Trend following has long promised and delivered diversification, crisis protection and uncorrelated returns. Yet many investors still struggle to hold it through difficult periods. In this conversation, Andrew Beer and Eric Crittenden explore why that gap exists and how combining trend following with equities may create a more durable portfolio. Together with Niels Kaastrup-Larsen discuss the rise of managed futures ETFs, the debate between simplicity and complexity in systematic investing, and why algorithmic discipline allows investors to act when intuition fails. The episode also examines portfolio construction, product design and the evolving role of alternatives in a changing investment landscape.

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50 YEARS OF TREND FOLLOWING BOOK AND BEHIND-THE-SCENES VIDEO FOR ACCREDITED INVESTORS - CLICK HERE

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Episode TimeStamps:

00:00 - Introduction to the Systematic Investor series and the week's guests

02:19 - Eric reflects on recent market trends and challenging periods for trend followers

03:15 - Andrew shares optimism about AI, innovation and technological progress

06:25 - Elon Musk, SpaceX and the future of technological disruption

09:22 - The evolution of managed futures ETFs and the growing demand for alternative strategies

15:58 - How ETF liquidity works and why portfolio construction matters

19:40 - The case for combining equities and trend following into one portfolio

21:37 - Eric explains the philosophy behind his multi asset approach

31:15 - Product design, allocator behavior and why diversification often fails in practice

40:44 - Simplicity versus complexity in systematic investing

46:58 - Why elegant models often fail in real world markets

57:05 - Sharpe ratios, diversification and combining multiple return streams

59:52 - Andrew introduces the idea of Contrarian Tactical Alpha

01:02:55 - Eric on algorithmic discipline and why trends are uncomfortable to follow

01:05:26 - Final thoughts on trend following, risk management and portfolio construction

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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, Eric Crittenden and me, Niels Karstrup-Larsen, where each week we take the pulse of the global market through the lens of a rules-based investor. Andrew and Eric, it's really great to have you both here this week and it's been a little while since I had you on Eric, so that's a real pleasure.

So let me start with you, Eric. How are you doing?

Life is good. It's hot down here in the desert in Arizona. Business is good. Yeah, I have nothing to complain about. Is a fertile soil environment for finding trends and there's a lot of dislocation, a lot of uncertainty, and I think a lot of risk premiums to collect going forward. So, looking forward to it.

Exciting. Good stuff. And Andrew, not that long since we last spoke. How are you doing?

I'm doing very well, thank you. Looking forward to the summer.

Yeah, absolutely. Things are heating up in the US, with the invasion of football fans or soccer fans I should say. But we'll hear about that, I'm sure, as we head into the season.

Now, we’ve got a few things that we wanted to cover today, but still I would like to just go a little bit outside the topics, as we normally do in the beginning, and just kind of get a feel for what you find interesting at the moment that doesn't necessarily relate to trend or anything finance for that matter. But Eric, since it's been a little while, is there anything, in particular, that I wouldn't say has kept you up at night, but something that you find interesting at the moment?

It has been a while. I would say that the drawdown we experienced last year, maybe, what was that, 14 months ago? There were a couple of nights where it was more difficult than usual to fall asleep. That was a very challenging environment. The tariff tantrums that were going on in April of last year. Since then, it's basically been smooth sailing.

Can't count on that forever, but it's been a very profitable period of time. It's been a lot of trends, a lot of risk premiums to collect, but there was a challenging period of time for pretty much everyone I know that was trend related in April of last year. But this year and the subsequent 12, 14 months have been pleasant.

That's good to hear. Andrew, since we last spoke, anything exciting that you've come across that you've been interested in?

Well, I mean this was I'm sort of a, like a curmudgeonly battle hardened investor in a lot of ways and I'm very skeptical of a lot of things that are going on the markets. And you know, when I see the valuations of AI companies and the kind of circular financing and everything that's going on in it my natural instinct is just to, is to feel like… it feels “dot comish” to me.

On the other hand, I was talking to the guys here at the office yesterday. And there's something so wonderfully optimistic and exciting about it. I mean, SpaceX, a private company like shoots these rockets into the sky and catches them with chopsticks. They're talking about colonizing… And like the private sector… We have companies coming back into the public markets after two decades of basically public companies going private and the wealth creation involved in it.

So, there's something… I just took a step back and I thought this is… I mean, yes, maybe AI will kill us all in a few years and this will be… But there's something just wonderfully optimistic and exciting about what humanity can do at this very, very moment in time. And I don't know.

So, in the midst of all the macro chaos, and waking up every night at three in the morning, and checking where the hell oil is, and everything else like that, I just had this kind of burst of optimism. And maybe it's just the fact that it's finally warm here after a brutally long winter. So, that's been on my mind.

Yeah, absolutely. It's funny, speaking of AI, I think you and I, actually, Andrew, last time we spoke I mentioned something about AI and there was a single guy who had created quite a large company, in terms of revenues, just by using AI. Anyways, so, the other day I was sending a song on Spotify to my son saying, yeah, take a listen to this is pretty good. And he comes back, like half an hour later and said, dad, you do realize this was AI generated. I thought, wow! I mean this is crazy. If it can make music like that, we're in for a good time.

But you're right I guess, is it an hour ago SpaceX launched? I don't even know what the price of the stock is, but I guess it IPOed at US$135. So, we'll see how it all goes.

I don't know to share, but you know, but I think Musk just made another US$400 billion in the last hour. So, it just is… it's just incredible. Right?

I mean, if you like hear the thing, the number of times it almost went bankrupt, and the way they're talking about the people who stood behind him through good and bad, the fact that this is an industry that had basically been nationalized for decades.

And I don't know there's so much that's problematic, that I find problematic, about social media and technology and other things like that, but there is just something boyishly exciting about sending people into orbit and putting data centers in space. It's just… I don't know, I'm feeling... There's something wonderful about it all.

It actually reminds me also about, we had a guest on many years ago, I would say five, six, seven years ago, a financial astrologer. So, even by definition that title, you get pushback when you put someone on the podcast like that, and he was making his forecast, and so on, and so forth. But actually, one of the things that stood out to me (and this was kind of the beginning of Tesla and all of that stuff), basically, I don't know if this was on the record or off the record, but he was basically saying, Elon Musk is going to be the richest man on the planet. And I think he just solidified that position today.

So anyways, enough about that. Let's jump into the program, so to speak. Trend following, my trend, barometer finished yesterday at 43. That indicates a slightly weaker environment, the last couple of weeks. Probably that aligns with the performance we'll hear about, in a second. And I think mostly, at least from my vantage point, what I see is that equities and metals have been a little bit challenging. And that's probably where most of the difficulty has come, but this Friday, today, it might change a little bit going into the weekend.

BTOP 50 down 69 basis points for the month of June, up 8.93% for the year. SocGen CTA Index down 58 basis points, but still up 9.83% for the year. SocGen trend down 84 basis points, up 9.49% for the year. And the Short-Term Traders Index down about 0.50%, but still up 4.84% so far this year.

And in the traditional world, MSCI world, as of last night, down 2.39% for the month, and up 8 and change for the year. The S&P 500 Aggregate Bond index up 6 basis points for the month, up 64 basis points for the year. And the S&P 500 down 2.4% so far in June, and up 8.6% so far this year.

Now, before we jump into the topics, because people heard that both you and, well, both of you were on the show this week, we did actually get a couple of questions, three in total, that I wanted to just briefly run through.

I was hopeful that would change over time. And the evidence I've seen thus far is that has been changing. Market makers are starting to build the infrastructure such that a portfolio like ours would run smoothly and efficiently in an ETF structure. So, it is on the horizon for us to look at offering it through an ETF structure.

I think the things that Andrew has done were very intelligent; to take managed futures and reduce some of the dimensionality in order to fit it into an ETF structure. I think he's done a great job. Some of the other providers have also done a great job. And we've looked at doing something like that as well.

So, some balance in the middle because you don't need all of these markets. We don't need to be trading platinum in Japan, and Malaysian palm oil, and whatnot. They're kind of nice to haves but they’re not needs in the portfolio. At least from a performance attribution perspective, you can kind of see that they just don't make that big of a difference. So, I'm happy with the direction that the ETF industry is going and it's something I have my eye on.

So, maybe a follow up question for you, Eric, on that, and that is, what do you think it would make in terms of difference? What would you be able to do if you converted your product to an ETF or launched a version of it? But let's just say it's essentially trying to do the same thing, but within an ETF structure. What does that actually do for you?

So, on the equity side, because we're using ETFs rather than futures for that dedicated long equity exposure, there would be some tax benefit and that would be great. But the main thing, selfishly, is simply to increase your distribution opportunity set. The newest generations of advisors, a lot of them are ETF only. A lot of individual investors, ETF only. So, it would be to increase our ability, our footprint to do business with more people.

Maybe I could follow up with you, Andrew, on this because there's another question that kind of relates to what Eric was mentioning about market makers. There's a question from Johan who says he'd love to know more about how are these ETFs are actually priced intraday? And also, are you able always to buy or sell an ETF at some kind of official NAV once a day? Like if you were doing it with a mutual fund where I think you always can trade at an NAV.

Yeah, so ETFs are different at least the way… And by the way, there are some mutual funds that will have ETF share of classes now and some ETFs that will mutual fund share classes now. I really don't understand all the mechanics of all that, so I'm going to talk specifically about just a straight ETF.

So, a straight ETF is different from a mutual fund. In a mutual fund you don't do anything during the day and then you subscribe or redeem at the end of the day. They calculate the NAV at the end of the day, and you subscribe or redeem.

But with an ETF you have an NAV that fluctuates during the day because you know what the underlying portfolio looks like and that changes your pricing. But the pricing, when you buy and sell, is the market. It's that there are people who are offering to sell at certain prices. There are people offering to buy at certain prices.

And you know, all the things you would think about if you're buying a stock in terms of what's the mid, where's the bid, where's the ask, how deep it is on either side of it? There are different exchanges, there are off-market trades that get done.

So, you know, back to Eric's point, I mean Eric makes, I think a very interesting point is that there is a structural question in the ETF space, the liquidity… but it’s a debt… One other things, as well, is there are people called market makers whose job it is, and who make money if that order book is imbalanced and somebody has too many buys or too many… They are supposed to step in and keep things close to NAV during the course of the day. Sometimes they do better, sometimes they do worse. But this is how firms like Virtu and Jane Street and others and Citadel have become monsters.

But the efficiency of that process is also tied to the underlying portfolio. Because when people are buying and selling, when market makers are transacting in the market, they may often be hedging themselves, not necessarily with the ETFs themselves, but also just by hedging or looking through and looking at the underlying. So, the more complicated the underlying is, the more illiquid the underlying is, the more risk they have of moving the price of the underlying. They will take less risk to try to keep the price close to NAV. So, when we built the ETF that we launched, back then the idea was if we stick in the deepest and most liquid markets, they've got no excuse. If you guys need to hedge yourself with these 10 instruments, you should be within a penny or two of where the NAV is at that time.

And given the massive success you've had in growing your product, Andrew, have you seen the kind of spread that I guess you refer to during the day between the bids and the offers that people can trade at? Have you seen that change a lot then? Meaning I imagine narrowing?

Yeah, I think so. There's what you see if you look at the screen and clearly the spreads have come in. If you wanted to blindly put 25 or 50 million dollars into a managed futures ETF, and you looked, you said like where can we actually transact at that level and not have to think hard about it? I think what we do would be the obvious choice.

But when you get into bigger dollar amounts, if you're a model allocator and you've decided on Tuesday we're going to put $75 million in, then that you have an ETF desk, and the ETF desk will basically do block trades or trade in dark pools or things like that. And so, one of the things that we found, and one of the selling points, is the ability to move large dollars in and out of this (hopefully just in, thank you), and to be able to do that efficiently because there is a fear, for people who grew up in a mutual fund world, you never had to think about this.

And I think, as Eric can attest to, when you get into the advisor community, they're often incredibly focused on the one, or two, three things that can go wrong and make them look bad. And if they spend months looking at a fund or an ETF deciding they love it and then they accidentally put in a market order at 350 and are not paying attention to it. And their little trade moves the price 50 basis points and they look bad because of that. You've got to make sure that doesn't happen for them.

While you were writing about, in your LinkedIn the other day, about another ETF that got a 4 billion dollar ticket one day. So, I guess…

Eric, yeah… you got in against the ETF space. I mean this is the multi strat ETF space just tripled overnight. You know BlackRock… So, BlackRock launched this… It's kind of… I mean we can talk about it but like there are some allocators who want a one stop solution that kind of helps them to fill the alts bucket, gives them kind of an absolute return profile. There are other allocators who want to build those building blocks themselves.

And so, there's a strategy called the multi strat space which is designed to be the one-stop solution. And there are really two, roughly, billion dollar funds in that space; one by New York Life called QII or IndexIQ (I wrote kind of a fairly obnoxious LinkedIn post about it a few minutes ago) that's now above US$1 billion, and then Franklin Templeton has a fund that's done very well. It's a long/short quant ETF called FLSP that's getting close to a billion. And then BlackRock came in (and in the interest of disclosure we sub advise a similar kind of product for SEI which is now an ETF)... And then BlackRock launched a new fund at the end of December. And it kind of got up to like US$100 million, US$200 million, US$300 million.

You're like, okay, they're putting into their models, it's growing and then boom, like US$4 billion came in one day. So, to me this was the starter gun, back to Eric's point. It's going to eclipse the money that was ever in the mutual fund space once these trillions and trillions of dollars of model portfolio start to basically say we need something, we need a third leg of the asset allocation stool and how do we build that?

Yeah, all right, well, speaking of products that people need, the magic combo was one of the headlines you brought along, Andrew. And of course we are referring to trend plus equities, or equities plus trend, or it has many names nowadays, this combination.

And so, I'm going to pass it over to you, Andrew, because you know where you want to go with this. And I'm sure Eric has lots of good things to say about that as well.

Well, so, I think this has probably been covered in, I don't know, 50 podcasts, 100 TTU podcasts with different people. And Eric has done great research on this and you know, Rob Croce wrote that paper recently for Fidelity and Man AHL has done this. I mean, it is about as statistically obvious as anything that managed futures, as a strategy, plus equities is, 1 plus 1 equals 3, or 4, or something like that. It's a very, very valuable combination.

When I first spoke to Eric, several years ago he had talked about (and he could talk about this himself), this idea of do you combine in the same package basically to bring those benefits together for somebody and do the work for them, or do you want to let them pick and choose in how to build it? And then it goes into a further direction with what Corey Hoffstein has done. And now JP Morgan is coming with managed futures plus equities and Winton is doing it. And I think Aspect has a product. So, we know this combination is incredibly powerful. And then just the question is, how do you deliver it to people based upon their different preference functions?

And so, I will tell you that I spent some time with ChatGPT this morning and they love what Eric is doing in part because of this, because ChatGPT cares about results, it cares about the statistical outcome. You don't have to convince it that diversification, that improves your risk adjusted returns, is a good idea.

Eric, why don't you take us back a little bit to the thought process and just tell us how you thought about it, why you chose the combination you did? And actually, also, in a sense, that allows you to be different from some of the new ones that have come out. And so, we'd love to hear that.

So, I've experience dealing with the realities of getting allocations into long/short equity on a standalone basis, and managed futures on a standalone basis. And it took me, I don't know, a couple decades to be fatigued by the bizarre behavior that you see from people that allocate to these two spaces.

They tend to buy things that are up a lot and sell them as soon as they stall out. I mean, you guys are familiar with prospect theory where a $10 gain gives you one unit of pleasure, but a $10 loss gives you two units of pain. If you take that, and I found that to be generally true of most human beings across cultures, across generations it's just a reoccurring thing. But when everyone is ranking investments against some benchmark like the S&P 500 or 60/40 portfolio, the prospect theory gets even weirder, where it's not only are you up or down, it's are you up or down relative to what I and everyone else is staring at?

So, it got to the point where it was almost impossible to get anyone to hold managed futures for more than a few quarters, let alone years or a full market cycle. So, no one ever disputed the math. I mean, it's such simple algebra. If you integrate in a decent managed futures program into any portfolio, it does the thing where returns go up, vol goes down, drawdowns get smaller, everything gets better. So, no one ever disputed that. And most people can be convinced that's a wise thing to do.

Then they do it. And then every quarter of every month after that, they're staring at it. They're staring at that line-item risk, they're staring at the statement risk. And it just creates this psychotrophic cascade. It's a new problem that goes into their life that has them talking to their clients, and talking to regulators, and their compliance department. Everyone's micromanaging everything. And I just got fatigued by it after a couple of decades.

One was what would I do with my own money if I had to leave my money in something for 25, 30 years and just set it and forget it, what would that something look like? And the other was product market fit. What does the marketplace need that it doesn't already have, at least at scale?

And it didn't take long for me to realize that if I can build a good managed futures program and don't charge hedge fund fees, don't charge the 2 and 20, and have something that's scalable, and I combine it with low fee, tax efficient equity exposure, that would satisfy both my needs. I'm not afraid to own equities as long as I've got the long convexity trend component that can fill those potholes during the hard times, or at least the expectation of that. And going forward, I'm happy to own equities with a big chunk of my money. As long as I have that balance between convexity and equities. So, it solves that problem.

And then the theory was that we think that there's a marketplace for products like this and we decided to put it in a mutual fund wrapper at the time. I think that was a wise decision. It remains to be seen if that's the best wrapper going forward. So, we're very open minded to other types of wrappers.

But you know when you're embarking on the final chapter of your career, and you want to do something satisfying, kill two birds with one stone, it's the product that I would like to invest my money into. And I do think that the marketplace, once they see it for a while, will find a way to put it into their portfolio. Andrew mentioned that things like this sometimes are a one-stop solution for the alts bucket, at least for smaller advisors or smaller portfolios. And we found some of that.

We’re still trying to find our exact place. The way that the industry works is they've got these boxes. Are you large cap growth? Are you small cap value? Are you fixed income active? They've got these kind of discrete boxes they want to stuff you in.

But to get that benefit that we're talking about, a diversifier that actually increases returns and lowers risk at the same time, you're not going to fit into any one of those boxes nicely. So, we're trying to figure out how to navigate that going forward. But I mean, I don't know. That's my answer is that it solved two problems for me and that's why we did it. And so far, so good.

I'd love to hear, obviously, from you Andrew on this, but I’d also love to hear, before we move away from that product idea… There have been a lot of iterations, let's call it that, I mean the idea was obviously not new per se, but I think you should have the credit, Eric, for being really the first that kind of brought it out. Lots of people or some people were talking about it but never really brought it out as a product. So, kudos for that. But since then, there have been new versions of this idea; portable alpha, return stacking, etc. etc.

Maybe you can talk a little bit about how you thought about balancing the risks between the trend part (and I know you don't necessarily talk about it as trend but global macro maybe), and the underlying equities, and also maybe how you maybe see the different directions other people have taken, rightly or wrongly, so to speak. And yeah, any thoughts you have on that?

I strive for equal risk contribution from the equities and from the trend side. Call it trend, systematic macro, managed futures, those things are such close cousins that, you know, it's hard to tell them apart, in my opinion. That's from my definitions. So, I strive for equal risk contribution from both because I don't know which one's going to do better in the future.

And when you say that, Eric, sorry to interrupt. I just want to make sure people out there listening, saying, well, what does he really mean by that?

Do you mean you just want to have the same level of volatility for both or how should people think about when you say equal risk contribution?

It's pretty close to that. You could think of it as equal vol contribution. Contribution mathematics are complicated and we're not doing super complicated stuff. But you could think of it as, I've got a managed futures program that has 8 vol, and if I put half my money in stocks, that gives me about 8 vol from stocks. So, 100% in my managed futures program at 8 vol, 50% in stocks that are at 16 vol, mathematically gives me 8. You could think of it like that it's pretty close to that.

I'm a firm believer that whatever it is that you're going to bat for, and you have to stick with for decades, it better be a decent fit for your personality. Because the accountability and the responsibility land on me. I need to be able to sleep at night and I need to be able to stand up, and deliver, and defend what it is I'm doing. So, it needs to be congruent with what I think is right.

So, I picked the numbers. I'm not trying to get rich fast. This isn't an aggressive program. And I'm glad that the new entrants, many of which I'm friends with, so, I'm glad they're not exactly copying us. They're coming with much higher volatility products. They're doing what they need to do. They're also trying to balance what works for them psychologically and also their own interpretation of product market fit. Like what does the marketplace want?

I took my shot. I built the program that I am comfortable with, something that I'm happy to invest my money or even my mom's money, and for a long period of time. I'm happy with the volatility, the drawdowns, the returns. It's just right there. And I wake up every day with a smile on my face.

So, if I was running it two times the vol, I'd be worried about compliance and, you know, the VAR risk, and, you know, I might be losing sleep. If I was running at 1/2 vol, I'd be worried about being left behind, not keeping up with inflation, not making any money, not justifying the fees that one charges. So, it was just a place where that's what made me and my co-workers comfortable. It's aggressive enough to be competitive, but not so aggressive that, you know, we're going to be scrambling in risk-off events or, you know, when trend is way out of favor.

Yeah, I guess Andrew, from all our conversations over the years, to me there's a lot of similarities. I mean you also, I guess, built a product that really was something that you wanted to be in for yourself and a few billion other people as well, so to speak. Tell me a little bit about… Because you had this, in the notes we shared together, you had a headline called the Good, Bad, and the Ugly of Zero. So, take us into that, and your thoughts?

Sure. Well, I mean I just want to highlight and compliment something that Eric has been saying. To anybody who's listening to this, I want you to understand how different the way Eric described this is from normal product development in this business. Normal product development, in the mutual fund and ETF business, is marketing and distribution people who are saying, look at how much money they're raising over there with that product. How can we build something and stuff it in people's portfolios as fast as we can and all make money? Right?

Whether it's going to work over five years is not a critical part of their thinking. They don't own it five years from now. They will have moved on to multiple different products. And I think what I have talked about a lot, and I think one of the great problems with the alternative products… I mean, the average… Look, I mean, I've said this a million times, the average hedge fund, mutual fund has been a catastrophe for investors. Like 2% to 3% per annum returns after 200 basis points in fees.

I say stuff like if this was a football team, you'd be investigating people for throwing the game. I mean, it's worse than random. And I think that's the industry structure issue. So, I would just say to anybody who's listening to this, like you want to hear from somebody building a product that they're thinking about it from an investment perspective. They're thinking about how they're going to be judged on this 5 or 10 years now.

And look, Eric has made a career bet that this will work over 5 or 10 years. And that is similar to the way that I had it. We don't have a zillion different products out there. I'm a very big fan of it. And I think what I would also say is that, when we talk about kind of addressing or the addressable market, there is no addressable market. There are hundreds of submarkets out there. And the challenge is how do you build products? How do you identify which of those submarkets you're going after?

They then start doing screens and they look for managed futures, they look it up, they find hedge fund indices. They can't invest in hedge funds. They find mutual funds, they can't invest in hedge funds. Can I give them something that will make their lives better by making it easy for them to allocate 3% to 5%?

If I did nothing but have allocators like that, and if I could find all of them and talk to them over the next 10 years, I'd be very happy. And I think what Eric identified, and I think I even said this on TTU, that I thought it was brilliant when he described it, was that what advisors say they want, when they say they want diversification, they say they want these benefits, they say they want tail risk or whatever it is, like tail protection or whatever it is they're talking about doing, there's often a narrative because their actions often don't follow their words.

You can show up with them and say we have something that's providing diversification the way you just defined it to me, and they still don't pull the trigger. And so, I think the really interesting thing about this business, and what I enjoy about talking to people about it is trying to understand really what's in their decision making.

And I think when I think about Eric's product, what he identified was a very specific investment, or a very specific fear that allocators have, which is, I put money into this, I've taken it from stocks or a combination of stocks and bonds. Equity markets go up 100% over the next three years. And people are asking why I did that.

And even if this is fantastic in year four, if equity is one of a hundred, and my managed futures portfolio had a fine three years and went up 20%, even though that's a success from a diversification perspective, I'm going to be blamed for it. But if I've got 50% equity in there as well. And I'm up 70%. No one's going to complain.

And so, the way, when we first met and talked about it, is I thought it was such an insightful perspective on a particular segment of the allocator community who was looking for an absolute return product, who wants something they can put in their portfolio for a long period of time, and this happens to be an important criteria.

When you shift over to the full portable alpha products with 100% equities, the driver there is that there is a subset within the allocator community who is very worried about capital efficiency. They don't want to sell anything to get exposure to it. They don't want to sell a penny. Why would you sell a penny of stocks? They've gone up 15% a year for 15 years. Like, keep them all. But yet, we still need to diversify, so what can we add on top up to do that?

And so, I think the great thing that's happening is, between the ETFs, and the mutual funds, and the different kind of shapes and sizes of different products, is trying to identify, within this broad landscape, as to how do we make the allocators lives better around their specific preference functions?

I mean, you mentioned something that I just picked up on when I was listening to you and you said lots of products are being sold. It essentially starts with the marketing problem and then how do we do that? And you've mentioned this thing about, well, they don't own it, and all that. And I think, I mean, it does raise a little bit of a topic, I think, that is the industry, as a whole, including the firms that we represent, we are individual firms where we probably have a very large part over there, our net worth, liquid net worth tied in the products that we offer.

And as you say, and that goes for the three of us here, and for most, I would say, of, at least from the CTA community that I know, to a large extent, they have one, maybe two big products that they offer, but they're very focused on making that the success. But the challenge is always… And we've seen this, we've talked about this, Andrew, in the last year or two, I mean we have the very, very biggest asset managers in the world coming this space now offering these types of products.

But as you rightly mentioned, they're not doing it with the same background, so to speak, or whatever the word is, that the all the small individual managers are doing. So, I don't know. I mean, I don't know if this is good, this is bad. But I do think it's important maybe for investors to know the difference between what it means when you invest with a manager where they are really committed and invested in the product, and in a product that is just one of a hundred and where the people you talk to probably own very little or nothing of the product. So, I think that is an interesting…

And I think that should be part of the due diligence process. Right? I mean, so, I spoke to Yaz Romahi who's the JP Morgan guy who's built their products (I've known Yaz for years), because they're coming with an ETF in the US. They had a series of ETFs years ago and they pulled them. Yaz is an all-star. Right? I mean, he is an absolute brilliant quant who runs a very, very large business who's been running trend products for years and years.

So, to me, JP Morgan is doing something very serious. Incredible. They're going to a team who knows how to do this. They're not asking somebody, kind of, who happens to have an engineering degree to try to become a trend follower over time. I think Fidelity did something similar when they went out and they hired Rob Croce.

I think my criticism of some of the other people out there is that they've kind of just gone and grabbed anybody who seem to meet the criteria because again, it's really, for them it's largely a one-sided option. If it works, they've got a product they can go out and market and throw a distribution team behind. And if it doesn't work then they'll just shut it down and move on to the next thing. But again, the burden of that is on the allocator.

This is a… you guys have got to ask these questions. You should talk to people and see if you're comfortable that this person is making decisions on the product development, modeling, etc. side that is going to maximize the likelihood that you're going to achieve what you're looking to achieve over the next five or ten years.

Yeah. Now, the other topic that we already touched a little bit on, but it was one of the topics you wanted to bring up, Andrew, comes back to… I think you've been writing about it, but it also touches a little bit on Eric's initial research in terms of how do I build the trend path, part of my product, how complex or how simple? It's an ongoing debate, ongoing discussion we have in this industry.

So maybe I start with you, Eric, in terms of some thoughts about complexity, what's enough, what's too much, and then you can obviously chime in, Andrew, with some of the things you've been out saying. So why don't we start with you, Eric?

Sure, well, let me admit up front that I have a lifelong complexity bias. I have kind of an engineering brain. I have a scarcity bias and a complexity bias. Which means that I'm inclined to believe that in order for something to be good or great it must be complex, and that in order for something to be valuable it must be scarce. I have found both of those to be false in this space, which was humbling.

I think it's actually an area of strength. Right? Like, I'm also dyslexic, but I am very, very reliable when it comes to doing things that you normally wouldn't trust a dyslexic person with because I know my weaknesses and I do things necessary to accommodate them and make sure that they don't translate into failure.

So, I have built many programs, from long/short equity, to tail risk hedging, to systematic trend. I've built really complicated ones and I built embarrassingly simple ones. The complicated ones oftentimes, almost always, will look better in hindsight, and their presentations are impressive, and they'll look a little bit better than the simple ones. However, the simple ones are the ones that hold up on data they haven't already seen a lot better. And that's what matters is real life.

So, there's theoretical life like on the screen, and then there's real life: what happens when you take a hundred million dollars, and you push it into a program, and you track it for three years? Does it look similar to what your beautiful spreadsheet and your model is telling you, or is it dissimilar?

I can tell you that the simple, durable, blunt tools, in my experience, do a lot better digesting changing markets, new stuff you've never seen before. I mean, go back to COVID, when crude oil went negative. We were short that market and our broker said, you can't stay short a market that's negative. I mean, those were simple blunt tools that put us on the right side of risk premium.

But to answer your question or your point, I built really complicated systems, but I know from experience, I'm in my 29th year now, that simple blunt tools are much more reliable. So, I don't fall victim to the seduction of the more complicated stuff.

The other thing I would point out is, and I think Andrew sent this over a couple papers, about beta and how the majority of the returns that trend followers collect can be mapped back to four, five, maybe six principal components. You've got energies, you've got fixed income, you've got grains, you've got the US dollar versus everything else.

I didn't want to believe that was true 20 years ago, but pretty much all of the research I've done shows that the vast majority, it's kind of like the Pareto principle; 80% of the results come from 20% of the parts. It's more like 90/10 in my experience. So, I've had to check myself, and check my ego, and stay humble, and admit that all of the empirical data consistently over decades has told me that simple, blunt rules work or if you can find ones that work, and they're more reliable than complicated fragile things that look elegant in a spreadsheet but don't hold up in real life going forward.

Can you give me an example, Eric? Because I think, again, I want to make sure everybody understands what, to you, would be examples of things that are too complicated, that look good but don't hold up, so to speak, just so we're sure that everybody understands what is meant by that.

Yeah. The one that comes to mind immediately when I get that question is correlation. Like finding situations in your portfolio where a new trade comes in and it's one of those markets that's uncorrelated to the others. So, that's great, that's what you want, but what do you do with it?

My initial instinct would be to overweight that position and dilute positions that tend to have high correlation with each other because, in an elegant spreadsheet, everything else held static. That is something you'd want to do. You want to maximize diversification. So, I've wasted two years of my life chasing the correlation, co-integration copulas, like all of these things, trying to come up with the magic formula to maximize diversification.

But then when you build these things, and you push them into the real world, and you get this mess that is reality with crude oil doing this, gold doing that, and whatnot, what you'll find is that you make a lot less money and you fool yourself into thinking you have less risk than you really do.

And you know this, Niels, being with Dunn for so long. And Andrew, I'm sure knows this, in trend following you make your money in market environments where the vol’s going up, the correlation's going up, you-know-what is hitting the fan, and that's when you to be pressing the gas on that portion of your portfolio.

If you want to reward low vol environments with gentle correlations, that tends to correspond with whipsaws and the lack of profits in the trend space. So, it's just another example of, you have this elegant idea that the CFAs and the PhDs, that I've known over the years, will pat you on the back and say, that's great, that's exactly what we're teaching people. But if you're an actual practitioner in the space, and you're pushing real money into the real world, you're getting kicked in the face and getting completely different feedback.

So, I want to respect reality, not the elegance of academia. That's my job. And that's what I've found is that these blunt tools that, from a behavioral and psychological perspective, aren't the most satisfying in the world, but they just work a lot better. If our job is to make money and control risk, they work a lot better.

Andrew, I'm sure you have a few things to add to this.

I think there's, again, I'm not a quant, right? So, I'm always coming at this from, like, the work that Eric's done, I rely on my partners to do stuff like that. And I have the privilege of basically being able to sit back and just ask questions when something doesn't feel right to me. So we talked a little bit about when Rob Croce was on, and he wrote this great paper about the trend following the managed futures space.

And it starts with this great description of why you definitely want this in your portfolio. And then he tries to construct a model to say, basically, how much of it is coming from picking up, as I think Eric would say, when correlations go high and a lot of assets are kind of moving together versus these true idiosyncratic risks. And going back to the simple versus complicated, so he built a model that's very simple.

And again, it's always very, very hard reading these papers because you're presented with the final results. You're not handed an Excel spreadsheet to go through. You're not given a list of parameter assumptions. You're not shown the 37 models that were thrown out that didn't make it into the final paper.

But sometimes when you're reading things and things pop out. And the thing that came up, that popped out in his paper, was that this simple, super-ultra simple trend following model that he built, which is basically looking back over a year and reflexively just buying it. As Eric would say, blunt instruments, like a super blunt model.

That, to me, is like hold on, I want to stop there. If the simple model generates those kinds of returns over time, then my question is why aren’t you doing that in a product? Okay, so let's throw in a couple hundred basis points of implementation costs or whatever requires to get there. But I think there is just mounting, mounting, mounting evidence that the CTA signal is this unique trend following thing, this unique extraordinary signal. But there's a big difference between capturing the signal through a complicated portfolio. And at the end of the day, when you're making money in the real world that Eric describes, are you making it from 70 instruments working in your favor or are there clusters of instruments because oil's going up and it's dragging the whole energy complex with it, or gold's going up and it's driving the whole metals complex up with it, and the S&P is going up and all equities are going up?

So, you know, I think what I've been surprised at, I've been talking about this for two years, I haven't seen a well-articulated evidence-based counter response to that argument. Where is the trend follower that has a Sharpe ratio of 1.1, not 0.3? Because the short-term models are getting people out at you know, 9:31, before the markets move, not at the end of the day, or the risk controls are kicking in.

And so, I think it's just an area where I think Eric and I have both, again, he coming in from inside the industry, running the numbers, thinking about what he does with his own money, which applies a certain discipline. And I'm coming at it completely as an outsider saying I love the signal, how do I get it as efficiently as possible?

So, there's something that's interesting to me. I know when we quote the Sharpe ratio, or certainly if the media quotes a Sharpe ratio of trend followers, they probably take the SocGen Trend index and 0.3. 0.4, whatever the number is. When I look at the peer group that I follow of certainly larger, well-established managers, I tend to go back 10, 15 years. It just coincides with when we made some upgrades to our systems. And most of them, I would say, have certainly somewhat higher Sharpe ratios, for sure. But it also led me to think about, I mean, is there something inherently bad, for example, by creating these indices? Because I kind of feel that the SocGen Trend index or the SocGen CTA index, are they really showing the industry at its best, if you know what I mean? I don't know how to phrase it, but it just seems like there's a little bit of the air that goes out of the balloon when you mix them together.

The index returns are, in fairness, they're not super great when you look at them. Right? But then I look at some of the individual managers in the index and they've done pretty well.

But you still look at FORT, right? I mean…

Yeah, yeah, I mean, the problem is that you get, I mean, in a sense the problem… A little bit what I feel maybe is that you, on one hand, get all the blowups in the index because they're all usually the biggest managers and then they blow up. So, that drags the index down. And you may not get the smaller, and I say smaller but it’s still hundreds of millions, maybe even a couple of billion dollar managers who are doing really well, they're just not big enough to get into the index.

So, I think it's great to have these indices. All I'm just throwing out as a question, I don't know the answer is, I mean, is the performance actually… does it really reflect… I know people say yeah, it reflects the industry, it reflects a certain portion of the industry, but does it reflect the larger industry as a whole when you limit it to 10 or 20 managers, including all the blow ups?

Well, so clearly the indices, like the SocGen CTA index, do not pick up smaller managers, right? And actually, even in the trend sub-index, again, trend it's longer, like a backfilling issue. And Corey Hohfstein (by the way, go to his LinkedIn thing), he did a great post showing the trend managers who've been in overtime and drop out, etc. Look, I mean the real challenge is what is the underlying if you look at the industry? And another issue that you’ve got is, if you're a big institutional investor, you're not paying the fees that are built into the SocGen CTA index. You're Sharpe ratio will be higher. The Trend index has a bit of a higher Sharpe ratio than the non-trend index or slightly higher Sharpe ratio.

Now, of the ones that have been added in since then, Winton dropped out for a while now they're back. I don't think CFM was in the beginning. Now if you look at it versus the current constituents and so, the current manager which has selection bias also because you know Graham will switch from this one to that one, and man will switch from this one to that one. So again, looking at the current constituents, as far as we can tell we're number three, so we're not number two.

So, I think it is actually a representation, an accurate representation of the large funds including the pool of managers today versus it's not that different relative to where it was 10 years ago, when you look at their backtested returns. Smaller managers, like Throne, or Mulvaney, or something, I have no idea what that does to the results.

I mean, it's kind of funny. I mean Greg, our friends over at iSAM. I know them well. Great guys. But the funny part is, when you mention that is, I couldn't help thinking, well actually, iSAM, given the conversation we just had before about simpler being better in many ways, actually, they're not simple in any way, shape or form. And they trade hundreds of markets. They're kind of the complete opposite of that. So, in a sense, that's kind of funny that they're the ones that are hardest to beat.

There's one consulting firm that I've talked to for years about what we do. And their answer is always, why would we do you when we can do iSAM? And I have no good answer to that.

Look there's enormous talent in futures. CFM, I mean, we talked about Mr. Bouchaud. I mean, the guy is, he's building a D.E. Shaw like contraption over there. Anyway, I'm just saying, from my perch, I don't see some secret pool of large, high Sharpe ratio managers except in very limited circumstances over time. Which, to me, reinforces my argument that there's an inefficiency issue across the large managers that has actually played in our favor from a relative performance perspective.

Sure. Eric, you were saying.

So, for anything five years in, you would see Sharpe ratios of 5, and Sharpe ratios of 2, and Sharpe ratios of negative 1. And you would have this kind of scatter plot.

You get out to three years, it starts to come down. No Sharpe ratios over 2, you get out to 10, no one has a Sharpe ratio over 1. And if you get out to 15 or 20, it basically zeros in on elite managers. 0.65 Is about the maximum Sharpe ratio you're going to see over a career.

So, I started looking at that in terms of mutual funds, ETFs, CITs, managed accounts, all the data I could get all around the world, and a few things and I can't prove this, but what appeared to me is that single strategies, good ones, have a Sharpe ratio somewhere between 0.3 and 0.4 sustainably. That's just what I see. Just that the empirical data says no one has a Sharpe ratio over 0.4. If the horizon's long enough, it's 0:4 if they're good.

However, if you combine strategies, you take a.04 from equities and you take a.04 from managed futures, you get something like 1.1. And if you can get a.03 from tail risk hedging and something else and the next thing you know you got a Sharpe ratio of 1.2. The question then becomes is that part sustainable?

And the data so far says it may not be perfect. You may not be able to maintain a Sharpe ratio of 1.2, but you can get a lot closer to 1 than with a single strategy. So, I don't know, it's just, it's interesting to me. So, I bring it up now.

I know we have a hard stop today and so I want to respect our time. There were a few other things that we could have talked about. There's one paper I just want to mention because I think I might include it in my Sunday email coming up and that's a paper from Man Group called Don't Look Down, by Henry Neville. I thought it was interesting. It talked about different assets and strategies in terms of their drawdown and what it really means and the fact that maybe it's not really the individual drawdown that's important, it is what else is drawing down when you're drawing down. And that also has a reference to trend.

So, I obviously think that's always relevant, but I also want to give both of you an opportunity before we wrap up just to bring up anything that you want to bring up since we didn't have time necessarily full agenda as we're coming up to our hard stop today. Andrew, let me start with you. Anything we missed?

So, back to the Man AHL paper for a second. So, I will say it until I am blue in the face. I believe we have a messaging issue with this space. I have tried, and my partners joke about the fact that every six months I think I'd have a narrative angle that I think is going to convince the world and be able to bridge the gap between, Eric would say, between the theory of the Sharpe ratio and the experience of owning the product. So, I actually refer to this space now as CTAs.

But instead of getting bogged down in commodity trading advisors, I say, you know what CTA stands for is Contrarian Tactical Alpha. And the reason I say it is because CTA as a term that is familiar to people. They know it. I don't have to introduce a new term. But when the space makes money, it's not trend following, it's not getting into something late. Right? When people think about trend following, they think about, I often say this analogy, it's like you show up at a party at 1 and hope it goes till 5. Right? It's like everybody is already there and you're showing up because it's already popular.

And the idea of inflation is just some out of the… it's not even on people's radars yet. So, contrarian also gives the reason why this is in your portfolio, because the rest of your portfolio is strategic consensus beta. You're building a portfolio of lots of different betas that aren't going to change a lot over time. Tactical, because that's what we are. Every other asset class in the portfolio, and a guy who actually was talking to, who's an investor in BMF, who's not in this business, he basically said, look (and he builds his own asset allocation model), he said, every other asset class has a static exposure to whatever is out underlying it.

This isn't a strategy, it's an asset class. It's an asset class that, by its nature, is dynamic and tactical. That's what makes it different and that's what makes it valuable.

And then alpha, because alpha for any allocator has a universally positive connotation, and because of the low correlation of the space, every dollar of generated returns shows up as alpha. So total Portfolio Construction, ChatGPT, Claude, etc., they're all looking at the statistical value benefits of it. But we need language.

So, I would please encourage you guys, if you guys think this makes sense, you just keep repeating it and hopefully we'll get people to just say, what I need in my portfolio is a little contrarian alpha, whether it's blended with equities or on a standalone basis.

Eric, any parting words from you?

So, if you want alpha, it's not comfortable. They don't write a report and hand it to you and all of a sudden you're on the right side of this lumpy alpha. It requires algorithmic discipline. And if you're going to pursue it, you better have some risk controls in place because it is lumpy and it is volatile. So, you need the algorithmic discipline to give up on trades that don't work out.

And in the trend following world, 50%, 60%, sometimes 70% of your trades don't work out. So, those losses need to be kept small, versus your gains where you can just hold for one year, two year, three or sometimes five years. I mean, at one point I was short natural gas, I think for eight consecutive years. It was just algorithmic discipline. Just sit on your hands and stay short. This heavy contango market that just seems going down year, after year, after year.

What Andrew was saying is that you call it the tactical contrarian alpha.

I like that. That makes sense to you and me, but those words mean different things to different people because people have different glossaries or whatever, but just the blunt algorithmic discipline of getting on the right side of trends that people aren't paying attention to yet. It's not safe yet. It doesn't make any sense yet.

Like gold, gold was dead money for two decades and then it broke out and it just… it's been on a tear for 25 years. Algorithmic discipline forced you to not waste your time on it for 20 years and to be long and strong ever since then.

So, I love trend but on a day-to-day basis it tends to drive people crazy which is why I blend it with other assets and just you know, call it multi asset and take what I get.

Well said. All right gentlemen, this was really, really great. I appreciate the conversation and your time. Next week I'll be joined by Rob Carver. So that's another chance for people to send in questions like we had today. That's always great at [email protected]. That's where you can send them and I'll do my best to bring them up.

And if you want to show some appreciation, which I really do hope you will, for Andrew and Eric, for all their hard work preparation, head over to your favorite podcast platform, leave a rating and review and then hopefully more people will join the show.

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

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