Shownotes
What happens when the data goes dark, yet markets barely flinch? In this episode, Niels and Katy unpack the month of October defined by missing economic releases, relentless equity strength and three extraordinary days of Liberation Day turbulence. They explore why price often tells the truest story, how total portfolio thinking could rewrite the role of trend, and why short term strategies faltered while precious metals surged. The conversation then shifts to the coming wave of alternatives in private wealth and the silent risk inside target date funds, asking how managed futures can reshape retirement outcomes when timing paths go wrong.
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Episode TimeStamps:
00:00 - Introduction and catching up from Boston
02:00 - Life without economic data and what markets really need
04:20 - Price as the only truth and the limits of official data
05:45 - CalPERS, total portfolio thinking and what it means for trend
08:20 - AI, data centers and the inflation story hiding in electricity
10:30 - Inflation regimes, unstable prices and why trend cares about change
12:40 - Year to date trend review across equities, metals, FX and bonds
15:10 - Why short term traders struggled in a headline driven year
20:00 - Picking “the best strategy” and why robustness matters more than Sharpe
24:10 - Parameters, speed of response and treating markets differently
26:20 - Liberation Day: three consecutive shock days and what CTAs learned
33:40 - Economic trend, price trend and the blurry line with global macro
39:00 - Crisis alpha, convexity and when fundamentals stop mattering
44:50 - The rise of alternatives and why “core” portfolios are changing
48:20 - How the industry can tap private wealth and model portfolios
52:00 - Trend in target retirement funds and the sequence of returns problem
56:40 - Looking ahead, volatility forecasting and next week’s guest
58:25 - Wrap up, disclosures and final reflections
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Transcripts
You're about to join Niels Kostrup Larson 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.
Speaker A:Welcome to the Systematic Investor Series.
Speaker B:Welcome or welcome back to this week's edition of the Systematic Investor series with Katie Kaminsky and I, Nils Kastro Larsen, where each week we take the polls of the global market through the lens of a rules based investor.
Speaker B:Katie, it is absolutely wonderful to be back with you this week.
Speaker B:How are you doing?
Speaker B:What's going on in Boston?
Speaker C:Good.
Speaker C:I mean, it's, you know, we're ticking along here.
Speaker C:I mean, trends are working well again, so that's exciting.
Speaker C:And I can't believe we're already so far into the year.
Speaker C:I mean, this is amazing.
Speaker C:So time flies.
Speaker B:I know, I know.
Speaker B:Have you had any snow yet?
Speaker B:I was close to Boston a couple of weeks ago and I see now that in Montreal, for example, there snow now.
Speaker B:But what about you?
Speaker C:We missed some of that, but we did have sort of a super cold chill and ironically over Veterans Day and you know, the heat was off in our office and I was wearing my parka, so I was like, oh my gosh, we're here.
Speaker C:It's winter.
Speaker C:Yeah.
Speaker C:So definitely getting ready for the cold here.
Speaker B:Yeah, absolutely.
Speaker B:We've got a, a great lineup, as I always say.
Speaker B:So some, you know, important talking points, no doubt.
Speaker B:But before we do that, I always ask you about what's been on your radar.
Speaker B:And I know you said, well, I don't really have anything specific, but let me mention a few things.
Speaker B:And what has been on another person's radar that involves you is that my daughter actually met you in Boston and she thought you are the coolest and most chill person and very inspiring.
Speaker B:So I just wanted to publicly acknowledge you for taking time out to see her.
Speaker C:No, that was awesome.
Speaker C:So fun to get to meet your daughter.
Speaker C:I've heard so much about her over the years and she was visiting Boston, which is such a fun place to be when you're, you know, exchange student or whatever.
Speaker C:So, I mean, I was very impressed with her organization and structure on her trip.
Speaker C:So she must have inherited that from you.
Speaker C:Niels.
Speaker B:Not sure about that, but she is very organized.
Speaker B:Okay.
Speaker B:All right.
Speaker B:So what's been on my radar?
Speaker B:Flying around and in the US last week, of course, the government shutdown was a little bit on my radar because everything was a bit delayed.
Speaker B:But one thing I thought of is, despite whatever it was, 40 days of no government data, the markets didn't really seem to be too bothered about that.
Speaker B:So the question is, do we really need economic data all the time to be good investors?
Speaker B:Katie, what do you think?
Speaker C:Oh, that's a really good question.
Speaker C:I mean, I think it's been kind of a nuisance in some sense because, you know, we're so used to the routine.
Speaker C:Here's non farm payrolls, here's this.
Speaker C:And you know, I think people are a little out of sorts.
Speaker C:I feel particularly bad for the people in the media who are just used to that routine that, you know, Friday's release.
Speaker C:And I think that must have been hard for them kind of thinking like how do we structure if we don't have any data?
Speaker B:As I hear you talk about.
Speaker B:Actually reminds me of something we're going to be talking about later because we're going to be talking about diversifying trends.
Speaker B:And one of those are economic trend that AQI is doing.
Speaker B:And I'm kind of thinking, wow, economic trend, no data.
Speaker B:That's not a great situation to be in.
Speaker B:Not that the economic data changes that quickly, but still it kind of shows you a little bit of a weakness similar to if we did get, if we didn't get any data from the exchanges for 40 days, that would be a little bit of a challenge.
Speaker C:That's a good point.
Speaker C:I mean, and let's start asking the question like, what if the data gets, you know, manipulated, right?
Speaker C:I mean, that's another thing we can think about is, you know, we know the head of data for was also fired, right?
Speaker C:So I mean, you got to start asking that question as well.
Speaker C:But I guess the point is, you know, there's official data and then there's also lots of other sources of data.
Speaker C:So I think that it'll be interesting to discuss.
Speaker B:You know, I think in our industry, Katie, we've always talked about that the only truth is the market price because that's where the market is clearing.
Speaker B:And maybe that's a good reminder that, that, you know, price data is really pure and important in, in many ways.
Speaker B:I'm sure there's maybe small commodity markets that can be manipulated.
Speaker B:But anyways, so that was one thing that was on my radar.
Speaker B:The other thing that was on my radar is closer to you than it is to me because it's about what's going on on the west coast of the US because next week, one of the largest pension funds in the world, I think CalPERS, they're going to vote on adopting the total portfolio approach.
Speaker B:And I'm not an expert in that, but my Understanding is that if you adopt the total portfolio approach, each individual investment kind of, you look at the value it adds to the portfolio as a whole.
Speaker B:That's kind of the justification.
Speaker B:And I'm thinking that alternative investments, and specifically something like trend following, which we know objectively, empirically, we know that that is, you know, non correlated, et cetera, et cetera, you would think that that would move up the, the list, so to speak, of really valuable components in a portfolio like that.
Speaker B:So, and I know this is completely off the cuff, of course, but do you think that these pension funds that are now adopting this, that it will have an effect on say, alternative investments, percentage allocation in the portfolio, maybe even managed futures allocation in the portfolio?
Speaker C:I definitely think so, because I mean, we've often talked about this, this concept of locally optimal versus globally optimal and why a trend strategy in general is one of the few strategies that is so complementary in the sense that you end up total portfolio risk reduction.
Speaker C:And I think that is not always the case for a lot of other alternative strategies.
Speaker C:And I think, you know, we've seen this in the success of risk mitigation strategies and buckets where they've actually tried to create a bucket where you get that total portfolio effect.
Speaker C:But by creating the bucket they created a list where they could put that.
Speaker C:Because I think the line item problem and sort of the subdivision of labor in the investment management creates this very silent load view from time to time where, you know, you're optimizing each of your buckets or each of the line items, but maybe not able to see sort of the total portfolio view as easily.
Speaker C:So I do think, you know, philosophically that that's very aligned with how we think about things in our space.
Speaker B:Yeah.
Speaker B:And it reminds me of a conversation we had with Elizabeth Burton, who at the time were the head of pension fund in Hawaii, now she's with Goldman Sachs and she told us that they had completely stopped using anything to do with buckets.
Speaker B:I mean, they just looked at things individually and so on and so forth.
Speaker B:So very interesting indeed.
Speaker B:Now, the final thing that was on my radar has nothing to do with trend following or portfolio management.
Speaker B:It was just a little blog post that came out from a previous guest of ours, Ed Yardeni, and talking about the enormous demand, demand for data centers.
Speaker B:Right.
Speaker B:With all this AI going on.
Speaker B:And you know, I was stunned by the increase in.
Speaker B:He talked about the spending for building the data centers and also the Microsoft CEO came out saying that's actually where the shortage is, not in getting the chips, but actually Getting the sensors to put the chips in.
Speaker B:And it had gone up the spending like 400% in two years, which is crazy.
Speaker B: most data centers, more than: Speaker B:And I think now 26% of total electricity supply in Virginia is consumed by data centers.
Speaker B:I mean, these are staggering amounts.
Speaker B:And if we don't know where inflation might come from, I would say electricity prices is a good guess.
Speaker C:Oh yeah, definitely.
Speaker C:And I mean there's a lot of other places as well.
Speaker C:I mean, I was looking at numbers for US Healthcare as well.
Speaker C:There was some interesting stats on that.
Speaker C:So there's all these little different places where you're seeing that things have gone up substantially, insurance, cost, et cetera.
Speaker C:So I mean, I think it's coming.
Speaker C:You know, price increases may not come linearly and we know this with inflation, but they do drift.
Speaker C:So I think inflation is still a very interesting topic to think about, especially over the next few years.
Speaker C:And I think.
Speaker C:Wasn't the podcast last week you guys were talking about inflation as well and one of those great papers, I think Yoav was talking about that too.
Speaker C:That.
Speaker B:Yeah, I think, yeah, talking about it when I was traveling.
Speaker C:Yeah, absolutely.
Speaker C:And you know, there, what I think is interesting about it, we did a very long study of inflation for trend following.
Speaker C:And trend following does really well in high inflation and rising inflation.
Speaker C:So we might be the only people that might be slightly happy about that because in general it's difficult.
Speaker B:But talking about that, because I do think that's relevant, my non detailed analytical view of that is that actually we don't care so much about the level of inflation, but we care that it's not stable.
Speaker B: period for CTA has been this: Speaker B:It's like a long period, 17 years.
Speaker B: to: Speaker B:And that actually when I look at Don's track record, that was the highest compounding period.
Speaker B:So not the highest, highest inflation level that was back in the 70s and early 80s, but it was just an unstable inflation.
Speaker B:And I feel that's kind of the environment that I'm expecting, not so much, you know, that we have 88%, 10% inflation constantly, but actually just that we can't control it or central banks can't control it.
Speaker C:That actually makes sense.
Speaker C:I mean because it's more the disruptive nature and sort of the trends that that creates.
Speaker C:So for example, electricity prices might be sort of a pocket where you see the inflation surging and then you may see inflation dropping in other areas.
Speaker C:And I think it's that sort of turbulence in the inflation sort of changes that probably causes more sort of is indicative of price trends because obviously inflation has to do with how much prices move.
Speaker C:Right.
Speaker C:As well.
Speaker C:So there's some relationship there as well.
Speaker B:Yeah.
Speaker B:And even in a relatively stable inflation environment we've had the last 18 months, I mean bonds where you think oh, there must be a link to that.
Speaker B:That has not been an easy place to operate in as we will talk about, I'm sure.
Speaker B:Anyways, let's talk a little bit about trend following.
Speaker B:October had a couple of days in October.
Speaker B:The first couple of days of October was actually a little bit soft and you think okay, natural correction.
Speaker B:But that's really changed.
Speaker B:Seeing a lot more managers now to be well aligned with these longer term trends that have come back in play.
Speaker B:You know, obviously equities seem to be never stopping.
Speaker B:And I was looking at something I picked up and I think this is from Deutsche bank actually they had a chart that shows the total equity fund flow in percentage of assets.
Speaker B: ge or the mean or median from: Speaker B: ar than the aver average from: Speaker B:So no doubt that there's a lot of flow behind the constant increase in equities which of course works very well with trend following as long as there's no politicians that are trying to upset that trend.
Speaker B:Precious metals continues to do really well.
Speaker B:Softs doing okay, but slightly different direction depending on which commodity you're looking at.
Speaker B:And even currencies, although not overall for the year has probably not been great.
Speaker B:But the last month or so starting to pick up.
Speaker B:Which leaves us as I mentioned before, with fixed income being the big challenge.
Speaker C:Yeah, that's it.
Speaker C:I mean you summarized it perfectly.
Speaker C:I think we've seen a consistent equity trend move that has been sort of surprising.
Speaker C:If you think how we felt earlier this year we had been talking about this idea of is the Risk really overstimulation at some point, you know, maybe inflation at some point.
Speaker C:Obviously we've been a little bit at limbo in those narratives without official data coming out.
Speaker C:But I think the trends that I'm seeing that have been hard are things like energies that have been back and forth.
Speaker C:And also fixed income has been a year where you're sort of the market wants cuts, especially for the U.S. but they're waiting for them.
Speaker C:So those trends, I've seen less risk in that asset class.
Speaker C:So that could be something interesting next year.
Speaker C:Perhaps currencies, you have seen a little pivot in the sort of weak dollar theme, which is kind of interesting to me as well.
Speaker C:Is the dollar kind of moving on, potential slowdown in rate cuts that people don't expect, or is it kind of has it bottomed out because it moved so far this year?
Speaker C:So I think that's an interesting asset class that's a little different right now.
Speaker C:And of course, the best trades for trend this year, precious metals.
Speaker C:Right.
Speaker C:So gold, silver, platinum, palladium.
Speaker C:Any of those markets really sort of surging on what I think it looks a little bit like a hedge.
Speaker C:Right.
Speaker C:So you want the equities, but if you're worried, you buy the safe asset.
Speaker C:The dollar doesn't look good.
Speaker C:So you go for gold and you hold the gold.
Speaker C:It could also be central banks and just people general demand for gold.
Speaker C:So it's definitely an interesting year for precious metals.
Speaker B:Yeah, no, it is.
Speaker B:And I was just looking at it this morning and I mean, even just where we're, we're not that far into the month of November, but silver is up, you know, 12%, silver is up 73% this year, platinum 68% and gold 59%.
Speaker B:So hopefully that's a good indication for people to realize how important it is to trade commodities and not just be stock stock with the usual suspects in a traditional portfolio.
Speaker B:Well, at the same time, orange juice is down 65%.
Speaker B:So there's a little bit on both sides for those who do trade orange juice, but there we are.
Speaker B:Now this environment is also being reflected in my own trend barometer.
Speaker B:We're up at 57.
Speaker B:That's kind of, I don't remember everything that's been going on this year, but it is certainly one of the highest levels I've seen.
Speaker B:So very much in line with recent past performance.
Speaker B:B50 index as of Tuesday, the 11th close of business is up 93 basis points for the month, up now for the year, 2.59%, which is great.
Speaker B:And by the way, people often I think talk down trend following CTA performance but in the B top 50 in the last five years it's up four of those five years.
Speaker B: and the only down year was in: Speaker B:I mean that's not too shabby frankly.
Speaker B:Anyways, Soc Gen CTA Index up 1.19% for the month and down only 35 basis points for the year.
Speaker B:SOC Gen Trend Index up 1.77% for the month and now positive tip territory up 0.86% for the year.
Speaker B:The only real lag that I find which is surprising to me is the Short term traders index down 53 basis points, down 4.8% on a Vol adjusted basis.
Speaker B:That's a high number actually.
Speaker B:And given the it's a year where we've had these short term corrections based on statements and trade policy and all of that, you would kind of logically think well that must be great for short term because they can react to it.
Speaker B:But that's not been the case.
Speaker C:I would agree because it's interesting is that we would have expected short term to do better this year as well and we've seen similar results.
Speaker C:I think it just has to do the amount of sort of the frequency right?
Speaker C:So there's been a lot of like big event risk and a lot of moving around earlier this year that was difficult for short term.
Speaker C:Interestingly enough it seems that having sort of ironically like just a very long term view this year in some asset classes would have been very helpful.
Speaker C:So for example equities, if you had just kind of ignored the noise earlier this year that would have been helpful and you may have seen sort of a mismatch in frequency for them.
Speaker C:So for example they're kind of seeing a new trend that's moving or following new short term opportunity and then sort of you get a swap back that is at the wrong frequency and I think that's definitely been the case this year as you've been sort of particularly the first part of the year right now.
Speaker C:Shorter term movements could also be a little challenging because we've had occasionally little pullbacks but for a longer term trend volume system pretty normal but you know you've seen pretty big moves in things like gold over a two or three day horizon.
Speaker C:It's interesting we'll have to kind of see it was just definitely a different kind of year.
Speaker C:So I guess short term wasn't the savior in that scenario.
Speaker B:Yeah.
Speaker B:No, very true.
Speaker B:Now, I must be out of my normal routine since I've had two weeks off from doing podcasts because I completely forgot to look at the traditional markets that are not normally Also quote, although I can see on my screen here The S&P 500 is up about almost 3% for the month and up 16.25% for the year.
Speaker B:So, anyways, there we are.
Speaker B:Let's jump to a question before, which I normally put in here at this part of the section before we move on.
Speaker B:It's from Justin, who lives in the U.S. he's asking about what's the importance in terms of performance metric?
Speaker B:But when you replied back to me about it, you actually framed it quite nicely because it's about not just evaluating performance metrics, but also kind of the confidence and how robust it is.
Speaker B:And I think what Justin was trying to look for is just what are the key metrics that you would look for?
Speaker B:Why those maybe.
Speaker B:And so I would love to hear your thoughts about that.
Speaker C:Well, this is a good question because he was kind of asking about how do you determine the best metrics to determine which is the best trading strategy?
Speaker C:And I think for me, always the most important thing to think about is sort of out of sample performance.
Speaker C:And especially when you think about academic research, that's.
Speaker C:That's kind of very important in the sense that you might have selected a set of parameters and a configuration that works very well in your backtest.
Speaker C:But it's really sort of the robustness of those parameter choices that matter to me the most, in the sense that if you choose these five parameters, if you permute them at all, how robust are those performance statistics relative to those selection choices?
Speaker C:Choices are probably my number one criteria.
Speaker C:And the reason for this is it's so easy to overfit the past and to find a strategy that worked in history.
Speaker C:But what's hard is we live forward in life.
Speaker C:And so for me, it's about looking at sort of stability across your selection criteria.
Speaker C:And then of course, we always look at many of the more classic approaches.
Speaker C:You want to look at downside capture, upside capture.
Speaker C:You want to look at at, you know, sharp braces.
Speaker C:You want to look at many different things, but you don't want those things to be very susceptible to some of the decisions you made.
Speaker C:And I think that's, for me, the most important thing about what we do is combining methods that are sort of robust to the selection choices.
Speaker C:That's how I start.
Speaker B:Let me ask you just a few Follow up questions, then we'll move on to the other topics.
Speaker B:I think there's a school of thought whereby parameters are changed very rarely, let's put it that way.
Speaker B:There are another school of thought where they change dynamically over time.
Speaker B:And there is one school of thought that uses more recent data.
Speaker B:There's another school of thought that uses the most data you can get to select.
Speaker B:There's one school of thought that may have different parameters per market or sector.
Speaker B:And there's another school of thought saying, well, no, you should trade the same parameters on all markets.
Speaker B:Where do you sit in that?
Speaker C:This is a really good philosophical question.
Speaker C:And I actually think that you should do a little bit of most of those things.
Speaker C:And so let me explain.
Speaker C:So if you look at a classic trend system, like a moving average crossover system, that is somewhat unbiased in the sense that once you pick your time horizons and how you estimate it, you kind of have a predictable response to market moves.
Speaker C:Now, is this particular approach going to work the best all the time?
Speaker C:Not necessarily.
Speaker C:For example, one asset class may move quicker or slower or be more nonlinear.
Speaker C:So my general view is that you can use more advanced techniques to try and shift how you adjust those parameters over time.
Speaker C:Things like machine learning, other methods which can sort of cater to some degree and add some value over a more classic approach.
Speaker C:Now, the problem is, and you kind of highlighted it, the past is not always the same as, you know, the past and what's happening now.
Speaker C:Things can shift.
Speaker C:And I mean, this is something we've been talking a lot about as well, this idea that, you know, in a world where bonds or the Feds, you know, has many dissents and all these things going on, it may be that bonds don't behave exactly the same.
Speaker C:And that's where that school of thumb, you know, of thought comes in that says, like, well, we should look at recent events.
Speaker C:And so I think there's a grain of truth in all of those methods.
Speaker C:But you probably don't want to stick to just one because philosophically you're kind of, you know, banking too much on one particular view of the world.
Speaker C:So I think the best approach is really to kind of of combine different methods with different assumptions and sort of aggregate those over time.
Speaker C:And that should be the most diversified in terms of school of thought.
Speaker C:And I think that that's how I think about it.
Speaker B:I think that makes perfect sense.
Speaker B:It kind of ties into something that I thought was very interesting that Alan and Joav spoke about last week, and that is this idea based on this paper that's a few years old, but I'd not come across it before of market elasticity and, and depending on their general reaction pattern.
Speaker B:I mean some markets react more quickly than other markets.
Speaker B:Perhaps that is something to take into account when creating parameters.
Speaker B:But of course you don't want to over optimize at the same time and make it too complicated.
Speaker B:But anyways, if people haven't listened to that episode, I would definitely recommend to go back and listen to that as well as actually the one with Nick and Moritz about the whole QIS space, which was very interesting because that is one thing I would love and I think they touched on it and that is why don't Nick and his friends report their performance anywhere?
Speaker B:Why is it completely opaque to the world how these strategies are?
Speaker B:Because they are so big in size.
Speaker B:I mean they're bigger probably than the official CTA aum.
Speaker B:So why would that not be a good idea to have some regulation or whatever it is to say, well, if you're running these strategies, whether you're a CTA or whether you sit inside an investment bank, that needs to be disclosed.
Speaker B:Let's talk about, you know, some of the things that we had planned trends so far this year.
Speaker B:Talk to me a little bit about that.
Speaker B:The styles, the chunky etf, slow moving replicators and all of that good stuff that you know much more about than I do.
Speaker C:Well, it's interesting because I think, you know, what we've seen in a pure Trend space is Q1, Q2 were very challenging.
Speaker C:Q3 and Q4 have been much better.
Speaker C:So you know, to me it feels almost philosophically like, you know, we had a huge shock to the markets around Liberation Day and at that point there was a lot of uncertainty in terms of price discovery and movements in markets that were, you know, very at sometimes erratic and headlines driven.
Speaker C:So in that sense you didn't really have, you know, we had a big shock in terms of everything is changing.
Speaker C:But if you think about it from a fundamental macro perspective, the world hadn't changed yet.
Speaker C:So the market was really trying to assess that.
Speaker C:And as we've started to see things calm down, of course macro change is occurring and you're starting to see sort of more consistent price trends in the market as some of that headline risk has toned down.
Speaker C:Another thing which was very interesting to me that I'm looking at right now is if you look at sort of the typical, typical sort of what there are multiple names for this.
Speaker C:So I remember early in my career we called it coordinated market Sell offs then, you know, a few years ago a colleague of mine and I wrote this paper on turbulence metrics.
Speaker C:So like turbulent days, so like high magnitude surprise days where you sort of have a huge move in terms of how CTAs react.
Speaker C:And if you look at those, we showed that those are very negative for CTAs and they usually the day after or the next day they tend to like recover from these type of shocks.
Speaker C:What was interesting with Liberation Day is that for the first time in history, within the time series I've looked at four turbulence metrics or magnitude surprise.
Speaker C:Liberation Day was actually three days in a row.
Speaker C:So that has never happened in the data that I have examined.
Speaker C:Looking at, you know, lots of years of data, there's a lot of these events, right?
Speaker C:There's svb, there's Black Friday, there's, you know, Brexit, other things.
Speaker C:But you know, a three day in a row magnitude surprise and then the market was flat and then it went up.
Speaker C:So I don't know what you would call that, like a debut or something, I don't know because it's definite.
Speaker C:Definitely not a V. If you think about that from the perspective of a trend following system, we often are able to sort of waver through a one day shock, right?
Speaker C:A one day shock relative to all the data that we're investigating has sort of shock impact, but not maybe sort of massive impact.
Speaker C:A three day consistent move is pretty large.
Speaker C:Right.
Speaker C:And so as a trend follower, it's really the question of balancing between the strength of the trend and sort of the volatility as well.
Speaker C:So if you have that type of move, it's not in the back test, right?
Speaker C:There's nothing like this that's happened before.
Speaker C:And so I think it's very tricky to imagine replicating that again, right?
Speaker C:So like three days of negative shock complete.
Speaker C:Even Covid was nothing like this, right?
Speaker C:Because you'd have a shock up and then you have a shock back and then, you know, something a little bit more in those lines.
Speaker C:This was much more of a, um.
Speaker C:And so I think that was interesting to me because it represents, you know, it tells me how big of a shock this was to the markets compared to some of the ones that we've experienced in the past.
Speaker C:And I think the market definitely was very challenging for trend strategies that are trying to measure the direction of the trend using data in that environment.
Speaker B:So I have a question, I have to.
Speaker B:Sorry to interrupt you here, but otherwise I'll forget now that the data is in the backtest Okay, I don't know if you've looked at that, but if you then ran a backtest today versus a backtest prior to Liberation Day, how would the parameters.
Speaker B:I don't think the models would change, but how do you think the parameters would be different or would they even be different?
Speaker B:Because it's still only three days out of maybe a backtest running 15 years.
Speaker B:So kind of you just have to live with it or, you know, I.
Speaker C:Don'T think that, you know, you, you don't want to, you don't change based on, you know, recent events and things like this.
Speaker C:But it does, it does sort of get you to start questioning what these magnitude surprises mean and sort of, you know, and it also begs the question of like examining how you measure your volatility and how it reacts to a much more sustained shock.
Speaker C:And also sort of how signals react to sustained shock is definitely something I'm thinking about.
Speaker C:Obviously that it's very hard to do those analysis because there's no statistical significance.
Speaker C:They're one off events.
Speaker C:But it is something to note that this was a very unique price trajectory movement that we haven't seen in the data for CTAs.
Speaker C:Doesn't mean it's going to happen again per se, but it does get you to do some thought about volatility estimation signals and how they adjust to that type of movement.
Speaker B:I completely agree with that actually.
Speaker B:And also speaking to our researchers, I think they learned something during that period.
Speaker B:So I would agree with that.
Speaker B:What changes that may or may not be done is different question.
Speaker B:But to say that they learned something, I think is completely fair.
Speaker B:And more importantly, as you say, actually you should think about things when this happens because it had not really happened before.
Speaker B:So definitely.
Speaker B:Actually, a colleague of mine, Mike, sent to me yesterday an article from citywire.
Speaker B:It was an article about AQR specifically and it talked about how they had kind of coped quite well this year, but thanks to doing things a little bit differently, which we already touched upon, namely not just using price data for their trend models.
Speaker B:Now when we had a on the podcast a couple of years ago, Alan and I, they already did this economic trend for 50% of their for.
Speaker B:For one specific program.
Speaker B:So if people want to listen a little bit more detail about what they do, that might be an episode that they can find in the Top Traders Unplug series on the website.
Speaker B:But I thought it was very interesting.
Speaker B:And of course, now that we've come out of a period of time with no economic data, we'll see how that actually work out.
Speaker B:But anyways, did you have a chance to just sort of skim through the, the article and what, what are your thoughts about this kind of, I guess we could call it either alternative data trend following or diversifying trend following or bit of both.
Speaker C:I mean, I think it's very interesting.
Speaker C:I mean they highlight how they use single lane equities and then they use 50% economic trend, 50% price trend, and generally economic trend or macro even as well, has done pretty well this year.
Speaker C:And what that makes a lot of sense to me because if you look at what's gone on, I explained there was a lot of headline risk that was causing a lot of chaos in price movements.
Speaker C:Whereas if you step back and perhaps followed the fundamentals and looked at of what the overall themes of the economy were, you know, you might have sifted through some of that noise.
Speaker C:So that to me is very intuitive, that that worked well.
Speaker C:I think one of the things I'm still sort of navigating myself because I'm also very interested in economic trend is it's a little bit more of an art to understand exactly what, what you're using.
Speaker C:So it's more pretty much macro with a different name.
Speaker C:Right.
Speaker C:And then, then what we need to do next is sort of distill what type of macro strategies actually connect to trend and how much trend capture they really have.
Speaker C:Because I think the challenge for any investor is going to be if they're looking to capture trend or the features of trend.
Speaker C:No doubt there are scenarios where macroeconomic indicators or data can predate or can give an indication of a future trend.
Speaker C:But there's also the other direction where they actually predict a trend that doesn't actually occur.
Speaker C:And so I'd say it's interesting and it's something I'm actually thinking about.
Speaker C:I'm hoping write a little bit about it at some point.
Speaker C:But the concept of trend capture, how much do economic trend models capture of price trends and how do they complement and what part of that, that trend capture is connected with sort of, you know, price trends themselves.
Speaker C:And I think, you know, if you look at macro and we have a paper coming that we've been working on on macro trading, it has a very high correlation with trend falling, at least a lot of macromanagers.
Speaker C:And this is, you know, a question of what part of the trend are they part of?
Speaker C:Because the truth is we're all trying to capture global trends across asset classes and there are different methods to get in and out and, or participate in those trends.
Speaker C:And I think for me, economic trend is one way.
Speaker C:The challenge, of course, is the art of how you implement it and what data you use.
Speaker C:But there's definitely some connections between economic trend and price trend.
Speaker B:Couple of thoughts.
Speaker B:I'd love to hear your thinking on this.
Speaker B:So.
Speaker B:So when I read the article and I don't remember sort of word by word, but one of the ways that they were writing it, and I don't know if this was the journalist or whether this was something that came from aqr, but it was this thing of they were trying to diversify kind of the responsiveness, meaning that the data has.
Speaker B:Investors have different time lag in terms of how they respond.
Speaker B:That's how trends form.
Speaker B:And by using economic data, they were trying to maybe capture some things that had not played out in the price data yet.
Speaker B:For example.
Speaker B:Okay, so this concept is kind of interesting to me because one of the things, at least in, in my career that we've kind of tried to stay away from and that we say about trend following is that we don't try to predict.
Speaker B:And one thing that we also have to acknowledge, which is some people would say it's a weakness, is we cannot anticipate either because we need the data and we need some time to adjust.
Speaker B:So in a sense, when I hear this, it feels a little bit predictive.
Speaker B:It feels a little bit, oh, maybe this is a way to get the anticipation into your trend model now.
Speaker B:Love to hear your thoughts about that.
Speaker B:But what it also reminds me is an interview I did very early on in my podcasting career, quote unquote, with a systematic global macromanager out of Sweden, ipm.
Speaker B:They had fantastic track record for many years and they kind of raised all the assets in, in.
Speaker B:In the space and there was not much left for, for the rest of us until it stopped working.
Speaker B:And they didn't blow up, but they didn't make money and they were in a drawdown when they decided to close the business.
Speaker B:So, and maybe that's just how it works, that you like the trend.
Speaker B:You have your periods where it works, you have your periods where it doesn't work.
Speaker B:And maybe that's why it's a good idea to combine, I don't know.
Speaker B:Just saying is that sometimes when I read these things, and I'm not suggesting that AQR is doing the same as IPM is doing or whatever, nothing like that.
Speaker B:I'm just saying that I think all approaches will have their time in the sunshine and their time when things don't work so well.
Speaker B:But Right now it's more about the time in the sunshine when I read about these things because recent performance has been certainly helpful, helped as they say in the article by this.
Speaker B:So that's kind of my two.
Speaker C:Yeah.
Speaker C:And it's interesting you bring this up because I do think one of the challenges with trend following is and I was just doing a presentation this week on Crisis Alpha that it was an academic presentation, but I was looking at one of the old graphs that I love to plot where you look at how does the SG trend perform in different quintiles, like the worst quintile and the best.
Speaker C:And, and over the history it's that the worst case scenario, that convexity that those opportunities that occur in a time of stressful market environments which do provide a lot of complimentary benefits of trend following.
Speaker C:And that's exactly the idea that in times of stress oftentimes the fundamentals become irrelevant.
Speaker C:And so it's really about the world changing and prices are changing.
Speaker C:And so trend is really very good in that type of environment if it's sustained.
Speaker C:We're actually this year not in that environment.
Speaker C:You already mentioned it yourself.
Speaker C:The s and P500 is up 16% and you know, macro data and information has suggested generally positive themes and if you followed that information, you ignored some of the price noise around the headline risk and you know, it was a good strategy.
Speaker C:So I say the, that each of these strategies and approaches have their days of sunshine and days of rain.
Speaker C:And I think I do agree that depending on the investor, combining them can make sense.
Speaker C:Depends on their mandate.
Speaker C:If we have certain clients that their main mandate is risk mitigation and they like trend because they know when it's really bad, it tends to do very well.
Speaker C:And they also understand that in a year when, when their S and P is up 16, it might do okay or not, you know, and, and that's kind of a question of construction and investor preferences to me.
Speaker C:So I think all these strategies are viable in different ways in different times.
Speaker B:Okay, we will end up on a positive note.
Speaker B:But before we get to that, you wrote a few comments to me about, and I don't know if you feel we've already discussed it, maybe we did the three days in a row topic about the Liberation Day.
Speaker B:So let's move on to the next topic, which I thought was very interesting, something that I don't even know where I got the link to the article.
Speaker B:Article.
Speaker B:It was an article or blog post from Capgemini and it was titled the Rise of Alternative Investments by Xiuya Jian I think it was.
Speaker B:And it talks about how alternative investments are really reshaping the wealth management industry.
Speaker B:And one of the, and I'd love to hear your more detailed thoughts about this, this but one of the headlines or sub headlines in the article was something like how some of these consultants or financial firms were essentially thinking of alternatives becoming the call, not the alternative in a portfolio.
Speaker B: trillion by: Speaker B: trillion globally by: Speaker B:I think that was Everest Group that had that prediction.
Speaker B:So I mean these are not small changes.
Speaker B:I mean these are like complete game changers if this is true or even comes close to being true.
Speaker B:It also talks about how institutions and different types of investors have really approached alternative differently.
Speaker B:Some people, you know, a 3% allocation is enough, but once you move into the kind of high net worth individual space and private investors, you know, 20, 25% seem to have been much more the norm.
Speaker B:Family offices, actually some of the ones that use alternatives the most, 30 to 50% allocation has been mentioned.
Speaker B:And the one thing that actually I thought about, and this is something I've been thinking about for like the last 20 years and this is this thing about fiduciary responsibility because I thought as a fiduciary your job was to pick the best investments for your portfolio portfolio.
Speaker B:And this is not necessarily a block for managed futures or trend following.
Speaker B:It could be other strategies.
Speaker B:But it's very hard to objectively argue that it doesn't add value to a portfolio.
Speaker B:I mean there's never been a white paper written to suggest the opposite.
Speaker B:So I've always kind of thought how do the fiduciaries get away with having no allocation to trend or 1% allocation to trend?
Speaker B:Maybe this is also part of the change.
Speaker B:I would love to hear your thoughts about this and also whether you already see signs of this in your conversations, in your kind of the construction of the types of investors you see the flows coming from.
Speaker B:Would love to hear that.
Speaker C:I mean, I think the most interesting thing about this particular paper is not just the flows to alternatives, but it does focus a lot on private wealth.
Speaker C:And I think of that as sort of, if you look at, at the way, especially when I speak with my friends in Europe, like the way that sort of investment management is bifurcated in the United States between institutional investing and sort of Private wealth and, you know, retail investing.
Speaker C:There has been a lot of limitations and barriers to sort of accessing very fragmented pools of capital.
Speaker C:And I think think what's happening a. I think there's a market opportunity because stocks and bonds, for example, with bonds being a little more challenging, has made larger investment firms have to ask questions like, can we just make it there with just stocks and bonds?
Speaker C:We need to think about this more and we need to think about what these institutions are doing differently from us and how we can sort of import some of that wisdom.
Speaker C:And I think the interesting part, I mean, that's just exciting with AI and all these other things that can solve some, you know, can aggregate information more quickly for us, sort of the development of model portfolios and solutions and more access points.
Speaker C:And this paper actually argued a little bit about that as well.
Speaker C:This idea of, you know, access to these things changing.
Speaker C:Access is a function of both new products and new, new legislation.
Speaker C:For example, the ETF market is a good example of that.
Speaker C:But it is sort of a slow evolution that seems to be speeding up after people have perhaps been a little bit concerned about the 60 40.
Speaker C:Right.
Speaker C:So I think for me it just shows that there's a wide range of investors out there that are limited in their diversification compared to an institution.
Speaker C:And I think that by aggregating these approaches that you can actually have access to a wider range of investment options.
Speaker C:And even the article mentions some of the larger banks and investment firms kind of examining alternatives, access for their clients and the private wealth.
Speaker C:And so I think it's a wave that's coming that is going to continue.
Speaker C:And so I agree with the article.
Speaker C:I think it's going to be interesting to see how that develops and sort of, I think accessing these networks and working with them is going to be important.
Speaker C:I think you and I, many times you've asked me questions about sort of like knowing your client, right?
Speaker C:So that's going to be, I mean, I bring that up because that's important to you, Niels.
Speaker C:And you and I talk about that a lot, especially when we talk about ETFs and other things.
Speaker C:So I think that there's going to be a lot of education necessary.
Speaker C:There's going to be a lot of, lot of people that need to sort of understand and obviously larger investment firms are going to have to spend resources to cover, manage and sort of understand alternatives.
Speaker C:We have been for a long time in the alternatives completion space, so like building portfolios of alternatives together.
Speaker C:And I think that's something that we strongly believe, and I believe I've talked about this many times with you, is, is like, interestingly enough, it's like having some trend following or manage futures of any type actually gets you farther than you would think.
Speaker C:Just because it's one of the few things that's actually different if you just own stocks and bonds.
Speaker B:Yeah, I had completely forgotten about that little pet peeve of mine where if you go, if you just get all the flow through an etf, you don't know who the underlying client is and how important it is in my opinion to know your clients, especially in the, like this year, where I think people got nervous after Q2, where people didn't really feel that comfortable in the trend space.
Speaker B:But if you know your clients and you can actually reach out and talk to them, you can avoid a lot of unnecessary hardship on their side by them making allocation decisions at the wrong time.
Speaker B:So thanks for reminding me about that.
Speaker B:Now let's, as we always do, let's look at it from a purely selfish perspective.
Speaker B:If this is true, how do we as an industry, do you think, how should we position ourselves or what should we do different to try and capture some of this?
Speaker B:And I know full well that this will be captured, I'm sure, both through, through managers like ourselves, but also through replicators for sure.
Speaker B:And, and obviously one doesn't mean that you shouldn't have the other and vice versa.
Speaker B:But, but what else can we do to be part of this potential, you know, tidal wave of assets that could flow into alternative investments?
Speaker B:Because alternative investments I think also includes private equity and private credit.
Speaker B:And to me that's not really that alternative.
Speaker B:Right.
Speaker B:That's really just the same thing in a different clothing.
Speaker B:But the true alternatives, like what we do well, how do we take advantage of this opportunity?
Speaker C:Well, I think it's important.
Speaker C:I mean, they talked about access points.
Speaker C:So I mean clearly creating products in different wrappers like ETFs is one way you can sort of be active in these spaces, but also sort of maintaining relationships with key stakeholders in these spaces, for example, model portfolio researchers.
Speaker C:So those are the people that's your client in some sense and sort of getting to understand the private wealth network and sort of how you can support that and help them make educated decisions about things like managed future is sort of our next educational journey in this space.
Speaker C:I know we've, you know, clearly there's been a lot of focus on institutions in the past.
Speaker C:The new wave is really probably private wealth and sort of, and also sort of aggregators of that Are thinking about model portfolios and model selection and manager selection.
Speaker B:Good stuff.
Speaker B:All right, final topic, which is not really a topic but I'm always curious about.
Speaker B:I know you mentioned you're thinking about or you already have started writing about, so trend and global macro.
Speaker B:What else kind of interests you?
Speaker B:Because I know you're someone who not only produces a lot of papers during the year, but you cover a lot of different topics within our industry.
Speaker B:What else?
Speaker B:After a year like this year that has been so.
Speaker B:I wouldn't say different because every year is different, but so wide ranging in terms of the, the challenges and the tailwind we've had.
Speaker B:What else inspires you at the moment?
Speaker C:So I have two papers that I'm almost done with.
Speaker C:One's on macro and trend and another one is on utilizing managed features and target retirement portfolios.
Speaker B:Tell me about that.
Speaker C:That's not something I again, something very.
Speaker C:I mean it goes to the same discussion of like new avenues for managed futures.
Speaker C:We're interested in this topic because if you think about target retirement, it's really a long term investment problem.
Speaker C:But the objective is a little different than a pension fund.
Speaker C:The objective is to improve some of the worst case scenarios for retirees.
Speaker C:What we do is we model cash flows for a typical target retirement with.
Speaker C:And it's not done yet, but I'll definitely send it to you when I'm done.
Speaker C:But the idea is that managed features can improve some of the down.
Speaker C:The worst case scenarios are some of the sort of bottom 5% where you have poor market timing in terms of when you allocate or when you withdraw.
Speaker C:And I think that's very interesting because they have a different objective in target retirement than you might have.
Speaker C:Sort of best risk adjusted return for a portfolio.
Speaker C:More to come eventually.
Speaker C:It's not ready yet.
Speaker B:Yes.
Speaker B:Okay, I don't want to take all your thunder, but I will ask you just one follow up question.
Speaker B:So because again, target retirement plans are probably more common in the US than they are in Europe, you would think that as we get older and nearer our retirement age that our portfolio construction should look different.
Speaker B:I think.
Speaker B:Well, if people have listened to the podcast since it began, they're like 14 years older than when they, you know, know, started or whatever.
Speaker B:How many years we've been going on about this.
Speaker B:So they're getting closer to retirement.
Speaker B:So how should they, as you get older, how should you think differently about your portfolio?
Speaker B:And also without again taking all the thunder away, how should you think differently about or how will that impact how you should Think about trend following just broadly.
Speaker C:Well, I mean, I don't think we answered that huge philosophical question exactly.
Speaker C:But what, you know, the allocation that you have and that's why our conversations about the total portfolio and this conversation about adding alternatives, those choices matter.
Speaker C:Obviously when you're thinking about retirement, those may be time bearing as well.
Speaker C:I think what we are trying to understand is, you know, sort of, we all understand that trend following, especially with equities, has a naturally, you know, more diversified approach and it has lower maximum drawdowns on average.
Speaker C:And so if you're thinking about the average of the population, that matters.
Speaker C:But if you're actually thinking about individuals, each individual has their own sample path and depending on when they're getting close to retirement, they want to sort of minimize those drawdowns so, so that they have enough time to recover.
Speaker C:So I think it's an interesting question and for me that's a hard question.
Speaker C:I mean we try to look at that a little bit because the value of managed futures is that it can help reduce maximum drawdowns for a equity focused portfolio and that can help over a longer term avoiding some of the worst case scenarios.
Speaker C: ally decided to, to retire in: Speaker C:So I think that's a good question.
Speaker C:I don't have the whole answer for you yet, but it's something we can.
Speaker B:Talk about done yet.
Speaker B:So I'm expecting all the answers in the paper when we get the chance to talk about it.
Speaker B:Of course.
Speaker B:Katie, this was wonderful as all, always very wide ranging and super educational.
Speaker B:So really appreciate your time and your efforts in preparing for this.
Speaker B:It's not always easy to come up with new ways of talking about the same thing each week.
Speaker B:So I always appreciate the help I get from, from you and all the other co hosts in that.
Speaker B:Speaking of new angles, next week I have Rob Calver coming back on the, on the show and you said something, something interesting about Rob.
Speaker B:Just before I press record, tell me more.
Speaker C:Oh, Rob has a really fun post on volatility forecasting and if it helps so I would love for him to talk through that next week.
Speaker C:So ask him about it.
Speaker B:So we are putting.
Speaker B:Yeah, exactly.
Speaker B:We're putting down the challenge and I'm sure he would want to bring it up anyways.
Speaker B:He, he, he and others obviously like to, to do that, which is pretty Perfect.
Speaker B:So anyways, if you have questions for Rob Info Top Traders Unplugged.com is the email to to do that.
Speaker B:If you want a copy of the paper that we did at Don regarding where we combine or we where we compare all the alternative investment strategies including Trend and see how they perform, as Katie said during crisis periods and why they might be a true alternative.
Speaker B:If you sign up to the weekly newsletter that I do, you can do toptraders on pl.com TTU/news or whatever you however you pronounce that.
Speaker B:Then from time to time I will promote that little paper and you can see for yourself what these things do.
Speaker B:And finally, very importantly, if you want to show your love for Katie and all the work she does, and not just here but everywhere she shows up to educate people about Trend for following, then head over to your favorite podcast platform and leave a rating and review because there is a lot of work that goes into preparing these conversations.
Speaker B:So it's nice to see some positive feedback on that.
Speaker B:Anyways, from Katie and me, thanks ever so much for listening.
Speaker B:We look forward to being back with you next week.
Speaker B:Until next week, take care of yourself and take care of each other.
Speaker A:Thanks for listening to the Systematic Investor Podcast podcast series.
Speaker A:If you enjoy this series, go on over to itunes and leave an honest rating and review.
Speaker A:And be sure to listen to all the other episodes from Top Traders Unplugged.
Speaker A:If you have questions about systematic investing, send us an email with the word question in the subject line to infooptoptradersunplugged.com and we'll try to get it on the show.
Speaker A:And remember, all the discussion that we have about investment performance is about the past and past performance does not guarantee or even inferior anything about future performance.
Speaker A: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.
Speaker A:Thanks for spending some of your valuable time with us and we'll see you on the next episode of the Systematic Investor.
