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Top Traders Unplugged
SI394: The Quarter That Tested Every Trend Follower ft. Katy Kaminski & Harry Moore
01:13:48
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- [00:01]
A
Welcome to top traders Unplugged in markets. Success doesn't come from predicting what happens next. It comes from being prepared for what you can't predict. In each episode, we go deep with some of the world's most thoughtful minds in investing, economics and beyond to understand how they think, how they prepare and how they decide and the experiences that shaped how they see the world. No noise, no. No shortcuts, just real conversations to help you think better and invest with confidence.
- [00:36]
B
Welcome or welcome back to this week's edition of the Systematic Investor series with Katie Kaminsky and I, Nils Caster Blaassen, where each week we take the pulse of the global market through the lens of a rules based investor. This week we have a very special guest, namely Harry Moore, partner and senior client Portfolio Manager at Manhlan, who is here to discuss some of the recent papers that he has also co authored as well as a new paper that Katie has just published. So, Katie and Harry, it's really wonderful to have you both here today. I'm excited about our conversation, but first and foremost, happy Easter. If I can say that over here in Europe, it's something where it gives us a little bit of, how should I say, downtime. Not so sure about the same can be said about the US but it's great to have you here.
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C
Thanks for having me fun.
- [01:26]
B
Absolutely. So do you get any time off in the, in the US for these holidays?
- [01:29]
C
The US has one day off. But I mean, I, I have a Swedish husband and he's very sad because, you know, back in Sweden they have two days off and our kids have zero days off. So it does feel a little bit, you know, less of a big holiday than, than what, you know, he would have hoped for here in the US I do, we do have, the markets are closed Friday, so Harry and I are off. Right. So that's good.
- [01:52]
D
Yeah, absolutely. The, yeah, the London extra Monday off. So my colleagues will all be enjoying Monday over in London. But yeah, at least we get the one day off here on Friday in New York.
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B
Yeah, no, absolutely. I mean, as I do work for a US firm myself, but, you know, based in Europe, I'm allocating my European holidays, not the US holidays. I think that should be fine. Anyways, as I said, we have a great lineup of topics, some topics that are really, I think, very relevant actually as to where we are right now. But before we get to that, we normally just talk a little bit about what else has been on our radar other than trend following. And I'm excited to hear Maybe you Katie first, anything that has caught your attention recently?
- [02:40]
C
Well, I mean obviously we've all been so overwhelmed and following the big moves in the market. So I think most of us have been at home de stressing watching a lot of very exciting sports. So for example, I've been watching the March Madness, both the women and men's. But I guess I'll also flag that we're very excited about Sweden getting into the World Cup. So my condolences to you Niels for Denmark, but it's been a good distraction from what has been pretty wild, you know. Q1 2026.
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B
Yes, I was going to bring that up of course, but thank you for doing that, Katie. Harry, is sports what's distracting you at the moment or something else maybe?
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D
Yeah, little bit of sports. I mean I can't say England are on a fantastic run at the moment. We had a pretty difficult game without Harry Kane the other night. So yeah, little bit concerning right ahead of the World Cup I guess outside of sports, other thing just wanted to mention I have a toddler at home and she's been watching Number Blocks, which is this animated TV series and me and my wife now can't get the theme tune out of our head. We love it. It's a superb way to teach little ones about maths and get them interested beyond learning sort of counting songs. So I think a lot of kids, they can sort of count because they've learned it by a song but here they're sort of trying to teach basic math operators. So adding, subtracting and yeah, it's a great series. I think it even won a bafta. So yeah, that's certainly been on my radar not just this week, but over the past few months now.
- [04:20]
B
Yeah, well that sounds, that sounds good and, and fun. Always good when, when the kids can learn something at the same time as being entertained. You know, back, back when I had kids living in London, it was the Teletoppies, I think it was. And that was, I think it was. They were accused at some point for being indoctrinating the kids. So now at least I know why they are the way they are, I guess. But other than that, actually let's hope
- [04:47]
D
the Number blocks are doing the same.
- [04:51]
C
So you're gonna have napkins.
- [04:52]
B
We have an explanation. Yeah. Now what was I gonna say? Yeah, so besides the, the saga with Denmark and the World cup, the only thing, and this is a little bit market related that I was just gonna say that did caught my or catch my attention was just some of the headlines where you know, with the S and P closing, the worst quarter, the worst quarter, I think since 2022. We know what 2022 was for for our industry and we had gold, the deepest or the steepest drop on a monthly basis, I think since the autumn of 2008. And the 6040 portfolio got a little bit stress tested in the month of March. But we'll get to all of this. But those were some of the headlines. But of course, the biggest news that I should mention here is that I finally got myself around to creating a new introduction and outro intro and outro, as they say in podcast speak. So when people listen to this today, they will have. They would have heard the new music theme song and in the theme. Well, yeah, I think it could turn out to be a theme song, but we'll see. Anyways, I'm excited about it. So there we are. But let's talk a little bit about trend following and I think since we're recording on April 2nd, I think it is today. Yeah. And since we've just come out of March, we've just come out of the first quarter. I thought the first few minutes here we should spend a little bit of time talking about the month. And the quarter obviously was a quarter that had some great moments and some challenging moments, for sure. It was something that maybe surprise will be surprising to some people, even though March wasn't an easy month for our industry. I think if I'm not mistaken, this is the sixth or seventh month in a row where trend following, measured by the Soc Gen Trend Index, has outperformed the MSCI World Index. I did not actually know that, but I saw a chart this morning that kind of suggests that we've actually done better for a prolonged period now than equities. So that I thought was interesting. But maybe I'll just turn it over maybe to you first, Katie, and we hear a little bit about how you saw March, how you saw Q1, and we can have a little bit of a conversation about that.
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C
Well, I mean, I think it's been really interesting this first quarter because trend has been doing what we expect trend to do. And I'm sure Harry will agree with me that, you know, the first two months there were strong trends that we were profiting on that were continuations of themes from last year. And then we had a massive market pivot in March where you saw sort of the themes in classic traditional assets flip and start moving in other directions. So you saw sort of this inflation themes and you saw one of the biggest moves in Energy that we've had outside of 2022 and say 2014. And so you kind of found that new trends were building as other trends were pivoting. And so what happened with trend following was it was very positive on continuing trends in the first two months, more classic themes like weaker dollar strong equities. And then you know, as this tumultuous changes occurred, trends starts pivoting and some of the new trends offset the reversals in older trends that we saw earlier this year. And so I think, you know, for me that's definitely a win for a strategy in an environment where equities are down so much. I mean granted it's only been a month that equities have been down this much. So you know, you gotta kind of give it some time to see how it evolves. But it's really what you like to see, that diversification, that energies and other asset classes like some of the short rate positions or short positions in fixed income that profited from the inflation concerns really sort of offsetting some of the challenges in equities themselves. So for me it's been sort of a pivot in some of the themes but overall a positive quarter for trend, especially considering the backdrop of where equities
- [09:25]
B
are right now and bonds for that matter.
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C
I would say exactly, yeah, yeah.
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B
What about you Harry? How have you experienced sort of March and Q1 in general when you look at things?
- [09:37]
D
Yeah, I would really echo Katie in that you had January and February, this kind of continuation of risk on, continuation of, of, of of gold rallying and then this, this big pivot in, in March. And I think for, for investors in trend and people looking at the space, I think this is, this has been one where it's really provided that diversification that people are looking for. So of course trend had a very good run through the second half of last year, but so did many other asset classes. If I look at where we're at year to date and, and look at your trend indices, etc, if you sort of contrast fast, slow, whichever markets you're trading, most formulations will be up somewhere sort of between 3 and kind of 7% on a year to date basis. Which I think if you contrast that with equities, you contrast that with bonds or a 60, 40 is a fairly good result. Especially if you're looking at a long portfolio today and you're sort of saying, well in this mix of assets, what is it that's going to help me if there is a continued escalation or if inflation really comes back into markets. And it doesn't seem to be equities, it certainly doesn't seem to be bonds. Gold has clearly had a wobble. And then of course people are high loaded up on private markets as well. And of course there's issues there. So I think trading strategies like trend, I mean it's only been one quarter, but it's certainly getting a bit more attention, especially those looking for sort of more defensive allocations.
- [11:22]
B
Yeah, I think a lot of people would say that the last couple of days of March was kind of like a nice relief a little bit, especially if you were kind of still long equities and so on and so forth. But then we had a speech last night and then suddenly, you know, when I look at the screens today, it's kind of, oh, we're back in March now again, it seems like. But. And I know we will talk about this a lot more detail in a few minutes. But the other thing that I think March was really interesting in some ways was that January and February, I think there was a lot of similar performance among managers. Right. March was different. March again showcased the difference in some of the stuff that you've been writing about, both of you essentially speed market universe. I mean the numbers that I've seen so far, early numbers, really different between managers. The larger managers, yeah, they're always kind of more or less get in a smaller narrow band in terms of performance, but once we go a little bit below that, but still sizable managers, dispersion seems to be real.
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C
I would say this is not surprising. I mean, anytime there's a big trend, it's going to depend so much on sort of subtle differences and selection choices per different programs. And I mean obviously how much energy you had was sort of PCA1, right. So the more energy you had, the better things were and also the less of the things that were selling off, the better things were. So I. We've also seen that speed was helpful. So being able to pivot out of some of these, you know, reversing trends also helped. So I'd say that, you know, in a big move you're always going to see a little bit more dispersion. But that's it's kind of typical given sort of how large the size of the moves are. So small differences in choices can make big differences in return.
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B
I don't know this is true or not, Harry. I think it is. You obviously have many different strategies, but you also have some that are pure trend, I imagine. And one of the things that I notice when I see the Larger say the top 20 managers or so kind of the early indication of numbers, I certainly get the suspicion that certainly not all of them are pure trend anymore. And because when you start looking at some of the soft strategies like carry maybe some value, whatever, where my gut feel is that some of those strategies might actually have done really well or could have done really well in a month like March. So I think what we as educators need to do here is also just to make sure that the people looking at the space, looking at the numbers understand that. Yeah, but that might be influenced of things that are really not trend related. So when they do their assessment that they compare apples to apples and not just CTA to cta because that that could be something is that your would do you think that's a fair statement, Harry? You probably overview more different strategies than, than I have access to. But that's my gut feel.
- [14:32]
D
Absolutely. Niels. I completely agree with that. I think whenever anyone's looking at trend following, you you need to ask yourself allocation, doing and, and, and therefore how should I build this trend portfolio? And that might be 100% trend following models. I think once you go below 80, 70% trend following. Right. You're starting to introduce different return drivers. So I think Katie's kind of written about this in, in the past in terms of your sort of divergent and convergent strategies. Like if I'm looking at something that I, I would call trend following, I want that to be a divergent strategy. I want that to be kind of continuing on, betting on, on something that's, that's happening now. If in March you've had excess performance from other strategies, well that's great. But if it's a dedicated trend mandate, you need to be asking yourself some questions. Right, okay. How much trend is in here? If it's below 70, below 80%, how do you expect those other strategies to behave in a, in a kind of prolonged sell off? And a lot of those other strategies might do well kind of in the middle of the distribution when you're starting to get a bit of an equity unwind. But if there's a kind of full liquidity break a dash for cash, sometimes they have these, these kind of horrible left tails. So I would completely agree with you there Neil. Is this, if you're looking at trend, you, you expect these to be sort of 70, 80% trend models. And in terms of the divergence last month, I think a lot can be explained by the market mix and the speed. So as Katie mentioned, if you were already long oil coming into March, then you should have had some good offsetting profits there. Bonds was a key one. So if you were trading quickly, you would have been long bonds, which is bad right. In coming into March because bonds have sold off, but then you would have quickly switched to short bond. So I think bonds will end up seeing being mixed across the universe and then I would expect most being long equities coming in. Right. So equities have been on a long run. I think most managers will now be kind of full scaling and also just their momentum signals changing in equities as well.
- [16:58]
B
Yeah. Do you want to add something, Katie, or no?
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C
I think, I mean this is a good point. I often just point to the three key differentiators. One is speed, one is market set, third is like trend or non trend. So how much non trend. And I think as Harry put so starting with the trend or non trend, you know, carry as an example, if you're trading carry, energy carry worked very well. FX carry worked well. Bond carry didn't work so well. So, you know, as Harry was pointing out, it's not clear how that's going to react in, you know, this type of environment. It seemed to have been net, net positive if you had Carrie. But if you're in a divergent strategy, you, you know how trend is going to react to this. So it's really a question of investor objectives for that one. And I agree with Harry on that. In terms of speed, we did see that faster was good, except for maybe in fixed income. So I do agree with Harry on that. Frankly, fixed income has been a headache for over a year, in my opinion. Every time we think it's pivoting, it's not pivoting. So. So I agree with that. And then finally, market set, as we mentioned, when you have the key strongest trend and you have a 50% move in energy, like every different, you know, if you're 10% or if you're 20%, like that makes a huge difference. So I think, you know, that's the natural variation in the space. I mean, we're all measuring trends in different ways, so you end up with slightly different results, but you're all sort of in symptom, similar position. So I think that's where you see varied results across managers. But really sort of they're all doing what, you know, they're all doing, they're all following the trends, but they just have different methodologies. So. So I have to agree, you know,
- [18:40]
B
it's rare that we come across a month where you could say it really had everything that you can imagine happening in trend. It had the big trends. Right. The energies. Right. It had the big reversals. It, I mean it. And it had markets that just didn't do anything. So yeah, we were certainly tested as an industry and speaking of that, I think the industry did really well. The Beta 50 index looks to be down only 1.44% still up 7.15% for the year. Soc Gen CTA index down only 74 basis points, up 7 1/2% for the year. Stockton trend down 1 and 1.5% roughly up more than 7% still this year. Short Term index or traders index obviously as it should do well up 56 basis up 4.4 so far this year. Contrasting with that is the MSCI world down 6.32% at the end of the month, up now. I think it should be actually down 3.47%. I think it's a typo on my side for the year. World government bonds down 2.4% down a quarter percent for the year. And the S&P 500 total return index down almost 5% in March, down 4.33%. So relatively speaking, I think as an industry I think we did really well. I was surprised to see that people there were comments out there already saying oh but this industry didn't do anything. There was no crisis alpha. I beg to differ on this and for all the reasons we've talked about, we will probably mention them again today. But it's a beautiful segue actually to the first paper we're going to talk about, which is again one of the papers that Harry has been involved in. It's a paper that I love and I've talked about already a few times on the show with different people. So it's perfect to have one of the co authors with you, Harry here to maybe point out some of the things that you found most interesting about your findings, maybe surprising about the findings. I know that Nick Bolters kind of left a little bit of a question for you hanging out there when I talk with him that you might want to talk about. So I was gonna just give you the floor and, and talk us through this wonderful paper which is called a trend following Deep dive, the optimal market mix for a trend follower. So very apropos March, I would say.
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D
Thanks so much Nielsen. Yeah, I appreciate you discussing that with, with Nick and I, I think you discussed it a little bit with, with Rob as well. And yeah, the, the real background for wanting to, to write this one was there's been a Lot of work done on speed of trading and including by ourselves, essentially looking at if you trade more quickly, you tend to have more crisis alpha. If you tend to, if you trade more a little bit slower, you tend to have a slightly higher sharp. Now what we wanted to do here was take those ideas and really move it into the plane of, well, what about the markets that I select? So as trend followers, we have a huge selection of markets available to us. And so really what we wanted to do is say, well, if I trade more traditional markets, and by traditional I mean the centrally cleared, big liquid futures markets, things like crude, like gold, things that we've already spoken about this morning, how does that differ from a portfolio where I expand that market, set out and push out into alternative markets? So this might be things like Nordic hydropower, it might be iron ore. How does it differ if I push out even further and trade things like synthetic markets? So synthetic markets might be equity factors. I can also consider China, Chinese commodities, very differentiated, completely different return drivers to what you'll get from say, crude or gold if you're trading bitumen or if you're trading glass, for example. So what we did is we built portfolios from these markets using essentially a maximal diversification. So you're not putting too much weight into, into any individual market. And, and just took a look at the, the results. Now what I think was, was key here is that there's the statistical analysis, right? You do that and then it gives you some results and you say, hey, well, the traditional markets, they've tended to give me my best sharp in the crisis periods, whereas my alternative markets have tended to give me a higher Sharpe ratio over the long run. That's kind of finding number one. Now what we wanted to do was not just say, well, okay, there's the statistical answer, right? Like that is interesting. That's very interesting to us. That's what the stats say. But take it a step deeper and say, well, is there a fundamental reason that we can come up with that explains why that is? And so the next section of the paper really looks at those market sets. It looks at returns through time and it decomposes those into what can I explain with known macro factors and what can't I explain? Now that might sound a little bit kind of scientific, but what can I explain with macro factors? At the most basic level, my macro factors are things like risk on, risk off, are equities going up or down? Is it this kind of growth doing well? It's things like inflation, right? Sometimes inflation is the main Driver in market, sometimes it's monetary policy. And you can map these factors and take a look to how much contribution they have. And what we find there is that the traditional markets tend to pick up more of those macro factors and the alternative markets tend to pick up less. And so they have more idiosyncratic return drivers. Now why does anyone care about that? Well, what it means is that in a crisis environment when markets tend to move a lot, what we found is the, and it wouldn't be a surprise to anyone, but what you find is that those macro factors explain more of the variance. They're using a kind of principal components analysis to just figure out how much of that variance can be explained. And you find in these sell offs, things like risk on, risk off, or inflation, they explain more and therefore the traditional markets do better. So we tried to take this point of, okay, traditional markets tend to have higher crisis sharp, alternative markets tend to have a higher long run sharp, and then try and map that to why. And, and, and what we essentially come up with in the paper is that yeah, during those crisis those macro factors get stressed and being in the traditional markets helps you. Now from there, the next part that we wanted to do was essentially take those findings and say, okay, that's all well and good, you've given me some information. How as an investor, how as an allocator, should I then think about these portfolios? And so what we did is we created essentially a maximum crisis sharp portfolio and we created a maximum long run chart portfolio. And long story short, that maximum price is sharp overweights traditional markets. So again, higher weights to gold, to crude, to dollar versus pound, and the higher long run chart portfolio has a higher weight to our alternative market. So things, as I mentioned, your Nordic hydropower, your iron ore, your China commodities, then one final little exercise we did at the end, and that's just because it's come up with so many investor conversations recently, was flip that argument around a little bit and say, well, what if I'm trying to get the maximum cash efficiency out of my trend allocation? Now why is that interesting? Well, a lot of people that are looking at trend or looking to allocate to trend, they don't really want to sell something they already own. You kind of like your portfolio, you spent maybe years building it, you've done a lot of analysis, so what if I can get trend exposure with minimal dollars committed, almost zero dollars like minimal dollars committed, get the maximum kind of cash efficiency out of trend following. And so we did that as a kind of follow on exercise. And there we found essentially again traditional markets that are great for that cash efficiency, the long story short, for the whole paper essentially for crisis Sharpe, traditional for long run Sharpe, the broadest market mix. So including more alternative and then cash efficiency, which, which kind of links to portable alpha as well. You want to get lean on, on traditional markets. But I'll just pause there in case. Yeah. Any questions?
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B
Yeah, sure.
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D
That Niels and Katie.
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B
No, absolutely. I want to turn, I want to turn it over to Katie, but I do want to just throw in the couple of things that I remember from the previous conversations. One was when I saw the number of markets you had found or identified, including these factors, I think you got to like, right, 900 or so. That was quite impressive. Let me put it like that. And I think Nick mentioned something, right, 60 factors, he thought that was quite impressive as well. So I don't know if you have any insights as to how you discovered all of these.
- [28:25]
D
Yeah, absolutely. So yeah, Nick for sure commented on the, on the equity style. So how, how are there 60 equity factors now? I would, I would agree if you're, if you're going for the kind of six big factors, you're going to have your value, your moment, your growth, etc. You can stretch that out a little bit. Right. You can go to things like low beta liquidity, variations of quality factors. So maybe you get to kind of 12 to 15. What really gets us to 60 there is that we then differentiate by region. So if I trade value in the US and I trade value in Japan and I trade value in Europe, like those aren't perfectly correlated. And so once you get to your 15 factors and four regions that, that gets us to the, to the 60. I'm not sure if Nick will be happy with that answer. Maybe he wouldn't the split by regions, but that got us to 60 and then it's a similar argument to get to the 900. I do actually think this is an interesting question in trend because If I trade 30 stock indices, if I trade S&P 500, the NASDAQ, Euro stocks, topics, is that 30 markets? Most people would say yes, even though they are highly correlated markets. If I trade 30 commodity markets, cocoa, gold, crude, right. They're lesser correlated. So it comes back to this kind of basic philosophical question of what is a market? But yeah, we get to 900 there in the paper.
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B
What are your thoughts, Katie?
- [30:01]
C
Well, I mean, first of all, I really liked the paper. It was very interesting and I loved how you turned the question on your head to say, okay, so given the markets that we can trade, what are the different objective functions and what should investors do given those different objective functions? And I also liked how you differentiated between sort of the max sharp so something that an investor isn't thinking about as a risk mitigation strategy. But hey, if I want to add this, it's different. What should I do that gives us the most sort of best risk adjusted return over long term versus an investor that's maybe trying to solve a more specific global optimal portfolio by adding a defensive strategy that they're really trying to get that crisis alpha so they can make their overall portfolio more max sharp. Right. Because those are very different objective functions. I thought it was also a couple things. First, I also thought it was really cool that you went into the cash efficiency and secondly, I really appreciated the link between those two. You know, how it was very interesting to see that those two ended up in similar spaces. So for those investors out there looking at risk mitigation, they're actually sort of close to their cash optimal portfolio as well. So I thought that was, that was kind of really cool as well. But I think the thing that was the most exciting to me about this paper that had me sort of being like, ah, this is great, this is a way you can explain, this is how you connected macro moves to trend in a way where you're trying to say, okay, when an investor. And this, this is something, you know, when you speak with investors, I have found myself saying more and more in the last 10 years is that if you don't know the macro economy is going, you could go out and find a person that tells you that they know. Right? Like so a macro manager say, oh, I have an idea, I know what Powell's going to do. I mean, it's tough, right? Or you know, with trend, you actually are following a lot of the big macro themes and capturing them with a process that's diligent and sort of systematic as opposed to trying to predict which macro theme is going to occur and when. And so I think what was really cool about that particular aspect to me was that you kind of showed like what trend is capturing is the changes in macro themes and is these traditional markets are the best at doing that. Which makes sense because for a lot of investors out there that want to be prepared for inflation, that want to be prepared for risk off, that want to be prepared for trade, your different factors that you're talking about, it's very hard for them to find someone who can predict those themes that are so complex and so just kind of reiterated the point that, you know, when an investor invests in trend, they're giving themselves exposure to macro themes and if they're doing alternative markets, they're also getting sort of idiosyncratic, interesting return profiles that are differentiated. So I thought that was, that was very cool and I think for me, you know, and it did smell a little bit like the economic trend paper from aqr. Right, they talk about that as well. But that was probably the part that I thought was the most intuitive and exciting because an investor who says, hey, I want crisis Alpha, I want this, you at least answer to them like, this is why you should do this. This is the type of portfolio we suggest. The last point that I wanted to make and sort of for me, who's spent a lot of time talking about crisis Alpha, we've talked a lot and you mentioned this, Harry. We've talked a lot about speed, we've talked about a lot of the results that people have for crisis alpha. But when you go back paper, some of the things that I was thinking about with crisis Alpha, it's a few key things. One, being unbiased, two, being liquid, three, being adaptable. And I think very few people address the liquidity part of it. And I think the liquidity part is sort of addressed both in a different way in this paper as well because you kind of say, even though, because a lot of people, and that's the question I get from investors is like, why should I have the bigger markets for crisis alpha as opposed to alternative? And you're the first person I've seen that actually answered that question. And it does link to this concept of during a crisis, it's the things that are liquid that move with the macro themes that have the potential to find opportunities if you can adapt with them quickly enough in markets that are tradable enough and, and that can give you that potential offsetting returns that can help in a period of stress. So I thought that was really awesome and I really enjoyed the paper. So thank you for writing it.
- [35:02]
B
That was a lot of praise in a couple of minutes, Harry. So well done and feel free to comment on anything. But of course you, in the paper you also mentioned the cash efficiency and I think that kind of segues quite nicely to another paper that we wanted to revisit. Although it's a year old, it's, and it's called Portable Alpha Solving the Magnificent Problem. It is something that I think only since it was written has probably become even more at the front of mind of many investors. And that is how can I, you know, in a, in an efficient way improve my equity portfolio? And of course we in our industry know that. Well, that's one way that we would like to see that happening and that is by combining it with trend. So maybe you can take us into that thought process. And paper.
- [35:58]
D
Thanks so much, Niels. And yeah, the listeners won't be able to see, but I am blushing from those compliments, so thank you very much. The portable alpha paper, it's a little older, but it's actually very linked to what we're discussing regarding cash efficiency. So the kind of genesis for writing this portable alpha paper was very much kind of being on the road and listening to investors and I guess you see financial headlines and it makes an easy click. Is that the kind of evaporation of alpha in active equities? So 10, 15 years ago, most people who owned the US or others would probably have a mutual fund and it might be actively managed. And we've seen that move moved quickly to passive over the last decade or so. And a big reason for that is simply allocators. Investors, we're all saying, oh, it's so hard to beat the benchmark in the US or it's so hard to beat the benchmark in developed markets. And so portable alpha is a way to try and address that. Because when you go down the road of portable alpha, you're essentially saying, right, I'm going to decouple my investment choice, so the index is hard to beat. Well, why don't I just go and replicate the index? So I'll go and own the index. That might be through a swap or a future, but now I have the index, right? I'm going to get the index return. Now the alpha question is now a new question. So before it was, does my manager who manages my equity book, do they have alpha that's repeatable? Now it's can I find any manager who I believe has a robust long run track record at a repeatable alpha? And so the kind of genesis for writing this was to say, well, if it's so hard to kind of generate that alpha, why don't I split the problem over can I find a manager that can deliver alpha? And we're all in the business of trying to deliver long run alpha. And so within that paper we say, well, what can you do? Can you do better? And one of the things we investigate is trend following. Now why does trend work quite nicely in this context? Well, the first reason is that it doesn't use Much cash up though. Again, link into that cash efficiency point. I don't need a hundred dollars to get a hundred dollars of trend exposure. I might only need $25 or $30. That means I have a lot of spare cash. It means I can replicate my beta index very nicely and I can layer my trend on Parliament. And so in that paper we essentially look back through time, we consider trend, we also consider a more multi strategy type alpha. And what you find is that through time you are able to outperform with more consistency. That's what we're aiming for. So you believe your theory is that you can outperform with more consistency. Historically that's been the case. So you've separated your beta and alpha choice and trend seems to appear to be quite a nice alpha to sit on top now for sure. We can go into some more details on sort of the cash management, the buffers, et cetera. But yeah, I'll just pause there at the top in case leave a second.
- [39:24]
B
Yeah. Any thoughts from your side, Katie, on this? Obviously this is also something that you've been writing about and talking about for, for a long time and but of course, as I mentioned in the beginning, it's something that has become incredibly popular again in, in recent years.
- [39:43]
C
No, I mean, I think, you know, it's, I think it's exciting that people are talking about it too because I think people forget the cash efficiency part of our field and you know, they think about hedge funds and a lot of them require quite a lot of cash and that's something that is not quite as cash efficient. The only thing I would definitely say, and I like that this paper pointed it out that adding trend as your portable alpha strategy did have the better drawdown characteristics compared to say, more equity focused or hedge funds. And that's important. But the only thing I always worry about the term portable alpha is just the idea that alpha and beta are never 100% separated. And I think this month has showed that particular example. So I think updating the paper for last month would be fun to see just because I think we always talk about alpha beta separation. I remember the first time portable alpha was very popular and I think it's going to, that's going to be the challenge for those of us who work with investors like to help them to understand that, like when that alpha beta decomposition falls apart. And I think March would be a good example. If you look at say for example the return stacked etf, that does something similar to this. So investors can actually look at that and it's tough to be long equities and long trend and if trend and equities are in a drawdown at the same time.
- [41:08]
B
So maybe to both of you, based on the various research you've done, if people are interested in this area, I'm thinking, and I don't know if you already said this Harry, in the first section, but again people might just hear this and saying yeah, I can add any trend on top of an equity index. I can even just trade equities as a trend following and put that on top of a benchmark. But this is where we have to be a little bit careful. My again, gut feel here without having done the research. I imagine that there are certain kinds of trend following that probably are better suited for this particular thing. Could be, you know, the liquid market universe rather than the alternative or the idiosyncratic universe. It could also be, you know, a certain speed in order to get long term, you know, portable alpha benefits. Let's call it that. Did you, did you look at this in the paper? I don't remember specifically Harry, or just your thoughts on these kind of topics so that people don't go down the wrong path if they're interested in portable alpha strategy.
- [42:25]
D
Yeah Niels, I think, I think this really links to Katie's point on like coincident drawdowns and like we saw in March, right. Both, potentially both your alpha and beta have, have drawn down together. Now March wasn't such a large move that that's probably not causing anyone too bigger issues. But if you wind back to Covid or the gfc then certainly you're going to find moves that, that could be problematic. So I think that that really links to this, this question of when you are putting a portable alpha structure together you really need to do your due diligence. Like those risks from 2008 that caused so many issues. They haven't gone away. They're just being controlled for better by all of us as, as an industry. So some of those things that, that certainly need to be looked at are cash buffers though. One way that this strategy can really struggle is if it uses up all of its cash. Now think how tempting it might be if you can go out and own the S and P. Very a free show with just 10% margin. Right. You can get a hundred dollars of exposure for just $10. Now should I go and put $90 directly into another strategy? Wow. Probably not. Because if the S and p draws down 8, 9, especially if it draws down 10.
- [43:44]
B
Right.
- [43:45]
D
All of your margin is going to Be exhausted. You're going to need to source that from somewhere. Now, if your alpha isn't li, you're not going to be able to source that from your alpha and you'll get closed out of your, of your beta. Now that's not a good outcome. Usually if you want to own equities or an index, you expect it to go up over the long time. So having that shutdown is, is not a good outcome. But you can easily defend against that by holding very supportive cash buffers. So instead of my $10 to support my hundred dollars of S and P, maybe I put $40 alongside it. Okay, now I have a little bit less to invest in my alpha, but let's link that back to our previous chat. Trend following is super liquid, right? It doesn't need all of these dollars to fund its full allocation. So even if I only have $60 left over from funding my S and P or my MSCI acqui, or whichever index I've decided, Trent makes a very nice candidate to go on the alpha side. Now, just to take that a stage further and really explain, like, okay, we're talking about cash management, we're talking about stress scenarios. What does Trend actually do in a stress scenario? Let's take March as a very good example, right? Coming into March, so let's say we're the 26th or 27th of February. Trend is long risk. Equities have been going up. Up, right? It's long equities. Gold's been going up. It's long gold, bonds and commodities have just been going up. And so maybe its margin requirements are 25%, 20% breath hits the market. Right? Oil volatility is up, the VIX is spiking. What does Trend do? Well, Trend manages to risk, so we're managing to risk. Our margin requirements actually go down in the crisis. Right. So you, you have this alpha strategy that through your crisis period, where you might be worrying about your portable alpha structure, is actually taking less cash to run it. So I think that's, that's kind of one of the beautiful properties of, of trend that's maybe lesser discussed is that in a crisis, its actual funding needs are lower because as exposures, it wants to take a lower and that's because it manages to risk.
- [46:04]
B
Yeah, no, I think that's a great point. Any thoughts from your side, Katie, before we move to the last two papers?
- [46:11]
C
No, I mean, I think this is really helpful because I think a lot of people don't focus on the cash management. But in the end, like I said, before in a crisis or in a stress period. Liquidity is what matters. And I think you only care about that when you need it. So you have to be prepared for it. And I think portable alpha done right can actually maximize the cash efficiency without putting extra risk on, on the portfolio.
- [46:40]
B
Yeah. Well, let's move on to the third paper that, that came from man before we move on to your latest paper Katie. And I think the third paper is equally interesting, perhaps even more timely Even though it's nine months old because back in June of 2025 you published this paper called Trend following and Drawdowns. Is this time different? And I, I think you did as well. Katie published a paper relating to drawdown. So I'd love to hear your thoughts on this as well. But I think we want, we need to, to reset the clock a little bit here. We need to reframe what was going on back in June of 2025. The industry were in the fifth consecutive months of drawdowns. We were trying to deal with the fallout of the Liberation Day tariffs and the reversals in many markets happening at the time. By June of 2025 the Soc Gen trend index was kind of touching its historical all time maximum drawdown of around 2022%. The headlines were coming out in the press. That trend following for sure would be too slow to deal with a world where political news were communicated through social media and so on and so forth. And both of you did the right thing by putting pen to paper and published something that I think when you look back on it now is perhaps even more important than at the time it was published. Because we can now go back and see were these arguments actually true? Or maybe true is not the right word but were they solid arguments that was put forward? So with that setting the stage, Harry, maybe you can take us into the engine room in June of 2025 when you and your colleagues were were about to press release on the 17th of June of this paper and why you concluded the what you concluded and maybe also take a, take a look back at what happened since then because obviously the paper won't include the result, so to speak.
- [49:05]
D
Yeah, absolutely. Maybe we should put out a new one. Niels, that says the sort of 12
- [49:10]
B
I'm hoping for the updated version. Yes I am because some of your charts actually, actually talks about what happens 12 months after some, some of these things as far as I remember. So I would love an updated version.
- [49:25]
D
Yeah, well certainly we, we have seen a, a, a strong recovery which is, is, is been great for, for for the industry. And, and certainly, yeah, when you, when you're writing and of course you're, you're making forecasts, but of course it, you're still drawing from a random distribution in, in. You don't know how the recovery is going to go out. But the way we really approached writing that, and this was our cio Russell, we essentially approached it and saying, well, if you're an investor, you're going to hold many different assets and at times you expect some of them to perform and at times you expect others to not perform. Now, when an asset underperforms, what should you do with it? Like, you need to ask yourself, do I believe that this asset no longer works? Right. There might be a hundred years of data that says that it does, but this particular drawdown has changed your underlying beliefs. Now if it doesn't and you think it's, well, this is just par for the course of investing. Sometimes strategies will go through difficult periods. Then what you should actually do is rebalance in that time. Right? You shouldn't be looking to get rid of that asset, you should be looking to rebalance into it and get your portfolio back to wait. So what we did is we essentially ran through varying lines of argument about the state of the current drawdown, which if I wind everyone back to April, May and June of 2025, like the SG trend was in its worst ever drawdown, I believe, or at least it's one of two largest ever 12 monthly rolling drawdowns. And we were getting questions like, as you say, can trend deal with this world of new tweets that change information quickly? So we approach this from a few angles. I think the one that I like is essentially running a simulation many times and looking at the different paths. And we picked a path from a 0.6 sharp strategy that runs at 15 volt. That's a good strategy you want to own. Equities have historically been about a 0.4 sharp. So 0.6, you're higher than equity. Now, that strategy spent years in drawdown. It had a drawdown of 33%. Now we have statistically set that, that is 0.6 Sharpe. Right. And it still had this 33% drawdown. So we know that the underlying distribution is good, but it would still cause you pain in time. Now for the holders, that recovers really, really well and over a long time frame, you do, you do very well. It's just that psychological pain of being in the losses. So we analyzed that, we looked at what about if you set drawdown rules such that you deallocate from strategies when they have drawdowns and again, you find that underperforms. And ultimately what we were aiming to do is to say there's a lot of evidence for trend over the long run, Big, long track record. There's a lot of well documented biases from humans and psychology that explain why trend following works over the long run. And it was kind of a rallying call to say, hey, look, if we stick with it, it's always done well again in the past. We expect it again to go in the future. And very fortunately, and of course a lot of those kind of forecasts have played out and we've seen a very strong recovery from the industry. So, yeah, it was a big piece of work at the time, but I think it was the right thing to do to get that note out. We went on the road, we spoke to a lot of allocators, people in the markets, and yeah, very fortunate to see that that's played out and it's what we expected from a positive, sharp and uncorrelated strategy.
- [53:23]
B
Yeah. Katie, I don't know if you remember having read this paper. I think maybe I forgot to send you the link, but I know you also wrote your own paper around the same time. I'd love to hear your, your thoughts in, in general as well and, and any specifics to this particular paper.
- [53:38]
C
Yeah, I do remember reading it. I had to take a quick glance at it again. But for me it's interesting because whenever you have these big events and maybe Harry's the same as me, it's the only thing I go right to writing a paper, I'm like, okay, let's do the data. Right. Because if I think about how my emotions were after Liberation Day, you're kind of, oh my gosh, did everything change? Does the world change? And then when you look at the data, and that's kind of what we did, similar to what Harry did, and that, you know, drawdowns, they happen, they happen over time and sort of consistently over time they also recover. And actually there's some philosophical reasons for why. And this goes back to Harry's paper as well about the macro factors. If you look at Liberation Day, Liberation Day was a huge shock. And everybody, if you think about classic finance theory, went back and said, oh my God, the world has changed. And the markets were very volatile and it was as if the world had to try distill. What does this mean in a very short period of time? And they knew that the world had changed, but nobody knew what this really meant. And so that type of shock is very difficult for trend because there's no actual trend yet, right? It's just, oh my gosh, change, shock, it's sort of like a big sort of lightning bolt that happens. And then what's interesting is philosophically after you have this change, then you have the realization of that macro change. And guess what? Realization of macro change takes time. It takes time for tariffs to affect prices. It takes time for people to understand the US's pivot towards more inner focus. All of those things create massive macro change of which Harry already pointed out. Trend following follows those themes. So I think for me, philosophically, when there's a shock and when we're in a drawdown, that's usually a period where things, you know, have been good and then get shocked. And then you tend to find trends come back at some point so they wax and wane over time. And that's going to give you natural drawdown profile. Very similar to what we saw last year and how you saw since 2000 at the beginning of the index. It was true that this was the second largest drawdown. But for those of us that lived through the CTA winter in like 2013 and you know, and have also been around for a long time, we go, okay, let's get out our coats and we start writing, right? So because over time the strategy is sort of self correcting, just like most strategies. Just like the example of the 0.6 strategy, it's not broken, it just goes through cycles. But it's important to remind people because emotionally it is very tough when you're in that situation. So I'm glad that that's changed. But you know, and thank you for bringing us back to that.
- [56:42]
B
Well, I mean, listen to both of you here. What's so interesting is when you raise that question like people were or did at the time, and that is, oh, did the world change maybe without realizing that? Okay, yes, it probably did. I think a lot of people would agree to that. But here's the key. Change will hit all strategies that have a convergent profile because they don't like change. And there are very, very few strategies that will say, well, hang on, change is good. This is exactly what we want, as you've written about and talked about, Katie, for all these years, the divergent strategies, right? So I think sometimes, and obviously this is what we're trying to do every week, is to remind people that change happens all the time somewhere. Sometimes it's so obvious that everybody can see it. But change is not something that we as trend followers necessarily think is a bad thing. It's actually what we, what we design our systems to deal with. So change is nothing new. It's the only constant really. And the other thing that there are two charts that maybe are not the ones that are tables that are the ones that gets the most focus in that paper that I really love. One was figure four and people should go and download the paper on man's website and go and see it. And it's this thing where you talk about the probability of reaching a 2 standard deviation drawdown assuming I think, you know, 0.5 sharp and 10% annualized volatility. And so for example, when people bring out a new strategy saying oh yeah, no, I've been around for five years and I've never had a two standard deviation drawdowns, I must be really good. Well, according to your and I'm not a quant, people will realize that. But I can see what the table says. It says, oh yeah, that's a 21% probability of that happening. But if you've been around for 25 years like some of us have, that number goes to almost 80%. So clearly. And that's the soccer and trend index has been around for 25 years plus now. Right. So of course we're going to have a two standard deviation drawdown with very, very high probability. Those are some of the things we just have to get to get used to. And the other one that I really liked because I feel I remember as I'm getting old, I have to say, I feel I remember that back at the time people were saying, oh yeah, it's a crowded space, too many people doing trends, so it's not going to work as well. And what you do so beautifully here in this paper is that you go and say, well, well, how big is the CTA AUM actually of the total percentage hedge funds aum? And you calculate it to being, you know, basically dropping from somewhere almost 30% back in the late 90s to now it's just 5% of the total hedge fund universe. And you go even further to look at how much is it as a percentage of the total futures volume. And even that has gone down dramatically to about only 2%. So clearly this argument we so often hear, oh yeah, there's too many people doing trend or whatever it might be. And I do know that there are more people doing trend than is the in the official AUM number, but still it's a small percentage. So it's not really an argument that I that I take very serious. We could go on talking about this paper and to remind people about all these things. And by the way, there's one thing I forgot to say before when we talked about did the world change? Yes, it did. I think the real question is did people change? And that probably didn't happen. Right. And that's the basis, in my view, at least, as to why, you know, why trends form and so on and so forth. We don't have time to that because we do need to go to the fourth paper today. This time we're going to switch from Harry to you, Katie. So talk to us about your latest, newest, hottest paper.
- [60:54]
C
Yes, and this is just a short one, but it was fun because it just came out this week. So I was excited to have Harry read it and tell me what he thinks about it. So two of my colleagues, Tansu and Jashu San, Tansu Dimirbilek and Jashu San, collaborated with me on a fun piece that we were looking at macro strategies. The paper is called Assessing Alpha and Macro Strategies. And this is a fun paper because there's been a lot of discussion about macro and sort of, you know, particularly fees and sort of what is, what is macro? Because we are talking about macro today. It's a word that people just throw around, as Harry would probably agree. And when you're looking at sourcing macro strategies, it's so much harder than trend even, you know, because we're talking about trend here because macro can be defined in so many different ways. And so what we did in this particular paper is come show sort of some mathematical techniques where you can kind of keep a macro manager honest. So in the sense is like, cause if you look, and this is fun is that if you look at macromanagers over time, what you'll see is a lot of them have of equity exposure and then other ones incorporate a lot of trend. And given what we talked about today, there's some implicit links between trend and macro anyways because they're related strategies. And so what we did in this paper, which is fun is we kind of showed mathematically how you can tease out, sort of take out the equity and trend exposure and understand the idiosyncratic alpha that you have in a particular manager and showed some neat formulas of how you can actually think about teasing that out. And I think this is really important because a lot of investors have been, or there's been a lot of discussion about fees in the macro space as well and transparency. And we did see that, you know, even dealing with actual data is tricky because you don't have performance data, but you do have fee data. And so that was sort of a fun, fun exercise where we wanted to kind of demonstrate some important ways to think about what is the idiosyncratic alpha in macro and how can investors actually measure that and think about that.
- [63:09]
B
Yeah. Any thoughts from your side, Harry?
- [63:13]
D
Yeah, I really enjoyed this one, Katie. Thank you. Thank you for writing it for sure. So prior to joining man, if I go back seven years, a big part of my role there was putting hedge fund portfolios together in my previous role. And so it's looking at risk and correlation liquidity characteristics such that you end up with, with a robust portfolio. And I think the points that Katie makes in the paper are absolutely crucial to anyone that's looking at allocating to alternative assets. So I really like at the start where you decompose your trend and equity returns for those macro managers, essentially making the point that if I can go and access trend via a low cost route and I can access equities through a low cost breed, like what is the actual alpha on top of that. So Katie looks at that and then also makes the point that look, the fee that you're then going to pay for the manager that you pick, well, there's this huge spread right, from low fee to high fee. Now there's a very, very weak positive correlation between higher fee and higher net of returns from the paper, but it's very weak. Now that's crucial, right, because if you are deciding on one of those managers to allocate to, the last thing you want to be doing is making the error where you pick a high fee manager on the basis of expectation of higher returns and you end up with lower returns for higher fees. So I love that point. And the final point was just a classic from the hedge fund literature which everyone needs to be reminded of is the survivorship bias in indices. If I look at 10 managers available today, there might have been 20 managers available in that universe 10 years ago, but the 10 that did badly don't exist anymore. So my data set is very biased towards the better performers. So I really enjoyed it. As a reminder, if you're trying to build a good portfolio, you're looking for diversifiers and you're looking at systematic macro. You need to take these things into account, do some basic correlation analysis, do some analysis against factors like equities. You could do it against bonds. Here it's equities and trend. Do that analysis. So yeah, I love reading it. Thanks for contributing it, Katie. And I Think some excellent reminders for anyone building portfolios of alternatives.
- [65:38]
C
Yeah, I'm glad that you brought up the survivorship point too because that's really fun and we have these neat little graphs with stars and special characters on it and it was so fun to actually see as you look at sort of who survived and who didn't. There's definitely some themes there and we looked at that by Aum as well so it was kind of a fun paper. But so, so thanks for taking a look at it Harry.
- [66:02]
B
Thank you and appreciate, sure appreciate both of you keep helping our conversation to keep going with always having something to discuss but also to go back and revisit from time to time. I think this has been quite fun and very educational. So thanks very much to both of you and as I mentioned earlier you should definitely go. If you're listening and you're interested, go to both man's website and Alpha Simplex website to find the papers and and read them for for yourself. Any final thoughts as we start to. To wrap up our conversation today? Anything that you're particularly excited about as we look into the future, which we never do but as well we.
- [66:53]
C
Well, I would say, I mean I, and I. I'm going to turn this on Harry too but I'm very interested in geopolitical risk and there's been some really interesting literature in that. So I'm working on a paper on geopolitical risk and managed futures and did a talk on it recently and it's just so fascinating when you look at that literature how the literature has actually played out. So things like oil shocks and what does that do in terms of. Oil shocks cause a weakened consumer. They also cause inflation shocks. So it's been a very interesting time from a macro perspective. So I'm interested in geopolitical risk and its impact on alternative strategies. More to come maybe next time I see you Nils. That would be wonderful. I would love to hear what Harry is excited about and like also thinking about or writing about.
- [67:42]
D
Yeah, absolutely. So I think the geopolitics for sure interested to see how trend continues to evolve to sort of tilt into those types of trade. So if we continue to see the inflation theme I think we'll see a bit more oil in there, we'll see shorter bonds. So yeah excited to see how that plays out in terms of writing I think the next will probably be some more portable Alpha certainly trying to dig into a few more of what I would call the third layer. So already a lot of literature on what it is, how you can construct it, I think less literature so far on things like the cash buffer question Tail Codependent structural. So excited to explore that a little bit more. And yeah, I don't want to promise anything but we'll see if there's a, if there's something to write on that one and so maybe some more content as well.
- [68:33]
C
Niels Tail Codependence and Portable Alpha. That's like a lovely buzzword salad. I love it.
- [68:40]
D
Maybe that'll fit this.
- [68:42]
C
Tail codependence. You have to come up with a catchy title. You gotta get a new title because K Tail Tail Codependence in Portable Alpha. That's like good.
- [68:52]
D
Yeah, we're going to get no listeners and no readers.
- [68:55]
C
You have to change it to something catchy.
- [68:58]
B
Not that we try and forecast anything in our industry, but when we sit here in April 2026, I do feel we're at another kind of pivotal time point in our industry because of what's going on in the world. I can certainly see things happening both ways in a sense. I can see a recovery, have recovery happening and everybody will kind of have a sigh of relief and that was fine. I can see a much larger crisis occurring from here. When I really feel, or what I really feel about is that despite everything we do as an industry, I'm not so sure that there is enough people who are well prepared for whatever comes because I still think that the allocation to our space is way too small for what I would like to see. And I think the frustrating part of all of this is that we can have yet another example of where it's so clear that having these strategies, the non correlated strategies in your portfolio, be it through Portable Alpha, be through a straight allocation to trend following, how it really helps and how all the evidence once again will be confirmed, I'm sure of that. And yet a lot of people will be doubters and, and, and not necessarily feel that they have enough. But it doesn't stop us from continuing this, fighting the good fight and, and hopefully with all the stuff that you guys put out as well, we will slowly but surely grow the piece of, as our friend Andrew, who's coming on next time, likes to say, despite him eating all the pie at the moment. I think it doesn't stop us from, from continuing to educate people in, in terms of all of this. And, and these papers are so foundational in that journey even though they're not necessarily new concepts. But the fact that you guys can find new ways of explaining it, talking about it, displaying it, visualizing it it. I think it's just wonderful and and you do a great service to to our industry. So so thanks very much for that. Thanks for coming on and discussing all of that and I hope that to all of you listening, I hope that you all took something away from from our conversation today and that you're going to show some appreciation to Harry and Katie for all the work and time they put into these because they do take preparation and you can go to your favorite podcast platform, leave a rating and review and tell them how great they are. That would be. That would be wonderful. More people will find the show and hopefully get educated about this. As mentioned, next week I'm joined by Andrew Beer, so that would be your chance for him to tackle some of your questions. Feel free to make them difficult as he's a replicator, of course, and you can send them to infooptraders unplugged.com that's where I will pick them up and and put them forward. Anyways, from Katie, Harry and me, thanks ever so much for listening. We look forward to being back with you next week and until next time, as usual, take care of yourself and take care of each other.
- [72:11]
A
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