Shownotes
In this episode, Moritz Seibert speaks with Asim Ghaffar, the founder and CIO of AG Capital, a Boston-based macro hedge fund. Asim explains why he believes insourcing rather than outsourcing the organizational processes of running a hedge fund business is critical and how it can add long-term value to the business. He also describes why sales and branding are key components to a successful investment management business, and how AG Capital connects with clients and prospective investors. In the second part of the conversation, Asam and Moritz speak about AG Capital’s style of trading, how they position size, why they take concentrated positions, how their methods differ from those of systematic trend following funds, and what their current long-term and short-term investment themes are, touching on gold, Bitcoin, copper, natural gas, and some other markets.
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Episode TimeStamps:
02:13 - Introduction to Asim Ghaffar and AG Capital
06:48 - What defines a great hedge fund?
12:13 - How do you find clients as a hedge fund?
18:32 - Creating world class in-house operations
25:32 - Ghaffar's framework for building portfolios
35:05 - How Ghaffar differs from a classical trend follower
39:16 - Why Ghaffar enforces a fixed number of positions
41:40 - What is so cool about stocks?
46:16 - Why Ghaffar sometimes decreases an exposure
51:36 - How Ghaffar approaches gold
54:05 - Why AG Capital stays away from Bitcoin
01:01:54 - Is China actually more democratic than the US?
Copyright © 2025 – CMC AG – All Rights Reserved
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Transcripts
Fundamentally I'm still bearish. I think we're at the end of a long 16, 17 year secular bull market in equities where ‘buy the dip’ has become ingrained in both the professional and retail community. We haven't had a proper recession, a cyclical bear market in, again, 16 years, since the ’07, ‘09 episode.
So, these things don't happen very often, but you know when they do happen you have to have your eyes open. And that's what I'm looking for with equities is a classic old school bear market which, again, we have not had in 17 years. So, people have really forgotten how equities trade during true bear markets.
Intro:Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level.
Before we begin today's conversation, remember to keep two things in mind. All the discussion we'll 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.
Here's your host, veteran hedge fund manager Niels Kaastrup-Larsen.
Niels:Welcome to another episode in the Open Interest series on Top Traders Unplugged, hosted by Moritz Seibert. In life as well as in trading, maintaining a spirit of curiosity and open mindedness is key and this is precisely what the Open Interest series is all about.
Join Moritz as he engages in candid conversations with seasoned professionals from around the globe to uncover their insights, successes and failures, offering you a unique perspective on the investment landscape. So, with no further ado, please enjoy the conversation.
Moritz: ge fund which Asim started in:Asim has more than 20 years of experience trading across a variety of asset classes and prior to forming AG Capital, he served as a Senior Consultant at Cambridge Associates and as a Principal at Partners Capital where he managed an internal portfolio of absolute return hedge fund investments. He started his career at Bain & Co. and Charles River Associates and holds a BA in Economics from Dartmouth College and an MBA from the MIT Sloan School of Management.
Now, prefacing this conversation, let me say that I'm really excited to have Asim on the Open Interest series today because his performance, at times, can be very similar and positively correlate to systematic trend following funds, which are usually the funds that we're speaking about on this series. But also, at times, he'll be very, very different and much more concentrated than a systematic trend following fund would ever be.
And in our prep call, Asim mentioned that he has a sometimes 30 year, let me repeat this 30 year view on how to structure his investments. He has some very interesting perspectives on China and the potential end of our current monetary order and the probable birth of a new one. So, all of these are very interesting topics, something new, something that we haven't touched on this series and I think this is a good time to get started, Asim.
It's really great to have you here. Thank you for joining me today. I hope we'll have a great conversation.
Asim:Thanks Moritz. I'm happy to be here.
Moritz:Excellent.
Now we had a little bit of a prep call, and also looking at the materials which you sent me, Asim, it mentions that you draw inspiration from some of the macro pioneers in our space. So, if you could, I mean, what triggered the formation of AG Capital and, maybe, if there are some names or some heroes that you have that you were or maybe still are looking up to that inspired you to create the firm. Give us some background on that.
Asim: So back in:And then completely randomly a friend of mine, not an MBA classmate, but just a random friend of mine, handed me a book. And this story will be familiar to a lot of people who began trading futures and other derivatives.
was the one that came out in:So, it was very timely. The people he interviewed were completely unknown. The idea of a hedge fund wasn't something that people talked about back then. It wasn't an asset class that people were familiar with. And so, these were people managing $100 million, maybe $3, $4, $500 million was a lot of money back then, so, unknown traders who might have a two or three person team with them. And I read all the interviews and I just fell in love with the macro, the top-down macro traders.
Part of it was that I had, in high school and in college, a liberal arts background. That was sort of my sort of childhood training, call it. And so, yes, I graduated with an economics degree, but I took a lot of courses in history, philosophy, psychology. And my initial look at macro was this is a blend of a little bit of math and economics with a lot of history, psychology, philosophy attached to it. So, that was where sort of the genesis or the spark for trading, and what would ultimately become Ag Capital, came from.
So, the traders in there that I really drew inspiration from were probably Bruce Kovner who founded Caxton, Paul Tudor Jones. The second book (this isn't the first book), the second book had Stan Druckenmiller, and it became clear that the macro top-down traders, that was what I wanted to do. It was just clear to me. It wasn't as though I had any question about it.
I really didn't have as much of an interest in the bottom-up stock picking, or the credit managers. And I really gravitated towards those legendary sort of macro traders in that philosophy.
Moritz:Great, thanks for the background.
We'll get into some of the specifics and the way that you're trading in a bit, but I'd like to stay with the business management side for just a second longer and how you started the business. In our prep call, I found it very interesting that you said that in order to be successful as a hedge fund, you need to have a good live trading record. Okay, fine. I mean that is I guess the most important thing, otherwise people leave.
But you also said that you need to have great operations, great marketing, great branding, and that you also find it very important to have these functions in house and not outsource everything in the age of software as a service solutions and all that type of stuff, and that you'd rather have people on the payroll and kind of like build your business organically, intrinsically from the inside as opposed to attaching services from the outside.
Asim:So, there are a number of different threads here. This will take some time, but let's get into this. This is actually an important topic.
The first piece about basically having a love for operations, sales, marketing, branding, I can't stress this enough that I think the majority of people that want to start a hedge fund love trading. They love the markets. They come from a math or a finance background, and they know they have to do the operations, they know they have to go out there and raise capital. But they almost say, you know what, I'll spend enough time to get that done. And they almost bury it in their subconscious knowing they'll have to deal with it. But they don't sort of physically really think about it and bring it to life and say, this is something that if I don't love, the business will fail.
And so maybe they're 90% interested in the trading and 10% of their mind is on building a team, and middle office software, and then going out and doing the sales and marketing. My view is it's really a three legged stool. It's 1/3 sales marketing, 1/3 the portfolio, and 1/3 operations.
And if you don't, as the founder of the business, if you don't actually love the sales and marketing piece or the operations piece, the business will fail. So let me get into why that is.
Let's just talk about the sales and marketing first, you know, and I'm going to speak from personal experience. I started my business when I was 38 years old, but when I was 25, when I first read Market Wizards and said, okay, I want to do this, I want to eventually become a trader and run a hedge fund, I thought it was all about having a great 3 or 4 year track record and the money would just come. The outside world would find you, you would show it to the Internet, put it on some platforms, and the money would just roll in.
And it's one of those things where, in hindsight, it sounds so stupid to think that's the way the world works. But that was the stereotype I had as a 25, 26 years old. And I can't help but think that that's also the stereotype that many people have.
They think that they'll go out there and either use their prior track record from a prior fund they worked at, or they'll launch a fund and build an awesome 2, 3, 4, 5 year track record, and the money will just come. And nothing could be further from the truth. That's not the way our industry works. The industry works on inertia.
So, in general, money doesn't have to move. The money that is invested in a Vanguard tracker or a cheap just long-only fund, or the money that's in a private equity fund like a Blackstone or even at a different large blue chip hedge fund, by inertia it just sits there and it doesn't have to move. Yes, there's new wealth being created, but in general you have to give people a reason to actually move their money.
And the way you do that is by taking a very long-term view on the sales cycle. It's, what I call, a three to ten year sales cycle, not a two month or a two year sales cycle. And you actively have to love the process of getting on an airplane, meeting people in person, flying all over the world. And if that's something you dread or it doesn't sound like something you want to allocate a third of your time to, things aren't going to work.
So, just to break that down a little further, the way that works is most people think you're going to fail when you start a hedge fund. Because most hedge funds fail. There's a very high attrition rate. People don't end up building 20, 30, 40 year track records. So, the intelligent allocator will try to outwait you. And this is the right approach for an allocator to take because of the failure rate and the career risk involved in just allocating capital to a manager that's going to disappear in year 7.
And so, it takes a long time for them to realize you're going to stick around and then a longer time to realize that your process is repeatable and that you're not going anywhere. So, it's incumbent upon you, the manager, to literally be willing to go to conferences, these are expensive conferences often. Or to get on an airplane and fly out to Singapore, Asia, all over the US, if you're based in the US, to Europe, and meet people. And you need to meet the same allocator sometimes 10, 11, 12, 13 times over the course of 6, 7, 8 years to build that rapport, to show that you're not going anywhere.
And then, even then, you don't expect them to drop a ticket or to give you capital. Your expectation should be, if they give it, great, if they don't, that's fine too. But enough people will, I think (if you do your job correctly), be open to you - that it works out over time.
So, the sales and marketing mentality has to be a very long game. And you have to love that process of getting out, meeting people, and doing meetings over and over again all over the world.
Moritz:Let me stop you there, on the marketing piece, because I think we also want to speak about the operations, which I find equally interesting. And by the way, I do agree with your view on sales and marketing. We operate in the same way. If you don't like speaking to your prospective clients, you're in the wrong seat, you have the wrong job. Because, at the end of the day, that is your job as the owner of the business to do that. But my question is, how do you initially reach these people?
Like, you know, this isn't a trivial thing because sometimes they just come to you because they find you on the Internet or they hear you now on a podcast. This is a good opportunity. Or do you put stuff out on LinkedIn? Do you put out research pieces? I mean, do you go to conferences? What do you do in order to get the initial contact with investors?
Asim:You know, I can only speak from my experience. I think the story will be different for most people. I started the business on a shoestring with $500,000 on day one. So, I really bootstrapped the business. And I started my business before podcasts were a big thing, before social media really had built up to where it is today.
he way it does today, back in:You know, sometimes you need a certain amount of luck and timing in life, and everybody will tell you that when they start a business. You need to put the effort in. You have to have the right strategy. But then timing is important. So, here's where, at least for me, for my story, the timing worked out.
back in time to that, again,:So, I only had separate accounts for the first handful of years of our track record. And there just happened to be a conference that I came across when I was doing a Google search. That conference was called CTA Expo.
It offered events in Chicago, New York, and I think they did a couple in Miami that I went to as well. But I would go to that event two to three times a year. And over the course of four years, I probably went to 12 or 13 of those conferences.
I built relationships with potential end clients. These were basically high net worth investors, let's call it, small business owners, doctors, dentists, that sort of crowd, as well as brokers. So, introducing brokers who had a Series 3 license to sell a futures product.
And it took years in the beginning, you know, people looked at the year and a half track record I had and said, well, you know, interesting, but he's probably not going to make it. And then, you know, 2 years later, 3 years later, some small accounts came in and it just took 3, 4 years to really build the assets up to the, call it the $5 to $10 million level. I think it took a good 4 years to get to $10 million and then it took 5 years to get to $20, $25 million.
So took a long time. That conference happened to be there. If that conference had not existed, I don't know how I would have done it. I would have maybe tried a different angle, but I don't actually have an answer to how I would have done it.
Today, if the question is, am I giving advice to somebody else who's starting from scratch? That conference went away after Covid. When Covid hit it just disbanded and that conference sort of went defunct. I think it's coming back now, potentially, but it was gone for a good 5 years. So, maybe a young guy today, or a young woman today needs to use the podcast world or social media to build a brand and a presence.
I don't really have an angle on that. That's not the way I did it. But for me, you know, things worked out. The luck and the timing and the hard work all kind of came together and that was how I did it.
Moritz:Like you say, there is no blueprint. It's probably a different solution for different firms at different times, you know, when they start. I guess now that you're beyond the point of escape velocity, as far as AUM is concerned, is it now more word of mouth or you're more in the institutional space? Do people just started to recognize you more because you've been around for 11 years, something like that, now? It probably has changed, right?
Asim:It's definitely changed. You know, the irony is, from the actual broader institutional world, and this goes back to the fact that my prior career was as a consultant. I was on the allocator side for a very long time, for 7, 8 years as an investment consultant.
You're considered an emerging manager if you have under a billion dollars of AUM. That sounds like a very large amount of money, and it used to be, but it's the nature of our industry where, you know, a manager with a few hundred million dollars is very much an emerging manager. So, we still fall in that bucket, but we're no longer, you know, tiny - a tiny, tiny startup. We have a team and so we’re in the driver's seat now.
So, I have a marketing budget. We attend what I would call the flagship conferences that are out there where allocators come and look at hedge funds and private equity - sort of the alts world.
And then separately I'll do trips on my own to different places all over the world to basically meet clients – roadshows, in essence, and get our name out there. So, it's a mix of things. You have to still continually be in the driver's seat and get out there and push your name out there.
Yes, some people, some dollars will trickle in just through the word of mouth and just through, say, the monthly letter that you write, that we write every month. But that's not the right approach to sort of bet on that as your long-term strategy. You still have to have the mentality of getting out there and physically traveling and meeting people and building that brand and then ultimately the relationships then come together over time.
Moritz:I think the personal relationships are very important. I mean just the way we do it is we know each and every single one of our investors in person. We either have teams, calls, and most of them we actually do meet in physical reality to have a chat about our way of trading, about the risk, and all that type of stuff. And we think that's very important to create that alignment and speak about the risks involved, make sure that people understand what they're doing.
So yeah, now the other piece, and you said it's going to be a longer answer, is operations - world class, in house, or in house operations. Give us a little bit more background on that please.
Asim:So, this is again one of those parts where it’s a three legged stool and you, as the owner of a hedge fund, and I think this is the piece that people will struggle with the most. You have to love the fact that you're building a business and operations are 1/3 of those three legged stools - the sales, marketing, the portfolio and then operations.
And this is where I think the temptation is, especially today where you have so many software options, you can outsource to emerging markets like India, the Philippines, Eastern Europe. For middle office, you could just use SaaS software and plug in whatever you want.
So, there's this temptation, I think, when you start a hedge fund to say, listen, let me find a good partner and the two of us can go out there and raise a few hundred million dollars. And we can keep the overhead very low. And we can start to make good money and replicate what we were making on Wall Street before very quickly, and not really add a ton of overhead. And that's, I think, the absolute wrong thing to do. And let me explain why.
If you're thinking about building a business and really having it last over 30, 40 years and even hand it over to the next generation and have a hedge fund or a financial services business that's going to last outside of your lifetime, you have to understand, from the outside world's perspective, how they feel and what they look at you and how they sort of have confidence in you. So, there are two different things here that I want to talk about. The first is human nature and our subconscious.
When you're asking somebody for money for an endowment to give you $50 million, or for a high-net-worth family office to give you a check for $10 million, they want to know that that money is safe. The first thing you need to think about is, you know, is this money going to just disappear?
I'm writing a check, sending a very big wire, and at the end of the day, we're animals. And when you see that there's a set of people sitting in an office together, there's a subconscious sense that this company will be around, that there's a safety there. That 500 person firm in New York City, that firm has been around for a while. They'll probably be there in 20 years. But the one person firm, the two person firm that's using technology, maybe they'll be there, maybe they won't.
And I think subconsciously, when we, on the allocator side, look at managers having a team that has experience, that's worked together, and that has bodies in seats sitting together, it makes a difference. It gives you that, again, that unconscious thought that these guys will be around for decades and they're not just going to disappear.
So that's thread number one. And that gets a bit philosophical, a bit metaphysical, but I actually think it's important from just a pure human nature perspective.
The second piece is a little more strategic. And this is where, yes, you can use off-the-shelf software tools to build your business. You can probably outsource a lot of the operations to either cheaper labor jurisdictions, or you can use technology. And if you were to hire somebody in the US on a W2, pay them on payroll, there's a lot of expense.
So, let's just use some math. And I'm making these numbers up, but they're directionally correct. Let's say you have to offer somebody a salary of $100,000 in the US to get somebody in an operation seat in whatever the role is. On top of that you're going to pay taxes. They're called payroll taxes. So, add another $20,000 so that person costs you, as the owner of the business, $120,000.
Now in Europe or Asia those taxes might be lower or even higher, but in the US $100k for the salary, $20,000 in in taxes. So $120k for that human being to be on your team.
If you look at what they're doing when you first hire them, for that first year or even first two years, you could have used either outsourced labor in again, India, the Philippines, wherever, or some kind of software solution and maybe that would have cost you only $30,000 to do that. So, you're paying four times as much money to put that person in a seat in your office.
And I'm trying to argue that that's actually the rational decision to take to pay all that extra money. And the reason is, over time you are not going to get the benefits of all the learning that that person brings to the table. So, on a 1 to 2 year horizon, you are definitely hurting. You're spending way more money.
If you hire the right person, over a 5 to 10 year horizon, the insights they bring, believe it or not, they should be able to create enough value to more than overcome that huge 4x delta that you had in year one. So, it could be as simple as a new process they put in place. It could be the way that they reorganize some of the interactions you have.
It's amazing what you can do. And I've seen this in my own team over the last six, seven years. It's amazing the ideas that come from the other people on your team if you hire good people. You, yourself, can only go so far. No matter how smart you are, what schools you went to. And it's the people around you that really help you build the company.
So, these huge payoffs come over 5, 10, 15, 20 years when you add labor. And it's a very poor decision financially in the beginning because you, the owner of the business, don't make any money. In fact, you might run the business for break-even, without any profit, for 5 or even, in my case, 10 years. But you're reinvesting and thinking over a 20, 30, 40 year timeframe. It just makes a huge difference and it compounds then.
So, then you get into the idea of, we understand compounding of money because we're all, you know, on Wall Street. You're compounding capital at whatever it is, 5%, 10%, 15%, 20%. You understand that geometric process. It's the same thing with people.
And if you outsource everything to Silicon Valley or to a call center somewhere, you're not going to get those people to help improve your processes and to build your business with you. And so, I'm not trying to argue you should basically add labor just for the sake of it, but whenever you have that question mark in your head, what should I do? Which way should I go? And if you think, well, I have a 3 person team, I can really scale this to $500 million, or I could make it a 6 person team and have much lower profitability, but that's potentially better over a 15 year horizon. I would argue go for the 6 person team, be smart about how you do it. But that's the way that I've built my business and that's the mentality that we have.
Moritz:Very interesting. You view human resources as an investment, essentially.
Asim:I think you have to, yeah, yeah.
Moritz:Now, super interesting. This has been a topic that we've never really touched on in this series. So, we're kind of like 25 minutes in and we haven't yet spoken about anything that has to do with investment and how you form your investment thesis. But I think that was very interesting and very important to chat about because yeah, it's just not spoken about regularly, or not at all, but it is an important component of how we build our businesses.
Now let's get into the nitty gritty and some of the portfolio details and maybe we can start with your investment thesis and the framework and how you built this, how you come up with ideas, what triggers these ideas and how you then implement them in the portfolio.
Asim:Yeah, what I'll do is let me back up and start philosophically, I think this is a tricky topic. I think it's important to almost back up and really look at it from a top-down perspective.
Trading is difficult, especially for a boutique firm where there's a single PM, single strategy. When you look at trading futures, whether it's currencies, commodities, you can go on a good run. You can put some short-term trades together on a discretionary basis. I'll buy something, sell It a week later, short something, it goes down, I close the trade 5 weeks later.
My supposition is that if you attempt to build a track record for 30 or 40 years with these short-term, multi week, or even 1 or 2 month type trades, eventually you will fail. You might go on a good 3, 4 year run, but eventually you will either blow up or you'll just hit a patch where you can't make money, you'll lose your confidence, and it'll go away from you. The business will be taken away from you.
So, I strongly believe, and there's probably some great traders out there who will prove me wrong, but, in general, I actually don't think it's possible to build a long-term, multi decade track record as a discretionary trader with any kind of a very short-term process. So, whether you're using technical, or fundamentals, anything on a short-term horizon, I think the markets have changed. They become very difficult with all the algorithms that go off the changing structure of the markets. And I think you'll fail.
So, one of the things that I thought about before I launched the business, and I had a good 12 years of trading experience on my own, self-taught, I never worked on Wall Street, but I traded 40, 50 hours a week, nights and weekends for 12, 13 years before starting the business. And years before I started the official track record for AG Capital, I thought look, if you start to go to med school or dental school, you become a dentist or even if you start a small landscaping business, as long as you keep your head straight and you really build the infrastructure, you can project out 30, 40 years and say look, I have a career, and then I'll retire someday. And it's very hard to argue that you won't have a multi-degree career.
This is the only business, hedge funds in particular, liquid markets, where it's very hard to have that confidence. Most people who start these businesses, and I saw this as a consultant at Cambridge Associates, you can have a great pedigree, you went to an Ivy League school, you worked at Goldman Sachs, you launched with a great 4 person team, you start with $500 million, 6 years later you write that letter to your investors saying sorry, we're in a drawdown, didn't foresee the markets changing the way they've changed, we're closing shop. And that just happens time and again.
It's the only business where I think, on a weighted average, the lifespan across the industry must be 5 to 7 years for the average hedge fund launch. And I said to myself. I don't want that to happen to me. I don't want to go out there on a shoestring and then just pray that I somehow outlast everybody else. Because I think, again, that would be irrational. How can I think about this on more of a 30, 40, 50 year horizon?
And so, the one thing that I've done differently and the one thing that I think my mentality in our business is a little bit different, we're a little longer-term than pretty much every other discretionary or even systematic manager. So, we think about trades that are almost investments. So, 1/2 to 2/3s of what we're doing is more of a 3 to 7 year timeframe. So, you could call that an investment. And then the other 1/2 of what we're doing are, what I call, short-term ideas. And those might last for 6, 7, 8, 9 months. So, under a year, but still longer than the typical 1 to 3 month timeframe that I think a lot of macro folks try to operate on.
And again, the reason for this is I think there's so much noise in the way the markets have changed over the last 20, 30 years. The underlying market makers, everything about the markets, the algorithms from big CTAs, the entire order book gets swept over the course of 2 days to 3 weeks when an algo fires off. Looking at patterns with your eyeballs, you deceive yourself.
And so, the only edge you have, I think that works on a multi decade horizon, is getting longer-term than the multi day, multi week noise, so to speak. So, what hasn't changed and why do I think this works?
I think secular themes and even cyclical themes that are going to last for 3, 4, 5 years, that hasn't changed. If there's a big imbalance in the copper market and there's going to be a bull market, that's going to happen, that's going to play out. Copper will go from whatever, $1 to $5, and it'll take 5, 6 years. And that's a move that you can stay with. You manage the exposure, but you can stay with that move and that's part of the edge right there.
On the short-term there are contrarian trades you can find where the large CTA crowd is fully on one side of the boat. The trend is extended, the fundamentals are shifting and you can find nice risk/reward trades in the short-term that, again, are longer than most people would think about for a short-term trade. But again, I like that 5 to 9 month timeframe, call it, for the short-term ideas.
So, the thought process I always had was to be very long-term and almost have a multi decade view and then put together a rough blueprint for where I think some of these big macro markets will trade. So, when I started the business, I had that rough blueprint. It hasn't always gone exactly according to plan. The timing has been off, as it always can be. But broadly speaking, the blueprint is playing out. And I think I like that I have a blueprint for the next, call it, 15, 20 years as well, that I hope will play out.
Moritz:Speaking about that blueprint, like what is it? What interests you and why and how did you find it?
Asim:So, a lot of this is not secret, it's stuff that a lot of other smart people are talking about. But I think the edge here, or the difference, is the psychological ability to stick with an idea for years that's almost too long if you have a short-term horizon for either pain or for performance reasons. So, in our industry, the monthly returns, if you're working at a large fund, the need to keep your drawdowns really, really shallow and to consistently have a smoothed out track record forces people into closing trades after 2, 3 months.
In my case, as the owner of the business, I can take that longer view and I can have a little more volatility and hold those trades through that blueprint. So let me talk about the blueprint because I'll take the question you asked directly.
Essentially it gets down to the idea of trade-offs in secular regimes. So, you'll go through a secular bull market in equities, and we've had 2 or 3 of these regimes in the past 80 years, and then a secular regime where either commodities or precious metals will then take sort of the torch and carry performance for the ensuing 10 year period. And on top of that you can layer currencies where there's more of a 5 to 10 year cycle in the dollar. Nothing to do with the reserve currency status but just for other reasons. And the drivers are always slightly different.
urrencies floated starting in:And the trick is sort of to understand that your timing can be off. So, I'll try a trade using these blueprints. And I might be off by a year or two, take a small loss, gets to our risk point, try it again a year later, I'll still be wrong, and then try it again 7 months later. So, it's that third attempt, after 1.5 or 2 years, where the trade starts to work. And now I'm still sticking to my long-term blueprint.
I think this market will be in a bull market for the next 4 years and my job is to just dial up and down the exposure according to the roadmap we already have. We have preset ad points, a preset exit point, and just carefully manage the exposure throughout that 4 year window.
But the trick part here is that there's nothing new under the sun. I'm reading the same things that a lot of other folks are, doing my own homework. But the blueprint I'm using is, I think, grounded in common sense. It's grounded in fundamentals that eventually do play out. But it's possible that I'm 1 year, 2, even 3 years early.
We can go through some examples, but this is, I think, the place where it's tough for some people in our industry to stick with a theme. You can't be 3 years early. And you can, if you have sort of my style where I'm not going to walk away from it. I can keep it in the back of my head. But people tend to want to jump around from theme to theme and only try to find what's hot in the next 2 months.
And again, that's where I think you get into trouble because you'll be chasing your tail, you'll get chopped up, you'll get whipsawed and eventually you'll look back after 10, 20 years and realize that you walked away from many, many big picture themes that you could have stuck with but it was just psychologically difficult to stay with something that you might be early to the theme for a couple of years and then to actually stay with it for the next 4 years is also tough. So, that's sort of the rationale behind how we operate.
Moritz:You mentioned that, I think from what I took away is your position sizing is kind of like similar to what some of the like trend following funds would do. You have a risk budget. You risk a certain amount of your bankroll on any given trade. I think you mentioned that you're adding to trades, probably trades that work. You're not adding to losing trades, you're adding to winning positions.
But your entry timing is going to be not necessarily different to that of a trend following fund but it could be very different to that of a trend following fund because you're formulating your thesis at different points in time. You might have this maybe 30 year view or very long-term view on rising yields and therefore be short some bonds. I don't know, maybe short the long end of the bond curve and maybe a trend following fund would, at that point in time, have no position in the bonds or be slightly long, be slightly short, I don't know. But you would have that short position and hold it.
Asim:I think that's exactly right. We're going to be in some of the same trades as a trend follower. The key difference between us and a classical long-term trend follower, somebody who's using, say, just a moving average crossover system, they'll be in 60 or 70 or 80 trades at any given time. We'll only be in 6. So, we have 1/10th of the number of trades. We're very concentrated.
So, I'm going to miss a lot of the trends that a trend follower will capture and I'll be in some of the same trends that they're in. But I won't have a lot of the little losses that the trend follower is getting by being whipsawed. I'll also miss out on some of the big gains that they get by being out of the trades that they're in. And then separately, even for the trades that we overlap on, my entries I try to be contrarian with.
So, if I want to get long copper, I'm looking for some kind of a pullback so that I can risk manage the position and hang a stop. And they're probably going to get in using price action that's heading in the direction of the trend. So, the entries, the add points, and the exit points, for me, will be different but there will be overlap with the trend follower.
All that being said, I think, philosophically, I am probably, when I think about the math behind a 40 year track record, I'm probably more in sync with the trend follower or the systematic manager than I am with some of my discretionary peers, especially folks on the equity or credit side. I think too many people spend all their time thinking about the stocks they have, or the types of commodities, or what they have in their portfolio when the ideas you have, over a 40 year period, your ideas might only account for 5% or 10% of your track record's performance. 90% of your performance comes down to how much you risk per trade, where you add, where you exit. So, it's the math behind how you handle the actual trade execution and implementation. So, you know, how much do you risk? Where do you take the trade off, how often do you try it again? When you try it again and it works, where do you add? Where are those add points? And where's the profit target?
So, the math behind the trade structuring will literally account for 90% of your track record's performance over a multi decade period. And the ideas you have are just not as interesting. They'll only account for 5% or 10% of your performance.
Now the irony is I spend half of my day reading, generating the ideas, but I'm aware that when we structure our trades, that's what's going to account for our performance. So, then you ask why am I wasting my time reading so much? Because if I didn't read all day long, and didn't have the conviction in the longer-term multi year concepts, I wouldn't be able to stay with an idea for 3, 4, 5 years. I would give up and just walk away from it after losing money on it 1 or 2 times.
And then you look back again, after 10 years, and say, oh my God, that market went up, you know, 400% over a 4 year period. I had that idea, why didn't I stick with it? It's because you didn't have the conviction, you didn't do your homework.
So, it's ironic, but I have to spend all day reading even though I know that the math behind a track record, a multi decade track record, really the driver is the trade implementation and how do you handle losses? Where do you add? Where do you exit?
Moritz:You mentioned that you have profit targets, which is another difference to a systematic trend following fund because they would usually not have profit targets. They would get out on a, you know, give back on open trade equity. But let's leave that aside.
What I found very interesting, from what you just mentioned, is the concentration to size. I think you mentioned 6 positions. Is this strictly enforced? Why do you do that? Why would you not allow yourself to have 12 positions, or 24, or 36, to get more diversification? Why 6?
Asim:Well, it's anywhere from 2 to 10. On average it will have 5 or 6, but we'll never have more than 10. We've never had more than 10 in our 11 year history. The reason is we're trading roughly 40 to 50 of the most liquid North American futures market.
So, it's 25 or so commodity markets, the energies, agricultural markets, the soft commodities like cocoa, coffee, sugar, metals, and then 7 or 8 currency markets against the dollar, 4 or 5 interest rate markets, the US yield curve, and then another 4 or 5 equity index futures markets. So, it's a map of 45 or so markets.
Once you start putting trades on, you realize that there's correlation here. So, if I'm already long soybeans, you don't want to then add a long corn or a long wheat position. Yes, they're different but there's a 0.7 or 0.8 correlation between these two markets quite often.
Similarly, if you're long the British pound and you then go and buy the euro, that's the same trade, 0.9 correlation. And so once you get up to 8, 9 positions, you just look across and unless it's a very unique instrument like live cattle or like cocoa, it just doesn't make sense to get up to 15 or 20 trades. If you have 20 trades on you look across that portfolio, you might as well get rid of a good half of them because of the embedded correlation. So that's the real reason.
You know, I don't know as much about the exact portfolio construction for a long-term trend follower. I'm sure they have some issues here, but they probably have a global portfolio where they could argue that they're just looking for really big moves in certain markets and they want to make sure they have the entire global map.
Whereas I, as a human being, even though I'm reading a lot, I'm doing my research, I'm writing things down, I can't keep track of 30 trades in my head. And if I can't keep track of the portfolio in my head, it's probably the wrong portfolio and I should get rid of all the detritus and just focus on the core ideas that I have a conviction on.
Moritz:I think you're also trading stocks and that I presume is something that you've only added later to your portfolio after the SMAs. I might be wrong there, but why did you add the stocks? Because you already have a lot of the like themes or thematic implementation options through the futures markets that you've mentioned. What is so cool about the stocks for you?
Asim:So, we have a two-person investment team, and this goes back to the idea of making sure you invest in human capital and not just outsource everything. But I put a lot of time into the right team, and one of my team members really focuses on the single name equities, on our two-person investment team. And between the two of us we do so much homework and so much research on our core long-term macro themes that inevitably we were turning up equity names alongside some of the futures themes. And we did enough research, enough homework to really have conviction on a few themes.
So, in general, our equities tend to back up our longer-term commodity themes. So, we're not buying healthcare stocks, we're not buying artificial intelligence stocks or tech stocks. They're all in the materials sector or the energy sector.
So, just to touch on some of the highlights, I do think that we're in a structural bull market in gold. This is, you know, depending upon how you look at it, potentially a contrarian concept. But I think we're in the very early days, year 2 of what could be an 8 or 9 year, 10 year bull market in gold.
And so given that view, we basically broke apart the two leading ETFs, GDX, GDXJ and even some of the junior mining stocks and recognize that the vast majority of the smaller gold miners, there's either a fraudulent component or there's no chance that those earnings will come to life over time. The very, very large cap gold miners have terrible balance sheets and quite frankly very poor management.
But there are a few names in the mid cap space that are very well run, have unhedged forward looking books where they don't have hedges on, short gold futures hedges like they did 20 years ago. And they're well run and they're in good jurisdictions. So we put together a very small basket of a couple of gold miners to get that operating leverage. And now we have a theme.
We can be long gold futures where we'll dial up and down the exposure over the next 6, 7, 8 years for the duration of the bull market. And then we'll carry the two gold miners and almost have a mini theme there in the gold kind of basket. Same thing we'll do in copper, we'll do the same thing in the energy sector for natural gas, crude oil. And so, we have just a mix of equities.
And then there's another reason, the second reason we have the single name equity is there are certain areas where you just don't have liquidity in the futures market. So, this will be a very consensus thing I'm about to say. There's nothing contrarian about this, but a lot of folks believe, as do we, that uranium is in a secular bull market. We've had a good leg up over the past few years. We had a big correction over the last 12 months and we could be setting the stage for a bit of a grind and then a second leg, in this bull market, over the next 3, 4 years. So, you just don't have any liquidity with uranium futures. I think there's a contract listed on the CME. It just doesn't trade. Maybe there's something you can do over the counter. But we thought the better way to handle this would be to look at either a large cap, well-known uranium miner or just the physical trust.
So those are the reasons that we got into single name equities. It's a small part of our business. It's less than 10% of our funds exposure or AUM, but it's meaningful enough and we do enough homework there that we can add some value. So, we added that as part of the strategy.
en you go back in time to the:But it was almost a three-dimensional portfolio where there was always a core equity holding that a lot of those managers held with half their cash and then they'd use the other half of the cash to put on the futures positions. Now we're not doing that, we're far more futures oriented. But you know, it does line up with that classic ‘80s style macro theme that we're trying to, in some ways, bring back to life and put our own spin on.
Moritz:You mentioned dialing up and down exposure as you are in the trade. What do you mean by that? Why would you dial up and down the exposure? If you're sitting on a big winning trade, you know, you were long cocoa or, you've just mentioned, use gold as an example. You say we're in a long-term structural bull market for gold, why would you be dialing down your exposure?
Asim: their computer code since the:If you look at their performance, they have great performance in the past 4 years. But there are drawdowns that are 30%, 40%. And sometimes those drawdowns are caused by a single trade. Because the issue is, and we tend to build up some chunky exposures like classic trend following. We'll put on some meaningful size if we have conviction on an idea. We'll start the trade, we'll risk maybe 100 basis points on a core theme.
What I mean by that is, if we're wrong on that trade and it goes from the entry point down to our exit risk point or stop loss point, we've lost 100 basis points or 1% of the fund's equity. That's considered punchy, that's more aggressive than a lot of the lower vol systematic managers.
And then we have ad points where we add to the exposure a couple of times, maybe 2, 3 times. When you think about that, once you've fully loaded that trade and you might even have 100% of your cash exposure in that one position and you built up additional trades so you have 300% gross exposure. That one trade, if you leave it alone and you don't have a profit target or you don't dial the exposure down when it gets very, very overbought after say 5, 6, 7 months, you could easily have a 15%, 18%, 20% drawdown just from that one trade.
And this is where you're running a business. You're not running your own personal account at home where only you see the statements or only your wife, you know, can yell at you if you have a big drawdown. You cannot build a long-term track record in this day and age and have 30%, 40%, 50% drawdowns.
Yes, there are some brand name hedge funds that have it, but in general, you're going to scare the allocator community. You're going to lose your own confidence as a discretionary trader. If you're down 50%, you just have to make too much money to come back. You have to make 100% to get back, to break even. So, one of my rules of thumb on the risk side is to try to keep the multi month drawdown to under 20%. And that's across all the trades in the portfolio. And so, we really try to dial the exposure down when a market gets very overbought. That's why we have a profit target.
The profit target is just a reasonable best guess as to how far this market should go based on the technical price action for this particular 5, 6 month leg of what might be a 7 year bull market. And we take the trade off or we just cut it down tremendously. Sometimes you're wrong and the market keeps going. That's part of life.
Moritz:It could be… Sorry to interrupt, but it could be a good example if we stay with the gold theme, because gold has rallied quite strongly, I think up to $3,500. And maybe this is kind of like the area. I mean, I'm no analyst in that space and I don't have anything of value to say.
But you know, when you look at this, it could be like at $3,500, we're running out of some steam, and maybe it goes back to $3,000 and then it goes back up to $4,000, $5,000, $6,000. So, it sounds like these are the trigger points where you might be reducing your risk and taking some of the profits off.
Asim: out of the trend in the high $:We're not putting on a small, tiny 1% position as a mutual fund and holding a diversified portfolio for the next 10 years. We're trying to really add alpha with the trade expression. The dialing up and dialing down of the exposure is partly how you perform.
And so, it's important for us to then either close the trade or reduce the exposure, knowing that you're not going to get the timing perfect. It'll keep going. Sometimes you get the timing close and then you hope to rebuild the exposure on some kind of a correction or a drawdown.
Even if the market goes sideways, that's a signal. That's telling you that there's a lot of buying coming in on every dip. And that 4 or 5 month consolidation can give you the confidence to try the trade for the next leg. But it prevented you from having, again, an 18% drawdown on the single trade, which you just, you can't do that to your investors. And I, you know, psychologically, again, it's very important for me to not lose my confidence because, to go back to that one earlier point I made, I think the main reason that hedge funds will shut down with great pedigrees and great seed investors, after a 7 year track record, is the manager loses his or her confidence in their deepest drawdown. And then an allocator pulls, and then it's a spiral, and they write the letter to the investor saying, sorry, we've lost our confidence, we're going to give you all your money back and we're going to go off and do something else with our lives.
Moritz:The emotional damage and paralysis that you do to yourself… Staying with gold, I mean is this now a position where you're back on the long side or are you still kind of like in waiting mode? And it's kind of like ah, it's still kind of like wobbling around?
Asim: losed that trade in the high $:Your typical hedge fund that wants to buy gold is looking at the chart and saying, God, there's just no way to get in. It's gone straight up from $2,100 to $3,400. It's kind of barely corrected. It's going sideways for the last two and a half months. But I want to buy it at (I'm just hypothetically talking about XYZ hedge fund guy), I want to buy it if it goes down to $2,600. Give me that 20% correction. I want to get in and buy and it's not giving the world that opportunity.
So that right there is a signal. So, I looked at this. I wanted that big deep correction as well so I could rebuild my position. It's not giving that opportunity. It's gone sideways for two and a half months.
rently than it did during the: two data points. We have the:It would move up for 6 months, then have a big, big pullback. It gave you a lot of chances to get in and it never just went up, and up, and up, in a straight line. In the 70s, however, it did have these moves where it just went up and did not let you in.
with the power of sort of the: Moritz:I think you mentioned copper and Nat gas. Sounds like you have a structural long view on that as well. But maybe speak about some of the things that are more enthusiastically sometimes debated on Twitter and stuff, which is bitcoin and the S&P 500. I mean, what's your view on equities and bitcoin as well? Because I noted that you have bitcoin in your portfolio.
Asim: traded it three times back in:We only trade the futures. We don't trade any physical cryptocurrencies. So, let me talk about the tactics around why we have not traded it and then I'll give you my almost layman's view on bitcoin longer-term.
Why we have not traded it? So, bitcoin is actually a very difficult market to trade for a macro hedge fund if you're trading the futures contract. The margin that you have to post, at least this was the case a few years ago, is 70% or 80% because of the volatility and because of the gap risk with the futures. Bitcoin itself, the underlying trades 24 hours a day. It doesn't respect Saturday, it doesn't respect Christmas, it doesn't take any time off. So, when the futures markets close Friday at 5pm, and then they reopen Sunday at 6pm, you have almost a 48 hour gap. And if you were a hedge fund, and you were short bitcoin futures, and bitcoin goes up 50% over those two days, there's a huge gap.
And so, the exchanges and the futures commission merchants, the brokers out there, they have just put the margin for a typical futures contract might be 5%, 10%, 12% of the face value of the exposure. Bitcoin had 70%, 80% margin. So, it's almost a cash instrument where you have to put up almost the entire cash value to trade it. So, it's extremely inefficient to trade. It ties up a huge amount of capital. And then, as I mentioned, that gap risk is a real thing.
So, if you're short the bitcoin futures contract, you think it's in a bearish trend or a bear market, you're just taking on a huge amount of risk. You have to size it down so much to deal with that gap risk that it's almost not worth trading in some ways from a technical perspective, from a tactics perspective. So that's one point.
The second point is for those first 7, 8 years of its life, it really was its own animal. Nobody knew what it was, and it was just doing its own thing. For the last 5 years people have noticed (and I'm not the only one to say this) that it's become very correlated with equities. So, you could almost call it a triple levered NASDAQ. That might be breaking down. That correlation might be breaking down.
I like the fact that Bitcoin held its own during the March/April slide, during the Trump tariff slide, Bitcoin actually performed better than I expected it to. So, if that correlation starts to break down, I'll become more interested in Bitcoin. But I really want to see it trade as a store of value.
I want it to be uncorrelated to gold and uncorrelated to US equities. And so far, I think the jury's out a little bit. But that's what I would want to see, to trade it.
And the last point I'll make, just to give you again my perspective on Bitcoin. I was actually fundamentally bearish. I thought that this was a technology as opposed to a store of value or a currency and that it was old legacy code, that the code was written a long time ago and it would eventually become obsolete.
People would walk away from it. Whether it's quantum computing, something would come out to change the market's perspective on it and it would fundamentally just slowly drift down to a much lower price level and then just kind of die. And I think I've been proven wrong, to a certain extent, over the last handful of years.
So, gun to my head, I'm actually bullish on bitcoin's price over time. I think part of the reason though is that we've entered this world now where the rule of law is breaking down, particularly in the US as a lot of commentators have noticed. Currencies are being debased - a lot of the reason that I’m bullish on gold. And I think bitcoin is another release valve.
I don't think there's another fiat currency to take over from the dollar. You can't go from the Dutch gilder, to the British pound, to the dollar. There's no next fiat currency to take over in the next 50 or 100 years that I can sort of see. But a mix of migrating out of the dollar into gold, bitcoin, the euro, whatever else is out there. And so, bitcoin is just one more release file.
So, I think I am bullish on it on a 5 to 10 year horizon. We're probably not going to trade it very much. So, that's my take on bitcoin.
On US Equities, I have a very, I call it, very bearish mindset right now. But I've been wrong. You know, I tried shorting the S&P a couple of years ago and as I often am, I'm a couple years early to the theme, got stopped out for a small loss, tried it again, had a short position on as of January, February, made some good money in the Trump tariff move down in March and April. I took half of that trade off because it got very oversold. So again, managing the exposure left half on. And I just actually got stopped out recently on the piece that I kept on because again, this market now it's just trading in a way where it doesn't make sense to hold a short position if it's threatening to break out to all-time highs.
Fundamentally I'm still bearish. I think we're at the end of a long 16, 17 year secular bull market in equities where ‘buy the dip’ has become ingrained in both the professional and retail community. We haven't had a proper recession, a cyclical bear market in, again, 16 years, since the ’07, ‘09 episode. And yes, there's a lot of fiscal spending that happened post Covid that really kept the economy humming.
And yes, AI has been another reason to stay long tech stocks in the past few years, but at the end of the day, the labor market is, for me, the key litmus test. And I think it's held up much longer than I thought it would. But it's finally starting to show signs of cracks. Not the initial claims, but the continuing claims in the US are finally starting to tick up and stay high.
school cycle like you had in:What I'm looking for is the typical 15 month, 18 month, 19 month slow bleed where the VIX never spikes, but you just have a very slow bleed and you're down 35%, 40% in the S&P when you wake up two years later. And that's what we had in ‘01.
nd the same thing happened in:So, these things don't happen very often, but you know when they do happen you have to have your eyes open. And that's what I'm looking for with equities is a classic old school bear market which, again, we have not had in 17 years. So, people have really forgotten how equities trade during true bear markets.
Moritz:Right.
One of the things, I mean as we're rounding this up, one of the things you mentioned when we spoke earlier is that you believe that China is in many ways more capitalistic and also more democratic than the United States. I found that interesting and maybe we can use this as a closing point to our chat today.
Asim:Yeah, this is partly one of those things you say with a little bit of hyperbole just for effect, but I think there's some truth to it. And so, the claim itself that I made is probably exaggerated. But let me break it down and almost explain why.
On the capitalism side it's so easy to just fall into the quick stereotype and say communist China, and capitalist United States, and capitalist west in general. And this is just false in so many ways. The Chinese historically have very much a business oriented capitalist culture. Just at a personal level. They really do, as a people. And when you look at the Chinese Communist Party, yes, they will provide some directive that they want to move towards EVs or green tech, but it's the underlying Chinese people and the companies that launch. And it's far more capitalistic than what you see in the US.
You'll have 100 EV companies launch, in the US you'll never have that many competitors enter. And the Chinese government sits back. They don't just shower the industry with subsidies right off the bat. They wait, and wait, and see what happens. And that natural process of competition and almost capitalism, the market itself sort of dictates and decides which of these cars the consumer wants, which they don't want.
And over time, we know the names now of BYD and the other names, but then, later on, the government comes in and assists with capital and incentives and assists some of the winning companies. But they don't, in the beginning, they really allow, I think, a thousand flowers to bloom.
And in many ways, when you look at the US and what we've evolved into over the past 40 years, it's become an oligopolistic market. Every industry, healthcare, has 3 insurers. There are 4 airlines. There are 5 big banks. And there's a big tale of a thousand smaller banks that you really can't do business with if you're running a business like we have. It’s every single industry, and the public knows this in their hearts, they figure this out.
And it's just those incumbents get the subsidies. They get picked up in ‘08 when there's a crisis and when you want to see capitalism work and you want to see some business failures, you don't get it.
And it's strange, to me, that we have the stereotype that China is communist and there's this communist threat when, in many ways, they behave. And both as a people and as an entity, they're more capitalistic in their behavior than we are here in the West. So, that's point number one.
On the democracy side, I'll probably get myself in some trouble by saying this, but in the US, you know, and I can say this because I'm a US citizen, I was born here. This is my country. Yes, we have this notion that you can go every 4 years to vote. And yes, it makes a difference.
You could argue that the election of Trump or the election that just happened in New York, these are monumental elections when people are changing the order that's happened over the last 40, 50 years, but within one of these regimes, when you're in a regime and you're not having a monumental change oriented election, it's really just money that really buys votes in the US.
And so, the super PACs and the lobbying groups and the donors that have the money, they get to vote. And when you go to the ballot box, in a typical election, and cast a vote for president or for a congressperson, for the most part, when you look back at US history, these votes don't really count the way that money counts.
And then when you talk about China, you know, my read and from doing a lot of research on China, is that the party is actually more responsive to the average citizen in many ways than our leadership or our towns and jurisdictions are in the US. There are a thousand plus mini protestations, people protesting, and revolting against something. And via apps and social media, the party is responsive.
If people complain in China about XYZ, change happens at the local level and a lot of changes get made very quickly in response to public comments and protests and what not. And you read in US newspapers, and I think there's a propaganda element to this, about how certain protests happen and the people are just locked up and whisked away and they're never seen from again. And I think that's the minority.
I think in many cases the party is very responsive to the citizenry and it's partly because they know that's where they need to provide economic growth and they need to maintain the people's trust in what they've done over the last 40, 50, 60 years. So, in many ways you could argue that's not democratic. No one's voting. But this gets philosophical. What is a democracy? What does it mean to be in a democracy? I think the Chinese system has allowed for the average person to have somewhat of a voice and they get listened to.
And in the US, you can make the case that the average person has very little voice. And it's really not the sort of democracy you think it is. It's a democracy where if you have access to the lobbyists, if you have the money, if you're organized and have networks of wealth and power, then you have a voice. Otherwise, you don't.
Truth is always somewhere in the middle. But I just thought that the stereotypes we have of the US and China are, they're just bonkers. And you're seeing more and more sort of xenophobia from US politicians. I don't like it personally, but it seems that's the way the world is going. It's just splintering.
Moritz:Well, very interesting. Thank you so much, Asim. I think this is a good way to end the conversation or a good end to the conversation. And I want to thank you again for coming onto the open interest series on Top Traders Unplugged today. I really enjoyed it. I thought it was fascinating to chat with you, and I hope that our listeners will find it interesting and valuable also. As usual, for listeners we'll include the most important points of today's conversation in our show notes. And should you have a question or comment, please send an email to info@toptradersunplugged.com.
Thanks again, everybody, for listening. And until next time on Top Traders Unplugged.
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