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- [00:00]
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Marin Somerset Webb
Welcome to Marian Talks Money, the podcast in which people who know the markets explain the market. I am Maren Somerset Webb, and this week I am speaking with Simon Judes, who CIO of Winton. Now, Winton is a quantitative investment management firm, headquarters in London, but with offices around the world. The Firm manages around $16 billion worth of cash, mainly for institutional clients, but I think increasingly with an idea of having ordinary investors and wealth managers buy their products as well. So we will talk about that along the way. Simon welcome to maritalks Money.
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Simon Judes
Thank you very much for having me.
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Marin Somerset Webb
Right, let's start by trying to explain what on earth it is that you do. We hear a lot about quantitative investing. We hear about cta, we have all those kind of mod models, systems, et cetera, et cetera. What is it that you actually do?
- [01:08]
Simon Judes
Well, let me talk about quant investing in a more general term, and then I'll come on to CTAs in particular, which is one type of quant investing. So the way to think about it is imagine you start off with a more traditional style of investment where perhaps you have analysts thinking about a company and whether they should buy shares in the company, whether they think the company is likely to do well. That would be something that a lot of effort goes into a lot of discussion. And if you want to make that decision not about one company but about 10 companies, you need to have 10 times as much discussion. And that leads you to scale those organizations quite heavily and to focus on having a small number of positions that you have a high conviction in. That's how traditional investment works. And quant investment is based on a different idea, where you say, well, maybe we don't have to have that high conviction in every single investment if we can have a larger number of them. So it's a little bit more akin to how an insurance company might treat its products. It doesn't have to make money on every single policy it sells as long as it arranges things so that on average it does so the idea is, well, what if in instead of doing all this huge amount of analysis on each company that you decide to buy a share in, you instead come up with a rule that is perhaps much simpler and it's something that's so simple that you can automate, you can get a computer to do it. So suppose that you look at some valuation metrics or something else about how the company's performed recently, and you decide based on that, you will have a position of a certain size in the company. And that's something that you can get a computer to do for you. And you can do that with a much, much larger portfolio. Now, that might sound a little bit speculative. Could you know that following a rule like that would be a good decision for you in the long run? And the reason that you can get confidence in that is because you can do something that you can't do in the more traditional style of investment. What you can do is a back test where you take that rule and you test how it would have performed over a much longer time horizon. And that is what gives you confidence in quant investing, that this is going to be a good rule for you to follow. And if you think about what that then looks like, it means that when you are allocating money as a quant investor, you're not allocating or you're not really thinking directly about each individual investment. You're thinking about allocating to these rules, these ideas or algorithms that are themselves going to decide which companies they buy and which companies they sell. So that's the general idea of quant investing. It's the difference from more traditional styles of investment. And that's how you can get confidence, by doing these historical studies which show you how the rule would have performed.
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Marin Somerset Webb
How does that work with the long term idea that every time an anomaly or a gap in the market like that is found, it's almost immediately traded away?
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Simon Judes
That's a great question. You definitely see with many types of rules like that that they work for a while and then you can even see in this back test that they gradually start to work less and less well. And that almost certainly is always because many more people are doing it. So what can you do about that? Well, the first thing you can do is that there are some ideas which don't have that, that fall off in a way. Perhaps they're not based on discovering a simple trick or arbitrage which once somebody else has discovered it, it will just stop working. They might be based on more general behavioral biases that people have. And that's really where CTAs and Momentum and trend following are going to sit in this way of thinking about it.
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Marin Somerset Webb
So there's two types of rules that we might follow here. One would be purely numerical, statistical and the other might be behavioral.
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Simon Judes
Well, even the behavioral ones we would still measure through data. They would still be measured through the way that either prices or other sorts of data we might use are behaving. So they're still encoded as systematic algorithms that take in data, transform it in some other way, and then come up with a rule for how you trade. So I think those two things might end up being the same. But the second way, I was going to say that you can combat that, people call it alpha decay, where the idea stops working is by doing a lot of research and continuing to find new ideas, and that a big component of our activity as well.
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Marin Somerset Webb
Okay, so there are still new ideas to find.
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Simon Judes
Absolutely, because there's new data all the time as well.
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Marin Somerset Webb
All right, can you give us an example of a. Of a new rule?
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Simon Judes
Well, that's why you might be infringing in.
- [05:15]
Marin Somerset Webb
Okay, you don't want to do that because it's proprietary stuff. And this is one of the problems, I think, that retail investors often have with this type of fund, is that they're told the theory, but it's not possible for them to be told the practicalities, because that's your model, your proprietary data. So why don't we go back a bit. Maybe you can give us an example of a rule that you use that once worked and doesn't anymore. That way we're not infringing on your corporate knowledge.
- [05:39]
Simon Judes
Well, I think we can do better than that, because in the CTA space, actually, which is a particular type of quant investment, the basic idea of how we come up with the trades is quite well known, and it's something we can talk about very openly. So CTAs are a particular subset of quant hedge funds which apply that same philosophy that I was talking about earlier to macro markets, primarily through trading futures. So they're trading equities, they're trading bonds, they're trading currencies, and they're trading commodities. And predominantly the way they're doing that is by looking at recent price momentum. So the things that have gone up over some recent period, you have a long position, and if they've gone down, then you have a short position. And that is the algorithm. It really is looking mainly at recent price behavior.
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Marin Somerset Webb
Okay, so you've got a fundamental. That trades in futures in all the asset classes based on the direction prices are already going, with the idea that you can spot where the turn will come.
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Simon Judes
No, we can't really spot when the term come. That's. That's very hard. It's based on the idea that if the price has been going in that direction, that is more likely than not to continue going in that direction.
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Marin Somerset Webb
Okay, so you've got to have an awful lot of positions for that general rule to work.
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Simon Judes
Yes. You need, you know, more than 100 really, to get the benefit of the diversification. Because like I said, in general with quantum investing, you don't have very much conviction in any one position. So I'm slightly suspecting at some point you'll ask me what gold is going to do next, for example.
- [07:06]
Marin Somerset Webb
Not yet.
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Simon Judes
That's coming. The answer is I don't know. When the question comes, I don't know. But we believe that there's a greater than 50% chance that it will continue to go up, which is not saying very much. But as part of a large portfolio, it's still a very valuable thing to do.
- [07:23]
Marin Somerset Webb
Okay, before we move into cta, what does CTA stand for, by the way?
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Simon Judes
It sounds for Commodity Trading Advisor, which is. It's a regulatory term from the 70s in the US so it doesn't have very much.
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Marin Somerset Webb
The words don't really mean anything anymore. The acronym means something, but the words no longer mean anything.
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Simon Judes
Correct.
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Marin Somerset Webb
Okay, let's go back to the pre CTA conversation about the different rules and valuations. I am actually really, really keen to nail you down a little bit on the kind of thing that you. When we, when we talk about all these different rules, all this different diversification, different models, et cetera, for the purpose of the retail investor who is not, not used to this kind of fund and is used to more of traditional equity funds where we're talking about, oh, we're doing growth and this is what growth means, and we're doing value and this is what value means. And we're doing growth at a reasonable price and that's what this means. And we're doing tech and that's what this means. We're doing mining, that's what this means, et cetera. This stuff is easy to get a handle on, but what you do is, is not. So a neat little example of one type of strategy model, valuation metric, et cetera, that works or has worked for you would be super handy.
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Simon Judes
Absolutely. I think value is a good one to focus on. So if you think about traditional value investors, Warren Buffett, Benjamin Graham, this kind of thing there is.
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Marin Somerset Webb
We take issue with that one. Warren Buffett and value investing come back to that, maybe.
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Simon Judes
Well, think of somebody who's doing a lot of effort into assessing a company and deciding if the Current market price represents good value. So maybe if that's a way.
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Marin Somerset Webb
And that now describes every single investor there is, because no one buys something which they don't think is good value. Even a growth investor, if they're paying 70 times for something, will think is good value because they expect it to go up. Right?
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Simon Judes
Absolutely.
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Marin Somerset Webb
Same thing. Same thing.
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Simon Judes
A lot of people would fit themselves into that way of describing things. And now imagine, instead of putting a huge amount of effort into each company, into looking at what the management have said, into looking all over the balance sheet, into looking at the drivers of the company's profits and so on, and working out what the price should be. Imagine that all you do is you look at the price to earnings ratio of every company that you can find and you just rank them. And you just look at the ones that have lower than average and the ones that have higher than average price earnings ratios, and you just decide to go long the ones that have lower than average PE ratios and short the ones that have higher than average. That is an example of an algorithmic rule which in and of itself is not very sophisticated or clever, obviously, because it doesn't involve any interesting analysis of what those companies are doing. It just takes one piece of data per company and updates it roughly once a quarter, depending on how often these numbers are updated.
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Marin Somerset Webb
Okay, so it would rebalance once a quarter. Generally speaking, yes, exactly.
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Simon Judes
So this is an idea that many people have traded for decades. It doesn't work that well anymore as well as it used to, and many people have adopted more sophisticated tweaks on it. You know, perhaps you don't just rank every single company. Maybe you look at the ranking of a company within a sector. Maybe instead of looking at the trailing earnings, earnings, you look at analyst forecasts of earnings. Maybe you try to forecast what the next earnings announcement will be yourself. There are lots of ways to make the idea still quantitative and systematic, but more sophisticated than that original base idea. But ultimately, what they're all doing is something that is much less in depth than what a traditional investor would do to assess whether a company is good value or not. And on the flip side is that you can do it very easily for a very large number of companies. And you can backtest it through history and you can see what following this rule would have done.
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Marin Somerset Webb
Okay, so you can do all that and you have maybe 100 different strategies running in a, in a fund. You said earlier it varies.
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Simon Judes
We have different products. So some of the, the CTA products, for example, are really based around the properties of momentum, of trend following on macro markets. And there are good reasons for that because that has a specific function for investor portfolios, which we can talk about. Other products we have combine a much larger number of different strategies where we're really trying to benefit from the diversification you get from a large number of different ideas.
- [11:22]
Marin Somerset Webb
This sounds to me like the kind of thing that AI would be remarkably helpful for.
- [11:28]
Simon Judes
AI certainly is helpful for us. It's not something that's extremely new. In a sense, it's the latest example of a fairly transformative technology or set of techniques. It probably wouldn't surprise you, given that we have a huge technology component to our business and the people we employ are people with backgrounds in software engineering and sciences and so on, that this has always been something that's very important for us. And before AI, it was machine learning and it was alternative data and it was big data and it was cloud technology. And it's very important for us to keep up with the way that all of these ideas develop. And certainly the recent developments in large language models have been very helpful for us.
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Marin Somerset Webb
Yeah. Does it make everything move faster, faster, faster, so the edge that you might get from each new idea is removed much, much more quickly?
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Simon Judes
Well, to some extent. I mean, there's a general truth in investing that nothing ever totally transforms the business because at the end of the day, if everyone discovers something, then its value reduces because ultimately there's a certain number of dollars to be made out of a given idea. The more people that do it, the more they have to share it. But that doesn't mean that you can and just not follow it. You still have to do these things.
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Marin Somerset Webb
All right, let's move on to what I know you really want to talk about, which is the CTA stuff and the trend following funds. Explain how that works.
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Simon Judes
Yeah, absolutely. So this is a quant strategy that trades the macro markets primarily through futures. And it has a particular role in investor portfolios, which has always been there. But it's become increasingly important really, since 2022. There have been other moments as well where investors have become particularly interested in CTAs. The financial crisis was one particularly where equities obviously fell a lot and lots of other asset classes did poorly. And people started to look around for what things had done well. And at that time, the two things that had done well were bonds and CTAs. And so there was a big surge of investment into both of them after the financial crisis. And then in 2022, the remarkable thing that happened, which is a headache, not just for the retail investors that you mentioned, but actually for all investors, is that bonds and equities fell together for a year. The reason this is a problem is because a lot of allocation philosophies had relied on the idea that bonds could provide diversification to equities. And that wasn't a crazy idea. You'd had a 20 year period leading up to there where bonds and equities were negatively correlated. And, and not every time, but pretty much every time stocks had gone down, bonds had helped, as they did in the financial crisis.
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Marin Somerset Webb
So the traditional 6040 portfolio worked for everybody for a very long time and then suddenly kind of stopped working.
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Simon Judes
Exactly. And in fact, it didn't have to be 60 40. Any reasonable combination of bonds and equities would have performed extremely well over that time period. And then that diversification disappeared, really starting in 2020, the correlation flipped to being positive, which meant that the potential for them both to go down at the same time was there, even if it hadn't actually happened yet. But then in 2022, that potential was realized and they both did go down together. And that really drove home that you can't just rely on bonds to be your diversified equities. And so people started again looking at CTA strategies, which had done very well that year. So why is it that CTA strategies provide this diversification? There are basically two reasons. The first reason is that among the futures markets that they trade, there are a variety of things which are very uncorrelated. Exposures are things which are quite difficult for people to benefit from otherwise. So an example of that would be, for example, the big rise in the price of cocoa, which took place in late 2023 and early 2024, and then subsequently the big drop in the price of cocoa that's happened in the last few months. That's a trend that you can benefit from by trading the futures markets. But it's very difficult to get that exposure through stocks, for example. So that's one reason. The other reason that you can benefit of a lot lot from CTAs in a portfolio is that because they trade. Futures markets and futures markets have this amazing property that it's just as easy to be short as it is to be long. You can benefit from short positions in the major asset classes. It's just as easy to maintain a position that's short equities or short bonds as it is to be long equities and long bonds. And so trivially, in a year like 2022, the strategy is short in those asset classes, and it does well.
- [15:42]
Marin Somerset Webb
So that was a good year for cta. That was a period when the assets that you hold kind of peaked. Right. So that there's. Winton as a whole manages less money now than it did at its peak. What's driven that is that because people looked at the successes in times like that and then go, well, since then, long equity has been marvelous, very easy to make money. And why do you need to mess around the edges?
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Simon Judes
Oh, our peak was at a different time from that.
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Marin Somerset Webb
Or was it. When was it a bit earlier?
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Simon Judes
Yeah, well, in 2016. But I think there's. There's the peak of a single manager, which has more to do with what's going on in that organization. But the peak of the industry is a different question. So in terms of how much people are allocating to CTAs, it's a little more difficult to tell because some CTAs are public, like we are. Others are offered through products that perhaps banks offer. And it's not publicly known how much is being traded there. But what we're certainly seeing is that the interest relates strongly to the performance of the strategy, as you'd expect, of course.
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Marin Somerset Webb
Okay. And the performance of the strategy long term?
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Simon Judes
Well, look, long term, it's been a great addition and diversify. So you can take any combination you like of bonds and equities, and it's been beneficial to add an allocation to CTAs as well over the long term.
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Marin Somerset Webb
Beneficial, like how?
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Simon Judes
Beneficial in the sense that performance is improved. And particularly the drawdowns that you get when you have these big moments like 2008 or 2022 are mitigated to some extent.
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Marin Somerset Webb
So let's say, for example, you're a retail investor and you make 5% of your portfolio CTA. How would that have helped your performance over, say, a decade long period?
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Simon Judes
Well, you know, the exact numbers vary depending on.
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Marin Somerset Webb
I know, I know the exact numbers vary. But, you know, we need to know that it would make a positive difference of more than a couple of basis points here or there.
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Simon Judes
It does. It makes a positive difference. And you can measure in a couple of ways. So you can say, well, there's an annualized number which might go up by 1% or something depending on exactly the weighting you give to it. But then what is also important is not just that sort of average, but the fact that historically, at least, the CTAs have performed well in the periods which haven't been good for equities. And so it's added the profits at particular moments when other things were doing badly, which isn't as easily quantified by just adjusting the annual return number, but it's a very important component of why people are allocating to it.
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Marin Somerset Webb
Yeah. Can you tell from. Of course you can, but looking back, how much of your performance comes from being long asset classes and how much comes from being short asset classes? There any differential there? Are you equally good at both or do they both equally feed into performance?
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Simon Judes
You get good performance from both. So I'll give you some examples. So if we look at 2008 at the financial crisis, that's a really good example to play through. So that year, a good portion of the profits did come from long positions in bonds. Bonds did very well, but about a third of profits came from being short in equities. So you saw profits on both sides. Now, you can pick other examples, again, on both sides. In 2014, that was a very good year for CTAs. Why was it a good year? Well, there were two enormous trends. One was the downward trend in oil prices that was driven by the shale boom. And that is a great example of a trend that is very, very easy for CTAs to latch onto to. Being short oil is as easy, like I said, as being long oil, but it's not so easy to do in other contexts. So CTA did very well being short oil in that year. The other thing that was going on was there was this tremendous upward trend in fixed income, particularly in bunds. And it was quite surprising actually at the time, because yields on bonds were getting towards zero, and in fact, they ended up going below zero, which is something that people generally didn't expect could happen. And these two examples actually reveal something quite unintuitive about momentum, about the idea of following trends in these markets. Because often people think, well, if you're following a trend, you must be getting into some very crowded trades and you must be sort of following a herd. And just the general received wisdom. And in fact, these examples show you that very often you can be doing precisely the opposite. And the way we know we're doing the opposite is that we can look at what fundamental analysts are saying about what the market is going to do at each moment. And we find there are these moments which are very profitable, where the trend disagrees with what the fundamental analysts are saying. So if you look at what people were saying about where oil would be through 2014, people were not focused on the shale boom. They were focused on the apparently unquenchable demand from emerging Markets, the policies which might lead to the reduction in supply. You heard people talk about peak oil supply, for example, at that time. And every analyst was predicting that oil would increase, increase in value. And similarly with that trend in bunds, everyone was saying, well buns cannot possibly go up from here because why on earth would anyone give their money to the, the German government to get less of it back in 10 years time?
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Marin Somerset Webb
Yeah, well we might still ask that question actually Simon, why they did that. But here we are.
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Simon Judes
Yes, well you might. But the great thing about, about trend following and about these algorithms in general is that they don't have to know, they don't have to have a theory about why the markets do what they do. They have a rule that they, you know, this market has been moving in this direction, maybe it will continue and they have evidence that following that in the past has been a good thing to do.
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Marin Somerset Webb
Okay, so let's move on to talking about what trends are interesting at the moment. Because of course that's what everyone really wants to know is if as you say, there are, the market is moving in one direction, there is momentum there before it has become a consensus view. What should we looking at at the moment?
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Simon Judes
Moment? Well, the things are not necessarily things that are unknown. So the big trends that we've seen recently have been in the precious metals to some extent in base metals, in equities obviously equities have been going up in general. There's been good short trends in some places in US Natural gas for example, and particularly in cocoa. The, the example I mentioned earlier, obsessed with coco. Well, it's interesting you mentioned that because it's obviously a fairly niche market and particularly when we trade a few hundred markets. Why, why am I mentioning this one? The interesting thing is that the, the strategy itself is, is very dynamic. So when there's a big trend it will take a big position and when there's not much going on, it won't take a huge position. So what that means is that even though you're trading perhaps 200 different things, it's not like building a long only portfolio of stocks where you have to just always maintain this collection of positions. The strategy is behaving very dynamically. So at any given moment there'll be a much smaller number of things which are really contributing and it will be based on what those markets have done recently. So I'm talking about Coco because it's had this astonishing rise and then equally astonishing fall recently. And that's why it's making a big impact on the portfolio and this, that it didn't do for perhaps 20 years prior to that. So if you'd have asked at any point in the last 20 years, I wouldn't have been talking about that.
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Marin Somerset Webb
I wouldn't have mentioned it. Okay, this is quite interesting. So when you talk about one of your funds, for example, having all these different positions and things being traded, et cetera, the returns over, say, an annual period will probably only come from a couple of those positions. There'll only be a few that are of reasonable size.
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Simon Judes
Well, it's only a smaller number than the 200, you're right. It's typically a few big things that are, that are happening every year. That's absolutely right.
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Marin Somerset Webb
So cocoa.
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Simon Judes
Yes, cocoa. Gold. Yeah. Some of the base metals as well.
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Marin Somerset Webb
Copper.
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Simon Judes
Yeah. Aluminum.
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Marin Somerset Webb
Uranium.
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Simon Judes
Less uranium, because it's a less liquid market for us to trade, but again, as well, has been a big market for us over the last few years.
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Marin Somerset Webb
And would you expect the yen to turn. Lots of conversation about the yen, absolutely.
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Simon Judes
And Japan, et cetera.
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Marin Somerset Webb
Again, you don't know, right? That has to be the answer. I don't know.
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Simon Judes
No. Although it is another great example of the fact that the algorithm doesn't have a theory it's trying to follow as a massive strength. Because obviously what we saw the last couple of years was everyone predicting that the yen is going to rally and in not doing it or doing it for a bit and then resuming its slump.
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Marin Somerset Webb
Interesting. And you can tell so many good stories about how it should rally, will rally interest rates, going up, inflation, all the political change in Japan, et cetera, et cetera. And it never quite happened.
- [24:06]
Simon Judes
Exactly. And in fact, you can see these kinds of episodes. This is an interesting point. I think that often these kinds of episodes are almost necessary for a trend to appear. Because if you think about what a trend is, it's a situation where a market moves a long way, but slowly. If a market moves a long way very, very quickly, then it's kind of 50, 50, if you're on the right side of that or not not. For there to be a meaningful trend that we can benefit from, it has to do it slowly. And that's a slightly surprising thing that it could ever happen. Because what you hear about the way markets have developed is that information is incorporated into them at an ever faster rate. And so you might think that if something is going to happen to a market, well, it is going to be very, very quick. But there are ways nevertheless that things can happen slowly. And one of the ways is if the market Kind of has to fight against the narrative that is saying that the thing that is going to happen actually can't happen. And that's exactly what was going on with the yen. Right. Because all of the narrative was saying the yen has to rally. And the fact that for whatever reason, which I'm not going to be able to tell you, for whatever reason, the market in fact was really pushing in the other direction. The fact that that had to fight against what everyone thought was supposed to happen, and it's part of the reason that it got drawn out into a long term trend and was therefore something that we were able to benefit from.
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Marin Somerset Webb
Interesting. Are there any other things that you're looking at the moment that are moving remarkably slowly?
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Simon Judes
Well, look, gold is a good example. Well, but it's been over a couple
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Marin Somerset Webb
of years that it's happening slow and then very fast.
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Simon Judes
That's right. And the dollar, obviously the dollar has started to weaken in over a relatively drawn out time period.
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Marin Somerset Webb
Silver third, again, very slow and then very, very fast, which is in a
- [25:56]
Simon Judes
way that is ideal behavior. Actually, there's another element of the algorithm which I haven't talked about before. But what we do is when we have a strong signal that determines that we want a certain amount of volatility from. From that position. So when you get the situation, like with silver, particularly silver, but gold too, where it starts small, builds and then accelerates, that means that we start with building in a long position and then as it accelerates, well, the volatility of the market goes up and actually we don't need to own so much silver anymore in order to get the amount of volatility we want. So actually, as that market is accelerating upwards, we are selling again, another slightly surprising thing that you wouldn't necessarily expect from somebody who's following a trend, but that's typically what's happening as those markets accelerate. And in effect, you are locking in the profits that you make as you go. As you go. Yeah.
- [26:52]
Marin Somerset Webb
Okay.
- [27:00]
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- [27:31]
Mind Games Podcast Narrator
if mind control is Real.
- [27:33]
Simon Judes
If you could control the behavior of
- [27:35]
Mind Games Podcast Narrator
anybody around you, what kind of life would you have? Can you help hypnotically persuade someone to buy a car?
- [27:40]
Marin Somerset Webb
When you look at your car, you're
- [27:41]
Simon Judes
going to become overwhelmed with such good feelings.
- [27:44]
Mind Games Podcast Narrator
Can you hypnotize someone into sleeping with you?
- [27:47]
Simon Judes
I gave her some suggestions to be sexually aroused.
- [27:50]
Mind Games Podcast Narrator
Can you get someone to join your cult?
- [27:53]
Simon Judes
NLP was used on me to access my subconscious.
- [27:56]
Mind Games Podcast Narrator
Nlp, AKA Neuro Linguistic programming, is a blend of hypnosis, linguistics and psychology. Fans fans say it's like finally getting a user manual for your brain.
- [28:07]
Simon Judes
It's about engineering consciousness.
- [28:09]
Mind Games Podcast Narrator
Mind Games is the story of nlp, its crazy cast of disciples and the fake doctor who invented it at a new age commune and sold it to guys in suits. He stood trial for murder and got acquitted. The biggest mind game of all, NLP might actually work.
- [28:26]
Marin Somerset Webb
This is wild.
- [28:28]
Mind Games Podcast Narrator
Listen to mind games Games on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.
- [28:46]
Marin Somerset Webb
There's a sort of a view that pretty much all investing these days is momentum investing or trend following investing. Because everyone, everyone in a passive investment is effectively a momentum investor just on the long side
- [29:02]
Simon Judes
in the sense of passive loanly equity investment.
- [29:07]
Marin Somerset Webb
If you've been invested, for example, until relatively recently in a global equity ETF of any kind, you've effectively simply been following American and tech momentum for years. That's it. You're not a value investor, you're not a growth investor, you're not anything in just a momentum investor.
- [29:25]
Simon Judes
Yeah, there's an element of truth to that. I think it's slightly difficult to compare long only investments with long short investments. Because even though some of the ideas might be similar, the actual trading that you end up doing and the nature of the portfolio you end up holding is very different.
- [29:41]
Marin Somerset Webb
Obviously just this idea that most people have one side of your portfolio already to a degree, the equity part.
- [29:51]
Simon Judes
Well, yeah, they have one half perhaps of the, of the equity portfolio that in some sense. That's right.
- [29:58]
Marin Somerset Webb
And the point being that's kind of dangerous in that most, most people passively investing in a global ETF are not aware that they have a one sided momentum strategy.
- [30:11]
Simon Judes
Yeah, look, it's an interesting point of view. You can think of any index, if you like, as a type of trading rule, as a type of algorithm, because it's effectively saying if it goes in the index then you buy it, if it exits the index then you sell it and other times you maintain it in these proportions. And it's interesting because obviously that is another rule that you can back test over time. So you can, if you like, think of it as a type of quant strategy. And we often do try to to think of it that way. I don't think I have anything useful to tell you really about whether that's dangerous or not. That perhaps is a deeper question than I'm prepared to address.
- [30:52]
Marin Somerset Webb
Listen, while we've been talking, remember I asked you earlier about the extent to which it would have enhanced the performance of a portfolio. Luckily you have PR people, Simon. They've sent me something saying Winter research found that a 10% allocation to trend following would have improved the returns of an equity bond portfolio in 87% of 10 year periods since 1972, increasing the portfolio's outperformance over cash to 4.8% from 4.1% on average. And this return improvement nearly doubled in the bottom decile of 10 year periods for the equity bond portfolio, highlighting diversifying properties and portfolio resilience. So there you go.
- [31:32]
Simon Judes
Fantastic. I'll congratulate them.
- [31:35]
Marin Somerset Webb
I think you did the work, they just wrote it down. So in that sense, would you say that a 10% allocation would be a reasonable amount for a retail investor? So let's say we've still got our long equity exposure, we've got some bond exposure, maybe we've finally got the message and we've got somewhere between 5 to 10% in gold, maybe. Maybe we've got 3% in Bitcoin. Not recommending that, by the way, but maybe we do 1%. Should we also have 10% in. In a trend following in a CTA strategy? Does that make sense to you?
- [32:08]
Simon Judes
Look, it certainly makes sense. The right level of allocation depends on what your preferences are as an investor. If you allocate to things other than equities and bonds, then obviously you're departing from that benchmark and you introduce some risk of outperforming or underperforming that benchmark. And different people have different tolerances for that. There's another way of doing it as well, where you get to maintain the exposure to equities, which we offer through a portable alpha type structure. This is something that has been really always on the radar of institutional investors and we offer it now for retail investors as well in a UCITS product.
- [32:50]
Marin Somerset Webb
Okay, and now I know I said you might have a couple of percentage points of your portfolio in Bitcoin, but is crypto one of the asset classes that comes into your strategy?
- [33:02]
Simon Judes
We do trade crypto in that way. If you think about what we're looking for, particularly with that kind of momentum strategy, we're looking for markets which might have trends and which are liquid enough that we can trade them. Obviously, crypto satisfies both of those things. The only question would be, is there a way to trade them which is operationally safe? And there is, actually, because there are futures on some of the crypto assets. There are futures traded on cme, on Bitcoin and Ether and a couple of others as well. And the structure of those is basically the same as most of the other futures that we trade. So it's fairly straightforward to add them in to a momentum system and to benefit from them, which we have done this year.
- [33:45]
Marin Somerset Webb
Okay. In which direction?
- [33:47]
Simon Judes
Well, this year, short, we benefited. At other times, it's been long.
- [33:51]
Marin Somerset Webb
Long, yeah. And would you be short now?
- [33:54]
Simon Judes
Well, look, again, you shouldn't take any of this as. As insightful advice about.
- [33:59]
Marin Somerset Webb
We're absolutely not. We know that this is purely about momentum and trends, but we still want to know.
- [34:04]
Simon Judes
That's right. Well, really, you're just asking me, have they gone up or down recently?
- [34:08]
Marin Somerset Webb
No, I'm asking you, where are you expecting them to go now? What. How does the trend look? Well, down.
- [34:13]
Simon Judes
Yeah, like I said, the trend is just what has happened recently. Which is, which is down. Down. But the chance that that means it's going to go further down is. Is only marginally above 50%.
- [34:23]
Marin Somerset Webb
Okay. What makes it difficult year for you? What are the risks in this strategy? What, what, what makes it go wrong?
- [34:30]
Simon Judes
Look, there are two kinds of situations where momentum investing is not going to do well. So one is where there aren't any trends, where markets just move sideways. The other is where there might be a trend, but then there's a sudden reversal. So we've had good examples of that recently. So last year, for example, there were big reversals in March and April. The tariff announcements in particular caused equities that had been going up. They then started going down. The dollar had been strengthening, then it started weakening. A lot of commodities have been going up, then they went down. So those kinds of situations are the situations where the strategy won't do well. The case where it does well is when markets move steadily and consistently in a particular direction, or at least enough markets do that to outweigh the ones that are behaving in a more negative way.
- [35:16]
Marin Somerset Webb
Yeah. So what are your expectations for the rest of this year? Well, I know you can only tell me some things will go up, some things will go down, but are you expecting the type of volatility that will make it a good year for you.
- [35:29]
Simon Judes
Look, we have evidence. When we look historically, we see that there are some years which are good, some years which are less good. And we can't predict if we could time when trend following is going to work. We would just build it into our strategy that it would take more risk in those periods and less risk at other times. What we found in terms of allocating to trend following is that it works best if you don't try and time it. If you just regard it as a permanent allocation and live with it. For example, after that period in April, April, May, June were difficult months for the trend strategy for the reasons that I said. And if you'd been thinking about at that point, you get pretty depressed and you think, well, this just hasn't worked. When is it going to start to work? And then what happened was over the course of the rest of the year, we saw several big trends emerge. So obviously the precious metals rally continued. Equities went up relatively steadily. We saw some of the base metals do well as well. And there wasn't a continuation of that negative whipsawing behavior that that was really a prominent feature earlier on in the year. So that meant that overall the strategy did very well. But there was nothing that you could have pointed to in July that said, now is the moment. Now is the moment. It's definitely going to work. Just as there was nothing you could have really pointed to in January which would have said now is the moment is definitely not going to work. So unfortunately, that's the way things are. And I don't have any better answer to be able to predict it.
- [36:58]
Marin Somerset Webb
This is a kind of trust of strategy, isn't it?
- [37:01]
Simon Judes
Well, not really, because this is where you can look back at the track records and we can look back at the back test and it's those things that we are looking at. It's the more discretionary type of investor who's making one decision today. And it's totally different from the things they looked at last year and the year before. They're the people who are saying trust us because they don't have the historical back test to look at.
- [37:27]
Marin Somerset Webb
So let me ask you something. One thing that comes up a lot on this podcast is ESG strategies stewardship around investing. And if you're investing like this in a way that is entirely non company specific, you can't really have an ESG overlay of any kind, can you?
- [37:43]
Simon Judes
Not in the traditional sense. There are various things that you can do. There are, for example, ESG versions of the traditional indices and there are futures on those indices. So we trade those where there's sufficient liquidity to, to enable it. We obviously can't create that liquidity where it doesn't exist. So we're to some extent reliant on the market makers and other people to take an interest in those things. But we're well positioned to do it if they become popular.
- [38:10]
Marin Somerset Webb
Okay, and tell us briefly about the appropriate vehicle that you have for retail investors. That's the Winton Trend Fund. Right? The U sets.
- [38:19]
Simon Judes
Yeah, well, we have U sets vehicles for all of our major strategies. Strategies. So we do have the, the Winton Trend Fund. In addition, we have another Winton CTA fund which includes some non trend elements as well.
- [38:34]
Marin Somerset Webb
That's the. Then you've got the Trend Enhanced Fund.
- [38:38]
Simon Judes
Hold on, I'll get.
- [38:38]
Marin Somerset Webb
That's a different one. All right, come back.
- [38:40]
Simon Judes
There's the first one that I mentioned was the Winton Armor Diversified Fund. The Winton Trend Enhanced Fund is the, the fund I mentioned that has trend for, but then also maintains the exposure to global equities. So for example, if you wanted to add this into your portfolio, but you didn't want to disinvest from your equity portfolio, this is a way to do it because it maintains 100% exposure to equities. And then the last usage fund that I should mention is our Quant Multi Strat Hedge fund, which is also there.
- [39:14]
Marin Somerset Webb
Okay, and these were all global funds, right? They were looking at everything everywhere, all the time.
- [39:20]
Simon Judes
That's correct.
- [39:20]
Marin Somerset Webb
It's a very busy 200 employees you've got there.
- [39:23]
Simon Judes
They are very busy. But remember, they're not individually, they're not
- [39:27]
Marin Somerset Webb
doing any individual analysis.
- [39:30]
Simon Judes
They are looking at the algorithms. And the algorithms are mostly things that can be applied relatively broadly.
- [39:37]
Marin Somerset Webb
And do you think that over the next decade these jobs will still exist? Because an awful lot of it does sound as though it's hugely automated already. Will it get more? So will there be 200 people required to run $16 billion in a decade using this kind of strategy?
- [39:54]
Simon Judes
It's a good question.
- [39:55]
Marin Somerset Webb
Or can we just vibe code everything?
- [39:58]
Simon Judes
I don't think you'll be able to vibe code everything. I struggle to make predictions about this. It's interesting to look at.
- [40:06]
Marin Somerset Webb
I'm going to get a prediction out of you before we get to the end of this podcast. If it kills. Kills me. Don't make one on this.
- [40:12]
Simon Judes
Oh, I'm sorry. Well, look, when you look at how particularly technology jobs have. Have changed you, what you find it's not necessarily that you need more of your people. You find great variation in the, in the skill sets that are required and that's, that really is driven by technological change. Often that's change in the type of software that we use that, you know, the, the development of Python as a programming language that's much more broadly accessible than previous programming languages were the changes in the type of databases that we use going back a decade or two. Now the introduction of virtualization of PCs, which drove a lot of the reduction in PC sales and the types of expertise that were then required to, to maintain the computing resources also change dramatically because you suddenly are not dealing with a computer that's sitting on your desktop anymore, but it's sitting somewhere in a remote warehouse. And then the development from there to using cloud resources, all of these drive changes in the type of expertise that are required. And I'm sure that that will be true with AI as well. But there are some types of business where there's just a fixed thing that you're trying to do and if you can do it more efficiently, then you just have fewer people do that. And that is not really what our business is because our goal is a bit more open ended. We want to drive the best investment returns that we can. And if we can do the tasks that we're currently doing more efficiently with fewer people, then what we'll do is we will keep the same number of people and we'll do more.
- [41:53]
Marin Somerset Webb
Okay, fair enough. What do you think you'll get your kids to study at university? When I ask this question now, there's a kind of clear division between be. Between people who still think it should be STEM all the way and those who think, well, we're moving into an age when empathy is more important than anything else and therefore, you know, sod chemistry to philosophy. Where do you stand on that?
- [42:17]
Simon Judes
I'm not sure. It's really up to me. My children have their own.
- [42:21]
Marin Somerset Webb
Nothing will be up to you. But the bit where you try and feed it to them and make them think it's their own idea, what do you think that'll be?
- [42:28]
Simon Judes
Well, my oldest son's interests at the moment are split between maths on the one hand and classics and history on the other.
- [42:35]
Marin Somerset Webb
That's a very classic combo, isn't it?
- [42:37]
Simon Judes
They are. And I actually quite like that, that combination. I think there's great value in both.
- [42:43]
Marin Somerset Webb
Okay, here was me desperately trying to get something definitive out of you about the future. And we're coming up with do both.
- [42:49]
Simon Judes
That was the path I took. So I studied physics and philosophy and I think I've definitely been a benefited from having both.
- [42:55]
Marin Somerset Webb
Yeah. You were on holiday last week. What were you reading?
- [42:59]
Simon Judes
I was reading a Kebaqua detective fiction novel by Louise Penny. I don't know if you've come across those, but those.
- [43:08]
Marin Somerset Webb
I've read them all. I read them all.
- [43:12]
Simon Judes
I've just discovered them. So this is. I think I was on my fourth one and I'm really enjoying them now.
- [43:17]
Marin Somerset Webb
They get a little dull towards the end. There's an awful lot of things them I've now shifted towards a series of murder mystery suspenses in Dublin by Tana French, which I recommend very highly.
- [43:27]
Simon Judes
Oh, thank you. I'll give that a try. Thank you very much.
- [43:30]
Marin Somerset Webb
Simon. Thank you so much. Thanks for listening to this week's Marin Talks Money. If you like our show, rate, review and subscribe wherever you listen to your podcast and keep sending questions or comments to marinmoneyloomburg.net you can also follow me and John on Twitter or x. I'm Marinus W and John is John Underscore Stepeck. This episode was produced by me, Marin Sumset Webb. It's produced by Summer Sadi and Moses Andam sound design by Blake Maples. And special thanks, of course, to Simon Judge.