Market Resilience: Despite geopolitical upheavals and economic uncertainties, global equities have shown remarkable resilience, increasing by 55% over the past few years.
Inelastic Market Hypothesis: The discussion highlighted the inelastic market hypothesis, suggesting that investment flows into equities can have a multiplicative effect on market prices, challenging traditional market efficiency theories.
Portfolio Strategy Shift: Kalpers, a major institutional investor, is shifting to a total portfolio approach, evaluating investments based on their contribution to overall portfolio goals, which could increase interest in strategies like managed futures.
Trend Following Performance: Recent months have seen positive performance in trend following strategies, driven by sectors like equities and precious metals, although fixed income contributions remain subdued.
Replication vs. Single Managers: The conversation explored the potential benefits and challenges of using replication strategies versus investing in single managers, noting the unpredictability of outperformance timing.
Multistrategy Hedge Funds: Multistrategy hedge funds have delivered consistent returns despite high cost structures, leveraging diversified strategies and talent akin to proprietary trading desks at major banks.
Investment Paradigms: The discussion emphasized the need for continuous evolution in investment paradigms, as traditional models like the 60/40 portfolio have faced challenges in recent years.
Transcript
Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence or investment career to the next level. Before we begin today's conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. Here's your host, veteran hedge fund manager Neil's Krup Larson. Welcome or welcome back to this week's edition of the systematic investor series with Andrew Beer and I Neils Castro Larsen where each week we take the pulse of the global market through the lens of a rulesbased investor. Andrew, it is wonderful to um to be back with you this week. How are you doing? >> I'm great. Look, I'm all dressed up. >> You're all dressed up today. Actually, you are. For those back >> Exactly. For those who will catch some of the short clips we're going to do, you're all dressed up. Last time I saw you, you were in a in a warm hotel in Greece. Um and this time you're looking very um yeah, very polished, I have to say. >> Thank you. >> Um >> not a funeral. I'm glad to say that. >> True. Before we get into uh all the topics that we're going to be speaking about, uh which are of course great as I always say. Um just um wondering it's kind of late late summer, early autumn now. um August passed without too many disasters. We're into September. What uh what's been on your radar lately? >> I think and I actually this is something we're going to talk about a bit a bit more today, but I I think you know the astonishing thing to me is if you just take a step back and where we are today, um and it's something we've talked about on, you know, in the CTA space. If you if you'd gone back a year or two ago and said, "This is what's going to happen. These are the 10 big things that are going to happen. We're going to have this, you know, political upheaval. We're going to have assassination attempts of presidential candidates. We're going to have uh you know like radical changes in policies and threats to withdraw from NATO and wars flaring up and and you know a tariff war for the first time in 100 years. Like you got to list all this stuff. You'd say like oh my god you know what would the world look like? And and I just looked and and and the um equities are up 55% over that period of time and uh and and and nothing's broken. And so I think there is this there's been this uh now it may break. I mean I'm personally of the view that that you can't keep lighting matches, dropping them on a carpet and hoping that nothing the drapes don't catch fire at some point. But it is pretty astonishing um just the resilience of of of this you know global system that we have. Um and uh of course you know usually when I say something like this publicly it means it's about to cause some massive like market calamity. But uh um but that that's what I've been thinking about. >> Yeah. No, I mean um I agree and and kind of uh on my radar, I've got a few things and I know some of this will will will tie in what you said just to some articles that I found. Um but of course the first thing that's really on my mind as a Danish u you know native um is what's going on in Denmark right now with the drone activity uh this week. um and how it kind of uh on one side shows maybe the weakness uh of uh of the western alliance because we haven't really done anything to you know to determine we haven't been able to do anything to determine who is behind it. Um but at the same time it kind of feels very surreal that um what I would consider a kind of a peaceful part of the world that we are now talking about um you know the threat level being at heightened uh alert in all of the country and uh drones flying across the uh airfields where most if not all uh our newly bought F-35s are are stationed. I mean it really is incredible. It's an extraordinary world. Not necessarily a world that uh unfortunately I think will get any better anytime soon. Um and um and it's concerning and that of course that concern we can then translate into sort of the financial markets. Uh not that that's more important. It's always you know of course people safety I would say before portfolio safety. But um but still there were a couple of articles that caught my attention and I shared them with you and I know you have some thoughts on them because I think you were able to kind of tie this uh all together. And the first one, I don't know whether this is the right order to do it in, but the first one I wanted mentioned was this article um in the FT uh where one of our previous guests actually two of our previous guests had lunch together. uh both uh Robin Wigglesworth and uh JP Bashard from CFM had lunch together and out came a very interesting article uh where uh JP talks about um what what he now believes to be um not the efficient market hypothesis but the inelastic market hypothesis um where essentially it's a theory that um contemplates that $1 into equities just it doesn't just notch the price higher. I mean, you're just talking about how high equities have gone in this uncertain world. It really multiplies it. Um, and I'd love for you to kind of give your thoughts. You may have read the article more closely than than I have to be frank. Um, but I think you are able to kind of tie this into some of the things that you're seeing uh happening right now. >> Sure. Well, first of all, I I love the article and just for um so for anybody listening, so so FT does these articles where they take somebody out to lunch and the article is half talking about the lunch and where they're going and what they're eating and and and half, you know, kind of the conversation around a topic. First of all, I mean, the two people sitting at the lunch, um I don't know, uh Mr. Bushard, I know Robin reasonably well. And I mean, you're talking about two incredible minds sitting at lunch. Um, uh, by the way, if you don't have Robin Wigglesworth's book, Trillions, I think I have 30 sitting in my office. And the next 10 people who sign up and subscribe to DTU, you can text me and I will send you your free copy of of of Robin's uh, trillions. >> That is an offer I will take you up on. So, the next 10 people who subscribe to something on my website, toptradersunplug.com, create a little link to >> will get a book from from from Andrew himself. free free run don't run don't walk um so um you know I I guess so one observation from it which we'll talk about as well is is like the guy's obviously unbelievably brilliant you know to be a a physicist and write a play on the side and and I'll just tell you a funny story in that in that you know like in my career I've worked with people who are just so much smarter than the rest of us um and and so one of the guys that that that we built DBI with um was one of these guys he was He was a mathematical mathematics professor who then went to Wall Street. But um just sort of a funny anecdote about how smart this guy is um is I took him to uh an opera last year. It was a Mozart opera in German and uh and they have these little things on the back of the seats in front of you where you can put it on and you can you can see the lyrics in English or you can see them in German. and and his wasn't on and I so I leaned over and I whispered to him I'm like Matt you know like like you can put you can think you'll know what's going and he glanced over to me he says it's okay I memorized the lyrics like in the w you know reading reading the liretto he actually he knew what that and so so look there are some people who just whose just minds are astonishing and and and I think that gets back to the whole idea of efficient markets is that is is it's the tension between how valuable is a particular talent and and and I've always had this view that if you can you can apply somebody who's got an astonishing talent but in an air there are certain areas where I don't care how smart you are you're not going to make it that much better. You know, if you are the very best executive in America running a steel company going through a 30-year structural decline, you're going to have a really hard time. You're the worst Bitcoin investor in 2015 and you're a centillionaire today. you know, you're the worst investor in Miami real estate after the GFC or or or Dubai and you're, you know, fabulously wealthy today. So, so, so it it is that that that tension between talent which we know is not evenly distributed and then also how that gets monetized and what's the worth of it and and and and this gets into a very emotional um uh discussion for a lot of people. Now what I think with respect to to what he's saying it does it does dovetail which that I think a lot of the orthodoxies you've had generations of people trained around certain assumptions and you know and to be a sophisticated allocator was to be able to you know not just talk about um FMA but be able to talk about a black litterman model and and in a sense what he's saying is is that we have generations of people who are trained reinforcing an idea that may be wrong and so um there was Uh uh the last geeky point, there was a uh an amazingly important book written in the 1950s called the structure of scientific revolutions. And it basically made the point that when you have an existing paradigm, it it's very sticky because you have tons and tons of people who are trained in that paradigm and part of their identity is their knowledge and expertise in that paradigm. And so what you get are these over time is you get these things that contradict the the prevailing view >> but it's not until it reaches sort of a critical mass that the vast majority of those people will abandon the first paradigm and move to a second one. Um so if he's right then 5 years from now we'll be talking about markets in a very different way. Now, one thing that maybe we could try um and let's see what what what you what you think about this and that is and it kind of ties into kind of this active versus passive debate uh where uh clearly people like Mike Green thinks that this is really distorting the markets and and um and of course what Bushar is saying is that yeah we've had this uh tremendous I mean what determines more uh what goes on in markets are the flows, right? And so one day if these flows turn things may be very different and we may experience something that we haven't experienced for for quite a while. But before we get to that point, uh we have seen as you as you pointed out, I mean despite all the uncertainty, we have seen an enormous amount of of upwards market movement uh in equities. And if we go back of course to to the GFC, I can't remember how many fold now we're up uh from 666. Now we're at 6,000 plus in the S&P. So I mean that's extraordinary. But how does that and and and then and and maybe we can kind of slowly tie it in a little bit to what we will talk about later on today. Do you think that if they're right about this other hypothesis uh so to speak where inflows multiply the effect of where equity markets are are going? Do you think that that has also had an impact on say uh performance opportunities in some of the strategies that you and I follow more closely in the alternative space um and maybe have impacted changed the landscape there. I know we're going to talk about multistrategy funds uh later on, but again I wonder whether we looking at something where we've built kind of new avenues and people now are thinking oh these are fantastic strategies but they're kind of built on a unique time period where markets were behaving somewhat differently that they may do over a longer period of time. Do you know what I'm trying to say here? >> Yeah. Well, I think I mean I think the the the easiest way to look at it is 60/40 portfolios. I mean, that's that's >> I mean 6040 portfolios was basically one of these self-reinforcing paradigms. You know, people somebody I don't I don't think they I don't think anyone's ever figured out who actually came up with it. Um so all of a sudden it's just it's just 60/40 and then enough people say it. I mean there's this great Lenin quote that if you say a lie often enough it becomes the truth. And um uh the um so but then it but then there was positive reinforcement. and it kept working. And if you'd done it in 1990, um then you wouldn't have seen the same negative correlation or zero correlation of stocks and bonds. You weren't going through the great bond bond, you know, the mother of all bond bubbles. Um and so so it it it reinforces and reinforces and that was basically the cornerstone of every asset allocation model. Um, and this decade it it hasn't worked. Not because equities haven't gone up, but because bonds have 80 80% correlation to equities and they went down in 2020 when they were supposed to protect. So the problem when you have these these things that challenge a paradigm uh is that um is that people don't really have a playbook because they've sold everybody not just on their their portfolio, but they can't really go back and say, "Sorry, we were wrong about stock and bond correlations." And so everything in our business model is basically we have to you know tear up the playbook. Um but so so whether it's passive, whether it's these things, what you're seeing is is what you'll see is clearly a big impact on lots of different active strategies that seek to make money in the markets. Um and and it's it's not going to be evenly distributed. You know, equity long short was everyone's favorite hedge fund strategy in the 2000s. by the end of the 2010s it had faced years and years and years of underperformance and that could be something where just passive has killed the strategy. Uh on the other hand uh you know managed futures which you know we both love showed in 2022 that all of these allocators out there who are deliberately slow you know part of the what they've told their clients is is you know don't change your mind fast you're likely to be wrong. We're not going to change our minds fast because we can't time the markets. That was a really bad decision when inflation started to come back. And so what it did was it presented an opportunity for CTAs to make a decade of alpha in one year. Um so so I think the yes I think it has an impact. I think it's it's very hard to say that you know it's necessarily got the same impact on everybody over some period of time and the impact it's having on people in 5 years may be very different than it is today. >> Yeah. If if money starts to flow out of passive funds and we get a 10-year bare market, everyone's gonna love short sellers again. Find me an allocator who can ename a a dedicated short seller today. So, so, so the world changes and we must adapt. >> Yeah. Well, speaking of uh adapting, um and that was the other article that I noticed that sort of hit my radar was from the uh institutional investor. Um and that is um a a big change in in kind of the way um a very large may perhaps the largest uh institutional investor think about portfolio construction, namely Kalpers. um as they are now uh essentially uh want to stop thinking about putting strategies and investments in buckets and they're going to adopt the total portfolio uh approach which I'm not an expert in per se um but one of the things that um what the article describes and it talks about the total portfolio approach is a strategy where every investment is judged by its contribution ution to the entire portfolio goals, not just its own asset class. Now, I may misunderstand that uh sentence completely, but what I'm what I'm thinking is well, if that's the case, that really fundamentally changes if they were if they're going to be true to this that they're going to look at the strategies and say, "Okay, what kind of contribution can you actually uh provide uh us with?" and so on and so forth. because then a lot of the strategies that on their own might not look very appealing say managed futures for example or trend following or whatever suddenly becomes very attractive because of its contribution to a portfolio. So, I'm not saying that this is what they're going to do. Um, but I'm just suggesting that if that is true, if my interpretation is true, then it's going to change the landscape in terms of uh how favorable some strategies will will be. And of course, then if the largest institutional investor in the world is making a change like this, well, then maybe there will be more um following along that way. So, uh, that's what I find interesting about this article, even though this might take years to really, um, you know, trickle down to what you and I deal with, but you never know. >> Well, so I Well, first of all, from your mouth to God's ears that that people then say, you know, I really want things that behave differently from other asset classes. I'm going to value those more highly and make those a more important part of my portfolio. um because as I've written about uh you know the allocation to manage futures relative to all these other hedge fund strategies is is preposterously small uh from a statistical perspective but that's also a segue into um uh you know sort of another fun quote which was either Draeli or or Mark Twain which is that there are lies damn lies in statistics um and so when I read something like that I said okay that's great okay you're moving to factors you're moving to something else really how are you going to decide what those things are going to be over a long period of time. And so having spent with a lot of people who build models for a living um they they torture the data until they get the the answer that they want. And so you know so back in 2000 if you were building an asset allocation model I think I think small caps had outperformed for years and years and years because of the small you know the small size factor and asnness has noted there were a lot of issues with that data etc etc etc and yet nobody that I'm aware of had a an equity portfolio in the 2000s that was all small cap equities and a tiny percentage of large cap um so so what happens is they come up with these long-term assumptions and then based on and They they start with historical data and then they extrapolate it out and what you find is like right now the only equity you want to own is the NASDAQ, right? Like like like why would you own anything else but the NASDAQ? But but they're like no no no it wouldn't be prudent to put a lot of money in the last and and they start thinking about you know we're going to be written you know Robin Wigglesworth is going to write an article on us about uh you know how we were the fools who went all in on AI at the at the turning point. Um and so what they do is they then make judgments on top of it and and so what you end up with is kind of they kind of haircut assumptions for things that look too good recently and they and they kind of assume mean reversion on other assets. So look, I am all in favor of, you know, continuous evolution of this, but it's going to be a judgment call on their part in terms of what they like and how they look about it. And and and again, this probably precludes scalpers from ever giving us a meaningful allocation. But I think what it sounds to me like is guys, you were all in on a model, >> a paradigm that didn't work for various reasons, right? It it's failed to predict this decade. Um and and again they've they've had bad Kalpers has had bad stumbles in like they used to have a $4 billion absolute return bucket but making 4% on 1% of your two you know 2% of your portfolios didn't mean anything and it had a lot of people so they ended up shutting it down. Um but but to me the more honest answer is we thought we had a solution for how the world worked and and and we made all these long-term predictions about various asset classes and how they're going to interact and we structured art this massive portfolio that matters immeasurably to hundreds and hundreds or millions of of of end investors. And we made a very big mistake and and in in that you know at the very very peak of the bond bubble uh we we we basically decided in the beginning of 2021 that a very meaningful portion of your portfolio would be in something that mathematically was going to diff have difficulty earning a return over time and and uh so it's it's very hard for people to go back on their prior narratives with investors and so I think a lot of what you're seeing in the wealth management in the model building space is rather than staring headlong into the issue which is you know what was it Neils Boris said predictions are are are are difficult especially about the future or something um that what you're seeing is people kind of coming up with a new paradigm that that sounds good now this is happening across the US wealth management space where a lot of people who um who who sold or built their business on 60/40 have now introduced a 20% % diversifying bucket. The reason of which is bonds have not worked the way they were advertised to work this decade. I mean you've had correlations have gone to 08 from negative volatilities have doubled or tripled. Uh they went they you know they went down during during 2022 in many cases they've been earning less than cash. Um so what they've done is they've introduced a new category they can talk about but without kind of un really explaining re why they got there and I I I understand why they do that but that that was my reaction when I read the paper. Yeah. No. >> Again, it's knowing almost zero about what they're talking about is and but uh at at a granular level, but uh I've been to this rodeo before. >> All right. Well, let's move on to our usual segue, which is of course kind of a quick trend following uh update and um my own trend barometer finished at 36 yesterday. That's a bit weak still despite actually the data looking pretty good. Um and um you know so far September is kind of turning out to like one of these sort of maybe a September to remember as I think Earthwind and Fire once uh sang about uh simply for the fact that if it could close in a positive territory it would be four months in a row for the sock trend index and we haven't seen that since January through April 2024. So it's been a while. So I'm kind of hoping that that's where we are that's where we're heading. Um to me at least where I'm sitting um you you maybe you have a better view um in in terms of your replication strategy. It seems like it's kind of the usual sectors right now. It's the equities and it's the precious metals in particular uh that are helping with a few supporting acts from the commodity side um in terms of driving performance. Interestingly enough, again from my vantage point, despite fixed income being maybe where the focus has been in terms of the fact that the Fed pivoted to some extent by lowering rates, it seems relatively well behaved and kind of quiet uh in terms of uh P&L contribution uh in the trend following uh space. Let me run through the numbers and I'll I'll I'll give you the floor if you have any comments on on on current um uh attributions or whatever. But BUP 50 is up 2.81% so far this month. So it's pretty flat now for the year uh having been in negative territory territory for uh quite a few months. The SGCTA index is up three and a half% or so. Now it's down uh only 3% for the year. The trend index is up almost 5% for the month um as of Tuesday, I should say. Um down 3% for the year. And the short-term traders index is also up one and a half% uh is uh but still down 5% so far this year. Now, of course, the traditional markets are doing really well. Continue to do well. Mi World up 2.5% up almost 17% so far this year. the uh S&P US aggregate bond index up almost 1% uh in September and up almost 6% so far this year and of course the S&P 500 total return up 2.85% 5% in September as of last night up 13.95% so far uh this year. Any overall thoughts? I mean and you know obviously you you you will have different contributions etc etc but you kind of know what's going on from from the work you do. Is there anything that stands out to you uh in in recent month in terms of what managers are doing exposures are changing or anything like that? >> Well I I'll say it in in in general. So, one of I had a funny call from from one of our investors um uh who reached out to me at at near the near the near the bottom of everything and you know and he said you know what do you think about this? We talked about it and he said, you know, he said, "What's your answer?" And I said, I won't say it here cuz, you know, for the for all all the children listening to your podcast, but I said, "BTFD." Basically, I said, you know, I said, "We've we've just known this strategy for a long period of time. It could be rattled, but then it turns around and pivots." Um, and so, you know, so what was so hard about um August and Liberation Day was not just the inflection, it was the inflection. >> You mean April? April. April liberation day. >> Sorry, April. What did it say? August >> um was was it wasn't it wasn't it wasn't just the head fake. It was the double head fake, right? It was the and >> and and what happened at least from what I saw was that um uh you know so it's always funny when you're talking about people today because the whole space has been having a great run and it's recovering from a very tough period. Um and nobody wants to say it out loud because nobody wants to jinx it. So >> right, we'll be saying very quietly today. But but basically what's so fascinating about this space is when it seems to detect something early and when it detects something early and what I think it detected early was the let it run hot trade and so if I'm talking to somebody about the underlying position in our portfolio in June when everybody still has post-traumatic stress disorder from from what had happened in April you know it it felt reckless. You know the exposures felt like you know are you not paying attention? know you're not watch these guys not watching the news because it was starting to embrace the let it run hot trade in September right and then I had people saying well it's going to work you know it's it's it's going to flame out in in in August sember it hasn't right so so this is an example where uh where where man's got behind broadly speaking and I say let it run hot which means uh you know Fed is Trump is going to jawbone the Fed or they're going to then keep rates lower than they should that's going to you drive up equity valuations. So, um you know, if there's a bond market tantrum, it's going to happen later, not now. Um and you know, it's probably great for for uh for gold and crypto. And I would just remind everybody that it's the first time I think we've had a a uh you know, a president who's massively short the US dollar. So, just take that into consideration. Um um the um and so so it's they've done it and it's been working. Um, and uh, and I think that's it's great. Like it's what the strategy is supposed to do. >> Yeah. [Music] Okay, let's move on. Before we get to your topics, I actually had a question that came in. I don't remember if I actually sent it to you. I should have done, but it's a very simple question. It's from Michael. Um, and Michael wrote, "My question for Andrew is about pair trading with his replication product." He says, "Why shouldn't I sell Andrew's product when it's outperforming single managers and buy single managers and then vice versa?" So essentially, you know, because as as we know, um, one type of strategy sometimes will outperform and then vice versa and so on and so forth. So that's his his question. I'm not sure how he would buy the single managers and how it doesn't explain that, but but any any thoughts on this? Oh, I think it's a little bit like so so my argument would be well first of all I don't know when we're going to outperform and when we're underperform Michael has an answer to that then he should call me >> I think it's just based on whether you are outperforming which are at the moment I mean clearly this year you've done much better than than many single managers >> yeah look I I mean we were outperforming earlier this year and then we outperformed by more and then we gave a little bit back and now we're outperforming by more again. um uh it it's extremely unpredictable. So I don't know how I don't I don't but the structural problem is that historically having done this now for 10 years is is we have about a 300 basis point efficiency advantage. So so being short US and being long single managers historically and and it's even worse if you're talking about investable things like mutual funds or usage funds where you're talking about more than 300 basis points of of outperformance over time. that's a that's going to be a very costly short. Um, and so because I don't know if I knew structurally when I thought we're going to outperform or underperform, you know, in advance and you you you they would have to you'd have to get that timing very very right. But um, uh, I it's interesting. So, you know, people used to talk about replication as something they could hedge, use it to hedge. You can short DVMF, right? So you could buy five well-known mutual funds in the US and short DBMF against it and you'd lose 300 basis points on average. So you know or more and so I'd be very curious to hear ideas around it. But I I don't know how to solve those two points from a from a timing and shorting perspective. Let me do a follow-up question on this just something I thought about as as you were talking and about this sort of idea from memory and again I don't want it to be sort of uh taken as something that's super precise but from memory when I look at kind of your evolution in terms of of performance and I probably from memory normally look at it back from when it was launched I think in 2019 and then comparing it to the index from time to time. I do see these periods where clearly you you move uh away from the index to the upside and but then there will be a couple of times over that period where you kind of come back and you kind of meet again and then you go off again and so on and so forth. I think that's what he I think that's what he's kind of referring to. My question is more have you noticed whether there are certain environments where you move away from the underlying index and then there are certain environments where you actually see yeah we when we go through these type of environments that's usually where we then tend to move closer to the index again and so on and so forth. Is there anything that you've noticed that describes those periods? >> We we know it after the fact, right? So we know that there are two periods of times when and you and I talked about this in in January and February of 2023, right? So we underperformed we gave up a lot of outperformance from the peak in 2023 through around mid sorry peak of 2022 >> like remember we because remember by by the peak in 2022 >> we were outperforming in part because of absence of incentive fees and so they re of course yeah >> six 7 800 basis points. >> Yeah. And then when the markets reversed, we gave that back and then we had a like when we underperform it's because some it's one of two things happens. Either we miss trades >> that are generating a lot of excess returns for the hedge funds which which is natural, right? I mean you would expect >> and and in as you and I talked about in January and February 2023, we didn't have the Mexican peso, we didn't have the front end of the Canadian interest rate curve, we didn't have the Nikkay, we didn't have softs, we didn't have a lot of different things. Now, so the bet that you have to make is that there's going to be a period of time where a lot of idiosyncratic trades >> statistically are working at the same time, >> right? >> 80% of non-core trades are working at the same time and it's and it's going to persist for a month or two. >> Yeah, >> good luck. >> I mean, that's that's it's very very hard to predict. >> The other is at very sharp inflection points, >> right? >> So, so if um and there look inflection points play out in a couple of ways. So SVB happens and we like everybody else are very short treasuries and and it happens and 3 days later one of two things is going to happen. Either it was a head fake like with the end last year >> and things will revert and we'll be fine. We'll underperform by a day or two or 3 days then we'll come bouncing back. >> Um or it'll keep going >> and and when it keeps going we will be de-risking that position faster than actual funds. And so SVB was one of those things a very sharp inflection point and a week later it was the regional banks were going down and a few weeks later it was credit Swiss was going down and so so you went in a you know four-week period of time from rates are going up inflation is back to my god we're going into global banking recession again. Um and so so so we'll underperform but we underperform. The math of it though is the underperformance is not a thousand basis points >> right? >> The underperformance is a couple hundred basis points here and there. So um the periods when we tend to outperform are periods when those non-core trades backfire or risk management backfire. So the the outperformance this year like I think is I think what's sort of interesting about the space is nobody has a really good explanation as to why the draw downs among a lot of single manager funds were as bad as they were in the first okay that's not it's really not what my perception is of of of of that actually I think there's a very simple explanation to it uh if you don't mind me sharing >> yeah please >> I think that again if we look at these large managers that you uh that you track also that's in the index. Um we must assume that they have a tilt towards the financial sectors because that's where they can get the liquidity and the size and nothing wrong with that. But then if you look at the actual market movements the last 14 months or so in equities in fixed income and in currencies I would argue that there have been you know two three big reversals in all of those sectors within the last 14 months. And some of those maybe not with equities, maybe you didn't go short at any point in time, but you certainly went from being fully long kind of thing to being almost flat and then almost long fully long again and then down again, you know. And then in fixed income, I would say it's been a very large range that has forced many managers to go from quite large long positions to quite large short positions, then back long and then back short. And with currencies to some extent the same. So to me at least for as an observer of these things, I would say that it's kind of a it's a little bit of like the the um what do you say the the perfect storm for large managers who are maybe tilted towards financials that you have all those three sectors being challenged by big reversals within the same time frame. That is how I perceive uh what's going on. So to me it's actually not a surprise that it's been a difficult period and then you have those that are more diversified where smaller market contributions or where smaller markets like you know the commodities have been able to mitigate um some of those losses and some people are you know as I said a lot of managers are coming back now to kind of the flat and slightly positive um performance and then of course we can't forget about you know speed of models of course that will have an impact as well. But but to me, I just think that it's rare that you see these three financial sectors being so difficult at the same time. And I think that's just the the explanation. But maybe it's too simple. I don't know. >> Well, look, we we we've all been living through whipsaw hell, right? And it's and and it and it feels like as soon as you take your eye off one thing, there's a bomb goes off somewhere else. Um >> and no, no, it's it's I'm making I think a slightly more nuanced point, which is I think that if you had gone to the beginning of 2025 >> Mhm. and said, "We're going to have a really chaotic year with a lot of noise and other things like that." And you said, "What should do better in 2025?" a a a simple replicationbased model that is going to be a little bit slower and not capture up, you know, again, not capture really interesting trades that may present themselves in a lot of different markets or single manager hedge funds with hundreds of instruments, uh, uh, V controls, risk management, short-term models, etc. you know there is a hundred billion dollars of professional money that has had would have made a bet on on the latter not the former and it hasn't happened right and so so to me look and and I'm uh I'll be in Stockholm with the heads of some of these firms and in in a few months and if I make it out of there alive um uh it'll it'll be >> I know the people they'll be gentle they'll be gentle >> I'm quick I bet I can get out of the room faster but um but no Looks so so to me again just thinking about it from is >> when things do badly there's often very in in the rest of the hedge fun world there's very clear storytelling around it like like you know we we lost money because uh you know we believed in this thing about the company that proved to be wrong this is how we change our mind this is how we made our decisions um what my impression is that is that when you ask well at least when I've had conversations with people about it it's kind of diffuse it's like well the models are heard you know we timed it bad we rebalance this is the wrong it's it's a lot of little paper cuts that resulted in a in in a fairly deep wound across the industry and just again when I so I've been thinking about this convergence of what and I I wrote this paper not paper I wrote an article in in hedge nordic um earlier this year basically talking about the the awkward statistical fact that 80 to 90% of ETFs are outperforming um the average mutual fund hedge fund in 2024 and 2025 by a lot and and Again, that's not supposed to work. And so I've been thinking a lot about is there a structural reason around it? So now I imagine it's liberation right after liberation day, right? >> And and you're focused on commodities because that's you know, you've got a lot of conservation, a lot of a lot of but >> but now imagine a fund that has added position number 298, right? And that was they they made the decision to invest in it because you know well I you know let's look at the underlying liquidity over time. Well, on certain days it's not something we'd want to trade, but you know, but we can ease into our positions and we're going to be intelligent about it, but you know, but but you know, in a period after liberation day, the liquidity might disappear in that market. Now, you've got a V control, you know, red light that goes off because that thing is whipsawing much more than something else. And or you've got a short-term model that now wants you to get out of everything quickly. So in a four or five day period of time, you may be selling a hundred different positions or buying back a 100 different positions in markets where there's thin liquidity and and and again you're talking about the larger firms who are going to have a larger footprint in those markets. And so going back to the Buchard point right now, now take that argument and collapse it down to the micro structure of hundreds of markets that themselves. It's not just that you're trading with other people who trade like this. Now you're also trading with prop desks, right? Who can who can smell blood in the water. Uh and so you know, so when you're getting out of position number 298, did you lose two points on Tuesday closing your $8 million position? and and would you five years ago when you thought about in including position number 298 would you have included in your portfolio knowing there could be a day where you lost 200 basis points just trading it u so I've been waiting to hear those kinds of stories and I haven't heard them um but but so that's what I mean about um uh and but I could be totally wrong on this right I could be it could just be a combination of these factors collector you know collective factors as you described but I think this has been going this has been going done since um the beginning of 2024 and I think there are structural reasons around it and then rational reasons why people have done this but I'm just not sure whether we're going to look back in 5 years and say these things didn't work as well as people thought they were going to work. So just for me to understand your point here uh to be clear on that your point is that some of these larger funds are are too diversified so to speak and and the trading cost of being uh trading smaller markets it does have an impact whereas uh I would generally say and and and you know my view on on on alternative markets. I'm not a big uh uh well I certainly will just say it's different. I I wouldn't say it's better. I've never believed that but it's different. I agree with that. But um but my point is just that um I think you know and having been in this space for 35 years and my observations are simply that there will always be times where you're going to have um certain sectors of your portfolio doing well or badly just from normal way of market um movements and obviously financial monetary or fiscal policies whatever whatever it may be there's going to be an impact and and and that's just how it be behaves. But over time, uh at least it's our belief at Don that all markets has the ability to trend. They obviously don't trend at the same time, nor would they be in in in non-trending environments at the same time. So, so yeah, you're going to have periods of time where you get draw downs because you know nothing is happening and whereby maybe being in fewer markets and having a longer time frame like replication is just simply a better way of doing it. But that's just a snapshot of say as you point out maybe 24 and and and parts of 25 that's been a period like that. Okay, fair do. not there's going to be a period of time where having more sectors for example um you know will be will be a better so I don't see that as a necessarily conclusive evidence in my opinion it may be what's going on right now so I don't dispute that but I think it's hard to conclude that it is a permanent change because I've seen this happening before even though replication has been around for a long time but but just the difference between certain managers would suggest that um yeah, you could have a different, you know, the the kind of quote unquote the wrong look back period for your models. Um or you could have just as you said a lot a lot of markets in your portfolio that just wasn't really trending well at that point in time. >> But okay, but I mean let's let's go to an extreme example, right? And my my partner gave this in a speech in Paris when he was talking about this, right? Okay, you let let's say the Copenhagen housing market trends upward over time, you know, trends up and then trends down, trends up and trends down. You know, when thinking about how do we trade that, right? We're going to we're going to look for the trend on the way up. Then we're going to sell all our houses once we see the trend reversing. We're going to since you can't short houses, we're going to wait for the bottom and then we're going to buy them again and do it all over again. If getting in and out costs you 10 to 15%. brokerage commissions and everything else, there may be a trend, you still don't want to try to do it from an investment perspective. And and so again, having talked to a lot of very very very serious quants about how they approach it, there is always this question of it sounds great, can you implement it? When high frequency trading came around, people could make staggering amounts of money on like unbelievable returns on $5 million or $10 million and the returns disappeared at 30 or 50 million. So, you know, what what what I've seen in the industry again as an observer when we started looking at replicating the space um back about 10 years ago, um the talk at the time was about bringing down slippage costs, right? It was a badge of honor to be able to say that you had brought your slippage cost down from 400 to 200 basis points. Now, if you'd asked them at the time, you said, "Okay, so what would happen to that?" And that's and that's with simpler portfolios in more liquid markets like what you do. >> Right. >> Right now, you say ask them at the time, okay, what do you think about trading 300 instruments, not >> 70? >> What do you think about that? So, so, so take again the liberation day example, and this is where I keep looking for the story. Okay, so I'm running a very I've got a very part of my portfolio is a very short-term model and I'm I'm very long equities going into Liberation Day, right? Trump basically, you know, equity markets collapse over the course of the next week. And so now I'm selling my equity exposure. I bring it down flat. It goes on for another few days. I'm actually flipped to short at that time. Then he head fakes everybody again. The markets go back up. So now I'm un I'm covering my short and then 3 weeks later I'm now back to being long again and thank god I'm starting to embrace the the the the let it run hot trade early. Okay. So if I'm doing that in the S&P 500, okay, I mean it's going it's annoying and and and it may the timing of the rebalancing and everything else may cost you, may hurt you, but it's understandable. Okay, now I'm doing that with I I don't I mean, you know, pick some esoteric equity market where I'm doing it. Um and and and and that's that's so all of my point is is is there are a lot of great ideas. >> Um and but the question is are they implementable? And usually when you're looking at it, you're not saying like like private credit, right? Nobody's worried about the fact that they don't mark private credit to market during good times. They're worried about if defaults rise and you get all of a sudden a sudden 25% markdown. So, so everybody evaluates these things on the very worst day that it can happen. Um, so again, I'd love to hear what your guests have to say about it. Like I just think because it it feels to me it feels structural to me and and you're right, we won't know, right? If these first off, some of the guys who were down more have become roaring back. >> Yeah. >> Um, they're still, >> you know, they're still down, but but but you've definitely seen a rebound across the space. That kind of reinforces my argument, though. you know, if you'd said because you've had a and talk about Buchard. I mean, talk about the liquidity that's coming into the markets right now. The the you know, yolo, fear of missing out, you know, like like you know, like let it run hot. And so, so that recovery is not necessarily a sign of long-term high expected returns. It may be just benefiting from from from from a sharp influx of liquidity into into into areas where you happen to have exposure. >> Yeah. No, I certainly don't disagree with any of that. I and I do think that it is so important to um to stress that trading liquid futures on exchange relative to off exchange and illquid stuff um that's certainly our belief as well. So we don't disagree uh a point on that but but I do think it's interesting. I would love to I would love to have one of your you know your your your very best PM of one of these funds and and and I be so curious to hear to hear their responses live to a question like that. Um well maybe I am you know I don't I don't scratch the surface in terms of their knowledge of of of the underlying space and how they build their models. I'm just I'm observing things that I'm seeing and it's pretty widespread across the space. >> Well, let's put it out as a challenge. if there's one in these large uh CTA firms um that's been around for >> to beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat the daylights out of here beer on TTU. >> Well well that's been around for a long time but and do include um you know uh alternative markets if they're up for it. Um they are invited to the next uh recording with Andrew in in 6 8 7 weeks. Um, and uh, we'll talk about this because it is an interesting point. We're completely not started yet on on any of the main topics you send along. So, I'm going to let you decide where you want to go. Uh, we we have some stuff about ETFs versus mutual funds. Uh, and we have something about multistrats. We have about 15 minutes time. So, I'm going to let you drive, so to speak, and I'll try and follow along and maybe I have a comment or two along the way. >> So, I I I think what I'll do is I'll leave aside the I mean, you can read the article if anybody is interested in kind of the ETF versus mutual fund or or or hedge fund world. Um uh if you don't if you can't find the article, ping me and on on LinkedIn or something and I'll I'll send you a link to it. The um No, I think so. I think the really interesting thing is uh is is multistrats, >> right? multi-read hedge funds and and these things show up in the news a lot. Costus Morsales at FT wrote a great article on it recently. Nishankumar is the the high priest of writing articles on this space and and and I think it's it actually dovetales with Bart um and it dovetales with a lot of other things which is which is um uh and passive investing and everything else and because so a couple of observations about the multistrat hedge fund space first of all what these guys are doing from an investment perspective is cold fusion it is high temperature superconducting like like it is they are they are running hedge funds with enormously high cost structures that are generating returns that are staggeringly consistent and valuable for investors. So just to throw out some numbers in 2020 right through the midst of COVID now they had the worst month I've been able to find was down 6% in March which was not terrible but again if you're talking 5x leveraged funds that means across your portfolio down 1% when you know the world basically collapsed. So they're up 13% in 2020 9% in 2021 2% up 2% in 2022 up 6% in 23 up 11% 24 and up 8% year-to- date. Which index is that you're quoting by the way? >> What's that? So, by the way, this is >> the very best data is a the Pivotal Path Multistrategy Hedge Fund Index. Okay. Um it's published by Pivotal Path >> Connect to a guy named John Kaplas, CAP LIIS on LinkedIn. The reason it's the best data out there is because he gets his hedge fund index data from the institutions like Kalpers that actually invest in hedge funds. So uh so he has the best data and it gives you the most accurate picture, >> right? >> Um so now now again these things depending upon how you look at them might have a thousand basis points and fees before before clients get paid. >> And so so there are a lot of articles on this space um that are you know talking about how this is a disaster waiting to happen and and it is by it's very very bizarre because clients end up paying you can hire anybody at any price and your clients will end up paying it. like it sounds like this and I' I've written on the space by the way about two years ago I wrote something basically saying that I thought the risk of the space was not that they're going to blow up but that they are but the risk is basically dead money over time and in 24 months I had been dead wrong on that but also uh equities have gone up 55% and bonds have gone up like 8% a year so it I think it's it's this is not really the time to be able to tell that but but so but it but it gets it gets back to the point about how inefficient markets are and and I'm I'm going to segue kind of a little bit of a weird seg way in 2003 I started a commodity focused multi-manager firm called Pinnacle Asset Management. It was initially a fund of funds business. It evolved into a commodity um uh fund because we had first mover advantage doing that and and the guy who ended up becoming the CIO and is now the you know billionaire genius behind the business which I've been out for a long time. Um but um but he had this theory that if he could find a guy who was the very very very very best trader in a very esoteric commodity market you know the guy making markets in options on you know the I don't know you know like some some like power trading business or something or or there was this this guy who put up the most ridiculous numbers in the hedge fun industry named John Arnold who had a firm called Santorus. um he'd been making I don't know $600 million a year. So again, Enron trading like two contracts. I mean, so so Jason's theory was that um at the time when you were talking about putting somebody into the business, so somebody who had no hedge fund, no business to speak of, shows up and they say you and and say, "Look, how much money do you need to get going? I need 50 million to start. I'm going to put up $5 million of my own money." the the thing at the time was to use the $50 million you could give them as a cudgel and say, "Fine, well, you're going to do it at half fees or we're going to get a stake in your business." And and Jason's very contrarian view was that guy with that talent, with that competitive advantage, is not going to do 200 basis points better than the established guy. He's going to do 30 a year for his first three years. And as long as he agrees not to go to $500 million in six months, I don't care what we pay him. Two and a half and 20, fine, take it. Right? I mean, I'll give you the money in two weeks set up in a managed account. And and he was absolutely right >> about it. And and plus, what he did also have was liquidity, right? So, it wasn't a it was kind of an early version of the multi-manager model. He could see all their positions, etc. >> So, so in a sense, what you've seen with a multistrat hedge funds is they're not hedge funds anymore. they are. This is like the proprietary trading desk at Goldman Sachs where you have better information. You're the first call on things. You have better financing terms and and so what they're doing is when they're when they're setting up the compensation structures, they're setting them up like the bank. Banks used to pay 55% of revenue and that and they had a lot of less attractive business in it. 55% of revenue was basically compensation. So you're doing the same kind of thing here. Now um a second observation is that everybody's jealous of what they're doing, right? I mean you are talking about $50 billion funds that are leveraged and they're mysterious and uh like so a funny story is is I my favorite restaurant in New York I go to enough that they give me one of the power tables in the front. Another guy gets a power table. That same power table whenever he wants it is Izzy Angller. >> And and I'm friends with the matri. I said, "Look, I just want to tell you if I am halfway through my appetizer and he walks in, I am fully expecting you guys to pick me up and throw me into the bag and give it in the table because because there there is a difference in in in talent in this world. And this guy is, you know, what Ken Griffin has done with his business and with the Citadel Securities, you know, these are it's LeBron James like it is these are there there there is talent out there and and what the what what what Buchard is talking about and and what what Pinnacle is a counter example to is is the idea that you know the markets broadly are very very efficient and so and and that comes from the fact that the you know the incredibly talented the guy parts of the markets are weak efficient and and you at least weak efficient. So picking uh large cap stocks in the US and getting paid 100 basis points for it, your clients are probably not you're probably not going to do better than 100 basis points over time statistically. Um, so, so the but but what the multistrats are basically doing like the philosophical underpinning of it is we can find a guy who can go out and raise a $500 million head hedge fund and he's distracted. He's dealing with investors. He's explaining what he has to do. He has to hire people and pay them and monitor them. And so, so this, you know, it's it's Le LeBron James running the, you know, like the the NBA, the draft picks and and and the business and hiring having the the towels washed and whatever the hell he's doing. And and so so the bet is basically we can take that guy >> and give him an incentive structure where he is not sleeping for the next five years. And if he makes $500 million for us and we pay him 200 million of it, our clients are better off. We're better off and he's better off. >> And so, so that in a sense is absolutely utterly fascinating. Um, now let let me pause for a second and and I know you you you spent a lot of time thinking about the space and then then I have an interesting segue as to as to where it doesn't work. >> No, I I don't actually have a lot of thoughts about what you said. I think uh it's it's a interesting um kind of um some interesting insights that you you share. Um I am um impressed slashs surprised and I have nothing really to base it on. But I also see that you know if too much money you know flows into kind of the same types of um businesses uh like maybe we've seen with private equity again without being an expert. At some point things are not necessarily going to work as well. Um and then people might add additional leverage or whatever they may do and you start having some fairly hidden weaknesses and dangers building into that business model because I I imagine to some extent and maybe you can can confirm or deny this and that is the the risk management teams that are allocating the money to these uh sub uh parts to a large extent they're buying P&L curves. So the more successful you are, the more money you get and at some point it's like okay so um I don't know there there is a little bit of a a risk in in that approach. I agree right that the logical thing is right you can't you cannot keep so you know is is is pod number 300 >> right >> by definition less attractive than pod number 20 right and and look I don't know the Ken Griffins Izzy Anglanders Bobby James to to to have conversations with them about that I would be more than happy to buy them lunch if they would spend an hour >> at your power table >> but they're proving it wrong right okay if I told you five years ago like pre20 2020 that that you had $50 billion of capital leveraged five times with and we're going to go through the kinds of market girrations that we've seen, the kinds of regime shifts. And you told me that not a single one of these funds had not only not blown up, but not had a anything approaching what would be deemed to be a catastrophic draw down. um and they had generated hundreds and hundreds of basis points of returns over cash as they're paying higher and higher fees to do that. It sounds impossible, >> right? And that's and that's exactly what B I think again to >> you know keep paring Buchard that's exactly this idea of it shouldn't work but it does so why. >> Yeah. >> Right. And look, I'm very simp sympathetic to it because a lot of people said replication shouldn't work and and does. So it's it's I mean I I'm very fascinated with with with the why. But um but so so the interesting about about it is that it works but you need the hedge fund structure for it, >> right? And and and when you compare it then to the mutual fund world where about 15 13 years ago, people started to try to develop the plug-andplay one-stop solution. Like like why do you do anything multi- strategy or multi-managers? because you're trying to outsource it to somebody who knows what they're doing to be able to pick the right, you know, balance the right strategies, um, pick the right managers, you know, come up with the right implementation around it. And and so you then say this basic idea of we're trying to give you diversified exposure to a diversifying return stream has been an embarrassing failure. the the entire space has done less than 3% peranom after about a 200 basis points in in in expenses over the past 10 years, right? And and and so there's this kind of musical chairs of people kind of like going from one fund that's working well to another fund. Back to your point about about you know people chasing hot dots and so so to me also the fascinating thing about the hedge fund the multi-stret hedge funds is you can't do it outside of a hedge fund model and you can't do it if if clients have the ability to withdraw their money every quarter. So in a sense what they built are these almost like they built companies you know they built these the the these trading engines and um and again talking to people who run the underlying strategies what's sort of fascinating about it is is you kind of get the impression that they're worker bees. >> They have no idea what happens to layers above them in this organization. They're fabulously wealthy worker bees. they they don't have great job security. Like, you know, a guy told me of, you know, being down 3% one year and, you know, he goes back to his office and the fact his, you know, he's he's all his stuff is sitting in boxes and he's being escorted out the door. So, but but boy, I mean, you talk about motivation and hunger for these guys and when it works, they become fabulously wealthy. Um, I was in Miami a couple of years ago and and uh somebody had um they told me a story about Citadel moving its headquarters down to Miami. And my two favorite stories were uh was somebody as a a you know a representative of Citadel apparently went around to the private schools, the the three top private schools and said, "Yeah, we need 200 slots." They're like and and you know, it's like because they're moving these, you know, hundreds of whatever people down to Miami. And the other one was that two of the brokerage firms uh had basically signed agreements where they had to show Citadel any houses that were $10 million or more uh you know within 100 feet or something or 100 meters of of of the water 10 miles up or down the coast and and and so you know again these are staggering moneym I have no idea if those stories are true but they're they're they're too fun not to uh uh you know to talk about the you know so this legendary thing that we see going on. So, so in a weird weird way, like I'm somebody who's very critical of fees, like I think you're way overpaying a multi strategy mutual fund manager 200 basis points if he's giving you 3% a year for 10 years. Um, on the other hand, I think if you're paying 10 points for guys who are basically have found a way to generate a four sharp ratio, take two of the sharp ratio to pay everybody and everybody has private jets and and and and $50 million homes. I think that's pretty great. Yeah, it's a fun paradox. Uh I have to uh I have to admit. Um okay. Well, I think we've done it as much as we could today with the time uh allowed. Uh really appreciate the uh the insights, Andrew, and uh there are definitely some some uh topics that we will need to continue. Um we'll see if we'll be joined by someone on the uh on the alternative markets uh front next time. You never know. Uh, and let me just remind Andrew's offer the And this will be the first 10 I, this is up to me to to to do the judgment here, but the first 10 after I publish this episode on Saturday that opt into something on the top traders unplugged website. And by the way, you can't use funny names that are not real. Um, well, for two reasons. One, I usually delete them anyways. And two, if you want the book, we need your details. Um, and I will forward that the the the details to Andrew and he will send you uh one of uh Robin's uh books. I think it was we talked about >> Michael gets Michael the the emailer gets a complimentary copy if he can tell me. >> Yeah. Then Michael, if you're listening to this Yeah. If you're listening to this um and you haven't um sold your DBMF just yet, then you should uh send me your your uh details and Andrew will um will thank you with a book as well. So very generous of you. Um and of course super fun conversation as usual. Um and and I I think and I hope that you will go to your favorite podcast platform and show some love for for Andrew and all the work he puts into these uh conversations and all the insights uh by leaving a rating and review. Now next week I'm going to be out traveling. So Alan will sit down with Jim uh who I know uh has been traveling, meeting some very interesting people um in both Las Vegas and over here in Europe and they're all coming out as the um you got options series continues. Um so please send me your questions if you have any questions for Jim and um of course you can email them to infotoptradersunplug.com and I'll do my best to um to get them to uh Alan. So, from Andrew and me, thanks ever so much for listening. We look forward to being back with you next week. And in the meantime, as usual, take care of yourself and take care of each other. Thanks for listening to Top Traders Unplugged. 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Risk, Replication & Portfolio Strategy | Systematic Investor | Ep.367
Summary
Transcript
Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence or investment career to the next level. Before we begin today's conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. Here's your host, veteran hedge fund manager Neil's Krup Larson. Welcome or welcome back to this week's edition of the systematic investor series with Andrew Beer and I Neils Castro Larsen where each week we take the pulse of the global market through the lens of a rulesbased investor. Andrew, it is wonderful to um to be back with you this week. How are you doing? >> I'm great. Look, I'm all dressed up. >> You're all dressed up today. Actually, you are. For those back >> Exactly. For those who will catch some of the short clips we're going to do, you're all dressed up. Last time I saw you, you were in a in a warm hotel in Greece. Um and this time you're looking very um yeah, very polished, I have to say. >> Thank you. >> Um >> not a funeral. I'm glad to say that. >> True. Before we get into uh all the topics that we're going to be speaking about, uh which are of course great as I always say. Um just um wondering it's kind of late late summer, early autumn now. um August passed without too many disasters. We're into September. What uh what's been on your radar lately? >> I think and I actually this is something we're going to talk about a bit a bit more today, but I I think you know the astonishing thing to me is if you just take a step back and where we are today, um and it's something we've talked about on, you know, in the CTA space. If you if you'd gone back a year or two ago and said, "This is what's going to happen. These are the 10 big things that are going to happen. We're going to have this, you know, political upheaval. We're going to have assassination attempts of presidential candidates. We're going to have uh you know like radical changes in policies and threats to withdraw from NATO and wars flaring up and and you know a tariff war for the first time in 100 years. Like you got to list all this stuff. You'd say like oh my god you know what would the world look like? And and I just looked and and and the um equities are up 55% over that period of time and uh and and and nothing's broken. And so I think there is this there's been this uh now it may break. I mean I'm personally of the view that that you can't keep lighting matches, dropping them on a carpet and hoping that nothing the drapes don't catch fire at some point. But it is pretty astonishing um just the resilience of of of this you know global system that we have. Um and uh of course you know usually when I say something like this publicly it means it's about to cause some massive like market calamity. But uh um but that that's what I've been thinking about. >> Yeah. No, I mean um I agree and and kind of uh on my radar, I've got a few things and I know some of this will will will tie in what you said just to some articles that I found. Um but of course the first thing that's really on my mind as a Danish u you know native um is what's going on in Denmark right now with the drone activity uh this week. um and how it kind of uh on one side shows maybe the weakness uh of uh of the western alliance because we haven't really done anything to you know to determine we haven't been able to do anything to determine who is behind it. Um but at the same time it kind of feels very surreal that um what I would consider a kind of a peaceful part of the world that we are now talking about um you know the threat level being at heightened uh alert in all of the country and uh drones flying across the uh airfields where most if not all uh our newly bought F-35s are are stationed. I mean it really is incredible. It's an extraordinary world. Not necessarily a world that uh unfortunately I think will get any better anytime soon. Um and um and it's concerning and that of course that concern we can then translate into sort of the financial markets. Uh not that that's more important. It's always you know of course people safety I would say before portfolio safety. But um but still there were a couple of articles that caught my attention and I shared them with you and I know you have some thoughts on them because I think you were able to kind of tie this uh all together. And the first one, I don't know whether this is the right order to do it in, but the first one I wanted mentioned was this article um in the FT uh where one of our previous guests actually two of our previous guests had lunch together. uh both uh Robin Wigglesworth and uh JP Bashard from CFM had lunch together and out came a very interesting article uh where uh JP talks about um what what he now believes to be um not the efficient market hypothesis but the inelastic market hypothesis um where essentially it's a theory that um contemplates that $1 into equities just it doesn't just notch the price higher. I mean, you're just talking about how high equities have gone in this uncertain world. It really multiplies it. Um, and I'd love for you to kind of give your thoughts. You may have read the article more closely than than I have to be frank. Um, but I think you are able to kind of tie this into some of the things that you're seeing uh happening right now. >> Sure. Well, first of all, I I love the article and just for um so for anybody listening, so so FT does these articles where they take somebody out to lunch and the article is half talking about the lunch and where they're going and what they're eating and and and half, you know, kind of the conversation around a topic. First of all, I mean, the two people sitting at the lunch, um I don't know, uh Mr. Bushard, I know Robin reasonably well. And I mean, you're talking about two incredible minds sitting at lunch. Um, uh, by the way, if you don't have Robin Wigglesworth's book, Trillions, I think I have 30 sitting in my office. And the next 10 people who sign up and subscribe to DTU, you can text me and I will send you your free copy of of of Robin's uh, trillions. >> That is an offer I will take you up on. So, the next 10 people who subscribe to something on my website, toptradersunplug.com, create a little link to >> will get a book from from from Andrew himself. free free run don't run don't walk um so um you know I I guess so one observation from it which we'll talk about as well is is like the guy's obviously unbelievably brilliant you know to be a a physicist and write a play on the side and and I'll just tell you a funny story in that in that you know like in my career I've worked with people who are just so much smarter than the rest of us um and and so one of the guys that that that we built DBI with um was one of these guys he was He was a mathematical mathematics professor who then went to Wall Street. But um just sort of a funny anecdote about how smart this guy is um is I took him to uh an opera last year. It was a Mozart opera in German and uh and they have these little things on the back of the seats in front of you where you can put it on and you can you can see the lyrics in English or you can see them in German. and and his wasn't on and I so I leaned over and I whispered to him I'm like Matt you know like like you can put you can think you'll know what's going and he glanced over to me he says it's okay I memorized the lyrics like in the w you know reading reading the liretto he actually he knew what that and so so look there are some people who just whose just minds are astonishing and and and I think that gets back to the whole idea of efficient markets is that is is it's the tension between how valuable is a particular talent and and and I've always had this view that if you can you can apply somebody who's got an astonishing talent but in an air there are certain areas where I don't care how smart you are you're not going to make it that much better. You know, if you are the very best executive in America running a steel company going through a 30-year structural decline, you're going to have a really hard time. You're the worst Bitcoin investor in 2015 and you're a centillionaire today. you know, you're the worst investor in Miami real estate after the GFC or or or Dubai and you're, you know, fabulously wealthy today. So, so, so it it is that that that tension between talent which we know is not evenly distributed and then also how that gets monetized and what's the worth of it and and and and this gets into a very emotional um uh discussion for a lot of people. Now what I think with respect to to what he's saying it does it does dovetail which that I think a lot of the orthodoxies you've had generations of people trained around certain assumptions and you know and to be a sophisticated allocator was to be able to you know not just talk about um FMA but be able to talk about a black litterman model and and in a sense what he's saying is is that we have generations of people who are trained reinforcing an idea that may be wrong and so um there was Uh uh the last geeky point, there was a uh an amazingly important book written in the 1950s called the structure of scientific revolutions. And it basically made the point that when you have an existing paradigm, it it's very sticky because you have tons and tons of people who are trained in that paradigm and part of their identity is their knowledge and expertise in that paradigm. And so what you get are these over time is you get these things that contradict the the prevailing view >> but it's not until it reaches sort of a critical mass that the vast majority of those people will abandon the first paradigm and move to a second one. Um so if he's right then 5 years from now we'll be talking about markets in a very different way. Now, one thing that maybe we could try um and let's see what what what you what you think about this and that is and it kind of ties into kind of this active versus passive debate uh where uh clearly people like Mike Green thinks that this is really distorting the markets and and um and of course what Bushar is saying is that yeah we've had this uh tremendous I mean what determines more uh what goes on in markets are the flows, right? And so one day if these flows turn things may be very different and we may experience something that we haven't experienced for for quite a while. But before we get to that point, uh we have seen as you as you pointed out, I mean despite all the uncertainty, we have seen an enormous amount of of upwards market movement uh in equities. And if we go back of course to to the GFC, I can't remember how many fold now we're up uh from 666. Now we're at 6,000 plus in the S&P. So I mean that's extraordinary. But how does that and and and then and and maybe we can kind of slowly tie it in a little bit to what we will talk about later on today. Do you think that if they're right about this other hypothesis uh so to speak where inflows multiply the effect of where equity markets are are going? Do you think that that has also had an impact on say uh performance opportunities in some of the strategies that you and I follow more closely in the alternative space um and maybe have impacted changed the landscape there. I know we're going to talk about multistrategy funds uh later on, but again I wonder whether we looking at something where we've built kind of new avenues and people now are thinking oh these are fantastic strategies but they're kind of built on a unique time period where markets were behaving somewhat differently that they may do over a longer period of time. Do you know what I'm trying to say here? >> Yeah. Well, I think I mean I think the the the easiest way to look at it is 60/40 portfolios. I mean, that's that's >> I mean 6040 portfolios was basically one of these self-reinforcing paradigms. You know, people somebody I don't I don't think they I don't think anyone's ever figured out who actually came up with it. Um so all of a sudden it's just it's just 60/40 and then enough people say it. I mean there's this great Lenin quote that if you say a lie often enough it becomes the truth. And um uh the um so but then it but then there was positive reinforcement. and it kept working. And if you'd done it in 1990, um then you wouldn't have seen the same negative correlation or zero correlation of stocks and bonds. You weren't going through the great bond bond, you know, the mother of all bond bubbles. Um and so so it it it reinforces and reinforces and that was basically the cornerstone of every asset allocation model. Um, and this decade it it hasn't worked. Not because equities haven't gone up, but because bonds have 80 80% correlation to equities and they went down in 2020 when they were supposed to protect. So the problem when you have these these things that challenge a paradigm uh is that um is that people don't really have a playbook because they've sold everybody not just on their their portfolio, but they can't really go back and say, "Sorry, we were wrong about stock and bond correlations." And so everything in our business model is basically we have to you know tear up the playbook. Um but so so whether it's passive, whether it's these things, what you're seeing is is what you'll see is clearly a big impact on lots of different active strategies that seek to make money in the markets. Um and and it's it's not going to be evenly distributed. You know, equity long short was everyone's favorite hedge fund strategy in the 2000s. by the end of the 2010s it had faced years and years and years of underperformance and that could be something where just passive has killed the strategy. Uh on the other hand uh you know managed futures which you know we both love showed in 2022 that all of these allocators out there who are deliberately slow you know part of the what they've told their clients is is you know don't change your mind fast you're likely to be wrong. We're not going to change our minds fast because we can't time the markets. That was a really bad decision when inflation started to come back. And so what it did was it presented an opportunity for CTAs to make a decade of alpha in one year. Um so so I think the yes I think it has an impact. I think it's it's very hard to say that you know it's necessarily got the same impact on everybody over some period of time and the impact it's having on people in 5 years may be very different than it is today. >> Yeah. If if money starts to flow out of passive funds and we get a 10-year bare market, everyone's gonna love short sellers again. Find me an allocator who can ename a a dedicated short seller today. So, so, so the world changes and we must adapt. >> Yeah. Well, speaking of uh adapting, um and that was the other article that I noticed that sort of hit my radar was from the uh institutional investor. Um and that is um a a big change in in kind of the way um a very large may perhaps the largest uh institutional investor think about portfolio construction, namely Kalpers. um as they are now uh essentially uh want to stop thinking about putting strategies and investments in buckets and they're going to adopt the total portfolio uh approach which I'm not an expert in per se um but one of the things that um what the article describes and it talks about the total portfolio approach is a strategy where every investment is judged by its contribution ution to the entire portfolio goals, not just its own asset class. Now, I may misunderstand that uh sentence completely, but what I'm what I'm thinking is well, if that's the case, that really fundamentally changes if they were if they're going to be true to this that they're going to look at the strategies and say, "Okay, what kind of contribution can you actually uh provide uh us with?" and so on and so forth. because then a lot of the strategies that on their own might not look very appealing say managed futures for example or trend following or whatever suddenly becomes very attractive because of its contribution to a portfolio. So, I'm not saying that this is what they're going to do. Um, but I'm just suggesting that if that is true, if my interpretation is true, then it's going to change the landscape in terms of uh how favorable some strategies will will be. And of course, then if the largest institutional investor in the world is making a change like this, well, then maybe there will be more um following along that way. So, uh, that's what I find interesting about this article, even though this might take years to really, um, you know, trickle down to what you and I deal with, but you never know. >> Well, so I Well, first of all, from your mouth to God's ears that that people then say, you know, I really want things that behave differently from other asset classes. I'm going to value those more highly and make those a more important part of my portfolio. um because as I've written about uh you know the allocation to manage futures relative to all these other hedge fund strategies is is preposterously small uh from a statistical perspective but that's also a segue into um uh you know sort of another fun quote which was either Draeli or or Mark Twain which is that there are lies damn lies in statistics um and so when I read something like that I said okay that's great okay you're moving to factors you're moving to something else really how are you going to decide what those things are going to be over a long period of time. And so having spent with a lot of people who build models for a living um they they torture the data until they get the the answer that they want. And so you know so back in 2000 if you were building an asset allocation model I think I think small caps had outperformed for years and years and years because of the small you know the small size factor and asnness has noted there were a lot of issues with that data etc etc etc and yet nobody that I'm aware of had a an equity portfolio in the 2000s that was all small cap equities and a tiny percentage of large cap um so so what happens is they come up with these long-term assumptions and then based on and They they start with historical data and then they extrapolate it out and what you find is like right now the only equity you want to own is the NASDAQ, right? Like like like why would you own anything else but the NASDAQ? But but they're like no no no it wouldn't be prudent to put a lot of money in the last and and they start thinking about you know we're going to be written you know Robin Wigglesworth is going to write an article on us about uh you know how we were the fools who went all in on AI at the at the turning point. Um and so what they do is they then make judgments on top of it and and so what you end up with is kind of they kind of haircut assumptions for things that look too good recently and they and they kind of assume mean reversion on other assets. So look, I am all in favor of, you know, continuous evolution of this, but it's going to be a judgment call on their part in terms of what they like and how they look about it. And and and again, this probably precludes scalpers from ever giving us a meaningful allocation. But I think what it sounds to me like is guys, you were all in on a model, >> a paradigm that didn't work for various reasons, right? It it's failed to predict this decade. Um and and again they've they've had bad Kalpers has had bad stumbles in like they used to have a $4 billion absolute return bucket but making 4% on 1% of your two you know 2% of your portfolios didn't mean anything and it had a lot of people so they ended up shutting it down. Um but but to me the more honest answer is we thought we had a solution for how the world worked and and and we made all these long-term predictions about various asset classes and how they're going to interact and we structured art this massive portfolio that matters immeasurably to hundreds and hundreds or millions of of of end investors. And we made a very big mistake and and in in that you know at the very very peak of the bond bubble uh we we we basically decided in the beginning of 2021 that a very meaningful portion of your portfolio would be in something that mathematically was going to diff have difficulty earning a return over time and and uh so it's it's very hard for people to go back on their prior narratives with investors and so I think a lot of what you're seeing in the wealth management in the model building space is rather than staring headlong into the issue which is you know what was it Neils Boris said predictions are are are are difficult especially about the future or something um that what you're seeing is people kind of coming up with a new paradigm that that sounds good now this is happening across the US wealth management space where a lot of people who um who who sold or built their business on 60/40 have now introduced a 20% % diversifying bucket. The reason of which is bonds have not worked the way they were advertised to work this decade. I mean you've had correlations have gone to 08 from negative volatilities have doubled or tripled. Uh they went they you know they went down during during 2022 in many cases they've been earning less than cash. Um so what they've done is they've introduced a new category they can talk about but without kind of un really explaining re why they got there and I I I understand why they do that but that that was my reaction when I read the paper. Yeah. No. >> Again, it's knowing almost zero about what they're talking about is and but uh at at a granular level, but uh I've been to this rodeo before. >> All right. Well, let's move on to our usual segue, which is of course kind of a quick trend following uh update and um my own trend barometer finished at 36 yesterday. That's a bit weak still despite actually the data looking pretty good. Um and um you know so far September is kind of turning out to like one of these sort of maybe a September to remember as I think Earthwind and Fire once uh sang about uh simply for the fact that if it could close in a positive territory it would be four months in a row for the sock trend index and we haven't seen that since January through April 2024. So it's been a while. So I'm kind of hoping that that's where we are that's where we're heading. Um to me at least where I'm sitting um you you maybe you have a better view um in in terms of your replication strategy. It seems like it's kind of the usual sectors right now. It's the equities and it's the precious metals in particular uh that are helping with a few supporting acts from the commodity side um in terms of driving performance. Interestingly enough, again from my vantage point, despite fixed income being maybe where the focus has been in terms of the fact that the Fed pivoted to some extent by lowering rates, it seems relatively well behaved and kind of quiet uh in terms of uh P&L contribution uh in the trend following uh space. Let me run through the numbers and I'll I'll I'll give you the floor if you have any comments on on on current um uh attributions or whatever. But BUP 50 is up 2.81% so far this month. So it's pretty flat now for the year uh having been in negative territory territory for uh quite a few months. The SGCTA index is up three and a half% or so. Now it's down uh only 3% for the year. The trend index is up almost 5% for the month um as of Tuesday, I should say. Um down 3% for the year. And the short-term traders index is also up one and a half% uh is uh but still down 5% so far this year. Now, of course, the traditional markets are doing really well. Continue to do well. Mi World up 2.5% up almost 17% so far this year. the uh S&P US aggregate bond index up almost 1% uh in September and up almost 6% so far this year and of course the S&P 500 total return up 2.85% 5% in September as of last night up 13.95% so far uh this year. Any overall thoughts? I mean and you know obviously you you you will have different contributions etc etc but you kind of know what's going on from from the work you do. Is there anything that stands out to you uh in in recent month in terms of what managers are doing exposures are changing or anything like that? >> Well I I'll say it in in in general. So, one of I had a funny call from from one of our investors um uh who reached out to me at at near the near the near the bottom of everything and you know and he said you know what do you think about this? We talked about it and he said, you know, he said, "What's your answer?" And I said, I won't say it here cuz, you know, for the for all all the children listening to your podcast, but I said, "BTFD." Basically, I said, you know, I said, "We've we've just known this strategy for a long period of time. It could be rattled, but then it turns around and pivots." Um, and so, you know, so what was so hard about um August and Liberation Day was not just the inflection, it was the inflection. >> You mean April? April. April liberation day. >> Sorry, April. What did it say? August >> um was was it wasn't it wasn't it wasn't just the head fake. It was the double head fake, right? It was the and >> and and what happened at least from what I saw was that um uh you know so it's always funny when you're talking about people today because the whole space has been having a great run and it's recovering from a very tough period. Um and nobody wants to say it out loud because nobody wants to jinx it. So >> right, we'll be saying very quietly today. But but basically what's so fascinating about this space is when it seems to detect something early and when it detects something early and what I think it detected early was the let it run hot trade and so if I'm talking to somebody about the underlying position in our portfolio in June when everybody still has post-traumatic stress disorder from from what had happened in April you know it it felt reckless. You know the exposures felt like you know are you not paying attention? know you're not watch these guys not watching the news because it was starting to embrace the let it run hot trade in September right and then I had people saying well it's going to work you know it's it's it's going to flame out in in in August sember it hasn't right so so this is an example where uh where where man's got behind broadly speaking and I say let it run hot which means uh you know Fed is Trump is going to jawbone the Fed or they're going to then keep rates lower than they should that's going to you drive up equity valuations. So, um you know, if there's a bond market tantrum, it's going to happen later, not now. Um and you know, it's probably great for for uh for gold and crypto. And I would just remind everybody that it's the first time I think we've had a a uh you know, a president who's massively short the US dollar. So, just take that into consideration. Um um the um and so so it's they've done it and it's been working. Um, and uh, and I think that's it's great. Like it's what the strategy is supposed to do. >> Yeah. [Music] Okay, let's move on. Before we get to your topics, I actually had a question that came in. I don't remember if I actually sent it to you. I should have done, but it's a very simple question. It's from Michael. Um, and Michael wrote, "My question for Andrew is about pair trading with his replication product." He says, "Why shouldn't I sell Andrew's product when it's outperforming single managers and buy single managers and then vice versa?" So essentially, you know, because as as we know, um, one type of strategy sometimes will outperform and then vice versa and so on and so forth. So that's his his question. I'm not sure how he would buy the single managers and how it doesn't explain that, but but any any thoughts on this? Oh, I think it's a little bit like so so my argument would be well first of all I don't know when we're going to outperform and when we're underperform Michael has an answer to that then he should call me >> I think it's just based on whether you are outperforming which are at the moment I mean clearly this year you've done much better than than many single managers >> yeah look I I mean we were outperforming earlier this year and then we outperformed by more and then we gave a little bit back and now we're outperforming by more again. um uh it it's extremely unpredictable. So I don't know how I don't I don't but the structural problem is that historically having done this now for 10 years is is we have about a 300 basis point efficiency advantage. So so being short US and being long single managers historically and and it's even worse if you're talking about investable things like mutual funds or usage funds where you're talking about more than 300 basis points of of outperformance over time. that's a that's going to be a very costly short. Um, and so because I don't know if I knew structurally when I thought we're going to outperform or underperform, you know, in advance and you you you they would have to you'd have to get that timing very very right. But um, uh, I it's interesting. So, you know, people used to talk about replication as something they could hedge, use it to hedge. You can short DVMF, right? So you could buy five well-known mutual funds in the US and short DBMF against it and you'd lose 300 basis points on average. So you know or more and so I'd be very curious to hear ideas around it. But I I don't know how to solve those two points from a from a timing and shorting perspective. Let me do a follow-up question on this just something I thought about as as you were talking and about this sort of idea from memory and again I don't want it to be sort of uh taken as something that's super precise but from memory when I look at kind of your evolution in terms of of performance and I probably from memory normally look at it back from when it was launched I think in 2019 and then comparing it to the index from time to time. I do see these periods where clearly you you move uh away from the index to the upside and but then there will be a couple of times over that period where you kind of come back and you kind of meet again and then you go off again and so on and so forth. I think that's what he I think that's what he's kind of referring to. My question is more have you noticed whether there are certain environments where you move away from the underlying index and then there are certain environments where you actually see yeah we when we go through these type of environments that's usually where we then tend to move closer to the index again and so on and so forth. Is there anything that you've noticed that describes those periods? >> We we know it after the fact, right? So we know that there are two periods of times when and you and I talked about this in in January and February of 2023, right? So we underperformed we gave up a lot of outperformance from the peak in 2023 through around mid sorry peak of 2022 >> like remember we because remember by by the peak in 2022 >> we were outperforming in part because of absence of incentive fees and so they re of course yeah >> six 7 800 basis points. >> Yeah. And then when the markets reversed, we gave that back and then we had a like when we underperform it's because some it's one of two things happens. Either we miss trades >> that are generating a lot of excess returns for the hedge funds which which is natural, right? I mean you would expect >> and and in as you and I talked about in January and February 2023, we didn't have the Mexican peso, we didn't have the front end of the Canadian interest rate curve, we didn't have the Nikkay, we didn't have softs, we didn't have a lot of different things. Now, so the bet that you have to make is that there's going to be a period of time where a lot of idiosyncratic trades >> statistically are working at the same time, >> right? >> 80% of non-core trades are working at the same time and it's and it's going to persist for a month or two. >> Yeah, >> good luck. >> I mean, that's that's it's very very hard to predict. >> The other is at very sharp inflection points, >> right? >> So, so if um and there look inflection points play out in a couple of ways. So SVB happens and we like everybody else are very short treasuries and and it happens and 3 days later one of two things is going to happen. Either it was a head fake like with the end last year >> and things will revert and we'll be fine. We'll underperform by a day or two or 3 days then we'll come bouncing back. >> Um or it'll keep going >> and and when it keeps going we will be de-risking that position faster than actual funds. And so SVB was one of those things a very sharp inflection point and a week later it was the regional banks were going down and a few weeks later it was credit Swiss was going down and so so you went in a you know four-week period of time from rates are going up inflation is back to my god we're going into global banking recession again. Um and so so so we'll underperform but we underperform. The math of it though is the underperformance is not a thousand basis points >> right? >> The underperformance is a couple hundred basis points here and there. So um the periods when we tend to outperform are periods when those non-core trades backfire or risk management backfire. So the the outperformance this year like I think is I think what's sort of interesting about the space is nobody has a really good explanation as to why the draw downs among a lot of single manager funds were as bad as they were in the first okay that's not it's really not what my perception is of of of of that actually I think there's a very simple explanation to it uh if you don't mind me sharing >> yeah please >> I think that again if we look at these large managers that you uh that you track also that's in the index. Um we must assume that they have a tilt towards the financial sectors because that's where they can get the liquidity and the size and nothing wrong with that. But then if you look at the actual market movements the last 14 months or so in equities in fixed income and in currencies I would argue that there have been you know two three big reversals in all of those sectors within the last 14 months. And some of those maybe not with equities, maybe you didn't go short at any point in time, but you certainly went from being fully long kind of thing to being almost flat and then almost long fully long again and then down again, you know. And then in fixed income, I would say it's been a very large range that has forced many managers to go from quite large long positions to quite large short positions, then back long and then back short. And with currencies to some extent the same. So to me at least for as an observer of these things, I would say that it's kind of a it's a little bit of like the the um what do you say the the perfect storm for large managers who are maybe tilted towards financials that you have all those three sectors being challenged by big reversals within the same time frame. That is how I perceive uh what's going on. So to me it's actually not a surprise that it's been a difficult period and then you have those that are more diversified where smaller market contributions or where smaller markets like you know the commodities have been able to mitigate um some of those losses and some people are you know as I said a lot of managers are coming back now to kind of the flat and slightly positive um performance and then of course we can't forget about you know speed of models of course that will have an impact as well. But but to me, I just think that it's rare that you see these three financial sectors being so difficult at the same time. And I think that's just the the explanation. But maybe it's too simple. I don't know. >> Well, look, we we we've all been living through whipsaw hell, right? And it's and and it and it feels like as soon as you take your eye off one thing, there's a bomb goes off somewhere else. Um >> and no, no, it's it's I'm making I think a slightly more nuanced point, which is I think that if you had gone to the beginning of 2025 >> Mhm. and said, "We're going to have a really chaotic year with a lot of noise and other things like that." And you said, "What should do better in 2025?" a a a simple replicationbased model that is going to be a little bit slower and not capture up, you know, again, not capture really interesting trades that may present themselves in a lot of different markets or single manager hedge funds with hundreds of instruments, uh, uh, V controls, risk management, short-term models, etc. you know there is a hundred billion dollars of professional money that has had would have made a bet on on the latter not the former and it hasn't happened right and so so to me look and and I'm uh I'll be in Stockholm with the heads of some of these firms and in in a few months and if I make it out of there alive um uh it'll it'll be >> I know the people they'll be gentle they'll be gentle >> I'm quick I bet I can get out of the room faster but um but no Looks so so to me again just thinking about it from is >> when things do badly there's often very in in the rest of the hedge fun world there's very clear storytelling around it like like you know we we lost money because uh you know we believed in this thing about the company that proved to be wrong this is how we change our mind this is how we made our decisions um what my impression is that is that when you ask well at least when I've had conversations with people about it it's kind of diffuse it's like well the models are heard you know we timed it bad we rebalance this is the wrong it's it's a lot of little paper cuts that resulted in a in in a fairly deep wound across the industry and just again when I so I've been thinking about this convergence of what and I I wrote this paper not paper I wrote an article in in hedge nordic um earlier this year basically talking about the the awkward statistical fact that 80 to 90% of ETFs are outperforming um the average mutual fund hedge fund in 2024 and 2025 by a lot and and Again, that's not supposed to work. And so I've been thinking a lot about is there a structural reason around it? So now I imagine it's liberation right after liberation day, right? >> And and you're focused on commodities because that's you know, you've got a lot of conservation, a lot of a lot of but >> but now imagine a fund that has added position number 298, right? And that was they they made the decision to invest in it because you know well I you know let's look at the underlying liquidity over time. Well, on certain days it's not something we'd want to trade, but you know, but we can ease into our positions and we're going to be intelligent about it, but you know, but but you know, in a period after liberation day, the liquidity might disappear in that market. Now, you've got a V control, you know, red light that goes off because that thing is whipsawing much more than something else. And or you've got a short-term model that now wants you to get out of everything quickly. So in a four or five day period of time, you may be selling a hundred different positions or buying back a 100 different positions in markets where there's thin liquidity and and and again you're talking about the larger firms who are going to have a larger footprint in those markets. And so going back to the Buchard point right now, now take that argument and collapse it down to the micro structure of hundreds of markets that themselves. It's not just that you're trading with other people who trade like this. Now you're also trading with prop desks, right? Who can who can smell blood in the water. Uh and so you know, so when you're getting out of position number 298, did you lose two points on Tuesday closing your $8 million position? and and would you five years ago when you thought about in including position number 298 would you have included in your portfolio knowing there could be a day where you lost 200 basis points just trading it u so I've been waiting to hear those kinds of stories and I haven't heard them um but but so that's what I mean about um uh and but I could be totally wrong on this right I could be it could just be a combination of these factors collector you know collective factors as you described but I think this has been going this has been going done since um the beginning of 2024 and I think there are structural reasons around it and then rational reasons why people have done this but I'm just not sure whether we're going to look back in 5 years and say these things didn't work as well as people thought they were going to work. So just for me to understand your point here uh to be clear on that your point is that some of these larger funds are are too diversified so to speak and and the trading cost of being uh trading smaller markets it does have an impact whereas uh I would generally say and and and you know my view on on on alternative markets. I'm not a big uh uh well I certainly will just say it's different. I I wouldn't say it's better. I've never believed that but it's different. I agree with that. But um but my point is just that um I think you know and having been in this space for 35 years and my observations are simply that there will always be times where you're going to have um certain sectors of your portfolio doing well or badly just from normal way of market um movements and obviously financial monetary or fiscal policies whatever whatever it may be there's going to be an impact and and and that's just how it be behaves. But over time, uh at least it's our belief at Don that all markets has the ability to trend. They obviously don't trend at the same time, nor would they be in in in non-trending environments at the same time. So, so yeah, you're going to have periods of time where you get draw downs because you know nothing is happening and whereby maybe being in fewer markets and having a longer time frame like replication is just simply a better way of doing it. But that's just a snapshot of say as you point out maybe 24 and and and parts of 25 that's been a period like that. Okay, fair do. not there's going to be a period of time where having more sectors for example um you know will be will be a better so I don't see that as a necessarily conclusive evidence in my opinion it may be what's going on right now so I don't dispute that but I think it's hard to conclude that it is a permanent change because I've seen this happening before even though replication has been around for a long time but but just the difference between certain managers would suggest that um yeah, you could have a different, you know, the the kind of quote unquote the wrong look back period for your models. Um or you could have just as you said a lot a lot of markets in your portfolio that just wasn't really trending well at that point in time. >> But okay, but I mean let's let's go to an extreme example, right? And my my partner gave this in a speech in Paris when he was talking about this, right? Okay, you let let's say the Copenhagen housing market trends upward over time, you know, trends up and then trends down, trends up and trends down. You know, when thinking about how do we trade that, right? We're going to we're going to look for the trend on the way up. Then we're going to sell all our houses once we see the trend reversing. We're going to since you can't short houses, we're going to wait for the bottom and then we're going to buy them again and do it all over again. If getting in and out costs you 10 to 15%. brokerage commissions and everything else, there may be a trend, you still don't want to try to do it from an investment perspective. And and so again, having talked to a lot of very very very serious quants about how they approach it, there is always this question of it sounds great, can you implement it? When high frequency trading came around, people could make staggering amounts of money on like unbelievable returns on $5 million or $10 million and the returns disappeared at 30 or 50 million. So, you know, what what what I've seen in the industry again as an observer when we started looking at replicating the space um back about 10 years ago, um the talk at the time was about bringing down slippage costs, right? It was a badge of honor to be able to say that you had brought your slippage cost down from 400 to 200 basis points. Now, if you'd asked them at the time, you said, "Okay, so what would happen to that?" And that's and that's with simpler portfolios in more liquid markets like what you do. >> Right. >> Right now, you say ask them at the time, okay, what do you think about trading 300 instruments, not >> 70? >> What do you think about that? So, so, so take again the liberation day example, and this is where I keep looking for the story. Okay, so I'm running a very I've got a very part of my portfolio is a very short-term model and I'm I'm very long equities going into Liberation Day, right? Trump basically, you know, equity markets collapse over the course of the next week. And so now I'm selling my equity exposure. I bring it down flat. It goes on for another few days. I'm actually flipped to short at that time. Then he head fakes everybody again. The markets go back up. So now I'm un I'm covering my short and then 3 weeks later I'm now back to being long again and thank god I'm starting to embrace the the the the let it run hot trade early. Okay. So if I'm doing that in the S&P 500, okay, I mean it's going it's annoying and and and it may the timing of the rebalancing and everything else may cost you, may hurt you, but it's understandable. Okay, now I'm doing that with I I don't I mean, you know, pick some esoteric equity market where I'm doing it. Um and and and and that's that's so all of my point is is is there are a lot of great ideas. >> Um and but the question is are they implementable? And usually when you're looking at it, you're not saying like like private credit, right? Nobody's worried about the fact that they don't mark private credit to market during good times. They're worried about if defaults rise and you get all of a sudden a sudden 25% markdown. So, so everybody evaluates these things on the very worst day that it can happen. Um, so again, I'd love to hear what your guests have to say about it. Like I just think because it it feels to me it feels structural to me and and you're right, we won't know, right? If these first off, some of the guys who were down more have become roaring back. >> Yeah. >> Um, they're still, >> you know, they're still down, but but but you've definitely seen a rebound across the space. That kind of reinforces my argument, though. you know, if you'd said because you've had a and talk about Buchard. I mean, talk about the liquidity that's coming into the markets right now. The the you know, yolo, fear of missing out, you know, like like you know, like let it run hot. And so, so that recovery is not necessarily a sign of long-term high expected returns. It may be just benefiting from from from from a sharp influx of liquidity into into into areas where you happen to have exposure. >> Yeah. No, I certainly don't disagree with any of that. I and I do think that it is so important to um to stress that trading liquid futures on exchange relative to off exchange and illquid stuff um that's certainly our belief as well. So we don't disagree uh a point on that but but I do think it's interesting. I would love to I would love to have one of your you know your your your very best PM of one of these funds and and and I be so curious to hear to hear their responses live to a question like that. Um well maybe I am you know I don't I don't scratch the surface in terms of their knowledge of of of the underlying space and how they build their models. I'm just I'm observing things that I'm seeing and it's pretty widespread across the space. >> Well, let's put it out as a challenge. if there's one in these large uh CTA firms um that's been around for >> to beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat beat the daylights out of here beer on TTU. >> Well well that's been around for a long time but and do include um you know uh alternative markets if they're up for it. Um they are invited to the next uh recording with Andrew in in 6 8 7 weeks. Um, and uh, we'll talk about this because it is an interesting point. We're completely not started yet on on any of the main topics you send along. So, I'm going to let you decide where you want to go. Uh, we we have some stuff about ETFs versus mutual funds. Uh, and we have something about multistrats. We have about 15 minutes time. So, I'm going to let you drive, so to speak, and I'll try and follow along and maybe I have a comment or two along the way. >> So, I I I think what I'll do is I'll leave aside the I mean, you can read the article if anybody is interested in kind of the ETF versus mutual fund or or or hedge fund world. Um uh if you don't if you can't find the article, ping me and on on LinkedIn or something and I'll I'll send you a link to it. The um No, I think so. I think the really interesting thing is uh is is multistrats, >> right? multi-read hedge funds and and these things show up in the news a lot. Costus Morsales at FT wrote a great article on it recently. Nishankumar is the the high priest of writing articles on this space and and and I think it's it actually dovetales with Bart um and it dovetales with a lot of other things which is which is um uh and passive investing and everything else and because so a couple of observations about the multistrat hedge fund space first of all what these guys are doing from an investment perspective is cold fusion it is high temperature superconducting like like it is they are they are running hedge funds with enormously high cost structures that are generating returns that are staggeringly consistent and valuable for investors. So just to throw out some numbers in 2020 right through the midst of COVID now they had the worst month I've been able to find was down 6% in March which was not terrible but again if you're talking 5x leveraged funds that means across your portfolio down 1% when you know the world basically collapsed. So they're up 13% in 2020 9% in 2021 2% up 2% in 2022 up 6% in 23 up 11% 24 and up 8% year-to- date. Which index is that you're quoting by the way? >> What's that? So, by the way, this is >> the very best data is a the Pivotal Path Multistrategy Hedge Fund Index. Okay. Um it's published by Pivotal Path >> Connect to a guy named John Kaplas, CAP LIIS on LinkedIn. The reason it's the best data out there is because he gets his hedge fund index data from the institutions like Kalpers that actually invest in hedge funds. So uh so he has the best data and it gives you the most accurate picture, >> right? >> Um so now now again these things depending upon how you look at them might have a thousand basis points and fees before before clients get paid. >> And so so there are a lot of articles on this space um that are you know talking about how this is a disaster waiting to happen and and it is by it's very very bizarre because clients end up paying you can hire anybody at any price and your clients will end up paying it. like it sounds like this and I' I've written on the space by the way about two years ago I wrote something basically saying that I thought the risk of the space was not that they're going to blow up but that they are but the risk is basically dead money over time and in 24 months I had been dead wrong on that but also uh equities have gone up 55% and bonds have gone up like 8% a year so it I think it's it's this is not really the time to be able to tell that but but so but it but it gets it gets back to the point about how inefficient markets are and and I'm I'm going to segue kind of a little bit of a weird seg way in 2003 I started a commodity focused multi-manager firm called Pinnacle Asset Management. It was initially a fund of funds business. It evolved into a commodity um uh fund because we had first mover advantage doing that and and the guy who ended up becoming the CIO and is now the you know billionaire genius behind the business which I've been out for a long time. Um but um but he had this theory that if he could find a guy who was the very very very very best trader in a very esoteric commodity market you know the guy making markets in options on you know the I don't know you know like some some like power trading business or something or or there was this this guy who put up the most ridiculous numbers in the hedge fun industry named John Arnold who had a firm called Santorus. um he'd been making I don't know $600 million a year. So again, Enron trading like two contracts. I mean, so so Jason's theory was that um at the time when you were talking about putting somebody into the business, so somebody who had no hedge fund, no business to speak of, shows up and they say you and and say, "Look, how much money do you need to get going? I need 50 million to start. I'm going to put up $5 million of my own money." the the thing at the time was to use the $50 million you could give them as a cudgel and say, "Fine, well, you're going to do it at half fees or we're going to get a stake in your business." And and Jason's very contrarian view was that guy with that talent, with that competitive advantage, is not going to do 200 basis points better than the established guy. He's going to do 30 a year for his first three years. And as long as he agrees not to go to $500 million in six months, I don't care what we pay him. Two and a half and 20, fine, take it. Right? I mean, I'll give you the money in two weeks set up in a managed account. And and he was absolutely right >> about it. And and plus, what he did also have was liquidity, right? So, it wasn't a it was kind of an early version of the multi-manager model. He could see all their positions, etc. >> So, so in a sense, what you've seen with a multistrat hedge funds is they're not hedge funds anymore. they are. This is like the proprietary trading desk at Goldman Sachs where you have better information. You're the first call on things. You have better financing terms and and so what they're doing is when they're when they're setting up the compensation structures, they're setting them up like the bank. Banks used to pay 55% of revenue and that and they had a lot of less attractive business in it. 55% of revenue was basically compensation. So you're doing the same kind of thing here. Now um a second observation is that everybody's jealous of what they're doing, right? I mean you are talking about $50 billion funds that are leveraged and they're mysterious and uh like so a funny story is is I my favorite restaurant in New York I go to enough that they give me one of the power tables in the front. Another guy gets a power table. That same power table whenever he wants it is Izzy Angller. >> And and I'm friends with the matri. I said, "Look, I just want to tell you if I am halfway through my appetizer and he walks in, I am fully expecting you guys to pick me up and throw me into the bag and give it in the table because because there there is a difference in in in talent in this world. And this guy is, you know, what Ken Griffin has done with his business and with the Citadel Securities, you know, these are it's LeBron James like it is these are there there there is talent out there and and what the what what what Buchard is talking about and and what what Pinnacle is a counter example to is is the idea that you know the markets broadly are very very efficient and so and and that comes from the fact that the you know the incredibly talented the guy parts of the markets are weak efficient and and you at least weak efficient. So picking uh large cap stocks in the US and getting paid 100 basis points for it, your clients are probably not you're probably not going to do better than 100 basis points over time statistically. Um, so, so the but but what the multistrats are basically doing like the philosophical underpinning of it is we can find a guy who can go out and raise a $500 million head hedge fund and he's distracted. He's dealing with investors. He's explaining what he has to do. He has to hire people and pay them and monitor them. And so, so this, you know, it's it's Le LeBron James running the, you know, like the the NBA, the draft picks and and and the business and hiring having the the towels washed and whatever the hell he's doing. And and so so the bet is basically we can take that guy >> and give him an incentive structure where he is not sleeping for the next five years. And if he makes $500 million for us and we pay him 200 million of it, our clients are better off. We're better off and he's better off. >> And so, so that in a sense is absolutely utterly fascinating. Um, now let let me pause for a second and and I know you you you spent a lot of time thinking about the space and then then I have an interesting segue as to as to where it doesn't work. >> No, I I don't actually have a lot of thoughts about what you said. I think uh it's it's a interesting um kind of um some interesting insights that you you share. Um I am um impressed slashs surprised and I have nothing really to base it on. But I also see that you know if too much money you know flows into kind of the same types of um businesses uh like maybe we've seen with private equity again without being an expert. At some point things are not necessarily going to work as well. Um and then people might add additional leverage or whatever they may do and you start having some fairly hidden weaknesses and dangers building into that business model because I I imagine to some extent and maybe you can can confirm or deny this and that is the the risk management teams that are allocating the money to these uh sub uh parts to a large extent they're buying P&L curves. So the more successful you are, the more money you get and at some point it's like okay so um I don't know there there is a little bit of a a risk in in that approach. I agree right that the logical thing is right you can't you cannot keep so you know is is is pod number 300 >> right >> by definition less attractive than pod number 20 right and and look I don't know the Ken Griffins Izzy Anglanders Bobby James to to to have conversations with them about that I would be more than happy to buy them lunch if they would spend an hour >> at your power table >> but they're proving it wrong right okay if I told you five years ago like pre20 2020 that that you had $50 billion of capital leveraged five times with and we're going to go through the kinds of market girrations that we've seen, the kinds of regime shifts. And you told me that not a single one of these funds had not only not blown up, but not had a anything approaching what would be deemed to be a catastrophic draw down. um and they had generated hundreds and hundreds of basis points of returns over cash as they're paying higher and higher fees to do that. It sounds impossible, >> right? And that's and that's exactly what B I think again to >> you know keep paring Buchard that's exactly this idea of it shouldn't work but it does so why. >> Yeah. >> Right. And look, I'm very simp sympathetic to it because a lot of people said replication shouldn't work and and does. So it's it's I mean I I'm very fascinated with with with the why. But um but so so the interesting about about it is that it works but you need the hedge fund structure for it, >> right? And and and when you compare it then to the mutual fund world where about 15 13 years ago, people started to try to develop the plug-andplay one-stop solution. Like like why do you do anything multi- strategy or multi-managers? because you're trying to outsource it to somebody who knows what they're doing to be able to pick the right, you know, balance the right strategies, um, pick the right managers, you know, come up with the right implementation around it. And and so you then say this basic idea of we're trying to give you diversified exposure to a diversifying return stream has been an embarrassing failure. the the entire space has done less than 3% peranom after about a 200 basis points in in in expenses over the past 10 years, right? And and and so there's this kind of musical chairs of people kind of like going from one fund that's working well to another fund. Back to your point about about you know people chasing hot dots and so so to me also the fascinating thing about the hedge fund the multi-stret hedge funds is you can't do it outside of a hedge fund model and you can't do it if if clients have the ability to withdraw their money every quarter. So in a sense what they built are these almost like they built companies you know they built these the the these trading engines and um and again talking to people who run the underlying strategies what's sort of fascinating about it is is you kind of get the impression that they're worker bees. >> They have no idea what happens to layers above them in this organization. They're fabulously wealthy worker bees. they they don't have great job security. Like, you know, a guy told me of, you know, being down 3% one year and, you know, he goes back to his office and the fact his, you know, he's he's all his stuff is sitting in boxes and he's being escorted out the door. So, but but boy, I mean, you talk about motivation and hunger for these guys and when it works, they become fabulously wealthy. Um, I was in Miami a couple of years ago and and uh somebody had um they told me a story about Citadel moving its headquarters down to Miami. And my two favorite stories were uh was somebody as a a you know a representative of Citadel apparently went around to the private schools, the the three top private schools and said, "Yeah, we need 200 slots." They're like and and you know, it's like because they're moving these, you know, hundreds of whatever people down to Miami. And the other one was that two of the brokerage firms uh had basically signed agreements where they had to show Citadel any houses that were $10 million or more uh you know within 100 feet or something or 100 meters of of of the water 10 miles up or down the coast and and and so you know again these are staggering moneym I have no idea if those stories are true but they're they're they're too fun not to uh uh you know to talk about the you know so this legendary thing that we see going on. So, so in a weird weird way, like I'm somebody who's very critical of fees, like I think you're way overpaying a multi strategy mutual fund manager 200 basis points if he's giving you 3% a year for 10 years. Um, on the other hand, I think if you're paying 10 points for guys who are basically have found a way to generate a four sharp ratio, take two of the sharp ratio to pay everybody and everybody has private jets and and and and $50 million homes. I think that's pretty great. Yeah, it's a fun paradox. Uh I have to uh I have to admit. Um okay. Well, I think we've done it as much as we could today with the time uh allowed. Uh really appreciate the uh the insights, Andrew, and uh there are definitely some some uh topics that we will need to continue. Um we'll see if we'll be joined by someone on the uh on the alternative markets uh front next time. You never know. Uh, and let me just remind Andrew's offer the And this will be the first 10 I, this is up to me to to to do the judgment here, but the first 10 after I publish this episode on Saturday that opt into something on the top traders unplugged website. And by the way, you can't use funny names that are not real. Um, well, for two reasons. One, I usually delete them anyways. And two, if you want the book, we need your details. Um, and I will forward that the the the details to Andrew and he will send you uh one of uh Robin's uh books. I think it was we talked about >> Michael gets Michael the the emailer gets a complimentary copy if he can tell me. >> Yeah. Then Michael, if you're listening to this Yeah. If you're listening to this um and you haven't um sold your DBMF just yet, then you should uh send me your your uh details and Andrew will um will thank you with a book as well. So very generous of you. Um and of course super fun conversation as usual. Um and and I I think and I hope that you will go to your favorite podcast platform and show some love for for Andrew and all the work he puts into these uh conversations and all the insights uh by leaving a rating and review. Now next week I'm going to be out traveling. So Alan will sit down with Jim uh who I know uh has been traveling, meeting some very interesting people um in both Las Vegas and over here in Europe and they're all coming out as the um you got options series continues. Um so please send me your questions if you have any questions for Jim and um of course you can email them to infotoptradersunplug.com and I'll do my best to um to get them to uh Alan. So, from Andrew and me, thanks ever so much for listening. We look forward to being back with you next week. And in the meantime, as usual, take care of yourself and take care of each other. Thanks for listening to Top Traders Unplugged. 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