Top Traders Unplugged: Systematic Investor Series

Episode SI386: When Position Sizing Saves You ft. Rob Carver
Date: February 7, 2026
Host: Niels Kaastrup-Larsen
Guest: Rob Carver

Episode Overview

This episode dives into why position sizing—especially when dynamically adjusted for volatility—is such a crucial risk management tool within systematic trend following. Leveraging recent dramatic market moves, notably in silver and natural gas, Niels and Rob dissect how managers navigated "Freaky Friday," avoiding catastrophic losses while still capitalizing on long-term trends. The episode also reviews a major new research paper from Man Group on trend following portfolios, covers audience questions about correlation and risk targeting, and touches on current market dynamics including AI spending and central bank leadership changes.

Key Discussion Points & Insights

1. Recent Market Volatility: Silver’s "Freaky Friday"

• Freaky Friday in Silver (03:56–17:13)
  • Rob shares his systematic approach: trading silver futures with dynamic position sizing optimized daily, factoring in both trend signal strength and realized volatility.
    • Continuous volatility adjustment meant Rob reduced exposure as volatility spiked, thus limiting losses during the unprecedented one-day drop in silver.
    • Although missing out on the absolute peak, he still realized a profitable trade by scaling in as signals strengthened and scaling out as volatility spiked.
  • Illustration of PnL: Bought at $53/$59, sold at $71/$81. Although silver reached ~$120, risk management kept results robust.
  • Systems not adjusting for volatility or using tight stop losses could have seen catastrophic one-day drawdowns.
    • Rob Carver [10:25]: "Funds that don't do that and have much more leverage potentially are exposed to even bigger moves... still profitable, great work, guys. But it scares the hell out of me the possibility of that happening, I have to say."
  • The importance of systematic dispassionate risk management was highlighted by a comparison to historical events (e.g., the Hunt brothers' 1979 silver saga).

2. The Nature of Position Sizing and Volatility

• How position sizing prevents disaster (04:28–17:13)
  • Rob explains that adjusting exposure in response to both signal changes and volatility automatically “defends” the portfolio from adverse moves, while non-adjusters can get quickly wiped out or whipsawed.
  • Niels and Rob discuss different methodologies (continuous adjustment, stop losses, etc.) and how all require careful calibration—especially as volatility rises.
    • Rob Carver [11:09]: "If you do increase your stop width, you also should reduce your position at the same time. Otherwise you're basically taking more and more risk..."

3. Liquidity Considerations and Market Structure

• Differences between trading gold, silver, and other commodities (12:38–17:13)
  • Silver, unlike gold, is less liquid and more easily disrupted when positioning gets crowded.
  • Rob: CTAs and quant funds help buffer, not exacerbate, parabolic moves, as they systematically reduce exposure in rising volatility—contrary to common misconceptions.
  • Discussion of how “tourist” traders and leverage can precipitate sudden collapses in thin markets.
    • Rob Carver [13:45]: "People treat liquidity as a constant number... but in market crises, liquidity disappears..."

4. Diversification and the Role of Commodities

• Include commodities for robust portfolios (22:29–24:55)
  • Niels argues that including commodities uncovers diversifying opportunities when other sectors are flat or in crisis (ex: natural gas’s 60% up, 26% down), reinforcing the multi-asset diversification thesis.

5. Macro Events: New Fed Chair & Political Risk

• Markets react (or not) to central bank news (24:55–31:46)
  • Discussion on the (supposed) market impact of Kevin Walsh’s surprise nomination as Fed chair, and skepticism regarding its direct effect on precious metals’ plunge.
  • Both agree that systematic, diversified approaches are superior given political and macro unpredictability.
    • Rob Carver [25:25]: "...the true answer is no one really knows. And this is true of most things related to the current president."

6. Technical Q&A: Risk Targeting, Correlation, and Volatility

• Listener Question: Realized Book Correlation (34:58–44:13)
  • Pedro asks about using realized book-level correlation vs. fixed assumptions for risk targeting.
  • Rob: Measuring realized correlations from P&L is reasonable, as it factors in both asset and strategy correlations; recommends using a 6-month rolling window or EWMA.
  • On predictability, Rob notes volatility is more persistent/predictable than correlation, but both can be estimated separately for robust portfolio construction.

7. Major Paper Review: Man Group on Trend-Following Universes

• Key insights from "Trend Universes" paper by Man Group (45:14–58:38)
  • Traditional, Alternative, and Esoteric Market Definitions:
    • Traditional: Mainstream, highly liquid futures contracts (e.g., S&P, T-Notes).
    • Alternative: Less conventional but accessible markets (e.g., electricity, emerging markets).
    • Esoteric: Newer, less liquid, more complex markets (e.g., physical crypto, certain Asian contracts).
  • Portfolio Decomposition: Traditional markets’ returns are mostly factor-driven (risk-on/risk-off); alternatives provide more idiosyncratic (diversifying) performance.
    • Unconstrained optimization: a portfolio would be only 30% traditional, 70% alternative/esoteric for maximum Sharpe.
    • For "crisis alpha" (protecting when stocks crash), best results come from a blend closer to 50% traditional—since those assets' returns align better with tail risk periods.
    • When accounting for cash efficiency (futures are much more margin-efficient), portfolios will allocate even more to traditional markets.
    • Rob Carver [53:44]: "...it's that Total Factor return, that thing that explains most of the risk of traditional markets, that makes traditional markets look bad from a kind of generic optimization perspective. Because they haven't got much of the syncretic risk. It turns out in a crisis, that's what you want."
  • Big takeaway: Portfolio construction should match investor objective—max Sharpe in isolation? Prefer alternatives. Crisis protection? Prefer traditionals with high liquidity.

8. Quant Finance and AI: The Convergence

• Article highlight: "Quant Shop, AI Lab Convergence" (61:45–66:40)
  • Rob notes the increasingly blurred lines between quant finance and AI labs, especially as deep learning and machine learning techniques become more common in both.
  • Implementation in finance tends toward tightly constrained problems (e.g., execution algorithms) rather than “blue sky” prediction.
    • Rob Carver [61:45]: "In finance, in systematic finance, we've always used something that you could wave your hands and call machine learning..."

Notable Quotes & Memorable Moments

• On Volatility & Risk Management:
  • Rob Carver [10:25]: "It scares the hell out of me the possibility of that happening, I have to say."
• On Position Sizing:
  • Rob Carver [11:09]: "...if you do increase your stop width, you also should reduce your position at the same time. Otherwise you're basically taking more and more risk."
• On Portfolio Design & Paper Summary:
  • Rob Carver [53:44]: "...in a crisis, that's what you want. And this kind of makes intuitive sense because in a crisis you basically want to just make fairly big bets on going 2008, going short equities, long bonds."
• On Systematic vs Discretionary:
  • Rob Carver [31:33]: "Discretionary Rob sold all of his equities in April last year and Systematic Rob is up since then, is up well that you know, 20, 25%."
• On AI in Quant Finance:
  • Rob Carver [61:45]: "All of systematic finance is machine learning. Although some, you know, some people say, oh no, that can't be machine learning because it's too simple. But... where's the boundary?"

Important Timestamps

• 03:56–17:13 – Silver market breakdown, risk controls in action
• 22:29–24:55 – Diversification and commodity opportunities
• 34:58–44:13 – Listener Q&A: Correlation estimation and risk targeting
• 45:14–58:38 – Deep dive into Man Group’s trend following universe paper
• 61:45–66:40 – AI/quant convergence and practical applications

Final Takeaways

• Systematic, volatility-adjusted position sizing is a critical defense against the rare but brutal shocks that periodically upend markets.
• Diversification, not just by asset class but by underlying risk drivers and strategy universes, remains fundamental to robust portfolio construction.
• Matching a CTA or trend-following approach to the investor’s real need—max Sharpe or crisis insurance—should inform the balance of traditional vs. alternative markets in any allocation.
• The convergence of AI and quantitative finance is real, but practical application is often still tethered by the need for transparency, interpretability, and significant, relevant data.

For full reading and more resources, visit toptradersunplugged.com.