative contribution or or changes in exposure that you've seen in your portfolios. I mean I think broadly I would be relatively in line with some of your comments. So yes, August has been a positive month broadly speaking um and that is across a variety of um of programs that we have um in terms of speed uh in terms of equity participation and so on and so forth. Um broadly speaking the slower the better for the month which seems to be the theme of the the last couple of years. um perhaps also related to the discussion we have had back in the days on the Vshapes that we saw in April, the Vshapes we saw last last August. So monthto date um the slower has been better uh but not substantially so to substantially change the overall profile of the ST. So we're talking about you know between two and 3% of positive returns um you know for a V of 10 to 15 depending again on the variation. um return drivers to your point are indeed quite similar um and partly reflecting also what we've seen year to date. I think equities obviously with a significant April impact have had um significant negative contribution at the time but have been now contributing capturing those those those positive trends as you as you nicely pointed out. Um, gold for sure. I think gold uh is probably the number one positive contributor year to date out of a universe of like know 80 plus markets. >> Mhm. >> Um and I would agree with you on the fact that the that the interest rate space is by far the most challenging um you know la last week um yo was speaking um and you know he actually made the point and I certainly agree with him. This is um very disappointing year for fixed income. realized that there's no particular trend. Uh it's it's it's it's really kind of going around and whipsing uh with no specific direction. If I try and see the difference between different speeds um monthto date on the fixed income front there's a bit of a discrepancy. I think the slower has done actually slightly worse than some of the faster ones but you know the absolute numbers are actually quite small. The contribution to the month performance from the fixed income components is very very muted in a way. Yeah. Yeah. No, I completely agree. >> So, not not not much to say about if I just literally look into the numbers. Yeah. We're talking about like a month-to- date contribution of negative 20 base points, but it's it's it's quite small. Uh primary primary drivers have been equities and and and uh and currencies actually. >> Okay. Oh, interesting. for for for this month. I mean some other reflections specifically in the CDA space for for the month of August has been very strong performance of um of Kerry components which again is sitting outside of of trend following but Kerry continues to have very very strong >> month or months or maybe year uh it's supposed to be one of the best years for um for carry across the classes but this is beta neutralized that's beta neutralized right >> that explains actually a little bit of some uh very early numbers that I've seen where I thought that's a little bit of an outlier uh in a positive way and that I think would explain uh that would explain that. >> Correct. >> Um >> yeah. >> Yeah. So so so those CTAs that deploy some of Kerry or perhaps stop loss or reversion exposures I would expect them to fare better monthto date as well as year to date and I think some of the some of the reasons uh could come from those components specifically the carry one. >> Okay cool. So my own trend barometer actually yesterday finished at 34. So that's still a weak reading. Um so from in from a trend perspective but also from a relatively short uh look back period which is what the trend barometer uses it hasn't been a great month and I think that's kind of confirmed when I look at uh performance uh numbers because the beta 50 index which obviously is a very broad index uh is indeed up uh 0.92% uh as of Tuesday down 3.29% so far this year. So, you know, not not a bad year really. Um, so NCT index up 1.3% um but still down 6.25%. That's fine. The trend index definitely stronger uh up almost 3% uh so far, down 7.39% so far this year. But then comes the little bit of the outlier and that's the short-term traders index. It's down one and a quarter% uh and it's now down 6.29%. Um and that's a very low volume index. So uh if we turn that into kind of CTA uh or trend index V uh it's actually suffering uh and by far the worst of these indices. So um so it kind of um speaks to this uh idea of of um how different speeds are behaving quite differently uh this year. >> Yeah. I think it also aligns to to my earlier comment that month to date the the faster you've been um the relative underperformance you've had. you know still positive but you know to to to your point faster signals this month have not actually delivered as much as uh slower ones so that's quite that's quite in line with my with my data. >> Sure. Okay cool. So in the traditional world, Msei World is up 3% as of last night for the month and up 14.3% so far this year. And the US aggregate bond index up about 1% uh in August up almost 5% so far this year. And the S&P 500 total return up 2.35% and up 11.14% so far this year. Okay. So, let's leave the usual stuff uh behind and let's um talk about two topics uh initially. Let's see how much we get to today. Uh but two topics init initially that you brought along which I find very interesting because on the surface they look like are we not going to talk about things that we've talked about before or is this or where's the new part? And actually when I when I saw your thoughts I thought this is interesting. This is kind of a new twist to uh an old uh narrative. And the and the narrative here is really that CTAs have gotten slower over the past decade or so, maybe even more. Um but you question whether that's really a shift in speed or whether that's a shift in structure. And I think this is interesting because I think most people will just by default say, "Oh, that's that's a difference in speed." Um, so I'd love to hear you lay this out. Um, and hopefully we can get into some some level of detail about this because I think investors need to understand this uh maybe a little bit better than the way we often just sort of casually talk about speed. >> Yeah, thank thank you Neil. So I mean this topic came to me maybe partly as a consequence of some of your discussions with the rest of the the speakers in the show. Um and you know we keep on talking about the characteristics of trend following strategies how you know fast the signals have been or have been shifting towards or maybe they become slower and how the industry is adapting and so on and so forth. Um and most of the empirical analysis to document those patterns um pretty much comes from let's build a set of bottomup strategies that go from a very fast signal to a very low signal and let's start doing some exposed correlation analysis maybe on a one-year rolling base or a two-year rolling basis and see what has been the shift in those correlations throughout the years. These are the correlations between those different speed programs and let's say the socks and trend index. Right? So if that is the benchmark and if that represents the industry which is in itself a question that maybe we'll address later and let's look into the correlation that this entity has had with those let's say proxy strategies with different speeds. And you know if you run this analysis maybe you can argue that over the recent 10 or 15 years the slower programs correlate more with the benchmark versus what was the case maybe in the in the in the in the years of 2000. And you know we keep on making those comments that you know some of the programs have become slower and so on and so forth. That pretty much comes from this type of an analysis. It's an expost analysis with those um kind of stylized simulated returns and how they correlate and how they cross-sectionally rank on the on the basis of that correlation to the benchmark. The point that I wanted to flag or maybe just bring forward without necessarily having specific proof about it is that purely by looking into a correlation metric beyond the fact that we can make the case that something is cool moving more than what it did in the past. I don't think we can necessarily argue that the speed of that program changed versus for example that program having had other features being introduced. Let me make a very basic example. If I'm a momentum investor in equities and suddenly I become faster or I introduce a value signal in addition to my momentum signal, it is highly likely that my correlation to some benchmark will shift very similarly. But the reason for the shifting is very different in those two cases. In one case I change the speed at which I'm following trends. In the other one I'm just interacting those speeds with a negatively cored signal and that's now a value signal. So it might appear as if I'm behaving slower or faster, but this does not come as a consequence of a change in my speed. It can simply come as a consequence of me introducing stop-loss rules, introducing car signals, introducing reversion signals, amending my program, amending the algorithm not at the speed of trend, but on other components around it. Maybe we're adding different markets and the different markets behave very differently with a given speed which in itself changes those correlations. So the fact that the so trend index in itself is a living creature of realized returns of real programs and it's not a simulated history of today's algorithms that in itself can put a question mark on this type of analysis. So to be clear and maybe I make a pause here to hear your thoughts, a shift in realized correlations is a necessary but not sufficient condition to infer that the speed has changed. We can maybe hypothesize it because the data suggests that this is the case from a correlation standpoint, but it could be other reasons that interact with trend in a variety of ways that make it look as if it's faster or make it look as if it's smaller, as if it's slower. So that's the point that I kind of wanted to bring and and discuss with you. I I think it's a super important point actually and um it it it also is something that relates very much to my my own day-to-day work because often at Don we're classified as a long-term trend follower uh which is true but only if you look at sort of signal generation right if you look at other things like risk management as you say you can have risk management filters that react much faster and it'll look like uh you have um you know short-term models in there but but you don't you just have more agile risk management for example. So I think this is high very relevant but it's also very difficult for investors to uh maybe fully uh get their arms around. I I also agree I don't have any experience with this really but I also agree that uh there is definitely an intro there has been an introduction we know that of of other strategies in the trend programs value carry other things. >> Mhm. Um I don't know if from your experience whether you uh have any um feel for whether say a carry or a value model actually makes a strategy looks slower to to your point. I mean have we become slower? Is it just that these extra factors that that are are playing that? And then the um the other thing uh that uh I was thinking of and the the the topic actually or the the question actually uh just escaped me. So may maybe I'll leave it at that. I'll try and and and think of what I was uh wanted to ask you as well. But those are the things that I I see as well. >> Um I agree with you also on the on the very smart mansment component, right? um even changing the way that volatility is estimated or the coverance is estimated or how you penalize some of your exposures might in itself appear exposed as a shift in the speed. Speaking from personal experience, you know, we do a lot of research on a continuous basis and I'm sure CTAs do the same if not more. That's their day-to-day as well. I cannot speak on their behalf but I cannot at the same time feel that know people go to bed and wake up and say let me make it make it faster let me make it slower let me make it much faster or much slower this is the anticipation that I'm having about the markets and the micro environment let me do this let me do that I think the response is more on the risk management side maybe let's reduce the level of risk we take maybe let's reduce the net or the gross exposure maybe let's have a more prudent way of diversifying our signals and less so let's become just faster for the sake of being faster or being slower for the sake of being slower. So I think some of that discussion as to what is the speed at which we can maximize the correlation might be masking other types of phenomena that take place in the model evolution and model design that we just shrink down to a single number and that's the speed right I could be completely wrong just to be clear right that's my disclaimer here but let's use another extreme example if I take a correlation of a moment momentum trader to a value investor, I can equally say that it's a contarian, but in reality it's a value investor. So it might appear as if they take negative return signals, but in reality they might take fundamental information to position themselves in favor of convergence back to fundamental value. So the correlation beyond just the statistical nature that it has cannot tell us necessarily what is the the behavior of um of of a particular program. Right? So I think we should look at it >> with a pinch of salt while acknowledging the deficiencies it can have like >> I can produce information I can produce variations of strategy that actually show that the socks and trend index has become faster not slower >> right and and that again depends on the markets that I can put together depends on how I calculate the signal depends on a variety of ways right if we use exponential weighted moving average with the same look back window the story might be slightly different right so I know remember this quant ICA paper like a couple of years back maybe two years back three years back that they did this maximization of correlation per year and identifying what's the halflife that does so so what is the halfife of a signal that achieves the maximum correlation to the soen trend index and I think they ended up with something like know 66 business days of halfife for the last like know 15 years >> if I were to claim that this is the maximum correlation and then we argue that we have become slower or the industry has become slower. I don't think that 66 business days of a halfife is what we consider as being slow. Right? So again, I'm just putting a bit of >> not doubt in a bad way, but you know, more like transparency and and scrutiny on how we feel about the speed and how active we feel the industry is when in reality I think the research direction moves more towards how can I protect my portfolio, how can be how can I anticipate the signal to noise dropping, how can I anticipate a micro environment that becomes less trendy or more trendy and less of should I make like a 3 month speed the four month speed or a fivemon speed but I could be wrong. I could be wrong. >> Okay. Okay. So, a couple couple of things. First of all, I'd love to know whether you think we should rethink how we define speed in a trend model. I mean it seems like what we are using is not necessarily a very good indicator and I'm not sure that there is really any universal definition of speed anyways frankly. The other thing is that I think a lot of modern portfolios uh CTA portfolios today you know the speed is not constant anyways. I mean we do dynamic select parameters on an ongoing basis and and therefore they will they will shift uh over time um quite naturally. Um but again if we don't really know how to define it what should investors do um because they love to put managers in buckets. Oh he's a short-term manager. Oh, he's a medium-term manager or whatever. Um, but then they may be surprised by the way they actually behave uh during a certain period of time. So, is there a way to define speed differently? >> I think there are classes of signals that in their ecosystem we can have some breadth of speeds. You know, if we look into the sign of past returns, that's the window of estimation. If you look at an exponentially weighted moving average at the half life, if you look at the crossover, that's the combination between the short and the long-term window. >> I do not think that there's a good answer to your question. Um I always however remember this um this nice paper um I think it was like Lassa Peterson and one of his colleagues at AQR back in 2016 whereby they made a point that different signals in a way um are functional transformations of each other. Mhm. >> So to some extent um too much research on the signal is possibly just a functional transformation what you already have and their point was like focus on portfolio construction focus on risk management. The signal in itself is a version of how trendy a market is and if you believe in dynamic risk scaling can also be an input into your relative risk scaling between the assets and that's about it whether it's slightly higher or slightly lower we can have the conversation so I don't think there's a unified way of defining speed but condition upon a single definition we can have a family >> as I mentioned I think a lot of investors like to classify managers in certain categories, >> which is fair and and speed is is one, >> but it reminded me about the conversation I had uh which you may have listened to or not with Rich a couple of weeks ago where we talked about well, you know, trend followers are often um you know, labeled the same because long-term their correlations is pretty high. Um, but really they're not the same. And you could probably define four or including my extra definition, five types or categories of trend followers. Uh, you know, the replicators, the the core diversifiers, the the crisis risk offsetters, the outlier hunters, and then I called I added one called the pure trend followers because I do think there's a little bit of a difference there. Um, and so firstly, I don't know if you listened to it. If you did, I'd love to hear your thoughts about this. But it does. No, but it does >> it does beg the question and that is um how can we help investors maybe look at the universe of trend followers in a different way in order to make sure that they actually get the right trend follower uh or CTA um for their purposes. Um, and of course I'd love to hear what you think your own strategies that you design. Uh, what kind of uh one kind of trend follower are you, Nick? Uh, but but I do think it's important. I actually think it's a conversation that we need to evolve a bit more uh if we want um a broader participation of investors in the space so that there are fewer of these quote unquote surprises, right? Oh, it didn't do exactly what I expected. Well, maybe because you were looking at it the wrong way, for example. >> Yeah. So, my immediate response or maybe my my impul response to to to your question is that trend followers or at least the strategy in a broad sense achieves two objectives. Uh some form of defensiveness in prolonged equity drawdowns or market macrodriven draw downs and some long-term positive returns. And this is achieved with some level of decorrelation to benchmark markets not locally but more longer term >> which to a certain extent explains why longer term CTA managers are more corrected than locally >> because locally the differences become more prevalent but long-term whether you are 10 out of the 12 months long equities or nine out of the 12 months long equities because you have had an equity rally at the end of the day is going to realize a positive correlation long-term. but not around those transition points. So I think what really matters is what trend following is used for is that used for a defensive mandate. It's a very different discussion to be had. >> Are they used for an absolute return vehicle as an overlay together with other absolute return strategies? No, maybe hedge funds, maybe private assets and so on and so forth. That's a different discussion as well. And and sometimes you ask the question and then the response you get is probably different to what you're expecting it to be cuz sometimes you know you get this question kind of posed to investors and say okay what do you needed that for? And and they might as well say you know what I actually care about that being my inflation hedge. I care about that being my prolonged draw down kind of defensive slave. And then year like 2022, sorry 2023 or 2024 comes up or 205 for the sake of argument and then you end up having questions why is it not working? And obviously you can have the arguments and you can explain what's going on. But then you can point to that kind of defensive objective, right? And and if that is the objective that should prevail, then obviously we do not want to have a draw down and we know it's painful to have to go through the draw down and explain what's going on, but it's a different objective. M >> and I think the more you can dilute trend following programs to make them absolute return, the less defensive by nature you're going to make them. >> But here's now the question. If that is what it's after, that is what it takes to maintain that exposure in anticipation of a repeat of 2022, then be it. Right? So, so I think to me a response to your question would go along the lines of how do we set the expectations with investors. How do we monitor those expectations and how we eventually manage them? Because on their side they have their own stakeholders internal and external to convey those points to convey those discussion points. Um and if it's a single line item, it is completely assessed in isolation and it has to be seen alongside the rest of the portfolios. Right? So that's how I typically go about when it comes to to to those strategies. >> Um that's why in the very beginning of our discussion I mentioned about carry I mentioned about you know reversion dynamics and I get you know I mentioned about beta neutral implementations. Why beta neutral? Because if beta is what you're getting from trend following and seemingly it's a good beta timer or maybe not we can again debate upon that you don't want to add more beta to it whether it's adding to it or maybe negating it you want to add something diversifying to it that in principle should help at the periods that is not performing like this year. But speaking of beta, actually kind of a nice segue into our next uh topic that we wanted to to talk about. Um, you know, we often talk about the trend betas if it's something we can just download from an index like the socken trend index, but you know, let's be clear, that's an index. It is, you know, that index isn't some pure representation of trend. It's a snapshot of the 10 biggest managers. that means that it's shaped by aumumumumumumumumumumumumumumumumumumumum by survivorship and by whatever model compromises came with that scale uh of the program. Um, so the real question, you know, are we measuring trend following uh or just what it takes to run a billion dollar plus uh CTA today? And uh again, I know you have some thoughts about this. Uh so I'd love to to dive in. Uh it's obviously something that when it comes to indexing and rep replicating uh CTA returns, it it comes up in in our wonderful conversations with Andrew and and Tom. So I'd love to hear your thoughts on this. >> Yes. And and in in reality, that's that's that's that's where this topic came from, by the way, those discussions. And I was like, okay, may maybe I share my thoughts here in um as as much um of an objective manner as possible, but everything is subjective clearly. Um I think the way that human beings behave and investors behave is is is in the form of dimensionality reduction. No, you know the fact that things like principal component analysis resonates quite well is because it allows us to reduce information to a few tangible items. Um so thinking of a benchmark is both allowing us to condense information into one or two items um but also in itself acts as a benchmark to bit maybe to track maybe to outperform and and and the point I was trying to make here is that what is really the trend beta um and I've heard obviously your discussions with with with um Andre and home speaking about the trend beta and replicating it and the trend alpha. Um I've had my personal discussions with um with investors that you know speak about what is the trend beta and while I do get the sense of what is the need here and that is a representation of what a trend following strategy would look to be defined somehow. I would suppose the question is the soen trend index a trend beta in itself. Um clearly I don't really have visibility on how this is put together beyond the fact that we have you know the average return of the largest and managers on an annual basis and so on and so forth. Um but that in itself entails some survivorship. So it's only the managers that stayed alive that can be used in that average. Um it is the mans that either outperformed so their assets grew by outperformance or they managed to attract capital so they grew by simply attracting capital and that aggregation of those 10 managers is now perceived as the industry. But is that the industry or is that perhaps the best 10 managers and the threshold to clear is actually quite higher than just a beta. So that's point number one. Point number two, if we think that this is a core trend exposure, we're implicitly stating that all the design choices beyond just a simple trend, which in itself is very hard to define. But any anyhow, let's assume that everyone has a transcript that says that's your trend thing. Do your risk management however you want, but this you keep as is. um all those design choices around risk management, maybe reversion signal, maybe stop losses, we make a supposition here that they average to zero because if they do not average to zero, the average of those 10 managers is now trend beta plus a bit of alpha or maybe a bit of negative alpha. I don't know if they add value or they deduct value, right? So where am I going with this one? Again, it's almost like a philosophical point that I'm kind of trying to bring up, but at the end of the day, a trend benchmark is different to a backtested performance of today's models. Statement number one. Statement number two, there is no absolute scrutiny on whether those 10 or 20 or however many managers are just core trend managers. That in itself is very hard to define. And maybe here maybe Tom has some some good good pointers to share next time around when he's when he's around because if they are not just pure trend followers but you know call out themselves call themselves as as trend followers uh at heart. Then I would question what is the impact of all the risk management features, the correlation adjustments, the volatility targeting, the gross and net leverage adjustments, whatever the features that come into play, how do they aggregate into an average? So that's basically a stream of thoughts that I have in the trend beta space because I also get the question, can you give me the trend beta? I'm like, okay, how do you define the trend beta to start with? You know, maybe it's the index. Maybe it is not the index. But if it is the index, then it's not even the historical performance of that because I'll get a model today and I'm going to back test that model and that's very different to the realization of that model if you were to kind of run it live. And obviously this is evolving through time. So that evolution in itself makes that index deviating from the sense of a benchmark because of all those active decisions that happen within it both in the composition as well as in each one of the components. So imposing >> well what I wanted to to try and also make clear to people listening to us today is that this may sound trivial right do we have the right definition of a trend index I mean but actually it's not that trivial there are there are big investors where they are paid bonuses based on their outperformance of these benchmarks right in terms of their own own portfolios. So these are not uh completely trivial questions. Um I'm sure you're also familiar with the other sochen index which is not based on managers but is the trend indicator uh that they do and I look at that on a daily basis just to get a feel for how that's behaved and although I don't know long term if it's you know the the proper design or the proper choices in terms of look back and so on and so forth. But in terms of the daily direction, it seems to align pretty well with what I see from kind of pure trend performance. Uh so that is interesting in some ways and and maybe we we can also obviously encourage our friends and peers in the industry to think about whether there should be uh a better benchmark for what we do that is not based on the commercial success uh of of companies. Um I don't I know there are lots of other indices that I don't track. Um I think actually you guys have a index. Credit Swiss has an index and and and I have no idea how they calculate these and and so on and so forth. So it's not like there's a lack of of indices and benchmarks, but the question is do we have the right ones and is there something again we can do to improve it. Um and in that way also perhaps help uh investors uh along the way. And and of course what would be quite interesting and this is maybe something we can throw back to Andrew and that is well if we did come up with a better index for trend following even if it's not based on managers could that be replicated probably could but again yeah uh that would be that would be interesting then you could maybe have a replication of a of a true index um so to speak. Do you have any thoughts on if if one were to put something together like that, what how would you even go about it? >> I mean, I think it would look um very similar to some of the some of the simple bottom up models that you see flying around in a number of academic papers for the last 1015 years, right? I I don't think it would be too dissimilar. Um and frankly I think what we try to do and I think the uh at least the QIA space across across all banks in a way is kind of following that path obviously with the nuances here and there on the design on the choices and so on and so forth but I think that's the principle here. There are some attempts by some third party um service providers in the QIS space to build aggregated strategies or aggregated uh representations of a specific strategy type utilizing um versions across different banks that you know in principle resembles what the so trend index does with with itself having you know its own survival biosis you can expect that some of the STRs that do not perform you know banks can decide to um to take them out or maybe replace them by um by new variations of their models. So very similar in in in um at least in uh in nature. Now could they be a good benchmark? Uh hard to argue right hard to argue at the end of the day what is a what is the best allocation benchmark? Nobody knows. I mean people use the 60/40 partly by convention rather than um academic prudence right or or or or economic sophistication in a way. So it's it's a matter of definition. Um I just find ourselves or at least I'm expressing here an opinion that calling it train beta something that in reality could be an aggregated performance of managers who are also trying to provide alpha could be an assumption that the aggregate alpha is zero or cancels out leaving the index just with a beta which can be a fair assumption simply by arguing that all those gimmicks in one way or the other just cancel out, >> right? >> Or you can make the argument that there is some alpha there and that alpha we're expecting it to see it performing but in reality these are programs that are put together today and are tracked going forward rather than backwards in time. So we don't have the back tested version of those models today. >> So although all these are nuances, right? So and I'm not really trying to make a point beyond the fact that I think these are important items. >> Sure. Fair enough. Fair enough. >> And and that's it. Right. I'm not saying it's a bad or a good benchmark, right? Just not to be um misrepresenting uh anything here. >> Okay. Well, let's uh let's dive into the last topic uh and spend a few minutes on that. It's something that um you know both you and I have tried to kind of um familiarize ourselves with because it's based by um the latest LinkedIn update by our friend Dave Dredge uh from Convex Strategies and he uh you know writes um wonderful update every month and this one I found uh particularly interesting. Um, I don't know exactly sort of what what what sort of caught my my my attention uh to to really dive in and and bring it up on this show, but uh shout out to Dave for for for putting it together. Now what it's all about is um you know uh the idea of short-term capital preservation which uh a lot of investors uh focus on versus how do you actually maximize your long-term compound returns when you build these portfolios and um and and of course is in his view you should defi you should build your portfolio very differently to the way portfolios uh are built today. institutional portfolios I'm referring to here and of course uh I I agree completely with that. But what's interesting about it is that uh the the starting point of this is from a uh report that came out recently from one of the sovereign wealth funds uh in Singapore GIC that published uh their uh review where they discloses their uh annual long-term returns and it kind of gives people a chance to uh look into this and to see if anything has changed. if they're starting to adapt some of the um ideas and proposals that Dave has come up with and so on and so forth. I I think for me to really dumb it down and then I'd love to hear you maybe talk a little bit about uh about it in in in a better way. I mean to really dumb it down um it kind of goes back to what what is it and again I hope I'm not misrepresenting Dave here but you know what are people really trying to optimize for often when when we look at these portfolios and they tend to to target some kind of long-term average return. Uh so they build the portfolios to to look safe to stay close to this long-term average return which often leads to slowing down the portfolio adding a lot of strategies that essentially are highly correlated. So they may look safe most of the time but when uh when when trouble uh comes they kind of all fall at the same time. uh what Davis is proposing is that actually if you want to build your portfolio um to have the highest long-term uh return a little bit like uh the race car analogy that he talks about uh and also has talked about on on on this podcast is you kind of have to build the car to have the best best brakes because if you have the best brakes and in this case the best strategies to help out when things get difficult ult in your portfolio if you have the best brakes um it allows you to drive faster um and basically win each lap instead of just get you know aiming for an average lap time uh so to speak. So not very elegantly explained but I think people would get uh the gist of that. So of course in his world which is not the sharp world uh we we definitely should stress that um you need to allow your portfolio to include some of these wonderful strategies like in his case longv but in our case say trend following that has the ability to really make a positive impact and difference to a portfolio when uh equity markets for example or even at 60/40 portfolio is having a a tough time like we saw in 2022 uh and the latest. Um so and and his view is that if you include these strategies, it actually allows you to own more equities. Um so you could have an 80/20 portfolio rather than uh a 60 2020 or whatever. So that's kind of the the the the gist of what he's trying to say. Um, and since you obviously come from a much more institutional world and you speak to a lot of the people who who sit with this problem, um, I'd love to hear what uh, what takeaways you have from this um, because I actually feel it's a really really important discussion we need to have, especially in light of the fact that given fiscal policy changes that we now see where governments essentially are really spending much more money than they can afford, we know that uh the issuance of fixed income products will just continue to grow. Um so that means that you may end up with a lot more of that in your portfolio, which is not necessarily something that's going to help you uh build uh the best long-term compound returns, even though people perceive fixed income markets as safe uh and probably well yielding at the moment. Well, on an emotional level perhaps, but certainly not on a real. Anyways, let me stop rambling here and let me bring you in, Nick, to hear what you thought of this. >> No, thanks. Thanks, Nas, a lot for for also um raising that. Um and it's a topic actually quite close to to my heart and and work that we've done over the last few years. You made some very very good comments here. Um I think you flagged the importance of uh cumulative returns and the importance of compounding returns. Uh just to make it super simple, losing 10% would require you an 11% gain to go back to flat. Um so uh precisely because arithmetic returns which are the ones that we realize and they're not logarithmic um um will get us into this disadvantage um when we lose x% and we need x plus something more just to bring us back to flat um and and I think that's the gist of it here like short-term losses um would hurt substantially the benefit of compounding returns over the longer term um and there are many directions actually we can take this discussion Um maybe we start from something very very basic right. So mean variance um you know the mark of its portfolio theory the one that obviously has been guiding all financial economics for years and years obviously has been evolved in a variety of directions that's a single period model right basically says investors observe today they care about a period they allocate they want to maximize expected returns for that single period they want to minimize risk or effectively they want to maximize sharp ratio that's to your point is not it's not um you know the articles points about get out of the of the sharp ratio maximization world and what really matters here is how we can compound returns over the longer term which however in itself brings the importance of short-term risk mitigation at the forefront. Um and I think here the difference to just a simple mean variance single period model is that we're focusing on different horizons depending on which part of the portfolio we're looking at. the expected returns is now a long-term capital appreciation whereas the risk that we want to minimize becomes more of a short-term risk mitigation and I think that's where the article goes in that is the direction that is kind of taking and if I kind of draw parallels it looks to me very similar to how a a a carry harvesting investor would perform or would operate like if I chase for yield the last thing I would want to happen is to have a spot impact in my um in my investment. Um like genuinely I should go and buy properties that deliver high rental income for low mortgage payments and hope that the prices of the houses will not change. So literally just get that yield, that cost of carry or that positive carry for whatever it's worth it, the the rental yield minus whatever the mortgage rate is and just live there for um you know for forever in perpetuity. The main issue that we would have there assuming all the rest is the same is that the spot prices drop, the house prices drop and then the capital gain losses would be more than what the rental hill would would would uh would bring to us. Right? So in that context, we would want to achieve this long-term capital appreciation, this long-term yield harvesting while having controls on those spot reductions or spot movements in a way. So for that to happen even visually or I guess mentally one can think of a path that tries to grow very smoothly and tries to moderate short-term drops because the short-term drop doesn't have an impact on the day but does have an impact on how the acrual or the accumulation of wealth will play out over the years and in reality I would even add to your point that it's not just the terminal wealth after 30 years that matters. I would make the problem even more important for investors that care about solveny on an annual basis. Like if you're a pension fund, yes, you care about 30 years of solveny, but you actually want to make sure that you can pay your pensions on an annual basis. So there are checkpoints of importance and the same thing, for example, would happen for income funds. They want to be able to finance that income while at the same time preserving the capital that will continue to acrue returns over the years to come for them to be able to sustain that payment that coupon payment out. So in this regard and that's why I kind of agree with some of the points made here is that short-term risk mitigation is very important for a longer term capital appreciation. M >> we've done back in the days some um Monte Carlo simulations that we basically say if you experience the weekly or the monthly returns of a particular strategy but you experience a sequence of those let's say 12 months randomly sampled or 52 weeks randomly sampled or 24 months randomly sampled so that you can form stylistically how an annual return or a bianual return would took from a specific investment and of course you can add some noise in those samples and so on and so forth. You can make it a bit more uh statistical. What you find is the following. A strategy or any investment that contains some form of downside risk mitigation for the very short term be long volatility be trend following some form of defensiveness would not necessarily have a significant difference in the average annual sorry in the average monthly or average weekly arithmetic return but the simulated compounded return would be substantially skewed to the to the right set differently a negative return if smaller when it appears in the first part of my random sample has more chances of being mitigated over the year if I accumulate returns if that return is actually quite smaller because of a risk mitigant that I have in my portfolio there's a lot that I'm basically saying here maybe some of that part is a bit technical but in reality you know we don't have to go down to the dynamic uh programming and and and sarcastic control and how some of those single period models became longer term and multi-period models and how we can um expand economic theory and and those portfolio construction mechanisms into those models. I think just keeping it high level the value that I see in this type of article and this type of discussions is the importance of short-term risk mitigation not for the moment >> but for what what is to follow not in a month but in a year in two years and that goes back to the point we made possibly in the very beginning whereby if a long volatility exposure or a trend following exposure is pure purely assessed in isolation, the whole purpose is actually completely missed, right? Because we have to see that in the context of what are we gaining at the times that we needed. There are many negative expected returns investments that we can have outside or maybe negative expected return costs that we incur as as as human beings. you know, we pay insurance. >> Like in reality, insurance is a negative expected return investment, quote unquote, right? You know, you keep on paying and you actually don't want that to pay anything back because, you know, if that were to pay something back, it's actually something bad happening, >> but you kind of have it there on purpose and and and I think that that's how we can circle the whole thing. And maybe I'll I'll make a post very shortly. That's how I can circle the information of that report or that article. some of our work, some of my work uh and some of the experiences that I have seen over the years in terms of importance of short-term risk mitigation, medium-term risk mitigation for trend following purposes for a long-term capital capital preservation. Pausing here. >> Yeah. No, absolutely well said. And uh yeah, I agree. It's definitely something that uh I'm sure we'll continue to to discuss. Everyone should go and read uh Dave's LinkedIn updates. uh not just the latest one but but all of them when they come out. Um and um he published them under his own name and also Convex strategies of course. Um and I think Dave will join the podcast in a couple of months. So I'm sure there will be a chance maybe to uh to dive into it uh even further. Um that's pretty much what I had on my uh on on in my notes uh today, Nick. Uh I think we uh I think we've done an okay job in trying to cover what we set out to do. Of course uh for people um who want to uh show their appreciation uh for the hard work uh you do in putting together these outlines uh feel free to go to uh the favorite podcast platform and leave a rating and review. Uh that really does mean a lot to us. Um next week I am joined by Morates. He comes back to the systematic investor as a guest. Um, so that would be fun. Um, and I know we're going to be discussing a new paper that's coming out in the next couple of days because it's coming out from the firm that I work with. Uh, which is a rare thing. We hardly write any papers. Um, but I don't want to set expectations too high. Um, but I think it'll be uh fun and we're going to be trying to uh answer the question, what is the best alternative investment really? So, uh hopefully you people will be back for that uh conversation. If you have any questions for Morris or me, um you can send them to info at toptradersunplot.com and uh we'll do our best to to discuss them. From Nick and me, thanks ever so much for listening. We look forward to being back with you next week. And until next time, take care of yourself and take care of each other. >> Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you. And to ensure our show continues to grow, please leave us an honest rating and review in iTunes. 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