Shownotes
Niels and Alan sit down with BlackRock’s Jeff Rosenberg to examine how the post Covid shift from too little to too much inflation is reshaping portfolios. Jeff explains why bond and equity correlations have changed, why fixed income is drifting back toward income rather than pure diversification, and how fiscal pressure and soft financial repression may influence rates. They explore what systematic really means at BlackRock, from trend ETFs and defensive alpha to market breadth and execution. The conversation ends with the rise of liquid alternatives, whole portfolio thinking and growing equity concentration risk.
-----
50 YEARS OF TREND FOLLOWING BOOK AND BEHIND-THE-SCENES VIDEO FOR ACCREDITED INVESTORS - CLICK HERE
-----
Follow Niels on Twitter, LinkedIn, YouTube or via the TTU website.
IT’s TRUE ? – most CIO’s read 50+ books each year – get your FREE copy of the Ultimate Guide to the Best Investment Books ever written here.
And you can get a free copy of my latest book “Ten Reasons to Add Trend Following to Your Portfolio” here.
Learn more about the Trend Barometer here.
Send your questions to info@toptradersunplugged.com
And please share this episode with a like-minded friend and leave an honest Rating & Review on iTunes or Spotify so more people can discover the podcast.
Follow Alan on Twitter.
Follow Jeff on LinkedIn.
Find out more about DUNN Capital
Episode Timestamps:
00:00 - Introduction, Jeff’s role at BlackRock Systematic and setting the agenda
04:09 - From too little to too much inflation and the end of divine coincidence
09:32 - Wage dynamics, “prices are too high” and persistent, not resurgent, inflation
14:48 - Bond equity correlation, the changing role of fixed income and income versus diversification
19:55 - Fiscal dominance, debt loads and the risk of soft financial repression
25:21 - What “systematic” means at BlackRock across beta, factors and pure alpha
30:44 - Trend as a systematic return stream and why BlackRock entered the ETF trend space
35:58 - Breadth, capacity and why market selection matters more than cocoa
41:12 - Defensive alpha explained using a credit lens on equities and crisis behaviour
46:27 - Execution, implementation alpha and using BlackRock’s liquidity river
51:39 - Constraints of wrappers, leverage limits and designing strategies for ETFs
56:54 - Growth of liquid alternatives, 50 30 20 and replacing the old 60 40 mindset
01:02:10 - Equity concentration, big tech, AI and the need for uncorrelated return streams
01:07:32 - Whole portfolio thinking, total portfolio approach and final takeaways
Copyright © 2025 – CMC AG – All Rights Reserved
----
PLUS: Whenever you're ready... here are 3 ways I can help you in your investment Journey:
1. eBooks that cover key topics that you need to know about
In my eBooks, I put together some key discoveries and things I have learnt during the more than 3 decades I have worked in the Trend Following industry, which I hope you will find useful. Click Here
2. Daily Trend Barometer and Market Score
One of the things I’m really proud of, is the fact that I have managed to published the Trend Barometer and Market Score each day for more than a decade...as these tools are really good at describing the environment for trend following managers as well as giving insights into the general positioning of a trend following strategy! Click Here
3. Other Resources that can help you
And if you are hungry for more useful resources from the trend following world...check out some precious resources that I have found over the years to be really valuable. Click Here
Transcripts
You know, that's the challenge within all alternatives, whether they're private, public, trend, systematic, fundamental. And so, we've seen that as well in the trend space. We've tried to be very careful in how we've implemented ours, and I think our performance sort of a testament to that. But the risks that you highlight are important as well.
And so, you know, you’ve got to kind of look under the hood a bit at what you're getting in these various offerings. And that's one of the ways to manage the dispersion, within the manager selection problem, within liquid alternatives and all alternatives, I should say.
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 product before you make investment decisions.
Here's your host, veteran hedge fund manager, Niels Kaastrup-Larsen.
Niels:Hey everyone, and welcome to another edition of our Top Traders Unplugged series where today Alan Dunne and I are delighted to be joined by Jeff Rosenberg, managing director at BlackRock Systematic, where he serves as a member of the SFI investment and executive committees and as a senior portfolio manager of a number of the investment products including the Systematic Multi-strategy Fund as part of our conversations with industry leaders in the world of systematic investing, and where we, admittedly, have a bit of a bias towards real CTAs and trend following.
Jeff, it's really a great pleasure to have you on the podcast. Thanks so much for making time to join us. We have so much been looking forward to this conversation.
Jeff:Niels, it's great to be here.
Niels: set for the last few weeks of: Jeff:Yes, I'm coming to you from our headquarters in New York City, Hudson Yards. And yeah, looking forward to wrapping up what has been, you know, quite a tumultuous year.
Niels:Absolutely. I think we'll touch on that during our conversation.
Now, we've got a great lineup of different topics that we wanted to discuss with you, but before we go into them, I would like to maybe set the stage a little bit for our conversation. My bio of you was very brief, so it's always good to hear a little bit about how your own background is described in your own words. So, maybe you can share a few highlights of that journey, and ultimately, you know, how you got into the systematic world and ended up at BlackRock Systematic.
Jeff:Yeah, I'll try to do a quick version of this. There's another podcast I recently did where there's a longer version, but the short version is I started in fixed income kind of at the birth of mortgage market, Liar’s Poker, mortgage models, OAS Models, I was really, you know, fascinated with that. I got turned on to the application of mathematics to finance by a professor of mine in undergrad.
He kind of helped me through a PhD application process, which ultimately I kind of bailed out of and ended up doing one of the first masters of finance in, well, now we call them MFEs, Master's in Financial Engineering, but I did it at Carnegie Mellon, so if they call it something different; Masters of Science and Computational Finance, and really got interested in that aspect.
And as I came out, it was kind of the peak of the derivatives boom, kind of banker's trust and the application of stochastic calculus and derivative pricing. That was really where I started and learned about this thing called the Merton model, which was the application of kind of Merton option pricing to value corporate debt. Got into the corporate strategy and research function on the sell side, built the first application of a Merton model to publicly traded debt.
Then we had the boom in credit derivatives, and CDS markets, and structured products, and that was really kind of my entree into Systematic. And about 15 years ago joined BlackRock on the buy side, and about eight years ago joined BlackRock Systematic. IT was kind of a return home for me, if you will, coming back to systematic investing.
Niels:Sounds great. Now, for our conversation today, we probably all have our own favorite topics and hopefully we'll touch on many of them in a somewhat logical order. So, let's just dive in and I think we'll be spending a lot of our time today talking about how to approach the markets from a systematic point of view and how these type of strategies fit in.
But I would like to start in a slightly different place and that is kind of to hear a little bit more about your current big picture, let's call it global macro view. And where you think we are in the world of investing right now.
u rightly pointed out before,: Jeff:Yeah. Where do you jump in on that in terms of kind of time horizon?
I would say let's draw back a little bit from the near term to a little bit longer horizon perspective on the macro outlook. And it's really about adjusting to this post Covid environment. And that adjustment is really dealing with what I think is probably the largest kind of shock and change to the macro backdrop, which is kind of the emergence and the persistence of inflation in a post Covid environment.
Sometimes I'll tell clients, when I'm doing presentations, if you forget everything that I just spent the last hour talking about, I want you to take away one thing that the pre-Covid environment was one of too little inflation. And the post Covid environment is an environment of too much inflation. And that is a major structural change that we're all kind of still trying to navigate.
Now if we fast forward that to today, the issue is inflation's coming down, right? So yeah, it's too much inflation, but not that much too much.
And so, people are getting more comfortable with the notion that the Fed can cut rates. The Fed has cut rates. But we really are still dealing with that fundamental tension. And that tension really changes the structure of many strategies, investment, portfolio construction, because it challenges one fundamental construct so important to portfolio construction, and that is the relationship between risky assets and safe assets; stock/bond correlation.
And we talk a lot about this in portfolio construction, but I like to bring it back to now. Let's talk about the moment issue of now, in the macro space, is the tension in the Fed and what we heard from the minutes last week. And what you're seeing there is the tension that exists as a result of having too much inflation.
And that tension is that the Fed no longer operates in a world of divine coincidence of monetary policy. Divine coincidence of monetary policy exists when you have too little inflation. The Fed and central bankers can pursue (in the Fed's case, its dual mandate) both objectives at the same time with the same direction of a singular policy. Accommodation raises inflation and stimulates the economy.
That means there's no conflict in monetary policy. It makes bonds incredibly powerful as diversifiers. That was the pre-Covid environment. What we're dealing with is the post Covid environment and what you see today, and this is what you're hearing when you're reading the minutes, when you're seeing the various statements and every headline coming out of every different voting member. What we're seeing play out is that tension.
Powell talked about it. There is no riskless path for the path of monetary policy, but that's new for investors because for about 30 years there was a risk free path and that path was towards accommodation. So, I think that's the big picture framing. And then we get stuck into kind of the little minutiae. Will they, won't they? What are the odds? What are futures prices saying about December? And we'll get into that as well. But this is kind of the construct in which I think about the macro environment on some of these critical issues.
Niels:I'd love to get Alan involved here with your macro background as well, Alan. But before I just have kind of a follow up question.
I do share your view and I do think there is a risk to inflation, but I also struggle and I think a lot of people might agree with that. They struggle identifying where most of the inflation risk would come from. Do you have a sense of… And obviously you're based in the US, Alan, and I am not based in the US, so, you may have a different perspective, of course. But where do you think the risk of the resurgence of inflation might arise from?
Jeff:Yeah, and before answering that question, I want to make a couple of clarifying points. I'm not really that concerned about the risk of resurgent inflation. And I think when we talk about this from a global perspective, you have a very different perspective. Most of that inflation concern is really in the US. Outside the US you don't really see the same sort of factors that might contribute to resurgent inflation.
What I was talking about before was really the concept of too much inflation or too little inflation. That we've shifted the ground and that's created this tension. Now, inflation's come down, it just hasn't come down all the way to 2% and it's kind of lingering here at 3%.
That's not a resurgence of inflation, but it is more this kind of lingering concern about elevated inflation. And then, to answer the question, what are some of the scenarios that might lead into, not necessarily this when people have sort of the memory of COVID and you ask the question of resurgent inflation, people might think that's what you mean.
It's going to be very hard to get to those kinds of inflation levels. Resurgent inflation really means, first and foremost, the lack of the continual collapse of inflation down to the 2% target. I think the risk that we have of that is actually not a risk. It is the reality. And that isn't so much resurgent inflation as persistent inflation. Persistent above target inflation.
Now, some people might say, hey, what's the big deal? 2% target just raised the target to 3%. And you know what, I kind of agree with that. There isn't a huge deal to that except that the Fed tells you that their target is 2%. So, there's a credibility problem. And that problem then feeds back into are we compensating investors enough for a 3% inflationary environment?
And I think the answer to that is probably not. And that's a big debate around term premium and the value of the hedging efficacy of back end yields versus front end yields and a bunch of other topics. I think that's what we mean when we talk about this kind of inflation uncertainty. Not so much resurgent inflation, but more inflation uncertainty.
And then to kind of get to, okay, what are the, some of the key issues? The key issue in inflation, and inflation uncertainty, is wages, and wage inflation, and real incomes. And what we're talking about here, in the US, is the affordability crisis. And prices are just too damn high, and the rent's too damn high, is back as a theme.
Okay, so there's prices and there's price level. That's what you're seeing politically as a problem. Inflation has actually kind of come back down, so, it's not so much a problem. But when people talk about the affordability crisis, what they're talking about is real income growth didn't keep up with the surge of inflation. And so, people feel worse off. And what's the resolution to that? Well, you don't want to put prices back down. That's a deflationary spiral. That's a bad economic outcome. So, what you need is you need nominal incomes to grow, you need nominal GDP to go up. But that's inflationary, and the source of that is wages and wage pressure.
So, you got to kind of watch this kind of petering out of the decline in the wage inflation figures, because that's really your source of where you're going to have not so much resurgent inflation, but I would call it persistent inflation.
Niels:I agree with that. And before I hand it over to Alan, I just wanted to add, and I don't know if you agree with this, I think the other challenge actually will be lack of stability and inflation in inflation. Meaning we used to have very stable inflation. People could plan. But post Covid, I think going forward we'll continue to have kind of unstable inflation, if that's the right way to describe it.
Jeff:And before Alan comes in, I want to add one other concept. To your point about unstable inflation is once you sort of unleash the furies of inflation, once you teach people you can adjust prices, price adjustments become easier. So, for that really long period of too little inflation, it was very hard to adjust prices. People were afraid of adjusting prices because they thought they'd lose market share. Once you've gone through that process, then it's easier the next time to see the price increases. And that's a little bit of a concern or a source, if you will, of I don't want to use the term resurgent inflation, but persistent inflation.
Niels:Alan, finally, over to you, my friend.
Alan:Well, Jeff, you talked about pre-Covid, and post Covid, and inflation, obviously, a big change. And reflecting that if we went back a few years, we had this world of negative yielding bonds around the world, whatever it was, US$10 trillion more maybe. Now, as you say, bonds are maybe less reliable diversifiers, but they offer more attractive nominal yields.
So, for somebody in your seat, obviously you're involved in fixed income, you're involved in systematic fixed income and systematic in alternative strategies. How do you think about where all of those fit in in this kind of world of higher yields, but maybe fixed income being a less reliable diversifier?
Jeff:Yeah, it's a great question and it really touches on kind of a critical shift in investor usage of fixed income. And that shift is because income is a more attractive source of use of fixed income in portfolio then diversification.
nt. So, when you had the post:And so, people gravitated towards fixed income as 60/40 portfolio construction. And it was the heyday of risk parity construction and a lot of things that people built up. In a post Covid environment, with the loss of diversification, not the entire loss of diversification, but the lessening of the effectiveness of diversification, for the reasons we just talked about - the loss of divine coincidence, and monetary policy, and the power that gives to bond diversification and you've gained something. You've lost something in diversification, you gain something in real yields and real yields coming back to positive levels. And so that makes income and income investing a bit more attractive.
And we go back further, as students of financial markets and students of history, we recognize that the origins of fixed income as an asset class was in income asset class, not this thing that we sort of developed in the mid-70s and grew up in the 80s. The Lehman Gov Credit Index, total return investing, the rise of Bill Gross, and Pimco popularizing. Don't think about fixed income as income, think about fixed income as total return. And so, we changed for an entire generation, a generation that I grew up in, thinking about fixed income as a portfolio diversifier. And it was a great environment. Yields were secularly declining.
Thinking about bonds as total return in an environment of secular declining interest rates, that's a pretty good strategy. You hit zero. I wrote this piece called Investing Without a Parachute, like, really, you're going to think, yeah, we did hit negative yields, and that was a really interesting time when we didn't know whether you could have that. But you're kind of reaching the limits of this diversification argument when central banks couldn't lower interest rates that much more.
And that began this pivot away from fixed income solely as kind of diversifier and total return with a little bit of movement towards fixed income is income, and, as you were sort of suggesting, Alan, the rise of alternatives, and systematic strategies, and systematic trend. You know, it's opening the door, if you will, for other types of diversifying strategies to help fill the gap that is being created by the structural change. Systematic trend is one of that. Liquid alternatives are one of that. And traditional fixed income can kind of move a little bit towards income. It gives a little bit of room in the marketplace, if you will, for alternative forms of diversification, which is a big part of our themes.
Alan:And I guess a more recent kind of change in the macro backdrop that kind of has come to the fore has been all of this chat of fiscal dominance, high debt levels, possible financial repression down the road. As a fixed income investor or somebody thinking about systematic investing and fixed income, this could be quite a tail risk to be aware of.
Is that something that can be modeled or thought about or how do you think about it as a systematic trader?
Jeff:Well, you definitely can think about it, and you definitely have to think about it. How well you can model it and how well it fits into various systematic frameworks is something we could maybe discuss a bit more, but let's unpack, a little bit, the fiscal issues and the financial repression issues.
Yes, this is another theme that's sort of coming out in the post Covid environment is not only did we create inflation, we also created a tremendous amount of government debt along the way. And, even without Covid, it's not like our government debt structures in western developed markets were particularly on a great trajectory here.
The difference is we greatly accelerated it. And with the increase in inflation, inflation uncertainty sort of undid the secular decline in term premium and real interest rates falling. And so that is another part of the story. And how do developed markets deal with this? How does the UK deal with it? It is the topic du jour. How will the Fed deal with it? Or the United States government, or the Fed, and the treasury, do they get back together again in an accord, which raises the issues of the potential for financial repression. And so, what this does is it makes you have to think very carefully about what is the underlying structure that you're building your models under.
There's a presumption, since the ‘51 Treasury Fed accord, that markets are pretty much free to determine their own pricing. And so, when you think about inputs to that, you think about fundamentals, and you can build a model off of that. But if prices are not free to be set by those signals, then you've got to recognize that. And in the most extreme case, when you go back to the history in the United States, interest rates were determined; 3/4 on the front end and (now I'm forgetting my long term interest rate in the pre ‘51 accord) I think it was 2.5% on the long end. Somebody will fact check that. But they were set. They were set and they were maintained. It was a fixed interest rate regime.
That's very unfamiliar to people. But you’ve got to understand when you're building models, what are you modeling and what is modelable? So, I'm not saying we're going back to that, but there are soft forms of repression that you need to be aware of and your models need to be aware of them. And so, it's not just going to be macroeconomic growth and inflation indicators that are necessarily going to be setting interest rates.
And so that you have to try to factor in and know what you know. It's also about knowing where the repression is likely to take place and then pivoting away from repression. I mean repression is basically a tool to transfer wealth from my investors to someone else. And so, my job as a fiduciary is to protect them from that.
And so, if you saw things like poor valuations in long term government bonds, you might pivot away from those investments. And we invest in long-term government bonds because they're good investments. The yields were attractive, the diversification properties were attractive. If those things are no longer the case and you have choice, investors won't invest in those areas, and that will adjust, and we'll make those adjustments in that kind of space.
Niels:You obviously work for a part of BlackRock called BlackRock Systematic. Often when Alan and I, for example, we talk about trend following, we kind of not use the word systematic very much because for us it's implicit. But I think the word systematic is somewhat underrated in terms of the importance of a lot of these strategies.
I'd love to hear your thoughts of why, in this changing environment, this post Covid environment, you think, if you do, of course, you think that actually systematic strategies may become, how should I put it, even more important or even more useful than non-systematic strategies and how that shapes the way you go about coming up with new ideas for products.
Jeff:A risk is, in calling ourselves BlackRock Systematic, the sense that there's ambiguity in language. So, when I say systematic, you hear something. You probably hear trend, and managed futures, and CTA. When I speak to somebody else and I say systematic, they might think Fama and French style factors. When I think systematic, because of my origin story, I think derivative pricing, Merton models, that's what systematic means.
And when we think systematic at BlackRock Systematic, we think a lot of a very famous textbook written by Richard Grinold and Ron Kahn, the head of our research department, Active Portfolio Management, and how do you have edge and systematically put edge into portfolios? And that's the kind of fundamental basis for our entire investment platform.
So, there's a lot of different interpretations to systematic and systematic investing. And today when you talk about systematic, now it's all about artificial intelligence and the use of artificial intelligence. And mostly, when people are coming to us, and I do a ton of these meetings with our clients, they want to talk about the new artificial intelligence. They want to talk about the generative artificial intelligence.
And I have to tell them, hey, we've been doing artificial intelligence before, artificial intelligence was cool, but it's the older form of artificial intelligence. But some people might call predictive artificial intelligence, differentiated from generative artificial intelligence, but we do both. But you know, we didn't have generative until the last couple of years, but we've had predictive for a lot longer.
So, systematic… I think everyone is becoming more systematic. I use this analogy from one of my favorite kids movies, The Incredibles. And if you remember The Incredibles movie, the whole premise is the spurned evil character, you know, wasn't allowed to be incredible. And so, he basically decides to make everybody incredible. And the famous line is, “If everyone's a superhero, then no one is.”
And so, there's this risk here that everybody's becoming systematic and then nobody's systematic and we're losing the differentiation. That's a challenge. I think it's a good thing for the industry because I think systematic investing brings some really important characteristics that we've often anchored on, which is about outcome orientation, engineering for outcomes, explicit portfolio construction that identifies and separates sources of returns.
I mean, we see a lot of confusion in the market about what is alpha, what is true alpha, what is active, what is beta, what is smart beta or strategic risk premium? And the different sources of returns have very different risk profiles. They have very different requirements in terms of data and skill.
They should have very different compensation structures associated with them. And so, I think one of the benefits of systematic is just helping to clarify, for people, what are you buying when you're buying a return stream.
And we're very explicit about our different return streams. And we have return streams across that entire spectrum. You know, even at the far end of that spectrum, pure beta investing is a form of systematic investing. It's index investing, it's purely rules based, it's not very aspirational, but it doesn't cost very much either. And those two things go together.
And as you extend that spectrum from beta to alpha and we get our highest aspirational, pure market beta factor neutral alpha investing. It's very aspirational. It's also exceedingly difficult.
It is the hardest thing in our investing world to achieve market neutral alpha investing with real alpha delivered as measured by IR (information ratios). And all of that, I think, systematic investors contribute to the broader ecosystem in a very helpful way.
Niels:You mentioned this thing about everything becoming systematic and I tend to agree. I mean obviously we live in a tech driven world.
From our biased trend angle here, it also seems to me a little bit interesting that I wouldn't say everybody is becoming or going into trend, but big houses like your own, Fidelity, I think Invesco, and other really big asset managers are launching pure trend strategies this year or maybe last year.
Why do you think (and I'm just speaking from my own 35 years of experience in the trend space) that it was never popular? It was never a strategy talked much about, or embraced much about, or embraced by the very large asset managers, frankly. But that's changing. Why do you think that might be? Why now?
Jeff:Yeah, well, we are one of those, it's one of the funds that I'm a co-manager on, iShares Systematic Managed Futures (ISMF). (Shameless plug, sorry guys.) But we did get into the space, and you're asking a great question, and the answer goes a lot to that earlier conversation about the opening in the need for diversification and the need for alternative diversifications.
You know, being a large asset manager, working at a large asset manager, you know, we manage, I manage specific products. But the focus of our firm, with our clients and our engagement, is very much on the portfolio level. We talk a lot about being the main provider of portfolio solutions.
And so, when you think about a lot of the things that we've done over the years to expand our capacity, it's to be able to speak to our clients in every aspect of their portfolios, to be their number one portfolio investor provider. So, when we talk about this space, this is a space that we see opportunity in, to extend the aspects, the very attractive aspects.
One thing I didn't say before about systematic, it's about delivering expected outcomes. We call it engineering for outcomes. So, you know exactly what you're going to get, you know what the return profiles look like.
Trend has a very specific return profile. And when you invest in it, in a systematic manner, and you do it well with good engineering and good risk management and good risk budgeting, you deliver on that intended outcome. Now, we know there are not all environments in which trend is a great strategy, but we know as well there are particular environments in which it is a very good strategy, a very diversifying strategy.
And so, educating our clients and bringing that idea to a broader , and then our particular innovation is something we're really good at, exchange traded funds. And so, marrying the two concepts, the investment outcome and the specific return profile of trend in a wrapper that is very modern, is very client friendly, is very attractive to our retail client base, was an opportunity we thought to bring liquid alternatives, a form of diversification in a wrapper that they find very attractive. And that's why we got into the space and that's why we're excited about that space.
In the right circumstances, in the right environment, those strategies will be very helpful and very additive to clients portfolios or can be, I should say
.
Niels:Absolutely. Over to you, Alan.
Alan:So, I'm just curious. Obviously, you come from a, we might call it a derivatives background. You mentioned kind of the theoretical work you've done, and kind of financial engineering at Carnegie Mellon. I mean some people who do trend come from a trading background, or they may have the turtles influence, or also a lot of people who do trend maybe are influenced by the AHL kind of experience. And you've got different types of trend that link back to those two types.
I mean is there something different about how a house like BlackRock thinks about trend following, as you mentioned, as a return stream and how you execute it? Obviously, you have the expertise in ETFs, but outside of that, is there a particular philosophy or flavor you bring to it?
Jeff:Yeah, one of the things, and I like to study markets, I like to study financial history. I also have had the opportunity of working in lots of different subcultures within our investment world. So, I started on an investment grade trading desk. Actually, I started at Banker's Trust in a derivative model validation group with a bunch of PhD quants but then went onto the trading floor in credit. And then, you know, spend a lot of time with high yield credit people.
Everybody's got their own history, and they've got their own philosophies and their own path dependencies, and it's fascinating to learn all about, about those. So, as you pointed out, my path did not start in trend, but it did intersect with trend. And so, I spent a lot of time with our people, inside BlackRock Systematic, who do come from and spend time within that trend ecosystem.
And so, a lot of it is drawing from that same school of thought, that same history, and blending it with all the other influences that exist around systematics. So, trend, on a broader context, is momentum. And price momentum, if we think about it from kind of Fama French and the equity literature, is a big factor. And so that brings in another word, and another group of people, factor-based investing.
And so, it all kind of mixes together and is this incredible cauldron of bubbling enthusiasm for all things systematic. But things are sort of getting melted down here and mixed up where you got factor people, and trend people, and I’ve got to throw in the AI people, and the machine learning aspects.
And so, what we're doing is, in some aspects, we're just taking a very simple strategy, and keeping it simple, and replicating what investors expect out of trend, and trying to deliver a trend-like experience. And so, you can think about that in terms of ISMF, that was the goal and the objective.
We have a new fund coming out. It's called iShares Systematic Alternatives Active ETF. It's, again, in an active ETF wrapper. And that one, you know, is a little bit more ambitious. And so, it takes some of kernel, it adds it into the mix, but it adds some of the other aspects of our research and history around momentum strategies, machine learning aspects to it, to sort of modify a bit of the payoff profile. It's mixed in with a bunch of other strategies as well. That's a multi-strat liquid alternative.
But to answer your question, Alan, it's a little bit of respect for the specific history and intellectual aspects but bringing to that a diversity of viewpoints that results in some differentiated and, we think, some really attractive return profiles.
Alan:And you mentioned what investors expect from a trend experience. And it kind of touches on one of the debates we've had here on the podcast as well with people about kind of the dual mandate of managed futures, of delivering a return stream that's uncorrelated to equities over the long term, but also delivering crisis alpha, or whatever you like to call it, at times of stress.
So, how do you balance those and how does that weigh into the conversation in terms of speed of systems or risk allocations to different markets, etc.?
Jeff:Yeah, well, I started by saying this year, at the beginning, was sort of a tumultuous year. So, it's certainly been a tumultuous year for trend. And if you look at the inception date of our fund, ISMF, the specific trend fund, we look back on it, I think it was March 13th is our inception date. I mean, we couldn't have timed it worse in terms of a trend strategy because trend hates reversals.
And the policy uncertainty of this world has been a reversal engine. It just creates massive reversals. And we navigated that period, you know, with risk management and diversification, our signals are a little bit slower in terms of like where we fit within the kind of time windows. We also have diversification across the time windows. But I'd say the diversification and breadth are kind of hallmarks of BlackRock Systematic.
If you go back to kind of our intellectual founding and what we call Grinold Kahn, and active Portfolio management, it is the idea that breadth is your systematic differentiator. So, the law of active management information ratio is skill times the square root of breadth times transfer coefficient.
So, where we really try to focus is there's a little bit of skill in momentum. That's the insight is momentum and persistence, a little bit of skill. The key is breadth and then transfer coefficient; like getting into your portfolios, managing the risk, and risk budgeting. So, this was a very difficult period for trend, and so having a higher breadth strategy.
The challenge in an ETF is how much breadth can you have is sort of limited by the structure because you need it to be able to scale. And so, you have some very unique structural characteristics that, when you meld trend strategies with the ETF wrapper, you've got to get that right.
I think we've navigated that pretty well, taking the two great expertises, a great expertise in ETF and a great expertise in trend and systematic, to navigate that time period. But it was a very tumultuous and difficult time period. But you get that through diversification as well.
So, we try to have good diversification, significant enough numbers of underlying strategies across the buckets of futures. And if you look within the ETF world, you can see there's been a lot of diversification in how people have gone about this and implemented. You have some very concentrated strategies. You have some incredibly high breadth strategies. I don't know how well those can scale when you have that much breadth.
We've tried to hit the sweet spot between breadth and diversification to try to manage the structure with the strategy.
Niels:Just to butt in here, just on that point, I find that very interesting and it's something that we certainly discuss a lot.
Niels:Of course, I come from a company that has been doing trend following for more than 50 years. And one of the things we truly believe in is that commodities adds a lot of value in that breadth, in that diversification of the markets that you trade.
Now, of course we also understand that limits the capacity, as you rightly point out. But for your product, specifically, how many markets did you decide on doing? Because one of the big surprises to me has, of course, been the success of these, as you say, very narrow, mostly replicator ETFs that have come out.
And even though some of them have been around for a few years now, I still wonder whether, when we look back 10 years from now, whether that last five or six year period where, yes, they did perform probably better than I would have expected it, but it was just basically because of fortuitous selection of a few markets. I'd love to hear your thoughts on that, and whether you've done any research in deciding your own breadth, in terms of market portfolio, to kind of avoid the luck/unlucky factor being too much of a role.
Jeff: Yeah, I mean you look in:And so, you want to try to, again, find the sweet spot. When you have limits that you have in our structure, when we're trying to build something that can scale, then you’ve got to find the sweet spot between scalability, and capacity, and diversification. I think we've gotten there. We're somewhere about over 40 individual contracts, the four big markets, FX rates, commodities, and equities. And if you look at our holdings, you're going to see, basically, that we're up market in liquidity. It's not particularly surprising which names we trade, and which contracts we trade, and which contracts we had to exclude for the capacity.
But we felt, and we tested, and did the research on those names and we looked at different lists, we spent a lot of time going back and forth, going through the trade-off, that this was the right sweet spot in terms of delivering sufficient diversification in sufficient liquid and capacity. And I think that's the right strategy.
I think these very concentrated strategies, yeah, you're going to get some outperformance when you're in the lucky right spot and then you're going to miss it in other days. And that's not really what we're about. We're about consistency of performance, we're about consistency of delivering on the outcome.
But part of that outcome, as well, is understanding that a trendless market can be a very challenging environment to these strategies. And we're pretty explicit about that. And the other thing, it's very hard to forecast what environment are you going into?
And so, you own these things from a portfolio diversification perspective and less from a timing perspective. Now we know that not everybody does that and people will try to try to time, but it's hard to time those things. It's hard to time when you're going to be in the tails or the middle of the distribution. So more of a kind of a diversification approach.
And really it's about what I was saying earlier, giving people the opportunity, the access to different forms of diversification in this liquid alt space outside of kind of beta exposures, the uncorrelated space.
Niels:Yeah, you mentioned just the words ‘when times are difficult’, and I seem to have heard you talk about something that I believe you described as defensive alpha, which strikes me maybe as something a little bit different. Can you refresh me on when you think about defensive alpha, what that means?
Jeff:Yeah, so, we'll pivot here away from, you know, one of the strategies and, again, in my funds, Systematic Multi-strategy or the fund we're about to roll out, which is an ETF I Alt. There's a strategy in there, which we created, called defensive alpha. And it's a very differentiated approach to an uncorrelated strategy where we're investing in a long short market beta factor neutral equity portfolio, but we're doing it from a credit investor lens. So, this is going to harken back to that tree of systematic that really springs from Robert Merton, I think it's the ‘77 Value of The Firm paper, where we really think about capital structure investing. And we think about how can we take signals and inputs from the equity to value the debt. That was the underlying idea using option pricing.
And so, you fast forward to our development. We're building out a long/short credit expertise. Credit is very capacity constrained, on the short side, as we're looking at how can we extend this capacity. And we realize, well, we have all these insights, let's trade those insights, those credit insights on the equities.
And it was one of these kind of aha moments when you realize, well, when you change the universe from a typical long/short, typical long,/short systematic. It's what we talked about before. You want to have the highest breadth possible. We have 15,000 names in our equity long/short portfolios.
But in this strategy, in defensive alpha, we're limiting the universe to a universe of companies that have debt on its balance sheet. Now why that becomes important is because what drives alpha in any market neutral investing is the dispersion between the winners and losers.
And one of the sorts of insights, the aha moment of narrowing the universe, which is very kind of antithetical for a quant and a systematic quant, you don't want to narrow the universe. You always want to… It's the law of active management. More breadth, better.
But when we narrowed the breadth, and it's still a high breadth universe, it's about 500, 600 universe names that we invest in, to companies that have debt on their balance sheets, you realize, oh, what does debt do? It accelerates dispersion. And when does it accelerate dispersion? When it matters most to a defensive need for diversification, which is when markets are going down.
When markets are going down, there's this pivoting feature of kind of the behavioral side of our markets. Which is when things are going great, equity analysts focus on the upside, they focus on the income statement. When things are really tough, you batten down the hatches, you circle the wagons, you focus on the balance sheet, you focus on liquidity, you focus on access to credit and cost of credit. All the things that we tend to, in our signal set in building a model, systematic implementation of defensive alpha, we tend to overweight those signals.
And the result is a profile of our alpha that tends to be really strong in down markets, tends to be okay in up markets because it's market beta factor neutral. And that profile kind of looks like a long put option profile, but without the timing and without the directionality.
And so, this is something that we do. It's highly differentiated, comes out of our credit expertise piece, and it's central to systematic multi-strategy. It'll be a central aspect of the new fund in I Alt as well. And again, back to the broader theme. Whether it's trend or systematic investing, we're in the world of uncorrelated assets. But even in a world of uncorrelated assets, what we're talking about is, well, what is the profile? Trend has a particular… the CTA smile. It's good in really down markets, it's good in really strong up markets. It has that kind of profile, kind of tough in the middle. Well, here's another uncorrelated profile that we've engineered systematically. Defensive alpha; what does its profile look like? Kind of okay in up markets, really strong in really down markets. Okay, that's a really cool profile.
And then it's about, once you've engineered these various uncorrelated profiles, how can you put them together to create a really attractive profile?
, in systematic multi-strategy we do it with a fixed income anchoring and we're going for fixed income replacement or complement fixed income type volatility. In I Alt we'll go a little bit more higher octane, more for an alpha diversifier, more of an equity substitute but without the correlation, with a broad mix of strategies, defensive alpha, some trend, some equity long/short, kind of more full alpha, equity long/short as opposed to the defensive type. And that will be kind of the mixture of underlying strategies in I Alt.
Niels:So, before I hand it back to you, Alan, I just wanted to ask you, you mentioned briefly liquidity, and of course in a big company like yours, obviously execution capabilities will be probably some of the very best. Is there any, if we say with the word alpha, I mean is there any edge anymore in execution?
We live in a world where it's difficult maybe to compete with some of the, you know, very, very large shops, market maker shops, however we define them. But, but how important are execution capabilities at a shop like yours?
Jeff:Yeah, I, I would frame this just because we invest across so many different asset classes. I think each asset class is different answer with regards to the importance. And I think it roughly scales, by the liquidity, of the underlying asset class. So, commodities, equities, corporate bonds, high yield bonds, emerging markets.
In the lower liquid asset classes, I think there's more alpha opportunity. We call it implementation alpha. Sometimes it's real alpha, sometimes it's the avoidance of losing alpha and having all your alpha taken from you by your counterparties. And so, that's a really big important part in our credit and credit implementation. I think as you get to the more liquid asset classes, it becomes more about scale, and I think it becomes more about the ability to trade without market impact, and that also impacts the lower liquid areas as well.
One of the benefits that we have, in the fixed income side, is we trade index products, fully active products, systematic products, and they all get traded together. And so that kind of river of liquidity that we can tap into really helps us both in terms of implementation but also in terms of mitigating market impact. And in systematic strategies that's really important because your footprint in the market matters as a systematic investor.
And so, you want to be really careful about how that footprint is being left in the sand. And one of the advantages in trading in BlackRock is rather than stepping into the sand, we can step into the river. And this is a terrible analogy, but we get the full liquidity stream of all the transaction activity that is going on at BlackRock and that helps us in terms of trading and market impact.
Niels:Alan, where do you want to go next?
Alan:Yeah, just curious to get your thoughts on kind of, for all of these products, or how they're positioned with investors. Obviously, you're a solutions provider. You're providing the building blocks for investors to build portfolios. But curious hearing you talk about trend and how it does well in very good markets as well, which is not something that's often talked about. People talk about the defensive quality, but it can obviously do well when markets are ripping higher.
nes, more prolonged ones like: Jeff:Yeah, first and foremost, I think the pure trend was just to introduce the concept of a derivative heavy structure within an ETF construct. We wanted to start with the notion of something that people were familiar with, even if sometimes it feels like they're less familiar with it.
They're certainly a lot less familiar with some of the other strategies that we have within the lab, if you will. The capabilities that we have that have been, you know, understood and rolled out for institutional investors. They're in our hedge funds. We're trying to bring these to a broader audience with a more modern and attractive wrapper, the ETF wrapper.
But when you do that, you start to really push the ETF ecosystem in ways that it hasn't been pushed before in terms of what are some of the things you're doing in that ecosystem, in the underlying portfolios, that we wanted to start with something that was relatively more straightforward and simpler, that was ISMF, and that was the pure trend strategy. So, part of this is really about this merger here between the capabilities of BlackRock Systematic and the expertise and capabilities of the ETF wrapper and the ETF ecosystem.
And those two things coming together is really an opportunity that we see for growth within the uncorrelated asset capability space, of which trend is a portion of, to grow the overall liquid alternative space. Which is really about the space in clients portfolios for diversification and non-correlated assets within the portfolio. But I think the sequencing here was very much conscious. It was a plan that let's roll out with first a strategy that is more well understood within the investor community. Use that to build the understanding within the ETF community in the ETF ecosystem. And then follow that learning and experience with a multi-strategy, the I Alt strategy, That's going to add even more complications, sophistication, challenges to the ETF ecosystem. It'll be easier to accomplish that if we built the base of that understanding with the pure trend strategy.
Alan:I mean you've talked a lot about the ETF wrapper, its attractions, people like it, it's familiar, the liquidity, tax advantages. I mean, the flip side is obviously you can't do everything. There are constraints, there are trade-offs. I mean, are they quantifiable? How much are you giving up?
Obviously, volatility levels can impact, you know, if you're running at a higher level of volatility, say for trend, you should expect higher returns, but more drawdowns. But I mean, how constraining or not is it when you bring alternative quant strategies into an ETF?
Jeff:It's different. You can't manage the way we manage across the spectrum. Hedge funds in a Cayman vehicle, mutual Funds in a 40 ACT wrapper, UCITS funds in a UCITS wrapper, ETFs are a 40 ACT wrapper, but they just add some additional constraints without recognizing that there are trade-offs and there are trade-offs on liquidity and capacity.
And they create design choices, and they create choices that are designed to maximize the investor experience given the constraints of the wrapper. And so, you're just a more constraining wrapper. If you want to invest in an unconstrained wrapper, that's a Cayman vehicle. Unfortunately, Cayman vehicles are not so easily accessible to the broadest array of investors.
And so, this is the trade-off between accessibility, liquidity, transparency and what are the types of strategies that you can implement underneath those? A very simple example, we face this in UCITS, we face it in 40 ACT, we face it in ETF is there are varying degrees of constraints on leverage.
When you look at a Cayman structure for an institutional client, there's really not a lot of concern around the leverage. There's an understanding that leverage in an uncorrelated asset world means something very different than what leverage means in the beta world.
And unfortunately, there's still a legacy of investor experience with leverage in the beta world, where leverage is used to just amplify market directional returns, and in many cases to bad outcomes.
So, there's a lot of leverage limitations that are built into the investment ecosystem that when you then introduce into that ecosystem something very unfamiliar, long/short market beta factor neutral investing, that many cases just simple definitions aren't even clear what it means, what you're talking about, when you're talking about a leverage calculation or a leverage limitation, because they were written from the construct of a beta exposure.
And so, a lot of that has been some of our experience and growing the kind of understanding of how you evolve for a product that has more of a long/short market beta neutral construct. But the leverage is a good example where the kinds of leverage that you are willing to run in a UCITS structure. UCITS has explicit limitations. Leverage in a 40 ACT or an ETF is going to be lower than what you're going to run in a Cayman structure.
And so specifically where that factors in, take our trend strategies, for example. You want to be judicious about how much volatility you're trading in the underlying commodity contract. So, really low contracts attract a huge amount of notional leverage to deliver a similar level of risk.
And so, so one of the things we were thoughtful about was kind of going through and not only constraining based on capacity and liquidity, but also in terms of efficiency, how much risk are we really generating from that contract per unit of notional? Because we are going to have some kind of thoughtfulness about how much leverage that we're going to use. And that also affected the choice of strategies or choice of contracts in that strategy.
So, there are definitely differences, there are trade-offs, there are some advantages, there's some disadvantages, and they go into the construction of all these strategies.
Niels:Jeff, I read a report from Capgemini, very recently, where they talked about the growth potential of alternative investments. And I don't remember the number specifically, but they saw a massive growth; two, three fold from the US$5 trillion we see right now. And I think there were even other firms quoted that had even higher expectations in terms of that. We saw, last week, that CalPERS decided to move. In the middle of next year they're going to move to a total portfolio approach where each investment actually has to be justified in terms of its contribution to the total portfolio, which means, in theory at least, that uncorrelated strategies should get much more of a slice of the pie, so to speak.
How do you see the alternative investment area evolve from here? Obviously, it sounds like you are well positioned for growth because you've got lots of products on the shelves. But how do you see it? How do you talk about it internally?
Because clearly, whatever goes on in a large company like yours, where it doesn't get much bigger than that, is important for the industry. So, how do you think about the prospects of specifically alternative investments and their acceptance by institutional investors into their portfolios to a degree that we have not seen so far?
Jeff:Yeah, really, really great question. And, I think there's two or three questions in there. There’s one on alternatives and the rise of alternatives. Two, on kind of whole portfolio lens. And the third, which I hopefully will get back to in the answer, is kind of the institutional versus retailer; different segments and how they're approaching this. So let me start with the whole portfolio part of it first, and the reference that you made to CalPERS.
You know, we've had a whole portfolio perspective here for a very long time at BlackRock. And you see it more on the institutional side. And I think that's what CalPERS is kind of describing. And I think to the third aspect, I think it's about bringing this whole portfolio perspective to a broader audience, to a retail audience, moving away from kind of a specific product focus, evaluating products in isolation as opposed to evaluating in the context.
And this brings you to kind of alternatives. And here, let me be careful here because the Capgemini report, I didn't actually see that. But when we say alternatives, it means a lot of things. You know, just like systematic means a lot of things. Alternatives, you know, means private equity, it means private credit, it means REITs, it means commodities, it a lot of things.
For most of our conversation we've been talking about uncorrelated assets, and mostly without being explicit about it, in the liquid markets space. So, trend strategies are the most liquid space.
So, let's put to the side for a second alternatives as defined as the private markets and the growth in private markets. Let me not forget infrastructure. I mean, obviously you've seen a lot of things at our firm talking about and pivoting towards the growth in that space. But we here, we're in the liquid market space. We'll talk about liquid market alternatives. And that's really about what I call alternative strategies.
Trend is an alternative strategy. It invests somewhat in alternative assets.
If you think of commodities as being different than kind of stocks and bonds or rates and equities, but really it's strategy that is alternative. It's long and short and then it's particular intellectual property of momentum or trend and capturing that as its essence of its skill, that's an alternative strategy. And it can deliver an uncorrelated return to a portfolio.
I think this is the theme for: the origin story of trend in:But we can broaden that conversation to an uncorrelated return stream is very attractive in an environment where you've got a lot of concentration in your market betas and your market beta just isn't as diversified as it once was. And just doing small sort of tilts around that market beta isn't going to really get you away from that market beta enough.
And this is where allocating a good portion of your portfolio in the retail space, we talk about 60/40 a lot. And 50/30/20 is the new 60/40, like 20% of your portfolio in alternatives.
Now, whether that's liquid alternatives or illiquid alternatives, for us amongst friends here in the liquid space, it should all be in liquid alternatives. But it may be a mixture between taking some illiquidity premium for diversification in terms of mark to market risk, liquid alternatives for diversification. But this idea of market concentration I think is really the one that is another driver of growth in liquid alternatives.
Niels:Before we wrap up, Jeff, this was really great. I was going to ask you if there was something you felt Alan and I left out there. I mean there are so many directions we could go.
I love the topics that we've touched on, but there may still be some that you feel we should bring up. So, I'll give you the opportunity to touch on anything you feel we should do before we wrap up the conversation.
Jeff:Ah, that is a great question for me. So, I guess one question because you have this forum, this Top Traders Unplugged forum. What are you guys seeing in terms of some of your recent participants, guests, around this same topic of the growth of uncorrelated assets? I'd be interested to see sort of the summary of your recent guests.
Niels:Allan, do you want to go first? You come from the allocator perspective still, I guess.
Alan:Yeah, I think all we've talked about resonates. Correlation shift, bond equity correlation shift is a big driver for allocators. So, that's definitely part of the case for alternatives, hedge fund strategies, liquid alternative. I think we've been talking a lot about the growth of the ETF market in various domains and how that offers more choice for people.
I think you've got concerns about correlation, but also there is a kind of whether it's concentration risk or not, but just that sense that the equity market rally has gone on for a long time. So, how do you construct portfolios that can continue to participate but have meaningful protection in there? And I think that speaks to all of the strategies that we're speaking about. Whether it's multi-strat, or defensive alpha, or trend following, they're certainly all part of the solution.
So, I think that's the kind of the big topic in conversations I'm having with allocators. Are we in ‘95 or ‘99? This rally could go on for quite a while, but it may not. So, how do you build a portfolio that can be resilient to different scenarios?
Niels:I think from my part, Jeff, speaking to clients and potential clients, I think there are a couple of important themes. I think, overall, there's probably, as you pointed out, a bigger or a better understanding by institutional investors in terms of the value of having strategies. And in my case, of course, like trade trend, I think they understand that better. I think they're more open to conversations.
ding, so to speak. So I think:Even though maybe I should be worried, but I'm excited about the fact that people like yourselves and some of the other very, very large asset managers are getting into the space because we need more people with the reach that you have and with, with the same shared conviction as we have about the importance of having these strategies as core allocations in a portfolio. So, I'm excited about that now.
Now, what I wouldn't say I'm worried about, what I do think adds a little bit of concern is that because of the success of the ETF world, both on the replicator side and I'm sure on your side as well, I'm concerned that people might think, well, trend is so easy to do because now you can buy it for 85 bips flat fee and not the 1 and 15 or whatever the full scale CTAs are charging at the moment.
That is a concern because I don't think it's easy. And I worry a little bit, to be completely transparent, I worry a little bit that some of the ETFs and I'm not speaking specifically about your ETF, but some of the ETFs where I feel there's a lot of compromise in, for example, breadth of markets in order to get scalability because the fees are so low that you need 10 billion to make it even a good business.
I worry that will come back to haunt the industry because at some point something is going to happen whereby they will be caught in a situation that will not reflect the performance of a traditional trend following or CTA strategy. Those are concerns, they may not be proven correct, but those are some of the concerns.
So, it's a, it's a mixture of excitement and concern at the same time.
Jeff:Those are really good points. And you know, we have seen that this year. We've seen tremendous diversification across the ETF trend landscape. And, and so it does matter. It's not just all one asset class with an asset class return. And this is one of the issues that investors face when selecting within the uncorrelated space. The correlated space, it's a lot of beta. And so, you kind of know you're going to be pretty close to the market return, plus or minus.
In the uncorrelated space, there's much, much more diversification. You know, that's the challenge within all alternatives, whether they're private, public, trend, systematic, fundamental. And so, we've seen that as well in the trend space. We've tried to be very careful in how we've implemented ours and I think our performance is sort of a testament to that. But the risks that you highlight are important as well. And so, you got to kind of look under the hood a bit at what you're getting in these various offerings. And that's one of the ways to manage the dispersion within the manager selection problem, within liquid alternatives and all alternatives, I should say.
Niels:Yeah, absolutely. This was excellent, Jeff. We're going to wrap up on that note. Thank you ever so much for being on the podcast and for sharing your thoughts and insights with us. And we hope we can do this again sometime in the future.
And to all of you listening today, I hope that you were able to take something from today's conversation onto your own investment journey. And if you did, please share these episodes with your friends and colleagues.
From Alan and me, thank you so much for listening. We look forward to being back with you on the next episode of Top Traders Unplugged as we continue our journey into the quant industry. And in the meantime, go check out the show notes for these episodes and all the other resources that you can find on the website. And of course, not least, take care of yourself and take care of each other.
Ending:Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you and to ensure our show continues to grow, please leave us an honest rating and review in iTunes. It only takes a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.
