Niels Kaastrup-Larsen is joined by Andrew Beer and Tom Wrobel to examine a remarkable period for systematic investing. They discuss how CTAs have navigated volatile moves across equities, commodities, currencies and rates while preserving strong gains, and why diversification has been central to that resilience. The conversation explores leverage, the renewed interest in managed accounts and portable alpha, alongside the growing distinction between trend and non-trend strategies. They also challenge the traditional framing of CTAs as crisis alpha, debate whether greater complexity actually improves returns, and examine the difficulties investors face when selecting managers and benchmarking an industry where yesterday’s winners may not remain tomorrow’s leaders.

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Episode TimeStamps:

00:00 - Introduction and eclipse mania

02:57 - Volatility, valuations and a changing market environment

06:22 - Trend Barometer falls as opportunities narrow

08:21 - How CTAs have navigated 2026

10:10 - An extraordinary year for systematic investing

14:07 - Yen intervention and CTA resilience

17:11 - Trend versus non-trend performance

22:20 - August performance and the systematic landscape

24:48 - Active commodity strategies versus traditional CTAs

29:39 - Situational Awareness and the risks of leverage

32:14 - Managed accounts, capital efficiency and risk control

37:49 - Are systematic strategies becoming over-engineered?

42:45 - The growing divide between trend and non-trend CTAs

50:34 - Reframing trend following as all-weather alpha

55:07 - Why the crisis alpha narrative can be misleading

01:04:06 - The hidden challenges of CTA benchmarks

01:12:12 - Manager selection and diversification across CTAs

01:14:15 - Does non-trend really improve a CTA portfolio?

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Welcome to Top Traders Unplugged. In markets success doesn’t come from predicting what happens next, it comes from being prepared for what you can’t predict.

In each episode we go deep with some of the world’s most thoughtful minds in investing, economics, and beyond to understand how they think, how they prepare, and how they decide, and the experiences that shaped how they see the world. No noise, no short-cuts, just real conversations to help you think better and invest with confidence.

Welcome and welcome back to this week's edition of the Systematic Investor series with Andrew Beer and Tom Wrobel as well as myself, Niels Kaastrup-Larsen, where we each week take the pulse of the global markets through the lens of a rules-based investor. Andrew and Tom, it is great to have you both back this week on the podcast. Tom, it's been a little while. How are you doing?

Thanks, Niels. Yes, very well. Here we're in eclipse mania in London. We've had the solar eclipse which has been very exciting.

Yeah, well let me talk to you about that as well. Andrew, how are you? And did you see the eclipse? Because I missed it completely because of clouds over here.

I missed it completely, but we also didn't get it over here. It kind of arced from, I guess, sort of the Nordics down through… kind of hit Madrid. My sister did fly to Iceland to see it though…

Wow.

…with her daughter. And then had a perfectly cloudy day. But all things are great and thank you very much for having me back. It's great to be here.

Absolutely.

Tom, so did you actually see it? Because I was looking at it… So, here, where I am at the moment in Denmark, they said, oh, it's going to be 7 o'clock and then it's at 8 o'clock. And I was obviously not watching directly into the sun. I really didn't see any signs of it.

Yeah, well, we had about 95% here in the UK which was pretty amazing. But interestingly, if you weren't looking at it through a sort of a safety glass or goggle, it was almost unobservable because the sun did get a lot dimmer, but it still was evening time, so the sun was going down anyway. However, we had some goggles, and it was really amazing.

Wow. Okay, well next time I'll buy the goggles, that's for sure.

Anyways, we've got a really good lineup of topics. Thanks so much for sending them over. We’ve got a question that came in as well. So, lots of things to dig into. But as usual, before we get into any of that, let me ask you, Tom, what has been on your (sort of outside the topics we're going to be discussing)… anything that you've sort of found interesting or caught your attention in the last few weeks?

I think it's really been volatility. It's like the markets have almost forgotten about volatility and where we're going and the geopolitics that is going on. I think I feel like we're in a new normal where prices have now digested the volatility in the Iran war and it's almost like equities are off again and here come the next big major trends.

Yeah, I mean that is true although there has been a little bit of volatility. It's just that net/net it's been up and down and not really going anywhere.

What about you, Andrew? I know you said you were heading for… The last time we spoke you said, oh, I'm heading for the mountains, I'm going to relax. Have you succeeded in relaxing?

Uncharacteristically, I have. I had been trying to tune out a lot of things that have been going on. I guess, sort of one observation (back to what Tom was saying) is that, I think I started my career in the hedge fund space working for a die-hard value investor, and before that I'd been an investment banker, and I worked briefly at an LBO firm. And I don't know how you conduct any kind of normal traditional valuation analysis in this world right now.

And I've used this metaphor, I think the equity markets have just become… They used to have venture capital, Cathie Wood, ARK, these kind of pie in the sky things where God knows what's going to happen five or seven years out. But if you added up everybody's projections of what was going to happen five to seven years out, everybody would have these huge monstrous companies.

Yeah, and I think that's true. And I think the thing that we may not be noticing so much in what's going on is this ever increasing level of interest rates. Right? The yields are just ticking higher and higher. Not all the time, not every day, and you're almost kind of not paying attention to it. So, interestingly enough.

So, for my part, I didn't find anything sort of from the markets because actually, as you both said, I mean, it's not like that a lot of things happening are new. But what is new is a story I noticed in the Danish newspaper. It's about an experimental magnetic train developed in China and it just broke its own world record. It accelerated from zero to 800 kilometers per hour. That's 500 miles per hour in 5.3 seconds.

Wow.

And I'm thinking that's going to be a fun ride. You don't want to have your coffee ‘just filled’ just before takeoff.

Are you signing up for a ride on that then, Niels?

No, so I'm not. But I was curious and so I asked ChatGPT, how does that compare to like the acceleration of like an F35? Would we even be able to go to these. And it says (and I have no idea if this is correct), it's roughly four to six times faster than an F35 acceleration. I'm thinking probably not for humans, for the moment at least, but anyways.

All right, well, back to something that has not accelerated very much in recent weeks. And that's the trend barometer. In fact, it's been the opposite. It's gone down to 27, which actually, to Andrew's point, I think it was, it suggests that, at the moment, there are very few markets that are trending. It doesn't mean that trend followers can't make money, but it means that the opportunity set is very limited because only 27% of the markets that it tracks is “in a trending state”.

So, I thought that's interesting also vis-a-vis the returns that I'm going to come to in a second, to me at least, we had a bit of a correction in June, I think it's fair to say. We had a bit of a soft July and not too bad. August so far seems to be off to a decent start. And from where I sit, it looks like equities, metals and maybe one or two currencies that are doing the heavy lifting. So, it’s not a broad-based participation as such.

So, I wanted to maybe come to you, Tom, and ask a little bit, from your perspective, firstly, kind of what you've noticed since we last spoke, performance wise, over the summer, obviously, and sort of, yeah, anything you found interesting, looking at the space, again, not going into the topics we're going to talk about, but just overall performance wise or exposure wise?

And although we've had a bit of a downturn now in performance, I mean most CTAs are still holding on to some strong year-to-date gains. So, there's still a lot going on and there's still a lot that the CTAs are very proud of.

If we look now, interestingly, thinking about gold, our trend indicator sort of model portfolio has actually gone short gold and is generating some interesting performance from that potential position. So, it looks as though CTAs, if they are themselves short, have sort of adapted and are now kind of taking advantage of the new environment that we're in.

Yeah, we'll come to maybe some of the differences you're also noticing between managers later. I know that Andrew brought a point up that we'll touch on that. What about you, Andrew? You obviously look at the exposure of the industry as a whole, that's what you kind of replicate. From that vantage point, are you seeing any changes, themes in the last few weeks, months?

Well, I guess one, just following observation, it's been incredible 12 months, I mean year-to-date aside. I mean I've got, last time I calculated and when we were talking about questions a few days ago, the SocGen CTA index is up 23% over the past year - 23%. Right? I mean, that's an incredible 12 month return. And the beta to equities… Now, everybody's been long equities, to some degree, over that period of time, which was the right trade. It was being long equities post Liberation Day was actually quite contrarian relative to what fundamental investors were saying at the time.

So, this is my point about being contrarian, tactical, alpha generating. But with a beta of 0.3, you're up 23% over that period of time. The MSCI world, which has had a great 12 months, is only up 21% and bonds are up 2%.

But what I think has been really interesting this year is that, and we've talked about this, there are some times when it feels like there's a single theme that's dominating the markets. And I don't care if you're trading, if you got a portfolio of 10 positions, like us, or 300 or 400, everything's kind of pointing in the same direction.

And so, when you get an event like an SVB, or a Liberation Day, or something that reverberates across all these different markets, that's when CTAs can be most affected by whipsaws. What's been really interesting this year is when you talk about macro commentary, there are really two prevailing views of the world.

On the equity side is fear of missing out. It's you only live once. It's this kind of venture capital like view of productivity growth, and AI, and everything else, and everything's CapEx, and everything's going to kind of grow to the moon.

And then other parts of the market are much more cautious. Where you've got a potential squeeze in crude oil, you've got (you mentioned) rising interest rates and stubborn inflation. And those two prevailing narratives have both been evident in our portfolios.

And so, what you've seen this year was kind of capitalizing on a number of trends that were working together in the first three or four months of the year and kind of big gains in the first. And then the rest of the year has kind of been treading water and holding onto gains during a period of time when gold goes up and then gets crushed, oil goes up and then gets crushed, and then bounces back, and then equities get crushed and then they come bouncing back. So, you've had all this volatility in all these different things and (at least we've seen in our portfolio) skating through it.

And given how rough and volatile this year is, that's been a very, very… it actually felt like that, plus the cumulative year over year performance, it really strikes as one of the most extraordinary periods that I've seen in the space, just from a risk adjusted returns perspective.

Yeah, absolutely. Yeah, go ahead.

I think Andrew's exactly right, and I think the fact that CTAs have been able to hold onto this performance, they've generated it from a variety of sources, has made systematic trading far more palatable for investors. There's a common frustration that they don't always deliver that immediate protection during some sort of market event or volatility, but they have these longer-term statistical relationships. But this year has really demonstrated the resilience of having CTA style strategies in a diversified portfolio.

And it's something which I think we always talk about on the podcast and it's something we sound like a broken record. But diversification is the only free lunch and the way people and CCTAs allocate risk across markets really is paying dividends this year. It's a very active process. They aren't just selecting markets then having a static allocation. And I think that is where they've been able to add a lot of value.

Can I do a follow up on that? The importance of diversification, but also the point about resilience. What are your thoughts on the maybe “the lack of damage” that the yen intervention did for CTAs? What do you… I mean, because we've often seen some that something like that can really be the catalyst of something more meaningful.

But it was painful but not that bad. Any thought from where you sit?

Yeah, go ahead, Andrew.

Well, so, to me the fact that the damage wasn't worse was incredible. Right? I mean it was. I mean the yen has been one of the very best money makers. And if you looked at our attribution a few months ago, we had kind of big gains in yen, and big gains in, say, crude oil, and some gains in equities. But I think it did show this kind of bifurcated world out there.

Interesting for us is, again, when I see something like that because we tend to be, if something big idiosyncratic happens in the 10 markets, that I expect to be hit more. Right? And I tell clients, if everybody is long some dollar trade, the core of which is a short yen trade, and there's an intervention, in the end I expect us to lose more money. You should expect us to lose more money because there is some idiosyncratic risk in it as well.

And we didn't and we actually outperformed it. The damage wasn't nearly as bad and we actually outperformed over those few days. And I'm still not quite sure exactly why that is. I mean, we can see it in some of our trend models but I can't quite pinpoint exactly what was causing it. But I think that's part of what I think is the success of this year.

That's a nightmare scenario, like the war starting is a nightmare scenario, if you're long equities and you're long gold, but the saving grace was then, by that time, we were also long crude oil. This is one of those periods where flat has been the new up or stability has been so valuable over the past four or five months. Now you realize that I am taking a huge risk of jinxing it for every by saying this out loud on this podcast. But I do think it's been a terrific year for the space.

What's interesting just hearing you talk about it like that. I'm thinking well, Andrew doesn't trade many currencies but one of them he picked is probably the only one where you still see intervention risk showing up. So, that. Yeah, that's a gutsy choice. Yeah.

Anything on your side, Tom?

It hasn't really been something that's been that much… You haven't had questions about it. I think, obviously, there has been a very strong downwards yen trend which has contributed really nicely to P&L in portfolios. It reverted, it reversed slightly. People lost as a bit of pain. There would have been some risk management, but I think hasn't raised too many questions. I think there's a lot of other things going on in the world and maybe that's kind of part of the reason.

Yeah.

Okay.

Actually, can I ask a question for Tom on that because one of the things, and I think it's something we may talk about a little bit, is the non-trend strategies. So, a very interesting statistical quirk of July is that there are three kind of broad groups that we track. The SocGen CTA index is one. We consider that representative of the flagship hedge funds. Then you've also got two Morningstar indices, one of which covers the UCITS fund space, another one which comes of the US space. Both of those were up in July and the SocGen CTA index was down. And it looks to us like there were a couple of funds, within the SocGen CTA index, that had much larger than expected drawdowns in July. But is that carry trade that you're seeing, Tom?

In other words, was an unintended consequence of the yen, which was bad from a trend perspective, but if you've been loading up on carry to diversify away from trend, did you get hit with a double whammy?

I don't know. I'd have to do a bit of digging on that. I think we used to actually run a similar index. So, we had a CTA mutual fund index. And one of the only two kind of things we ever really observed from that index was that it had an unsurprisingly very high correlation to the main CTA index and to trend followers. But it seemed to have some structural kind of underperformance in terms of about 200 basis points per year, which I think was due to structuring costs and other things. But then there were often markets that couldn't be traded in these structures.

So, the only thought I have is that maybe, especially from a European lens in the UCIT space, commodities is something that is harder to access in a UCITS fund. So, the only thing I can think of was maybe those UCITS sort of CTAs were avoiding certain moves in commodity markets that maybe were dragging on performance in July.

Actually, let me add two things to that. Actually, it's a good point you mentioned about UCITS because, as some people may know, when you do trade commodities in a UCITS fund, it takes an extra couple of days to settle the P&L. So, Andrew, if you're comparing two specific days with big movements and you say, well, this is what happened in ETF land, or in the index land, and this is what happened in the UCITS land. Actually, that's a tough comparison if you do specific days, if there are big commodity moves, because it doesn't show up in the same time span.

However, to your point, I remember… do remember, a couple of years ago, over the summer, there was like a carry unwind situation for a few days in August? I can't remember if it was ‘23, ‘24.

Yenmageddon.

Right. And actually, when I looked at the UCITS space, so, I compared our UCITS with the kind of a peer group of UCITS, you could be right, Andrew, in the sense that there may be more carry going on in some funds. Not to say that they're not open about it. I'm just saying that it may be surprising that there are some funds that run more carry and not really pure trend and that causes differences when you have an unwind of a carry.

So, I think, years ago you had funds that were loaded with 2 and 20 down in the Cayman subs plus other funds on top. It was basically these were… I mean, you might consider them garbage products, and almost all of them have gone.

So, with AQR and Alpha Simplex and now Winton and others having kind of clean 150 basis point products, there's no spread anymore. That's why it was so unusual, in July, to see 150 or something basis point difference.

It'd be interesting to look. So, whenever we do an in depth correlation analysis like that where we're trying to compare specific periods, we actually tend to roll data up into weekly periods just to avoid time zone differentials and as you say, Niels, maybe some sort of settlement issue. And we do observe much more stable correlations when we kind of do that weekly data analysis.

Yeah.

All right, well we've talked a lot about performance but let's get to August performance and this is as of Tuesday night, yesterday, I think was pretty flat overall. So, the BTOP50 index was actually up 95 basis points so far in August, up about 9% for the year. SocGen CTA index up 58 basis points, up 8.74% for the year. SocGen trend up 55 basis points, up 8.50% for the year. And the Short-Term Traders index doing well up 1.08% in August, and up 4.3% so far this year.

In the traditional world. MSCI World, and this is as of yesterday, is up 3.31% in August, up 13.05 for the year. And then MSCI World eve, so without US and Canada, up 2.31% in August and up 12.34% so far this year. S&P US Aggregate Bond index is up 40 basis points ish for August, and up 6 basis points so far this year. And the S&P 500 Total Return up 3.46% so far in August, and up 13.19% so far this year. So, overall, actually both in the traditional and in the alternative world, CTA world, August is looking pretty good.

All right, so, before we get to our list of topics, we want to just touch on a question that came in from Jamie and this was specifically mentioned for you, Andrew.

So, Jamie writes, long time listener, first time writing in. I had a question for Andrew as, I believe, he has mentioned that he ran a commodity fund in the past. There are some newer active commodity funds that could be described by the technical literature as third generation funds. These funds take long flat or long short positions, are systematic and can use momentum and term structure strategies. I would be interested in hearing yours and Andrew's observation on how such funds are similar to and different from a typical CTA systematic trend following program, besides the obvious fact that they only invest in commodity futures. Sincerely, Jamie.

He mentioned a couple of tickers. I'll leave them out. But just overall thoughts, Andrew, is this something you're familiar with?

So, the business that I wasn't the PM of the business, I funded the business, I seeded it, I wrote the business plan and raised the initial money for it. But it was actually, it was the antithesis of it. They were all fundamental commodity traders. So, there were people who would make markets in fixed price natural gas futures contracts or forward contracts like somebody like John Arnold or Pierre Andurand etc. And it was actually to play against the CTA space.

So, I guess what I would say is I'm delighted to have a conversation with you. I’m a little bit familiar with some of the funds I think you're referring to, but please reach out to me over LinkedIn and I'll tell you everything I know, which may be wildly disappointing given the nature of your questions, but maybe I can at least give you some of the historical background as I see it, because that business has changed a lot.

That's an interesting career. First, you start by being against the CTAs and now you're with the CTA. There we are.

Well, because a lot of those markets were thinly traded enough. And again, what I liked about it is the information asymmetries in those markets were huge. And, I mean, a friend of mine ran Calpine's natural gas trading business. Well, you're running a natural gas trading business and the company you work for happens to own a lot of the combined cycle natural power plants in the country.

It gives you a kind of good insight into supply and demand that goes well beyond. And also there are a lot of asymmetrical… because you have the relationship to the physical economy, there are a lot of asymmetrical relationships. So, you move from hydropower to coal, there's a step function in cost. Then you go to natural gas, there's another step function.

I think this is what we would, historically, have classified as commodity enhanced beta in our cap intro world. And it's really a response to a lot of interest in commodities and the super cycle of commodities. But if you think back for a long time, just being long commodities was a very difficult thing to do. It was not profitable. Yet portfolio theory tells you these are great diversifiers and this is something that you should own during inflation.

So these products are really a response to that. Trying to merge together and blend strategies which, I imagine, are probably some things like some trend, some carry, some curve structure, sort of rolling down the curve to try and mitigate the roll cost of basically having to be long commodities all the time. So, you do get that profile, hopefully, of inflation proofing with some sort of performance that can basically keep you alive for when the portfolio needs to have this protection.

Point. If you look at the… we have this great chart of drawdowns across asset classes. The drawdowns in commodities, over the past 25 years, is 80%. Okay, like 80%. That's why there's this expression about, in commodities, you take the escalator up and the elevator down. So, I think people have always viewed commodities as… I mean, you think people worry about drawdowns in CTAs, and our max drawdown is sub 20% over 25 years across the space. I mean, you were talking about very, very, very different kinds of outcomes, which is why it's always been relegated usually to a very small percentage of people's portfolios.

Yeah. And the funny part about that statistic, Andrew, is that people still think of what we do as highly risky, that's the funny part.

Anyways, speaking of highly risky, you both brought up, or maybe I don't know if you both brought up, one of you brought up before the other, but kind of agree that that's an interesting place to start. It’s also a topic that we touched on last week and that is the Situational Awareness situation, if I can call it that.

Andrew, I think maybe it was you who brought it up and maybe it relates to… Yeah, well, anyway, what does it relate to, in your view?

Well, I think we always have these, at any point in these markets, you have kind of the prototype or the poster child or something. And here's a fund that, again, it's like an AI company. It's gone from zero, basically a few years ago, to being a US$20 billion fund…

US$45 billion actually…

So, zero to US$45 billion, it's a humbling number in a few years. I think it does point back to the fear of CTAs. I mean, the fear of CTAs is if there's a major whipsaw on the market and we all lose 5% in a week. I mean, it is so disconnected with how other markets move in terms of the magnitude of what they move.

So, here's somebody who is basically doing venture capital investing would look like 4 to 1 leverage, or something like that. And it worked spectacularly well until it didn't. But I think it points out, and I think this is something Tom can provide a lot of insight on, is the difference between borrowing money from somebody who is looking over your shoulder, making sure you have enough money to pay it back, and the instruments that you have supporting as collateral, where they can kind of force you to unwind it (which is what happens in this case), versus trading liquid futures contracts where, yes, you may have notional leverage exposure, but again, I'm not aware of a CTA in history going through what Situational Awareness went through.

So, before Tom jumps in, let me provide a little bit of context to that. First of all, by the way, I mean, you've had phenomenal asset growth, even though this guy seems to have had the accel growth of a Chinese magnetic train, that's for sure. But you mentioned this thing about the leverage.

And actually, one of my very first guests on the podcast, not the first one, but one of the very first, had long track record and actually a really good one. And then I think they launched a five to one version of it, or three to one, or four to one, or five to one. And that fund ended up going down something like 90%. Which, for the normal leverage it's just a 20% drawdown. Right? Completely normal. But that's what leverage does. Right? And I think they ended up closing the business following that.

So, yeah. But Tom, you probably see much more of these.

Well, I think Andrew's correct. CTAs, when you look at the notional exposures that can be taken, there is a sort of a misunderstanding or a mistranslation of leverage from equities into listed derivatives because listed derivatives have an inherent leverage from futures margin. But the CTAs that we work with, these are groups that are sort of experts in this field and it's something which they do very actively and, ultimately, they are a hedge fund, they are trying to hedge risk.

So, I think what was going on with Situational Awareness is sort of maybe an irresponsible use of leverage, but they definitely knew what they were doing. An investor in that fund must have known that this was the risk that was being taken with the portfolio - very concentrated with leverage. But what goes on in the CTA space in this derivatives is you've got an ability to size risk according to how an investor wants it and then the very careful control of that risk and the ability to exit that risk whenever they want. And I think this kind of feeds into the use of managed accounts, which is becoming a big theme across the entire industry, that investors are increasingly looking at ways to be much more efficient in the way they access markets and much more efficient in the way that they deploy their capital.

So, the SBAI have written a really interesting guide, I think last week, a guide to separately managed accounts. And they lay out the sort of the reasons why groups are doing it and they lay out the advantages and disadvantages of each of the sort of perceived benefits. So, you've got this kind of notional funding and capital efficiency of only having to pay margin. You've got the ability to cross margin across different instruments, and for multi managers you've gone and got the even more increased efficiency of being able to cross margin across allocations at the top level. And then you've got all these liquidity, transparency, customization and control benefits.

So, it really does seem that the trend of the SMA usage is going to continue growing and I think more and more investor types are continuing to explore it on a spectrum of kind of how direct and dedicated they are. So, you kind of start with this idea of managed account platforms doing a lot of the heavy lifting for you, and then you move along the spectrum to more dedicated vehicles and more dedicated platforms, to then going all the way to building your own platform or basically doing direct managed accounts yourself, which can be a heavy lift but has all those benefits.

So, let me just try and intersect something and then, or inject something, and then love to hear your thoughts on this. So, one of the things that came to mind was… Well, first of all last week we touched briefly… So, when I spoke with Harry Moore from AHL, we touched briefly on a paper that went back to look at the math of the Turtles. But I will say this obviously goes back to even before the Turtles to really the pioneers of trend following. Because what I think people feel that they brought to the table was this idea of the benefit of buying a 100 day breakout, or the 150 day breakout, or whatever.

But actually, what the paper suggests, from memory, and what I completely agree with, if indeed it does suggest it, is that actually it was probably much more about the risk management that they brought to the table. Not so much whether it's a 100 day breakout, or it's a vol breakout, or whatever, but it's the way they we manage risk is really why this industry is still around. And to your point earlier, we have seen very few blow ups unless you deliberately do a 5x version of your strategy, then you're probably going to blow up at some point.

But my question, and I want to hear both of your opinions is that we're now bringing back SMAs is coming back into vogue, it seems like, from what Tom is saying. They've been there in the beginning of this industry, then it became more funds, and UCITS, and easy for investors to invest in and all that.

Then we, on top of that, then we talk about capital efficiency and we see a lot of growth in the portable alpha strategies where we add “leverage”. And even though I've been asking the guests recently about why is it okay to add further leverage when it comes to these type products? And of course it's to do with the convexity of the things you combine and stuff like that. But still I wonder sometimes when we over-engineer things they don't necessarily become better with time.

And I was just wondering whether there is a risk, a little bit to our industry, that we are trying to become too clever, we're trying to design too clever solutions, so to speak, to all sorts of problems instead of just saying this is what we're good at, we know how to find trends, we know how to follow trends or whatever it may be. But let's not get too clever about how we maximize the efficiency of the capital and do this, that and the other on top. Any thoughts here?

Well, a point that I've been saying again and again, on this podcast, that relates to ETFs versus hedge funds and everything else is there's enormous heterogeneity of preference functions among investors. Capital efficiency is extremely important to certain investors. The ability to play a role in customizing something. There are vehicle preferences.

I mean certain investors, if we talked about it, they have a hedge fund bucket and they're going to add CTAs or trend to it, it's going to be in a hedge fund. It doesn't matter. So, in our world we're trying to find people who have vehicle preferences for ETFs.

So, I mean, I broadly agree with the over engineering point. I mean, you look at an industry for 25 years, that has had a lot of incredibly smart people working on more, and more, and more engineering and more, and more instruments and the Sharpe ratio hasn't budged. But I think there's two things, one is an investment decision, the other is a vehicle and delivery decision.

As you know, I mean our view is we don't need a lot of versions of what we do and it's not very efficient for us to spend a lot of time trying to think about customizing it. But on the other hand, if we can create different vehicles that help people because somebody's particularly price sensitive, well, let's come up with very low-cost products. If somebody needs UCITS funds, if somebody doesn't want commodities in their portfolios.

There are things that we can do at the margin to potentially expand the pool of investors. And I think the managed account is just that. I think you have institutions that are fundamentally changing how they think about hedge funds.

And I think over the past 15 years, we've seen mutual funds like AQR and Alpha Simplex and everybody else has kind of launched mutual funds that give you the same kind of exposure without the illiquidity and other constraints. You’re now see it in UCITS land, you're seeing it in the QIS world, and you see it in managed accounts and now ETFs.

So, I think it's just part of the natural evolution. Making the structure work, to me, is just very different from the over-engineering on the investment side.

Any thoughts, Tom?

Well, I don't think it comes down to over-engineering. I think it's if you go down the philosophical route of we want to be able to capture trends in as many different places and opportunities as possible, you need to be adding markets and you need to be thinking, how can we do that efficiently?

So, I think the use of leverage through futures and through instruments like futures is going to be something that continues and thinking about how investors fund their investments is going to be more important.

One of the things that falls out of using managed accounts is almost that you can get your CTA or your managed account allocation, sometimes, for “free”, without a capital cost. And this is kind of why portable alpha is so thematic at the moment, because it goes hand-in-hand with managed accounts.

If an investor has US$100, and they're thinking where they want to allocate it, as Andrew says correctly, you've got this sort of equity FOMO. So, they want to have as much equity risk as possible. Now, historically you had to take dollars away from that to invest in a fund. But what you can do now, with portable alpha, is very easily and efficiently overlay your diversifiers, your alphas over the US$100 of equities with the additional kind of US$20, US$30, US$50 worth of other things like CTAs. And that isn't something that you have to go and borrow money to do. It's something that you can do very easily via listed derivatives.

I completely agree with that. But it's also interesting to me that it's now in the last two or three years we're talking much more about it. I mean this is a concept that's been around for 30 years and so, why now? Anyways, let's stay with your world a little bit for longer, Tom. You mentioned in your note something about that you see a bifurcation occurring in the CTA world. Do you want to talk a little bit about that?

Yeah. It's something that we have really been looking at, how we classify CTAs. So, for a long time our broad SG CTA index has included all CTA strategies by which we mean systematic managed futures. So, this is strategies which have the predominant P&L drivers coming from active futures and FX trading. And an obvious kind of component of that is trend following. But it's not the only strategy that exists within CTAs. And something that we've been very actively looking at is how we classify CTAs to make it easier for investors to understand these strategies.

So, we've really split the CTA world now, in our systems, and how we think of CTA as CTA trend (which I think most people are pretty familiar with), and then CTA non-trend. And I think this is a period, now, where we're starting to see investors maybe starting to understand that a bit more. I mean, trend is a very accepted and understood term. It’s kind of a term which is thrown around hand-in-hand with managed futures and CTAs. But I think we've got to a point where a lot of investors will have CTAs as a core part of their portfolio.

Now it's maybe not as big a core part as Andrew would like and I think when we think about modern portfolio theory and thinking about an efficient portfolio, the allocation to non-equity things like CTAs should be a lot higher than it ever is. But trend is increasingly dominated by large established CTA groups. These groups are typically multibillion blue chip hedge fund managers and it's very difficult to break into that market.

Successful new entrants really have to disrupt and typically that is around something like being a commodities specialist or operating in alternative markets which I know we're going to talk about a bit later. So, trend is kind of fairly vanilla but non-trend is really a lot less uniform. There isn't any definition of what non-trend is, it's just not trend following.

Short term CTAs have always been and continue to be a really challenging space. We've had this year, we've had Quest returning capital, and only really, if you think long-term, of a billion dollar group, as Crabel, as a group that's managed to survive outside of the shorter-term space. I think the non-trend CTAs are becoming increasingly niche or starting to blur the lines with kind of quant multi strats.

So, that's groups that deploy capital across multiple strategies with one centralized research function across all asset classes, maybe including single stock equities. And I think this loops back to SMAs because there's an increasing number of specialist managed account investors who are very happy allocating to high Sharpe, low capacity strategies. I'm thinking of groups like multi strats, or the new kind of evolution of fund-to-fund groups, where they have the expertise and knowledge to access these strategies and they're really interested in something that adds diversification to their portfolio.

Can you break down when you talk about non-trend, I mean, what do you think about? Can you describe like three or four classic examples of trades, in very, very concrete terms, that you're referring to?

So, we would probably class, of the three obvious groups that stand out is short-term. So, this is, as a trend follower, typically looking in sort of weeks to months if not longer. And so, we classify short-term as anything with an average holding period of two weeks or ten days and less.

But it's trend.

It can be, it can be. I think trend or breakout forms a part of that. But then there's a whole lot of other stuff going on. And what we have typically seen is that it's really parameter dependent. So, as soon as you change a parameter by a tiny amount it completely changes the way that the portfolio comes out.

So, you've got short-term. I think we have then more kind of fundamentally driven or what we might call systematic or quantitative macro is a classic kind of area of focus as well in the non-trend space. So, these are groups where they're digesting more fundamental forward-looking market data versus a trend follower which is maybe looking at more historical technical price based data.

That for me was an area that was obviously going to grow five, ten years ago, but surprisingly didn't. It's actually been an area where we've seen a lot of groups go out of business. So, I was expecting trend following to be a reducing strategy and quant macro to be a much more obvious area of growth for many years. Happy that I was not happy that it's been proven wrong.

And then, I suppose, the third obvious group is then commodities. So, a quantitative group, maybe relating to some of the ETFs that we spoke about earlier, where they are taking advantage of a lot of factors across commodity markets, maybe that directional or relative value.

I couldn't help noticing that you, in your description… I think the description is correct in terms of what the narrative is like where you say, yeah, trend is becoming plain vanilla. And I'm thinking, I think there's a lot more that goes into being a trend follower than plain vanilla. And, actually, the risk, the reason why I want to highlight it and kind of resist that narrative is I feel that there is a risk that people will get to the point where they say, well, trend, it's all the same, I just need one. Or it doesn't matter who I pick, I'll just pick the biggest or something like. And I think that's just so far away from the truth.

And I just see a little bit of a risk once we start describing trend as something that is plain vanilla. Even though, of course, they're also for competitive reasons, people who would like it to sound like it's plain vanilla. And then they say… There was, I think they're still in business actually, so I don't want to necessarily mention them by name, but there was a firm, a few years ago, that came out saying, oh, we can do this trend stuff for 50 basis points. And they raised billions of dollars very quickly. And then it all went the other way. And that program, probably, if it still exists, it's very, very small today. So, I think there is a risk about that.

So, maybe I should restate - maybe not plain vanilla. But I think the concept of trend following, as a portfolio element, is now more broadly accepted than it was maybe 10 years ago.

Sure, that's absolutely fine. It's just that I think, actually, also you're right in the sense that people may think about trend as something that's really simple and plain vanilla.

But anyways, I think the next topics that you brought along, Andrew, kind of touches on some of the stuff we've already talked about. I'd love to dig into that. So, why don't you kick off with the non-crisis or all weather alpha type.

Well, look, I think, to pick up the discussion, I don't think that the drivers and returns of CTAs are that complicated at the end of the day, from my seat. When you sit down with a serious hedge fund manager, and you're talking about an investment idea, it's not just whether you think something is cheap, or interesting, or going to grow, there are a million smart people out there. Why aren't they capitalizing on it?

There's this running joke about two economists who are walking down the street and one of them sees US$100 bill and goes to pick it up. And he says, don't bother. If it was there, somebody would have picked it up already. Right? And so, there's this kind of assumption that the best opportunities are because somebody has handcuffs from an investment perspective where even though they're smart and they met at the area, they somehow are not able to capitalize on it. And so, my conclusion about trend following (and I hate the term because I don't think it's about being late into a trend. I think it's about being very early into a trend when the signs of a trend begin to emerge), I think it's because the reality is that most investors (I mean, we're in this talking about a tiny, tiny, tiny, tiny subset of the overall investment world), you go out and you talk to somebody who's running a sovereign wealth fund, or a wealth management portfolio, or putting together asset allocation recommendations at an investment bank, the portfolios don't move. I mean, they just don't move.

And so, thematically, most investors, although you get a lot of noise (it's a little bit like politics where the loudest and most active people kind of get the most attention), yes, of course, the 2x leverage, this, the 3x leverage Nvidia fund that's going up or down, that gets all the attention. It's still a tiny, tiny, tiny, tiny portion of the overall universe. The overall universe are things like 60/40 portfolios that don't change or change minimally year to year.

And so, I think what this space brings, and why it's an all-weather solution, is that there are always things that are changing outside the range of expectations of those big model portfolios, those strategic asset allocations. And human beings are just not very good at capitalizing on it. We're too emotional.

And one of you was talking about introducing risk management and a rules-based approach to things. It's very hard for a human being to say yes, but all time looking at this opportunity and I started buying it at US$100 and it went up to US$110. And then all of a sudden it goes down to US$97. And I'm just going to sell everything and walk away and look for something new.

Like it's very, very hard for humans to give up on their favorite ideas and their best ideas. The inclination is I'm going to hold it. And that's where you get this white-knuckle grip. And you can end up losing much more than people end up expecting.

And so, the cold rational way in which this industry hunts for these big unexpected changes that are going to happen in the market and then ruthlessly gets out of them when they're not working is a money generating activity, an alpha generating activity that can function over the last year where there hasn't been a crisis.

So, you could be up 23% over the course of the past year because people were wrong about Liberation Day resulting in a global economic slowdown and a 20% or 30% decline in equities. It was the right thing to buy them, even if that was very much of a FOMO trade.

It was right to be long gold until early this year, and it was right to get out when they did. And it was right to start buying crude oil early on. So, I think in that context I think there really just needs to be this narrative reframing timing in the space and I think the language around trend is just not that helpful because it's a compliment. It's a completion strategy for something that you, as an allocator, don't do well, which is the time the markets.

Well. I think you also had a question for Tom, if I don't misremember, something about whether allocators still rely on the crisis alpha pitch in the evolution in the thinking.

For a period that was definitely something which CTA marketing was led with, wasn't it? And it obviously worked well. But I think it upset a lot of managers because that isn't what they're trying to achieve. They're trying to achieve long term portfolio gains. They're trying to realize a statistical relationship that shows that, yes, historically CTAs have delivered outsized performance and protected portfolios during crises. But there seem to be two things that go wrong with that.

The first is that investors continue to expect it to always be a case. And so, they get increasingly upset when it doesn't always protect, especially in shorter and shorter time frames. You might see markets down for one or two months and investors suddenly start to ask questions about why these things they thought were crisis alpha aren't suddenly delivering 10%, 20%. Well, surprise, surprise, equity trends were very strong up until this point.

So many groups will have been long those assets, and it takes time to re-adapt portfolios but it also takes time for new trends to emerge that maybe will be complementary over the medium to long-term and provide significant portfolio benefit. Now, I think more usefully the rhetoric has maybe changed to more be RMS. So, this is kind of a concept of risk mitigating strategies.

But again, as we said Niels, it's nothing new. These aren't new concepts. This is simply adding things that diversify your portfolio and trying to build an all-weather solution that has a balance of things that are going to benefit during growth periods and also which can have protection and generate interesting performance during less interesting periods for equities and go through cycles.

I disagree with that in that if you look at the past 25 years, the SocGen CTA index, it's on cash plus 250 basis points net of fees and expenses. And so, if you start with the assumption that every 8 or 10 years you're going to have a 20% return in the strategy that almost by definition means in every other year you're earning cash. The framing it of a crisis alpha was also something that took off when they weren't delivering returns in other periods, the overall space.

And so, when we looked at this phase 10 years ago, the only way you solve that and you turn into an all weather portfolio is by bumping the Sharpe ratio so that over that 10 year period, you're not doing cumulatively 20 points over cash, you're doing 40 points over cash. So, then if I'm doing 200 basis points over cash in years one through eight and 20% in year nine, now you have something that actually now fits as an all-weather solution because if you're being paid to wait for that period of time, it's very different. So, I don't think it's just that people don't understand the concept or are framing it in the wrong way. I think it's a Sharpe ratio issue across the overall strategy.

Well, I think we would have to sort of do a proper analysis of the CTA index. I think it's something that Niels has brought up before. I think about half of the funds or strategies that report their performance to us for the indices are some sort of composite of a managed account, so they won't include a cash rate.

But I think your broad point does make sense in that there's something going on that they haven't been delivering quite enough during certain periods. I do think that the reason a lot of investors continue to look at these types of strategies is because they are interested in the broader portfolio benefits that they can provide across all scenarios.

And I don't know if you maybe have anecdotal evidence, but it'll be interesting to think how many investors do mis-time CTA investments and therefore come away with a bad experience from an asset class which, or an asset group which should be very additive to portfolios, but they just happen to be interested in an invest at the wrong time and therefore walk away and never want to come back.

And I can't remember all of them, but there are like three reasons. One is that it's unbiased. The other thing is it's highly liquid so we can change exposure in no time. And it's opportunistic. But don't take my definitions as anything. Katy has a much better, clearer definition of it.

But I agree, I think it's wrong to sell it as a crisis alpha strategy, I don't think that's the right. I've kind of forgotten some of the points I wanted to say.

Well, I mean, crisis alpha is a great term, right? It's a, it's a very clear, very concise term and it's what people want. But I think that, again, and Tom, your point about how much of the cash returns of the SocGen CTA index or how much of cash returns are not included in SocGen is a great statistical point that I'd love to know the answer to that. But I think that people are… And Tom raised the question about how do people mistime the strategy?

At least looking at US mutual fund data. Yes, people do. People tend to buy. But that's true of everything in the US mutual fund space. I mean, something goes up a lot and I'm sure…

So, by the way, going back to Situational Awareness for a second, we don't know a lot about the situation. Unless you've read articles or something that I haven't read. When somebody says it was down 67% in July and was only then therefore up 80% for the year, that's a very weird sentence for a US$45 billion fund.

So wait, I'm sorry, so through June you're up three hundred and something percent and you gave back the third of it in July and you still have Anthropic as one of your principal investments. But my point is somebody mentioned that a lot of the money may have come in this year, when they were already up 200%. And they may have been the fresh money coming into ARK just before ARK ended up getting crushed.

But I think this sort of broader idea of what is the right return stream that people should be looking at to decide whether to include this in the portfolio? The SocGen CTA index, to me, is the gold standard from an index perspective. And yet it still has this limitation that, as interest rates have gone higher, if a lot of the funds are not reporting their cash returns, that is a hit to the returns of the strategy over time.

I think what we need as an industry is a way for an allocator to very simply say this is what I'm buying, and this is what I expect to be my returns over time, this is what I think it's going to do, how it's going to contribute to the overall Sharpe ratio and efficient frontier of my portfolio, and then have a clean and consistent way of doing that, which, I think, so far people have struggled with.

Can I ask a question here? So, Tom, one of the things I've been thinking about, because I see a lot of managers who come out and say, oh, I beat the index. Okay, well, we're kind of expected to beat the index, in my opinion. So, the way I think about the index, and maybe there are no other ways of doing it, but if you think about the index, especially say the trend index of 10 managers, they're all very big. And the way I think about it is that, from time to time one of these firms starts to underperform but it takes a while before the AUM goes down, so they get replaced by someone else.

So, you get all the negative performance in the index, but the one you've replaced them with is usually a fund that has grown in size because they've done really well, but we don't capture that positive lift anywhere, so to speak. And then once they get to a certain size, US$4 or US%5 billion, they're in the index and who knows what their performance will be suddenly at US$5 billion compared to what it was at US$500 million. And maybe there is just no way to deal with it. But my worry is a little bit that the index is always being slowed down, to some extent, because a manager who's in the index is not having a great time, but the one who potentially replaced that manager, we're not capturing the positive side of that performance.

Yeah, it makes sense. And I think you raise a really interesting point. Your first assumption is we should expect to beat the index. Is that true? This is an index composed of the 10 largest, most sophisticated CTAs in the industry. So, thinking of these hedge fund indices in the same way we think of equity, like an S&P 500, is fundamentally different.

Well, let me give you a little bit more clarity. I think that if a client was looking to invest with us, for example, they would expect us to beat the index. I don't mean every year. I mean, just generally we should be outperforming over time. I think that's…

See, I would challenge that assumption because I don't think…

I mean, that would be great if we can lower the bar a bit, that would be fine.

I think you're dealing with a different type of index. It's an actively managed index. It's an index of active managers. It is not a passive benchmark in the same way that the S&P 500 is for equities. So, I think you've got that. Although the S&P 500 probably suffers from the same issue of bias.

So, this is something which we really do have to tackle with investors of when they look at the index and then they think about, well, those funds have done very well, or why isn't your fund done this, or why hasn't a multi manager blend of funds beaten the index? It is very hard to do.

Well, we wouldn't always have the data going back as far as we would want.

No, no, fair enough.

There's going to be a natural kind of period when it stops. But I think Efficient Capital does a very similar exercise and they compare the return characteristics of those back-filled vintages and it is significantly better than the live sort of walk-forward index.

Okay.

We've run the numbers as well, obviously, because we're very interested.

So, first of all, SocGen does what I think is analytically correct, in January they take somebody out and they add somebody and they're not going back… In the early days of hedge fund indices people would go back and say let's change all of our numbers going back...

Yeah, you backfill everything.

You backfill everything. That's like a cardinal sin from a statistical perspective. But it was also that the original hedge fund indices were built to also promote the hedge fund industry and they competed with each other on the base of performance. So, there was a lot of dumb things that happened.

And in fact, if you look at Sharpe ratio (and historically the index has had a somewhat… has had a strong Sharpe ratio, an above average Sharpe ratio because of diversification of single manager risk), the index comes into the 35th percentile. So, what it does is, from an allocator's perspective, fund selection looks easy when you look at the 20. 17 of the 20 look like they're above average.

And what I think it does, in sort of an insidious way, is that people underestimate single manager risk in this space. And there have been some papers that I've read over time that said you shouldn't look at the index data. And they point to three funds that have crushed the index over the past 20 years and say, look, see this is why you should be looking at single funds rather than the index. And I think that's just… But I want to be very clear, I think from a SocGen perspective, they're doing what is exactly right analytically.

But look, I think this is the challenge we will face. I think what it does over time though is you get people who pick a manager. They think the manager is going to basically give them the SocGen CTA index plus 200 basis points. So, every quarter they can look at it and show, look, I would have been really happy owning this over the past 10 years. And that doesn't happen.

Then I mentioned this kind of weird statistical thing with the SocGen CTA index and maybe timing or other delays factor into it, but it looks like some managers in the space did really surprisingly badly in July, which was overall kind of an okay, a decent area for the space. And so, that's where I think there are all these kind of complicated issues on the alligator side where they're trying to get this right. They're trying to get this right and they feel like they keep kind of like stubbing their toes or stepping on landmines in the process.

This is where I think there's an interesting role for either the diversification across managers or the use of multi manager solutions which potentially have a lot to offer and often use these managed accounts, which we spoke about, to access them very efficiently.

Well, and I'm sure efficient people are saying why would I invest with you when I can invest with these seven guys who have done much better?

And they're saying, well, if you'd known they were going to be so great 10 years ago, go back 10 years and invest with them. Which is why we do the work as well.

Yeah. I mean, oddly enough, I remember I think Harold over at Transtrend writing a paper, at some point, and I tend to agree with him. I mean, I don't think any institutional investor would just select one CTA and say, oh yeah, I've done my homework. I don't think they do that in reality. They should pick two, or three, or four. And I think when you do that, when you run most analysis and you've picked two, or three, or four, and if I'm asked about it, I would say pick two, or three, or four, that are structurally different. Right? They're not all the same.

I agree with you on that. I don't think investors are trying to pick three or four which are going to replicate the index for them.

Right.

I think they are very aware and cognizant of the issue that is presented to them and they are trying to pick three or four which have different characteristics.

Yeah. And I think if you do that and you run most numbers, you'll be fine. Anyways, we've gone along a little bit already. Now, there were more topics that were brought up. We certainly have another five minutes if we want, if there is anything either of you want to really bring up, let's do it. But we probably want to wrap up in about five minutes or so.

Anything on your side, Andrew? I know it was your topics that we were sort of going through the list here.

I would love for somebody to really dissect this trend versus non-trend because again, obviously, we're looking at the overall space which is supposedly a trend versus non-trend. I don't see the non-trend stuff as big drivers of performance over time. I see them as satellites to the core driver.

We've looked at a lot of short-term models and we've looked at a lot of the questions speed. We always come to the same conclusion. It's a zero Sharpe ratio exercise. It looks great on a graph because it looks like you're going to get in something earlier and get it out later. But that ignores the fact that you get kicked in and out of these trades, and you over trade all the way up, and you miss a lot of the benefits of it. When people talk about including carry and things like that, again, I forget exactly when the SocGen CTA index, trend subindex, was created but if you look at that versus the broader index, over time, it's like it's the same Sharpe ratio. Right? It's not… I don't see the diversification benefits of adding in all this other stuff.

So, I guess I'd be curious from your perspective, Tom, if you had to say like, when you look at the broad index, how much does the non-trend stuff really matter in it?

I agree with you. It's something which doesn't sit as a group and is complicated to decompose because you haven't got this sort of consistent risk factor that they're all trying to capture.

I remember one CTA telling me that they'd done a lot of research, probably similar, and it kind of sounds like it mirrors what your experience is in that the product that we're trying to build and the product we're trying to give to an investor, longer-term, just is better in general. But what they're trying to create is something that an investor can hold and present to an investment committee over different periods. So, adding shorter term strategies definitely smooths out the return profile during volatile periods which I think maybe goes a long way in explaining why people try and add these shorter-term strategies in.

And so, I think part of what you've seen, at least in the US mutual fund and ETF space, is people saying, all right, well maybe I'm not getting compensated for… maybe I just have to kind of accept that there's going to be a little bit more volatility. If I want to be able to have this be an all-weather solution, that's going to give me enough returns over time, that I can't worry as much about small inflection points.

Well, time will tell. We'll see. Anyways, this is great discussions. Thanks so much for bringing up and bringing with you some really important topics. I really appreciate that.

Before we wrap up, let me just remind the people listening today that we did, a couple of weeks ago, we had Rich and Dave Dredge on. It was a very long conversation, very important one I thought. And at the end of it I actually mentioned that people could win some TTU merch, namely the same vest that my prestigious panel of co-hosts are wearing from time to time. Not today though, but in the wintertime they generally dress up for that. And I have a couple of these very unique vests that I’d like to offer as a little incentive for people to go and leave a really nice review of the podcast and show the appreciation to the co-host.

But in order to do so, and in order for me to know that you've done it, you need to send me an email to the usual, [email protected] with a copy of what you wrote and then tell me where you wrote it - which platform you left it at. That offer is still out there and we will leave it until the end of August before we choose the winner.

Anyways, besides saying thank you to both of you, Andrew and Tom, I was going to say, next week I'm joined by Rob Carver. I'm not sure it's Rob coming. I think he's on holiday so I completely forgot to look up who's joining. So, that'll be a surprise for not just me but for anyone listening today.

But if you do have some questions for the next guest whom we don't know who will be, then by all means send it to [email protected] and I'll do my best to bring it up.

That's it for today from Andrew, Tom, and me, thanks ever so much for listening. We look forward to being back with you next week. And in the meantime, as usual, take care of yourself and take care of each other.

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