Markets are currently being shaped by geopolitical uncertainty, rapid technological change, and shifting investor behavior. In this episode, Andrew and Niels explore how these forces are influencing trend following and systematic investing. They discuss recent market volatility, the impact of global conflict on asset prices, and why traditional diversification assumptions are being tested. A key focus is the evolving structure of the CTA industry, including the rise of ETFs and the debate between complexity and simplicity in generating alpha. The conversation also examines replication strategies, implementation costs, and whether simpler approaches may deliver more efficient and consistent outcomes over time.

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Episode TimeStamps:

01:27 - Geopolitical uncertainty and parallels to past crises

03:13 - Why this crisis feels different from previous ones

04:24 - Ideology, negotiation, and unintended consequences

06:16 - AI, technology, and the changing global landscape

10:58 - Technology dependence and societal tradeoffs

12:37 - Market environment and trend following conditions

16:02 - CTA performance and the macro “do over” of 2026

21:11 - Traditional markets vs systematic strategies

22:39 - Hedge fund losses and dispersion across strategies

25:48 - CTA alpha, simplicity, and ETF performance

32:42 - Complexity vs efficiency in portfolio construction

39:40 - Hidden implementation costs in systematic trading

52:21 - QIS strategies and the illusion of beta

57:43 - Structural challenges in QIS products

01:03:12 - Index construction, research, and innovation constraints

01:08:47 - Fees, transparency, and real investor costs

01:12:41 - Product evolution and the future of systematic investing

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Welcome to Top Traders Unplugged. In markets success doesn’t come from predicting what happens next, it comes from being prepared for what you can’t predict.

In each episode we go deep with some of the world’s most thoughtful minds in investing, economics, and beyond to understand how they think, how they prepare, and how they decide, and the experiences that shaped how they see the world. No noise, no short-cuts, just real conversations to help you think better and invest with confidence.

Welcome and welcome back to this week's edition of the Systematic Investor series with Andrew Beer and I, Niels Kaastrup-Larsen, where each week we take the pulse of the global market through the lens of a rules-based investor.

Andrew, it is wonderful as always to have you back this week on the podcast. How are you doing?

I'm great, thank you, thank you for having me back, As always, I’m thrilled to be here.

Absolutely, absolutely. It's always good to have you on and give some perspective on your side of, of our industry, so to speak. Before we get into the topics (you brought along quite a few so it will be a fun conversation today, no doubt), you now I like to just ask you a little bit about what's been on your radar and not necessarily anything we're going to talk about today, but just what's come across your radar in the last few weeks since we last spoke, anything in particular spring to mind?

I think my radar is consumed by trying to figure out what's going on in the geopolitical front. So, like the entire radar screen; at midnight, at 2:30 in the morning, I find it very unsettling where we are. It reminds me, in a sense, a little bit after what it felt like in 9/11 in the US, where you just don't know what could happen next. And it could be a lot more devastating than people have been thinking about.

And so, look, I hope I'm wrong, but you know, the things I think about are, we've had somebody who, for 40 years, has been thinking about - how do we inflict damage on soft targets, basically, if it came to that. And it just puts me back when people were thinking about poisoning water supplies and now we've got AI, and whatever, bioweapons, and we have radioactive fissile material.

I just worry that there's something out there. What 9/11 was for a New Yorker, and for an American, and for everything else was, God, somebody knew us so much better than we did. That somebody with a box cutter could take over an airplane and everybody in the airplane is thinking if I try to challenge it, my downside is I'm going to be cut, and that's terrible. Because the base case is that we're going to land on a tarmac and somebody's going to make a political speech or demand asylum or something like that.

And then what happened was so catastrophic and so shocking, and it just feels like we've opened a Pandora's box that we don't really know what the parameters are. And again, I hope I'm wrong on all of it, but that's been on my mind.

I'm sure most people listening to us today will probably say the same thing. You touch, actually, on things that I had put down as on my radar as well. You know, what feels different to me about this particular crisis, and not just necessarily the last few weeks, but just generally what's been going on the last few years, and different to what you and I and many others experienced in the great financial crisis, even to some extent, the pandemic and, of course, previous crisis. All of those, more or less, could be fixed by the Federal Reserve coming in with a big bazooka or, you know, a fiscal package, and we would be off to the races again. This one feels very different.

This is about ideology. Right? And I think that this is why, in my opinion, it's not going to go away. And it literally is a completely different regime we're in. And really, all investors should pay attention to that if they're thinking about their financial health. That’s what it feels like to me. But I agree with you, it's obviously exhausting to try and follow all of that.

I mean, to me it feels like we've started something. It's just, we're going to be talking about this for 20 years. Whatever you think of Trump, good or bad, I think one of the things that's fascinating about him is that his whole life has been about that people will always come back to the table, or new people will come to the table if there's money involved and if there's a transaction involved. And so, he's kind of taken this idea that you can negotiate in a very, very, very tough way. You'll never alienate everybody so much, because as long as there's money, they'll come back.

And he's kind of applied this, now, in a geopolitical context, where you can threaten to invade Greenland, you can threaten to invade Canada, you can do all these different things that are so outside the scope of the normal proprieties of the kind of geopolitical intelligentsia. And when this started to happen, occasionally you'd read that one sentence and it kind of lands with you. And it was a one sentence thing that basically said, in a war the other side has a vote. And so, if you think about Liberation Day, every counter response to it was basically giving him an opportunity to come back to the table if he wanted. He could come, he could decide when to deescalate.

And I just remember reading that and thinking maybe this is, as you say, for ideological reasons because their incentive structure of this regime, as it stands, is very, very different. That maybe this is a scenario where that transactional mindset will have these grave unintended consequences.

Now that being said, if a month from now Iran has given up their fissile material and there are some negotiated solutions, everyone will think Trump is Bismarck. I mean, so it is, you know… and we'll talk about in the markets, I mean just the problem is the range of outcomes is not like between you know, 4 and 6, it's between 0 and 10. And so the markets are whipsawing back and forth trying to figure out what the hell all this means.

It's interesting what you point out about the whole kind of tactics and how, essentially, it's to a large degree about, you know, human behavior. Right? Which is exactly what we talk about. And you're right, maybe we will, in 20 years, still be talking about these kinds of issues. But that, at least, makes two things we're going to be talking about because we'll also be talking about CTAs and trend following in 20 years, for sure.

But you touch on another thing which I also find frightening, to be frank, and that's AI and what's happening in that space. I recently traveled on a long journey, and I was listening to one of the newer AI books about Sam Altman and how maybe a different side to him, described in this book (I forget the name), but it's all about the empires that these firms are building now.

Then, just this week I came across a story, could be in Bloomberg or maybe it was linked from another source, but it was about this guy who, on his own, the only other employee I think he hired later on was his brother. He's a 41 year old guy from Los Angeles. And in a relatively short space of time, with the use of AI, he has built a company that this year, I think it is, is estimated to do $1.8 billion in revenue. And he's one guy and his brother. And so, that's kind of interesting and optimistic. So, I wanted to ask you, is there a technology, it could be AI of course, but is there a technology or a gadget (but not your iPhone or your whatever phone you use) that really has become sort of part of your life, that you really would not want to give up again? Is there something that really makes your life great?

On the technology side?

Yeah, technology, gadget, whatever we define it as.

So, it's funny. I mean, I'm of the view that social media and stuff has actually destroyed a generation of minds. And so, I'm actually going the other direction in that I am all about paper books. I am totally addicted to peeking at my iPhone, particularly during periods like this, because, you know, I need to know, I really need to know, at 10 o' clock at night, New York time, what's been happening to the oil markets. And there's absolutely nothing I can do about it, but it's compulsive. And I have a four-and-a-half-year-old, and we are trying to raise him basically in the 19th century - so avoid that stuff as long as possible. Let his brain develop as it should.

Back to the question about AI. As a firm, we see extraordinary potential in a few ways. Not in terms of how it impacts our underlying investment strategy, but in terms of just efficiency. I mean, like, I think about it, you've got these people who are spending hundreds and hundreds of billions of dollars to create tools that would cost us millions or tens of millions of dollars to build on our own that they're basically giving us for like $20 a month. And so, my partner, who's… I mean, if one of the two of us needs to get run over by a bus, I would throw him out of the way and put myself in front of it, because he's the one who kind of manages all the business and he's extraordinarily capable technologically.

And so, we have a team of people who are very, very deep into AI, figuring out what it can do for us from an efficiency perspective as a business - from programming and trade, reconciliation, etc. And it is extraordinarily powerful.

On my end, my bet is that I will not be made obsolete because human contact and being able to read the whites of people's eyes, when you're talking to them, trust, these very, very, very human elements of it will coexist with that. But I think, rather than saying there are things that we don't need or need, I think it's all changing.

Yeah, I agree. So, I was driving in the last couple of hours. I had a short drive to do, and I was listening to the radio. And, since I'm in Denmark today, it was Danish radio and they had a Danish journalist living in China. And they were talking about technology and how China is so far ahead in many ways. And he was saying that he had a Chinese phone and a Danish phone, and his Chinese phone got damaged, so he didn't have it with him for three days.

He could do nothing, he said. He could not even order a cup of coffee. Without your phone, you're nothing. And of course, in one way, they were talking about, oh, this is, this is so convenient. Right? You can do everything on your phone. And I was thinking, sure, but you're being watched. Every single move you do, even when you buy a coffee, even where that coffee gets delivered, is being logged somewhere.

So, yeah, I have mixed feelings. Of course, technology is wonderful. I wouldn't have been able to do a podcast without technology, and efficiency, and all of that stuff, but it is interesting.

Anyways, by the way, the last thing on my radar was yesterday. I don't know if you watched this movie, I rarely go to the movies, but I did yesterday with my son and we watched a new movie that came out called Project Hail Mary with Ryan Gosling. Have you seen it?

I've heard of it. I've actually not seen it. I've said I've seen one movie in like six years. So, other than seeing it pop up in a couple places, I don't know anything about it.

Yeah, well, the message was fine. It's all about maybe looking after others before we look after ourselves. That was fine. But I have to say, it was a little bit of a long movie when it all happens pretty much in a confined space shuttle with one actor and an Alien, so to speak. Anyways, that was a bit of a sidestep.

Trend following, it has been interesting. We're going to talk about this, of course. My own trend barometer, yesterday, closed at 48 which indicates kind of a neutral environment right now. I think that's fair because I really don't think there's much direction. One day markets go up, next day they go down pretty much depending on whatever comes out of the Middle East. So, I think a neutral setting is fair.

The indices that I have data for is as of Tuesday, so, without yesterday. And I'll come to yesterday in a second. But what's interesting to me, looking from semi outside when I look at the space as a whole, will be to see for example how speed of models will differentiate returns. For example, you know, have managers started to go short equities, are they still long, and so on, and so forth? I think that could be a little bit of a decisive moment. Historically (when I say historically I'm thinking about the last three years), being slow has certainly, in these situations, been useful. It doesn't mean it's useful this time. We'll see.

But the encouraging thing, as of Tuesday, was that the BTOP50 index was up 83 basis points, it's up more than 8% so far this year. SocGen CTA index up about 1%, up 8.5% for the year. SocGen Trend up 1.3%, up 8.5% for the year. And the Short-Term Traders index up 35 basis points, up 4.78% for the year.

What was even more encouraging was, when I looked at the public data like mutual funds, ETFs etc., and the returns yesterday, and also comparing it to what happened on our side yesterday, yesterday wasn't a big day. Probably net/net most people lost a little bit of money. But, you know, with the moves we saw in the markets, and some of them going certainly against positioning, the outcome was pretty muted, down a little bit. And I think that's a great testament, really, to how risk management and how people are really focused on this despite the fact that this environment really isn't great for people who are kind of a longer-term trend followers, certainly. I think, actually, it was pretty useful to see that people have, you know, generally done well navigating this in this environment. And I'm sure risk management is part of that.

How have you experienced… I mean, we can talk about the year-to-date, we can talk about what probably people are mostly Interested in, the last five weeks since the Iranian conflict started, how do you see it?

Well, I mean, I would go back to, I mean, so through the first quarter SocGen CTA I think was up 7.5%, and equities in the US were down, and bonds were flattish or down. And that should be one of those iconic quarters that you point to when the strategy is really doing its job. Now it's a quarter, not a year.

So, my experience has been that, first of all, January and February was like trend heaven around a handful of rates. Right? I mean, gold goes up 30%. Everybody's long gold; or metals in some fashion goes up 30%, gold goes up 30%. And then there is this, you know, massive potential multiyear rotation out of US stocks and international stocks. So, I'm guessing a lot of funds, you know, were overweight in KOSPI, and they're overweight in their Nikkei and they've got all these other things that have exposure outside the US and those markets, late last year, were crushing US markets.

But I think, for a lot of people, the saving grace was then… And it was being caused by the fact that oil spiked. And so, I think a lot of people, at least what we saw in our portfolios, we had essentially no exposure to the energy complex at the end of last year. But then starting January we started adding to it. And so, by the time March rolled around, we actually had a meaningful allocation.

So, we got tagged, you know… We did much better than the overall space in January and February. And then we got tagged a bit in March. We kind of ended up March in roughly the same place.

And so, you know, what we've seen in our portfolios is basically a gradual de-risking of the positions that were working and have not been working, a reduction in equity risk, for instance. And so, one of our clients I was talking about it with and he said, you know, I used to have the things that were in crash protection mode. And he said, are you in crash protection mode? I said, no, but we've put on shin guards and knee pads, and maybe elbow pads.

But look, it's a very strange time, as you talk about yesterday. If you're long crude oil and long gold, you're sort of hedged, I guess, because they're not going up or down. If you're long international stocks, but short the S&P…

But you talk about a day like yesterday with the magnitude of the moves. I mean, when I saw the ceasefire announcement, again, and this is the emotional torture being in the markets right now. I would be thrilled for humanity if we had a stable ceasefire and fewer people died and everything else. But from a positioning perspective, when you see yourself kind of positioning for ongoing chaos and, from a portfolio perspective, you're like, oh, God, it's going to be another Liberation Day, or something like that. It hasn't been, but it does feel a little bit like we're on tenterhooks, you know, that the magnitude is so great. And I think this is what's happening across the space.

The overall space is doing great. I look at all the mutual funded ETF comps. I think, until like a week or two, literally, everybody was up this year. Right? And you had a wide range of performance, but everybody was up. I love to see that.

But within that, as you say, short-term models may have been a saving grace in March. You may have gotten out faster and avoided the last escalation to de-escalate. On the other hand, having exposure spread across a lot of positions may have helped because you're not as concentrated in WTI. We're going to be concentrating in WTI, but if you've got a zillion different contracts.

On the other hand, as we saw yesterday, maybe the world goes back to normal in two months and we'll be remembered for having had a good first quarter, but then we'll be back kind of in the middle of the pack or below equities again. We'll see.

Speaking of traditional markets, had we recorded this the day before, the numbers would have been very different because of what happened yesterday. But as of Wednesday evening, MSCI World up 4.73% in April, up only 1.09% so far this year. The US Aggregate Bond Index up 46 basis points, up 53 basis points for the year. And the S&P 500 up 3.92% for the month of April, and down 59 basis points so far this year. But the year is by no means over, so we'll just have to wait and see.

It is interesting to look at. I mean, obviously, your attributions will be very different from something like mine, but at least what I would expect is that, so far in April, the comeback of equities will probably be supportive. Meaning I think longer-term managers are overall still long, even though with smaller positions, as you rightly indicated. I think some of the currencies might have been productive, from a trend perspective, and maybe even the precious metals would have helped a little bit. But energies, fixed income, etc., etc., much harder to tell right now how that's affecting managers overall. I think we can be a little bit different in those positions.

One point I would add to it, if you expand outside the CTA space… And, by the way, if anybody listening to this goes onto LinkedIn, you must follow a guy named Nishant Kumar at Bloomberg. And Nishant publishes, he covers hedge funds for Bloomberg, and he publishes basically the rankings or the returns rankings of underlying hedge funds. And he puts it up on LinkedIn. And his data is great and it's up-to-date and he’s up-to-date.

But what you see is that tons of really smart people got shellacked in March. Funds that, again, were doing well in January and February, if you're doing well in January… the better you were doing in January, February, the more you got shellacked, generally, in March.

I often think about this strategy as latching on to these kinds of smart money trades, that people are coming to the same conclusion but from a different perspective. And so, I had this funny comment on one of the things where I said, misery loves company. You know, in March, you know, it is at least encouraging to see that that incredible, like, I mean, Citadel's fixed income fund was down 8%. You know, Brevan Howard was down 6%. I have a list.

Yeah, I did notice… I must be looking at a different table. But I did see that he, or someone at Bloomberg, posted a table with some of the multi-strat managers that we know well. And you're right, many of them were down, a few up, but mostly down. Caxton down 15%.

Caxton down 15%. Right?

Oh wow.

Absolute Return down 6%, Marshall Wace Eureka down 5%. I mean equity long/short funds, obviously, if you had more of an international focus, you got slammed. And, actually, also if you look at the UCITS CTA space as well, again you see a very, very wide dispersion. I mean, some people really got hit very, very hard in March.

So, all I'm saying is that what we're seeing in the CTA space is not what may have happened around Liberation Day, or something, where it felt like CTAs, in certain ways had stopped working. It's actually reflective of the broader, you know, what’s called the broader smart money space.

Yeah, completely agree.

Anyways, now that we've done our usual topics, let's dive into some of your topics. You brought along a few. Maybe I prioritized them in the wrong order, but I think maybe the bigger one is based on something you wrote. It may not be completely out in the open just yet, but it's something to do about CTA alpha and how simple it is or how complex it is. But that's the one I kind of listed as the first thing I wanted to dive into. So over to you, my friend.

True. So, I wrote an article. So, there's Hedge Nordic (if anybody reads it, you just Google them, Hedge Nordic), I wrote an article for them. They're doing a series on CTA ETFs, managed futures ETFs. And, by the way, the guys from RPM did a great article as well, kind of talking about how different a lot of the different ETFs are. I mean you have a very, very heterogeneous population.

But one of the issues that we've been focused on a lot, coming from a replication perspective, is the relationship between complexity and excess returns, or simplicity and efficiency in excess returns. And we obviously have skin in the game. We think the latter… we think efficiency is a key driver if you can get it right.

And Interestingly, there are 45 UCITS funds. But the AUMs of the UCITS space is actually lower than the mutual fund space. So, historically the kind of biggest category was the US mutual funds space.

So, what's happened, over time, is now there are 16 CTA ETFs and they've been growing over time. And as the population gets more robust, you can then start doing comparisons between all ETFs, versus all mutual funds, versus all UCITS funds, versus all hedge funds. And so, with the understanding a lot of the data is recent, we did that exercise and then put it into this note.

And I think, when you talk to people about this space, in terms of orders of complexity, the hedge funds will be the most complex, followed by the mutual funds and UCITS funds kind of on the same level. And in those cases, they're often kind of matching or identical to the flagship hedge fund strategy. So, sometimes they're different, sometimes they're the same.

But then when people have done ETFs, they've tended to strip out a lot of complexity. And so, they've said this is going to be more of a simple trend following model. We won't do as many instruments. And, again, as you know, in the space there's a wide spectrum in terms of how people have approached it.

So, understanding all the data and limitations, what's fascinating is that most allocators believe that if hedge funds are charging a lot more, and they're doing a lot more complicated things, the alpha generation of those funds or the Sharpe ratio of those funds should be greater than the mutual funds, where some of the things have been pulled out, and then, in turn, should be much greater than ETFs.

And so, looking at the results (and again, all sorts of caveats about the data limitations), if you look at the past five years, which I think is about as far back as you can go reliably, the average CTA ETF has done 6.1% per annum, which is 40 basis points higher, on an edit-free basis, than the SocGen CTA index, and meaningfully higher than the mutual funds and ETFs which have outperformed the hedge funds.

So, the first part of that, that hedge funds tend to outperform mutual funds and ETFs, seems to be true. But the second part of it, that an ETF's because of their simplicity should underperform, does not appear to be true, at least based on the data that we have. And it's not like they're taking more risk, actually the Sharpe ratio is higher as well.

And so, we talked about the different explanations for it. So, one is this could all be selection bias. A handful of funds happened to have launched, happened to have done well, drew a lot of other people in the space, and we look back in three years and everybody's the same or they do worse. I present some evidence that actually that hasn't shown up in the data yet.

And the argument that I've basically made, coming at it from a replication perspective, is that the alpha in the space… there's a disconnect between the signal that's generated from a complicated portfolio. Because we all agree you should not run a 10 factor trend following model. So, in order to get this signal, and the value of the signal, is that is basically what you're identifying when you're doing trend following is that you're actually identifying that you could be early contrarian and right into a handful of big trades.

So, when I look at the dollars made in the space and things that matter, to me it's not P&L from 100 different orthogonal positions. And so, what replication does, it basically looks at clusters of this and looks at the cross asset relationships. So, anyway, my point is that I think that, from our perspective, the alpha generation of CTAs, it's kind of a two-step process. You need a complicated model like a hedge fund, QIS, mutual fund, etc., in order to detect this signal. (I'm not entirely sure why…)

But the second question is, as an investor, as an allocator, should you be basically doing some sort of a PCA or another analysis? Then, to make a second decision, if I want to be long equities, should I be long 15 different equity markets or should I compress that into a long IFA contract or a long EM contract, which because of the liquidity underlying instruments has certain benefits, etc., etc.

I think this is just one element of the angle, but I think the performance data is starting to show up like that, and I'll revisit the data periodically and if it goes in the other direction, I'll tell you.

Okay, so let's think about this for a minute. I mean, we talked about this before pressing record because you've obviously had tremendous success. So, kudos to you.

To me, a lot of the success clearly comes from how you've positioned and the narrative around replication; that it's simpler, that it trades fewer markets, it's efficient, and on all that. But what I can't help thinking is about a comment I had on a recent business trip. And we talked about these things, right? And the person said, well, there's nothing simple about quant on top of quant, because that's what replication is.

You need the underlying complex quant engines to generate the daily returns that you can then use in your quant model to then extract the positioning that you feel that the space has. And I was thinking about that. Well, I mean, it's kind of true that it's quant on top of quant.

So, I know that's not the messaging, but as far as I can tell, you can't… Unlike maybe in an equity index, where you can put it together like you said, you have to have the complexity somewhere. And of course better to have someone else pay for it, which the managers do in terms of having big research teams.

But is there a point there that you kind of need the complexity, just you don't need it as a firm, but it needs to be there somewhere because otherwise there's nothing to replicate?

Absolutely. But you could also do it… I mean, I was talking to one of the guys who runs QIS models, and I was in Barcelona, and I gave a talk basically to EQ derivatives. I am surrounded by people who I do not want to get into statistical knife fights with. Okay? They will win, but I'm quick on my feet so maybe I'd get away before it reached conclusion.

So, look, in a normal investment process you identify the investment opportunities that you can do and then there's a second decision about implementation. Right? And this has been going on in the background of the CTA space ever since I've looked at the space. You know, boy, I wish we could do one day trend models, intraday trend models on this. It was like high frequency trading. We have a Sharpe ratio of 7 and we're trading 37 times during the course of the day. And it works with US$3 million, but it doesn't work with US$50. And God help you if you try to do with US$500.

Back when I was doing more portfolio management on the hedge fund side, there's also a question, it's like, that sounds great. How much is it going to cost to buy it?

Let's say I get 300 basis points of excess returns on this thing, but it's going to cost me 300 basis points to buy it, and there’s liquidity, conditional liquidity on this type of thing, is it still worth it for me to do it? So, it's not a question that I can answer, but in most things there's a determination of the signal and there's a separate process with a determination of implementation.

And so, what the guy said to me, he said (he actually used this example), he said, I've been looking at the same kind of thing (and this guy could beat the daylights out of me statistically). He said, I'm looking at the same kind of thing with our QIS models. So, I've got signals with all these different equity markets telling me I need to be long equity markets. But now, the next step is what do I do on the implementation side? Yes, you need complexity for the signal.

Well, the managers do. You don't, but the managers do.

Well, I don't know exactly why you need more positions for the signal. And I can't tell you exactly what the right number is. There's an intellectual leap that I see. So, that to me… because you mentioned our success as almost like it's like a marketing exercise. It's also a performance exercise.

Marketing is not going to take a mediocre trend product and turn it into something good. What resonates is because I can back up the efficiency argument with what, I would say, is a structural advantage on implementation. Now, what that gets back to is what I've called the Voldemort of this industry, which is, what are the true implementation costs?

It's easy to say this is what I'm paying for my round turns. What's harder is to say, how much bid/ask… how much am I impacting (I don't know) Chinese power markets, the South African soy bean market, or whatever. And, again, my experience… look, I founded what's now a US$9 billion commodity firm where the quants were the dumb money. They were watching, they were waiting for quants to come to these markets. And who was picking them off? Louis Dreyfus, Glencore. (I'm talking more about the softs and the metals markets where there's more supply/demand stuff.)

So, to me, I believe that when you have a very, very complicated model where you're trading it a lot all the time, that the ripple effects that you cause in the market add up over time. So, you start buying something at 10, by the end of the day it's 10.1 or something.

Now what you see is that your execution price was slightly below where it ended for the day. But you're driving it. It's you. Now imagine if you and seven people, who look like you, are doing it at the same time, and it goes to 10.2, and it ends up reverting. So, those little frictions, again, if you're buying a stock or buying a private asset and doing it once (as I mentioned, this example of what's the cost of buying it), it's one thing. If you're doing it… I think, what was it? A guy who's a senior partner at one of the CTAs, he said, they do 1,000 trades a day. So, as a guy who's been in other parts of this business, that's like, wait, what?

And I agree with that.

So, my belief… And I'm waiting for somebody to come with a robust intellectual defense of the counter argument, which I haven't seen. Instead, people I think just don't want to talk about it. If you get really serious about the implementation costs of more and more complicated portfolios, my thesis is that your implementation costs rise geometrically. And that when you look at these position numbers 180 or 350, that if you are being honest with yourself, it's a coin toss as to whether that market is going to trend enough and be valuable enough for you.

In fact, I would argue, and that's where you and I have talked about, that there are very, very smart people who will look at position number 350 and say, I can't make it work. Where there are very smart people who say I can make it work. And so, the question then, for an allocator, is who's right here?

So, I share your thoughts on that (and people will know this if they listen) I'm not a believer that trading hundreds of markets is necessarily better. I do recognize that some of my friends in the industry do trade hundreds of markets. And some of them have done really well. They've been, you know, exposed to certain factors that we, at our firm, are not. And those factors have actually worked out really well, and performance has been good. I can't comment on your numbers. You say we've outperform everyone by this. I don't know. I haven't done the analysis. And there are also going to be managers who've probably done better, but that's how it is.

But none of the managers, when we started, have done better. What happens is a manager who is not part of that group has done better. And they raise assets, they get included in the index. And so, they're in the index today, but they weren't back then. And a handful of those guys have done better. But, yeah, look, I'll send you the data. In fact, you can actually look at the UCITS fund, the UCITS fund where they publish the strategy data on it. The UCITS fund that we help advise.

So, it's not a marketing story. The market… I mean, yes, yes, look, I'm very good at understanding, but it's the fact that when I went into this business, the way that we did it is I went in as an investor. And I had one investment objective which is I love the SocGen CTA index as a pool of data, as a return stream. But if, as an allocator (and I'm trying to do it in an efficient way), I want to maximize my probability of beating that over time (maximize my probability beating that over a one-year or a three-year period of time), I couldn't find a way to do it by building our own models. I couldn't find a way to do it by buying QS products. I couldn't find a way to do it by thinking that I was going to be better than anybody in this industry has ever been about doing manager selection.

You get me a stock picker with a 54% chance, you’ll either have a higher probability of winning or you'll have some great skew when you win. We don't have great skew in that, but we do have a higher probability of winning. It’s that we're accurate enough, with enough of a structural advantage. And as you know, we don't know exactly how much that is, but it's a big number.

And so, if you have a 54% chance probability, you just keep doing it again, and again, and again. Over the course of a year, you're at 80% or so, over the course of three years, you're well into the 90%s.

And I have the advantage of it being something that could be put into different kinds of vehicles to broaden the investor base. And in particular, the real thing was I wanted to do this with an active ETF where you could see my positions. I wanted to make a new category, new industry, which is where we started this conversation.

Yeah, absolutely. And just for the record, because we talked about this before we pressed record, as I said to you, for me it was a combination of a great narrative combined and backed up by performance, which of course is absolutely true. Even though, of course, as someone who's spent decades in this industry, 5 years, 10 years of data doesn't say much about the future. But so far, this is all we've got.

Have you ever… I mean, I don't know if you ever thought about this. Do you worry that your success makes the underlying hedge funds, who pay the millions for their research to do the trade, that they at some point will say well hang on, why are we publishing this every single day for other people to outperform us? Have you ever thought about it?

Yeah. So, look, we use a broader range of data today than what we started. When we started it was all hedge fund data. But you can't… Okay, so every hedge fund, there are 20 hedge funds out there that could say we're not going to publish our data anymore. They run mutual funds, they run UCITS funds. I'm sorry, you can't tell the SEC we're annoyed at some guys in Greenwich, Connecticut, and therefore we're just going to give you monthly numbers at this point.

So, ironically actually, if you look at, I actually think the cleanest data on the space overall from a signal perspective is a multi-manager mutual fund in the US. And basically, because they have hand selected a bunch of managers that are, themselves, representative of the broader space. It's a subset of the broader space.

But one of the issues you get with, for instance, the SocGen CTA index is markets go haywire, in the US, at 3pm. A lot of European managers have already closed their books and so, you can get this kind of delayed factor auto correlation returns in the index which, from a replication perspective, can make the data a little bit foggier, basically - the signal foggier.

But look, you can also do it with QIS products as well. We could build our own series of basically… We run our own trend following models, we just don't invest in them, but we do use risk management tools. So, there are a lot of different ways of getting access to data.

But I would say what I said before, and I think part of the next part of the conversation will be about the rest of business is not going away. A lot of allocators are in the game of spending their days trying to figure out whether you are better than AQR, are better than Man AHL, are better than this, are better than that. And their clients go to them asking them to do that. And sometimes they will do it for hedge fund products and sometimes they will do it for mutual fund products or UCITS products.

But I would use the analogy from the passive and active debate, if everyone said, mathematically, where am I going to have an incrementally better return over the next 10 years and how can I minimize my fees? There would be no active US management business on the stock selection side. Statistically, the debate is over. And a free basis point S&P 500 ETF is simply a better investment than trying to pick long-only managers at 50 or 75 basis points in the US. And yet I think the latter is still much bigger than the former.

I mean that's an interesting point. We don't have to talk about it today, but actually Goldman Sachs just recently published a paper that, I think I sent you the link because there was something about alpha QIS related stuff, and there was a chart in that paper about the flows, in terms of what has gone into active and what has gone into passive. And yeah, maybe still there's a little bit of an overweight on the active side, but certainly from a flow point of view it's dismal for the active managers. The flow goes into passive.

Right. It's been devastating. You've also had rising markets over that period of time. And I haven't looked at the data recently, but last time, when you hear about passive, and ETFs, and everything else, there's so much noise around it in the press that you think everybody's just investing their portfolios in it. And then if you look at the actual dollars, the last time I looked it was like, I mean, active was still much bigger than passive.

And look, this is a human business. Part of our success, as a firm, is I think we try to humanize and try to think about the act of allocating to this space which is, if you're totally honest, it's a quantitative long/short term based black box. And so, you're trying to get people who find that scary and risky and try to help them look past that to how it can make their lives better.

And on the allocator side, there are people with whom our story resonates because they want something that looks and feels like… You know, fees matter to them. Things like the fact that it's an ETF matters them. There are allocators out there who don't like that story because they want everything else.

And so, look, I hope we're at a point… Right now the active ETFs are basically, including us, it's now 31% of the mutual funded ETF business in the US, so they've grown a lot in the overall space, and it is mostly because mutual funds have been coming down over that period of time. And again, I just don't see it going away.

Because, again, you look outside of it, I think a lot of people who are managing those mutual funds still have huge hedge fund franchises. And honestly their clients, in general, don't like us because it's not what they feel like their job is to do. I mean it's a terrible principal agent issue for their clients. But fund selectors are not rational, value maximizers, Sharpe ratio maximizers. They're also very focused on what do I like? What fund selection makes me look good?

Part of AQR success is how do you go wrong investing in AQR? They check every box. Smart. Here's a 70 page academic paper justifying the investment. I get to fly to Greenwich, and see them, and sit across the table from five PhDs. They have incredible numbers over the past several years, they’ve got a million different products. That's not hard for one of these guys.

Actually, to that point, I think I read an article today or yesterday about how their old business had doubled last year or in the last 12 months. So, it's fantastic. Well done.

Now, in the interest of time, Andrew, because there were several points in our exchanges, what would you like to talk about before we wrap up? There are several things we could talk about.

I would love to talk about the QIS space.

Okay, let's do that.

Because I think the QIS space is one of these areas that everybody talks about, but it is so opaque and foggy. The idea that trend following is an easily definable beta, I think it's generally on thin ice for the following reason.

If you And I and 10 other people say here is a beta and we all go to calculate it, we should be close to each other. You say US large cap stocks, you pick it, I pick it, somebody else picks it. We're not going to be that far off. You and I, and all these people have different trend models or pick different QIS products and you're 20 points off. You know, you could be 30 points off.

And so, in a sense the beta, just like the S&P 500, the stocks can vary wildly but there has to be some sort of agreement around what it constitutes. Now what the QIS products we’re sold at are basically, we’re the beta, like we're trend following beta. But they're not, really.

I wrote a series of papers, if you really get bored, you can go look them up.

But it was basically that this whole idea that you can build a single model that's going to be identifiable beta just isn't borne out by the evidence. And, I started with the merger arb space and I said, by the time we specify all the different parameters, I'm going to be very heavy In a few deals in the US, you'll be very heavy a few deals in Japan. It's like it's all about kind of specifying, you have 35 different parameters, we're going to end up with very different results.

So, an investment bank creates an index. If you launch a fund, you're up on Bloomberg. The fund starts on day one, and you start to build your track record at that point. Five years later you've got a 5-year track record. You launch an index, and on day one it has a 20-year backtest. And how do you get exposure to that? Why would an investment bank do this? They do it because this could be value versus growth. This could be merger arb. They build these strategies and you can get access to them through derivatives, swaps, structured notes, etc.

So, new principle agent issue. You're arming them with basically quantitative macro weapons. And when I looked at the space, I was sort of stunned by how little live data there was. And so, I would sit down with them and I would say, okay, so, G10 currency carry, what do you have?

And they’d say, oh, we've got a 25 year track record.

I’d say, okay, so, when did you actually start?

A year ago.

So, you've got 24 years of backtest. What's the Sharpe ratio on your backtest?

1.4.

What's your Sharpe ratio live?

0.2.

And as I looked at the space more, over time, then I'd go back and ask six months later I'm like, can I see that one again?

They're like, sorry, that one's gone. We have a new G10 currency.

So, as an allocator, unless you really want to do it, it's sort of a nightmare because products come and go. The definitions are incredibly… You might have four different indices of the same strategy with different vol targets. You'll have excess return versus total return. It is extraordinarily difficult, as an allocator, to make sense of all this.

But, I've been interested in it recently because we've been doing… Now we have an index on what we do which is again is grounded in live data. So, it's very unusual in this space.

But there's also, for full transparency, there's also a long backtest to that index.

Yeah, yeah. Well, I mean, actually, technically, the whole index is backtested, or from the date of launch, but usually it's just made-up stuff. Right? It's, you know, I wish 20 years ago I had done the following trades, basically. And people tend to turn the dials.

But the reason I bring it up is because the hedge funds in this space have faced competition from QIS products. And we always talk about it, we say, like we were talking about before, it's like, you know, I've heard there’s hundreds of billions of dollars of trend. You know, there's X amount in manufacturers products, but there's hundreds of billions of dollars in QIS products and things out there.

And I would tell you, as I'm learning about the space, the buyer base is a little bit different. There's often a fund selector guy who wants to outsource it to somebody who's a fiduciary, and then there's somebody who basically wants to be a PM and wants to use these as tools. Even within a lot of hedge plans there’s a little bit of a different constituency.

So, what we decided to do is basically say, look, we track about 17 of these QIs trend products. You can generally get the data on Bloomberg on them. And we were tracking them long enough, we know when they went live, like what their backtest is, when they went live. And, and like, you know, like a quick summary is that this should be a central marketing point of every managed futures hedge fund out there.

They should do this work because you have a multi hundred million dollar pool of capital that, as far as I can tell, has done 200 basis points of excess returns less than the SocGen CTA index. That, where the drop from the in sample Sharpe ratio to the out of sample Sharpe ratio is 90%. That, the dispersion among products, in some years is up to 40%.

So, to me, if I were working in a hedge fund right now who has institutional clients, I would be trying to take back the night and basically argue of course you can look at these different products and you can do that and bolt them together in some sort of integrated package. But somebody should be doing it, in the same way that I'm trying to do it, with hedge funds, versus mutual funds, versus UCITS funds, versus ETFs, somebody on the hedge fund side. This has been a far bigger threat to them than us because, again, you do a swap on a product, you can also basically report zero fees.

So, you basically have exposure to trend, from banks, for zero fees. And you can layer it on. You can do portable alpha, you can layer on top of other assets. But if what you're getting is 200 basis points worse and the dispersion you're picking up… Anyway, so, just throwing it out there.

So, let me ask, because I'm not an expert, in fact, I don't know much about the QIS space at all. But I have learned a lot from Nick, of course. But you once told me that, for example, you have an index now, right? And that when you have an index, you're not allowed to change the model. You have to stick with the model. You don't have to do any research, you have to stick with it.

Is that the same for QIS products? So, that if XYZ bank launches a trend product QIS, based on an index, that they cannot do any new research, they can't add anything to it? That strikes me, when I think about all the research we do and, like, a quarter of our company is in research, and we do make upgrades. We do believe that our product today is better than what we had 10 years ago. I would be surprised, if we weren't allowed to do any research… How…?

So, one is, a better question to ask than that. So, in theory, you launch an index, you're not supposed to change it. Right?

Okay.

But under extreme circumstances, let's say they have lots, and lots, and lots of swap contracts out there tracking the same underlying index. Yes, you can change it, but there's a process that you go through. It's not like we just decided to change things, so we're doing it tomorrow.

I think the general business strategy though has been to launch new indices, and new indices, and new indices, and new indices. So, the research happens. Right? And Nick is awesome. I mean, Nick, I think does some of the best research on the space of anybody that I talk to. But the tendency tends to be, we have thought of something new to enhance it, here is our new index around it. So, it's a constant series of launching new indices.

And look, there's a company called Premialab, which we don't use, but

they basically try to aggregate all this stuff, and you can go in as an allocator, and they just sold for a lot of money, they were bought by investors or something. So, there are people who are trying to get a handle on it.

But I think, rather than the energy being about hedge funds versus replication, if I were them, I would say, yeah, we're quants, but we're investors, and we're fiduciaries, and you give us money, it's in a fund, and we have a responsibility to manage that fund in a certain way.

But wouldn't the QIS market, wouldn't that be an even better market for you to go after, so to speak? I mean you as a replicator because there your outperformance might be even greater and you would have maybe an even stronger story.

So, it's a market I'm learning about. As usual, as we've talked about, I don't think about A MARKET, I think about distinct segments of different markets. So, where the index and the derivatives are most valuable to us, I believe, over the long term, is for it to be used by people who are running UCITS funds, mutual funds, or ETFs. And so, about two months ago, a US$12, $US13 billion dollar, US, ETF company, Simplify, launched an ETF that's 35 basis points, index based, reported - an index based and meaningfully more tax efficient than any other product out there that I can see. And that's the power of being based on a derivative.

So, I think, and we have a fund that's going to be launched, a UCITS fund, that again another partner is going to launch in May, that will be a sub 50 basis point swap-based product with a vol overlay.

Again, but this is… and I'm sorry to bring it up, but I do think it's interesting. It's this thing about when people say, yeah, it's going to be a 35 basis point product or a 50 basis point. Well, it's on top of the 85 basis points they pay you.

I mean this is where I find it to be a little bit weird that, with all the regulation we have nowadays that you can essentially… and I guess we could do it as well. I'm not saying you, I'm just saying generally you can just do a product, use a swap, and then you don't have to report any fees. I think it's completely crazy with all the transparency that is being imposed on us. We can't even talk about, you know, backtested data. We can't talk about even our real track records in public forums, and we certainly ought to disclose the fees. But if it's a swap, we don't have to mention it.

You disclose incentive fees.

Yeah, we have to disclose incentive fees. If you have a fund…

If you get to the end of the year, in a UCITS fund, and you have points of incentive fees, does your expense ratio for the prior year…?

Yeah, you have to adjust it. I don't know what the name is, but you have to adjust it. There are all these different reports you have to do.

What about trading costs? I think the flaw in what you're saying, Niels, is that you see us managing DBMF. Right? And DBMF is 85 basis points.

Right.

With, essentially, zero transaction costs. Right? We're competing with 170 basis point mutual funds out there that probably have 200 basis points in trading costs. You will electively ignore those 200 basis points? I think an apples to apples comparison…

No, I think that's a fair point. I think it's a fair point and I think people should disclose the trading cost as well. I'm all for that…

But, again, it's subject to manipulation of the rules around reporting. Right? Like this, it happens… So, if you look at most of the UCITS funds out there, okay, Transtrend wrote a great article on this, actually, about how flawed the UCITS fund transaction fee calculations are. If I start buying an asset, in a UCITS fund, at 10 and I buy it, buy it, buy it, and by the end of the day I've pushed it up to 10.2. That's a negative trading cost because I'm comparing my execution price to the settlement price at the end of the day.

So, there are complicated UCITS funds out there that report zero transaction costs - zero. Look, we know that is off by probably, from my calculations, would be off by a lot of basis points.

So if you did not see an 85 basis point ETF and somebody came along, and because I had never done that, and I'm just getting into the business for the first time with a swap, somebody is doing a product on us and we're not a sub advisor to it, and they're buying a swap on what we do, would you really want to dig into the underlying swap costs? No, you just say it’s 35 basis points, they are going to have costs associated with it.

And that's true across the asset management industry. There are products out there with hundreds of basis points of trading costs - nobody cares. Look, I've been with consulting firms where they're bragging about having 0% and 40% incentive fee share classes because they can report the 0%, not the 40%.

So, it's the ‘pearl clutching’ around this point. The reality is that we have hundreds of basis points of an efficiency advantage. That's the question. And whether it's worth 35 basis points or 85…

Sure, and, of course, investors obviously who at least want to dig a little bit deeper, they should of course look at the net returns and then…

It’s your job to ask. And I think it is even in the prospectus of what the expected costs are. I mean…

Yeah, but then let me ask you this thing though, and then we'll wrap up for today. If someone then buys a product that is based on your index, but they pay another 50 basis points, 35 basis points, whatever, on top of your cost, why don't they just buy your product? I mean, why pay the extra 35 or the extra 50 if they can buy your product?

Ah, good point.

Because here you're talking about two identical products.

With the same, with identical all-in cost. You know who I am, Neils, I'm not going to come out with some garbage higher cost product that costs 50 basis points more because I can tell people it's cheap. Right? Take that to an extreme, right?

Why don't we layer hundreds of basis points into the swap and do a zero and we'll subsidize the cost of somebody's ETF. It'll be a zero basis point ETF, right? I'm not going to do that…

No, no, I think you misunderstood. I'm thinking if people say, okay, I can buy product A, and it's up 10%, and product B is only up 9.4% … But they're exactly the same product. Why wouldn't they just buy the product that gives the best net return? That’s my question.

So, what I want to simplify with this idea, okay? I said we are only doing this if they have essentially the identical all-in cost. So, your fees, plus the swap costs, must equal DBMF fees plus implementation costs. And so, DBMF makes 10, this other one will make 10. But I can save you up to 150 basis, potentially. I'm not a tax advisor, blah, blah, blah… I am a taxpayer and hence motivated to try to think about this stuff. I think an Investor might save 150 basis points in debt, after tax returns, over time.

So, to me, look, the way that I thought about it was DBMF, In a sense, I felt like I got it to third base, but the new product, to me, brings it home around two issues that, again, when you break down the market there are a lot of allocators out there who sold their clients ETFs that are passive, very, very low visible fees, and generally more tax efficient. Those three buzzwords are…

Now even though I have a three plus billion dollar active ETF that I sub advise, it's 85 basis points, it's active and it's, look, it's tax efficiency, I mean, we sort of have actually bent the curve toward more tax efficiency by getting people to trade more futures in the entity as opposed to down in Cayman subs.

But still, that works very, very well for a specific constituency who's buying it. Right? These are model allocators who are comparing it to 170 basis point mutual funds. They never think about taxes because everything on the alt side is tax inefficient. But Simplify and I are going to focus on finding that guy who's got a model portfolio, desperately needs diversification, but his all-in expense ratio is 25 basis points. He's told his clients that, you know, passive, and kind of all these buzzwords words around it.

I want to build a product where it's easy for that person to make this a 3% or a 5% allocation. And that requires spending a lot of time on product engineering. And basically, so, you know, I spent two years kind of again, you know me like I'll talk to everybody. I will track down people left and right and get them on the phone and say, you know, help me think through these issues. But again, it's addressing different parts of the market.

Yeah, yeah, it's great, and we obviously love these conversations so people can better understand what the options are and also how the space is evolving. It's super interesting, and it'll continue to evolve. So, I can't wait for our conversation in 20 years from now, besides the global geopolitical issues, what product innovations has happened since then?

I'll be rolling in with my wheelchair by then.

We're getting to negative costs maybe, who knows, we'll see. Anyways, this was awesome, Andrew, as always. I really appreciate your time and the preparation that goes into to these conversations.

And for anyone listening out there, if you want to show your appreciation for Andrew and what he does, why don't you go to your favorite podcast platform, leave a rating and review. It helps us understand what you like and not like. And also, it helps more people get familiar with the podcast and the information that these amazing co-hosts share every single week.

Speaking of that, next week I will be joined by Rob Carver. So, that will be another chance for you to send in some questions for Rob, and he usually gets quite a few so be sure to be early on that. And you can, as usual, send them to info@toptrradersunplugged.com and I'll do my best to make sure we get them in front of Rob next week.

From Andrew and me, thanks ever so much for listening. We look forward to being back with you next week and in the meantime, as usual, take care of yourself and take care of each other.

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