SI339: CTAs vs ETFs: The Showdown That Could Change Everything ft. Andrew Beer and Tom Wrobel

Summary

Podcast Summary: Top Traders Unplugged – Episode SI339: CTAs vs ETFs: The Showdown That Could Change Everything

Host: Niels Kaastrup-Larsen
Guests: Andrew Beer and Tom Wrobel
Release Date: March 15, 2025
Duration: Approximately 80 minutes
Access Link: Top Traders Unplugged

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Introduction

In episode SI339 of Top Traders Unplugged, host Niels Kaastrup-Larsen engages in an in-depth discussion with seasoned experts Andrew Beer and Tom Wrobel. The central theme revolves around the evolving landscape of systematic investing, specifically comparing Commodity Trading Advisors (CTAs) with the burgeoning ETF (Exchange-Traded Fund) market. The conversation delves into market volatility, trend following strategies, portfolio diversification, and the impact of new financial products introduced by major firms like BlackRock and Fidelity.

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1. Current Market Environment and Geopolitical Influences

Tom Robel kickstarts the discussion by highlighting the unprecedented volatility in the current administration, drawing parallels with historical political shifts:

[00:46] Tom Robel: "The attitude of all these people is to figure out how much you can actually stress the system. Whatever people thought, you’ve got to stretch the tails out. And it's going to be an unbelievable ride from here. Good or bad, volatility is here."

The conversation underscores how geopolitical events, such as the Ukraine crisis and potential U.S. economic stagflation, are creating an unpredictable investment environment. Tom emphasizes the shift in U.S. global economic influence and the implications of tariff policies on commodities and international trade.

Andrew Beer adds perspective on the impact of strong equity markets over the past 15 years, noting:

[04:14] Andrew Beer: "Bridgewater was out with a paper saying the last 15 years have been the best since 1970. No other 15-year period where equities have done so well."

He points out that the dominance of equities makes it challenging for investors to diversify outside the equity market, especially when such equities have been performing exceptionally well.

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2. Trend Following and CTAs Performance Update

Andrew Beer introduces the discussion on trend following by sharing personal metrics:

[06:56] Andrew Beer: "Last night my own trend barometer finished at 57. That's a pretty good reading."

Tom Robel provides a detailed performance review of various CTA indices:

[08:11] Tom Robel: "The flagship SGCTA index is currently down just over two and a half percent for the year, with the trend index down nearly four and a half percent."

Tom explains the performance dynamics of different CTA strategies, noting that increased volatility could offer opportunities for trend followers to capture emerging trends despite a challenging start to the year.

Andrew Beer observes a 2% difference in average annual returns between the broader and trend indices over five years:

[08:43] Andrew Beer: "The trend index had done somewhat better over the last five years than the broader index with a 2% average annual return difference."

Tom Robel discusses the replication of indices and the inherent leverage involved:

[10:15] Tom Robel: "Statistically, they have a 98% correlation and the trend is like a 1.2, 1.3 version of the other. So it's almost all of the performance differential you're prescribing is essentially leverage."

The duo examines the challenges and benefits of replicating CTA indices, emphasizing the high correlation and the role of leverage in performance differences.

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3. Portfolio Construction and Diversification Strategies

The conversation shifts to portfolio diversification, with Tom Robel advocating for CTAs as essential diversifiers:

[25:14] Tom Robel: "Can investors hold onto these diversifiers... and can they actually hold onto it for long enough to benefit from the upside that they can generate in the portfolio?"

Andrew Beer reflects on the historical integration of managed futures with equities, suggesting that current products often bundle CTAs with equity indices to provide diversification without sacrificing the growth from equities:

[27:40] Andrew Beer: "Creating these products makes perfect sense for a diversification perspective."

Tom Robel further explores the concept of portable alpha, where CTAs overlay traditional assets to enhance returns without displacing the core equity investment:

[32:18] Tom Robel: "Portable alpha through the efficiencies you can get through derivative strategies allows you to have the equities plus an extra allocation to a diversifier on top."

The discussion emphasizes balancing risk and reward by integrating CTAs to protect against downside risks while capturing potential upside in volatile markets.

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4. Managed Futures ETFs vs Traditional CTAs

A significant portion of the episode is dedicated to examining the rise of Managed Futures ETFs launched by major firms like BlackRock and Fidelity, and their potential impact on traditional CTA and hedge fund models.

Tom Robel expresses skepticism about the threat posed by these new ETFs:

[58:48] Tom Robel: "The managed futures ETF space is $3 billion, compared to the $330-$340 billion in the broader space. BlackRock's entry, priced at 80 basis points, isn’t cheap relative to QIS products."

He argues that ETFs are unlikely to cannibalize the established CTA market as their primary investors are typically different—often those not already invested in hedge funds.

Andrew Beer concurs, emphasizing the importance of track records and expertise over the allure of lower fees offered by ETFs:

[63:21] Andrew Beer: "I would still argue that the old God that are probably represented in your indices and replicated by Andrew...have something to it. I would always choose someone who has experience over someone who just has size."

Tom Robel highlights the challenges and occasional failures of large firms like BlackRock when entering the CTA space:

[64:52] Tom Robel: "BlackRock launched the Style Advantage Fund expecting 6% return with a 6% standard deviation, but it went down 35%. It’s an absolute crapshoot whether they’ll get it right or not."

The guests agree that while Managed Futures ETFs add accessibility, they do not currently pose a significant threat to traditional CTAs due to differences in investor base, fees, and the proven expertise of established managers.

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5. Evolution and Innovation in CTA Strategies

The discussion transitions to the ongoing evolution of CTA strategies, focusing on the incorporation of regime identification and multiple model time frames to adapt to changing market conditions.

Tom Robel explains the necessity of diversification within CTA models to handle different market regimes:

[35:16] Tom Robel: "We've seen CTAs employ many more models and use methodologies to allocate risk across different model sets, allowing them to adapt more effectively."

Andrew Beer raises concerns about the feasibility of accurately predicting market regimes, citing past instances where sudden shifts defied model predictions:

[36:21] Andrew Beer: "Back in 2021, Omicron appeared and CTAs had one of their worst days. There's no regime mechanism that could predict that."

Tom Robel acknowledges these challenges but emphasizes the importance of having a diverse set of models to quickly adapt when regimes change:

[38:30] Tom Robel: "If they do, they can identify that a new regime exists and think historically how to best take advantage of that."

The guests discuss the balance between innovation and maintaining the core strengths of trend following, highlighting the ongoing research and adaptation required to optimize CTA strategies in a dynamic market.

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6. Assets Under Management (AUM) Trends in the Industry

Towards the end of the discussion, Andrew Beer brings up the stagnation of AUM in the CTA industry, referencing a decrease in Bridgewater's assets as a possible indicator of broader industry trends:

[70:55] Andrew Beer: "Bridgewater manages $97 billion now, down from $145 billion in February 2021. If this is accurate, it indicates significant shifts in where AUM is flowing."

Tom Robel responds by speculating on factors influencing AUM trends, including the competition from QIS strategies and the lack of new inflows from traditional hedge fund investors:

[72:04] Tom Robel: "There’s not a sense that people are opening lots of doors... It would be interesting if cannibalization had already occurred from QIS versus hedge funds."

They conclude that while AUM has remained stagnant or declined for some, the rise of innovative products and diversification strategies present both challenges and opportunities for the CTA landscape.

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7. Final Thoughts and Future Outlook

In wrapping up, Tom Robel discusses the potential long-term benefits of CTAs amid current market volatility and geopolitical uncertainties:

[74:17] Tom Robel: "We're in the best environment for macro investing we've probably seen for the last 10 years... CTAs are part of that macro toolbox."

Andrew Beer reiterates the importance of experience and proven track records over new entrants, emphasizing sustained performance and expertise as key factors for investors:

[67:21] Andrew Beer: "There's something for everyone in innovation... I would always choose someone who has experience over someone who just has size."

The episode concludes with an optimistic outlook on the role of CTAs in providing diversification and managing risk in increasingly complex financial markets.

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Key Takeaways

1. Market Volatility and Geopolitical Risks: Current global uncertainties are enhancing the relevance of CTAs and systematic investing strategies due to their ability to navigate volatile environments.

2. Trend Following Performance: While CTAs have faced a challenging start to the year, increased volatility offers potential opportunities for trend followers to capture significant market moves.

3. Managed Futures ETFs: Despite growth in this segment, traditional CTAs remain resilient due to differences in investor bases and the value of established expertise. New ETF products by firms like BlackRock are not yet posing a significant threat but could influence future dynamics.

4. Portfolio Diversification: Integrating CTAs as diversifiers in traditional portfolios can enhance risk-adjusted returns, especially through strategies like portable alpha.

5. Innovation in CTA Strategies: Ongoing research into regime identification and multi-model approaches is critical for adapting to changing market conditions and maintaining performance.

6. AUM Trends: The CTA industry faces challenges with stagnant or declining AUM, potentially due to competition from QIS strategies and shifting investor preferences.

7. Experience vs. New Entrants: Established CTAs with proven track records are favored over newer entrants, highlighting the importance of expertise and historical performance in attracting and retaining investors.

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Notable Quotes

• Tom Robel, [00:46]: "Whatever people thought, you’ve got to stretch the tails out. And it's going to be an unbelievable ride from here. Good or bad, volatility is here."

• Andrew Beer, [08:43]: "The trend index had done somewhat better over the last five years than the broader index with a 2% average annual return difference."

• Andrew Beer, [17:24]: "Hedge funds started to dial up the Trump trade... The flexibility is hugely advantageous."

• Tom Robel, [25:14]: "Can investors hold onto these diversifiers... and can they actually hold onto it for long enough to benefit from the upside that they can generate in the portfolio?"

• Andrew Beer, [63:21]: "I would always choose someone who has experience over someone who just has size."

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Conclusion

Episode SI339 of Top Traders Unplugged provides a comprehensive exploration of the current state and future prospects of CTAs in comparison to the emerging Managed Futures ETF market. Through insightful dialogue between Niels, Andrew, and Tom, listeners gain valuable perspectives on navigating investment strategies amidst geopolitical turmoil, market volatility, and evolving financial products. The episode underscores the enduring value of experienced CTAs in offering diversification and managing risk, while also addressing the challenges posed by new market entrants and shifting investor dynamics.

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Transcript

[Niels Kostrup Larson]

You're about to join Niels Kostrup Larson on a raw and honest journey into the world of systematic investing and learn about the most dependable and consistent, yet often overlooked investment strategy. Welcome to the Systematic Investor Series.

[Andrew Beer]

Welcome. Welcome back to this week's edition of the Systematic Investor series with Andrew Beer and Tom Robel as well as myself, Nils Kastor Larsen, where each week we take the pulse of the global market through the lens of a rules based investor. Andrew, Tom, great to have you both back on the podcast this week. How are you keeping?

[Tom Robel]

Absolute pleasure to be back. Thanks Nils. Hi Tom.

Very well, thank you.

[Andrew Beer]

Good to hear. Now I really look forward to our conversation today. I think there are a lot of things to talk about in the wider world, but also how it impacts our industry. A lot of changes actually in our industry. So I personally feel it's a pretty important time for us and I know both of you will bring some very unique insights to the conversation, which of course we may not all agree on the topics, but we will certainly have a good crack at it. But before we get into all of that stuff, I would always love to hear what's been on your radar besides the things we're going to be talking about. And maybe Andrew, from your side of the pond, what's been on your radar?

[Tom Robel]

What? I think there's only one thing that's been on anybody's radar, which is, you know, what on earth is going on. I mean, I think it's, I think it's incredibly interesting in is somebody who's, you know, who knows a lot of people who've gone into government over time. A lot of my family members have served both in business but then also served in government going back 200 years. And the, the attitude of all of those people like a, you think about like your, the Goldman Sachs investment banker who then becomes like Gary Con, who then becomes national head of the, the NEA or whatever he was. And you know, but there, and there was always a sense that we're going to go back and we're going to contribute something. It's noblesse oblige. But their incentive was also to add something to their resume. You know, so my grandfather was ambassador to France. He helped Eisenhower get elected and then for the rest of his life he was, everyone called him ambassador, right? So there was something. But these guys were not glass breakers, right. And, and there is something about this administration which we've never seen before, which is that, okay, social, somebody breaks the Social Security system, I mean like the information systems and people Go for two weeks or a month without getting their checks for a huge segment of the population, like that's a horror for a lot of people who are at senior levels of the, of the administration. It's a teaching moment, it's a learning moment. It's to figure out how, how, how much you can actually stress the system. So whatever people thought, and based on the conversation you and I were talking about earlier about on the geopolitical side, whatever people thought were the range of expectations in from a macroeconomic or market perspective, you've got to stretch the tails out. And, and, and it's going to be an unbelievable ride from here. And you know, good or bad volatility is here.

[Andrew Beer]

Yeah, yeah, no, I completely agree. What about you, Tom? Is it geopolitics on your side as well or something? Something completely different that's been on your.

[Tom Robel]

Yeah, well, there's a lot going on in the world. I think the, the big themes that seem to be on my mind is, is, is the Ukraine process. That's, that's, that's happening today. US economy stags, the potential for stagflation and ultimately it's kind of what over the next five years is going to be the US's part in the world. How are we going to see that, that shift and are we going to see a different approach and are all the rest of the economy is going to have to shift the way they engage with the us? I think it's, it's very interesting the way tariffs are going to play out. And if there is potential ceasefire deal in the Ukraine, how is that going to play out for people?

[Andrew Beer]

Yeah, there is no doubt that the world will be very different in a few years time. I mean, for me these are just kind of more things that just came on the radar. But of course I couldn't help the fact that Trump spends a lot of time this week getting delivery of a red Tesla in front of the White House. I mean, imagine that of course, the 200% tariffs on alcohol from Europe. I thought that's again just a sign of how crazy things are. But turning it more to the financial world, I did notice that Bridgewater was out with a paper where they basically say that the last 15 years have been the best 15 year period in any time since 1970. So there's no other 15 year period where equities have done so well. And I think in a sense that does impact our industry. I mean, we talk about why it's so difficult to get people to invest outside their equity market. Well, I mean, it's been bloody difficult to compete, clearly. So I think that's interesting. And of course we're also at an interesting time in the markets. I also noticed, I think this might be from the same paper, I think it is actually that the percentage of US household that holds equities is something like 80, 82%. So clearly, if we are seeing, and I'm not suggesting that we are, but if we are seeing some kind of high in equity markets because of all the things that are happening with the US economy and with the US administration, then a lot of people will feel that it would seem, and then I guess there's always a first time for everything. And for me this week it was the first time I actually watched the Greenland election on the night just to see what, what they ended up voting. So, yes, a lot of things happening. But let's turn it to our usual segment trend following update. I'm going to let you guide us through this, the Soc Gen cta and this is since it's kind of your, your baby here, Tom, but before I do, let me just say that last night my own trend barometer finished at 57. Now for those who follow it, they will know that that's actually a pretty good reading. So what's happened in the last week or so, not to get people's hopes up in terms of performance, but it has actually improved quite dramatically because it's been a bit of a rough start to, to the year, but it has turned into good, a good territory. So anyways, Tom, how are the indices doing this month, this year? Can you guide us through that?

[Tom Robel]

Yeah, Neil, so we're definitely seeing a difficult period of performance so far in the year. But I agree with your point about the increased volatility is something that a lot of these CTA groups look for and have historically done very well in. So the flagship sort of broad SGCTA index is currently down just over two and a half percent for the year and that's been a drift sideways throughout the first few months. And then this month again we're seeing a down nearly 1%. The trend index is down a little bit more than that, unfortunately, down nearly four and a half percent. And again it's been a steady kind of drift sideways for the first couple of months. And then this month has been a little bit difficult at the beginning of the month. But it'll be interesting to see with the recent volatility, are we going to see the emergence of some nice trends that those trend followers can capture. The interesting thing I Think is that out of the three indices, so we have the, the CTA which is quite a, as I said a lot broader that includes non trend strategies such as quant macro, short term, maybe specialized asset class groups that index. So I forgot what I was going to say there.

[Andrew Beer]

No, it's fine while you do that actually courtesy of Andrew. He sent me some slides yesterday and what I had not appreciated actually is that you have a column in your deck Andrew where you show the five year returns for the indices and as well as your own products of course. But actually I didn't realize that actually the trend index had done somewhat better over the last five years than the broader, than the broader index but there's like a 2% average annual return difference.

[Tom Robel]

So to me it's interesting. I mean people have often asked us why did you go replicate the broader index? It's not the trend index because we're picking up on trend, right? We're not picking up on. When you, when you do replication the it, it really has to do with the, the, the pendulum in terms of whether trend is cool or not cool. And in the mid 2010s when we were looking at it, there was a general belief that or a lot of people promulgated this idea that sort of trend was dead, the best days were behind it etc and also because there's a lot of price competition in trend with QIS products and things that we'll talk about. The you know, the public proclamations were the other stuff is going to be better, the other stuff is going to have higher sharp ratios and work better. And in March of 2020 that was the inflection point. Trend did better in March of 2020 and then it did better in 20, in 2020, 2021, 2022. And so it reshaped how people looked at it and said oh actually what I really wanted was trend in the first place as opposed to the broader industry. So the pendulum will go back and forth and will be very interesting is when Tom talks about a month where you know, where trend has gone down more meaningfully. Now imagine this happens three times over the next, you know, year where you've got these very, very sharp whiplashes in the market and the broader index does better than that then people talk more about I want manage futures, not trend.

[Andrew Beer]

So, so that's it would be easier to replicate the trend index than the broader index. Or, or does it not really matter?

[Tom Robel]

It doesn't really matter. I mean if you look at them statistically they have a 98 correlation and the trend is like a 1.2, 1.3 version of the other. So it's almost all of the performance differential you're prescribing is, is essentially leverage.

[Andrew Beer]

Right.

[Tom Robel]

What you'd expect to see would be that if the, if the non trend things were adding meaningful value, you would expect the Sharpe ratio of the, of the broader index to be meaningfully higher and the trend subindex to be somewhat lower but maybe operate in certain functions or be more efficient or easy to access. And that, that's. I, I just don't see the evidence of that. Which is one of the issues with, you know it's kind of the, the, the fact that Sharpe ratio in the space has remained relatively constant or somewhat declined over, over 20 years.

[Andrew Beer]

Okay. Anything else you want to add to, to this Tom? I can add that the, which is not one of your indices but the beta 50 index which we also talk about is doing somewhat better actually this year. I can't remember exactly what's in that index but it's down 34 basis points in March and it's down about 1% so far this year. So doing a little bit better. And I don't know if you mentioned Tom, but of course right now this month, March actually the Short Term Traders Index change.

[Tom Robel]

That's what I was going to come on to.

So.

Yeah, and that's what I was trying to clarify that the difference between the indices. So some of the, some of the differences that make up that SGCTA index are more macro but also shorter term strategies. And this has been the real month where we've seen dispersion between the three different indices. Up until now they've kind of tracked sideways fairly similarly. And this month, you know, is actually a pretty strong positive month for our Short Term Traders Index. So it's up over 1% and it's kind of broken out of lockstep with the other indices. And I think we'll come on to that a bit later when we go into some of the differentiators around what we're seeing in the CTA space partly to do with model time frame.

[Andrew Beer]

Yeah. You know what I noticed? I mean last month when you look at the individual managers, say the list of the 50 largest or whatever we look at, there were quite a lot of dispersion in that monthly return. I think minus 9ish was the lowest. And then plus 3 from a report I just received a few minutes ago. But then, and I thought wow, that's, that's huge. But then I looked at some of the Other strategies like long, short equity and all of that stuff, I mean dispersion is much, much bigger. So which I didn't expect frankly. But so maybe, maybe there's not that much dispersion as, as we think about.

[Tom Robel]

I think, I think what surprises people is when as Andrew correctly says, you know, the CT index has a very high correlation with the trend index because once you have trend following in your portfolio it's a very major factor. And so between different trend followers you often get these very, very high correlations. And so when you're looking at a peer group, for example in our index of 10 different trend followers, it can look as though they all doing very, very similar things. They're all very highly correlated and yes they will be taking advantage of a lot of the same price moves just as any program that, that will try and capture momentum will be doing. But the philosophical then difficulty is getting from a stage where you, you think they're all doing very similar things but then they have that performance dispersion. I would argue it's to be expected because they all do different things around the periphery and that can often make a big difference. But similarly in equity world, you know, that's a universe of a far greater number of instruments that they can be trading. So of course you're going to see a great amount of dispersion.

[Andrew Beer]

Yeah, true, true, true. Let me finish off with the traditional indices. We also normally mention MSCI World obviously struggling this month, down 5.4% as of yesterday and the S&P 500 total return down 7.21% as of yesterday, down almost 6% so far this year. Whilst the US Aggregate Bond Index from the from S and P is down 37 basis points and up 2% so far this year from my perspective. Feel free Andrew or Tom to share what you've seen. But so far to me it seems like this year obviously with what's going on in the world there is challenges in different parts of a CTA or trend following. Portfolio currencies have really struggled this year. Some equities have done. It's very interesting by the way. I mean there's a lot of also differences in the performance within each sector at the moment, which is not something we normally see. But for example in the equity sector, you know European and some Asian markets are actually doing well for trend followers and then US markets are not doing very well. For managers you have something like JGBS which are doing great whilst other fixed income markets not so much and then you have your kind of idiosyncratic moves in coffee. You have some gold and silver doing well and then a lot of small losses elsewhere in the portfolio. So I don't know if that's kind of how you're, you're experiencing it. Obviously. I know you don't trade as many markets necessarily, Andrew, but don't know what you're seeing on your side.

[Tom Robel]

Well, so I mean, I mean this has been. Well, from, from replication perspective, our portfolio is by design very US Centric in terms of the instruments that we use. I mean, not helpful. Right. I mean if you're, if you're expressing a lot of views at Euro versus the dollar. Right. And you're trying to aggregate those views. I mean this has been a month where diversification has really helped. I think has helped. I mean it's not, it's, you know, my argument with replication is always that you're going to miss things and you're not going to get it, but you don't miss by that much. Right. And, and, and this is a month where, you know, I think we're down a bit more than we, I think we were outperforming a bit through January and February. We're underperforming a bit this month. I think we're closer to the trend index, to the regular index. But look, we can see it. I mean we run lots of our own internal trend following models and you can see the things that are working. I mean if you're just short treasuries this month, it's much worse than being short treasuries, short buns, short JGBs or whatever. So look, I mean diversification definitely has, I think has helped recently and we see that every day.

[Andrew Beer]

All right, well, let's get into some of the topics that you guys brought along. Thanks very much for, for doing that. I'm gonna start with you, Andrew. Some of the stuff before we sort of dive more into the specific kind of quant CTA world, you had some, some, some bigger things kind of macro oriented stuff and, and you elegantly titled the first one Trump Dumps on Trump Trade. So take, take us into your mindset here.

[Tom Robel]

So look, I think the, you know, not, not just in CTA land, but across the hedge fund space. To me what was really interesting is in January, early, very, very early 2024, hedge funds started to dial up the Trump trade. And, and you saw it in fundamental hedge funds. You saw it in CTAs, you know, 2023, 2022, 2023. Obviously people were very concerned about hitting the economic fly, hitting the Windshield. And there was a kind of what was going to happen to rates, what was going to happen to inflation. But 2024 rolled around and you started to see across the portfolios more optimism about equities if you want the strength of the dollar, sticky inflation, things like long gold. And my general view is that when hedge funds generate alpha and this, it picks up CTAs as well, you have to do something that's contrarian, right? If you're, if your trend following model says all we're going to do is pick, go 100% long, the S&P 500 at all times, you're obviously not adding any value, right? So, so there has to be a contrarian. And the question is what drives that alpha generation? And it's as opposed to talking about being trend following, it's, you've got to be way in front of something that's happening. You've got to be early and, and it's got to, it's got a, and it really has to play out after you're already in the trade. Where, where my view is as again less of a CTA and more of a broader hedge fund guy is where, where the real alpha generation is is in shifts in information. Right? So Trump being in a dusty courtroom, you know, fighting charges, whatever you think about it, and then six months later starting betting markets starting to predict that this guy may actually come in with a second. Like that's a big change. That's a real change. And the thing about is most allocators cannot change their portfolios fast on that basis. They do annual rebalancings, they have long term capital market assumptions. So, so that's when macro traders and CTAs and hedge funds, these, the flexibility is hugely advantageous. The part that doesn't work is when sentiment flip flops back and forth around the same trade. And, and you know, as, as we talked about it, year end would win. And Nick Baltus was, and, and Katie were both talking about this. It depends on the oscillations of those changes in information. And sometimes those oscillations are really bad for short term guys, but okay for longer term guys because they happen really quickly or they kind of reverse quickly. Sometimes it's the other way around, sometimes it's in between. And so again just the general challenge for this space is going to be, I think we all agree we can get 100 of us on this call and say do we think the world is going to look a lot like today in two years or going to be really different? And we're all going to say no, to be really different and we're going to have all sorts of different opinions on it. The challenge is going to be the chaos, the, the flip flops, the, the, you know, the totally unexpected things. I'm going to, you know, annex Greenland tomorrow. I mean like those, those things and how the market ends up reacting with that's going to be hard. And it's going to be hard not just for CTAs, but it's going to be hard for anybody who's trying to do things that, that is somewhat against the grain of the market.

[Andrew Beer]

I mean, I completely agree on that. One of the things that has been kind of top of mind for me when I've been traveling around this year speaking to clients and prospects and all of that. It's just for me, sort of quite common sense that I agree with you. There can be lots of whip soaring while we go through these transitions, et cetera, et cetera. But I still think it must be easier, all things being equal, to be a systematic rules based manager just following whatever actually takes place in the markets rather than actually not only having to predict correctly what the new administration may do or some, someone in Europe or in Asia for that matter, and then at the same time get the market direction correct. So I'm very optimistic about a fool's errand.

[Tom Robel]

Right? Yeah, we know you're going to get it right once and then get it wrong twice. And so. No, no, so that's. But look, that's my whole point about CTAs is despite this, you do need it. Right. And I think what I've always said about, about CTAs and managed futures is people tend to focus in on the standalone allocation and it's very, they have this kind of black and white view. They either love it, then they think it's the best thing ever. They hate it and they're never going to touch it. It's, it's actually not, it brings, it's a completion strategy. It brings something to a traditional portfolio that you really cannot and should not be doing on your own. You know, so, so take something crazy. Take a scenario that there's some conspiracy theory that the Trump administration wants to drive the US Economy into, into a recession fast so he can blame it on Biden and it's going to bring down long term treasury yields because we're going to go into a deep dark recession that's going to kill inflation and it can refinance all the debt in six months, you know, 200 basis points lower than it is right now. Okay. And if that's real, right. I don't think it's real. But if it's real, who's going to make money on that? That is the ideal 6 month, 9 month, 12 month trade for CTAs. The fact that they were betting on sticky inflation will be gone in a matter of weeks and they'll be wholeheartedly into a long treasury trade. And this in theory, I guess could be one of those inflection points. I don't think it is, but, but so no, I think it's clearly a competitive advantage. Whether that results in a sharpe ratio of 0.6 or 0.2 or 0.4 is sort of irrelevant from the value of it in people's broader portfolios.

Yeah, and I was going to come on to this later, but it's actually a good time because one of the big questions that I'm thinking about is can investors hold onto these diversifiers of which a CTA may be one of them, but can they actually hold onto it for long enough to benefit from the, from the, from the upside that they can generate in the portfolio? And it goes to what Andrew was saying standalone, the case may not be very compelling of a lot of times there are periods when there are very, very strong performance. But given the negative correlation of CTA strategies and quant strategies over the last few years, in a period when equity returns have had an unbelievable run, when you're adding these diversifiers, you're going to be giving something up. And so you can only. The only thing you can be sure of is that your timing is going to be completely wrong. So having these things in your portfolio and when you're thinking about tails is definitely something that has to be thought about over a major time period. Not only actually maybe on the downside, but also on the upside. So we're seeing more and more interest in portable alpha, where we're seeing much more efficient use of a portfolio capital to generate returns that incorporate core equity components as well as then a variety of diversifiers overlaid on top. But still, rather than having to take away your equity dollars from risk, you're overlaying it using portable alpha through the efficiencies you can get through derivative strategies and then that way you get the hundred dollars of equities plus then an extra allocation to a diversifier on top. And that way, when you're thinking about tail risk, yes, you're protecting your left tail by having these diversifiers in your portfolio, but you're also making sure that you're going to be there capturing the right tail moment when equity markets go on the rip again and you have 15 years of unbelievable performance.

It's actually interesting actually. So mutual fund AUMs, managed futures. Mutual fund AUMs in the US have been actually, they've been constant over a long period of time. They kind of spiked during 2022 and they've come right back down. And where there has been growth is managed futures with equities bolted onto it. So Abby Capital has a fund that is actually again their multi manager mutual fund product is still bigger but you've had much more. You've had disproportionate growth in their basically managed futures plus equities. A firm called Standpoint has a fund and again they don't have, I don't know what else they have other than this, but again they've got a billion dollar plus fund and then the king of the space is Catalyst which is a very, very aggressive, very, very high, very very aggressive marketing. They've got it's, and their, their equities plus Milburn is 8 billion or something at 200 basis points. So I, so I totally agree with that. And then, then you have Corey Hofstein and you know, building and look, other people are going to come with these kind of equity bolted to, to manage futures. It makes perfect sense for a diversification perspective.

[Andrew Beer]

Yeah, can I, can I add one thing to that conversation because I thought that. This is interesting actually. When I worked with Jerry Parker we were pretty much ready to launch a port and we called it Portable Alpha actually in all our research and so on and so forth. I don't recall that we ever did it. Then came the equity bubble year 2000 and equities went kind of sideways or down for 10 years. And nobody mentioned the idea of combining equities with managed futures. It was much better to have managed futures on its own. So all I'm just saying is is this just a cycle that, because maybe our own strategies have kind of underperformed equities. The best thing you can do from a marketing perspective is just slapping on the one index that has been going on, going up for 15 years as Bridgewater just found. And then as soon as the underlying index is not that great to have with your product, we're going to see people saying oh no, I don't need that, Ben Beta. I'm just going to take the, the alpha over here. So I, I'm a little bit of a, I think it's, it's, it's maybe not Surprising that we're seeing all these products coming out right now and not 10 years ago.

[Tom Robel]

May, may I?

[Andrew Beer]

Yes.

[Tom Robel]

So the. I do think there's an element of that. But I would say having, as a person who has gone out and talked to people about. One of the questions often becomes okay, so I don't have any exposure to this space. Where should I take it from? Okay. And the question is, should I take it from equities or bonds? I don't think I've ever won that argument that it should come out of either one of those because it's not rational. Right there. What they have is they have client and this is the wealth management space, right? This is not, this is not a pension plan who has all their various buckets already set up. This is a client who is worried about if I take it from equities, clients are going to blame me if equities go off and if I take it from bonds, they're going to blame me if bonds outperform and where's my coupon? Right. So we looked a lot at doing one of these, you know, kind of manage interest plus. So basically like a, you know, with. And I decided, we said not to prioritize it for two reasons. One is there will be moments and this is actually one of those moments where they're both gonna, both skis are gonna go down at the same time. Right. And so when we talk about long term diversifiers and if you have a month where the S and p goes down 6, managed futures goes down, your trend following strategy goes down 4, so you're down 10. That strikes me as a very, very, very difficult thing to explain to clients when you're talking about something with the long term beta of zero that goes up and down a lot over time because again, most of the investors are ultimately, ultimately risk averse. The other reason we didn't do it, the reason I'm actually not a huge fan of the products broadly is that, is that you take a very, very cheap, efficient equity allocation and you tend to make it tax inefficient and expensive. And, and so I think the people who end up gravitating to these products are looking for a. It tends to be advisors in my mind who, you know, who are trying to sell some level of sophistication that differentiates them from bigger advisors who have much more state and defensible businesses. I should, it's not, it's not that I don't like the product, it's that if I did it, I would make sure I preserve the tax efficiency of that equity allocation and do it with a level of fee efficiency that you're not overpaying for equity allocation to, to, to be able to, to sell this line item.

But that's where I think it becomes interesting because there often are certain hurdles in the fees in those products. So you aren't, you aren't paying an inefficient fee. And why is it tax inefficient?

Well, so take a typical advisor whose clients are sitting in an S&P 500 ETF, right? And they can hold that and the only thing they'll get is they'll get dividends coming off it, but they'll never realize a capital gain as long as they hold it. If it was a mutual fund and you have a gain in a stock within the mutual fund and you sell it, the taxes flow through to you. But ETFs have a tax quirk where instead of realizing gains, when you rebalance the portfolio, you just basically spit them out. And in a non taxable way, it's a very weird tax arbitrage. So, and you get it at 2 basis points or 3 basis points or 5 basis points. So now you take it and you put it, wrap it in something. Now you've taken it from an etf, you put it into a mutual fund, which is where, where all the products other than Corey's are Corey's. Corey Hofstein's the only one who is focused on this. So now you've basically done some economic damage to your tax efficiency by having it in a mutual fund in the first place. And because let's say now again, if you're only doing, if you do a truly stacked product where you've got a hundred dollars of equities plus a hundred dollars of notional on managed futures, you need cash and margin to support the managed future side of it. So you can't invest just in tax efficient equities. You got to go get some of your exposure through futures contracts, futures contracts in the US Even on equities you have to market to market every year and you get hit with, contractually it's, I don't know, 30% tax or something on it. So for the long term investor who's thinking about equities as being their growth asset, the difference between having it really efficient from a fee perspective and really efficient for a tax perspective, if this is going to be part of your portfolio the next 20 years, I would invest with it unless somebody did it. Unless I did a very, very, very detailed Analysis of the cost of that. And, and so anyway, so, so my only point is that there's a lot of economic friction associated with it. Now you do it and you do it a catalyst product with a 200 basis point fee on top of it. It's, it's not the way I would choose to diversify.

[Andrew Beer]

I mean, it's interesting from memory I've seemed to have heard maybe Eric Crittensen said it on, on, on this podcast when we spoke with him a while back. I think he is doing something to kind of minimize the damage of the, the tax implications. That's on one. That's one thing not sure that you can fully mitigate it. But the other thing that I really do like and that's kind of his. I think his, his idea is that you're giving people a product that they need in a package that they want. And I think that's kind of, you know, we have not been super successful. We'll come to that when we talk about AUM and changes in aum. We haven't been super successful in getting a real strong football.

[Tom Robel]

Yeah. This sort of clash between your strategic asset allocation and your tactical asset allocation, which something like a portable alpha product potentially solves as you can create a more consistent risk approach rather than having to take dollars away from different asset classes during periods when you think tactically you should be under or overweight, which can often clash with your strategic outcome. The way you built the portfolio with different strategies.

[Andrew Beer]

Yeah, yeah. You wanted to.

[Tom Robel]

By the way, I called Eric. After I spoke to Eric about his ra sh for launching the product, I called him a genius. Like I think, because I think, I think what he did basically is like, and this is. There'll be some media stuff coming out on, on some things that we're doing right now. But the, the getting people comfortable with the strategy is step one. Sometimes, particularly in Europe with usage funds, something it's like one step one of out of four. Right? Yeah. I mean you, they like the strategy. Then you get into the all sorts of constraints that they have on the user side, what they can invest in, what current, what share classes you have, what currencies, et cetera. So finding a way to, to, to be very sensitive to understand what's really going through people's mind when they're looking at these strategies and, and what's really driving them that drives the heterogeneity in the space. And so what I've always said about these products is I believe, like, I think what Eric would say is that These products have a real role out there that there is a subset of advisors who will naturally graph it because it solves something that they have trouble solving otherwise, which is the five year line item risk of owning managed futures when equities are going up. And that for a lot of advisors is worth the friction potential frictions for doing it because it's good for them in their business. Is it necessarily ideal from a portfolio optimization perspective, from an efficient frontier, from a sharp ratio? No. And from it, from a tax efficiency perspective or fee perspective. But again, this whole business is about developing products and figuring out how to structure them in a way that people can use them in the most efficient, straightforward way that, that, that works for them.

[Andrew Beer]

Yeah. Tom, did you want to continue down the path of portfolio construction? I think you had some more points maybe you wanted to, to talk about.

[Tom Robel]

Well, it's interesting because one of the kind of areas of development that we see in the CTA space is we've got our trend following CTA but also more of a focus on regimes. So going back to what Andrew was saying about how do you offset the cost of owning something that maybe like long trend trend follow, which isn't doing particularly well during a period. We're seeing a lot of CTAs spend a lot of time on the research looking at kind of can they detect periods when long term trends aren't going to be as trendy. And so regime identification seems to be something that a lot of groups are focused spending a lot of time on applying a lot of different statistical methods to try and then adjust their portfolios and adjust the way they allocate risk across different model sets to try and be okay. We think longer term, medium term, short term or anything maybe looking outside of trend to more fundamental carry strategies where they can see that that's going to be able to capture significant returns for a period of time.

[Andrew Beer]

Do you think? I mean, I think a lot of investors, when I talk to them, they would love for any CTA to have such an ability to have some kind of filter saying oh yeah, now you need to be fully leveraged and now you need to be half leveraged and so on and so forth. But I mean, aren't we to some extent trying to engineer something that is impossible really to engineer? Because if you think about a lot of the regimes I'm just thinking about, for example back in 2021, if you remember, I think it was like just before Thanksgiving, Omicron, the variant comes out in the news and CTAs had one of their worst days, I mean, for a long, long, long time. And of course there's no way of, no regime mechanism would predict that. But it was also the beginning, pretty much on that day was the beginning of one of the strongest runs that we've seen in the space because it led into 2022 and that was a great year. So all I'm saying is that I sometimes feel that there is a little bit too much cleverness in what we're trying to do. And to some extent we also have to accept that, okay, it's not a perfect strategy, it's going to have its drawdown, but if we start tinkering too much with it, it's going to lose the exact value that people need it for.

[Tom Robel]

Well, there's two ways of thinking about this. So firstly is if you are employing some sort of identification like looking for different regimes, you can't always, as you say, protect from a shift, a sudden sharp shift. And a lot of models will struggle with this. But what they can do is then quickly and be much more rapid in adapting to the new regime, they can identify that there is now a new something happening in the market. Now, whether it's easy to model or not easy to model we can debate, but the important thing is that they have identified that this new regime exists and then think, okay, historically, how have we best taken advantage of that?

But Tom, I mean, haven't people been thinking about this for 20 years?

They have. And so this goes on to the second way of doing it, which is maybe more, let's admit that it's going to be really hard to do this. And so let's be a bit more naive and simply employ different model time frames and then have more of a constant allocation across those different models. So let's. What we noticed, I think over 10 years ago was that when we built our SG trend indicator, which was trying to sort of be a hypothetical model portfolio, which shows us how trend followers are behaving at that period in time, we selected quite a medium term model from the data of the last five years and our medium term model seemed to have a relatively robust correlation. If we went out to a longer term model, the correlation was dropping off quite consistently. But what we saw over the next 10 years, so during the 2010s into the 2020s was actually trend followers then shifted to be a lot longer term. So they were either changing their models to simply be longer term and maybe the cynic in you thinks that when you have a longer term model, you have a slower Model turnover and trading. So there's the potential to gather more assets and trade more assets efficiently. But actually no individual CTA has really breached the multi billion mark since Winton had a large assets above 30 billion and no longer is above 10 billion. So what we think it more is that CTAs are employing many more models and they are using some sort of methodology to try and allocate risk across those different models. And interestingly we have kept the trend indicator as more of a medium term model because simplicity that it's going to be very difficult if we change it because do we then restate the entire past or do we have this period in time when the model changes but then you can't do a consistent statistical analysis against the data. But what we do when we run all these different models is we can see during pretty major inflection points, global financial crisis, Covid, Ukraine, war kind of breakout, the shorter term models have delivered significantly positive returns during those periods. But then for the interim the longer term models are very, very strong with their performance. So having the different models and having in your toolset and being able to allocate across them is a really vital kind of tool. A lot of the CTAs have developed now how they go about it, that's, that's kind of up to them and their secret sauce. But I think investors are spending a lot of time kind of drilling into that and understanding, okay, we've got that adaptation ability within the CTA program and it's something which is really playing out this month. As we've seen, the short term traders are doing a lot better than the longer term peers. And so any CTA that has those kind of short term components and it will be able to adapt and flip them positions long to short, much, much more rapidly.

I don't think anybody would argue with a statement that a short term model is going to be better at an inflection point. It's just a truism, right? I mean by definition the problem is the Sharpe ratio. On the short term models there are a lot more periods, not like the inflection point. So yes, you look great in one out of four periods and your Sharpe ratio is zero. So the problem with the short term models is we see because look, we've looked at them and thought wouldn't it be great to take what we do, which is admittedly going to be on the slower side and put it to it. And it does help. And so look, we compete with American Beacon and Manhl in a mutual fund in The US and people often ask me, what do you think of it? I said, their drawdown controls their diversification. Everything is staggeringly good. And if you have what we do and what they do and you hit an inflection point, they're almost invariably going to do better at that inflection point. But there's a cost and the two costs are you're paying 100 basis points more for it, you've got an indeterminate amount of additional costs associated with trading hundreds or thousands of individual contracts as opposed to a simpler portfolio. And your Sharpe ratio is likely to be lower over time. It still may be better for you in your seat to buy that because it's an established, a player in the space and because it has all these different things. But I'll just tell you a story. When people talk about new innovations that they're doing and you're an allocator and they're changing their models, one of the first question you ask is why didn't you do this before, right? You're doing it now because something is not working to your satisfaction. So let's talk about what that is and why it's happening. The second is tell me your best idea three years ago, your best idea three years before that and your best idea three years before that. And you know the answer is that this stuff is really hard, right? And I remember I was talking to the Credit Suisse QIS team back in 2013 and I, and because we're trying to figure out like maybe, maybe we should be bolting on QIS products to what we were doing. And they showed me a product with an index based track record that had an unrealistically high Sharpe ratio. I knew for the, for the underlying strategy and I said how is it that you're adding and you're basically doubling the sharp ratio? Said ah, we've got a signal. We know, we know when to turn an on and off this QIS thing. And I said what's the signal? And the signal is whether the S and P is going to go up or down, right? And I'm like, whether the SB is going to go up or down, right? I said if you have that, I want that signal. Okay, okay. And if you have that signal, don't dial in and out of longer term, short term trades. Go buy the S and P, go buy oil. So that, you know, there is a, I, I'm, I would say I sit firmly in, in, in Niels's camp that if, look, and if somebody comes up with an answer to It, God bless them, because they're going to have an absolutely huge business. But.

[Andrew Beer]

Well, let me, let me address that a little bit and of course it's going to date me, but you know, 35 years ago when I started in this industry, you know, managers were once a year, maybe once every six months, we were essentially by committee selecting what time frames the model should be running at. Right. So. And we would even select different parameters for different markets. Right. So that's just how it was done and it lasted for quite a while. With technology came a change. So I can only speak to what we experienced at Dun Capital, and that was that in the early 2000s, we were able to not only come up with ideas as to how we could essentially recalibrate parameters to changes in market structure, but also do it systematically. So, you know, so, so, so I think, and we're not the only ones, I'm sure doing this, but I think to your point, Tom, I think today, at least I know of one, but I'm sure there will be more that essentially we allow our models to recalibrate themselves so that the parameters and, and let's just think about lookback period as the only parameter here to change over time. Right. So, and I spoke with Katie Kaminsky about this a few weeks ago. So the other thing we do to visualize this change for clients is that once a year we run an analysis to see what time frame was the best for that calendar year. And we allow it from a few weeks all the way up to like two and a half years or something like that, whatever. And what's super interesting, because this was something that came up in a question from a, from a listener, he asked whether there was some clustering because you're absolutely right in your observation that managers become long, longer term. But my point, my point to that is, yeah, okay, some of it could be driven by wanting to manage more money so you slow your system down. But actually when you look at it statistically and just from pure performance point of view, longer time frames tend to cluster, meaning that you might have five or six years in a row where the best timeframe is 200 days plus. Yeah, yeah. Then came, and this is interesting, something I did not appreciate until having looked at this with a different set of eyes. Then came the great financial crisis and doing that kind of five year slightly before. But then in the years afterwards, the clustering became less than 100 days, I think from memory. Right. But even in 2008, which was a fantastic year for any trend follower, the best absolute Timeframe was something like 56 days. But then following that we have had now another clustering of 5, 6, 7 years in a row where the best time frame is. So I absolutely agree that one, we know it's possible on our side to have some kind of calibration going on because clearly you shouldn't trade the same time frame all the time. I think that's. And I don't think our peers do that really. I think there is some. But my point is just it's always a back looking thing. We cannot predict the future regime and that's the thing. Now regarding that though, this is I think where risk management can come in and to some extent there are techniques. We try certainly to use them on our side and have done for the last 12 years. I think where we also want to dynamically allocate our risk. Because even though it's not an exact science, there are certain things you can pick up as to whether it is quote unquote a good. I mean it's like my trend barometer on the website of top traders unblocked. There's a, you can use certain methods to say, oh, this is a trendy environment. As I said, the trend barometer finished at 57. Generally speaking that should mean that we're going to see a little bit better performance. Even though maybe my trend barometer is much shorter term than, than what trend followers are doing in general. All I'm just saying is there are certain ways for you to do these things. I think the key is to not get too overexcited about predicting the future. But of course I think we shouldn't be naive and just say oh yeah, we're just going to trade it the same regardless of, of, of what environment.

[Tom Robel]

And I think people want to have those different options in their tool sets to know if we're going to be going through a regime that happens to persist for a long period of time. Does the cta, does the manager I'm invested with have the tools that can allow them to benefit from that? If we're going to be. Andrew, you're right. If we're in this recent volatility environment, shorter term models are going to do better. But is that volatility going to persist? Say certain short term strategies are looking for that breakout of volatility and the persistence of that volatility. They can capture that very effectively. And I suppose it's also a philosophical argument of would you rather invest with a manager that has an ongoing research process where they are dedicating time to Refining the program and the product. It's a balance, it's an opportunity cost of execution expertise and trying to reduce slippage, reducing trading costs to allow yourself to access markets more efficiently, to then be able to flip long and short and be shorter term in the way you trade, to have that in your, in your toolset more effective, more effectively.

I mean, I think, I think from our perspective what you're describing is why we chose to replicate the way we do. Let's say you come into the world today and you say, you look at the space today and you say what is a representative QIS trend following product for the manager space? It's going to be long term, right. And, but, but, you know, or whatever you're. But you're making a ten year bet, right? If you think you're going to have this as an allocation for 10 years, you're making a very, very specific bet. The industry is not going to change. Right. And so if you look at people who actually established these kinds of bottom up indices a long time ago, they work well at first and then they go through variations because the industry will evolve. Right. So if so, so if Trump is the catalyst for short term models doing much better because he's on some serotonin, six week serotonin cycle or something, or three weeks serotonin cycle. But again, I don't think the whole industry will go to super short term models. I think it'll be. But they may do it at the margin and they may pull in their models a little bit shorter. But the reason we decided to do replication like this, not from the bottom up, which I wrote papers on, was because it's adaptive, Right. You're making a very, very short term debt. So whatever the models, and I root for people to find the answers to these specific things, I would love it if the Sharpe ratio of the space doubled. Because people find ways to calibrate their models in a way where they're going in and out of the right things at the right time and that improves the overall Sharpe ratio of the space. Again. But what replication is, it's designed to be a very, very short term bet on where they're positioned on a Monday and how they got there is. And that's why actually over long periods of time, this kind of approach tends to have much more stably high correlations than the bottom up strategies.

But do you worry that you take a snapshot of what does the portfolio look like on a Monday and by Wednesday it could be very different?

Sure. But the question is, okay, so Again, there are two kinds of inflection points, right? So first of all, I haven't seen evidence that under normal circumstances the portfolio is going to change much between Monday and Wednesday. When it is going to get significant is if SVB happens on Wednesday because then volume controls, short term models, whatever, whatever, the composition of the industry is going to be very different next Friday by the time we rebalance and when we're rebalancing on a Monday now, we've got essentially 17 stale data points and three current data points to look at, right? And you can have the model, you can calibrate the model to say, well, of course I care more about what happened last Friday than three Fridays ago from a data perspective. But the other thing I would say is like across the space, we don't see. I've never seen a period, even through some of these very, very sharp inflection points where the industry goes from 100% long to 100% short. It happens over. And so what'll happen is at those moments, because of the volume controls, people de risk faster than we will. But if they go from a position of 100 and let's say cut it back to, you know, 70 because it's a very, very sharp move, we'll go from when we rebound, we'll go from 180, you know, so we'll have some residual risk, 185 on an equivalent basis. Now, from an investment perspective, right? And this goes back to if volume controls, if somebody developed a volume control or a stop loss that happened before the loss occurred or before Vol spiked, right. We would look very, very bad by being slow like that. But instead what happens is it's already, you're already bloodied, right? And the question is, you know, are you bloodied on when you're de risking on, on, on Thursday from something big that happened on Wednesday? Are you, Is Friday going to be worse than Thursday? Is Monday going to be worse? Is it going to continue if it continues? Yes, it's really important. But a lot of the times you'll get a couple of days like, look, we may look at the first few weeks of this month and say this was one of those really, really sharp shifts in sentiment where people were de risking positions like the unwind of the yen trades and that kind of, I think what Graham Robertson and Managel called a three day volume spike. In those circumstances you get a lot of false positives that go off or you kind of cut risk at the wrong time. So it introduces, it increases volatility. We haven't seen evidence that again that it diminishes Sharpe ratio or long term performance. But during those periods we're going to look a lot more like Neil's than we're going to look like Manhl or Pimco.

[Andrew Beer]

I guess this is also, I don't know if you listened to Katie's last episode with me. She had written a paper about replication and one of the things, although she was replicating the B top 50 index I think it was what she found was that index replication the way you do it. Andrew, obviously I'm not saying you're doing it exactly the way, but index replication rather than sort of a bottom up replication, whatever she called it, mechanical replication was the word she used. There is definitely signs that during stressful periods the correlation breaks more so on the index replicator than on the mechanical replicator. But that's the price you pay. I mean that's just how it is.

[Tom Robel]

She's right.

[Andrew Beer]

Yeah.

[Tom Robel]

I mean if the underlying positions of the industry changes very, very fast, it will take us some time to catch up to that.

[Andrew Beer]

Yeah.

[Tom Robel]

And we're very open that that is, there's, there's a lot of noise in replication. You're taking, you know, a synthesis of the pre fee or the net of fee returns of net of trading cost returns of a whole bunch of active guys who are doing a whole lot of different things and it's a very, very, very narrow, very, very small data set that you have to work with. So, so the question as, as an investor is the structural arbitrage, the structural alpha associated with efficiency which we believe is quite high, does that justify the, the, does that, is that sufficient to accept the noise associated with it? And I would say again back to the original point that you made about like the dispersion within the space, you know, is you can, you can, it is very hard to pick one trend person and end up with a reliable representation. If your goal is to, is to get close to the SOC gen CTA index or the SOC gen CT index trend index over time. I mean picking Katie's mutual fund is probably the best single manager way of getting to that answer. But you'll still see a lot of variation over time. It's actually larger variation than you'll see than I think you've seen from a replication base, from the way we do it.

[Andrew Beer]

Very true, very true. But I guess also it depends on what time frame you look at because even your products from memory can have huge variation in a single month. Totally right. Just in the interest of Time maybe we have another sort of ten minutes or so. I do want to transition into some of these other topics that we had talked about. One of them was this thing about, you know, are, you know, are these new ETFs that's being launched by a lot of big firms. BlackRock I think launched yesterday and Fidelity and I even this was maybe old news and it's not really a cta. But is it the All Weather Fund from Bridgewater that was going to come out at some point? Who knows? Anyways, you had raised the question Andrew, whether you know, these ETFs are threatening the hedge fund or CTA franchise. I know you said there's going to be some news out Andrew, but you seem to be in all the news, all the articles that I read about on Bloomberg. You must be very well connected sir, because you always have a little comment in those. But anyways, talk us through some of these things you wanted to bring up. There's the QIS strategies. Let's have a bounce around on those topics before we wrap up.

[Tom Robel]

Sure. Look, I think people are wildly overreacting to the idea that Managed Futures ETFs will be a threat to. First of all, according to barclay heads there's 330 or 340 billion dollars of assets across the space. The managed futures ETF space is 3 billion. It just happened to be. It's gone up 10x in five years or six years because it was 300 million or below 300 million for a very long time. It just didn't exist really. But the products are being so BlackRock came out. If there is one product that 330 or 40 billion dollars should be concerned about, it's the BlackRock ETF because it's coming from it's price at 80 basis points which is a bit higher than I thought they were going to come in but they're pitching it as a real Active Manager ETF. So I've got 40 or 50 underlying instruments across the four different major market categories. And the difference with BlackRock is that BlackRock can hit you at it can hit the pension plans, it can hit whatever, et cetera. Now my view is, and what I've always said about the typical allocator to hedge funds does not buy, generally does not buy an ETF because the person who is responsible for that decision, they walk into the office in the morning asking the question which hedge fund should I invest in the space and for. And, and it's, it's prestigious. They like it, you know that it feels more sophisticated ETFs for them are for the hoi poly. They're a part of the segment that they're not really that interested in. So growth in the ETF space will happen, but it'll happen with new people who are not going to invest those hedge funds to begin with. And the other, the other, the other reason it's not threatening is that, okay, so basically BlackRock is coming with a relatively straightforward trend model at 80 basis points. That's not that cheap even though it's in an etf. That's not that cheap relative to what a big institution might be able to beat up an individual manager on a managed account to get a mandate. It's not that cheap relative to QIS products. So it's not as though like in the ETF world, the 80% of ETFs are priced below about 25 basis points. That starts to make a really big difference. But the mutual funds, part of the reason the mutual funds never took much market share is their price at 150 to 250 basis points. Again, that feels cheap if you're used to paying 1 1/2 and 20 for hedge funds. And maybe it's more accessible because it's a mutual fund. But if you're in the general RAA world, those seem very, very expensive anyway. So I don't think broadly manage future's ETFs are a threat. But BlackRock is a little bit different because if you read their press release yesterday, they're pitching it as Basically, we have $306 billion of systematic strategies and we can deliver that to you. And this is, and we can deliver to you as an institutional investor. We can deliver to you as a portable alpha solution. We can invest, deliver to you in a million different ways. And this is just one more vehicle that we're adding to our arsenal.

[Andrew Beer]

So I'd love to hear your thoughts on this, Tom, but I mean, at least from my perspective, I can kind of understand why people would look at fees if they're buying a replicator product. Right? So Andrew's pitch is I can give you a better return than the index because it's cheaper. I can kind of understand that now. Of course I would argue that, yeah, sometimes. Not always. Right, sometimes. So anyway, that's one thing, but if you're buying a specific etf, say a trend following etf, I really don't think you are buying IT to save 20 or 30 basis points compared to another manager. If you believe that other manager with a 30, 40, 50 year track record has outperformed the index by several hundred basis points. Right. So my point is on an index level I kind of get the whole thing about let's get to zero on fees on an individual manager. I really don't think that it's that important if you, if you truly believe in, in the, in the historical data of a manager. And, and, and of course you're going to look at the net returns at the end of the day to, for someone to come out and say, oh yeah, I'm 25%, 25 basis points cheaper, but I haven't got a track record. I wouldn't, I wouldn't touch you with a anything.

[Tom Robel]

I think, I think the, I think the blackrock pitch is different. Is going, is going to be, I think their success was going to, to the extent they could be staggeringly successful.

[Andrew Beer]

Like if you look, well, they can allocate internal money. So they will be successful, I imagine.

[Tom Robel]

And so, but, but it's, it's, I think it's actually, it's, it's a little more in that. So a really interesting story. So, so PIMCO in the US Yeah was for a period of time the largest managed futures mutual fund. Like you would not pull PIMCO off a line and say, I bet those guys are great trend followers. Okay, they, they happen to have had a very good March of 2020. Right. But they're fixed income guys. They've got a quant group within Pimco. So. But they raised a ton of money. Why? Okay, because a typical allocator out there already has money with them and already has a 10 or 20 year relationship with them.

It's like an access kind of route.

It's, it's, you've got eight things with us, here's a ninth. So in one of the platforms that, that I know quite well, even though Pimco was not a highly regarded fund on that platform, they blew past Manhl and everybody else on a, from a fundraising perspective in when, when the assets were rising because it was people saying, well it's pimco, like how wrong can they be? And here we are a number of years later and they've actually been quite wrong. Right. They've under, I mean they've underperformed by fair amount.

[Andrew Beer]

Yeah. But you know what's interesting about that, Andrew and I completely agree with you, but actually when we had Pimco on the podcast when we did our SOC Gen CTA manager run through Alan and I a couple of years ago, they specifically said that they had designed their strategy to be much more sensitive to equity sell offs. Right. So they designed the program differently and so I completely understand why they've underperformed, actually. But I also agree with you completely that just because it's a big name, you know, and just because it's 20.

[Tom Robel]

Basis points cheaper than they underperformed in 2022 as well.

[Andrew Beer]

Yeah, exactly.

[Tom Robel]

They did well in March of 2020. Right. They did very well in 2021, which wasn't an equity market drawdown. They underperformed in 2022, but they'd already raised the money by then. Right. And that's so look, my only point is the power of having, you know, having this strategy which is a quantitative leverage long, short derivative based black box when you get down to it. Right?

[Andrew Beer]

Yeah.

[Tom Robel]

It has a lot of features that are going to scare the daylights out of less sophisticated allocators when it's coming from IBM, it's easier.

[Andrew Beer]

Yeah, but, but you know what, this is also why I keep fighting the fight for the, for the old timers here. Right. Because I actually think experience matters. Right. And I don't think that just because you're a big, that you can come out and necessarily compete with people who've been doing it for 30, 40, 50 years. That's kind of one argument. But the other, what this reminds me of is a few years ago, I'm sure you both remember it, a few years ago we were swept by this argument that alternative markets, oh, they trend better, right. And they had a two or three years where they did well relative to the other developed market managers and now they've had three or four years where they've underperformed. So my point is just that when we shouldn't be completely fixated on this shiny new thing that's coming out saying oh, this ETF is great or this is fantastic or I'm 20 basis points lower. So you know, there's something for everyone in it. I mean, this is the beauty of it, right? That innovation in products means that a lot of people can access it if they so choose. I would still argue that the old God that are, you know, probably represented in, in your indices and replicated by, by Andrew. I think there's something to it. And you know, I would always choose someone who has experience over someone who just has size.

[Tom Robel]

Let's, I mean, let's, let's, let's be totally clear. It's an absolute crapshoot as to whether Black BlackRock is going to get this right or not. Right. I mean you don't have to look farther than the risk premia space. Right? Which was one of the great no fail ideas that BlackRock came out with. They came out with something called the BlackRock Style Advantage Fund. It was a whole collection of alternative risk premium products. The guy who built the portfolios talked about it as a no brainer. It was so obvious. It was as easy as picking low hanging fruit. They launch it expecting to a 6% return with a 6% standard deviation, no correlation to anything and it goes down 35%. And so yes, out of the gate with all of that promise, they raised two and a half billion dollars or something and it's sort of a, you know, it's sitting at 200, $250 million or something right now. So they can easily screw it up, right? But as we know that that's only one factor, right? And this is not something where they're not taking a 22. They're going to, they're smart, right? They're going to frame it in a way knowing that those are going to be the concerns that people are going to have. Now my counter argument would be that's fine, but again, why would you go to them? Why would you go to people who've been doing it for a long time, right? Why would you do it? Let them have a three or five year track record, show them that for three or five years and then make the call. You should be in a rush. Your clients are going to have money for the next 50 years but in the meantime it's going to be an absolute tsunami of media. Now what it's going to do, I think broadly is it's going to legitimize managers as an asset class and as a strategy in the broader wealth management space. Which now the question is, does that rising tide, is that rising tide better than this battleship that just got, got, got, you know, jumps into the end and you know, and starts blocking off other parts of the market because you know, every major platform will only do it with them because you can't say no. We'll see. Yeah.

[Andrew Beer]

The other thing I just wanted to comment on, I know we haven't discussed it specifically up until now, but you had raised this question, Andrew, in your notes about why the AUM was so stagnant in the industry, which actually I think is quite an interesting point because there had been some performance, so where did the money go and so on and so forth. And, and I, and I do agree with you that some of it has probably gone to some of these strategies. But you know what, I also Notice. Right. My understanding, I could be wrong here, but I don't think I am. My understanding is that in the Barclay report, when they report on aum, they actually include Bridgewater's two products. Right? And they, for a long time were, I looked it up in February of 2021 in the, in the Barclay reports, they were showing up at about 145 billion in AUM. Okay. Right now I looked at a, I just Googled a couple of days ago, what's the AUM of Bridgewater? And there was some article that came up from not long, long ago and it says, you know, Bridgewater manages 97 billion whatever. So all I'm just saying is, well, if that's the case that you have in your aum, one firm that is so dominant and then they lose a third of the aum, which they may or may not have. But if this article is correct, that's quite interesting in terms of, of, of where the AUM has gone or why it's not growing. And so anyways, I just want to comment on that note you had put forward.

[Tom Robel]

That's a, that great data. We have the data. So I mean I, we never looked at that question actually as to the composition. I'm sure we can get it. No, that's, I mean, that's. There, there are a number of hedge fund data databases that have been distorted by, by Bridgewater and like they've done some asset weighted hedge fund indices that it's like, you know, 40% Bridgewater. But I do think there's a, when you talk to people in the space, there's not a sense that, that people are opening lots of doors and in a very inviting way and lots of new people are excited about, you know, for people who've been marketing these products for a long time. And the, just the question that I raise is that when I, when we first started looking at the space about a decade ago, you know, the, the threat, the competitive threat then was, was banks, you know, and banks offering QIS products. And I've never, I think it was just Sina Lee who just came out with an article, or maybe it was the FT talking about the growth of these products. And I just never seen data on it. It would be interesting for me if, if, if the cannibalization had already occurred from, from QIS vis a vis hedge funds.

[Andrew Beer]

But some of that for sure. But what's funny about QIS strategies which for those who may not know, but these are kind of the strategies that sits within big banks and their quant Teams basically say, oh, we can do that and we can do this. I mean 20 years ago the banks didn't want to do anything in say in trend land or CTA space and now they come out and say, oh yeah, that's great strategy and we can do that a lot cheaper. But we never really see their performance, we never really know what they charge. And so it is a little bit of a. Yeah, unfair competition because we don't know what we're comparing.

[Tom Robel]

QIS stands for Quantitative Investment Solutions. Right. And the key is there is on solutions.

[Andrew Beer]

Yeah.

[Tom Robel]

And I think what a lot of banks, SG included, we have a big QAs business is they're trying to be solutions providers to groups and so where they can see interesting themes and demand, they will build these products. But I think it's typically a different buyer of the product. It's not the hedge fund team, it's not the asset allocation team within a large institution. It's more of a. QIS is used by a variety of people from smaller to medium to large groups. It can be someone putting on tactical trade, it can be someone putting on a short term view or yeah, I'm, I want to access some sort of curve steepener and rather than building the trade myself, I can use a QIS index that simply does it for me and continually delta hedges it. So there's a lot of different use of these QIS strategies and I think we aren't seeing it, but it's not coming. The money isn't coming from the traditional hedge fund world.

[Andrew Beer]

Yeah, no, no, I completely agree. Anyways, gentlemen, this was a Fun hour and 15 minutes. As always, a little bit away from some of the themes we wanted to talk about. But we'll bring them up next time, I'm sure, along with some other things. Any final thoughts as we wrap up? Tom, anything?

[Tom Robel]

I think it was interesting going back to the blackrock point, it was interesting that blackrock decided to build it themselves rather than white label, which would have been an option, or to hire people directly from other CTAs or to go down the replication route. And I think it's going to be very interesting for the industry to see how that product, as you know, Andrew says it is going to be a, a moment where we see is it legitimizing the quant space or is it something that could end a disaster? And unfortunately half of launching a new hedge fund is luck.

I think these calls are always incredibly interesting and just look, I mean just how fast the world is changing. I mean back to Fidelity did hire a guy, a guy named Roberto Croce who's going to be their guy and he used to run these in a mutual fund. Same kind of strategies and mutual funded salient and for better or worse the space is getting a lot of attention now and there are a lot of people that we are talking to today who I don't think would have considered trend following or their ilk five years ago but are doing it now precisely because bonds stopped working as a diversifier. And so it's. And that's the Voldemort of asset allocation models. It's the entire model businesses based upon certain statistical relationships between stocks and bonds. And after 2022 you could say it was a one year phenomenon. That's why they said you know, 2023 is good, we're going to be back in business in 2023 and then we're back in business in 2024 and they're going to be back in business 2025 and it's working this month. But I think it's structurally very positive for anything that's a inaccessible, efficient, proven diversifier which is this.

Yeah, we're in the best environment for macro investing we've probably seen for the last 10 years. We have huge geopolitical dislocations, we have volatility, we've had inflation that looks uncertain whether it's going to go away. And CTAs are part of that macro toolbox.

[Andrew Beer]

Yeah, absolutely. Remind me next time we speak in a few weeks. I have. One of the things I also wanted to bring up was actually inspired by one of Andrew's many LinkedIn posts recently is this thing to me and I know obviously I'm kind of talking defending my. My old time of friends in the industry and that is. Does anything go in terms of calling you a cta? I mean a lot of people are just coming out now with quote unquote CTA products but once you look look at them sort of a little bit more in detail they're kind of not quite exactly how I would define a CTA product. We're not going to go there now. I'm going to throw it out there and so there's more to talk about. Andrew, did you want to comment on that? No, no.

[Tom Robel]

We had a brief exchange about one of the star is called CTA and it's really only commodities with a little bit of. I think they have a little bit.

Of interest rates, a little bit of.

Interest rates but they don't have equities. Right. So they've been on a great run, but they've been in the. It's like being a, it's like being a, you know, walking to the office and being a tech stock investor when the mag7 portion is certainly fit in the right areas. Yeah, but, but look, I like that though. You know, I like.

[Andrew Beer]

No, no, it's all fine.

[Tom Robel]

I like product diversity.

[Andrew Beer]

No, no, it's, it's all fine. My point is just that when people, when you use a certain label, you know, should there be some quote unquote rules for what that label stands for? But let's not go go there because next time we next we have to. We'll have so much to talk about next time. Anyways, I really appreciate your time, as I'm sure everyone listening to us today do. And if you want to show some appreciation for Andrew and Tom, head over to Spotify or Apple Podcast, leave a rating and review and let them know how great they are. Anyways, next week I'm going to be joined by Alan. He'll be back. And so that will be a different angle into this wonderful world of hedge fund and alternative investments. If you have a question for Alan, send it to me at infooptraders unplugged.com and I'll do my best to remember to bring it up with him next week. From Andrew, Tom and me, thanks so much for listening. We look forward to being back with you next week. And in the meantime, as always, take care of yourself and take care of each other.

[Niels Kostrup Larson]

Thanks for listening to the Systematic Investor Podcast series. If you enjoy this series, go on over to us iTunes and leave an honest rating and review and be sure to listen to all the other episodes from Top Traders Unplugged. If you have questions about systematic investing, send us an email with the word question in the subject line to infooptoptradersunplugged.com and we'll try to get it on the show. And remember, all the discussion that we have about investment performance is about the past, and past performance does not guarantee or even infer anything about future performance. Also, understand that there's a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions. Thanks for spending some of your valuable time with us and we'll see you on the next episode of the Systematic Investor.