Today, we examine a year that looked chaotic but felt familiar to trend followers. Gold surged, equities rotated globally, and non-US markets quietly gained momentum. Yet beneath strong returns lies a deeper debate about model design, short versus long horizon signals, and whether innovation in liquid alternatives serves investors or sales desks. From AI disruption to product engineering and allocator behavior, this episode explores where systematic strategies truly create value and where structural incentives distort outcomes. In a changing macro regime, clarity of purpose may matter more than ever.

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Episode TimeStamps:

00:00 - Introducing the Systematic Investor series

01:17 - AI disruption and systematic investing

06:52 - The shifting perception of US risk

09:21 - Winter Olympics and market metaphors

12:59 - Hedge funds versus private equity

19:23 - 2025 review and the importance of risk allocation

22:17 - Why CTAs did not fully capture gold

29:48 - Short term versus long term trend models

35:27 - Letting risk run versus investor palatability

44:43 - The problem with liquid alternatives

51:21 - Product design versus fiduciary duty

59:06 - QIS, innovation and investor sophistication

01:04:41 - Model risk and the myth of risk premia

01:10:51 - Hopes for a trending year ahead

Copyright © 2025 – CMC AG – All Rights Reserved

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You're about to join Niels Kaastrup-Larsen on a raw and honest journey into the world of systematic investing and learn about the most dependable and consistent yet often overlooked investment strategy. Welcome to the Systematic Investor series.

Welcome and welcome back to this week's edition of the Systematic Investor series with Andrew Beer, and Tom Wrobel, and myself, Niels Kaastrup-Larsen, where each week we take the pulse of the global markets through the lens of a rules-based investor. Andrew and Tom, it's great to have you both here. It's been a while, but how are you doing? Tom, I'll start with you. I know you were traveling last night, so you must…

Yeah, very well, thanks Niels. Very well. I was in, I was in Sweden and it was interesting to see how attitudes to hedge funds seem to be slowly shifting, maybe, there.

I'm sure we'll talk about that.

And yourself, Andrew, how are you doing?

Things are good. Things are good. We had a great year end, you know, multi person session and it'll be very interesting to talk about things that have happened in just the past six weeks, which seems like it's been about six months of activity.

I know, I know, it's crazy. Anyway, we've got, actually, a pretty strong lineup of various topics as you said. Some of that will be inspired from what we talked about in the group conversations and maybe also some new stuff that we normally don't talk so much about in this specific series. But of course, as we always do, I'm always curious to know kind of what's been on your radar, what's caught your attention the last few weeks. I'm going to kick it off with you, Andrew. Anything in particular that you’ve been noticing?

Well, I mean, I think, look, it's not an original topic at all. I'm totally fascinated with AI and how the narrative around it is shifting. I mean, some recent things and just in terms of both the power of it, but also the pace at which things are changing. I'm not an expert at all and I'm sort of realizing that, you know, part of what I need to be thinking about more actively, in terms of myself and our strategy as a business, is really where AI fits into it as it's evolving now.

Fortunately, I have a couple of partners who are extraordinarily capable at it. So, it's not that we're not focused on it but, but there was something interesting that happened recently where our PR firm … Usually I I'm very, very involved in anything that we do that goes out into the public domain. And while I was very distracted on other things, in December, they basically took podcasts of mine, as well as material that we had done, and did a killer two-minute video that I'll release in the next day or two that basically… But it's my voice, but it's my AI generated voice. The content is incredible by people who really are not experts in this field.

So, for me, it sort of encapsulated that there's something very, very profound in this. And so, you know, watching what's happening in the markets and how people are trying to figure this out, I think it's going to be disruption galore and I believe that that is actually going to be very, very positive for trend following. We need real economic change to make money.

As long as you promise there's always going to be the real Andrew that shows up on the podcast and not AI Andrew.

So, my theory is that people who actually have human connections to other people in this, like the asset management business is a people business. I don't think asset allocators are going to say, you know what, let's have AI pick the next hedge fund for me. I think it's too risky and it honestly takes all the fun out of the business. But I think understanding the ways in which it can be leveraged and I think this is what everyone's going to be thinking about for the next 20 years, and seeing it happen in real time, it's just, you know, endlessly fascinating.

It's interesting. Just before we hit record, I asked Tom if he was going to the iConnections conference in Miami in a couple of weeks. And both Tom and I will be there. So of course, if anybody's listening and they have a lot of money to allocate, they should definitely reach out to us in the app.

But, but having said that, it kind of is interesting with what you say because here you have probably the largest conference where you put together 5,000 people or whatever the number is in one convention center for two or three days. So, you can either say AI is going to either completely change that and nobody really needs to go to these events, or it's going to strengthen it and say no, as you say, Andrew, we do need the personal connections. We do need to sit down physically and talk, and so on, and so forth. Very hard to tell at this stage.

Yeah, look, one of my favorite investors sent me something they'd done last night where they basically used AI to do a whole asset allocation analysis. And he said it took him about 15 minutes, and the results are pretty astonishing. And one thing that was actually kind of encouraging about it is that it actually did say, all right, if you want to achieve these investment objectives, it brought managed futures is one of the core elements of doing that.

So, you know, there's a way in which the promulgation of this kind of technology and knowledge will also, you know, help the average allocator to be more sophisticated about the space, to cut through a lot of the noise in the space, which is what, you know, I think you and your guests do incredibly well. And so, I mean, look, everything's going to be… You know, the only constant is change. And seeing how it plays out in all the various manifestations, I think it's just incredibly interesting.

I don't think it's the same investor, but I have a client as well who's AI savvy and he sent me something a couple of months ago where he had given two or three different AI platforms kind of a question about asset allocation for the next five, seven years, based on the fact that he was based in Switzerland and this is what he was looking for. And as you say, not necessarily specifically mentioning any strategies as far as I remember.

And that also came back with a fairly large allocation to trend following. So, the information must be out there since they are picking up on it. So, that's interesting.

My one-line response, after reading his analysis, was super intelligence this year because I like the conclusion.

Anyways, Tom, I mentioned that you'd been traveling. Not sure that's what's really been on your radar, but what has been on your radar the last few weeks?

I think the risk in the US is perceived as potentially higher than it was previously, and the rest of the world is now clearly looking at the country's markets through an entirely different lens. Normally you have non-American investors can rely on the US dollar to rise in times of stress, and the US dollar is enjoyed the status of being a safe haven currency for assets.

As a completely selfish observation, here in Switzerland, the Swiss National Bank distributes some of its profits every year, I think to all the cantons. And, of course, it is well known for having huge investments in the US tech stocks, and so on, and so forth. So, I hope someone is listening and maybe reconsidering that strategy if you're right, Tom.

Well, there's two things to think about. I think there's a very valid argument that global equity markets don't have the capacity for a wholesale shift in investor assets away from the US. But there's definitely a thought about, outside of tech, what is the asset that we're accessing in the US and can we get it elsewhere?

Yeah, well, we're going to talk a little bit about that. I know Andrew has some topics on that. But on my radar, a few things that caught my attention. But the first thing is more a question for you, and that is, of course, we are in the middle of the Winter Olympics. So, I'm curious to know if you have like a favorite sport that you are watching or that you want to make sure you are going to watch in the next couple of weeks?

So, I've gotten very down on the Olympics in that, you know, one is I don't think you should have 37 events per sport. I sort of grew up in an era when the Olympics was special because you had people who were, you know, toiling as waiters in at ski lodges and that yet were finding six hours a day to ski and to kind of compete at the international level.

And it's a little bit like in US sports where they've added more and more playoffs because they're very, very high generative. And here, I was at the gym this morning and watching some snowboarding competition. But it could be snowboarding, you know slash V1, you know, whatever, whatever, like some subset, and then also with the barrage of promotion around individual athletes and the elevation of them, to me it's just lost a lot of the special quality to it. But that's going to make me sound incredibly old and cranky.

What about you, Tom?

In the UK we don't have many snowy mountains or frozen lakes. So, for us it still has that special element, I think. I'm definitely following the curling. The curling is quite interesting. All the curling stones are still made in Scotland, so it's very exciting. And we seem to be very good at the luge and the sliding events so we're definitely following that. But you're right Andrew, there's never been a time for interest in niche sports as around the Olympics.

I hate to break it to you but, actually, one of the things that caught my attention, that I'm really looking forward to, is actually one of the new sports at the Winter Olympics. They call it ski mo, but it's actually ski mountaineering where they first have to climb the mountain before they ski down. I'm very excited to see what that is going to be like. That seems like a fun thing to do. But, in general, I kind of know what you're getting at Andrew, in terms of too many things doing the same.

And then the other thing that caught my attention, I kind of quickly shared it with you. It was a little bit unfair because it was with short notice. But it's just this email that I received from Dan Rasmussen over at Verdad. And I don't know Dan at all, but I know he's involved in kind of the private equity world.

But he was writing an email about some of the differences between hedge funds and private equity, and the heading was Why Hedge Funds Got Better While Private Equity Just Got Bigger. And I think there is some interesting aspects to that observation for sure.

My key takeaway, and feel free to weigh in here, but my key takeaway was, if I remember correctly, that hedge funds, in his view, simply had to improve because of the competition and the attention that private equity was given by investors for so long, and to a large extent maybe, operating in liquid markets with mark to market. And all of those things that we do in the liquid alt space, for sure, basically meant that they became better managers, better structures, better processes, etc., etc. And I think that's kind of an interesting observation. I don't know if you agree with it or have another take.

I think from our side, I think we see renewed interest in hedge funds kind of across the board. And part of it is people got out over their skis, to use an Olympic analogy, in their exposure to private equity. And the way people often would do it was that they would over commit to it with the expectation that they would get money back in a certain period of time.

And so, the fact that kind of the money coming back didn't really materialize while they still had the commitment outstanding meant a lot of allocators simply had too much exposure to it. And that's also driven kind of the secondaries market.

You know, I think when you're in a persistently long bull market… And look, Dan has done great research on the return characters of private equity essentially being some version of leverage equity with the wonderful feature that you could pretend that there's… you don't have to mark things to market. I think now, when people are thinking about, all right, where equity market valuations are and what the expected returns are over the next 10 years, and leverage on top of it, and being up to their gills in things like software stocks that could be disrupted, maybe having long-term leverage, long equity exposure is not as attractive as it used to be.

And in a world where the macro environment is shifting, back to Tom's point about this migration, I wouldn't say it's a wholesale migration out of US assets. I would say that the attitude used to be FOMO about the US markets, and now has come to people saying, well, wait a second, this used to be the global bastion of rule of law around business activity, in terms of predictability, and clearly things have changed.

And so, you know, I think in the context of that, you think who has the ability to make money on a going forward basis? And then you point to the hedge fund industry, which has done… I mean, certain hedge funds have done astonishingly well in this environment. And so, that's drawing attention back to it, which ultimately, I think, will be good for all of us.

Yeah. Do you come across private equity a lot, Tom?

It's something we come across as discussions with investors because it's part of their alternatives portfolio, it's part of the portfolio allocation. And I think you're right, it's become a big part of what investors do. But we've been in an unbelievable environment for 15 years, more than 15 years. And is that environment going to persist for equities? We don't know.

But I think when I was last on the podcast, we were talking about the macro environment for, let's just sort of call it, global macro hedge funds. So, a hedge fund that can go into any asset class, deploy assets long/short, in a relative value kind of perspective, and take advantage of any kind of inefficiency. That environment for hedge funds has only gotten better.

We've got stubborn inflation, we've got geopolitical dislocations and tensions, we've got commodities bursting back onto the asset class, which has been underappreciated, with compressed volatility for a long, long time. And we've got interest rates still relatively low, but higher than they've been for a long period. And it just looks like a very interesting time for tactical trading strategies that can deploy assets across markets long and short.

Yeah, we'll dig into that some more. Let me just quickly run through where we are on the scoreboard, so to speak. My own trend barometer finished yesterday at 50, and that's still a pretty productive environment for trend following. And it has, more importantly, been very consistent the last few weeks as data also will be supporting.

These numbers are as of Tuesday of this week. And the TOP 50 is up 1.48 in February, up 6.58 for the year. The SocGen CTA index up 1.25 for the month, and up 6% or so for the year. SOcGen Trend Index up 1.65% for the month, up 6.43% for the year. And the SocGen Short-Term Traders Index up about half a percent so far in February, up 2.78% so far this year.

And it's interesting hearing about your trend barometer because we run a similar exercise where we calculate breakout models over almost, I think, 200 or 500 different parameters from very short-term to super long-term, across all different markets that are sort of potentially tradeable by CTAs. And, on average last year the Z scores, the opportunity sets, similar to your kind of barometer, I think was pretty poor.

So, last year your selection of asset classes and the way you allocated risk and managed risk was really, really important because there weren't opportunities broadly across all equity markets and all currencies and all bonds. In fact bonds was really poor last year. So, what we've seen I think this year is a continuation of that theme where we've got really important market trends and if you're not trading those markets, you're going to be missing out on something.

But also, there were some really, really strong trends in other markets and that's again continued this year. So, for this year, in our trend indicator, we're seeing really good trending markets in KOSPI, NIKKEI, the Swedish OMX and IBEX 35. So, these are sort of lesser, smaller European equity indices often that aren't necessarily the go-to financial markets that people are looking at.

It's funny you say this thing about yeah, if you weren't trading all these markets like the softs and some of the other metals you would be missing out. But not if your name is Andrew because he does not trade them. But he did not miss out last year, that's all I can say.

But let's, let's stay with this year and then we'll maybe dive a little bit deeper into your report, Tom, but anything, any thoughts from your side, Andrew, for this year?

CTAs generate alpha when they're early contrarian and right. The second half of last year they were dialing up equity risk after Liberation Day, they were holding their gold position. So, basically, from our perspective, you look at last year, it's gold and equities, and predominantly non-US equities, and it was either maintaining that exposure after Liberation Day.

Now, human strategists, after Liberation Day, were really rattled and really wrong in that, you know, the inflation was suppose to come soaring back, we were going to go into a deep recession. I think the Bill Ackman used the term self-inflicted, nuclear, economic annihilation or something like that.

I mean people really thought… And this is, again, the enormous advantage of CTAs is they don't care, as long as they see it bouncing off the lows and however they end up measuring it or continuing a trend. And I think that's continued into this year. I think there's an arbitrary end date as of December 31st.

But look, we started talking about a rotation to non-US equities. People have been talking about a fundamentally driven rotation into non-US equities for 15 years and it hasn't worked. It's consistently underperformed US equities. But it's been happening for the past couple of years, and I think it goes back to the risk premium issue that we talked about.

So, I don't think it's complicated. I think it's non-US equities, I think it's an emerging markets versus US equities, and I think it's gold which encapsulates the whole metals complex.

But the leadership has changed a little bit in February. It's not so much metals anymore. We seem to be shifting more towards equities in certain parts of the world, as you rightly pointed out. Nat gas has been more productive for sure. And even some of the currencies are starting to support, which it doesn't happen that often, but yeah. So, that's been kind of interesting for me to see.

Now, Tom, I wanted to give you the chance to, if there were more, because it's a pretty comprehensive paper you just published. So, if you want to dig out some more of those things that you felt were really important. I know we will talk about some of the topics as well because we will dive into, I think, Andrew had sort of specifically gold, silver, you know, and some specific markets to talk about. But is there anything that stood out, when you wrote the report, you thought, wow, that actually did surprise me a bit.

And let me frame that, if you missed the last couple of episodes of this podcast, Tom. What I've said to people, when I've been speaking with them in the first few weeks of this year, was that in many respects, I think we can all agree, that last year was very unusual. We can say that about almost every year. But last year was another unexpected set of events that we saw.

Yet from a trend following perspective, it was a very familiar year. Few markets did all the heavy lifting. Then you had a few markets that lost a little bit of money and you had a lot that didn't move much either/or. So, from a trend following perspective, I mean if you didn't know what took place during the year, you would just say, yeah, just another trend following year. Maybe a little bit on the low side. Okay, fair but yeah…

I completely agree and I think that's why the conclusion that we came to, of the allocation of risk, was so important. Normally, we see some sort of speed factor, and I think Katy Kaminski's done some really interesting analysis on the speed factor in previous years, and we'd normally see a much stronger preference for longer-term models outperforming. But it's the classic sort of contradiction about how you marry your investors who maybe can't always look at the performance with such a long-term lens versus the performance of models there where you can sort of show, systematically, that being longer-term and into longer-term trends does pay off.

So, it's really the allocation of risk, last year, that was the key thing and how you managed that risk. And we were monitoring performance this year as those trends continued. I think the trend index peaked at 7% as you correctly said, it's now at 6.5%. But the range of the individual manager returns is still pretty the same. So, I think the best trend followers are up about nearly 15% and still there are some up nearly that amount.

I think that's on a slightly higher volatility target than many, but we still have many managers in that 10% to 15% range and many just hovering just below the 10% in sort of 8% or 9%. So, CTAs have definitely allocated risk and managed risk very well. If you want to see what un-risk managed approach to trend following looks like, please ask us for the data on the SG Trend Indicator which is our hypothetical model-based portfolio, with very limited risk management. And you'll see some very interesting swings in the precious metals markets.

But I think, in general, a couple of weeks ago many CTAs were down a small amounts, but they had a laser focus on risk. So, not only allocation of risk but managing of positions. Silver has caught a lot of headlines but it's not as big a market as gold and so, maybe the allocation of risk to that market wasn't as big as many people might assume. And there was definitely a close monitoring of what the risk looks like in that market.

So, we've had CTAs kind of building proprietary models over the years to help them work out when trends are overextended, when trends are reversing. And I really think there was a looking at trend strength and looking at, are these breakouts really supportable?

And I don't think CTAs have had as much risk to precious metals as you might think. I looked at a CTA report today and there was a much bigger allocation of VAR to equities and FX.

Yeah, I mean we can dive into that. I know there was one of Andrew's topics actually. We can jump around a little bit if you want to stay on sort of the theme of gold and silver and how these were traded. I know you had some questions about this Andrew.

And in Tom's analysis, which mirrors what Nick Baltas was talking about at year end, and Katy has talked similarly, was short-term models really detracted from performance last year. And Tom's report, which everyone should read, has a great analysis basically on a factor by factor and using his trend indicator. But you're up 20% or something in long-term trend according to that and you're down12%, 13%, 14%, 15% in short-term trend. You know again, as we've looked at the space, and we've looked at the shorter-term models, we just don't see really positive Sharpe ratios in it. They sound great, right? But our view is they’re a risk management tool and they're often a costly risk management tool.

If you're going to allocate a meaningful amount of money to something that has a zero Sharpe ratio over time, that drives up your trading cost and creates all sorts of sorts of other issues. So, I think that's sort of the hard narrative part about the space right now is it feels like things are trending like crazy. So why isn't the space doing better? This year they are, but last year, you know, it was making money in our side, it was making money in gold and non-US equities, was about half the performance each. And then you got whipsawed and hope you didn't lose too much money in rates and currencies.

I mean, I think last year, if we just stick with that for a little bit, you're absolutely right. When people look at the year they will say, well hang on, equities were up a lot, so why didn't trend followers make more money in equities? It was very select equities that we could make money in because it really was all about the April deleveraging thanks to Liberation Day.

So, obviously, you execute once a week, so you have a different way of interpreting what happened. Managers who are much more frequent, of course, we have a different way of interpreting. So, I do think, for sure, the fact that we had to delever the equity long side for a while, and I think maybe some managers even got short at that stage, that obviously would have cost some. So, I agree with that. But people obviously need to understand the way we got to the strong equity wasn't in a straight line.

Where it was in a straight line, as you rightly said, is in the metals. And I think most people made all or most of their profits in metals or some select equities. A couple of them also in the, say, short JGBs, and so on, and so forth. What is most puzzling to me, and this may not be very popular with some of my friends, but I'll venture into it anyways. In a sense, you're kind of right because we have the discussion about being a classic trend follower where you don't adjust your positions, and being kind of maybe a more modern trend follower where we do adjust our positions all the time.

And so, last year, which may come as a surprise to people, even though we made most money in in precious metals, we were selling precious metals all year, right? So, our largest exposure was a long time ago in precious metals. And then you could say, well, that's not great when the trend is so strong, you should just have stayed with it. You would have made a killing. And there were one or two that probably did exactly that.

But of course, we also know they kind of had a huge surprise on the last day of January and had that day, for example, continued on the Monday with the same velocity instead of a rebound, some of those managers could have been in real trouble, in my estimation of how it took place. Because some managers will, when you get a big drawdown, like in silver and gold prices on Friday, the 29th to 30th, whenever it was, you may trigger your signal. You may trigger your stop. But you may not execute that trade until the next day. Had the next day been down another 20%, things would have been different.

But for the larger managers who don't have static position size, you know, we were just basically reducing our risk along with volatility expanding. So, yes, you could say it's a little bit of a shame when you have two or three markets that really move strongly that we didn't make more money. But on the other hand, from what I can tell, and this is by no means any criticism, it's just an observation, but I do see many managers… or not many… but there is a handful of managers who talk about this, oh, you should never touch your position size. You should just stick with it. And that's how you really capture these big outliers.

But the problem is their performance was not in any way, shape, or form, better last year. And why is that? And I think it has to do with the fact that they often trade 300, 400, 500 markets, and therefore any one market, even if you don't touch your position size, becomes a very small risk allocation in reality. And that's always been my view, that it's not a wrong or right, it's just a difference.

But if you really want to have punchy returns and make those 50%, 60%, 80% returns, yeah, then you actually have to have a fairly small set of markets but then be very gutsy about your risk allocation and stick with it. But that opens up another set of risk issues.

Yeah, there's a London CTA manager who is very committed to trend following, very committed to commodities, and trading a small number of markets, and letting risk run. I think we all know who it is, but is the end product something that's palatable to investors when they have these pressures on them from an investment committee and they have strategic asset allocations that they have to follow. I think you end up creating something which is difficult to sell to investors when you have something like that.

Yeah, I mean, you don't need many investors. I mean, frankly. And I think that's what I like about the space is, in the sense, if you have a certain profile you want to express then you can probably find enough investors who will want to join you. It's just a different set of investors. But I agree with you on that topic.

It's something that comes up, and it came up this week, about the role that your hedge fund or your CTA is playing in the portfolio. And it's something that we've heard about this. We have as our core risk, asset equity risk, and we're trying to diversify that. These large asymmetric returns are really good, and trend following is really good at diversifying that. And so, the investor's sort of continued fascination with multi strat isn't necessarily meeting the requirements or the objective that CTA maybe does when you get these large moves and you want to have these asymmetric portfolio diversification.

Yeah. Any thoughts, Andrew?

Again, I think about the space very differently than most people in that I view it as an allocator. And originally we got into space as an allocator trying to figure out… We love the signal of the space, but how do we access that in the most efficient, straightforward, liquid way that we can?

And so, to me, when I think about alpha, in the CTA space, as an allocator what I care about is when they pick up something whether, as I said, early contrarian and right. And it's big, and you can make money in it. How does that happen?

So, you've got an asset that's worth around US$10, let's say just, just assume it's sort of a basic model. There's a lot of noise around it, right? So just based upon sentiment or whatever, whatever, it'll go up to US$11 and then back down to US$9, and then back up to US$11, back down to US$9.

And so, the basic model is, when you have people with local knowledge of that market who are maybe sitting on trading desks or high frequency traders, whatever you want to want to call them, you know, generally the smart money is selling at US$11, buying at US$9, selling at US$11, buying at US$9. And this sentiment is driving these prices around, but with no change in fundamental value.

The valuable trends for CTAs are, when it's something's at US$10, fair market value is US$10. And then the information changes, something in the world changes and fair market goes to US$11. And the people with local knowledge like it more at US$11 than they liked it at US$10. And then it goes from US$11 to US$12 and the smart money likes it more at US$12 than they liked it more at US$11.

So, by that definition of alpha short-term models detract value. It's not the exposure that I would want. And, I think people have conflated risk management with, if you're going to introduce something into your portfolio and allocate a lot of risk to something with a zero Sharpe ratio, no thanks. Not for me.

I don't know if you remember, Andrew, because obviously you do things completely differently to an underlying manager, did you manage to keep a fairly static allocation to gold last year?

Slowness helped us last year. And if you look at our performance… So, one is our performance, around Liberation Day, was much better than the index and it was better for two things, one, I think your position 297 when your vol is spiking and you're de-risking after Liberation Day, I think you are making somebody's P&L in that local market.

I think you are the amateur outsiders who somebody has pressed a button to sell it, and you're not executing at… The liquidity dries up in that market because they can see you coming. That's why you have all these things on zero hedge about what CTAs are doing. Now translate that into a market where you've built your career for the past 25 years trading that market every single day.

Charlie McGarraugh actually, who runs Altis, which is the sub advisor to Simplified CTA hedge fund, used to run the metals desk at Goldman. And he's talked a lot about this, that when you have that kind of local knowledge, and you have systematic traders coming into the market, that's your P&L right there.

So, I think this diversification into a lot of excess positions, increasingly non-core positions, I think it hurt people after Liberation Day. It exacerbated the drawdowns. I think that's a market structure problem. That, when you're building these models, you have to make certain assumptions about implementation costs, and I don't think most people factor in getting taken advantage of by local traders.

And then the second was, we still had some risk on, we were slow to de-risk and bounced when Trump changed his mind. So, that kind of blows up the idea…I mean, in Tom's data, interestingly, really short-term models were fine during that. They preserved capital much better than longer-term guys during that initial period. It was actually later when they started to get chopped up.

But again, so look, I think, as an allocator, and I think, back to the point that you and Tom have made that investor preferences are often to live in paralyzing fear about what a bad whipsaw looks like. And, as you say, whether a bad Friday turns into a horrible Monday, which is what happened with SVB.

And so, it can happen. I just don't think you're paid for… As an allocator, you lose too much. It's like saying, well, let's do a long-term trend model and then buy out of the money puts on equities because that's what we're afraid of. Fine, you're just not going to have a business after five years.

We’ve got a few different topics, mainly from you, Andrew. So, I'm going to kind of defer to you which one you'd like to bring up. We talked about the gold and the silver. We tried to get into kind of a little bit more of the nitty gritty about how managers probably were different and how they handled this. Where would you like to go next?

Well, since I'm on a rant about product design, let's talk about the liquid alternative space. So, the broader liquid alternative space, which means hedge fund strategy, and we're talking about Dan's article.

So, hedge fund strategies in mutual funds and UCITS funds, and increasingly in ETFs, has been an astonishingly bad category. Like, the ratio between intelligent people and serious firms who've launched products relative to the total utter lack of success, from an investment perspective, is pretty astonishing.

You're talking about hundreds of products that have been launched. Each one, when they get launched, is somebody sitting there saying, we've got some great way of doing equity long/short, or market neutral, or this, or that.

The returns over 15 years, according to Wilshire's data, is between 2% and 3%. And the fee structures, on average, is about 200 basis points in a period of time when equity markets have gone up 14% a year over that period of time. So, this is worse than throwing darts. If this was a sports team, you would be asking, are you throwing the game on purpose? It's horrendous.

And I had this sort of epiphany last year as I was thinking about it, because we've only done a very, very small number of products over time because we've always had a view that for us if we launch a bad product, something that doesn't work, it's our reputation, it's a huge percentage of our time gets allocated to it. In fact, we ended up shutting products that we didn't think were scalable even though they did fine from a performance perspective.

But a typical firm has a huge distribution infrastructure to support, and they have no view on which is the best product that they're going to launch. There's no one who approaches this from an investment perspective. What would I want to own over the next five years? And how am I going to get that in the most efficient way?

With actually one exception, which SEI hired us 10 years ago with that mandate, to help them build a UCITS fund where they basically said, can you find a way to construct an absolute return product with a beta of 0.2 cash plus 5 gross and all in expense ratio less than 100 basis points and no asset liability mismatch, and you figure out how to kind of build it. But I think the problem, on the product development side, is that most products that are developed in the space are developed by salespeople who think they can sell it over the next year or two.

It's a hot area. And they're going to launch something where they think there might be incremental demand. And I compare that to the hedge fund industry (going back to Dan's article), generally when hedge funds launch new products is because there's a great investment opportunity. They're going to buy real estate in Greenland, denominated in Bitcoin (laughter).

I mean, you know, but they think there's something real there and they're going to put their own money behind it and they want to do it. It's completely backwards in the liquid alts world in that the guys who are building the products are the equivalent of the salesman on the showroom floor designing a car for you because he thinks you'll buy it. And if it's a lousy car in three years, it's not his issue.

And so it kind of dovetails with this thing about, should CTA managers be making changes to their portfolio models to maximize their risk adjusted returns over the next five years (things that they have high conviction in), or should they be responding to fears of clients about that once a year whipsaw that everyone runs into.

I mean, I have some thoughts, but I want to hear Tom first. But by the way, I will, I will say I have noticed, on your LinkedIn post, Andrew, that you're certainly not shy of calling out some of your competitors, let's put it that way.

Someone has to, for God's sake.

I'm going to defer to Tom first.

Well, we live in a world where Simpsons episodes seem to have predicted most of modern life. And Andrew, I think there is a Simpsons episode where Homer designs a car from the showroom which then bankrupts the company. So, I think your analogy is quite interesting and quite correct. There definitely seems to be some sort of disconnect.

My worry, in the liquid alts data (and it was something that I came across yesterday in a discussion) was the classification is the key thing. And are we talking about real hedge funds in that data or are we talking about quasi alternatives that live in this semi alternative world where it's kind of multi asset but being described, because it's a bit of a hot topic or sexy, as multi stress or macro when actually it's just a kind of a GTAA kind of tactical asset allocation across multiple different asset classes?

The conversation I had yesterday was with someone who was interested in quant multi strap UCITS funds and was telling me that there was a universe of a hundred of these funds, and I struggled to name even two. So, I think there's a disconnect in what liquid alternatives are, and what may be represented there isn't necessarily hedge fund strategies all the time.

But I think you're definitely right. There's definitely a mismatch or a misalignment between what hedge funds are creating as product and what an investor can satisfy their investment committee with. It goes back to what we were talking about earlier about has the hedge fund industry improved?

You're always going to get these different areas within the hedge fund industry where you've got strategies that become scalable that form part of a larger, longer-term tactical asset allocation that you want to have as a core holding, like a CTA. And then pure alpha where you are going to have strategies that come in and out of vogue. Maybe it's multi strat at the moment, there’s a huge amount of interest in commodity hedge funds at the moment. Commodities were nowhere five to ten years ago, but now, suddenly, they’re interesting.

So that seems to be this kind of split in two, within the hedge fund industry, of, as I sort of said, this niche alphas and things that form part of a larger tactical asset allocation which, obviously, are going to then have costs come down and there are going to be periods when they underperform. But you've got to remember we're living through an unbelievable equity bull cycle which shows no sign of abating.

I mean, to address your point. So, on the data side, you can look at the data in a lot of different ways. It sucks, okay? I mean the performance across the board is terrible. And this is one of those areas where they ended up alienating a lot of people because people make money on products that scale up to a couple billion dollars. They've got five products, one of them has a couple of good years of returns, you send an army of salespeople out to sell it, it scales up to 3 billion and then it just kind of whittles down over time, and clients end up often not making money.

So, I mean look, you can look at the multi strats, the multi manager, mutual funded ETF, so, mutual fund and UCITS category. Even Blackstone gave up on that. You know, I mean Neuberger Berman shut down their alt. It was a failed business model. Now there are some funds in it, like Blackstone's BIMBX, which has done a bit better, but again that's more of kind of a quant multi strat product.

I mean it was interesting. I went to speak at EQ Derivatives a couple of weeks ago. It's the whole QIS versus premia space. And one of the observations that I had about it is that people really don't talk much about returns. They talk about modeling, and research, and data, and innovations, and all these other things. And I kept asking these questions, like, what's the realized Sharpe ratio of the strategy over what period of time? And what do you think it's going to be, going forward, and why?

But going back to the point about, that is a different example on the product development side where products are created there because there's an audience that wants to hear, you know, wants a pitch around engineering. A guy who I know, who is quite a serious allocator, he said, look, if I had to rank the single most successful allocator to the CTA space over the past 10 years, it's you, it's DBI, and not by investing in funds, and not by picking managers, but by saying, what's the signal here? What is it we're really trying to get? And how do we do that as efficiently as possible?

And so, I think the challenge is, or the test for people on the allocation side is to get very, very clear about what you're expecting a product to do and how you're attempting to achieve it, and understand how to evaluate that, and how realistic it is for them to achieve those goals. And so, back to Niels's point, I often call out people where I think they don't have a strong view as to whether this is a good idea or not, but they sure have a good idea that it's good for them to launch a new product. And I just think it's bad for investors. You know, obviously a thing I feel strongly about.

I mean, this is a great thing about this, we can have these pretty frank discussions. I mean, I think we could probably say, with most firms, when you launch a product, you know, a certain narrative goes with it. I certainly remember your narrative, Andrew, when you launched your product. Focused on kind of the cost savings in order to get exposure to CTA returns.

But when I look at it, if I'm being very frank about it, I look at your product… Actually, the more I look at it, the more I look at it differently. That it's actually not about the cost savings, because I feel, at least, that the tracking error to the index that it's trying to mirror is too large for that. So, I see it more as an alternative data strategy where you just use a different data set input. And it has worked really well, in that sense.

But of course, you know, even five or ten years worth of data, we don't know what the next 10 or 20 years is going to be like. And I completely agree with you, by the way, that there is a lot of products that really shouldn't be launched and it's not good for investors to come out there. But I also, you know, from having seen this space from the inside for quite a few decades, some of these things will just go in and out of favor. And even if you have five years of underperformance, it doesn't mean the next five years, the next 10 years that you're going to be the highest performer. It's really hard to tell.

And so, I talked about it at the time and I said you're kidding yourself if you're going to do a beta… Like, once you start talking about a beta 0.2 unless you start bringing in things that are quite interesting like CTAs, and CTAs before fees, or before reducing your trading costs, unless you can bring in something like that, the reduction to beta of 0.2 is also going to kill your return profile.

And now I think people have realized the drop-off between the backtested numbers and the live numbers is something like 75%, or something. You know, I mean, equity long/short as a category, if you have a beta of 0.5 or 0.4 to equities, the amount of stock selection alpha and other things you need to do to be able to overcome even the cost of a mutual fund doing it, you're likely not to generate much alpha. So, I think the allocator community is getting smarter every year about a lot of these points. But I think there are things that work better on it.

And the structural problem that you have is that most liquid alternative products are sold and not bought. The capital tends to go to the largest firms with the largest salespeople who already have people who are invested in multiple products under the same umbrella. And it's an incremental addition to their portfolio.

And the typical allocator does not… Again, going back to this being a human exercise, [the typical allocator] doesn't want to ask the kinds of questions that I'm known for asking. I just did a post on somebody who launched a CTA product with a team of people who, as far as I can tell, have never run a CTA program.

Okay, so that is taking a flyer. Basically US$300 million of their client capital going into it. Now, if it works, if they get lucky, it's great. They have a $300 million product that's done really, really well. If it goes badly, it's their client issue and they won't talk about it. And in three years from now maybe they'll shut it down, or something like that.

So look, I mean, I'm going to keep calling out things in this industry where I think that people who are standing there waving a fiduciary flag are not acting in the best interest of their clients.

It's interesting. You say, do you think these products are sold and not bought? I was just looking at my screen trying to see if I can get the flow information on DBMF, because I'd be interested to know, do you have clients actively coming in and out of your funds or is it more of a very long term allocation part of the portfolio?

One was a line-item constraint. So, if I talk to Cambridge Associates or Mercer or somebody else, they can populate an institutional portfolio with four funds and get some measure of diversification. The reason AQR went to 14 billion in assets in their mutual fund was because a lot of allocators were basically saying, A, it's AQR, what can go wrong? And, B, I want to do a 5% allocation space, I guess the easiest thing is just to give it to AQR.

Okay, that was a catastrophically bad decision… I mean, AQR is an absolutely, staggeringly, incredible firm, but they were taking idiosyncratic manager risk without understanding it. So, what I thought was that there would be demand for something that would allow a model allocator, who's not the fund selector, who wants to be in the business of deciding whether it's Niel's or somebody else and how to assemble that portfolio, but rather for somebody overlooking the whole portfolio saying, give me as consistent and straightforward exposure as you can to this area in a reasonably priced way. So, 85 basis points for ETFs was about half of what the mutual funds were at the time. And ETFs were a growing vehicle in terms of popularity.

So again, we built it on the basis of feedback from people who were the decision makers to how to make it better. So back to your point. The vast majority of the capital are model allocators. There is somebody there who has a series of models for high-net-worth clients or mass affluent clients who is trying to… It's usually not a single allocation, but usually it's a core allocation or within that bucket. So, it's not actively… Very few allocators actively trade, which they shouldn’t. I tell them, if you're going to actively trade, you should find something else to trade.

SG has a very active and a very diverse and comprehensive QIS business. And I feel that the way those products are used and the way those products are approached by clients is probably more in line with how you describe your client journey, but it's a client engaging in trying to get exposure to a specific asset class, or strategy, or theme. So, there seems to be a very sort of thematic use of these QIS.

And I was actually really surprised to hear that often we have global macro hedge funds who want to access some sort of curve steepener or some sort of thematic play for a finite period of time who will use the QIS as a much simpler implementation of a macro theme.

No, I'm a huge fan of QIS when you know what you're doing. When you are trying to articulate a bet, and you are outsourcing execution and financing and everything else to somebody who, in most cases, is better situated to do it, if you're not Two Sigma, or GE, or something, who can do it themselves, presumably.

So, I mean, you know, the product innovation is there. My criticism is that there are a lot of landmines in the space that have been predictable and I've been talking about it for 15 years.

And so, I am hoping that, again, you know, in terms of the investors that I talk to, they're really smart. I'll tell you, I started talking about an AI story about an allocator who really knows what he's doing, and his clients are much better off for it. And the allocator base will continue to get more sophisticated in the same way that QIS allocators are much more sophisticated than they were 12 or 13 years ago when I first talked to them about this space.

I don't know if this is completely hitting this mark, but I'll venture it anyways. Of course we're going to have product innovation. I mean you, Andrew, have been definitely a part of that revolution and disrupting the space.

My concerns with things like QIS is that yeah, we know it's there, we know it's huge. We have no transparency, we have no idea what the returns actually are, compared to “if they're trying to replicate trend following” or replicate CTAs or whatever, but we don't really know how they're doing because they don't publish their returns or anything like that.

I guess my concern, and I do know this sounds really old fashioned when I say it. It's great with innovation. But I am still concerned that when you come at something and say, yeah, we can give you that, right, we can give you the CTA returns, or we can give you trend following, low cost, and we'll do it completely differently. But often, over time, when you do things really differently, why would you expect to be able to deliver the same outcome?

And maybe we have not seen it yet, right? Maybe the way markets have behaved. I noticed both Katy and Nick had some analysis where the environment for managers had been in a certain way the last 10 years, but it was completely opposite almost in the first 10 years of this millennium. And so, all I'm just saying, I'm open to surprise both ways in a sense that yes, there's going to be periods where these innovative structures outperform and do really well. And it kind of looks like, oh, we've solved it. There's another easy way to do trend following without you having to do all the nitty gritty stuff that we do and have done in the last 50 years. But hey, at some point maybe we realize that okay, it works, but it doesn't work all the time. And that's just my expectation to this space.

But I do agree that firms should not knowingly move into this space without the right experience. And just, if they can, put investors into products that are not, you know, built as they should.

Can I…? So, when

I first looked at trend following models, and these are the bank trend following models. It is easier to get the information now than it used to be. When I first looked at the space, I was asking questions that other people weren't asking, which was okay, when did you actually launch this index? If you launched the index three weeks ago, then have you launched other indices that look like this? How did those do?

So, these are normal due diligence questions. I mean, the fascinating thing about it was that I think a lot of allocators just sort of suspended belief and decided not to ask those questions because they were under so much pressure to find liquid investable ways of getting things that had low correlation to equities. But that's a different story. My issue, also, was calling it a risk premia, right?

So, labeling trend a risk premia… Like, as Tom knows, their trend indicator can look very different than the SocGen CTA index, can look very different than the SocGen CTA Trend index can. And so, risk premia implies that if the three of us design it, it's going to look the same. Like, maybe it's not the S&P 500, but it's going to be within kind of… And I think that's been a narrative.

And so, starting with AQR and others, the narrative on the space shifted to no, no, no, we're just harvesting risk premia that has been around for 70 years. And these are permanent features of the market. And so, BlackRock, and AQR, and others, who jumped into this space, talked about this as, it's not risky, these are just permanent features of the market and we're just going to help you to access it in an efficient way. That I think was wrong.

So, when I wrote about the trend and I wrote a paper on the trend products, we know that manager risk, as we talk about, is very, very high in this space. The three of us design a model, a long-term trend model, we may have a correlation of 0.8. We can still be 20 points apart at the end of the year. But it was the characterization of it as risk premia implied that XYZ Bank's solution would be the easy one stop solution.

Now, the way sophisticated allocators have adapted to this is not only by going underneath the hood on all these products, to a great degree, but also thinking about, okay, so this is your flavor, this is another bank's flavor and this is another bank's flavor. How as an investor, how is an allocator do I want to put these together into a package thereby becoming almost like an outsourced portfolio manager? And again, I think that's an enormous improvement relative to where we were 12 or 15 years ago. But then people, they can make calls.

And do we think the team here, who has 37 other quant projects that they're working on, do we think these are the people that we really want to invest in to be able to build this particular product or do we want specialized expertise?

Yeah, I mean with all models, whether it's CTA models, replication models, or whatever, I mean there is a model risk somewhere, or an execution risk, or whatever that might be. But yeah, this was great. We certainly got around today. Tom, Andrew, any final thoughts before we wrap up?

I hope this is the trendiest year we've ever seen.

So, do I. What about you, Tom?

Well, yeah, it's something that seems to happen here. We touched on the global kind of conferences and every year the first half of the year seems to go off with a bang. And I agree with Andrew, we want those trends to persist and we want to have good volatility but not bad volatility.

Yeah, I mean, I think we didn't even touch that much on it, but we had written it down that we would talk a little bit more about global macro and all that stuff. But I think we can all agree that there are a lot of things going on in the world right now. So, if you are engaged with strategies that essentially not trying to predict too much about where things going to go, but do enjoy change as a return driver, then yeah, maybe this could be a good year for us.

Anyways, Tom, I look forward to seeing you in Miami in a couple of weeks. Andrew, I look forward to seeing you in a few weeks, back virtually here.

Now for those listening, if you want to show your appreciation for Tom and Andrew for all the work they put in in these conversations, go to your favorite podcast platform and leave a rating and review. It does really help us and it's nice to show, you know, some appreciation for all the co-hosts who put a lot of time into producing these episodes.

Next week, Alan will take over hosting for a couple of weeks while I travel. He's going to be joined by Mark, one week, he's going to be joined by Cem another week. So, please make sure to send your questions to info@toptradersunplugged.com and I'll make sure that Alan gets ahold of them.

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

Thanks for listening to the Systematic Investor Podcast series. If you enjoy this series, go on over to iTunes and leave an honest rating and review. And be sure to listen to all the other episodes from Top Traders Unplugged.

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And remember, all the discussion that we have about investment performance is about the past, and past performance does not guarantee or even infer anything about future performance. Also, understand that there's a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions. Thanks for spending some of your valuable time with us and we'll see you on the next episode of the Systematic Investor.