246 Systematic Investor Series ft. Andrew Beer & Tim Pickering – June 3rd, 2023

[00:00:00] Intro

You’re about to join Niels Kaastrup-Larsen 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.

[00:00:23] Niels

Welcome and welcome back to this week’s edition of the Systematic Investor Series with Andrew Beer and I, Niels Kaastrup-Larsen, where each week, we take the pulse of the global market through the lens of a rules-based investor. Today’s episode is even more special as we are also joined by returning guest, Tim Pickering, for a good old-fashioned debate on some of the most important changes that we’re seeing in the CTA industry relating to how people access these strategies. Andrew and Tim, it’s great to have you both back on the podcast this week. Tell me what’s going on where you are today. Andrew?

[00:00:57] Andrew

Thank you. Well, first of all, thank you for having me back. From a macro perspective, I think what’s been taking a lot of time and energy is just the exhausting nature of US politics and what is going to happen over the course of the next couple of years. It seems like we were in sort of a little bit of a respite last year when it was more about the Fed and inflation was happening. I think a lot of attention is turning back to politics and it’s just kind of a dreary and depressing presidential process that we’re beginning.

I think what you saw with the debt ceiling, which again, it’s these external events which just kind of keep everybody waiting in abeyance while it feels like you have two clown cars driving toward each other playing a game of chicken. I hope we just have a more interesting and productive macro environment over the next few months.

[00:01:49] Niels

Absolutely. I was even thinking of just about what’s going on in New York where you are today and you’re laying out this whole macro picture for me, which I wanted to ask you anyway. So I appreciate that, Andrew.

Tim, Calgary? What’s going on? Anything exciting?

[00:02:03] Tim

Yeah, I’m a Calgary-based Manager, which is a little bit of an outlier. Obviously, that’s the focus of the energy business in Canada, and arguably, the largest oil reserves in the world is in Northern Alberta. So it is an energy-focused town. Yeah, it’s an interesting time for sure. We’re seeing some weakness in energies, which we’ve been seeing for I guess quite some time. As far as politics go, I generally don’t pay all that much attention other than for entertainment value. We don’t do anything with it from an investment perspective, that’s for sure. But it is interesting times.

I think it’s probably pretty unlikely that we go back to a world of quantitative easing, zero rates, no inflation, no vol anytime soon. So that makes it a more what I call a normal time to be a CTA or a quant manager, somebody looking to capture trends in the marketplace. So these are interesting times for what we do for sure, especially from a commodity perspective.

[00:03:09] Niels

Yeah. Actually, it’s interesting what you say there, Tim, because I think a lot of people don’t necessarily think about the last 10 years as being the anomaly, but I truly believe it is. So what we’re back in, now, is in an environment where these kinds of strategies become even more important for people who want some kind of true diversification in their portfolios. So I am truly excited about our conversation today. It’s going to be a debate where there’s going to be some strong views, strong opinions, strong disagreement, I feel.

But nevertheless, it’s a really important debate because it goes to the heart of how should people think about accessing or getting access to these types of returns that we all love and hold dear to our hearts. Before we go into all of that, since we are recording on the last day of May, let me just say, from a trend following update point of view, that May has actually been pretty good so far, as far as I can tell, although there’s been a few surprises towards the end in some of the markets.

But in terms of opportunities, the interesting thing about this month is that some of the best-performing markets and sectors have been things like meats and base metals and some specific equity markets like Japanese equities and long gilts in terms of fixed income, and of course, also accompanied by some energies and trends in grain. So an interesting month, again showcasing I think the strength of what we do and more importantly, the non-correlation to equities and bonds as we all love.

Anyways, let’s dive into it. Actually, before we do that, let me just throw in some numbers. My own trend barometer finishes the month around 43, so still stuck in neutral zone, reflecting somewhat inconsistent opportunity sets for this year so far. But in terms of the indices we track, the BTOP 50 Index, as of close of business last night, up 1.33% for the month, down about 1% for the year. The SocGen CTA Index up 2.76% for the month, down 60 basis points for the year.

Trend Index up 3.76% for the month, down about 1% for the year, and the Short-Term Traders Index, I have to say, is struggling a bit this year, down 73 basis points and down 2.9% this year. This in contrast to equities being down slightly as of close of business last night, 36 basis points for MSCI World, still up 8.5%. Bonds came off but have recovered the last couple of days, but still about 90 basis points down for the month. The S&P is up just shy of 1% as of last night, up 9.5% for the year.

Anyways, now, you’ve each given me a few topics that I could bring up and I will try to add maybe a few comments along the way or follow-up questions. Then actually we have a listener, Oliver, who wrote in with a couple of topics that actually I think are very relevant for this conversation so I’m going to try and throw them in as well.

Now, before we start really getting into the meat of all of this, I’d like maybe to start with you Tim because if I’m not wrong in my memory, you guys launched perhaps the first or one of the first CTA strategies within an ETF and clearly, that’s really a big part of our debate today.

So I’m curious in terms of why you did it and some of the experience from those early days, but then we’ll get into the real topics.

[00:06:49] Tim

Yeah, sure. So we are the first CTA ever to launch an ETF. It was back in 2008. We started with something very simple. It was an exposure, a beta exposure to natural gas, Canadian natural gas, what’s called Aeco gas, which is one of the largest gas suppliers to the US. Why did we do that? We had launched Auspice, started Auspice in-… I left Shell in ’05, First Fund in late ’06, and here, a couple years later, we were launching this beta natural gas ETF. What we were trying to learn about is the delivery mechanism.

We recognized that as a quantitative systematic rules-based manager, that really was akin to an index and could we find ways to get products like commodities and CTA into a format that we thought was where the puck was going, and that was as an ETF. So learn about indexing, learn about ETFs, do it with a very esteemed partner. It was Claymore. Claymore was then gobbled up by BlackRock. But we launched it with Claymore. They had a great distribution team and we learned a lot. So that was kind of the first thing was the beta product.

The next thing we did was more CTA-like, and that was we launched a trend following long-flat commodity product linked to our Auspice Broad Commodity Index. There’s a couple of indices or a couple of ETFs now in the world linked to that, both in the US and Canada, trend following, volatility-based position sizing, term structure, all that fun CTA stuff that’s from our world. Again, we were trying to break open that retail space and really give access to retail investors to something that otherwise was a little bit opaque, definitely hard to get their hands on.

Being in Canada, a very commodity-focused nation, everybody will tell you they have commodity exposure, and what they really mean is resource equity or debt and that isn’t commodity exposure. So we’re always looking for ways to enable the investor, whether it’s retail or institutional, to have access to products. So that was our first foray into it. We learned a lot. I’ll preface this by saying we really believe in the ETF product line as a delivery mechanism.

Again, these are just delivery mechanisms, very pro-ETFs and we’re pro-ETFs in the CTA and commodity space. It accounts for more than half of our almost billion in assets. So we really believe in that space in general. Obviously, the product that Andrew and team brought out piques our interest in various ways just because it’s a CTA type of product and we know this space so we definitely applaud the innovation and the pioneering aspects. That’s kind of what gets us up in the morning here at Auspice.

[00:09:57] Niels

Absolutely. Now, the first topic really comes from Andrew. Andrew raised the question, what is a managed futures index and why should anyone care about whether something is an index or not? So I wonder if you want to throw a little bit of thought to that, Tim, and then Andrew, you can comment from your point of view because I know you wrote about this a few years back. But Tim, what are your thoughts about this?

[00:10:32] Tim

Yeah. If you go back, I’m going to go way back to 2008, 2010, we made the decision as a CTA to take our strategy and actually publish indexes linked to those strategies. So we took a single strategy to carve out from our flagship, took that IP to the NYSE to an index provider, and they actually published that index as a third party. Why did we do that? The same was with natural gas. We needed to create a benchmark index for that ETF, one that the strategy had a goal of tracking. Instead of us tracking or comparing to something off the shelf, why don’t we create our own strategy and publish that and that is the strategy?

Then if there’s a deviation in our strategy or in our performance from theoretic, i.e. the index, the investor can see that and that provided the investor some comfort, especially way, way back when we were launching ETFs in a very, again, opaque area. Commodity and CTA was really new at the time, and it wasn’t hard to do. Because we have rules-based CTA strategies, putting them in an index format is pretty easy to do as opposed to saying, look, what we want to do is launch a product. In the case of commodity, our first product was, could we beat the GSCI or the BCOM? That was our goal.

We said, yeah, we can. So the benchmark could be BCOM or GSCI and we can use trend following and term structure and volatility-based position sizing to do that, or we can publish our own strategy as the benchmark index. That’s the path we chose. That created some comfort for the investor. That’s just the path that made sense for us at the time. So we do believe in the space (and I know Andrew has some specific thoughts on this) of taking a strategy, one that we believe is robust that can be replicated as a strategy especially for the market makers, and putting that out as an ETF product as opposed to replication.

I’m not saying replication is bad, and we can go down that path here shortly, but that’s just the path we chose at the time. It was to take our strategy, we had a lot of track record. We’ve been around 17 plus years, a lot of track record in this, and that’s what we’ll use as the basis for the strategy.

[00:13:05] Niels

Okay. Now, Andrew, I have to say, I have not read your article that you wrote, but I think it was a few years back in 2015. What did you write about this topic?

[00:13:18] Andrew

I’m endlessly fascinated by this intersection. One of the most fascinating things from an industry structure perspective is this debate between active and passive. A lot of things in the asset management world have big words attached to them and people kind of take it. So they look at the S&P 500 and they say, “Oh, my God, that’s passive.” But the index changes over time. S&P decides to change it. Now, they make relatively minor changes over a period of time.

At the other end of the spectrum, you’ve got a stock picker who is basically trying to beat the S&P 500 by 100 basis points a year net of fees and he’s deciding which ones of those 500 stocks he wants to own and put it together and try to do better. But they’re really not all that different. So what I wrote about and there was a whole wave of products that were launched in the mid-2000s that were labeled as index products. They were systematic in nature. It was called the alternative risk premia space and they sounded unbelievable on paper.

Why would I ever invest in a CTA when I can simply build my own trend following model? Building trend following models requires a great deal of experience etc., but you can get a lot of the way there by establishing certain rules and parameters. This whole business is based upon that we all learn from each other in different ways. So if somebody figures out that a certain window length or vol adjustment or something is better, over time, other people are going to adopt it. So we loved the idea in theory, then we looked at the space and we said all right, let’s build our own.

We started actually with merger arb. We said, let’s build our own merger arb model. The argument that Cliff Asness and other people were making was merger arb guys generate high risk-adjusted returns, they’re really not that smart. What they’re really doing is harvesting a risk premia because most investors hate merger arb deals and sell out too soon. A million guys are leaving pennies on the ground and we’ll just sweep them up. As we went through the process of trying to build it, what we realized is, my God, we just specify like these 35 different parameters.

Do we want Japanese equities or not? What happens when a bid comes in above the offer? How do we treat that? What if it’s a cash deal? What if there’s some weird security? When we got through all this, what we realized was that actually, those indices were single manager products wrapped up as an index. Now, why would somebody do this? What I wrote about was basically the power of it, from a marketing perspective, was that people were creating indices that were essentially systematized active management products and then walking out with a 30-year track record.

Because the way regulatory rules worked, and they still work that way, is that you can publish an index as your hypothetical performance but you can’t show a track record even if you’re doing exactly the same thing for the past 25 years but it just wasn’t in XYZ vehicle. So in the case of DBMF, we started it in 2016, identical underlying strategy, rolled it into an ETF in 2019. For the vast majority of investors out there, our world starts in 2019. So the appeal of the index products was you could show somebody how you think this would have done over a long period of time without them having to come and ask you for it directly.

But what it got to was this question of if you create an index or you’re using an index that’s not what the asset allocation bucket that you’re aiming for does, then have you introduced a new risk in your model? So as it relates to the managed futures, what we basically concluded at the time, and I think that products have gotten a lot better and Tim, yours may be far better than what we looked at, was that if everybody is saying they’re a trend follower, and this is the index, and the indices are 30 points apart, at the end of two years, that suggests that they’re really single manager products.

The problem it creates for you, as an asset allocator, is when you say index it should be something that you can fill a bucket and know it’s going to match that bucket or come close to that bucket over the next two or three years. We didn’t see the rules-based ways of doing that. Now, there are people, I think, who have done it well, but we saw issues where people hadn’t.

[00:17:42] Tim

Good points. I would say one aspect that we learned about, and you’re not wrong in a sense about publishing an index, you can look back over time and it’s theoretic and all the rest. The only correction I would make to that is when you go to sell a product, you can’t allude to that historical track record. You can only look at that track record (and this has gone through regulatory, I’ve been through it for whatever it is now, a decade, 15 years), where from that point that there was product and that index was published, then you can look at it going forward.

You can’t look at the backtest and publish that alongside product, at least that’s what we’ve experienced and that’s not only in Canada, but specifically with our relationship with Direxion in the US. So that’s one aspect. I think there’s a lot to unpackage here. I’d say part of what I’m hearing is this thesis that people like indexes. Why would they be comforted with an index? Well, in the equity and fixed income world, they’re very comfortable with it and this idea that people want index exposure in the CTA space. I don’t believe that’s the case.

I don’t think in the CTA space, that’s what people want. They want these benchmark indexes of 18 or 19 or whoever the managers are. What I hear from clients, both retail and institutional, is they want outperformance at critical times. They do not want index. If they get index, they want it with far less risk than even what the index shows, the vol, the drawdown. But they want outperformance at these critical times. You can go down this wild door of crisis alpha.

To me, all that means is, can you outperform the street at these critical times when a client is really looking for negative correlation, non-correlation, crisis alpha in performance? That’s when you don’t want to be benchmarked, you don’t want to be indexed. This is where the alpha debate starts to come in, is what is that element that causes a manager to outperform even if they are systematic rules-based? But what is it about their strategy that causes them to outperform at these critical times?

That’s what institutional investors do. They go build portfolios of CTAs that they think are better. They’re not looking for an index. They’re looking for better. They’re looking for these elements.

[00:20:16] Andrew

Yeah. Well, first of all, I think there are a million different kinds of investors. We have found zero interest in general, we have very little interest in general for our products from institutional investors, because they do want to pick you and five different guys. They want you and Niels and three other people. What they do is they don’t want five guys who look alike. They want five guys who do different things they want. They’re probably not going to do Niels and AlphaSimplex and somebody else who has very similar return profiles over time. They’re going to layer it with a Man AHL or somebody else.

They’re also probably going to go toward guys that they think are institutionally credible and safe to invest in. But what I would argue is when they’re putting together five or six, so one step above that guy is a consultant or somebody else who’s building a long-term asset allocation portfolio. There’s a decision that happens above that where they decide in the first place that they want a 3% allocation or 5% allocation to managed futures. How do they make that decision?

I’ve never seen somebody look at that and say, “Ah, what we need to do is Bob. We need Bob to be a 5% allocation.” They have to look at a long-term return stream and then somebody feeds it into what are called capital markets assumptions. They come up with all sorts of assumptions about the future. This is the expected returns, this is the expected correlations of different asset classes, etc., of which negative correlation or zero correlation to other assets is incredibly valuable.

So my whole thing was up at that level, when you’re trying to have an asset allocation bucket to begin with, you are by definition talking about an index of that strategy. You don’t say, “I’m going to start with my US equity allocation at 60% and I’m going to pick this guy because he’s been doing it for 10 years and he’s done better than the S&P 500.”

You start with, I want a 60% allocation to equities and then decide you want a guy to beat it. You just start with an allocation to bonds and then you pick this guy because you think he can do marginally better. So they’ve got to start with I want managed futures, and then they want Tim or they want Niels as the alpha generation relative to it.

[00:22:36] Tim

Yeah, so I don’t disagree. If we go back to the start of this conversation, in this ecosystem, and I’ve heard you say the same things, I want us all to do well. I think this is an important part of asset allocation. It’s fantastic to see a bit of a revival in that regard, I don’t know if it’s the right word. But there’s obviously a lot of interest, our assets have grown a lot, we’ve got a big runway here and it seems like there’s positive momentum (no pun intended) in this space. However, I think there’s a responsibility, and you’ve alluded to it, you’re not after that institutional investor or maybe they’re not looking in this space.

However, I think there’s a responsibility in the message that we deliver in terms of these products. You’re talking about retail investors. Again, I accidentally found myself in this space back from 2008 on with retail-based commodity ETFs. But there’s a responsibility in how we tell this story and that we’re accurate in what we’re describing. You just mentioned the word alpha. This is a real bone I have to pick, and that is this idea that fee reduction is the purest form of alpha. I wholly disagree with that. That is not alpha.

I think that perpetuating that story that you’re going to put out a product, whether it’s replication or a single strategy, whatever, it doesn’t even really matter, but that strategy, because it’s got lower fees than directly with the managers is going to generate 4% extra return over some period of time and that’s alpha, that’s not what alpha is. I think it starts with that. We have a responsibility in this space to the message.

A lot of us have worked extremely hard 10, 20, 30, some managers pushing 40 plus years in this space. At these times when people are looking in this space and we’re given this opportunity to wave our flag, I think there’s a responsibility in the message. I’m cautious when I hear certain ways things are describing.

[00:24:51] Andrew

Well, I think you’ve misunderstood the sentence. The point is that it’s a strategy that generates alpha. There are two measures of it. There’s alpha before fees and there’s after alpha after fees. Would you invest in a strategy that generates 500 basis points a year of alpha and has 500 basis points of costs? No. So if you ask the most sophisticated hedge fund investors in the world, how does a guy who runs the hedge fund portfolio at a sovereign wealth fund consistently do better than almost every other investor who’s out there?

It’s because they walk into hedge funds and they say, I can give you a billion dollars and you’ll raise $2 billion, just because I gave you a billion dollars. You can charge 2 and 20 for everybody else, but I’m going to do it at 75 basis points and 10 over hurdle. They always do better. Look, it’s a simple, straightforward statement.

[00:25:51] Tim

They’ll always do better if the manager performs. There’s a big “if, but” there, and that’s fine. Fees don’t solve everything. Cutting fees, in my opinion, people are going to debate this and I hope they do, fee reduction is not a pure form of alpha. I disagree with that wholeheartedly. When you lead with that statement to the retail public, I think that’s dangerous. Frankly, I’m surprised you haven’t got a tap on the shoulder because I’ll tell you, with the regulators we deal with, I would be scared to make that type of a statement.

It’s like you know what I’ve done here, I’ve launched Auspice, diversified our flagship, it’s been around a long time, so now I’m going to launch an ETF, it’s going to be at 95 basis points, and I put out an advertisement saying this is alpha, that’s a problem.

[00:26:42] Andrew

Look, I’ve written also a paper called “Lies, Damned Lies and Alpha”. How do you define alpha? Seriously, like what is your clear definition of alpha and what makes you think you can identify somebody who’s going to generate alpha in advance as opposed to picking somebody who has done it in the past?

[00:27:03] Tim

Well, look, it’s tough; this is the thing about alpha. It’s somewhat inexplainable, unexplainable and not replicable, and not necessarily attributable to a replicable factor. But what is it about that strategy or that manager or that approach that outperforms benchmarks, the status quo, whatever we’re going to call that, at these critical times? That’s what ends up being alpha. Whenever I talk to an allocator about alpha, it surely just isn’t about my fees.

When I sit down with a pension, some of the biggest pensions in the world, and they say, “Okay, let’s understand. You guys have been around a long time. You’ve still got capacity. We’re interested in what you do. You got this commodity focus. You’ve outperformed at these critical times. Tell us why you have that edge. What is that alpha?” If I answer and say, “Well, you know what? Why don’t we just forget about that. Let’s just talk about how you’re going to carve me out on fees and then I’m going to go sell that story.” That’s not alpha.

They want to know what my edge is. They want to know what the strategy edge is. Even the most naive retail investor, mom and pop at the donut shop, get this concept of edge. You put a nice fancy term like alpha on it, but these are the things that people start to identify with. You got to remember, now your product is going out there into the world. It’s being distributed. It’s got this momentum. It’s done well at times. All I’m saying is I think there’s a concern, I have a concern, that we’re using the right terminology and that we’re being responsible in the messaging that we say.

[00:28:53] Andrew

There’s a lot of complexity in the messaging. First of all, if you look at what I’ve said, there are hedge fund strategies where I’m a full advocate of high fees. Go read me in the FT and the Wall Street Journal and Bloomberg talking about you paying 1000 basis points a year to Millennium is worth every penny. They take $1 of your capital, they leverage and it’s 10, they make 200 to 300 basis points per dollar of capital and they don’t blow up. That is magic from an investment perspective.

They’ve done a 2.4 Sharpe ratio for long periods of time. They deserve every penny of that. But if somebody came to you and said, I will give you money at a full fee structure or I will give you a lot of money at a lower fee structure, would you deny the math that the guy who offers you less is going to do better over time?

[00:29:39] Tim

Absolutely not denying the value of fees. Bear in mind where we started this conversation. I’m the first CTA in the world to launch an ETF. When I launched that ETF, and Niels knows part of this story, it shook things up in that here you’re taking a strategy, this has been around a long time, there’s these nice big brands CTA, there’s the London club and there’s the turtle path, and I’m going to launch a 95-basis point ETF. Why are you doing that? Why are you going to offer this transparency and why are you going to offer this at a low cost?

We felt that was the right thing to do is the bottom line and we still feel that, for a certain type of product, if there’s this alpha to beta spectrum, this product for us deserves a fee and we can demonstrate why there’s alpha. This product is somewhere over on the spectrum and it’s going to be less fee. Maybe it’s not performance fee, it’s just a management fee. Or if you’re really confident in your alpha, you go straight performance fee or some combination of management fee or performance fee.

Either way, there’s the difference between alpha. My point is that we need to be careful in what we’re defining to the public as alpha, and fee reduction is not it.

[00:30:59] Niels

Can I intersect here? Because I think I certainly get the argument for both sides, but I don’t want this conversation to just be about whether fees are alpha or not. Well, I have a completely different view on people selling CTA strategies at low fees and giving all our alpha away, but that’s for another debate maybe? No, I want to take this point a little bit and expand it because if you want exposure to, say, a CTA return stream strategy, whatever we define it. I don’t know if, when people think about it nowadays, they would say, well, just pick the, whatever, index that is kind of the return stream.

The question is, what are you better off doing? Are you better off building your own rules, a proxy, and then you can call it an index, whatever you want, replicating what the big managers are doing, like what Andrew is doing, picking a few single managers or investing in a fund of funds? We don’t want to spend too much time on it, but your pros and cons for each of these paths. Maybe Andrew, I can put that to you first.

[00:32:20] Andrew

When we came into the space, we weren’t dogmatic. We were trying to figure it ou. We were basically saying we want exposure to the managed futures space, what does that even mean? At the time, it was very trendy to say that the underlying source of returns of managed futures is trend. What it did is it spawned this whole wave of investment bank and other products that were basically defining trend. They all had kind of a similar objective, which is to identify breakouts, identify things that are moving, rebalance your portfolio, maybe you do vol adjustments, whatever the set of rules were around it.

All we wanted to do was get efficient exposure to what we defined as the asset class. The asset class for us was not those individual funds because of the variability of it. The asset class was the guys who do it for a living. That meant the SocGen CTA Index. At the time, the view was, when we started looking at it, trend was unfavorable. It wasn’t until really 2020 and March of 2021 trend did better that people started to look at trend again. But back then, it was the non-trend stuff was supposed to do better. Winton was pulling out of the spade or claiming that they were no longer trend, etc.

If we went to an institution and we said, when you guys think of managed futures, what do you mean? The answer was the SocGen CTA Index. So to us, the definition of the space was the average of what the big guys do, no different than the S&P 500 is what the big stocks are doing. So the question is, how do you get access to them? Simple models work really well. Corey Hoffstein has launched an ETF in the US that combines a factor replication with a sort of mechanical trading strategy with a rules-based strategy around it. It is a perfectly legitimate and credible way of doing it.

But when we looked at it, we said what we’re really trying to do is how do we get as close as we can to what those 20 guys are doing and do it in the most efficient way that we possibly can? Because again, we’re building it for a portfolio in Europe. We looked at doing factor replication and it worked the best back then. We started doing it 2015 and by the end of 2022, it had worked far better than anything else that we’d found. We had basically been aiming for what we thought were the pre-fee and pre-expense returns and had outperformed I think 19 of the 20 constituents of the SocGen CTA Index by the end of 2022.

It hasn’t worked well this year. We’ve missed something in the markets this year. Maybe it’s the simplicity of the portfolio, maybe it’s the timing. But it hasn’t worked disastrously well. It just hasn’t worked as well as it had previously. Another approach is you go to Abbey, give all your money to Abbey, because Abbey is diversifying, they’re doing the decision for you. They have a great business model. I think they’re the best in the business of doing it.

A third approach is to buy some sort of a trend following index-type product or a managed futures index product. I think there it requires a certain level of sophistication. You’ve got to get under the hood on it. Or you buy a guy or a single fund. Each one of those has advantages and disadvantages. I think the positive thing, hopefully, when we look back at this in five years, will be that investors have a lot of really good choices. They’ve not had good choices in the ETF world.

Going back to this idea of index products, two of the early products that were launched were launched around indices that nobody would want. But it was designed to kind of say, oh, we’re giving you access to an index. The problem was, as an asset allocator, where do you put that in your portfolio? How do you feel confident that that index is going to give you what the SocGen CTA index would give you overtime? Look, I think there are lots of different great options.

I wish I had had all of my money with DUNN in the beginning of 2022, I had all of my money would DUNN in the beginning of May of this year. But we never found out a way to figure out who was going to have those better years. In fact, what we looked at is we’d say who were the great guys in 2010 and what happened to them? Who were the great guys in 2012 and what happened to them? It just underscored how difficult it is in this space to get it right and how much unexpected risk there was when you picked the wrong guy at the wrong time.

Look, the US managed futures mutual fund space is $20 billion today. It was $28 billion when we started. Half of that was AQR. No one is smarter than AQR. They are unbelievable in every sense in their business. But people thought AQR could not go wrong.

[00:37:12] Tim

I think AQR has lost more in their managed futures strategies in terms of assets than I’ll ever run. So there’s a comment to be made there. Good for them. There’s so much to unpackage here. You’re kind of going down the path of single manager and fund of funds and mentioning Abbey. Full kudos to Abbey. They’re a very smart group. But in replication, which, again, to be crystal clear, I think it’s innovative. I think if it performs, it’s great. I love the pioneering aspect, I love choice. In the space, we need more choice in the space, especially ETFs so 100% agree. I love it.

I personally prefer the single strategy over and I’ll get to a little bit why. If it delivers good or better returns with less vol drawdown risk, then I think you’ve really got something. I think that’s where I start to see red flags with the replication strategy and why we chose not to go that path. It just isn’t that we just took off the shelf, hey, you know what, we can create, carve out strategy and put it in an ETF format and publish an index. We looked at these things too. There’s reasons that we chose not to go the replication path for various reasons.

One thing is single manager risk. I don’t believe you solved single manager risk, which is real. Put all your money in one basket, they could be the greatest, but maybe there’s something wrong there. Maybe there’s various other things hidden, who knows. But I don’t think this strategy replication and providing a replication to what the perceived positions are of the big managers solves for single manager risk in any way. In fact, I think in many ways, I think the risk is higher because you don’t have frontline risk management. this boils down to risk management.

As a manager that’s paying attention to this on a daily basis, not just trying to mimic what somebody else is doing, what we’re trying to do, it starts with risk management. The bones, the core of a CTA is risk management, and that’s where I see a red flag. When you get to strategy, what are those red flags? Well, that that lag on execution, that’s a big deal in terms of protecting the downside. There’s lots of research out there, you’ve probably read the same papers, and that is on generating performance at these critical times or protecting the downside when you get these dislocations and being able to do that with a lag.

Look what we just saw in March. March of this year, a regional banking crisis was hardly a tail risk event. It beat up some of the big managers, it surely beat up a replication strategy, and that to me is, again, a red flag when I start to consider the risk management aspects to it. When you go replicating managers that have big portfolios and you do that with 10 or 12 things, to me, that concentration risk is real.

Concentration is fantastic when you’re riding it and it’s a great trend. But when things dislocate, that concentration risk is an extremely big problem, the lack of diversification, the lack of commodity diversification in the case of CTAs.

[00:40:40] Andrew

So the very best replication this year has one factor. It’s the two-year Treasury. You do a replication of the SocGen CTA Index with one factor, you get a 93% correlation and you match it perfectly. There’s so much hand-waving around diversification.

[00:40:57] Tim

I honestly don’t even know how to respond to that because that is patently ridiculous. I look at the returns that we’ve provided this year (and I can only speak to us with intimate knowledge), we’re up on the air, the benchmarks are down and our returns did not come from two years.

[00:41:17] Andrew

Because you’re a single manager. Of course, there’s going to be diversion. Look at look at March. Some guys de-risked early. We were looking at the portfolios in March and there were a few days in March where we thought everybody had de-risked because the SocGen CTA Index wasn’t moving when the Treasury market was going bananas. It turns out actually, people were a little busy. They weren’t reporting the SocGen CTA Index in the first few days after SVB.

So there was delayed reporting, and when it reported in, replications unfortunately followed everybody down just pretty much the way the index went down.

[00:41:55] Tim

Okay. So what you just said is even another factor. Doesn’t that alarm you? You’re saying they weren’t reporting ins, they were busy with other things. So replication gets a little tricky. There’s even a bigger lag there. Again, it’s pretty easy to see the math and say, look, when you start looking at adjustments and you get into these lag periods, you simply aren’t going to be able to adjust and reduce risk quick enough when you’ve got lags. So there’s a lag for a CTA that’s on top of things.

Again, there’s a big wide CTA space. There’s agile, quick CTAs, there’s ones that vol adjust, there’s ones that don’t. You and I can debate that till no end. But then when you start to get into periods of this lag, in terms of adjusting, to something that’s going on, it’s a dislocation. That’s a real big issue, like this regional banking crisis, like Q1 of 2020, like really the first quarter of this year. Are you going to be able to A, replicate those positions properly, but really deliver on what you’ve promised to deliver on, and that is that you’re going to really outperform this benchmark index through “all periods”?

The reality is that you’re opening yourself up for times when you won’t. You simply won’t be able to adjust quick enough, you’ve already stated that, and at those times of dislocation, that could be disastrous. I have trouble explaining to my clients, retail or institutional, probably even retail more, when I have months when I’m down more than 4% or 5%. Those are red flags. I just completed a managed account investment with a massive pension. If it gets over 5%, it sends up red flags.

So those type of issues start to point to the strategies. Does this really do what it wants to do? Then I asked you this question. If you can beat the benchmark, in terms of returns, 4% would be great. I look back at the returns, I say well, one and a half, one in three great, but then you’re doing that with higher vol and deeper drawdowns, that’s a red flag and that needs to be carefully explained to investors.

[00:44:20] Andrew

Look, I would highly recommend you don’t invest in our fund. We clearly ran over your dog.

[00:44:25] Tim

I don’t think you guys ran over my dog.

[00:44:31] Andrew

You’re starting with conclusions and then fishing around for arguments for it. Look, we’re not stupid. We looked at de-risking, we looked at vol controls. There are no questions it can hurt you at times, but what we also found was about half the time, you hated having de-risked. There was nobody on planet Earth that we found. We want to de-risk before it goes down. Guess what? No one’s figured that one out. So these are judgments that we make when we build it. We start with a very, very narrow factor set for a very specific reason.

We want to have the most efficient trading and execution we can possibly have. We rebalance once a week because we’re trying to keep our trading costs at 10 or 15 basis points. When we spoke to institutional allocators, no one is opening up their P&L to show us exactly how we trade. But when we were talking to some of the largest CTA allocators in the world, one of the frustrations some of them had was when they had gotten in, they saw hundreds of basis points of trading costs in certain circumstances, and it doesn’t show up in a TER. It doesn’t show up anywhere else.

But for us, it wasn’t about solving everything for everybody. But what we found when we looked at this over a very, very long period of time, the biggest positions were the ones that really drove performance. You asked about diversification, and again, our numbers go back longer than the ETF, but when we looked at it, we basically found that actually, sometimes, having those other 50 positions that we don’t have sucked. Because if you’re in crude oil and crude oil moved a little bit, but you’re also in natural gas and also in heating oil and those moved a lot, because the markets were less liquid, sometimes that was worse for the real guys than it was for us.

There’s no perfect answer to any this. I am doing monthly performance reporting where we’re talking about this. We talk about things we missed this year. January and February, I wished we’d had the Canadian dollar, the Mexican peso and a few other positions. We didn’t have it and that was one of those examples when things that we don’t invest in really helped. We didn’t see a lag issue even though we were worried that we were going to see a lag issue in March, we didn’t see it.

When you look at the underlying hedge funds, we’re pretty close to right the middle of those underlying hedge funds. This month, you guys are up more than we are. I had this correspondence with Niels this morning. There are a lot of markets out there that are doing really, really, really well. So it’s not about coming up with an all-in-one solution.

But I can tell you as an investor that having a big head start on what I think are fees and expenses on an annual basis versus what, on the hedge fund side, remains an expensive area to invest in, if we’re getting it 90% right most of the time, I think we’re going to come out ahead most of the time with a correlation of north of 80%.It’s actually been closer to 90%. If you can do that in an ETF and people can see their positions and can understand their positions, I think there’s a place in the market for it, not for the guys who want to invest with you.

[00:47:55] Tim

Listen, I am not saying in any way there isn’t a place. In fact, again, I’ll come back to what I started with, and that’s I applaud the innovation. What I’m just trying to do is pick your brains on what I see as some of the pitfalls here, some of the reasons we chose not to go replication when we started down this path 15-plus years ago, and those are the things that concern me. It’s fantastic that there’s been even more attention on the space because of your product. I applaud you for that. I’m concerned with some of these aspects.

There’s other things you’ve talked about that I think we’ve got to be careful on. Capacity is one of them. All strategies have capacity and the CTA space is most definitely capacity-constrained. It’s more capacity-constrained if you’re a commodity-tilted manager like us, for sure. But these are things again we have to be very transparent about when we talk to investors, especially retail investors.

One point I wanted to comment on that you made there was trading costs. It was an interesting point about talking to big investors, institutional investors and generating all these fees from over trading or just trading whatever the strategy is.

I have never in my almost 30 years trading institutionally and running Auspice pushing 20 years, ever had an investor of any type complain about my trading costs at times when I’m either capturing trends or reducing risk. They don’t care. That has never come up. Not once, ever.

[00:49:37] Andrew

Again, we’re not talking to the same investors.

[00:49:39] Tim

I think this is the part you’re missing is we are talking about the same investors because again, I went down and we went at Auspice down the path of retail starting in 2008, 2010. The funds we run in Canada are public funds. As of this year, there are public funds available to the kid with a paper route, daily liquidity. They’re not an ETF traded on exchange but anybody can buy them on a discount channel. They’re purchasable by any investor, public full prospectus.

So we are talking about the same investors and I’ve been on both sides of this. Half of my assets are coming out of the retail ETF space right now. So I know this space too. What I’m pointing out is I think, again, replication, this is smart, you guys are smart guys, but I see some holes in this and I think that they are red flags.

[00:50:33] Andrew

What investment strategy doesn’t have holes?

[00:50:38] Tim

You’re bang on. This was the debate. This is the debate. It’s supposed to be a friendly debate and I’m happy. I’ll tell you a quick story. Niels knows this. One of my close friends is Jerry Parker. Jerry and I met because we have diametrically opposed views on being a CTA. He’s been around far longer than I have, great success. I admire him incredibly. He’s got a very different view on volatility-based volatility position adjusting, completely different than mine. He says what I’m doing is wrong and I say what he’s doing wrong.

Here we joust and we’ve become great friends. I respect his side of the equation and perhaps he respects mine, I don’t know. But we have a fun debate. I think, again, the idea of replication is smart. It works really well in a lot of areas. What I’m doing is challenging some of the issues. The reason I’m doing that, Andrew, is because this is how I put food on my table. This is how I’ve developed a long track record. This is how my company has success and I care about the ecosystem incredibly.

[00:51:46] Andrew

Here’s the issue that I have. How does an allocator measure success in most circumstances? I’m talking about the guy who oversees the whole portfolio, who runs model portfolios. We got approached back in 2009 about launching an ETF around our strategies. These are actually before we got into the managed futures space. The issue that I’ve always had and the problem is the hedge funds and ETF space is a disaster area. So the question is why? Why is the $7 trillion space have no assets in hedge fund strategy ETFs?

[00:52:26] Tim

It’s hard to replicate alpha.

[00:52:30] Andrew

No, that’s silly. That’s like the 2003 second-year business school definition of alpha.

[00:52:39] Tim

I guess I went to a different business school than you.

[00:52:44] Andrew

I looked briefly at your index product. It’s called a managed futures index. There was a period it looked like just eyeballing it where you underperformed the SocGen CTA Index by 30% over a two-year period of time. That’s not an index to me if I’m an allocator. It’s an index because you’re telling people what your rules are. But you can be an active manager and you can say, these are my rules and I’m going to follow them blindly. Then you have to answer to well, what if the world changes? Are you going to change it? No, I’m not going to change an existing index.

What if your vol constraints are wrong? No, I’m not going to change it because an index or I’m going to keep changing it, in which case, you’re an active manager and you’re not an index anymore. So for me as an allocator, the problem is, you’re not going to hold it until 2022 when you need it if you go through a period of meaningful underperformance relative to the benchmark. You may not like the benchmark. I’m talking to people, the people who like what we do like it because they have a high confidence.

Now, this year, we are underperforming the benchmark more than we ever have and we are having a larger drawdown than we expected. We are talking a lot about it and what happened because it is different than our expectations. We are being very, very clear and upfront about it. But the thing is, when you look at the US mutual fund space, what we’re also looking at is why did so many people get out?

AQR had $14.3 billion in their managed futures mutual fund and around a billion by the time 2022 hit. That didn’t go all back into PIMCO and Man AHL and DUNN and everybody else who’s in the space. People fled because after five years, not only had the index done zero, but their one bet on the space had gone down 20%. So that’s the issue, it’s how do you get people to hold it? We could be in for another long winter in the space.

Look, you describe this as a debate. It doesn’t feel like a debate. It feels like you have a bone to pick and you want to be confrontational and you want to pick arguments. I can tear apart things that you’re saying. It’s not the point. It doesn’t help. You have an audience who wants to hear what you have to say. I think you are hand waving around terms like alpha, that the guys that I respect I don’t think about talk about it in those kinds of mythical terms like it’s somehow conjuring up fairy dust.

These strategies have definable ways of getting to a particular result. Otherwise, you couldn’t do it as an index. The question is, what are the excess returns? What are the expected returns? What’s the correlation profile of this strategy over time and is it valuable to people? I intend to be a very, very loud standard bearer that this strategy has more diversification bang for the buck if you do it with Niels, if you do it with us, if you do it with you, it should be in everybody’s portfolio.

[00:55:48] Tim

Don’t disagree. When it comes down to that biggest hurdle, one of the biggest hurdles in the space is what is that hurdle for retail investors, institutional investors, and it really is the same to invest in this space. The biggest hurdle has always been that unless you launched at an ideal time like 2019 or early 2020 and had that performance, CTA performance hasn’t exactly sold itself. We go through these periods when it is challenging to do what we do. As you pointed out, the index that we started publishing back in 2010 has definitely gone through periods of underperformance versus the benchmarks.

In a way, that’s exactly what it’s designed, or our strategy, that’s just one of our strategies, but it’s designed to do. It’s commodity tilted versus financial. The index doesn’t have equities in it. It is going to at times really, really underperform the financially tilted CTAs or if the only thing really ripping is equities or just bonds or just equities and bonds, 60/40 land. So we are going to have those periods of outperformance. But here’s what matters to my business.

I can only speak to our business and that is, do we perform at those critical times for our investors? Did we perform? If that money that did stay with us up until beginning of 2020, it was a very hard period of time for all CTAs, pretty much all I would say. There’s a big wide scope, but most anyway. The ones that stuck with us were pretty happy in 2020 because we not only performed, we outperformed in Q1, we outperformed in the rest of the year. It was an absolutely pivotal year.

[00:57:41] Andrew

Right. But were you up last year in 2022? You were up like 8% or something on your index, right? So you underperformed pre-fee. These guys were up 20 points ahead of you in the year when you needed it the most.

[00:57:58] Tim

So this is what I think you’re getting wrong. 2022, pretty much all CTAs in some capacity had a good year. Our strategies were up whether we underperformed a little bit or whichever, that’s a bit neither here nor there because that’s not what my clients are coming to me saying, “You know what, you didn’t keep up with the SocGen CTA index in 2022. You were positive, but you didn’t quite keep up.”

The question was, how did you do in Q1 of 2020? How did you do in March? How did you do at these dislocating times? That’s what they’re asking. They’re not asking for just those la-di-da years. How did you do in 2019? Well, they know CTA struggled, right?

[00:58:45] Andrew

It’s not what our clients are asking. What our clients are asking is, “I like this space, how do I have it for the next 10 years?” We entered the space in November 2015. The winter was just beginning. It was a horrible time to enter the space. The next five years, the space did zero, I mean, the SocGen CTA did zero net of fees.

[00:59:04] Tim

You think 2019 was a horrible time to enter for your financially tilted CTA?

[00:59:08] Andrew

2015.

[00:59:09] Tim

Oh, 2015. Yeah, that couldn’t have been worse.

[00:59:13] Andrew

Right. So during the next five years, fee efficiency saved us. Because if you were zero or you went through big drawdowns over that period of time, you weren’t around in 2020. Last year, you can look at the performance of the index, but basically, SocGen CTA Index was up 20. In order for it to be up 20, and as far as I know, everybody who’s in the index still has a 20% fee structure, these guys are up about 28.

That’s a year when replication should outperform because if you’re getting 90% or more of what these guys are doing before fees but you’re only charging 85 basis points, you’re going to do 400 basis points, 300, 400 basis points better. There are going to be periods of time when it’s not going to. But the question is, do you have the wind at your back? I think we do. You think we don’t. The questions your clients are asking you, it’s not the conversations I’m having with people.

[01:00:14] Tim

To be clear, I actually disagree with that. It’s not that I don’t think you have wind at your back. I think you’re in a CTA space that is in a very positive environment for the next 3, 5, 7, maybe even a decade. I think the CTA space is the right place to be. Whether it’s a single strategy, a multi-strat like our flagship, whether it’s replication, I think the wind is at all of our backs, Andrew. I think this is what you’re missing about what I’m saying. I think there is room. This is one product, pick your other products. You’ve been highly critical of the other CTA products that I’ve heard.

[01:00:51] Andrew

What products do you think I’ve been critical of? Let’s put that on the record.

[01:00:55] Tim

Well, if I listened to past interviews where you talk about the other products in the space, I’d say you’ve been pretty darn critical.

[01:01:06] Andrew

Which one are you talking about?

[01:01:08] Tim

You called one of them absolutely a terrible product.

[01:01:11] Andrew

Oh, look, there are some ETFs… WisdomTree launched a fund in 2010, but they’re not a CTA.

[01:01:19] Tim

So how are you a CTA and they’re not a CTA?

[01:01:22] Andrew

Oh, look, look, that’s actually a very good example of an index product that uses the term index. So they originally started following something called the Trader Vic index. It was a single manager product and the fund was positioned as a one-stop solution for the managed futures space. I think people who knew the space knew that if you’re picking one guys named index, you were taking single manager risk. You talked about appropriateness. That’s not appropriate in a retail portfolio filling an asset allocation bucket.

[01:01:56] Tim

Hold on. You’re single manager risk. So you’re saying that’s inappropriate, but you’re single manager.

[01:02:00] Andrew

So is Abbey. Abbey is a single manager.

[01:02:04] Tim

Absolutely Abbey is not a single manager risk. What you’re hiring Abbey to do as one of the most tenured funded funds in the space is use their expertise to put the right combination of CTA managers together.

[01:02:16] Andrew

They had a 37% drawdown in their flagship fund in the early 2010s when the index was down 14%. There’s a risk in every single product. We’re trying to minimize it to the extent that we can. I advocate for Abbey. When people asked me in the US mutual fund space, there are a handful of funds that I recommend to people if you want to invest in a mutual fund.

[01:02:42] Tim

But you’re just talking about single manager risk, Andrew, and you’re saying WisdomTree is a terrible product, single manager risk, you have single manager risk. You’re replicating a benchmark through these tools or managers in the space, you’ve got this big lag. If that’s not single manager risk, I don’t know what is.

[01:03:01] Andrew

We believe that if you look at the average positions of 20 guys, you’re going to look a lot more like Abbey overtime than you are like… The average drawdown of the members of the SocGen CTA Index is in the 20s. The index is 14. We are hoping to be a lot closer to 14 over time. But again, remember, we’re also doing it in an ETF with a fee structure that somebody who’s running a model portfolio can digest and feel like there’s not a situation where…

One of the things about 2000, that long winter, is that yes, the assets in the industry came down. But if every third year, you have a really good year and then you give it back over the next two years, the way the fee structure works is people make a lot of money in the one year and then you don’t get it back. It’s not like private equity where you get to the end and you see how much money you’ve actually made in hard dollars and distribute it. You can have big years with big payouts followed by periods of poor performance and nobody gives their money back. This is a problem across the overall hedge fund industry. That’s one of the issues we were trying to address. It’s the path dependency of it.

[01:04:20] Tim

I applaud that and having launched one of the first ETFs in this space. I get it. I think there’s an appropriate place for it.

[01:04:27] Andrew

Why do you think your ETFs failed in the US?

[01:04:30] Tim

It wasn’t just the US. We launched them in Canada when we first launched the managed futures ETF in Canada, and it was just timing. We launched them at a really challenging time. It was really hard to tell the CTA story. Part of our business model at Auspice was different than the other CTAs in that we were retail and institutional, US and Canada, different delivery mechanisms to really open up this to different investors.

The retail space, specifically in Canada, was definitely not looking for CTA products. So it was definitely a misstep. We learned a lot about that space. Our product has been live in the US, the comm ETF with Direxion and the predecessor 40 Act Mutual Fund has been live in the US since 2012 just to be clear. It’s five star rated. That’s 11 years.

[01:05:27] Andrew

But that’s a commodity tracking ETF, right?

[01:05:31] Tim

That is a managed futures ETF that is long-flat, the same engine we use in our managed futures index, it’s just long-flat a basket of commodity only. Same term structure, same volatility-based position sizing. It’s managed futures at the end of the day. But the point is even in that commodity side, in fact, even harder was the commodity side versus CTA, it was very out of favor. You couldn’t tell a commodity story, let alone a CTA story. I’m a commodity-tilted CTA manager. I come from a commodity background and so definitely with that tilt, it was very, very hard for us to tell our story.

[01:06:06] Andrew

By the way, do you know when I started Pinnacle? It was the first commodity fund of funds. I launched it back in the early 2000s. It’s now kind of the global leader in allocating to fundamentally driven commodity managers. I’ve known the commodity space for a very long time as well. You talk about us as though we are amateurs who cut corners to get to where we are. It’s not who we are.

[01:06:32] Tim

I think you’re taking it personal when I’m pointing out with every strategy, as you’ve pointed out with ours, Andrew, you’ve pointed out the pitfalls or the negatives or whatever the negative points are. Every strategy has pluses and minuses. I’m a commodity-tilted CTA who put out a single strategy managed futures index and commodity index back over 13 years ago, and there’s pluses and minuses. There’s time when it underperforms and it outperforms.

I recognize those pluses and minuses. I don’t take them personally. It’s not going to break my heart if somebody says, you know what, here’s the problem with that single strategy. It doesn’t have strategy diversification, you’re too focused in commodities, you don’t have equities. There’s a million criticisms of those things. The reality is, we’ve got a long track record. We’re growing our business. I see the pluses and minuses. I’m not taking those things personal, and you shouldn’t take these things personal.

What I’m pointing out is what I see as some of the red flags in the replication space, specifically as to CTA. Again, you’ve got a tailwind and I think you’re going to do great. As long as those managers and those benchmarks do great, you’re going to do great. But I think you have to be careful with your words when you start talking about alpha, when you start talking about infinite capacity, when the risk management debate comes up, because those are the bones of what being a CTA is.

I think those things just need to be pointed out. This isn’t an attack on you. You pointed out the negatives of mine and I’m just saying, hey, by the way, this is a debate.

[01:06:32] Andrew

Sure. Well, look, I think the way you talk about alpha to me seems..

[01:07:54] Tim

You said naive. You said naive and old-fashioned.

[01:08:05] Andrew

Look, I think there has been a huge evolution of how people think about and talk about these things. Cliff Asness has been a leader in it. I personally think that where people went with the alternative risk premium products, I think they were oversold for what they were. But I think when people use this term alpha, you have to think about what are you comparing it to.

If you’re saying our definition of alpha is that when you have certain market dislocations, you’re going to go up, what’s the cost of that the rest of the time? You can go out, you can go short the VIX or you can do whatever. You can do whatever, buy the VIX or you can short various things to get to get crisis alpha. It’s always a trade-off on this stuff. I think there’s another issue on the retail side as it relates to adoption, which Niels and I have talked about.

[01:09:11] Tim

Let me just address that for one second. This is a very elusive thing, what is alpha. So you can say I’m naive about it or old fashioned or whatever, I’m not that old, but I get your point. But that’s not the issue I have with it, let’s try to define perfectly what alpha is and that we perform perfectly at this time. My issue is very simple. Your statement publicly is fee reduction is the purest form of alpha. We think that’s a misrepresentation.

[01:09:40] Andrew

It’s a reference to the fact that with an institutional share class versus an A share class, the cheaper share class will generate more. If that wasn’t clear to you, then I think it’s clear to most people that I talk about that it’s really an effort to try to basically say…

[01:10:00] Tim

I think lower fees are good for investors. I 100% agree.

[01:10:03] Andrew

Lower fees are very good for investors.

[01:10:05] Tim

You know what? They’re actually reasonably good. There’s this sweet spot, I believe. It’s not just that they’re good for investors. If you want a business with longevity, I think having appropriately priced products for the performance is absolutely imperative. So we agree on that. It’s your statement. This is just a debate. It’s two guys talking. Again, it’s like Jerry and I saying, hey, you know what? I volatility adjust my positions when vols blowout in crude oil and he’s saying, don’t do that, and I’m like, well, we agree to disagree, right? So we’re disagreeing on what alpha is. You’re saying it’s fee reduction, I’m saying it’s not.

[01:10:43] Andrew

No, look, I’m saying I’m saying alpha is a complicated process. But look, mathematically, you’ve got to decide what you’re comparing yourself to.

[01:10:52] Tim

Your Twitter handle says, in hedge funds, fee reduction is the purest form of alpha. I didn’t know who you were, but that’s where my starting point was.

[01:11:02] Niels

Now, guys, let me interject a little bit here. This has been good. I’m sure the audience will be surprised with this episode, but I think they’re going to love it. Now, I will just say, there are a couple of things that I’ve just sort of written down and I don’t want to get into a big debate about it. I just want to point out that when we say that lower fees are good for investors, I don’t think necessarily that’s a true statement.

I know plenty of funds that have high fees and have much better returns than a lot of the low-fee products. So you can’t make that statement either in my view saying lower fees are better for investors. Not always. So I just want to make that clear.

[01:11:42] Tim

They have to all equate. I don’t know if that’s the right word, but they have to justify each other.

[01:11:47] Andrew

The clause in the beginning is all other things being equal.

[01:11:50] Niels

No, I wasn’t actually referring to your statement or anything. That little point that was mentioned at the end by both of you tend to agree that lower fees are better for the investor. I’m just saying, I don’t agree with that.

[01:12:02] Andrew

In isolation.

[01:12:03] Niels

Sometimes. Yeah, exactly.

[01:12:04] Andrew

Give money to Millennium, pay them 10 points if you can. They are worth every penny.

[01:12:11] Niels

Yeah, things like that. Even some of the CTAs that I know pretty well. Anyway, that’s one thing. The other thing I just want to say because I think that’s just something for me to be absolutely sure about, something I picked up from you, Andrew, and that is when you said, well, we are very closely correlated to the index. Again, from my point of view, I think correlation doesn’t necessarily mean that you’re going to replicate the performance.

Because you could be correlated but it doesn’t mean you’re generating the same performance because amplitude of returns is also important when you do correlation analysis. Because people often say to me, oh, I only need one trend follower because they’re so correlated. I’m thinking that’s not true because they can have very different performance.

[01:13:00] Andrew

Oh, completely. Correlation is a terrible statistic. We search for a better one to have. We are highly correlated this year, we are underperforming. We were highly correlated in the years leading up to it, and we outperformed by a lot. So that’s the challenge of replication is if you’re outperforming, are you doing your job, people aren’t happy, but are you doing your job…

[0]1:13:21 Niels

Sure. I just want people to understand that. The other thing is I mentioned earlier, we don’t have time for both of them. I actually did mention that there was a question that came in from one of our listeners, and I think it’s somewhat relevant. I don’t know if it’s more a statement than it is something we need to debate now. But Oliver writes in and I want to give credit to him for taking time to write in.

He says, “Why should it be more attractive for investors to invest in an index replication strategy instead of picking the trend fund that suits their specific portfolio goals and specific convictions best? I guess it’s more difficult for investors to tell whether the SG Trend or SG CTA Index will move going forward, e.g., a recent sharp tilt of the index, than to tell where a specific fund with specific characteristics will go. Example, if I invest in say DUNN capital, I know approximately what their fund and methodology stands for. I don’t know that as well for a mixed basket index. The index might move away from what I’m personally expecting from trend. However, it might reduce regret, fear of missing out though when looking at other funds’ short-term performance. So there is a behavioral benefit for some.”

I think also that is a relevant point because we talk about it as it’s either/or. I think it actually depends on what you want from an allocation to this space.

[01:14:57] Andrew

Absolutely. My whole point is, look, we tried to build this as an index-like solution, index being defined as the overall space, which we meant by the SocGen CTA index or an equivalent index. That guy should invest with you. It is really good for him. He wants to know how you think and what you’re doing. He has very well-defined views in terms of where you fit in your portfolio, or he should invest with Tim because Tim is basically articulating that we think we are going to have this particular return profile for a period of time that is going to generate XYZ at specific periods of time.

That’s a guy who is neck deep in this space and what he wants and has the technical expertise to do that. If that guy says my goal is in 10 years as part of my asset allocation to have something that is moving along with the index for good or bad, but if that’s my goal, he should talk to us.

[01:16:01] Niels

Now, I’m going to kind of wind this down, but it does leave us with I think potential for more debates because I sense you are becoming best friends through an hour of conversation even though it may not have sounded like this in the last hour. So I think that’s where we’re heading. But anyways, there is a new entrant coming into this space who will be listening right now and that is, of course, Jerry.

Even though I think Tim has some stories about how he thought that what Tim was doing back then was completely nonsense, he seems to be joining the ranks now. But more importantly, he’s doing it, as far as I understand, with his full product, and that is the difference, because often CTAs, have in that ETF space, carved out something which, let’s be frank, is not their best product.

So I can’t imagine why you want to do that for a flat fee of less than 1% and you have to share half of that. I can’t imagine why you would do that. I mean, you’ve been very frank with each other, I can be very frank with you and say, I still don’t really understand why you guys are giving what you’re doing away because, in my view, you’re only competing on price. But that’s for another debate. I’m setting it up as a little teaser.

[01:17:25] Andrew

Round two.

[01:17:26] Tim

You set you set it up well. This is part of the debate. I love the way you describe that Niels in terms of yeah, there was there was a high criticism of why are you doing this and why are you charging this and why are you carving this out of your flagship product, your subpar product, so to speak, or a single strategy. I don’t think it’s subpar, I think it’s a single strategy that makes up a multi-strat. But you’re bang on. I’m curious if those same things with Jerry. By the way, I’ll leave you with this, Andrew, from my side, I think what you’ve done is super innovative. There’s a great tailwind.

This is not that I think the thing should go away. That is not what I’m trying to get across here. I think there’s room and I think there should be choice for investors and I think that’s fantastic, especially in this place, the most underserved space in the retail world, in my opinion. That’s why I made the business decisions I made. Definitely had some missteps as a business, we were too early. Even just launching in Canada versus the US was probably a big mistake. It is what it is, but here we are.

All I’m trying to point out is certain things that I think we have to be careful in terms of how we describe things, and no more clearly has that been reminded to me most recently when I converted our longstanding funds to public funds in Canada, publicly available, different regulations in terms of how you describe things. What I’m saying is that we’ve just got to be careful in terms of what we promise and how we describe those things. That’s all I’m kind of pointing out. You’re obviously a smart group of guys. Replication is a cool thing. I chose a different path in the CTA space.

[01:19:15] Andrew

Look, I appreciate you saying that. As I would say, there are a million different ways to go with this space. I think Corey is a great example. Hopefully, Corey will listen to this. Corey is incredibly smart. He learned what we did and he built a product that he believes is better. It uses part of what we do, it uses part of what you do, Tim, basically in terms of constructing a rules-based approach, and then he added a fixed income and a leverage component to it to try to serve a different part of the market.

So back to Jerry coming into the space, I hope Man comes into this space, I hope AlphaSimplex comes into the space. They were just bought by a company. There should be a lot of really good ETF products out there and there haven’t been. I think what happened with our success last year is I think before last year, because of, Tim, your experience and the experience of other people in the space and the fact that WisdomTree had been around for a long time, First Trust had been around for a long time and they had gotten traction is people assumed you couldn’t do it.

You couldn’t offer a credible asset allocation tool, a credible trend following product in an ETF, and we’ve tried to break that mold. It’s not easy. We are $700 million out of a $7 trillion industry. We are one basis point out of the US ETF world. Niels back to your thing, our argument is that it shouldn’t be one basis point. I don’t know if it’s 10 basis points like in the mutual fund space or 20 basis points in five years or 50 basis points.

There is plenty of room for everybody to have really meaningful assets. Our view is that if we can solve an asset allocation problem, it gets us in front of guys who decide to just use us, not picking us versus other things, but they fill a bucket. If we can do that well for them, then we’ll have lower fees, but it’ll be on larger AUMs over a long period of time. It’ll work or not. In three years, maybe, I’ll be sending you guys resumes for jobs or something and there’ll be a big, resounding laughter from Calgary.

[01:21:33] Tim

Again, you truly shouldn’t take it that way. This is a debate about how to go about something in a space that obviously is where I’ve made my career and how I make my living, I put food on my table. I see you’re sensitive about it but don’t take it personal. There’s so many ways to slice the pie. Look, I’ve been the bearer of so much criticism in my career and even in what we’ve done at Auspice. We’re a commodity tilted CTA going down the ETF path.

I remember when I first launched a natural gas ETF. If you’re such a good CTA, why are you launching this beta ETF? Well, I want to learn about ETFs and indexing. So I’ve taken lots of criticism and there’s room for it. So be it.

[01:22:17] Andrew

If you want to enjoy widespread hatred, launch a replication business. I spent a decade and a half, almost 12 years getting the door slammed in my face again and again. It’s too simple, it can’t work, it’s not alpha. For whatever reason, I’m still standing but barely.

[01:22:40] Niels

Okay, let’s leave it on that note. This really was fantastic. I thoroughly enjoyed it. I think everyone listening to this enjoyed it because at the end of the day, as I sometimes say in my intro, this is the place where we come to voice our differences on the one thing that we all love. So I think we’ve lived up to that statement today. We will do this again, I have no doubt. Maybe there’ll be three, four or five of us.

[01:23:10] Tim

Next time, you’ll have Jerry and then you both can gang up on me.

[01:23:12] Niels

Exactly. There will be plenty of ways to keep this going.

Now, let me just say that if you enjoy this type of episode, why don’t you just let me know and maybe we can do more of these. But in any event, make sure you rate and review the podcast so that more people can find debates like this. These are some of the smartest people you’re going to come across in this industry so why not share that with more people.

Next week, I’m going to be joined by another very clever person from this industry, namely Nick Baltas from Goldman Sachs. So make sure you send in your questions for that episode. info@toptradersunplugged.com, that is where you should send them. From Andrew, Tim, and me, thanks ever so much for listening. We look forward to being back with you next week. In the meantime, as usual, take care of yourself and take care of each other.

[01:24:02] Ending

Thanks for listening to the Systematic Investor podcast series. If you enjoyed this series, go on over to 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 info@toptradersunplugged.com, and we’ll try to get it on the show.

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.