Top Traders Unplugged – SI390: "When Narratives Change Faster Than Markets"

Host: Niels Kaastrup-Larsen
Guest: Alan Dunne
Date: March 7, 2026

Episode Overview

This episode delves into how financial narratives can shift rapidly in today’s markets, often outpacing the markets’ ability to react. Host Niels Kaastrup-Larsen and co-host Alan Dunne discuss recent geopolitical and economic catalysts, the unique value of systematic trend following, position sizing debates, and the complexities allocators face in constructing resilient portfolios. They further share observations from the largest hedge fund conference in Miami and dissect new research out of Winton on building effective CTA portfolios. A notable theme: in an environment of fast-changing sentiment and deep uncertainty, timeless, rules-based investment frameworks are more important than ever.

Key Discussion Points & Insights

1. Market Shifts, Geopolitics, and Changing Narratives

• Recent Volatility in Bonds and Commodities
  • Alan notes the whiplash from last week's disinflation narrative (sparked by an AI research report) to this week's rising stagflation fears amid Middle East tensions. US 10-year yields dropped below 4% before rapidly rebounding; similar moves are seen in European bonds.
    Quote:

    “Sentiment has changed just as quickly this week. I think that's something definitely on my radar.” (Alan, 02:40)

• Muted Reaction in Equities So Far
  • Niels highlights that, despite geopolitical shocks, equity markets have been relatively restrained compared to moves in commodities and energy. He suspects "more surprises to come" (02:56).

2. The Subtle Power of Option Flows & Market Microstructure

• Pinning in US Equities
  • Alan references Jim’s recent comments: low surface volatility in equities can hide undercurrents of dispersion and heavy action in options.

    “A concept that is so counterintuitive...seemingly low volume on the surface actually means probably more dispersion and more volume in the underlying securities.” (Niels, 04:06)

3. Industry Updates: Firm Closures & the Rise of Pod Shops

• AlphaQuest’s Decision to Return Capital
  • The hosts reflect on AlphaQuest choosing to close after 25+ years—a well-respected short-term CTA, and early supporter of the podcast.
  • The rise of ‘pod shops’ (multi-manager platforms) and their impact on market dynamics and short-term volatility is scrutinized. Quote:

    “It takes a lot of courage to basically make that decision that it's better to return the money to the clients... It does lead to a lot of speculation as to why has it been so difficult maybe for these type of strategies to perform.” (Niels, 09:26)

• Short-Term Space Not Uniformly Struggling
  • Alan notes that while the short-term traders’ index has struggled, some managers have done well, underlining the importance of model differentiation.

4. Position Sizing Debates Among Trend Followers

• Dynamic vs. Fixed Sizing
  • Niels recounts Jerry Parker’s (of Turtle fame) recent remarks: in low-volume, high-volatility moves (like Bitcoin crashes), dynamic sizing may be more effective than classic volatility-based fixed sizing, challenging ‘orthodox’ trend following dogma:

    “If volume comes down, you can actually increase your position along the way... It just means that these strategies will perform differently from time to time.” (Niels, 12:30)

5. Trend Following as Diversifier & Crisis Alpha

• Listener Question on Portfolio Construction in Uncertainty
  • Devin asks how trend following helps during crises versus a classic 60/40 portfolio.
  • Alan: Trend’s value is twofold:
    1. Dynamic positioning in core assets (bonds/equities)—trend can flip direction or scale risk, unlike static 60/40.
    2. Alternatives exposure—commodities and FX drive crisis performance.

    “In many years, Trend has underperformed 60/40, but in a few years it has massively outperformed... there's maybe a 40 percentage point differential in performance during crisis years.” (Alan, 15:41)

  • Niels: Sector attribution studies show commodities, not equities, often drive crisis outperformance.
  • Alan: Difficult to time which sector delivers; best to have broad exposure and accept different drivers in different events.
  • On sustained performance:

    “Not many other strategies can really claim to be consistently as valuable as these strategies when it comes to...uncertainty.” (Niels, 20:47)

6. Trend Barometer & Recent Returns

• Niels' Trend Barometer at 55 signals a "strong environment for trend followers": broad-based opportunities across markets.
• Equity indices typically underperform for trend following, but bonds—‘the 40’—have historically been much better.

7. Hedge Fund Conference Takeaways (Miami)

(25:24)

• Alan: Buoyant mood for hedge funds—new allocators, strong recent performance, much debate on "portable alpha," return stacking, and total portfolio approaches.
• Global macro & managed futures are in vogue, especially for allocators worried about equity reversal scenarios.
  • AI is a hot topic: seen primarily as an operational enhancer for funds, not yet an alpha engine.
  • Geopolitics, while now at the fore, wasn't dominant at the conference, highlighting how quickly macro themes shift.

8. AI, Productivity, and the Fed’s Policy Dilemma

(37:49)

• Citrini AI Report & Macro Implications
  • Alan explores competing AI scenarios: deflationary shock vs. productivity boom.
    • Will AI lead to mass white-collar unemployment and disinflation, or a 1990s-style economic boom?
    • Historical parallels: Greenspan's Fed faced similar tech-induced dilemmas.

    “Warned economists don't even agree on how this impacts the economy. They don't agree what's the policy response. And you have a new Fed chair coming in who appears to already have made up his mind.” (Alan, 45:55)

• Fed’s new leadership (Kevin Warsh) may be tilting toward rate cuts, assuming AI will suppress inflation—a potential source of future policy error if that bet proves wrong.

9. On Timing Allocations to Trend Following

(51:42)

• Debate over whether investors should tactically add to CTAs during drawdowns.
• Alan: Empirically, timing is hard; investors often capitulate near lows. However, some clients have successfully timed entries after steep drawdowns.
• Niels: “When these things get near their worst drawdown, it's really not a bad time to invest,” though sticking with the program remains critical.

10. The "Midfield Player" Analogy for Trend Following

(50:14, 53:30)

• Alan rebrands trend following as the “missing midfield player” in portfolios—not just a defender (crisis hedge), but a contributor in both defensive and attacking roles, adapting with market shifts.

  “Trend can go on the attack in terms of be a positive contributor...but equally can shift back and be the factor that tilts the overall portfolio into a more defensive stance.” (Alan, 53:32)

11. Winton’s Research on CTA Portfolio Construction

(58:10)

• Tracking Error & Index Replication
  • Even two "random" CTAs can diverge from SocGen Trend Index by as much as 5% annually (due to differences in volatility and correlation).
  • Perfect replication requires 10+ managers or selecting those most highly correlated, but this may dilute the distinctive convexity that's valuable in crisis.
• Single vs. Multi-Manager Approaches
  • Winton suggests that blending too many speeds or strategies may simply “average out” potential benefits. They also highlight the large potential tracking errors for those trying to replicate indices via a handful of managers.
  • Alan highlights the trade-off: “Once you start doing a lot of these things to try and...replicate an index...you might actually lose the very thing that you want from your CTA, which is convexity.” (Niels, 65:24)
• Operational Considerations
  • Alan notes the mounting cost of managing multiple manager relationships may drive allocators to concentrate with fewer managers, but warns against losing the idiosyncratic value of specialized or smaller CTAs.

Notable Quotes

• Alan Dunne, 15:41:
  "In many years, Trend has underperformed 60/40, but in a few years it has massively outperformed."
• Niels Kaastrup-Larsen, 09:26:
  "It takes a lot of courage to basically make that decision that it's better to return the money to the clients..."
• Alan Dunne, 45:55:
  "Warned economists don't even agree on how this impacts the economy. They don't agree what's the policy response. And you have a new Fed chair coming in who appears to already have made up his mind."
• Alan Dunne, 53:32:
  "Trend can go on the attack in terms of be a positive contributor...but equally can shift back and be the factor that tilts the overall portfolio into a more defensive stance."
• Niels Kaastrup-Larsen, 65:24:
  "Once you start doing a lot of these things to try and...replicate an index...you might actually lose the very thing that you want from your CTA, which is convexity."

Important Timestamps

• Changing Narratives & Geopolitics: 01:38–04:06
• AlphaQuest Closure & Pod Shop Impact: 07:00–11:32
• Listener Q on Crisis Alpha & Trend vs 60/40: 15:15–20:47
• Miami Conference Observations: 24:18–29:25
• AI, the Fed, and Macro Uncertainty: 37:49–46:41
• Midfield Player Analogy & Trend Timing Debate: 50:14–53:32
• Winton Papers & Portfolio Construction: 58:10–65:24

Final Thoughts

The episode reinforces the timeless virtues of trend following—not as a relic or only a crisis hedge, but as a vital, flexible "midfield" strategy for uncertain times. The hosts urge listeners to stay skeptical of prevailing narratives, focus on robust portfolio design, and appreciate both the quantitative insights and practical realities revealed by this evolving industry.