From Chaos to Clarity: The Power of Systematic Investing ft. Nick Baltas

[00:00:01] 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 edition of the Systematic Investor Series with Nick Baltas and I, Niels Kaastrup-Larsen, where each week we take the polls of the global markets through the lens of a rules-based investor. And let me just say, a very warm welcome if today is your first time joining us. And if someone who cares about you and your portfolio recommended that you should tune into the podcast, I would like to say a big thank you for sharing this episode with your friends and colleagues. It really does mean a lot to us.

Nick, it is wonderful to be back with you this week. It’s another interesting week. It’s been a little while. How have you been?

[00:00:58] Nick

I’m glad to be back, Niels. It feels like a century ago that we last spoke, and it’s only been like maybe a month or two.

I’ve been doing well, I think clearly the markets are keeping us busy. I tried to take some days off over Easter, and same thing like last August that we just discussed before we started the recording, I think I timed it perfectly well. So next time I’m off I’ll let you know.

[00:01:21] Niels

Yeah, yeah, I’m doing well.

[00:01:25] Nick

I’m doing well, keeping up, keeping up.

[00:01:26] Niels

Keeping up, that’s the main thing.

[00:01:27] Nick

I had some travels earlier in Q1. That’s typically the travel season. Seeing investors goes on as well in Q2. So, maybe a couple of things that we can reflect upon. But yeah, all very good, all very good. Keeping up.

[00:01:39] Niels

Super, yes, exactly, doing well, doing well, I just finished all my travels for now and so yeah, it’s nice, it’s nice to be… Well, it’s good to be here, although the markets obviously keep you busy with answering a few extra questions that you normally wouldn’t get. But there we are.

Nick, we’ve got a pretty wide-ranging lineup of topics. So, quite a lot to tackle today.

Before we do that, and since, as you say, it’s been maybe a month, two months since we last spoke, I’d love to hear what’s kind of on your radar at the moment – maybe a little bit outside just the market, so to speak. If there’s anything that you find interesting at this point in time.

[00:02:28] Nick

I’d say, for markets, without necessarily relating to what we’re going to say, my problem these days is that I don’t think my radar is capable enough of keeping up with the market. I think I need a more advanced radar, myself, to be able to keep up with all this intensity of news, and activity, and art, and so on, and so forth. So, I guess that’s one point.

I think there’s so much information in the flow, for us all, in the last month, that is going to keep you kind of greedy for more information. And then, when information comes, it just comes into burst and then it’s quite hard to digest it. So, I think that’s probably not on my radar, but it is in my radar that maybe my radar should be just a bit broader. That makes sense in like a self-fulfilling prophecy or a visa circle. It depends how you see it.

I think beyond that, you know, that’s more like family time, obviously. Over Easter, you know, my son is about 10 months and it’s kind of quite nice to see, again, for the second time around, how I guess kids grow up from like the baby face to the toddler phase. And it’s just another level. My daughter was like one of the nicer and calm, I guess, human beings and I think nature does it to you. You know, they bring you the second one and it’s completely different – like, completely different, trying to explore stuff, standing, trying to be active.

So, spending time with them was actually what I wanted to do, and I managed to spend some time with them, and it was actually quite nice. So, maybe not what you’d expect to be outside of my radar, but it was like a conscious decision to really spend some time with them. That’s the one.

[00:04:05] Niels

Yeah. And it’s a great distraction, isn’t it, to be able to spend time with your kids and not focus on the markets. But I think the other thing, maybe to reflect on, in this part of our conversation, I think it’s also the nice thing about being systematic.

I mean in a sense you say that it’s kind of overflow with information. I mean if you weren’t rules based, I would imagine that this is probably impossible really to make sense of. Right? So, in that sense I think it’s interesting.

I wanted to throw a few random topics at you in this sort of early phase of our conversation, before we get to the trend and systematic part. And one of the things, you already alluded to it yourself, in saying that you’ve had your busy travel seasons. I think a lot of us do that in the first quarter, second Quarter of the year.

And since you sit in such an interesting organization where you really have access to some interesting information, interesting conversations, maybe you could reflect a little bit on what are people actually telling you or asking you about during these conversations? I know part of it has been focused, I’m sure, on the post Liberation Day stuff. Right?

But, but during Q1, before Liberation Day, maybe, what were some of the other things that people were interested in and reflecting on?

[00:05:30] Nick

So, there are a number of things I would, I guess bring up. And that’s both within the QIS world, but maybe a bit more outside of it. And to your point, even before the Liberation Day, I think around mid Feb was when we started seeing a bit more of gray outlook. That was the time that I think we’re pricing in five cuts for US trades. Obviously, the world is a different place today than it was back then.

And at the time what was very interesting was how the whole kind of equity concentration plays out; how the US/European equity dynamic has shifted from what we have at least seen for the last many years, whereby obviously, European equities have been significantly outperforming. Obviously, some of the defensives and the geopolitics were playing out.

I think some of the questions typically relate to how the more sophisticated and high frequency kind of hedge fund type of investors typically move. Obviously, we only have aggregated data from our prime colleagues, but it’s very interesting to see that, for example, from like Feb until beginning of April, we have had some of the largest reductions in net exposure. But interestingly, gross remained elevated.

And the way to basically comprehend that, I guess from a single stock standpoint, is that they started adding shorts rather than cutting the longs. And that is not necessarily the behavior that you end up seeing in these types of events. It was actually quite interesting to see that, you know. Some of those concentrated bets remain there, but it was more about the shorting and the net impact that this had to their portfolio. So, that was like certainly a point of discussion. We had a number of meetings with clients and that was the point that we kept on discussing.

There was a lot of focus on what is crowding? What are the crowded positions? How should we respond to those? Is it early? Is it too late? Is there a way to predict? Do they drive performance? Yes, they do. Are you rewarded from holding them? Maybe you are. So, that is another point of significant discussion. So, flows, positioning, certainly these come again and again and again.

I think the QIS world was primarily, and I think a bit more intensified, post Liberation Day. If and how people can be tactical, what could be the catalysts, that can drive a decision to enter or perhaps exit a trade? I think we’ve discussed, a number of times, how hard that is.

There could be some possibility, specifically in the vol space, that becomes a bit more stretched at times to create signals or at least suggest that the market is more appreciative of an entry point. So, broadly, outside of the QIS, how is positioning playing out? What are the flows? How do hedge funds act? What are the geopolitical dynamics, US versus US?

Obviously, China is always part of the equation, and then specifically the QIS world. How do we see the vol space shifting between carry oriented portfolios to more defensive oriented mandates and how investors can pivot between them? And obviously the parallel debate between timing and not timing always comes back.

So those, I think, are some of the high level points I would flag. Gold is another one, certainly.

[00:08:54] Niels

Sure.

[00:08:55] Nick

What are the points? Maybe look in the commodity space. We’ve seen nat gas going through a very interesting trajectory over winter. It was colder than expected. Inventories were actually quite shallow. So, some of the curve trades were impacted by that. That’s more around, I guess, the turn of the year and coming into January. Then discussing how more dynamic somebody should be on how they form spreads in the curve trades in commodities. So, look, I can keep on talking and talking and talking.

There are so many things like sentiment, how we can use sentiment, how can we extract sentiment and narrative, how we can use non-price-based data for positioning and decisions for investment purposes. There are a lot of topics. I’m just throwing stuff at you just because you asked what I’m seeing. And all of that stuff is part of my day to day.

[00:09:45] Niels

So, what’s interesting about that, because I think all of these are kind of relevant questions to ask, but what’s also interesting to me, at least, is that here we are with all these questions but what we’re faced with is perhaps, for the first time really, where a single person can move the markets to the extent that the markets are moving at the moment. And I don’t know that there is a model for that, at least not one, you know, that we can..

So, this is why I kind of find it interesting that people have all these questions, can we do this, can we do that? But we are dealing with a situation that is very unusual.

And then I was looking back, and saw some research on when a single president, maybe Trump is unique in the magnitude that he moves markets every single day, every time he speaks, but we have seen, historically, a couple of situations where presidents have made decisions, big ones, that have actually caused the markets to go for a decade with no return. I’m thinking about 1971, when Nixon devalued the dollar against gold. And the other one is back in, I think, 1930, when Herbert Hoover raised tariffs on about 20,000 imported goods. Both of those led to a decade or so with no return for equity investors.

And the big question, of course, is this what we’re seeing unfolding now with the changes that Trump is making? There has been, from memory, there have been people talking about that, at some point in this decade, we would run into a decade of no real return. I think maybe even Goldman came out and said, don’t expect much from the next decade or so (but I’m not going to hold you to it, I know it’s completely different department). But some of the big investment banks have certainly, at some point, been out saying it (they’re not necessarily right when they say it). But it is something to be aware of, at least in a sense. I don’t know if there was a question in there at all.

[00:11:55] Nick

I think my remark to this is that, whether it’s a single person or a single entity, information flows, now, very quickly in bursts. And I think this is what perhaps is different to what was historically the case.

I’m not knowing if it’s social media, or the vast amount of textual data we have, and NLP processes that we run to extract sentiment and signals, but I do feel that this V shape or this W shape, or whichever the letter is going to be again, is largely driven by some of those decisions that have been made – when I’m going to put on tariffs, then I’m going to pull back. And maybe there are some exceptions, but maybe not as many exceptions. All that is driving sentiment.

And I think because of the immediacy of information, I think it is different. Now, how do we react on that from an investment standpoint? I think this is the challenging part that maybe we can look into it and discuss a bit more. But if I have a remark to your point, this is the remark. I mean, can we see a decade with no returns?

This is equally hard to foresee, specifically because, you know, if I use those data points over the last week or two, even some of those investment bank forecasts for the year, and the probability of recession, where revised and then revised back over like three days. So, what do I tell out of that? What can we tell out of that? I mean, I don’t know. I guess I’m not even making a point here or a question.

It’s just like observations. Right? You wake up one morning and then you see, you know, S&P futures up by 5%, 6%, 7%, 8%. And then you start looking into how frequently that has happened historically. And then the day after is the exact opposite. And then not only do you look back as to how frequently the drop happened, but then the sequence of those two events is probably unseen.

[00:13:51] Niels

Yeah.

[00:13:51] Nick

And realizing that this is primarily driven by emotional reaction more so than, I guess, driven by financial valuation remarks is, I wouldn’t call it concerning, but I would call it a state of current affairs.

[00:14:12] Niels

Sure, sure, sure. And you know, and in fairness, you know, we might say that, right now, it feels different, it feels new. But, you know, if we go back 50 years, as trend followers, there will been many times where we would have felt that at the time. And then things get kind of more normal again. But you know what? I’m going to make a note in my diary, so when we record in April 2035, Nick, we’ll look back and say, do you remember that conversation?

[00:14:39] Nick

Okay.

[00:14:40] Niels

Did we have a decade of no returns? Let’s pin that. Okay, fair enough.

The other things that I was thinking about, this is a little bit silly, but still I’m kind of thinking. And now we have maybe a little bit of resolution since I came up with this. I don’t know if you did this as a kid, but when I was a kid, many, many, many years ago, there were these games where you would sit down with a little bit of a flower, and then you take one leaf off at a time and say, she loves me, she loves me not, she loves me… And I was feeling that when, every time I saw a headline about Jerome Powell, I’m thinking that’s exactly what he must be feeling about Trump. But at the moment, he loves him. Well, he tolerates him, So, we’ll see about that.

Another thing that kind of crossed my radar is, obviously, what’s happening in gold. We’ll maybe come back to that.

[00:15:30] Nick

Yeah.

[00:15:31] Niels

First of all, of course, there has been some, a lot of purchases in gold and so on, and so forth. That actually wasn’t what caught my attention. It was a chart that was sent by a friend of mine. And maybe he just took it like a screenshot from CNBC or whatever, I don’t know. But it shows, at least on this chart, that gold is only now back at the peak level, on an inflation adjusted basis, to what it was in 1980. Meaning that if you had held gold from 1980 to now, you’re only now just getting back to a point where you haven’t lost any money on an inflation adjusted basis. And that’s quite interesting.

And then, at the same time, I noticed that Aswath Damodaran, who’s been on the podcast (by the way, should listen to that episode), had made a table in a post in LinkedIn just showing kind of what these different types of assets have done over different timeframes. So, he had one timeframe was 1928 to 2024 and 1975… So, about kind of where the gold standard and all that stuff happened, sorry, to 2024, and then in the last 10 years or so, from 2015 to 2024. And gold has been, you know, 5.12% for the very long period, 5.42% for the very long period, and 8.303% since 2015.

But equities have been somewhat better. So, if I can do math correctly, on the spot here, equities probably have actually held its inflation adjusted value, but gold is only getting back to it at this stage. And that might surprise people because gold has had a lot of attention as a great investment.

Maybe, of course, people do it for other reasons, like actually if the world blows up and you have some gold, then you may have a chance to buy some stuff. But it is interesting. I actually thought, for whatever reason, I thought it had done a little bit better than that. But yeah.

And the final thing I just want to throw at you, not that there is necessarily a question in it, but just something that crossed my mind and that is that the headlines about certain of these well-known elite schools in the US seemingly trying to now raise cash. So, there was a story out, I think this is Bloomberg, that Princeton University was issuing bonds about 320 million of those, Northwestern, about half a billion, and Yale (this is what caught my attention because we know Yale from David Swinson and his portfolio and all of that).

And we know that one of the things that has worked very well for them is going into illiquid stuff like private equity and so on and so forth. But according to this story, they are trying to get rid of some of that illiquid stuff now. And maybe they’re all doing this because they’re worried that their funding will get cut. I don’t know. But it is interesting, in my view, because a lot of money has been poured into these privates as if it’s the best thing you can possibly get into. But there are downsides to it, and that’s the liquidity as well.

[00:18:46] Nick

I think liquidity is an important consideration where we stand today. And obviously that has implications with how, I guess politics will play out in the US, not that I can comment too much upon that. But I think also trade wars could have implications more globally. And I think there is more to be seen as to how the stories unfold because I can equally see tariff wars playing out in a more aggressive manner.

I can equally see services between countries and between regions becoming much more local than global. So, I think those immediate reactions could be driven by that rather than just having cash because private equity is not going to perform. I think it’s a twofold situation here that we’re facing.

But suffice it to say that obviously private equity has had its good years, I guess, in the recent four or five years, obviously with some of the challenges in 2022 and so on, and so forth. It’s fair to say that some of my conversations go in this trajectory, which is should we find a way to enhance liquidity at the time that other investments, including private equity, even if at times it can kind of smooth out the volatility but doesn’t necessarily deliver return, is it worth us having some more liquid investments on the side?

And that’s sometimes where QIS can play a role that can perhaps act as a liquidity resource, also to finance some of the calls, some of the capital calls in the environment whereby those private equity investments are actually picking up. Right? So, I think it’s twofold in my view.

It’s perhaps a reaction to what they’re currently experiencing in the US but also it could be just a need to diversify/ defend against the possibility that private equity doesn’t deliver the returns it has historically done. Everything is very fluid at the moment. That’s my view.

And maybe I don’t have a specific answer for any question because I just see this kind of dynamic between an attempt to foresee through the uncertainty, and the risk management that investors try to put through that trajectory. And I’m just trying to be careful with my words because risk and uncertainty can be perceived as equal notions, but one is measurable, and manageable, and that is risk. That’s volatility. The other one is just the unknown. It’s the known unknown and the unknown unknown, to put it differently. And I think that’s the challenge that I think investors are facing at the moment.

[00:21:26] Niels

One thing that I wanted just to mention about these long term returns that Aswath Damodaran showed on LinkedIn, because it ties into the last point I wanted to just hear your thoughts about. At least in continental Europe, pension funds in particular have basically, they’ve just loved fixed income bonds. I mean, in some countries it’s like 80% bonds and 20% equities. And certainly the country that I was born in, Denmark, some of the really large pension funds have been heavily in fixed income, sometimes even with leverage, et cetera, et cetera. When I look at these long-term returns, I don’t really see if gold didn’t beat inflation, then bonds certainly didn’t beat inflation.

And what worries me and what I don’t quite understand is (I don’t want to put you on the spot, I don’t necessarily expect an answer here), it is surprising when you see all this long-term evidence why some of these pension funds still think that bonds is the best thing that they can invest in because they can’t even hold on to the real value of the pensions, let alone give them a return. So that was just kind of one thing that stood out for me when I looked at that.

But then the other thing that kind of ties into it is just simply how US fixed income has been behaving in the last few weeks. Where, I think you have to question. I know people will come out and say, well you couldn’t really say that it’s a risk-free rate of return. I mean there is nothing, there is no such thing as risk-free. Well, it’s certainly been talked about that for decades.

And I have mentioned this in the past on the podcast, this thing about do we need to think about safe havens, risk free investments, etc. etc. in a completely different way than we have been for a long time. And I think the way these markets have been behaving in the last few weeks certainly makes that an even more relevant question nowadays.

I don’t know if that’s something that you even think about or not, but it is something that I’m concerned about given the fact that we have a population that really relies on having some kind of pension when they retire. I know the young ones probably won’t, they have to do it themselves. But certainly, my own generation and those who are a little bit younger expect that we get something when we retire. And I’m just concerned about how these pension funds manage the portfolios.

[00:24:04] Nick

I think Japan is another good use case here whereby not only equities have not necessarily delivered return, not only real but also nominal. Right?

[00:24:14] Niels

Yeah.

[00:24:15] Nick

You know, this is another space or another place whereby I think fixed income investments have had much more of a prevalent role in the asset owner portfolios. And by all means, the recent yield moves have not been well received, clearly.

So, I hear you on the point you’re making and maybe the question is bigger than just an observation. You know, we’re talking about policy portfolios, we’re talking about career risks that those asset owners are supposed to be taking if and so they deviate from those policy portfolios, the impact or the necessity of a policy portfolio. I’m sure Andre will have a lot of good remarks to make on that point. I hear you in this regard and, to a certain extent, I do share the reservations you might have.

[00:25:05] Niels

Yeah. Okay. All right, let’s move on to our usual topics, trend following, a little update here. My own trend barometer, let me start by throwing that out. That finished yesterday at 50. That’s actually an okay reading. But, as I say, often it is a little bit more shorter-term and I think the shorter-term strategies are doing a little bit better during this turbulence, turmoil, terror turmoil. So that’s one thing to note. Other than that, I think April, you could say, certainly continues to be somewhat challenging.

Maybe the last week or so has offered a little bit of a pause, maybe even a little bit of a relief for CTAs and trend followers in terms of at least stopping the drawdown and perhaps even, you know, reducing it a little bit compared to the first few days of the month.

The big question which we may want to talk about here is of course, you know, as a trend follower, as a CTA, are the models only reducing risk at the moment or have they actually and kept the direction, or have they also flipped the direction in some key sectors or markets? I think that’s an interesting one to think about right now.

From what I see, equities, currencies, some fixed income markets (to a smaller degree) have been the most challenging, but even some of the precious metals. In April, specifically, these have come under a little bit of pressure and also base metals, like copper has been tricky this month. The best sector has, without a doubt, from what I see, been energies. And this is not surprising. I’ve mentioned this before.

From the data that I see and all the papers that our colleagues have written over the years, it just looks like that commodities, as a sector, tends to be very reliable and pretty reliable through all of these types of crises, whether they’re long or whether they’re short in duration. So, commodities are super important. I’d love to hear kind of how you’ve experienced it. I know we can’t talk about specific performance, anything like that, but what are you seeing? How are your models reacting to all of this going on?

[00:27:22] Nick

I mean, I agree with you that April has been challenging for the trend space. It’s been a month whereby not only did we see equities reverting, obviously at the level that they did. But then bouncing back was quite impactful for some of the medium-term speeds because by the time you kind of try to reduce your exposure it takes you a few days to be there. The market, it basically dropped post deliberation day, kind of stayed there for a couple of days and then rebounded. So, not only do you need to revert your signal, kind of, it allows you to get into the new positioning and then boom, the reversion comes through.

But I think what happened, and what we are seeing happening is a significant reshuffling of positions across all asset classes. I think this is maybe a bit different to what we have seen historically.

Last August was, to a certain extent, similar in the sense that we did see some moves that were synchronous on the carry trade unwind and the equity reversion. But I should say that in this environment, I would say, pretty much everything across all asset classes was kind of caught off guard. Equities, obviously, that’s the obvious one, the dollar move was quite substantial, clearly, on the oil side, primarily driven obviously by OPEC decisions.

So, let’s talk about timing here. It was also not helpful, from a trend following standpoint, and obviously yields, maybe more as a reaction rather than as the causal effect, also flipped from being short at the beginning of the month to kind of starting shifting into being long.

So, I think the reversion that we have seen across the markets, in a synchronous manner, was the more challenging part and not just the fact that obviously maybe equities were caught off guard and the V shaped dynamic, or W shaped dynamic did not allow for some of the positioning to play out. So, looking at it for the very first few days, being quick was great. But then looking into the evolution of that, being a bit slower played out better.

So, I think some of the faster programs, point in time, they had less of an initial drop, but they somehow now continue kind of bleeding. Whereas, some of the slower ones, or medium-term ones, had a bigger impact in the beginning, but they’re now playing a bit of a catch up.

So, somehow between the models, we’re now into the days where they meet each other again, in some respect. But we know with a slightly different trajectory. So, that has certainly been in my radar and a big focus for us, for our clients, and so on, and so forth. So that’s on the trend side.

I can expand on other topics, but I think to your point, it was more the observation that we have had a number of trending markets or established positions flipping around, or crossing the zero, from the negative to positive, positive negative. It was like almost everything met each other at zero. And then the question is, okay, where are we going from here, and is positioning now just a consequence of rounding or are we actually picking up a trajectory that will play out in the medium term?

[00:30:45] Niels

Yeah. Okay, well let’s look at the numbers then. And I should say, by the way, the numbers here are as of Tuesday evening, but yesterday wasn’t a good day for CTAs as far as I can tell. So, these are a little bit smaller drawdowns than what we would expect as of last night.

The BTOP 50, I mean these numbers are not very bad, down 3.86% in April, down 3.91% in year to date. So, really very well actually. SocGen CTA index down 4.46% in April, down 6.87% for the year. The Trend index was hit a little bit harder, down about 5.15% and down just shy of 10% for the year. And the Short-Term traders index down 41 basis points and down about the same for the year. So obviously they, as they should, do a little bit better in periods like this. From time to time I mention the Bridge Alternatives index. That’s kind of flat-fee trend following. They’re down 6.27% for the month and down 10.59%. So, a little bit worse than the SocGen Trend index.

On the traditional side, MSCI World index down 2.5% in April as of last night, down 4.58% for the year. The S&P US Aggregate Bond index down about a percent in April, but still up 1.59% for the year. And the S&P 500 Total Return index is down 4.13% so far in April as of last night and down 8.23% so far this year.

So, I mean we’re not talking about a meltdown by any stretch of the imagination. It’s been painful, I’m sure money has been lost, without a doubt. But when I look at these numbers, I mean, given the fact how much equities have gone up in the last few years, and so on, and so forth, I know the drawdown is a little bit bigger from the peak in mid-February for the S&P, but I don’t think it’s worrisome at this stage personally, but who knows?

So, I wrote down a question about, you know, why this current crisis might feel a little bit different. I think we’ve already talked about that. You can also comment if you want. I wrote down another thing I wanted to ask you about, and that’s a little bit about the current positioning in the trend following space. But I think we’ve touched on that as well just before that.

Yeah, we do see some positions maybe being flipped but, at least from my perspective, I think at least for the longer-term trend followers, it’s probably more about reducing positions but not necessarily flipping positions right now. So, we’ll see how that goes. And then we talked a little bit about how one man can be the deciding factor. And obviously, without being political here, you can say that certainly the relationships with many countries right now and the US is very different to what it was six months ago.

And then I wanted to test your Danish history, Nick. I’m sure you had lots of Danish history in school. I have a feeling you may not know this, but you know, in 1807 the British Navy actually completely bombarded our capital of Copenhagen and actually seized the fleet of Denmark. This was something to do with securing the sea lanes to the Baltic Sea and the worried about the Russians fleet and all that.

But my point being here is that even though we see right now, perhaps, a lot of tension, a lot of relationships between countries changing, at least this point in my Danish history lesson here tells you that even if you are actually at war with someone after a couple of decades, I think it lasted, then suddenly things change again. You start working together. And obviously the Danes and the Brits are very good friends now. So, all I’m just saying is that a lot of things can change, but they can also kind of change back to normalcy at some point.

So, we’ll see how we go with that. Let’s move on to the questions. We had a few coming in. The first two are from Tim. Tim, very kindly does a lot of sharing and promoting of our social media stuff. That’s very kind of him to do so. So, thank you for that. He writes, first, “in the recent episodes you have discussed return dispersion among trend following strategies during the turbulent times that we’re experiencing in 2025. My question to Nick is should an allocator into trend following strategies keep holding onto the winners or switch between trend following strategies? On one hand there is a proven positive autocorrelation of trend following returns which would support holding on to the winners. On the other hand, a couple of weeks ago TTU mentioned (I don’t remember exactly the wording) that the longer term correlations and returns are much more similar amongst a set of trend following strategies versus short-term returns. That would suggest switching out of the best performers to some that haven’t done so well.”

Interesting question. I’d love to hear your thoughts on that.

[00:36:14] Nick

Okay, so let’s break it down. Number one is dispersion. Number two, that’s a hypothesis, so we should actually look at it rather than just taking it for granted that autocorrelation exists. And number three is that short term correlation versus longer term correlation between trend managers is lower. So, short-term correlation are lower than longer-term.

So, dispersion? I think, yes, dispersion we’re seeing, and I think we’re seeing more and more prevalent dispersion in the last few years. I think it’s driven by a number of factors that we have discussed quite at length – speeds (probably the most important one) in markets and type of markets that managers are trading, static versus dynamic positioning – that’s a third one which is quite important.

Fourth is core trend versus a few other things like reversion dynamics, maybe some carry dynamics. And I would just add a fifth, more of an asterisk, because that’s not systematic necessarily, maybe there are times whereby specific managers act discretionarily and they reduce risk, for instance. We can come up with some hypothetical examples here as to when this could potentially happen.

So, I think dispersion, because it’s a function of all those four plus one – five reasons – it has become, I would imagine (and that’s at least my interpretation), broader in the recent years partly because we have seen some significant reversions taking place. And this is precisely when those choices matter. I’m talking about the SVB. I’m talking about August last year and obviously April of this year. This is when we start experiencing the dispersion.

But also, because I feel that going through those phases and going through the post 2022 outperformance, I believe that managers and CTAs have been trying to amend their models to bring some element of differentiation versus psych. So not only have we seen the appetite for it, but also we have seen the events that make the dispersion most prevalent.

Sorry, I cut you out.

[00:38:29] Niels

No, no, no, no, that’s fine. But I just wanted to throw something into that conversation because I think that’s how I feel as well. But our friends over at CFM, they posted a, maybe not a paper but a blog post. I think it was in January of this year, where they looked at dispersion. Long-term they said, no, there’s no more dispersion today than there’s always been among, say, I think maybe they used the SocGen Trend index. So, actually, I’m thinking, I don’t know… It feels like there is, but maybe we just didn’t pay attention to it in the same way, you know, 15 years ago. I don’t know, anyways.

[00:39:09] Nick

Yeah, I mean I haven’t seen this particular one. And obviously, the question then becomes over what horizon this dispersion is measured, over which constituencies like the top 10 in the SocGen Trend index? Is it 20 of the CTA index? I think we can have a conversation. I think the more trend managers you look at, the closer they would be, the more CTA like, the bigger the dispersion, just by design. But I think maybe, let’s go to the last point, then, on the short-term and long-term correlation.

I think this is a well established finding whereby long-term correlation between CTAs is actually relatively elevated but short-term is not. My interpretation to this; it’s just a matter of speed more than anything. In the following sense, if we’re in a period whereby, over the last three years, let’s say, all signals, however fast or slow, agree on being long equities. Well, by design, being long equities will lead to higher levels of correlation between whoever is holding equities, whether that is coming from a one month signal or a 12 month signal. Around the reversion points, differentiation comes.

So short-term correlation, at the time that the speed is a meaningful differentiator, would be the reason why you would see lower correlation between managers and higher cross-sectional dispersion. But over the longer term, what is happening is that regimes (and I know we’re going to talk about maybe some economic trends and so on, and so forth), precisely because they allow trend followers to operate… Let’s take a step back.

Trend following performs precisely because we have been observing medium-term trends rather than significant turning points. So, out of a history of, say, 50 years, if trend is performing, it’s because there are periods that trends appear and exist rather than there are too many turning points where faster managers will perform and slow managers would not.

So, my point is that if 80% of the time you observe trends, and these are the times that signals would generally agree, however fast or slow, longer-term correlation is relatively higher because it contains more periods of agreement than disagreement. But around short-term periods, which is precisely when differentiation seems to matter or at least seems to build dispersion between managers, is when the short-term correlation will break or would appear to be lower.

So, that is kind of my response here. It’s almost like the function of the fact that speeds would agree, when the regime is not shifting too quickly. And you would only do so, as in differ, when you have a shift in the regime, a shift in the trend. But these are not, I guess, the rule. These are more the exceptions in the trajectory of how markets operate.

So, I think this is the reason why you observe this medium, this short-term and long-term difference in the correlation behavior. So, I guess to go now to the key point which is autocorrelation of trend following returns and whether we should go to the winners and losers, I’m not too convinced that there is autocorrelation in trend following returns. I think we’ve discussed it here a number of times.

You know, maybe over a prolonged period of strong trends we can argue that there is some short-term correlation of autocorrelation in the return series. But I think it’s extremely hard to argue that picking winners out of a trend following universe is a value add. I could be wrong, but this is how I perceive it. This is how I think about how trend following models operate.

And basically, chasing the best speed is not necessarily the best technique because that’s another way of saying the same thing. Should I have a dynamic speed, dynamic allocation purely on the bases of performance? There are other reasons why we can do so, but purely on which is the best speed of the last month? Not so sure.

[00:43:12] Niels

No, I agree with that. And also, I think one thing (just to throw it in there) which is relevant, if you really were to try this out, is fees. I mean, you’re giving up on your loss carry forward every time you make that switch. And I think that actually will hurt long term performance.

So anyways, the second quick question that Tim had was about crowding where Nick Baltas, as he says, is an expert. Well, you’re an expert in many things so that’s good. You’ve written great research on it, he continues. Raising the bar here now. “Based on his models, where does Nick currently see crowded trades? We all believe gold is a crowded trade, but are there any others? And what is his assessment on crowdedness/positioning in equities where things have been particularly choppy”.

[00:44:12] Nick

Yeah, I think, I guess there are two parts to the question; if there are any crowded positions at the moment, number one; and then number two, what is the situation in equities?

I think in equities is the point I made earlier on the Max 7 or, I guess, this kind of high tech AI driven frenzy, however you want to call it. That was certainly the theme of 2024 and beginning of 2025 and, clearly, have been impacted by the recent moves post mid Feb, I should say.

So, that crowdedness and that high level of concentration did bring value to the extent that you ended up having very low realized correlation between stocks purely because of this divergence between the very high cap and the rest of the universe. And there was so much coverage on these topics last year.

I think what we’re seeing these days is this inclusion of more shorts, as I mentioned earlier on, from the hedge fund community, I guess, maybe like a month back. So, I don’t necessarily claim that currently we’re seeing the same level of concentration we had in those names as we had a couple of months ago. I think on the more kind of multi-asset or I guess trend world, beyond gold, frankly, it’s actually hard to claim that there is a single bet.

I’m just kind of looking through some of the positions.

[00:45:34] Niels

I mean, maybe short energies, generally speaking, but it’s not a really super crowded trade.

[00:45:39] Nick

In some of the short trades there’s a bit of long behavior, in some respect, but, you know, nothing outsized in this regard. I think over the month there was some significant shift in the currency markets. So, some of the more DM markets are now, I guess, on the long side, so, you know, kind of shorting the dollar. No surprises there.

[00:46:01] Niels

No, no.

[00:46:01] Nick

Do we claim as this being crowded positions, not necessarily. Gold is by far outsized. Maybe coffee and cocoa and silver. So these kind of, I guess, precious metals, and coffee, cocoa positions that are actually becoming a bit more intensified. But do we call them concentrated? I think it’s a bold statement.

I think the equities are, actually, all over the place. Depending on your speed, you’re long, you’re short, I think they’re all netting out between them or between managers. So, nothing really with high level of conviction. That goes back to my earlier point. The level of magnitude in those positions, at least from a trend standpoint, I don’t know where your trend barometer is. Maybe you mentioned it and I don’t remember the name.

[00:46:49] Niels

It finished at 50, but that can obviously, I can’t remember in my mind which markets are trending and which are neutral.

[00:46:57] Nick

Yeah, for us it’s like the bottom quintile, just to give you a sense. So, like it’s around the 20th percentile, so it’s not significant. There’s a lot of reshuffling taking place at the moment, which, I guess, from a risk allocation standpoint kind of gives you a fairly balanced allocation between assets and asset classes. So, nothing that screams crowded.

[00:47:14] Niels

All right, okay, fine. Let’s move on to the next question. And I have to read the whole question here, Nick, because it is very complimentary to you.

[00:47:23] Nick

I don’t need that part. You can skip that part. Let’s go to the core of it.

[00:47:27] Niels

Fair enough, okay, fair enough. So, this is from Dimitri. He says, “if possible, I’d love to hear Nick’s view on the future of credit QIS. It’s a space I’m actively involved in. I’m curious whether he sees banks allocating more resources to systematic strategies in credit over the next few years, especially as credit vol seems to be gaining some traction lately. And, from what I’m hearing, I understand transaction cost is a big constraint, but I’m interested to hear what else might support or limit growth in this space?”

[00:48:01] Nick

So, crate has historically been a portion of the QIS world that has had its own challenges of, I guess, leading into a fully-fledged systematic product, that obviously follows the principles of indexing that investment banks have to operate under. Which is slightly different to how managers would look into this because obviously they have a bit of a discretion as to how and when they can go into some or pull out of some illiquid pockets.

But in the grand scheme of themes, in the same way as we have equities and equity indices, we have corporate bonds and CDSs obviously, and then CDS indices. So, it was primarily historically a space that the index world, as in the CDX, the CDS indices were more utilized, which obviously reduces, substantially, the breadth. But that, in itself, still allows for some vol based trades, for instance, or some of the more curve-oriented trades, in some respect.

I think the more challenging part, purely from a structuring and data cleaning perspective, is looking into either the corporate bond space or the CDS space. Now, am I expecting that the world of QIS will do more of that? I think the way that we have seen the industry evolving over the last few years, trying to explore more, and more, and more assets and types of markets that could be indexified and utilized in a systematic context, I could not see why not, frankly.

And I think, to me, the challenges are primarily driven by liquidity, data validity as well as data history for backtesting purposes, and obviously costs. But not that this is the only place that costs can be quite high. So, I think then the question becomes how, from a design standpoint, we can harvest the alpha after taking into account costs.

And certainly, I think part of the point that Dimitri might be making here is that there are limits to arbitrage. Maybe on paper you can observe returns, but in practice getting hold of them has a clear roadblock, that being the costs, in some respect.

So maybe I’m not necessarily answering the question directly because I cannot necessarily see the future, but I cannot see how a space that could be utilized more is not going to be utilized.

[00:50:32] Niels

Right.

[00:50:33] Nick

So yeah, I’m basically constructive here without having any forecast.

[00:50:40] Niels

Sure, sure, sure. And Dimitri also asked whether we see CTAs using CDS indices in trend following. And you know, the answer is, I’m sure some will, but I think the majority, not at this stage. Which reminds me, by the way, I rewatched The Big Short the other day over Easter. Actually, it was a better movie than what I recalled it being, so pretty nice.

All right, let’s move into our kind of topics where we still have around 15 minutes left to deal with some of that. We started out, or earlier today, we talked a little bit about how we, as managers, do our stuff. And if someone asks, generally speaking, you know, one of the things we would put into our models, I think a lot of our audience would say, well, clearly it’s the historical prices of the markets we trade, that’s what we base our signals on. But this has changed in recent years.

There are some managers now who also start looking at other types of information under this kind of umbrella called alternative data sources. And one of them has been kind of coined Economic Trend, based on economic data. You noticed, and I’m aware of this as well, that for example, in a year like this year, those type of signals have done very well.

They’re relatively new. We may not have a lot of history on this, but I think we both felt that this could be an interesting topic to hear your opinion about a little bit, and maybe you know more about how they operate compared to what I do. So maybe we can spend a little bit of time on economic trend, which I guess people like AQR are doing. Maybe some of the others, maybe there’s some others. But I do remember when we had AQR last on the show, Alan and I spoke with them about this and they were excited about it. But it’s still early days to some extent. Anyways, what are your thoughts?

[00:52:52] Nick

Yeah, I believe they run like a 50/50 program between economic data and price data. At least that’s what I recall from your conversation. If I’m wrong, I apologize.

So the interesting dynamic here is that how growth, inflation in this type of macro fundamental data can have some implication of asset class performance. I think what becomes more challenging is to have some sort of sizing considerations that go beyond risk. Like, if for example, the regime is accommodative of equity exposure, I don’t really have a trend signal for the US Index versus the European index.

Maybe the level of growth can be a way for us to size it, but I think it’s more of a directional type of a signal, like more like a binary one. And then some sort of risk adjusted by vol would be enough to get you to something that looks like an economic trend behavior, as in going long, the assets that are more likely to perform in a specific regime. And perhaps going short the ones that are not supposed to be performing the regime.

And I think some of the benefits, one can argue, that can become useful for a year like this is that macro regimes do not change as quickly as prices do. And the benefit is that you just don’t respond to those day-to-day shocks. So growth is not going to drop on a day or two and inflation is not going to spike on a day or two.

So, somehow this kind of slow movement of regimes can bring, I would expect, some value specifically at the time that you have either significant price corrections or price movements (of course it can go both ways and we can get that). But I guess in the current scenario, with growth being pretty much falling for the last two, three years, at least that’s what the data suggests. And inflation trying to decide upon a trajectory, then from an economic standpoint, surprise, surprise, gold has a key role to play in this environment. Depending on inflation dynamics, bonds have a role to play whether they are inflation hedged or not inflation hedged. That’s a decision one could make with regards to inflation trajectory, maybe steepness and you know, interest rate curve dynamics can also help out, but nobody would actually go long equities in this environment.

So, in a way it can immunize or help a portfolio move away from asset class that are not necessarily performing or perhaps go short those asset classes, but then have this diversification that purely comes from the fact that, yes, the regime suggests that these are the asset moves that should operate in the grand scheme of things rather than the short-term. So, I think this diversification that these types of signals could bring is just worth noticing.

I would still, however, flag that over the last year or two, with negative growth in the data, you would have missed quite a substantial amount of return that some of those equity trends have delivered for CDAs. So, there’s always a flip side here.

I’m not just saying that’s the panacea for trend following, to stop looking into price and start looking into economic data only. But I just wanted to flag that, you know, I think there is some value there, I guess, from a positioning standpoint.

[00:56:21] Niels

Sure, Yeah. I think that’s fair. You know, as I said earlier, these are strategies that still are relatively young in many ways. But listening to you now, talking, I was kind of reminded of one of my very early conversations on the podcast with a firm, back then called IPM, a Swedish firm, a systematic global macro fund.

And with the basic knowledge I remember about their strategy and what I know about what people are doing today, it feels a little bit the same. They’re using economic data and all. And I remember back then having to compete against IPM in the UCITS space. And it was very tough.

I mean, they raised all the money and the rest of us were kind of left with a little bit of leftover from investors in those days. But performance stopped suddenly. And eventually, after a year or so, they went out of business completely.

So, all I’m just saying is that what I like about trend, it’s been around for many decades. And we’ve kind of seen many sides of trend, when it works, when it doesn’t work. Some of these newer strategies, I’m not suggesting that people should completely ignore them. But I’m also acutely aware of how you really don’t know what you’re dealing with.

Even if they’ve been around for 5 or 10 years, it’s still not a very long time because things keep changing, things keep evolving. And you cannot rely on a backtest, even though we see lots of papers being sent out, you know, thrown out there, relying on backtested data, even in the replication space.

If CTAs, today, were to show their backtested version of their current models, they would look a lot better than what the real history is. So, just throwing it out there. But we should be open for new ideas.

We still have a few minutes left and I wanted to maybe spend those talking a little bit about one paper. It’s a paper that kind of relates to the paper I discussed last week, where Katy Kaminski had produced a paper on crisis and correction. I think this came… I can’t remember if this came before or after, but I didn’t pick it up until you kindly made me aware of this. And this is from our friends over at Man Group. It’s a paper called Why Patience Matters during Market Stress.

It is around the same themes, but given the fact that it’s always good to talk about these things as the events unfold in front of our eyes, I wanted to maybe give you a chance to perhaps extract some of the findings in their paper. And maybe if you listen to Katy and I, last week, maybe you want to contrast some of the things they find with what we discussed. So, I’ll leave it very open to you where you want to go.

[00:59:33] Nick

Yeah, that’s quite quick because you know, the report, the paper is actually quite short and nicely written. And, at the same time, I’ve seen Katy’s work and am always a big fan.

I remember the first time I met her, it was maybe like 13 years ago, probably, before the Alpha Simplex days. So, of course I follow her research, and of course I listen to her, and it’s always super, super good and to the point.

So, look, the topic is very similar, and the analysis is very similar. Actually, one of the charts is very similar. This bubble chart that you’re talking about. So, figure one in paper one and figure two in paper two are pretty much the same, in a way. Also, with the color: the green and the red.

So anyway, not speaking about colors, the whole story here is that April came around, reversion of markets did happen. Trend following had a negative impact. The question is, do we learn anything out of it? Is it the time that we’re expecting it to perform? Is it a warm up period for what perhaps will become a significant sustained drawdown? Which is when we know trend following is operating quite well.

And basically, Katy said, look, if the S&P is dropping by, I don’t know, 5% to 10%, to 12%, to 15%, to 17% in a short period of time, clearly, specifically if that comes post a rally, you’re not positioned for it. Trend followers are price takers. They’re not predicting returns, they’re just following price paths.

It takes some time before those positions get flipped from positive to negative. But should those movements become sustained, and the drawdown continues deeper and longer, this is when trend following starts operating.

And this is when we see things like the.com and the GFC and the inflation of 2022 playing out as scenarios of outperformance. Whereas Volmageddon, or April this year, or August last year, or SVB, you name it, are not the environment that trend following operates in.

And that’s obviously a different discussion as to whether we need trend following for those events or whether we should have something different for those scenarios. That’s a separate conversation. So that’s what Katie had done.

And what the Man Group work does is it pretty much looks into very similar dynamics and pretty much looks into the same three big kind of scenarios, 2002, 2008, 2022, suggesting, obviously, this outperformance, and so forth. But the point they make on patience is that, and that’s the nice thing they’ve done is that they also go three months before the drawdown in equity started.

[01:02:15] Niels

Okay?

[01:02:16] Nick

So, they look into the warmup period. And what they find… And it’s actually quite interesting because I was kind of hypothesizing what the paper says a couple of days before it came out. You know, I was discussing with the team (and that’s what I was saying earlier on), everything is currently reshuffling. The positive equities are going short, maybe the more long, the dollar becomes short, the more short trades become long, and so on, and so forth.

So, have we seen, in the previous scenarios whereby eventually trend delivers very strong performance, a similar reshuffling dynamic playing out? And they do show something like that.

They basically say not only do we see this performance playing out, but if we go three months prior to when S&P started dropping, trend following is just trying to reinvent itself. It doesn’t seem to be performing prior to the three months. It doesn’t seem to be performing a few weeks or months post the drawdown (which is Katy’s work), but should those become sustained, then performance comes through.

So, what the Man paper does is just, in some respect, adds a bit of evidence to Katy’s work by effectively looking into the three months prior to the equity market peak. So, not only does it look into the performance of trend following post the drawdown, however deep or shallow that was, but also what happened three months before even S&P hit the subsequent peak, and the drawdown obviously starts from then on.

And the point they’re making is pretty similar to the one I was making earlier on, and I was kind of discussing also with the team prior to the paper coming out, do we see a similar way of reshuffling of positions before equities hit the peak?

Is there a, not even a warmup period for the trendiness that comes after, but more about re-establishment, or I guess cessation of existing trends in other asset classes perhaps before S&P hits the high? Is, somehow, the algorithm picking up the fact that we’re kind of getting to the end, let’s reshuffle the positions, and, obviously, by the reshuffling you can be hit in the very short term by some sort of wrong positions in a way?

And what they show is that not only do you get this performance post the drawdown, conditional upon that being sustained, but even three months prior to the peak there is not significant performance that comes out from trend following strategies. So, they have this recalibration period that is kind of happening not only post the drawdown, but also a couple of months prior to S&P or equities hitting the high. And they showcase that in those three scenarios: the dot com, the GFC and in 2022.

Maybe you remember November 2021, just before 2022 came into life?

[01:05:13] Niels

I do. It was a single. Well, there was a single day just around Thanksgiving, I remember very clearly, that’s for sure.

[01:05:21] Nick

Or you remember maybe August 2007 with Northern Rock?

So, these are a few examples whereby S&P, prior to hitting its peak, where trend following is kind of reshuffling itself and tries to get into a new position in territory, not to perform in the equity turning point, but does perform if that becomes a bit more sustained.

So, that’s the point they’re making. They kind of say, it’s not just how long it takes for the drawdown to play out, for trend following to work. It’s also, even prior to hitting the high, that there is some sort of reshuffling that takes place. So, it’s kind of complementary and confirming, in some respect, the work that Katy did.

So, I found that as, I guess, an interesting maybe reflection of what we experience at the moment. There is shuffling of positions.

[01:06:07] Niels

Yeah, well, that’s it. That really is it for today, Nick.

But before we go, of course, I would encourage everyone to go and find your favorite podcast platform and leave a rating and review to tell Nick how great and appreciative it is for you to listen to him coming on and talking about these things.

Next week Rob is back. So that will be an interesting conversation, no doubt, to see how his models have been faring through this environment. If you have some questions for Rob, which you usually do, please email them to info@toptradersunplugged.com and I’ll do my very best to remember to bring them up.

That’s it for now. We appreciate you listening. We’ll very much look forward to being back with you next week. So, from Nick and me, thanks for listening and until next time, take care of yourself and take care of each other.

[01:07:07] Ending

Thanks for listening to the Systematic Investor podcast series. If you enjoy 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.

And remember, all the discussion that we have about investment performance is about the past, and past performance does not guarantee or even infer anything about future performance. Also, understand that there’s a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions. Thanks for spending some of your valuable time with us and we’re see you on the next episode of the Systematic Investor.