Why Trend Following Still Works in Tough Markets | Systematic Investor | Ep.381
Summary
Total Portfolio Approach: Panelists argue TPA should boost allocations to CTAs and macro due to true diversification benefits, though flows still tend to follow performance.
Managed Futures: CTAs are highlighted as liquid, scalable diversifiers with low correlation to stocks and bonds, best considered in the context of the whole portfolio.
Trend Following: Emphasis on process stability over reacting to pain, with recognition of dispersion across managers and the importance of sticking to a clear thesis.
Long Volatility: Presented as the most consistent diversifier and portfolio “brakes,” creating control and enabling faster compounding when monetized after market stress.
Drawdowns: CTA drawdowns often stem from volatility compression and fewer winners rather than bad bets, with historical evidence of relatively modest depth and faster recoveries.
Return Stacking: Discussion of portable alpha, capital efficiency, and ETF structures to layer managed futures on top of traditional assets, aided by higher interest rates.
Product Design: Consideration of high-vol trend products for retail appetite, but acknowledgment of daily mark-to-market and behavioral challenges in ETFs.
Transcript
Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence or investment career to the next level. Before we begin today's conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. Here's your host, veteran hedge fund manager Neil's Krup Larson. Welcome or welcome back to this week's edition of the systematic investor series with Katie Kaminsky, Jim Kasang, Rob Carver, Mark Resinski, Rich Brennan, Alan Don, Nick Balters, Andrew Beer, Y of Git, and I, Neils Castro Lassen. As you can tell from this introduction, today's and last week's episodes were very special because it's the time of the year where all 10 of us get together for one big conversation and debate. So firstly, let me start by thanking all of you for making the time for this extended recording today, which I really have been looking forward to and of course for all the time and energy you have put into making all the amazing weekly episodes that we have published this year. It means a lot to me and based on the feedback that we get, I know it means a lot to our community. We recorded our conversation on December 17th and last week we published part one of the conversation and today you'll be joining us for part two. We got a great lineup of topics across the two episodes and just to mention some of the themes that we will be covering in this group conversation. These are things like the impact of market selection on trend following, the massive bull cycle in non-correlated investments, and how 3 years in, it's still in its infancy. We're going to be talking about the period 2023 to 2025, which has been characterized by large dispersion between trend managers. We're also going to be debating whether model design decisions are ever obvious. We're going to look at the trend and performance and how much data you really need in order to make any inference about manager performance. We're going to be debating process stability in a changing market landscape and also if we should have more highvolve versions of CTA products and finally we have a topic about draw downs whether long draw downs or deep draw downs uh are to be desired or which is worse. So really, it has been a packed agenda across the two episodes and I really hope you enjoyed. So with that, let's rejoin the conversation. Well, there are two questions that I uh I have that I'd like to uh ask the rest of the panelists. One is about the AI revolution and modeling. Uh so I know that uh you know we see that everybody is getting on the AI bandwagon and I I was in doing some uh work with the Harvard Business School and we were uh assessing new entrepreneurs and it doesn't matter what the problem is they know that they have to have AI involved in it. So, how are you, you know, I want to ask everyone else, how are you using AI to improve your models or to improve your uh research process? So, that's one question and the other question has to do with this uh total portfolio approach and Allan and I touched on this a little bit in our last podcast, but uh there's now strategic asset allocation versus TPA. And what does that mean for trend following? Is a TPA approach good or bad for trend following versus strategic asset allocation? So is this going to help CTAs and trend following if there's a new portfolio approach? So those are my two questions that I I'm focusing on on >> the TPA is probably um an easiest question to uh to answer in a sense that in principle um this should be really good for CTAs. Okay. So um in terms of uh I think uh Jim talked about uncorrelated uh strategies and if you start looking at CTAs within uh a normal allocation process which just looks at total portfolio allocation you should allocate an insane amount of risk to CTAs. Okay. like in I don't mean insane like even if you expect your sharp ratio of your other portfolio to be one and a half and you think that CTAs are uh.5 sharp then in order to maximize your sharp you need to essentially have a 1 to3 allocation to CTAs so I'm looking really forward to the CTA industry running 25% of all assets under management which will bring us to you know a mere sort of 30 trillion actually so so really looking forward portfolio that's happening. Uh in reality, I I I suspect not. I suspect I think it's a good thing that allocators are actually beginning to think about the portfolio as a whole rather than oh here is the hedge fund bucket. This has got 20% allocation within this. We have to have macro, we have to have long short, we have to have real estate, we have to have private credit or whatever. And then CTAs get like 2% where they make a zero difference to the overall portfolio in terms of convexity, in terms of diversification. So I think it's a good thing for you to think holistically about CTAs. And I've long argued that really you should think about CTAs in the context of the asset classes that you're holding in your own portfolio. So if you're if you're a fixed income manager, you should think about fixed income CTA. If you are a fixed income exposure, if you're an equity manager, it's a very different story. So but I don't expect that to happen. I think that the TPA is a buzzword. I think it's a management consultant speak. um it's some governance and uh discussion and I don't really see huge flows uh flowing into CTAs. In practice flows follows performance and that will be the most determining factor of flows into the CTA universe. Uh and I can't blame people because at the end of the day that's exactly what we are trading. We are trading performance for like flows follows performance and that's absolutely fine. So I don't imagine a huge change in behavior from TPAs. Um I I I if you want me I can comment about AI. Uh but generally the approach has been very cautious on our side. Um it is able to help us in coding. It is help us to uh in terms of summary of client discussion. It's helpful in terms of uh summary of lots of the way that we think. It's actually useful for testing. you know, I can feed my presentation to a to an AI and it comes back and it's oh my god, it I didn't actually mean to say that. So the AI has the fact that the AI has not understood what I said has been very useful for me to rethink the message and what is the absolute message. Um, but I suspect other people have used AI in a more creative fashion. So I will let them comment about it themselves. >> Alan, over to you. >> Yeah, I think TPA is is interesting and we we did chat about it, Mark. Um I think there's a few different lenses you have to think about this from and I think if you take from the pure return lens what y said is correct. Um the um GIC and JP Morgan asset management had a paper out last year I think it was looking at if you construct a hedge fund portfolio and optimize it on a standalone basis versus if you optimize the hedge fund portfolio in the context of a an overall portfolio alongside traditional assets you get a different allocation. you get much more allocation to CTA macro commodities when you optimize in the context of the overall portfolio because you're going to have less allocation to long short equity and credit and strategies like that which pick up factors which you already have in your portfolio. So I think that that's a valid perspective. I think another perspective is that if you think about what a trend following program or CTA does, you know, it it does TPA already. it it it it evaluates the markets and assesses where are the best risk adjusted returns where where the best opportunities in real time. So it's it's evaluating coffee and sugar and cocoa and all of these markets and allocating risk and that's the idea of TPA that that you don't have static allocations to different markets that you dynamically allocate risk to where the opportunities are greatest. So in that sense adding a trend following program or a CTA on top of 6040 you're already building a more TPA like approach. Um a complicating factor though then is I mean the whole point of TPA seems to be to empower these investment teams. Um so rather than just sticking with strategic asset allocation they they can decide okay we want to have more risk in these areas. So how do they account for the fact that you know if you're allocating to hedge funds which is which are already making um tactical bets in certain sectors do they look through that or do they have to adjust for that in terms of their own views as well. So um I think that's where you know it it remains to be seen how it plays out but I think in theory there are couple of reasons why it should be very possible positive for for CTAs. Well, for I completely agree with YoV on this in that in that people people are going to come up with an allocation that they like that they think makes them look good and smart that their investing committees will like that their clients will like that they can explain in good times and bad I mean in a strategic asset allocation managed futures is a 25% allocation right it's just it's sort of mathematically obvious there aren't many things you have out there that have zero correlation to stocks and bonds and do well when you need it the most um that you can scale and do in liquid fashion you know back to the the paper that Allan mentioned um uh you know it was it was true actually man CTS were basically on almost every statistical measure like in terms of alpha generation correlation characteristics and and performance when you need it the most there just wasn't much else there the the pod shops come pretty close but where TPA could be very useful is it could break the anchoring around um indices and allocations so a typical institutional um allocator in the US has about a 6% allocation to hedge funds today of which managed futures according to kind of the broad classification of hedge funds is sub 10%. Um and so you're looking at about a 50 basis point allocation. It is extremely difficult for the guys who are in charge of running those hedge fund portfolios when they are benchmarked to to to these hedge fund indices to take it from a 6 or 7% allocation to a 30% allocation which is where it should be. it is even if they believe that the sharp ratio of equity long short or the diversification benefits of of equity long shorts would be a pale shadow of what you would get from this strategy um it is still very very difficult from a career perspective to break away from from from how they are anchored to these you know these these benchmark like measures and so I I think a glimmer of hope and in that I think I think that most people still view it as a largely unlikable strategy for some of the reasons we've described um uh because doesn't have the kind of the the warm and fuzzy of, you know, I get to talk to some guy about whether he thinks, you know, we're going to be in recession in a year. Um, but um but I I do think that that breaking that anchoring mechanism and having people kind of start with a blank sheet sheet of paper and then come back to the table thinking about things in statistical terms is going to be positive for the space. But my my my caveat is that I think it is um uh I think maybe Allan may have just said that space. It's a lot of it is theater around people trying to come up with you know basically get get a broader mandate. It sounds cool etc etc but but uh you know cautiously optimistic. >> Well before we move on to the next uh topic that Rich will bring. I certainly need to hear from Jim because I think we left out one strategy um that is also mentioned often in this context and that is of course volatility and I know that you Jim has had some great conversation with David Dredge recently um very much on on on this topic. >> Yeah, look to take a step back from this conversation. I think you know we get really deep on trend allocation and that's part of why people listen to us but I also think it's important to step back and look at the big picture. 95% of the world invests in the most simplistic basic way which is they go shopping for stuff and most of those things they divers they think diversification is probably buying more things in different ways which we all know are highly correlated on the tail and even much more correlated than people realize. This move to diversification non-correlation is practiced by a relatively small portion of the investing world. We can get into the details of how and why, but I talk to raas all the time. And one of the first questions I ask when I talk to raas is what do you think the sharp ratio is of the S&P over the last 125 years? What do you think the sharp ratio is of a um you know a 6040 portfolio the last 125 years? Do you know how many of the hundreds I talked to know or even have a guess on that answer? Answer is zero. Zero. And by the way, does anybody here have a sense of what that is? By the way, 35 both of them. Zero correlation, you know, uh zero diversification benefit of bonds versus stocks. Zero. yet that's what 95% of the world does. So, so this idea that uh we need to be, you know, talking about these little details of of diversification, how it fits. Let's get the big picture right. Right. Let's get the uh uh and there's several things. There's diversification broadly, meaning true diversification. Uh things that are not assets. Let's start there. Trend following is one of those many things. uh because a second you have assets are going to be correlated by definition in certain ways. Um but but two uh Neil's the one thing that tons of academic research points to is the one thing that is a true uh consistent diversifier and the most important thing in portfolio is is a long volatility hedge. Uh to our conversation with David Drudge which was my most uh you know my favorite of the year. We have so many uh he he gives this incredible metaphor which is so the more you dig into it the better it is. So many people go look uh at long volatility and like much like a lot of other strategies but particularly long volatility and they say oh this returns zero over the long term you know this thing is this thing makes me go slower. Why would I allocate to something that makes me go slower? That sounds like an awful idea to 99% of people, but that's like looking at at your brakes on a race car. You're like, "These brakes make me go slow. You got to get rid of these brakes." Um, the reality is long volatility, and this applies to other things in different ways, are brakes on your race car. And the net result of removing the brakes from the car means everybody goes slower because you're going to have turns and you can't go around those turns without brakes at full speed. So what stocks and bonds actually is is a matter of is going slower. There's no diversification benefit. You just go slower. And people do that because they're worried about flying off the tracks. Brakes though importantly don't just make sure you don't go off the tracks. And this is the critical part. That's everybody thinks, "Oh, long ball. That'll make sure you stay in the tracks and you don't fly off." The more important part of that metaphor is the brakes give you control. The brakes allow you to slow down into the turn and accelerate out. You win races. You go faster by having V in the portfolio. What do you do with brakes? You don't sit on brakes and sit on gas all day. Yeah, that will make you go slower. What you do is you have brakes in the in the car, you hit the brakes uh when when you're coming around a turn and there's risk or you you up it a little bit. You always have a little bit in the portfolio. And guess what? When that when those brakes pay off and it give you control, that gives you the ability to monetize push on the gas, go faster down the straightaway. This we're trying to build race cars, trying to build control and risk management in the portfolio. But risk management doesn't mean we go slower. You can't eat sharp sortino, but if you get a balanced sharp sortino, if you get control of the portfolio, guess what? You can go a heck of a lot faster. And I think that's what we all need to be thinking about. And that's the big picture. Um and again uh the I think this broad communication uh will serve make an incredibly greater impact to to the majority of allocators right than uh than the the little details given how overwhelmingly the the the whole investment world the majority of the investment world is completely doing things that again didn't exist until 1985 and doing it simply because of recency bias uh and a lack of needing to really manage risk and understand risk in a meaningful All right, Rich all the way from Australia. What uh what do you want to discuss? >> Well, I thought I'd bring up uh this idea about process stability in a changing market landscape. So, um you know, we we all accept the fact that markets change all the time. Um but that doesn't to me that doesn't necessarily mean your process should change all the time. So I think one of the biggest mistakes of investors make is changing their rules in response to recent outcomes. So but a stable process does not eliminate draw downs. In fact you must you must embrace your draw downs. Uh that's part of the process but what a stable process does do it doesn't eliminate the draw downs but it does prevent panic and behavioral drift. So um what allocators really need is not a promise they say of smooth returns but clarity on how the strategy behaves when conditions are uncomfortable. So um and this stability builds this trust um especially when these markets are so noisy as we all know they are. So I suppose the question I've I've got to ask people is um yeah how much change of our trend following strategies is evolution versus how much is really just reacting to recent pain. I'll take a first stab at that even though I'm not the trend follower in here. I I think I think I do have an important thought here is you know I think trend almost by definition at least started out as really uh thinking about things and up down and catching the up down. uh you know and and the reality is we and here in Ball World we think about distributions of outcomes and really taking this framework of of how is the distribution different in this environment? How is it uh and why is it different? Right? We have actually a pretty good ability to predict distribution. predicting direction is hard. But if you can broadly predict broad distribution of regime and that that does change then you can really more accurately have a sense of what type of trend model is going to work better in a different environment. And I think taking that broad approach and that mental kind of model as opposed to just back testing and seeing how it performed and what performs better and optimizing to that is going to get you to a much better place I think in a from a forward process. Um and volatility plays a huge role in that. Right? If we can if we can uh think about you know what the width of the distribution and and how fat the tails are in different environments um that input uh which again is broadly easier to predict um can play an incredible role. So I agree historically that has uh uh we've been taking the wrong process and there has been just a lot of curve fitting and uh naturally kind of u um you know getting to the last best outcome. But I do think uh you know this ability to to think forward on distribution based on supply and demand and factors that are changing in the market can really pay dividends and and do the opposite. I think there's more of that happening than ever. >> Great Andrew. >> So So Rich, it's interesting you say that because I have very um funny conversations people. They ask so we've been replicating the the the space for about 10 years and I get questions from people. They say like, you know, tell us all the changes you've made in your model and the answer is none. Zero. Not a line of code, not an instrument. And and that is not what they want to hear, right? They want to hear that, you know, 5 years ago, we decided that there was an 11th factor that we should throw into it, that we decided to switch up our window lengths because we had some sense that, you know, I don't know, Trump's election was going to change window lengths or something. And and I you know what I what I've said to people I said look it we have a extremely high bar. We look at and it's very very hard not to change what you do because back to your point about response to pain. There are of course there are always periods where you're going to go through and and you're looking at it constantly and thinking about god darn it why did we make that change you know 6 months ago or or we wish you'd be done some other things. The problem goes back to the the point that I raised before is that it's not obvious what whether those will have an impact on a going forward basis and and what I've what I've often said to allocators and this actually dovetailes with something that that Allan asked for a little while ago is is I said the very very best outcome for you from for so the easiest thing for you from a fund manager selection process should be you can look at our entire track record and know it's completely consistent. You don't have to think about you know whether these changes were good or bad that we made and whether they had an impact and what in what world would have been like the but I said the other the second thing is the very best outcome for you on a going forward basis if you invest with us is 10 years from now you ask us the same question we said we still haven't had to change anything I'm slowly winning hearts and minds with that but it is a very very very contrarian view because it feels like a loss of power um and and control um and but it does what it does it it comes back to you know what I've said about like there's a a an there's a an owning the investment process and the investment decisions in a very real way that I think people outside of this space cliff as I think is a great example of somebody who is runs a quantitatively based business but is very good at owning their decisions and is very good about saying you know like okay we picked this factor in the following time and it was a terrible decision on our part to do it or things are working in our favor. And boy, we're flipping heads and flipping heads and flipping heads and and I think you know what Allan said about the the difficulty of of an allocator in this space is this idea that when things go badly, it just feels like bad luck and and you don't really have a narrative necessarily as as to why it's going to recover. And so I I think this, you know, this idea of that there there there's a difference between those individual decisions that people make and the broader asset allocation thesis that one is trying to make and and and and and the source of alpha alpha and excess returns and and those are really the challenges on a going forward basis. >> Having consistency and being staying true to trend is is a really important um decision. Um but I think um there are two aspects where which are important in making any changes to your strategy. Um the first one is like truly actually understanding the causes for performance or underperformance i.e. actually measuring things properly and the second thing is actually understanding your thesis and staying true to your thesis. Okay. And I'm going to give two examples on that. So the first one is about benchmarking. So we've seen we've seen performance last three years has been difficult and you ask yourself what has possibly caused this and then you need to break your break your process. It says the reason why I've not been able to perform well is because maybe you know the asset itself has had a sharp one but in the past I've been able to extract maybe a sharp point 4 out of a market which had a sharp one. I think this um but now suddenly I'm only able to extract.3 okay that's cause for concerns for some reason my model has broken down but for to doing that you actually need to be able to measure the data you actually have to say well actually if we see historically we've seen assets that have trended a sharp one like the underlying asset has trended sharp one what do we see in the last 3 years versus what we've seen in the past and by the way I think for most CTAs this has stayed roughly constant Because I think the reason why we have seen the underperformance in the last few years is not because the model doesn't work is because we've seen this compression that we're talking about. We have seen just less outliers. We've seen less outside trend. Okay. So the first thing that gives you comfort is actually just being able to measure which parts of your model are actually not performing. Okay. So being able to break it down is be like before we even start a discussion you actually have to understand what's going on and then it comes to the question of what is your thesis and we talked a little about the design choices that we make in the CTAs what is obvious what is not obvious like if what you are selling to the investor is risk factors which are not financialized okay or risk factors which are financialized or a certain speed. So suppose if you're a very fast trend follower and you say well I'm not I'm not able to make money. I'm going to drift away from that space. That's actually going to be very bad. You're just going to lose your investors. In our case if we say we want to concentrate in markets with very low beta to the financialized universe then things that you can actually measure is the physical properties of those markets and how they've become more financialized. So one of the things that we monitor on an ongoing basis for example if we're looking at uh we're looking at ionor I was in I was with traders in Singapore in Ionor so in the past um in the past nobody was trading it no CTA was trading it these days I was talking to to the to the guy to the traders from um one of the big broker house and he said well about 70% of the of the volume in the front front month contract are CTAs Okay, to me that's a warning sign. I just don't want to trade this market. I don't want to trade the front month in iron o anymore because it is completely financialized. Okay, and the market the underlying properties of the market have changed and it doesn't mean it doesn't trend well. It doesn't mean it's but the program the thesis of what we are giving you as an investor is all about we are giving you stuff that other people are not trading. Well, that market is no longer in that category. So sometimes it's really depends. I mean it's great if you're saying I'm going to give you the most financialized and I'm going to give you replication of the city of the sochain index then actually you don't really need to do much. You just you you just follow a mathematical exercise. But actually I think understanding the markets that you're trading understanding what is the thesis that what you're providing the investors and staying true to that it means that you are like you may be throwing out markets which are trend trend very well. You might not have a gold exposure because gold is very highly financialized and you don't mind actually not having it. You just have to be true to what you've promised the investors. I think that's that changes in in the portfolio which reflect that I think are changes which you uh which are about following process in a very changing in a very fast changing world. All right, we're going to move over to Nick and then we're going to head over to Rob and hear his uh his secret topic because we we're not aware of that. >> Look, I'm going to be brief because um it's a super nice question by the way, Rich, right? I mean, is the pain an invitation to change your model? I would say no. Is the pain an invitation to think about changing the model? Maybe. And let me explain that, right? So, I'm going to maybe use the same thing that you know that we started discussing about those Vshapes. You know, it happens once, you're fine. You kind of understand what's going on. You know, you go back to your investors. You have an explanation. Everything is what it says on the tin happens again. The dollar yen happens again. The liberation day that kind of makes an invitation for you to kind of look through, you know, is there any blind spot? Is there something that the market is kind of telling us? Should we somehow change the model? Is it the right time to do so? you know, I think the bar as I said earlier on is extremely high. Um, I think underperformance and pain is an invitation to to reflect upon, but you know, we try to be extremely extremely averse to just change the model just as a response of um of of underperformance specifically when it's fully explainable. And that's back to Y's point. Maybe a soft comment on on what Andrew said. I think I think there's a subtle difference between an underlying model and a replication model. So as long as the underlying managers change or not their model doesn't necessarily make their application of the aggregation better or worse. I think to the extent and you tell me if you know if I'm getting that incorrectly right to the extent that those managers do not become super quick in the way that they behave and therefore a replication model lags too far behind I think it would remain to be successful you know obviously you kind of play at the benefits of the averaging um and and and I guess a good question is is the objective to minimize track and error probably not because obviously the outperformance is important actually you know I'm I'm sure this year you're you're happy to have this kind of high track and error Is that an indication that the model does work? Yes or no? I I I guess we don't really have a straight answer. But I think to my point kind of summarizing on this one, the replication model almost has an assumption on how the average underneath behaves. And as long as that remains through time, you don't really have to change your your your recipe, right? Even if the underlying managers change their models, if the sum of those changes kind of somewhere, I know sum up to zero, you're probably done, right, with your application. I don't know. I don't want to speak on your behalf, but I think that's how my thought process kind of went through as you as you kind of as you were speaking. But thanks, R good good question. >> So, look, look, I for Nick, I mean, you know what we do very well, and those all those are all the key questions, right? I just, you know, if everybody goes to a 15-day model, it's not going to be a surprise, right? like it would be it would be foolish like it's like like we'll be talking about it right everybody's abandoned long-term trend medium-term trend everybody's doing 15 or 20 day models and everyone's become crael or something and so no of course you have to you know you have to look and reflect and try to be intelligent about the underlying thing it's just it's it's but unless it indicates that there is something and try and and you know try to understand what it is and what's causing the deviation and whether that that that's consistent with it um I you know what what I say and and again because I think there were so many fascinating parts of this overall conversation and just to bring a couple of different things together like one of the things that that you know this whole idea of you you presented incredibly interesting data that over the past 3 years slower and simpler has worked better right so which obviously has benefited us presumably and and and certain people the ETFs more broadly things that have been simpler but what what I think is missing from this space is Because in the US mutual fund market for instance, a lot of firms have been going in the opposite direction up until the past 3 years like their claim to fame was moving into outside of the the the and in the hedge funds as well moving outside of the simpler strategies and adding more and more things. So as an alligator when I look at it is and again maybe people say this but again I think this is where sort of like you know is somebody saying like yeah I made a really big mistake over the past three years. I gave up this much return by adding these things that haven't worked well in this regime. I didn't see this regime coming. I'm still trying to understand what it was because I didn't have to do this but I did and it's cost me you know 1,100 basis points of returns relative if I've done nothing that kind of ownership of the design decisions that that that I I think that's just sort of I think if you do that with dispersion it makes it easier for allocators to locate the managers. It's that it's that you have all these decisions that are made and then kind of a raising the hands and saying, "Well, it didn't work because the markets just are weird." And so, you know, I think and I think Yov makes this point, Rich has made this point, etc., is that there is something about owning the decisions and why they're being made and staying true to it in some fashion. That's what also helps allocators to figure out how to put together this mosaic of exposures to a space that's really complicated for most people. >> All right, let's jump over. Well, actually, we're going to jump down all the way down to Israel now because that's where you are today. Y of um what's on what's on your mind? >> Uh right. So, with your permission, I'm going to steal your very own question. Um because I think that that's the way the discussion has been going here. And uh it's about risk management. It's about draw down. It's about staying true to your hypothesis. And I think it's also um about the discussion that Ken was talking Jen was talking about the volatility and um the having the breaks and um the outsiz gains when things aren't going well and I'm going to talk about draw down. So you asked questions what worse having a long draw down or a deep draw down and I think what is very interesting to me is that um when we have discussions with allocators I'm trying to explain to them that CTA drawdowns are actually very distinct to draw downs in other industries in other hedge fund managers and what I mean by that is that normally for most most uh most positions in most hedge funds um big draw downs or very sharp draw downs are to do with like poor risk management and just events playing against the big positions. So they will be losing money because things happen. Okay. So you know you happen to you you know you know the big shorts imagine you have the big big shorts you put a position on the housing market and the housing market tanks and suddenly you have a big draw down um and you have to explain to the investor and actually you can you can tell a story which I think that's the discussion that Andrew was talking about earlier um with CTAs it's almost the other way around it's the the reason why CTAs tend to lose money is mostly um because nothing happens Okay. So obviously when there is a position on and there is an event on on day one like if there is liberation day then you suffer. But the consistent draw down um really comes from um recognizing that CTAs are a little bit like buying straddles. Okay. In the same way that the volatility volatility insurance is about buying straddles at various times. Okay. And that means that we pay for them uh through trading cost. Uh maybe not in the case of Andrew uh but in the case of uh most of the assets that we trade uh we pay we essentially replicate an option we replicate a trading profile which is a struggle and uh we will lose money if nothing happens on this market and in fact in a normal CTA most years most of your markets you will lose money. Okay. And I think investors kind of puzzle about it. They go, "What's going on here?" Um, and the truth is because you will make outsized returns when there is a trend in one of your markets, that will more than compensate. So, you don't actually need 50% of your markets to be winners, you just need maybe 40% of your markets to be winners to have a good positive year. Okay? And the reason why you might have a situation where you're in a draw down is not because you haven't been able to capitalize on trends. It's not necessarily because there was a big event and you badly riskmanaged yourself. It's to do with the fact that instead of having 40% winners, suddenly you only had 35% winners or maybe 30% winners. And like and that's a very different drawdown profile which is actually very difficult for investors to accept because what you find is that you would like the you know the the allocator would like to go to the IC and say yeah he got this call wrong like he didn't know he made a bet about which who's going to be the fed German and that bet went sour but like we really trust this guy he's got he's come from a great pedigree so we're going to stick with these guys with the CTA drawdowns are much more difficult because there isn't necessarily a one event that will explain the draw down. It's just a very consistent event where we've seen a vault compression and the percentage of winners has just shrunk below the break even point and that's something that we have seen in the last in the last 3 years uh which has been very difficult for the industry. So I I think it's not about I think in CTAs you don't necessarily see a very deep draw down but you might have a go through a situation where for a long period you like the events like V compression is basically made outsiz trend very difficult to harvest um and I would like to hear panel's view panel's view about that >> Katie over to you >> I love this yav we we actually wrote an interesting paper uh this year about managed features there's draw downs and sort of studied them and looked at sort of the historical largest draw downs for managed futures and we have this really interesting bubble chart in there where we look at sort of the time of the draw down the depth of the draw down and then we also look at the recovery period for draw downs and what we find is if you look at what's happening during a lot of our very challenging environments they tend to be pretty good environments for equities so when things are stable we didn't look at V, but you can imagine when equities are doing well, V is also often often lower. And then the recovery for the strategy since it tends to be very cyclical um was much faster when you have sort of a challenging equity environment or things changing and what happens there is you just have a higher hit ratio of trending things which kind of mirrors what you were saying. So I think at least qualitatively this study for managed features draw downs was uh kind of explaining some of the things you just talked about but I also focused on and I think this is important for why I care a lot about dispersion driving behavioral effects is that you know if you look at most of the fund of funds who have studied our space there's it's very difficult to pick a winning manager in any one year and if you look had sort of sort of draw down periods this the strategies on average tend to recover. So if you look over when there's been a very challenging period of performance usually that's followed historically by one or two years of very positive performance. So I think that is something that you know it it has that although we can have skewess in the short term or we can have persistence in the short term we tend to have mean reversion over longer time horizons. So I think understanding that for investors is important because if you try to sort of pick tops and bottoms, you're basically trend following trend following which I wouldn't suggest. So um or trend falling squared which is an interesting strategy but yeah so interesting I don't know if you saw the paper but I think this paper does give some insights on that. So fascinating point is I think the perception of risk in the space is far greater than it is. Um and and again this goes get get sort of the narrative disconnect. Space has like a 15 16% draw down over 25 years like it's child's play compared to equities. And now for a while you could say again bonds had didn't have a draw down for 20 years basically and now you've had a 15 16% draw down. Um uh so I think I think but I think also going back to um the point about um you know sort of how to communicate the alpha generation the space back to to investors um I think where at least we've seen it um is that is that you're going to go through like the space is going to make money a lot of money when the world changes a lot right when there's a big change in information and like in there was no inflation And then there was a lot of inflation and no one thought inflation was going to come back and then everyone is totally confident inflation was going to 10%. Right? So, so you get this kind of big shift over 24 months. The reason I think you can I think what you can do is you can take that idea and explain to the total portfolio people and the asset allocators that this is what you do badly. Your whole business is designed to build these long-term capital markets assumptions and not change what you do. And so when you have a noisy market like this year or last year where the world really doesn't change very much, right? We haven't had that catastrophic return of inflation or deep you know tariff induced recession. We haven't had some crazy contagious bond market tantrum. It but so when there's a lot of noise but the world doesn't change very much of course the strategy is going to struggle. You're getting knocked in and out of you know whip getting whipsawed and knocked knocked around all day long. But my god, if a year from now, you know, equities are down 50%. What are you going to do with your portfolio where you're all in on the AI trade across equities rates and like, you know, pretty much every everywhere everywhere else you have it. So I I think again um I I think again what's so fascinating about the draw down the space is that they just they're just not that big of a deal in the context of any asset. It's some somehow it's difficult to explain to people because then you say, "Oh, no. What's really good about space is that they cut, you know, losses as they start losing money on things. They don't they don't hold on to things with a white knuckle knuckle grip. But a lot of allocators want to hear that you have a like an iron spine. You know, it went you you you were still buying you were buying Bitcoin at 20,000 cuz you knew it was going to recover. Like so people are and I I think that's the sort of need for some sort of anthropomorphism and storytelling to get it passed through the gates for the average alligator. This was a great question by the way, you I have to say, but I have a little bit of a follow-up um question mainly at to to Andrew um because you learn I learn a lot every time I speak to Andrew and today I've just learned that actually um we don't even have to have a research department and investors will be just fine if we uh if we say that. But the other thing that is very interesting, I'd love to hear your thoughts about this. So in the ETF world, um my my perception is that I think people think this much more along the lines of it's another stock, it's another ticker. So I actually wonder whether draw downs are even really being considered in the same way. When people look at at the performance of your ticker, do they even talk about the word draw down or is it just like with an equity? Oh yeah, it's maybe not at a new high, but but the word draw down when I think about equity investors, they never use that word. Does that come up in in in your world or your part of the world? >> Oh yeah. No, no, people don't like draw down. They don't like it because you can see it every day. You can see it every minute. Right. Right. And so I, you know, Allan made a point about sort of how do you talk to people about the space or at least how do I talk to people about the space is is you I think I think the problem is when you have a space with wide dispersion um and then the allocator's natural response and it's it's a very rational response from a career perspective is you pick the guy who's been doing well who has a good brand name like that's a that's a rational fund selector investment decision that's persisted for 50 years. Um the the challenge that it does, the way it flows through in a sort of to use a chem discretion uh in terms of like a a negative feedback loop or something like that is that is that what happens is a typical allocator who is not as well versed in statistics of no persistence of alpha and a wide dispersion is will tend to um oversell a a given an individual manners outperforms relative to the space because they want to get it into the portfolio. There's something in their incentive structure where they've been asked, you know, go find us the best person in this space. And so they're going to if they go back and say, "Hey, I don't really know, but this guy's done better. This woman's done better over over this past period of time." That's not really what the person on the other side wants to hear. So they tend to they tend to get more and more confident. It happens with every hedge fund strategy. It starts out with like, I really don't know who's the best equity long short guy. By the time you're s sitting in front of the investing committee, we found the very best, you know, the like the guy who could do no wrong, right? So, so what happens is though that people get worried about elevating the manager and then when it goes badly, they don't have a narrative around that that you have in other asset classes. But to your point about it, like because when people have been trained that when equities go down, if anything, it's a buy. If anything, buy the dip. and and and and so what they're looking for in this space is, you know, is is some sort of a story that explains the rebound. And people and people in the space tend to be very financially sophisticated, which kind of leads to a sort of a level of honesty about it. We don't really know that it's going to rebound. You know, we don't it's we're actually gotten out of the positions that we lost money on, but we think we're going to find new new trends and opportunities on a going forward basis. and that that honesty and equivocation actually plays against the broader adoption of of of the space. Um but but I think I think you know back to the point about if you can get people to focus on this as a strategic long-term allocation and and basically get them focused on day one not on the gears and how they work as but as much in terms of the broader benefit and why it makes the overall portfolio better. That's my thesis as to how I can get this to become a standard allocation in people who are not going to want to engage in debates as to model, you know, to model links or or or number of positions. But, you know, when we do this in 5 years, you'll know if I was right or not. Okay, cool. All right. Now, before we go to um before we get to uh our outrageous predictions for 2026, we need to hear from Rob. And he's been keeping us in suspense as to what he might bring up. >> Yeah. And it's definitely not cuz I hadn't thought of anything until I went to get coffee. That's that's definitely not the reason. Um honestly, um yeah. So, um, as we're getting towards the outrageous section, I thought I'd be a bit outrageous cuz, you know, you guys are all very, you know, very serious and intelligent and clever and it's all very worthy and stuff, but, you know, people people probably fallen asleep listening to all that. So, let's stir things up a bit. Um, so, one thing that occurred to me is, um, we were kind of worried about selling our sort of product to kind of, you know, mainly institutional investors or, you know, serious people. But there's actually a big untapped market out there we haven't thought of. So it occurs to me that if you say like Yos says whether we've got a sharp one strategy, you know, maybe slightly lower, um then even if we run that at sort of half Kelly, we we could be running at sort of annualized risk of sort of 40 50%. Uh and if you think we've got positive ski, you could probably push a little bit higher. Um, and actually if you look at the the kind of retail market over the last few years, um, people want V, they want le they want massive returns. They want massive outliers. They want things that are going to go up and down a lot. You know, they're not they're not that interested in kind of worthy things that are trying to track the SGCT index with it sort of singledigit standard deviation. Um, you know, they're interested in weird crypto coins and meme stocks and all this kind of stuff. Um so actually um I think we should be going for that market basically. So I think everyone should go to their uh you know their sales team now and say right we want a high vol ETF product off you go. Um people come because it's high volume you can put put the fees up a little bit higher as well because fees should be in there as a proportion of V. uh let the money come in and uh this time next year everyone's going to be being be living in much nicer houses and our our backgrounds on this video are going to look very very nice indeed. So I I welcome your feedback on my excellent suggestion. >> Well, you mentioned the word ETF, so I have to ask Andrew um high CTA in the ETF land. Does that >> There are million different kinds of of ETF investors. Um a lot of people have come to us and said, "Can you do 2x versions of what you do?" Um, uh, I I had this I was actually on a on a TTU one. So, there's a guy named Cory Hoffstein in the US who's pioneered the use basically bolting managed features on. He's basically recreated portable alpha calling it return stacking and put it into ETFs and and I I was uh with Neils once and and Neils I think asked me why don't you do that? and and my response was, "Well, I think it's a niche market." And then I got chased around by angry villagers with pitchforks on Twitter for about 2 weeks for having what they perceived as having insulted Corey, which it wasn't that at all. I said, you know, Innovator was just sold at two billion. It's a niche product. You know, you know, um the the buffered or the, you know, covered call ETFs, um you know, are niche markets. You can have a multi-deion dollar um niche market in the ETF world. Um, so I I think there's a market for all of this stuff. If you'd ask me whether there's a market for 2x, Tesla, ETFs, again, um, I I think where where I think the big money is is are the people who are riskaverse and and who spend 80% of their me mental energy how to avoid being embarrassed. Um, that's my debt, right? So I think that there is a a an enormous amount of of of opportunity to create products that can be huge in individual markets. Um I just think you have to try it and go out and talk to people who would be users of it and try to figure out how a way to monetize. And I think more leverage products is is is the flip side of the portable alpha coin. You know, how do I do things with less capital? >> I'll I'll add one one thing to that. Um I wouldn't say leverage as much as capital efficiency right the the return stack India you know we've been talking about yield stacking similar thing for 5 years right um you know before uh these ETFs were launched there is a dramatic there's a reason that options were introduced the options exchanges started in 1971 if interest rates go higher the it it is the simplest most important thing in the world to be capital efficient nobody's cared about that for 20 years because interest rates were zero, right? um that trend towards capital efficiency which again in this generally people call leverage is is what I think is critical and so the 2x 3x the growth in those I don't think will because people will be because people want more risk per se it's just they want to be more capital efficient and I think there's a ability to to lump things in together if you separate them they're less capital efficient but a lot of these strategies uh when lumped together can be dramatically more capital efficient so I do see that trend continuing but less because of the need for leverage and more for it for that reason. >> I love this question, Rob. It's really fun. The reason it it's fun to hear is that you know when we think about the old school CTAs like back in the day there, you know, they were sort of I guess gunslinging high ball like you know. But what was missing in that world was monthly prints. So basically like you didn't have a liberation day. You didn't have a ticker where you could kind of publish it. And then that was more retail actually in some ways especially in the US. And then what happened was institutions got into CTAs and Neil's is one to talk about this because he knows all the old school CTAs. Institutions got into it. Assets got bigger got down. you know, it was much more about managing that the size. But I I do agree that there is some, you know, there is a segment of the market that wants higher risk, wants something a little different that goes back to the dispersion of products. But I guess one thing that's going to be hard to see is like that daily print, right? So, you know, you kind of wish that you could do some things that they do in private equity like smoothing or sort of monthly or quarterly reporting. um which unfortunately most of us that's we're daily liquids. So I do think that it's going to be great when it goes up just like Bitcoin and it's going to be terrible when it goes down. So you know you could lose have people rush in only to like be disappointed once it doesn't go the direction they wanted. I'll turn to you Alan now but I just want to intersect one thing before and that is as Katie referred to um back in the day in the 80s and early 90s the Barkley uh CTA index were running at an annualized volatility of between 20 and 25%. And since then it's gone down and actually in the last few years we are now below 5%. Just just a FYI. Yeah, Alan. >> Yeah, I mean I I agree with everything that's been said. There's been that institutional trend for lowerval but there has been a little bit of a swing back. You know we have seen some managers launching highvall trend again in the last while and we obviously have some data points of highvall managers very successful long-standing Paul Mulaney h so we know how that plays out they go through exceptional periods raise some assets they have a draw down lose a lot of assets it repeats. So presumably that would be the same if if we were seeing high val trend in in the ETF space. I but at the same time I do think there is that trend increase of knowledge of capital efficiency. Um so maybe it is more um not just trend at high V but more balanced products at at at reasonable VA because the challenge in the market you know in most wealth management portfolios is you want more risk will give you more equities whereas in fact you should have a balanced portfolio and then decide how much leverage to apply to it and I think we are seeing a bit more of that now with return stacking and with portable alpha products. Um, so yeah, it's not just it's it's balance plus plus uh leverage and and high volume, I would say. >> Excellent. We'll start with you, Andrew. What is your 2026 outrageous prediction? >> I think institutions start buying ETFs in the managed future space. Um, I think the probability of that is quite low because I think they're I think most allocators at institutions have a business card that says uh hedge fund analyst and they have a hammer. They're going to look for hedge funds. I think they like it. Uh, but I think you will see some uh I I think there's a it would be very very significant. But I think if you see institutions starting to look at ETFs as a plausible way to um to get exposure to the managed future space, that would be very uh outrageous and significant. >> Katie, I'm excited to hear your outrageous prediction. >> I think for me the biggest uh thing we've been talking about is like how there seems to be something brewing whether or not it's good or bad. So that the boom and bust cycle to me I think next year could be a roller coaster that we could have sort of rates go lower over stimulation of the US economy and we could things could look awesome and then suddenly things could fall apart. And so I think for me I think 2026 could be a pivotal year to see that macroeconomic change of what happened in the news this year. So, I think that's my prediction is that that we will be on a roller coaster next year. >> Rob, what are you? >> Uh, as I'm being the funny guy today, um, my my prediction, outrageous prediction is that the next Fed chair will be Jared Kushner. >> Fair enough. Uh, Rich, um, and outrageous predictions from down under. I think in 2025, I said that uh 2025 in the prediction segment of this show, uh we'd have the low orbit commercial um space station. I'm I'm doing that for 2026. >> Fair enough. You're entitled to Alan. What's your outrageous prediction? >> I'm I'm revisiting one from not last year, the year before. Um so I think next year will be the year of the bond breakout. So, US 10ear yields up to 6% and then down to 3 and a half%. >> Very good. Very good. Nick, what's what are your thoughts for next year? >> That finally we'll see it trend. >> Okay. Yeah, that would be nice. Good. Jim, I think you may have won last year's at least. That was pretty good call. So, what are your thoughts for uh next year? >> That 2026 will in a lot of ways look like 2022. Uh the pain trade will be market down and interest rates up. Um it is uh nobody wants to sell stocks take their winners. Everybody's putting a band-aid in terms of longvall. I do think longvall can it could be again implemented the right way to make money. I'm talking more like VIX and implied ball broadly. Um uh and then uh I think again uh interest rates going higher um is is could be a pain point for some that are still in the bond space for diversification. >> I think we're all going to root for you to uh to be the winner for next year. >> I think trend has a great year anyways >> as part of that again. >> All right, Yav, what's your prediction for 2026? >> Equities up 25%. Uh that will make me happy. Uh but I'm afraid I'm kind of uh I'm kind of in the camp of 6% 10 year rate uh most likely. >> Fair enough. And Mark um what is your last year 2025 I thought was the year of the optimist that I think that a lot of people came in they were they were very negative uh of what we would see for 2025. I was an optimist 2026 I'm now going to be a pessimist. You're going to see higher inflation, which means higher uh yields on uh on treasuries. Uh we're going to see some credit crises. Uh we've seen some start in 2025. We're going to see that's going to carry over to 2026. Uh we're going to see uh stable to down equity markets. Not because uh the Russell 2000 is going to do poorly, but we're going to see some of the a bubble burst for our MAG 7, which is such a high weight in the S&P 500 that's going to put a pale on on all on all equities. The the positive side, we'll see uh a resurgent Europe. So, we're starting to see it this year. I think that uh they're going to start to get their house in order. So, if I was an optimist, it would be an optimist in Europe. >> Fantastic. I think that was everyone except for myself and I'll keep mine very short actually. Um my prediction is that despite uh all the pressures um on the Fed and despite Trump electing the next Fed chair very shortly, uh the Fed the Fed will end up having to hike rates uh next year at least once. So that's going to be my prediction uh for uh for 2026. On that note, let's wrap up part two of our year in group conversation. We hope that you've enjoyed it as much as we did making it for you. And if you want to show your appreciation for all the work that the amazing co-hosts put into making these episodes each and every week, I would encourage you to head over to Apple Podcast or Spotify or wherever you listen to your podcast and leave a nice rating and review. We really do appreciate all of them. Next week, I'll be back with Rich to kick off the new year in style. So, this is your chance to have him tackle some of your questions and also feel free to suggest some topics you think that would be relevant for us to discuss. And of course, you can email them to info@toptradersunploted.com. From all of us at toptraders unplugged, thank you so much for listening. We look forward to being back with you next week and until next time. Happy New Year and take care of yourself and take care of each other. Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you. And to ensure our show continues to grow, please leave us an honest rating and review in iTunes. It only takes a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.
Why Trend Following Still Works in Tough Markets | Systematic Investor | Ep.381
Summary
Transcript
Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence or investment career to the next level. Before we begin today's conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. Here's your host, veteran hedge fund manager Neil's Krup Larson. Welcome or welcome back to this week's edition of the systematic investor series with Katie Kaminsky, Jim Kasang, Rob Carver, Mark Resinski, Rich Brennan, Alan Don, Nick Balters, Andrew Beer, Y of Git, and I, Neils Castro Lassen. As you can tell from this introduction, today's and last week's episodes were very special because it's the time of the year where all 10 of us get together for one big conversation and debate. So firstly, let me start by thanking all of you for making the time for this extended recording today, which I really have been looking forward to and of course for all the time and energy you have put into making all the amazing weekly episodes that we have published this year. It means a lot to me and based on the feedback that we get, I know it means a lot to our community. We recorded our conversation on December 17th and last week we published part one of the conversation and today you'll be joining us for part two. We got a great lineup of topics across the two episodes and just to mention some of the themes that we will be covering in this group conversation. These are things like the impact of market selection on trend following, the massive bull cycle in non-correlated investments, and how 3 years in, it's still in its infancy. We're going to be talking about the period 2023 to 2025, which has been characterized by large dispersion between trend managers. We're also going to be debating whether model design decisions are ever obvious. We're going to look at the trend and performance and how much data you really need in order to make any inference about manager performance. We're going to be debating process stability in a changing market landscape and also if we should have more highvolve versions of CTA products and finally we have a topic about draw downs whether long draw downs or deep draw downs uh are to be desired or which is worse. So really, it has been a packed agenda across the two episodes and I really hope you enjoyed. So with that, let's rejoin the conversation. Well, there are two questions that I uh I have that I'd like to uh ask the rest of the panelists. One is about the AI revolution and modeling. Uh so I know that uh you know we see that everybody is getting on the AI bandwagon and I I was in doing some uh work with the Harvard Business School and we were uh assessing new entrepreneurs and it doesn't matter what the problem is they know that they have to have AI involved in it. So, how are you, you know, I want to ask everyone else, how are you using AI to improve your models or to improve your uh research process? So, that's one question and the other question has to do with this uh total portfolio approach and Allan and I touched on this a little bit in our last podcast, but uh there's now strategic asset allocation versus TPA. And what does that mean for trend following? Is a TPA approach good or bad for trend following versus strategic asset allocation? So is this going to help CTAs and trend following if there's a new portfolio approach? So those are my two questions that I I'm focusing on on >> the TPA is probably um an easiest question to uh to answer in a sense that in principle um this should be really good for CTAs. Okay. So um in terms of uh I think uh Jim talked about uncorrelated uh strategies and if you start looking at CTAs within uh a normal allocation process which just looks at total portfolio allocation you should allocate an insane amount of risk to CTAs. Okay. like in I don't mean insane like even if you expect your sharp ratio of your other portfolio to be one and a half and you think that CTAs are uh.5 sharp then in order to maximize your sharp you need to essentially have a 1 to3 allocation to CTAs so I'm looking really forward to the CTA industry running 25% of all assets under management which will bring us to you know a mere sort of 30 trillion actually so so really looking forward portfolio that's happening. Uh in reality, I I I suspect not. I suspect I think it's a good thing that allocators are actually beginning to think about the portfolio as a whole rather than oh here is the hedge fund bucket. This has got 20% allocation within this. We have to have macro, we have to have long short, we have to have real estate, we have to have private credit or whatever. And then CTAs get like 2% where they make a zero difference to the overall portfolio in terms of convexity, in terms of diversification. So I think it's a good thing for you to think holistically about CTAs. And I've long argued that really you should think about CTAs in the context of the asset classes that you're holding in your own portfolio. So if you're if you're a fixed income manager, you should think about fixed income CTA. If you are a fixed income exposure, if you're an equity manager, it's a very different story. So but I don't expect that to happen. I think that the TPA is a buzzword. I think it's a management consultant speak. um it's some governance and uh discussion and I don't really see huge flows uh flowing into CTAs. In practice flows follows performance and that will be the most determining factor of flows into the CTA universe. Uh and I can't blame people because at the end of the day that's exactly what we are trading. We are trading performance for like flows follows performance and that's absolutely fine. So I don't imagine a huge change in behavior from TPAs. Um I I I if you want me I can comment about AI. Uh but generally the approach has been very cautious on our side. Um it is able to help us in coding. It is help us to uh in terms of summary of client discussion. It's helpful in terms of uh summary of lots of the way that we think. It's actually useful for testing. you know, I can feed my presentation to a to an AI and it comes back and it's oh my god, it I didn't actually mean to say that. So the AI has the fact that the AI has not understood what I said has been very useful for me to rethink the message and what is the absolute message. Um, but I suspect other people have used AI in a more creative fashion. So I will let them comment about it themselves. >> Alan, over to you. >> Yeah, I think TPA is is interesting and we we did chat about it, Mark. Um I think there's a few different lenses you have to think about this from and I think if you take from the pure return lens what y said is correct. Um the um GIC and JP Morgan asset management had a paper out last year I think it was looking at if you construct a hedge fund portfolio and optimize it on a standalone basis versus if you optimize the hedge fund portfolio in the context of a an overall portfolio alongside traditional assets you get a different allocation. you get much more allocation to CTA macro commodities when you optimize in the context of the overall portfolio because you're going to have less allocation to long short equity and credit and strategies like that which pick up factors which you already have in your portfolio. So I think that that's a valid perspective. I think another perspective is that if you think about what a trend following program or CTA does, you know, it it does TPA already. it it it it evaluates the markets and assesses where are the best risk adjusted returns where where the best opportunities in real time. So it's it's evaluating coffee and sugar and cocoa and all of these markets and allocating risk and that's the idea of TPA that that you don't have static allocations to different markets that you dynamically allocate risk to where the opportunities are greatest. So in that sense adding a trend following program or a CTA on top of 6040 you're already building a more TPA like approach. Um a complicating factor though then is I mean the whole point of TPA seems to be to empower these investment teams. Um so rather than just sticking with strategic asset allocation they they can decide okay we want to have more risk in these areas. So how do they account for the fact that you know if you're allocating to hedge funds which is which are already making um tactical bets in certain sectors do they look through that or do they have to adjust for that in terms of their own views as well. So um I think that's where you know it it remains to be seen how it plays out but I think in theory there are couple of reasons why it should be very possible positive for for CTAs. Well, for I completely agree with YoV on this in that in that people people are going to come up with an allocation that they like that they think makes them look good and smart that their investing committees will like that their clients will like that they can explain in good times and bad I mean in a strategic asset allocation managed futures is a 25% allocation right it's just it's sort of mathematically obvious there aren't many things you have out there that have zero correlation to stocks and bonds and do well when you need it the most um that you can scale and do in liquid fashion you know back to the the paper that Allan mentioned um uh you know it was it was true actually man CTS were basically on almost every statistical measure like in terms of alpha generation correlation characteristics and and performance when you need it the most there just wasn't much else there the the pod shops come pretty close but where TPA could be very useful is it could break the anchoring around um indices and allocations so a typical institutional um allocator in the US has about a 6% allocation to hedge funds today of which managed futures according to kind of the broad classification of hedge funds is sub 10%. Um and so you're looking at about a 50 basis point allocation. It is extremely difficult for the guys who are in charge of running those hedge fund portfolios when they are benchmarked to to to these hedge fund indices to take it from a 6 or 7% allocation to a 30% allocation which is where it should be. it is even if they believe that the sharp ratio of equity long short or the diversification benefits of of equity long shorts would be a pale shadow of what you would get from this strategy um it is still very very difficult from a career perspective to break away from from from how they are anchored to these you know these these benchmark like measures and so I I think a glimmer of hope and in that I think I think that most people still view it as a largely unlikable strategy for some of the reasons we've described um uh because doesn't have the kind of the the warm and fuzzy of, you know, I get to talk to some guy about whether he thinks, you know, we're going to be in recession in a year. Um, but um but I I do think that that breaking that anchoring mechanism and having people kind of start with a blank sheet sheet of paper and then come back to the table thinking about things in statistical terms is going to be positive for the space. But my my my caveat is that I think it is um uh I think maybe Allan may have just said that space. It's a lot of it is theater around people trying to come up with you know basically get get a broader mandate. It sounds cool etc etc but but uh you know cautiously optimistic. >> Well before we move on to the next uh topic that Rich will bring. I certainly need to hear from Jim because I think we left out one strategy um that is also mentioned often in this context and that is of course volatility and I know that you Jim has had some great conversation with David Dredge recently um very much on on on this topic. >> Yeah, look to take a step back from this conversation. I think you know we get really deep on trend allocation and that's part of why people listen to us but I also think it's important to step back and look at the big picture. 95% of the world invests in the most simplistic basic way which is they go shopping for stuff and most of those things they divers they think diversification is probably buying more things in different ways which we all know are highly correlated on the tail and even much more correlated than people realize. This move to diversification non-correlation is practiced by a relatively small portion of the investing world. We can get into the details of how and why, but I talk to raas all the time. And one of the first questions I ask when I talk to raas is what do you think the sharp ratio is of the S&P over the last 125 years? What do you think the sharp ratio is of a um you know a 6040 portfolio the last 125 years? Do you know how many of the hundreds I talked to know or even have a guess on that answer? Answer is zero. Zero. And by the way, does anybody here have a sense of what that is? By the way, 35 both of them. Zero correlation, you know, uh zero diversification benefit of bonds versus stocks. Zero. yet that's what 95% of the world does. So, so this idea that uh we need to be, you know, talking about these little details of of diversification, how it fits. Let's get the big picture right. Right. Let's get the uh uh and there's several things. There's diversification broadly, meaning true diversification. Uh things that are not assets. Let's start there. Trend following is one of those many things. uh because a second you have assets are going to be correlated by definition in certain ways. Um but but two uh Neil's the one thing that tons of academic research points to is the one thing that is a true uh consistent diversifier and the most important thing in portfolio is is a long volatility hedge. Uh to our conversation with David Drudge which was my most uh you know my favorite of the year. We have so many uh he he gives this incredible metaphor which is so the more you dig into it the better it is. So many people go look uh at long volatility and like much like a lot of other strategies but particularly long volatility and they say oh this returns zero over the long term you know this thing is this thing makes me go slower. Why would I allocate to something that makes me go slower? That sounds like an awful idea to 99% of people, but that's like looking at at your brakes on a race car. You're like, "These brakes make me go slow. You got to get rid of these brakes." Um, the reality is long volatility, and this applies to other things in different ways, are brakes on your race car. And the net result of removing the brakes from the car means everybody goes slower because you're going to have turns and you can't go around those turns without brakes at full speed. So what stocks and bonds actually is is a matter of is going slower. There's no diversification benefit. You just go slower. And people do that because they're worried about flying off the tracks. Brakes though importantly don't just make sure you don't go off the tracks. And this is the critical part. That's everybody thinks, "Oh, long ball. That'll make sure you stay in the tracks and you don't fly off." The more important part of that metaphor is the brakes give you control. The brakes allow you to slow down into the turn and accelerate out. You win races. You go faster by having V in the portfolio. What do you do with brakes? You don't sit on brakes and sit on gas all day. Yeah, that will make you go slower. What you do is you have brakes in the in the car, you hit the brakes uh when when you're coming around a turn and there's risk or you you up it a little bit. You always have a little bit in the portfolio. And guess what? When that when those brakes pay off and it give you control, that gives you the ability to monetize push on the gas, go faster down the straightaway. This we're trying to build race cars, trying to build control and risk management in the portfolio. But risk management doesn't mean we go slower. You can't eat sharp sortino, but if you get a balanced sharp sortino, if you get control of the portfolio, guess what? You can go a heck of a lot faster. And I think that's what we all need to be thinking about. And that's the big picture. Um and again uh the I think this broad communication uh will serve make an incredibly greater impact to to the majority of allocators right than uh than the the little details given how overwhelmingly the the the whole investment world the majority of the investment world is completely doing things that again didn't exist until 1985 and doing it simply because of recency bias uh and a lack of needing to really manage risk and understand risk in a meaningful All right, Rich all the way from Australia. What uh what do you want to discuss? >> Well, I thought I'd bring up uh this idea about process stability in a changing market landscape. So, um you know, we we all accept the fact that markets change all the time. Um but that doesn't to me that doesn't necessarily mean your process should change all the time. So I think one of the biggest mistakes of investors make is changing their rules in response to recent outcomes. So but a stable process does not eliminate draw downs. In fact you must you must embrace your draw downs. Uh that's part of the process but what a stable process does do it doesn't eliminate the draw downs but it does prevent panic and behavioral drift. So um what allocators really need is not a promise they say of smooth returns but clarity on how the strategy behaves when conditions are uncomfortable. So um and this stability builds this trust um especially when these markets are so noisy as we all know they are. So I suppose the question I've I've got to ask people is um yeah how much change of our trend following strategies is evolution versus how much is really just reacting to recent pain. I'll take a first stab at that even though I'm not the trend follower in here. I I think I think I do have an important thought here is you know I think trend almost by definition at least started out as really uh thinking about things and up down and catching the up down. uh you know and and the reality is we and here in Ball World we think about distributions of outcomes and really taking this framework of of how is the distribution different in this environment? How is it uh and why is it different? Right? We have actually a pretty good ability to predict distribution. predicting direction is hard. But if you can broadly predict broad distribution of regime and that that does change then you can really more accurately have a sense of what type of trend model is going to work better in a different environment. And I think taking that broad approach and that mental kind of model as opposed to just back testing and seeing how it performed and what performs better and optimizing to that is going to get you to a much better place I think in a from a forward process. Um and volatility plays a huge role in that. Right? If we can if we can uh think about you know what the width of the distribution and and how fat the tails are in different environments um that input uh which again is broadly easier to predict um can play an incredible role. So I agree historically that has uh uh we've been taking the wrong process and there has been just a lot of curve fitting and uh naturally kind of u um you know getting to the last best outcome. But I do think uh you know this ability to to think forward on distribution based on supply and demand and factors that are changing in the market can really pay dividends and and do the opposite. I think there's more of that happening than ever. >> Great Andrew. >> So So Rich, it's interesting you say that because I have very um funny conversations people. They ask so we've been replicating the the the space for about 10 years and I get questions from people. They say like, you know, tell us all the changes you've made in your model and the answer is none. Zero. Not a line of code, not an instrument. And and that is not what they want to hear, right? They want to hear that, you know, 5 years ago, we decided that there was an 11th factor that we should throw into it, that we decided to switch up our window lengths because we had some sense that, you know, I don't know, Trump's election was going to change window lengths or something. And and I you know what I what I've said to people I said look it we have a extremely high bar. We look at and it's very very hard not to change what you do because back to your point about response to pain. There are of course there are always periods where you're going to go through and and you're looking at it constantly and thinking about god darn it why did we make that change you know 6 months ago or or we wish you'd be done some other things. The problem goes back to the the point that I raised before is that it's not obvious what whether those will have an impact on a going forward basis and and what I've what I've often said to allocators and this actually dovetailes with something that that Allan asked for a little while ago is is I said the very very best outcome for you from for so the easiest thing for you from a fund manager selection process should be you can look at our entire track record and know it's completely consistent. You don't have to think about you know whether these changes were good or bad that we made and whether they had an impact and what in what world would have been like the but I said the other the second thing is the very best outcome for you on a going forward basis if you invest with us is 10 years from now you ask us the same question we said we still haven't had to change anything I'm slowly winning hearts and minds with that but it is a very very very contrarian view because it feels like a loss of power um and and control um and but it does what it does it it comes back to you know what I've said about like there's a a an there's a an owning the investment process and the investment decisions in a very real way that I think people outside of this space cliff as I think is a great example of somebody who is runs a quantitatively based business but is very good at owning their decisions and is very good about saying you know like okay we picked this factor in the following time and it was a terrible decision on our part to do it or things are working in our favor. And boy, we're flipping heads and flipping heads and flipping heads and and I think you know what Allan said about the the difficulty of of an allocator in this space is this idea that when things go badly, it just feels like bad luck and and you don't really have a narrative necessarily as as to why it's going to recover. And so I I think this, you know, this idea of that there there there's a difference between those individual decisions that people make and the broader asset allocation thesis that one is trying to make and and and and and the source of alpha alpha and excess returns and and those are really the challenges on a going forward basis. >> Having consistency and being staying true to trend is is a really important um decision. Um but I think um there are two aspects where which are important in making any changes to your strategy. Um the first one is like truly actually understanding the causes for performance or underperformance i.e. actually measuring things properly and the second thing is actually understanding your thesis and staying true to your thesis. Okay. And I'm going to give two examples on that. So the first one is about benchmarking. So we've seen we've seen performance last three years has been difficult and you ask yourself what has possibly caused this and then you need to break your break your process. It says the reason why I've not been able to perform well is because maybe you know the asset itself has had a sharp one but in the past I've been able to extract maybe a sharp point 4 out of a market which had a sharp one. I think this um but now suddenly I'm only able to extract.3 okay that's cause for concerns for some reason my model has broken down but for to doing that you actually need to be able to measure the data you actually have to say well actually if we see historically we've seen assets that have trended a sharp one like the underlying asset has trended sharp one what do we see in the last 3 years versus what we've seen in the past and by the way I think for most CTAs this has stayed roughly constant Because I think the reason why we have seen the underperformance in the last few years is not because the model doesn't work is because we've seen this compression that we're talking about. We have seen just less outliers. We've seen less outside trend. Okay. So the first thing that gives you comfort is actually just being able to measure which parts of your model are actually not performing. Okay. So being able to break it down is be like before we even start a discussion you actually have to understand what's going on and then it comes to the question of what is your thesis and we talked a little about the design choices that we make in the CTAs what is obvious what is not obvious like if what you are selling to the investor is risk factors which are not financialized okay or risk factors which are financialized or a certain speed. So suppose if you're a very fast trend follower and you say well I'm not I'm not able to make money. I'm going to drift away from that space. That's actually going to be very bad. You're just going to lose your investors. In our case if we say we want to concentrate in markets with very low beta to the financialized universe then things that you can actually measure is the physical properties of those markets and how they've become more financialized. So one of the things that we monitor on an ongoing basis for example if we're looking at uh we're looking at ionor I was in I was with traders in Singapore in Ionor so in the past um in the past nobody was trading it no CTA was trading it these days I was talking to to the to the guy to the traders from um one of the big broker house and he said well about 70% of the of the volume in the front front month contract are CTAs Okay, to me that's a warning sign. I just don't want to trade this market. I don't want to trade the front month in iron o anymore because it is completely financialized. Okay, and the market the underlying properties of the market have changed and it doesn't mean it doesn't trend well. It doesn't mean it's but the program the thesis of what we are giving you as an investor is all about we are giving you stuff that other people are not trading. Well, that market is no longer in that category. So sometimes it's really depends. I mean it's great if you're saying I'm going to give you the most financialized and I'm going to give you replication of the city of the sochain index then actually you don't really need to do much. You just you you just follow a mathematical exercise. But actually I think understanding the markets that you're trading understanding what is the thesis that what you're providing the investors and staying true to that it means that you are like you may be throwing out markets which are trend trend very well. You might not have a gold exposure because gold is very highly financialized and you don't mind actually not having it. You just have to be true to what you've promised the investors. I think that's that changes in in the portfolio which reflect that I think are changes which you uh which are about following process in a very changing in a very fast changing world. All right, we're going to move over to Nick and then we're going to head over to Rob and hear his uh his secret topic because we we're not aware of that. >> Look, I'm going to be brief because um it's a super nice question by the way, Rich, right? I mean, is the pain an invitation to change your model? I would say no. Is the pain an invitation to think about changing the model? Maybe. And let me explain that, right? So, I'm going to maybe use the same thing that you know that we started discussing about those Vshapes. You know, it happens once, you're fine. You kind of understand what's going on. You know, you go back to your investors. You have an explanation. Everything is what it says on the tin happens again. The dollar yen happens again. The liberation day that kind of makes an invitation for you to kind of look through, you know, is there any blind spot? Is there something that the market is kind of telling us? Should we somehow change the model? Is it the right time to do so? you know, I think the bar as I said earlier on is extremely high. Um, I think underperformance and pain is an invitation to to reflect upon, but you know, we try to be extremely extremely averse to just change the model just as a response of um of of underperformance specifically when it's fully explainable. And that's back to Y's point. Maybe a soft comment on on what Andrew said. I think I think there's a subtle difference between an underlying model and a replication model. So as long as the underlying managers change or not their model doesn't necessarily make their application of the aggregation better or worse. I think to the extent and you tell me if you know if I'm getting that incorrectly right to the extent that those managers do not become super quick in the way that they behave and therefore a replication model lags too far behind I think it would remain to be successful you know obviously you kind of play at the benefits of the averaging um and and and I guess a good question is is the objective to minimize track and error probably not because obviously the outperformance is important actually you know I'm I'm sure this year you're you're happy to have this kind of high track and error Is that an indication that the model does work? Yes or no? I I I guess we don't really have a straight answer. But I think to my point kind of summarizing on this one, the replication model almost has an assumption on how the average underneath behaves. And as long as that remains through time, you don't really have to change your your your recipe, right? Even if the underlying managers change their models, if the sum of those changes kind of somewhere, I know sum up to zero, you're probably done, right, with your application. I don't know. I don't want to speak on your behalf, but I think that's how my thought process kind of went through as you as you kind of as you were speaking. But thanks, R good good question. >> So, look, look, I for Nick, I mean, you know what we do very well, and those all those are all the key questions, right? I just, you know, if everybody goes to a 15-day model, it's not going to be a surprise, right? like it would be it would be foolish like it's like like we'll be talking about it right everybody's abandoned long-term trend medium-term trend everybody's doing 15 or 20 day models and everyone's become crael or something and so no of course you have to you know you have to look and reflect and try to be intelligent about the underlying thing it's just it's it's but unless it indicates that there is something and try and and you know try to understand what it is and what's causing the deviation and whether that that that's consistent with it um I you know what what I say and and again because I think there were so many fascinating parts of this overall conversation and just to bring a couple of different things together like one of the things that that you know this whole idea of you you presented incredibly interesting data that over the past 3 years slower and simpler has worked better right so which obviously has benefited us presumably and and and certain people the ETFs more broadly things that have been simpler but what what I think is missing from this space is Because in the US mutual fund market for instance, a lot of firms have been going in the opposite direction up until the past 3 years like their claim to fame was moving into outside of the the the and in the hedge funds as well moving outside of the simpler strategies and adding more and more things. So as an alligator when I look at it is and again maybe people say this but again I think this is where sort of like you know is somebody saying like yeah I made a really big mistake over the past three years. I gave up this much return by adding these things that haven't worked well in this regime. I didn't see this regime coming. I'm still trying to understand what it was because I didn't have to do this but I did and it's cost me you know 1,100 basis points of returns relative if I've done nothing that kind of ownership of the design decisions that that that I I think that's just sort of I think if you do that with dispersion it makes it easier for allocators to locate the managers. It's that it's that you have all these decisions that are made and then kind of a raising the hands and saying, "Well, it didn't work because the markets just are weird." And so, you know, I think and I think Yov makes this point, Rich has made this point, etc., is that there is something about owning the decisions and why they're being made and staying true to it in some fashion. That's what also helps allocators to figure out how to put together this mosaic of exposures to a space that's really complicated for most people. >> All right, let's jump over. Well, actually, we're going to jump down all the way down to Israel now because that's where you are today. Y of um what's on what's on your mind? >> Uh right. So, with your permission, I'm going to steal your very own question. Um because I think that that's the way the discussion has been going here. And uh it's about risk management. It's about draw down. It's about staying true to your hypothesis. And I think it's also um about the discussion that Ken was talking Jen was talking about the volatility and um the having the breaks and um the outsiz gains when things aren't going well and I'm going to talk about draw down. So you asked questions what worse having a long draw down or a deep draw down and I think what is very interesting to me is that um when we have discussions with allocators I'm trying to explain to them that CTA drawdowns are actually very distinct to draw downs in other industries in other hedge fund managers and what I mean by that is that normally for most most uh most positions in most hedge funds um big draw downs or very sharp draw downs are to do with like poor risk management and just events playing against the big positions. So they will be losing money because things happen. Okay. So you know you happen to you you know you know the big shorts imagine you have the big big shorts you put a position on the housing market and the housing market tanks and suddenly you have a big draw down um and you have to explain to the investor and actually you can you can tell a story which I think that's the discussion that Andrew was talking about earlier um with CTAs it's almost the other way around it's the the reason why CTAs tend to lose money is mostly um because nothing happens Okay. So obviously when there is a position on and there is an event on on day one like if there is liberation day then you suffer. But the consistent draw down um really comes from um recognizing that CTAs are a little bit like buying straddles. Okay. In the same way that the volatility volatility insurance is about buying straddles at various times. Okay. And that means that we pay for them uh through trading cost. Uh maybe not in the case of Andrew uh but in the case of uh most of the assets that we trade uh we pay we essentially replicate an option we replicate a trading profile which is a struggle and uh we will lose money if nothing happens on this market and in fact in a normal CTA most years most of your markets you will lose money. Okay. And I think investors kind of puzzle about it. They go, "What's going on here?" Um, and the truth is because you will make outsized returns when there is a trend in one of your markets, that will more than compensate. So, you don't actually need 50% of your markets to be winners, you just need maybe 40% of your markets to be winners to have a good positive year. Okay? And the reason why you might have a situation where you're in a draw down is not because you haven't been able to capitalize on trends. It's not necessarily because there was a big event and you badly riskmanaged yourself. It's to do with the fact that instead of having 40% winners, suddenly you only had 35% winners or maybe 30% winners. And like and that's a very different drawdown profile which is actually very difficult for investors to accept because what you find is that you would like the you know the the allocator would like to go to the IC and say yeah he got this call wrong like he didn't know he made a bet about which who's going to be the fed German and that bet went sour but like we really trust this guy he's got he's come from a great pedigree so we're going to stick with these guys with the CTA drawdowns are much more difficult because there isn't necessarily a one event that will explain the draw down. It's just a very consistent event where we've seen a vault compression and the percentage of winners has just shrunk below the break even point and that's something that we have seen in the last in the last 3 years uh which has been very difficult for the industry. So I I think it's not about I think in CTAs you don't necessarily see a very deep draw down but you might have a go through a situation where for a long period you like the events like V compression is basically made outsiz trend very difficult to harvest um and I would like to hear panel's view panel's view about that >> Katie over to you >> I love this yav we we actually wrote an interesting paper uh this year about managed features there's draw downs and sort of studied them and looked at sort of the historical largest draw downs for managed futures and we have this really interesting bubble chart in there where we look at sort of the time of the draw down the depth of the draw down and then we also look at the recovery period for draw downs and what we find is if you look at what's happening during a lot of our very challenging environments they tend to be pretty good environments for equities so when things are stable we didn't look at V, but you can imagine when equities are doing well, V is also often often lower. And then the recovery for the strategy since it tends to be very cyclical um was much faster when you have sort of a challenging equity environment or things changing and what happens there is you just have a higher hit ratio of trending things which kind of mirrors what you were saying. So I think at least qualitatively this study for managed features draw downs was uh kind of explaining some of the things you just talked about but I also focused on and I think this is important for why I care a lot about dispersion driving behavioral effects is that you know if you look at most of the fund of funds who have studied our space there's it's very difficult to pick a winning manager in any one year and if you look had sort of sort of draw down periods this the strategies on average tend to recover. So if you look over when there's been a very challenging period of performance usually that's followed historically by one or two years of very positive performance. So I think that is something that you know it it has that although we can have skewess in the short term or we can have persistence in the short term we tend to have mean reversion over longer time horizons. So I think understanding that for investors is important because if you try to sort of pick tops and bottoms, you're basically trend following trend following which I wouldn't suggest. So um or trend falling squared which is an interesting strategy but yeah so interesting I don't know if you saw the paper but I think this paper does give some insights on that. So fascinating point is I think the perception of risk in the space is far greater than it is. Um and and again this goes get get sort of the narrative disconnect. Space has like a 15 16% draw down over 25 years like it's child's play compared to equities. And now for a while you could say again bonds had didn't have a draw down for 20 years basically and now you've had a 15 16% draw down. Um uh so I think I think but I think also going back to um the point about um you know sort of how to communicate the alpha generation the space back to to investors um I think where at least we've seen it um is that is that you're going to go through like the space is going to make money a lot of money when the world changes a lot right when there's a big change in information and like in there was no inflation And then there was a lot of inflation and no one thought inflation was going to come back and then everyone is totally confident inflation was going to 10%. Right? So, so you get this kind of big shift over 24 months. The reason I think you can I think what you can do is you can take that idea and explain to the total portfolio people and the asset allocators that this is what you do badly. Your whole business is designed to build these long-term capital markets assumptions and not change what you do. And so when you have a noisy market like this year or last year where the world really doesn't change very much, right? We haven't had that catastrophic return of inflation or deep you know tariff induced recession. We haven't had some crazy contagious bond market tantrum. It but so when there's a lot of noise but the world doesn't change very much of course the strategy is going to struggle. You're getting knocked in and out of you know whip getting whipsawed and knocked knocked around all day long. But my god, if a year from now, you know, equities are down 50%. What are you going to do with your portfolio where you're all in on the AI trade across equities rates and like, you know, pretty much every everywhere everywhere else you have it. So I I think again um I I think again what's so fascinating about the draw down the space is that they just they're just not that big of a deal in the context of any asset. It's some somehow it's difficult to explain to people because then you say, "Oh, no. What's really good about space is that they cut, you know, losses as they start losing money on things. They don't they don't hold on to things with a white knuckle knuckle grip. But a lot of allocators want to hear that you have a like an iron spine. You know, it went you you you were still buying you were buying Bitcoin at 20,000 cuz you knew it was going to recover. Like so people are and I I think that's the sort of need for some sort of anthropomorphism and storytelling to get it passed through the gates for the average alligator. This was a great question by the way, you I have to say, but I have a little bit of a follow-up um question mainly at to to Andrew um because you learn I learn a lot every time I speak to Andrew and today I've just learned that actually um we don't even have to have a research department and investors will be just fine if we uh if we say that. But the other thing that is very interesting, I'd love to hear your thoughts about this. So in the ETF world, um my my perception is that I think people think this much more along the lines of it's another stock, it's another ticker. So I actually wonder whether draw downs are even really being considered in the same way. When people look at at the performance of your ticker, do they even talk about the word draw down or is it just like with an equity? Oh yeah, it's maybe not at a new high, but but the word draw down when I think about equity investors, they never use that word. Does that come up in in in your world or your part of the world? >> Oh yeah. No, no, people don't like draw down. They don't like it because you can see it every day. You can see it every minute. Right. Right. And so I, you know, Allan made a point about sort of how do you talk to people about the space or at least how do I talk to people about the space is is you I think I think the problem is when you have a space with wide dispersion um and then the allocator's natural response and it's it's a very rational response from a career perspective is you pick the guy who's been doing well who has a good brand name like that's a that's a rational fund selector investment decision that's persisted for 50 years. Um the the challenge that it does, the way it flows through in a sort of to use a chem discretion uh in terms of like a a negative feedback loop or something like that is that is that what happens is a typical allocator who is not as well versed in statistics of no persistence of alpha and a wide dispersion is will tend to um oversell a a given an individual manners outperforms relative to the space because they want to get it into the portfolio. There's something in their incentive structure where they've been asked, you know, go find us the best person in this space. And so they're going to if they go back and say, "Hey, I don't really know, but this guy's done better. This woman's done better over over this past period of time." That's not really what the person on the other side wants to hear. So they tend to they tend to get more and more confident. It happens with every hedge fund strategy. It starts out with like, I really don't know who's the best equity long short guy. By the time you're s sitting in front of the investing committee, we found the very best, you know, the like the guy who could do no wrong, right? So, so what happens is though that people get worried about elevating the manager and then when it goes badly, they don't have a narrative around that that you have in other asset classes. But to your point about it, like because when people have been trained that when equities go down, if anything, it's a buy. If anything, buy the dip. and and and and so what they're looking for in this space is, you know, is is some sort of a story that explains the rebound. And people and people in the space tend to be very financially sophisticated, which kind of leads to a sort of a level of honesty about it. We don't really know that it's going to rebound. You know, we don't it's we're actually gotten out of the positions that we lost money on, but we think we're going to find new new trends and opportunities on a going forward basis. and that that honesty and equivocation actually plays against the broader adoption of of of the space. Um but but I think I think you know back to the point about if you can get people to focus on this as a strategic long-term allocation and and basically get them focused on day one not on the gears and how they work as but as much in terms of the broader benefit and why it makes the overall portfolio better. That's my thesis as to how I can get this to become a standard allocation in people who are not going to want to engage in debates as to model, you know, to model links or or or number of positions. But, you know, when we do this in 5 years, you'll know if I was right or not. Okay, cool. All right. Now, before we go to um before we get to uh our outrageous predictions for 2026, we need to hear from Rob. And he's been keeping us in suspense as to what he might bring up. >> Yeah. And it's definitely not cuz I hadn't thought of anything until I went to get coffee. That's that's definitely not the reason. Um honestly, um yeah. So, um, as we're getting towards the outrageous section, I thought I'd be a bit outrageous cuz, you know, you guys are all very, you know, very serious and intelligent and clever and it's all very worthy and stuff, but, you know, people people probably fallen asleep listening to all that. So, let's stir things up a bit. Um, so, one thing that occurred to me is, um, we were kind of worried about selling our sort of product to kind of, you know, mainly institutional investors or, you know, serious people. But there's actually a big untapped market out there we haven't thought of. So it occurs to me that if you say like Yos says whether we've got a sharp one strategy, you know, maybe slightly lower, um then even if we run that at sort of half Kelly, we we could be running at sort of annualized risk of sort of 40 50%. Uh and if you think we've got positive ski, you could probably push a little bit higher. Um, and actually if you look at the the kind of retail market over the last few years, um, people want V, they want le they want massive returns. They want massive outliers. They want things that are going to go up and down a lot. You know, they're not they're not that interested in kind of worthy things that are trying to track the SGCT index with it sort of singledigit standard deviation. Um, you know, they're interested in weird crypto coins and meme stocks and all this kind of stuff. Um so actually um I think we should be going for that market basically. So I think everyone should go to their uh you know their sales team now and say right we want a high vol ETF product off you go. Um people come because it's high volume you can put put the fees up a little bit higher as well because fees should be in there as a proportion of V. uh let the money come in and uh this time next year everyone's going to be being be living in much nicer houses and our our backgrounds on this video are going to look very very nice indeed. So I I welcome your feedback on my excellent suggestion. >> Well, you mentioned the word ETF, so I have to ask Andrew um high CTA in the ETF land. Does that >> There are million different kinds of of ETF investors. Um a lot of people have come to us and said, "Can you do 2x versions of what you do?" Um, uh, I I had this I was actually on a on a TTU one. So, there's a guy named Cory Hoffstein in the US who's pioneered the use basically bolting managed features on. He's basically recreated portable alpha calling it return stacking and put it into ETFs and and I I was uh with Neils once and and Neils I think asked me why don't you do that? and and my response was, "Well, I think it's a niche market." And then I got chased around by angry villagers with pitchforks on Twitter for about 2 weeks for having what they perceived as having insulted Corey, which it wasn't that at all. I said, you know, Innovator was just sold at two billion. It's a niche product. You know, you know, um the the buffered or the, you know, covered call ETFs, um you know, are niche markets. You can have a multi-deion dollar um niche market in the ETF world. Um, so I I think there's a market for all of this stuff. If you'd ask me whether there's a market for 2x, Tesla, ETFs, again, um, I I think where where I think the big money is is are the people who are riskaverse and and who spend 80% of their me mental energy how to avoid being embarrassed. Um, that's my debt, right? So I think that there is a a an enormous amount of of of opportunity to create products that can be huge in individual markets. Um I just think you have to try it and go out and talk to people who would be users of it and try to figure out how a way to monetize. And I think more leverage products is is is the flip side of the portable alpha coin. You know, how do I do things with less capital? >> I'll I'll add one one thing to that. Um I wouldn't say leverage as much as capital efficiency right the the return stack India you know we've been talking about yield stacking similar thing for 5 years right um you know before uh these ETFs were launched there is a dramatic there's a reason that options were introduced the options exchanges started in 1971 if interest rates go higher the it it is the simplest most important thing in the world to be capital efficient nobody's cared about that for 20 years because interest rates were zero, right? um that trend towards capital efficiency which again in this generally people call leverage is is what I think is critical and so the 2x 3x the growth in those I don't think will because people will be because people want more risk per se it's just they want to be more capital efficient and I think there's a ability to to lump things in together if you separate them they're less capital efficient but a lot of these strategies uh when lumped together can be dramatically more capital efficient so I do see that trend continuing but less because of the need for leverage and more for it for that reason. >> I love this question, Rob. It's really fun. The reason it it's fun to hear is that you know when we think about the old school CTAs like back in the day there, you know, they were sort of I guess gunslinging high ball like you know. But what was missing in that world was monthly prints. So basically like you didn't have a liberation day. You didn't have a ticker where you could kind of publish it. And then that was more retail actually in some ways especially in the US. And then what happened was institutions got into CTAs and Neil's is one to talk about this because he knows all the old school CTAs. Institutions got into it. Assets got bigger got down. you know, it was much more about managing that the size. But I I do agree that there is some, you know, there is a segment of the market that wants higher risk, wants something a little different that goes back to the dispersion of products. But I guess one thing that's going to be hard to see is like that daily print, right? So, you know, you kind of wish that you could do some things that they do in private equity like smoothing or sort of monthly or quarterly reporting. um which unfortunately most of us that's we're daily liquids. So I do think that it's going to be great when it goes up just like Bitcoin and it's going to be terrible when it goes down. So you know you could lose have people rush in only to like be disappointed once it doesn't go the direction they wanted. I'll turn to you Alan now but I just want to intersect one thing before and that is as Katie referred to um back in the day in the 80s and early 90s the Barkley uh CTA index were running at an annualized volatility of between 20 and 25%. And since then it's gone down and actually in the last few years we are now below 5%. Just just a FYI. Yeah, Alan. >> Yeah, I mean I I agree with everything that's been said. There's been that institutional trend for lowerval but there has been a little bit of a swing back. You know we have seen some managers launching highvall trend again in the last while and we obviously have some data points of highvall managers very successful long-standing Paul Mulaney h so we know how that plays out they go through exceptional periods raise some assets they have a draw down lose a lot of assets it repeats. So presumably that would be the same if if we were seeing high val trend in in the ETF space. I but at the same time I do think there is that trend increase of knowledge of capital efficiency. Um so maybe it is more um not just trend at high V but more balanced products at at at reasonable VA because the challenge in the market you know in most wealth management portfolios is you want more risk will give you more equities whereas in fact you should have a balanced portfolio and then decide how much leverage to apply to it and I think we are seeing a bit more of that now with return stacking and with portable alpha products. Um, so yeah, it's not just it's it's balance plus plus uh leverage and and high volume, I would say. >> Excellent. We'll start with you, Andrew. What is your 2026 outrageous prediction? >> I think institutions start buying ETFs in the managed future space. Um, I think the probability of that is quite low because I think they're I think most allocators at institutions have a business card that says uh hedge fund analyst and they have a hammer. They're going to look for hedge funds. I think they like it. Uh, but I think you will see some uh I I think there's a it would be very very significant. But I think if you see institutions starting to look at ETFs as a plausible way to um to get exposure to the managed future space, that would be very uh outrageous and significant. >> Katie, I'm excited to hear your outrageous prediction. >> I think for me the biggest uh thing we've been talking about is like how there seems to be something brewing whether or not it's good or bad. So that the boom and bust cycle to me I think next year could be a roller coaster that we could have sort of rates go lower over stimulation of the US economy and we could things could look awesome and then suddenly things could fall apart. And so I think for me I think 2026 could be a pivotal year to see that macroeconomic change of what happened in the news this year. So, I think that's my prediction is that that we will be on a roller coaster next year. >> Rob, what are you? >> Uh, as I'm being the funny guy today, um, my my prediction, outrageous prediction is that the next Fed chair will be Jared Kushner. >> Fair enough. Uh, Rich, um, and outrageous predictions from down under. I think in 2025, I said that uh 2025 in the prediction segment of this show, uh we'd have the low orbit commercial um space station. I'm I'm doing that for 2026. >> Fair enough. You're entitled to Alan. What's your outrageous prediction? >> I'm I'm revisiting one from not last year, the year before. Um so I think next year will be the year of the bond breakout. So, US 10ear yields up to 6% and then down to 3 and a half%. >> Very good. Very good. Nick, what's what are your thoughts for next year? >> That finally we'll see it trend. >> Okay. Yeah, that would be nice. Good. Jim, I think you may have won last year's at least. That was pretty good call. So, what are your thoughts for uh next year? >> That 2026 will in a lot of ways look like 2022. Uh the pain trade will be market down and interest rates up. Um it is uh nobody wants to sell stocks take their winners. Everybody's putting a band-aid in terms of longvall. I do think longvall can it could be again implemented the right way to make money. I'm talking more like VIX and implied ball broadly. Um uh and then uh I think again uh interest rates going higher um is is could be a pain point for some that are still in the bond space for diversification. >> I think we're all going to root for you to uh to be the winner for next year. >> I think trend has a great year anyways >> as part of that again. >> All right, Yav, what's your prediction for 2026? >> Equities up 25%. Uh that will make me happy. Uh but I'm afraid I'm kind of uh I'm kind of in the camp of 6% 10 year rate uh most likely. >> Fair enough. And Mark um what is your last year 2025 I thought was the year of the optimist that I think that a lot of people came in they were they were very negative uh of what we would see for 2025. I was an optimist 2026 I'm now going to be a pessimist. You're going to see higher inflation, which means higher uh yields on uh on treasuries. Uh we're going to see some credit crises. Uh we've seen some start in 2025. We're going to see that's going to carry over to 2026. Uh we're going to see uh stable to down equity markets. Not because uh the Russell 2000 is going to do poorly, but we're going to see some of the a bubble burst for our MAG 7, which is such a high weight in the S&P 500 that's going to put a pale on on all on all equities. The the positive side, we'll see uh a resurgent Europe. So, we're starting to see it this year. I think that uh they're going to start to get their house in order. So, if I was an optimist, it would be an optimist in Europe. >> Fantastic. I think that was everyone except for myself and I'll keep mine very short actually. Um my prediction is that despite uh all the pressures um on the Fed and despite Trump electing the next Fed chair very shortly, uh the Fed the Fed will end up having to hike rates uh next year at least once. So that's going to be my prediction uh for uh for 2026. On that note, let's wrap up part two of our year in group conversation. We hope that you've enjoyed it as much as we did making it for you. And if you want to show your appreciation for all the work that the amazing co-hosts put into making these episodes each and every week, I would encourage you to head over to Apple Podcast or Spotify or wherever you listen to your podcast and leave a nice rating and review. We really do appreciate all of them. Next week, I'll be back with Rich to kick off the new year in style. So, this is your chance to have him tackle some of your questions and also feel free to suggest some topics you think that would be relevant for us to discuss. And of course, you can email them to info@toptradersunploted.com. From all of us at toptraders unplugged, thank you so much for listening. We look forward to being back with you next week and until next time. Happy New Year and take care of yourself and take care of each other. Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you. And to ensure our show continues to grow, please leave us an honest rating and review in iTunes. It only takes a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.