Risk, Return, Repeat: The Portable Alpha Revival ft. Razvan Remsing & Alan Dunne

[00:00:07] Razvan

So, it’s really that ability to get people to think a bit about a multi asset approach, an unfitted approach and just consider, almost like the title of our paper, Finding the Right Match. I just want to put CTAs on the menu when people are thinking of doing these active risk within equity markets.

[00:00:34] Intro

Imagine spending an hour with the world’s greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level.

Before we begin today’s conversation, remember to keep two things in mind. All the discussion we’ll 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. Here’s your host, veteran hedge fund manager Niels Kaastrup-Larsen.

[00:01:29] Niels

Hey everyone and welcome to another edition on our Top Traders Unplugged series where today Alan Dunne and I are delighted to be joined by Razvan Remsing, Director of Investment Solutions at Aspect Capital. As part of our conversations with industry leaders in the world of managed futures. And with a bit of a bias towards real CTAs and trend following.

Razvan, it’s a great pleasure to have you on the podcast. Thanks so much for making time for us today, to join us. We certainly have been looking forward to this conversation. How are you doing?

[00:02:02] Razvan

Thank you very much. It’s a real pleasure to be on this podcast. I’ve been listening to it for a very long time. I’m a great fan, so it’s a real pleasure to join you.

I’m well. I’m in London, it’s sunny. It’s unusual. I think it’s all good.

[00:02:20] Niels

That sounds pretty good. And you, Alan? Hi to you. Dublin?

[00:02:25] Alan

Yeah, all good here. Yeah, thanks. Nice and sunny in Dublin as well for a change. So, all good.

[00:02:29] Niels

All good. Excellent.

Now, before we dive into all the topics we’re going to be discussing, I would like to set the stage a little bit for the conversation so that the audience, you know, can get to know you a little bit better, Razvan.

And also, in the past we’ve had Marty and Anthony on the podcast from your company, but since it’s your first time and hopefully certainly not the last one, I thought it would be a good idea maybe to share a few highlights from your career and what led you to this wonderful world of CTAs and to Aspect.

[00:03:05] Razvan

Well, thank you very much. I think it’s quite an honor to be sort of in such good company of previous podcast guests. So, I hope to add a bit of value there. My background, you know, I started my career in the sort of early 2000s. My initial training was in physics and mathematics. I didn’t quite know about financial markets.

Growing up out in South Africa I was more sort of science based, looking at neutron stars in my degree. And then I got sort of wind of the fact that you maybe could… that there’s a world of application of physics to some real world problems as well, and I moved to Cape Town.

The attraction of course was a beautiful city. I think the most beautiful city in the world which also happened to have a very good financial mathematics program. And really, through that period my world opened up to quant finance. We happened to have, at the time in South Africa, a very sort of budding quant industry with a really good quant asset manager that was providing really good mentorship for us back then. Which meant that I started my career in more traditional quant roles, so, SAA ,TAA type roles, stocks, bonds, a bit of commodities, but generally long only.

And then soon I moved into a hedge fund which was multi-strat at the time, Africa focused, contrarian, and I was doing all the quant support for it. So, I really learned, at an early stage, what it’s like to trade through the GFC. So, we had a pretty interesting experience which then got me into London.

So, I think we’ve always had an eye to go to one of these major financial centers. And in the process of living through the GFC and reading around what’s going on, CTA’s caught my eye and sort of my interest. And so, I sort of decided to come to London and look for a CTA to work with, and Aspect were very kind to have me.

It’s been a wonderful experience there. I’m currently in my 16th year at Aspect. I’m really fortunate to have the time to spend with Anthony and Marty, and actually my colleagues here are really well experienced. So, it’s been a wonderful, I would say, growing up in the industry.

My role at the moment is it’s a dual role. I sort of spend time on the client side, product side, really representing our products, our strategies and then internally more on the investment committee helping sort of reviewing and approving research releases and ongoing monitoring of our strategies. So, really, for me, it’s a wonderful career arc. I think I’ve really been very fortunate to have the ability to work with such industry pioneers. And they’ve been so generous with their time and their experience. We still speak on a daily basis and it’s something that’s kept me learning.

But also, hopefully, I’m starting to have a little bit of relevant experience. I feel like only being in the industry for 15 years doesn’t quite qualify you for a Top Traders Unplugged podcast. But hopefully, you know, you’ve let me scrape in. So, thank you very much for that.

[00:06:45] Niels

Absolutely. That’s great. That’s a great story, great background and, as you say, it’s a great company to be with.

Now, for today’s conversation, we have all chipped in with some topics. I’ve tried to put them in an order that makes sense, but, you know, we’ll find out. And the first one we’re going to sort of start out with, which is one of the main ones, is really one that is incredibly topical at the moment. It seems like there are new products being launched every day in this area. And no, it is not CTA replication.

In fact, it’s been something that’s been around since the 1980s, and according to a paper that Aspect actually published back in December, I believe it was, it is portable alpha that we’re going to be speaking about. So, what I thought would be really good, as a good starting point, maybe, Razvan, is for you to kind of take us into that, share some of the background story, and then go through some of the main points that you wrote about. And I will try and chip in with some, you know, hopefully meaningful comments along the way. But let’s dive into this. This is an important point in time, I think, for portable alpha products.

[00:08:07] Razvan

Thank you for that intro. It’s really, it’s one of these topics that, in all honesty, took me by surprise about a year ago. So, this is a topic that actually, again, at the start of my career (just sort of going back to what I spoke about earlier), the initial quant applications was really these how do you, within an SAA framework, do a bit more with your asset classes and then you sort of have these alpha extensions, and this is in the early 2000s. So, this concept of portable alpha was quite prevalent, even in South Africa. But it sort of turns out it’s a concept that’s not new.

But what actually, you know, the GFC really was such a formative experience for many investment approaches. And the concept of portable alpha, there’s nothing really too magical about it, it’s just the ability to package, in an investment vehicle, a combination.

You can control what sort of beta exposures you want, how you’re going to deliver those, and then overlay on top, somehow, an additional source of uncorrelated returns. The principle being that when you do that, you get a more efficient portfolio, it works harder for you.

I think what the problem was, was that the original implementations were very… they were using this sort of financial alchemy of really extreme leverage and trying to really push those structures using futures, using a lot of leverage to extract the betas and the alphas. And those structures weren’t as cash efficient as they could be.

And in fact, they weren’t as resilient to big tail events because a lot of these things, you know, they’re quite good if you simulate the application of say, seemingly uncorrelated return streams, it looks good, it improves your efficient frontier. It has all the right metrics. In practice, though, can you actually live with that structure and can you hold it?

And the GFC showed that a lot of the original portable alpha implementations shared a common left tail. They were all sort of impacted by a similar risk event, which meant that if those structures were too aggressively put together (in other words, not enough cash buffers left to finance the ongoing structure), it meant that they had to be unwound at the worst time possible.

And that was my understanding of the space about a year ago. I thought, it’s not going to come back. There are modern portfolio techniques out there. People build their portfolios in far sensible ways these days.

And as I was going on, talking to clients, going to conferences, seeing them, whether it’s in the US or Europe or Asia, the experience of 2022 highlighted and sort of almost flushed out a particular desire in people’s portfolios. Namely, they want to make their liquid part of their portfolio work harder.

So, what was happening in ’22, if we’re looking at the major institutions that we speak to and you think about the alternatives, allocations, there’s a whole host of different strategies there, but there’s a very big allocation to private market -. not good, not bad, but illiquid.

When ‘22 happened, those portfolios that were very heavy in private markets were impacted significantly in their listed, in their bonds, and their stocks. And if you happen to be maybe an endowment or a foundation or you’ve got liabilities that are due in the near term, you now have to meet those liabilities from a diminished liquid portion of your portfolio. And you probably also saw that your private markets, the cash flows dried up a bit in that period.

So, there’s a real urgency by some of these allocators to think, okay, how do I introduce… Actually, maybe we’re too exposed in our traditional assets in 2022. It’s not that the 60/40 is dead, it’s just that we know that it’s not enough to just have very, very undiversified liquid alts there. But what do we sell? How do we make space for these strategies in my portfolio, especially that I’m expecting to get more capital calls from my private markets. Maybe my liabilities are marked to inflation plus. So, it was a sort of double whammy effect.

And going around that, you know, you couple that experience of needing to make your liquid portion work harder with the career risk of selling down your equity. So, we’re in a really strong equity market environment. Yes, we’ve had some turbulence over the last few weeks, but arguably it’s been a really, really strong performance from the equity asset class. And the people I’ve been talking to, they’ve been saying, well, I don’t want to go underweight equities here, I really don’t. I want to diversify them but still to go flat-out in equities.

And that’s where the wheels started turning and thinking, hang on a second, we’ve been selling our strategy, we’ve been positioning CTAs and trend following strategies to do this exact role in a portfolio – to provide a good shock absorber in the portfolio to participate during times of divergence. But really, portable alpha is just a mechanism, another mechanism of allowing people to access these strategies without having to make big wholesale changes to their strategic allocations.

So out of this, we started looking at this and we focused. Half the paper was just trying to remind ourselves, and our readers, that this is not a new concept. It’s not something that… It’s not new. It has had challenges in the past, but maybe if we pair the right betas with the right alphas, you could maybe do better.

So, there’s a natural property of our CTAs. As we all know, our listeners will know this. By being margin traded there’s a lot of unencumbered cash floating around in your portfolio. And that’s a natural state of our strategies.

We have another property that’s really useful. We’re almost anti-fragile. What I mean by that is that the worse a market gets, the more volatile, the more stressed the markets get, the general tendency for CTAs is to take cover or to become more and more cash rich. And that’s also one of those self-healing properties of CTAs that lend themselves to actually allowing a portable alpha structure to withstand severe market shocks.

And again, there will be edge cases. You have to be very careful about making sure you’re very conservatively structured, that you have enough cash still left behind to meet significant variation in margin. Markets can drop pretty sharply in a space of one or two days. You know, for us, with $15 to $25 in $100 you can get access to a decent, well diversified CTA strategy. With another $15 to $20 you could replicate $100 notion of equity exposure, and you still have plenty of cash left over for those potential significant adverse conditions. And that’s really the concept and what’s interesting is that it’s really resonating with pockets of institutions. It’s not for everyone.

Most allocators actually have pretty strict rules. They’re not going to introduce beta into their portfolios again. But there is a segment of allocator that maybe is more mid-sized. They don’t have the scale or the ability to construct bespoke solutions, or to notionally fund, or have these more efficient ways of allocating. So, they do tend to go into funds, and they also do have a lot of static equity beta in their portfolio lying around.

As long as we’re able to utilize some of that structural beta in their portfolios, suddenly you’ve got a home for a CTA without having to disrupt the portfolio. And that’s been the last, I would say, six months. Whether we bring it up or people actually ask us, it’s been a very, very hot topic of conversation.

[00:18:16] Niels

Yeah, that’s great. That’s a great outline for that.

Alan, do you want to dive into some of these things? I’ve got a couple of questions as well.

[00:18:27] Alan

Sure. A couple of things come to mind. Just listening to Razvan as he speaks. And, I guess, when you hear about portable alpha offerings and the motivation for why they’re in the market, you kind of have maybe some cyclical influences and structural Influences, I think it’s maybe fair to say. The cyclical being the S&P has done 40.50% for the last five years and probably done that for the last 15 years. So, it’s hard to have an alts product on a standalone basis, as we’ve been talking about. So maybe blending makes an alts product look more attractive.

And then the structural, which I’m kind of maybe even more curious to hear about, is we had portable alpha back in the 2000s. It came. It went. It’s back now. But my impression is portable alpha, return stacking, the idea of using derivatives to have a portfolio that’s more than 100% (in the kind of simplest terms) has been, to my mind, more widely understood and been embraced by a broader set of investors.

So, Razvan touched on pockets of institutions, but obviously we’re seeing kind of use of those types of products by RIAs in the US. So, conscious to get a sense on how much of it is cyclical, how much of it is structural (probably both)? And also, you touched on some of the institutions, and I’m mentioning RAs in the US, from that structural perspective, are we seeing, say, more family offices thinking about having those more leveraged portfolios, or wealth managers?

It does fly in the face of the more traditional kind of multi-asset approach of the sum of your allocations being 100% and that’s it. So, I’m just curious to that evolution of the sophistication of investors.

[00:20:33] Razvan

Really, right across the whole spectrum. Like I said, it’s not for everyone and it’s really for particular reasons. It resonates. If you’re looking at more on the retail side, it’s just a more cash efficient way of allocating to maybe a strategy that would be quite hard to access directly. It’s important. I think you raised a good point. I think the concept, it’s been well circulated, it’s been a bit more accepted.

I think it’s still very, very important that we combine the right things together. It’s not any old alpha source with any old beta that will match. Our belief is that it’s the tail behavior that decides how viable the structure will be.

Is it cyclical? Hard to tell. I think it brings in new entrants to the market. There are people that maybe just could… What we’re finding is there’s a group of investors that traditionally just wouldn’t have had allocations to CTAs. They just didn’t have a place in their portfolios.

Again, it’s for this audience who is well schooled in these concepts. But there are the big institutions that have got RMS or CRO asset classes. That’s very easy. They’ve already done the hard work, they’ve already created their portfolios to house these types of strategies.

So, then it’s really a question of is your alpha good enough? Do you fit well within the existing portfolio. Institutions or even sort of more family offices that have got a more asset class specific view of the world, conceptually you speak to them and, of course, they want to hedge out equities and, of course, they don’t think that bonds will always be the defensive thing. But where do you fit the CTA? Is it a defensive asset, is it a growth asset?

And again, the answer to that is yes, it’s a bit of both. But if you want to go full-on growth, you can do better than that. If you want to go full-on defensive, you can do better than that. The things that we add, as a strategy, is how adaptive we are; that we are not fitted to being defensive or growth.

But very few portfolios have got a place for these things. I think this is an extension of potentially a new group of allocators that might be able to benefit from having CTAs. Whereas our traditional allocators, that we all know and have been in the space for a long time, will continue to structure their portfolios the way they have. I think it’s just a growing of the appeal of the strategy rather than a changing of preference from one style to the other.

[00:23:50] Alan

You mentioned, you know, where does the CTA side fit in the portfolio? And the classic challenge with portable alpha type products is what’s the bucket for these? And maybe there will be a unique bucket invented, but historically that has been a challenge. I mean what have you picked up, in terms of client conversations, as to where it slots in?

[00:24:13] Razvan

At the moment, you know, I’ve had good conversations with equity asset class leads. So, basically, the concept here is it’s been really hard to do active equity well. I’m still incentivized to outperform my beta benchmark there.

So, it’s either you talking to asset… So, wherever the beta you’re sourcing is. So, if it’s a bond beta or equity beta, but generally it’s equity beta which is sort of a better place to start.

There’s a lot of interest from the equity sleeves Think of it, you can decide how much overlay you put on top and then it becomes a tracking error question and a risk appetite question, or it’s the CIO’s office. So, in other words, some institutions have got this almost completion portfolio. They’ve got this pool of assets that sits on top of their asset class buckets. We’re getting some traction there again.

So really, I think it’s evolving. We could speak again in six or 12 months’ time and I could be entirely wrong, but this is kind of where the conversations are currently happening.

[00:25:28] Niels

Yeah, I mean I’m fascinated by this. First of all, I’m fascinated by the idea that it makes such a big difference whether you’re giving them one line item or two line items to look at. I mean, that in itself I think is quite… I mean we are talking about, you know, high finance here. So anyways, that’s one thing.

Now I have a kind of a theory that I wanted to test on both of you. I’d love to hear your thoughts.

So, when we think about an alpha source for these portable alpha products, because what investors really want, as Razvan was saying, is that they want to have full exposure on their equity book, but they don’t really want the downside that comes with it or the risk that comes with it. So, the first thing you would think of is, well, a perfect tool or strategy to combine this with would be some kind of hedging or tail risk strategy.

By default, hedging strategies are only successful if you have a short-term mindset because it’s simply the return bleeds, or you lose money over time, in these strategies unless you time it to perfection, like we saw during Covid. Those who monetize their options, for example, they had a great time and a lot of other people didn’t have such a great time.

Now thinking about investors who are the ones we’re talking about, now, their mindset of course is such that we’ve all learned that in order to be successful with investing you have to have a really long-term mindset and be a long-term investor. Everybody thinks of Buffett, and so on, and so on, and so forth.

So, I wonder if the secret to why trend following, in our view of course, is such a perfect match is the fact that you, in trend following, also need to be long-term. Yet it has this wonderful ability, because it’s adaptable, to be relatively, I wouldn’t say quick, but it turns out, at least that through crises, even crises that are not that long, it has the ability to deliver some relief in terms of positive performance during time frames where it’s most needed.

So, it’s kind of a weird one because you really do need to be long-term in order to benefit from trend following. Yet it has the ability to deliver returns from still being long-term, but maybe from the diversification and the market trades, etc., etc.

So, when I’m thinking about this, I’m thinking, well these two strategies are actually both long-term, in the way you should use them, yet they have this wonderful compatibility when it comes to short-term fluctuations, not always, it’s not guaranteed, but often. What do you think about that?

[00:28:27] Razvan

It’s spot on, Niels. The thing that’s really most important here is… I think Marty actually on your podcast a while ago said something that I really liked which talks about the trend being like a medicine that requires time to work.

[00:28:42] Niels

I remember that.

[00:28:43] Razvan

So, you’ve got to give it time to work. The biggest challenge, I would say, to living with a CTA is the behavioral pressure that it’s uncorrelated and it tends to zig and zag at different times to the most widely held asset class. And even if you go back to sort of, you know, prospect theory and Kahneman, Tversky, all these guys, they’re saying that downside hurts three times as much as missed upside. So, basically, although (linking back to your original question, it was like two line items versus one), if you’re looking at this one thing, and I’ve got two line items, one is equity markets, two thirds of the time it’s an up month. In a CTA, you’re closer to 50/50.

So, already now you’ve got this active decision that more frequently has a down period. Furthermore, equities are a widely held asset class. So, then you’ve got this sort of misery-loves-company description where when equity markets drop, we’ll actually hang on a second, all of us hold equities, we’re all in the same boat together. Whereas CTAs, they tend to have the downside at slightly different times, to equity markets. If you pair them together, as you all described and we all know, this principle, the combination, the very thing that feeds the trend following performance, is the fact that when you have a major asset class, like equities, when major equity asset sort of reprices, has a big correction or a big declines, it sets things in motion. It propagates through the system. It starts to cause ripples in currencies, in bonds, as central banks react, commodity markets react. It’s those ripples that trend followers capture.

So, if you sort of put the two things together, suddenly that positive skewness that you get with trend, with more frequent but smaller negative months, they can get hidden in inverted commas behind this widely held asset class. And suddenly it’s the same portfolio. But behaviorally it’s so much easier to hold something that doesn’t deviate too much from what your neighbor has. It’s taken me a while to get here because I’ve spent most of my time arguing for being different to equities.

And actually, I think it is important that the alpha source remains that independent source, but it’s the packaging that really talks to a behavioral need rather than a logical construct.

[00:31:35] Niels

Yeah, and this is also one thing where, and I know I’m going to step on some toes when I say this, but this is also where if we think about that and whether people put it as one line item or two line item doesn’t really matter, obviously the result is the same, but as a really true companion to people with equities. I used to work with someone, many years ago, who came from the pension fund industry and he had this wonderful quote where he just said, yeah, I mean, trend following is what allows you to own equities. And that’s actually exactly what this does.

But this is also why I’m a little bit concerned when I hear people say, oh, but I want to trade 50% of my trend following portfolio should be equities, and it should be single stock equities, and so on, and so forth. Because actually I’m thinking, but it’s going to be harder and harder to be that diversifier if you do that, because we know equities is this part of the portfolio that’s going to struggle the most when you most need it. Now, I do take the point that when you trade single stock equities, it’s a blended picture, so to speak. You can be short many stocks and, and long other stocks. But still, anyways, it’s a little bit of a sideshow here.

But, I think this is also why I’m a big proponent of these more classical, truly diversified portfolios that don’t get too big, too narrow, so to speak. Anything else we want to talk about before we kind of pivot to our next topic? Anything you want to mention, Alan?

[00:33:09] Alan

Well, just, you know, you talk about the merits of CTAs as the source of alpha, as the driver, the alpha driver in the port of alpha, I guess what are you hearing from people in terms of the merits and also the challenges of that, say, versus adding equity market neutral?

And I’m just thinking historically, if you were to say to something, okay, we’re going to have this construct that involves leverage, derivatives, futures, hedge funds, a lot of investment committees or pension boards would be like, hold on a second, not sure about this, but obviously for plenty of allocators, those hurdles have been overcome.

So, yeah, I mean, is the education getting better and are people identifying the merit or are you equally seeing equity market neutral being embraced in this role as well?

[00:34:06] Razvan

I think it’s overwhelmingly equity market neutral strategies that are being utilized. I think what’s new to the debate and what we’re trying to present is that we would like people… If they’re going to go the route of portable alpha, of alpha extension, of introducing things on top of the beta, we’ve been doing this as an industry for a very long time, providing these properties. And what we’re trying to bring to this discussion, what’s novel here is, hey, have you considered managed futures as also a very viable and, in fact, the very properties that we think are really, really hard to find in many strategies, this ability to be adaptive, to be resilient, cash efficient, almost antifragile? I only say almost rather than fully antifragile because if it’s a sharp drop, and I’m long that market, and it gaps against me, guess what, I’m not going to be providing protection. But I know that we can react in a meaningful time frame.

So really, Alan, it’s about trying to challenge the orthodoxy that says, stay within the asset class. So, the real appeal of equity market neutral, of course, it’s the same sort of models. The framework is consistent. An equity allocator has got familiarity with that. They should be able to pick a good equity manager.

There, what they can’t really sidestep is the shared tail risk that hits equity markets. And so, what we’re trying to say is that, yes, you’ll have greater tracking error, but it’s controlled. What you will have is you’ll have a mechanical response that will kick in whenever your major asset class shocks. And we all know that it’s not the shocked asset class that drives the returns, it’s all the other assets that react.

It’s very seldom that, you know, you short a market that then it just really drops. You know, it’s the reaction to it. For us, you know, in the GFC, or in the pandemic crash, or in the tech wreck, it’s all the other asset classes that drove performance with a little bit of a contribution eventually from stock indices.

So, it’s really that ability to get people to think a bit about a multi asset approach, an unfitted approach and just consider, almost like the title of our paper, Finding the Right Match. So, I just want to put CTAs on the menu when people are thinking of doing these active risk within equity markets.

[00:37:09] Niels

Well, another thing that I’m sure our listeners all are fully aware of is just a changing tide, so to speak, around the world. Clearly the global macro environment is shifting. The policies that we see and that we are witnessing are changing, some of them almost every day.

Alan, I wonder if you could, since you often speak about global macro stuff, maybe you can kind of set the scene a little bit and we’ll hear from Razvan in terms of his conversations or experiences with this particular point when it comes to what’s happening in our space.

[00:37:53] Alan

Sure, yeah. I mean, I think there’s been a strong sense of a structural shift in the global macro backdrop. You know, obviously in the 2010s we had secular stagnation, low inflation, low interest rates, low volatility of macro variables. And now we’ve gone into this decade, and we’ve had, you know, much more volatility in GDP, much more volatility in inflation, higher interest rates, and then obviously all of the obvious geopolitical shifts that we’re witnessing even in the last couple of months. And reflecting that, indices that actually quantitatively track uncertainty are at multi-year highs. And all of that would seem to be a favorable backdrop for CTAs in terms of potential dislocations.

And I think when we had Anthony on before, we were talking about the concept of uncertainty alpha. Now, CTAs had a very strong 2022, 2021, in many cases. Since then, things have been more muted. So, is that a challenge from a communications perspective or is this uncertainty something that translates into a better opportunity set, but it just takes time to materialize or how do you think about that?

[00:39:15] Razvan

It’s an interesting topic to discuss. It’s really, really relevant to how people think about our strategies. It links back to Niels’ earlier point about long-term. I think it’s about that the environment right now is far more fragmented, it’s far more divergent. The greatest example of that is just what happened the last few weeks, right? The big step change in macro policy, in sort of infrastructure spending, rearming Germany, lifting the fiscal break. The sheer amount of potential policy changes and also potential policy mishaps from the US has actually really put a question mark on this US exceptionalism. And then you had the DeepSeek moment.

So, I was in Asia recently and what struck me the most was how much the risk appetite had switched to risk-on for the region from the local players. I think the DeepSeek moment really was a validation that sort of really showed that China is able to compete in the technology sphere despite all the tariffs and the trade wars. And there’s a real expectation, at the moment, that there’s more stability in the region in Asia than potentially what we expect to see in North America.

What does this all mean and has got to do with CTAs? To me, these are all sources of potential big macro trends to emerge. And right now we’ve had a step change in the outlook for Europe versus where it was six weeks ago. There are some question marks on the resiliency of the US tech sector, but it’s not necessarily doom and gloom.

I mean, another thing that we wrote about a few years ago, a bit prematurely, on stagflation, but I definitely got some whiffs of stagflation from the Fed’s sort of results last night. You know, I don’t know how the markets took that as dovish. I mean, to me, I looked at a dot plot, they revised the growth down, the inflation is sort of still bubbling around. These things take time to play out. And you’re absolutely right, Alan, that we went from a pretty prolonged period of macro compression.

So, when we were in the zero policy interest rate, sort of in the ZIRP period, extensive QE, that was fairly, fairly systemic. It was well coordinated and so it suppressed risk appetite. We’ve kind of blown through that framework and we’ve had some good years.

As you mentioned, we had ‘21, ‘22, you know, ‘23 wasn’t too bad either. It had pockets of opportunity and even last year commodity markets carried a big, big load. But when I look at what actually happened in ’21, ’22, to then make it relevant to now, if you think of currency markets, currencies were a pretty uninteresting asset class, from a trend following point of view, during this QE era. Inflation starts to build up. (I actually heard the word transitory again, from the Fed last night. But anyway, sorry, flashbacks.)

And so, we had this inflation that was building up, and suddenly as it sort of went around the different geographies, the currency asset class was the one that picked up a divergence and drove returns and dispersion for the next two to three years. So, we’ve actually had really strong contribution to our returns from that asset class, on the back of this divergence of monetary policy between EMs and DMs, and then the resulting dispersion. I think right now we’ve seen a very big decoupling of fixed income markets between US and Treasuries bonds.

Bank of Japan is sort of still a little bit different. And then we’ve got the sort of the whole China ecosystem changing from bearish to full on risk on. These are, in my mind, really strong breeding grounds for sustained macro divergence. Is it choppy? Yes, it is. I think uncertainty certainly, well, excuse the choice of words, but uncertainty leads, in the short term, to inactivity. It’s quite hard for allocators to know how to aggressively play these things. But eventually, once there is a little bit of clarity of this divergence, we should see opportunities open up.

And why is it good for CTAs? Well, we’re not fitted. I have no prior, I have no sense of the fair value of any particular asset, and I have no geographical bias. And so, what I would like to see happen over the next 6, 12 months is divergence. I think we are really, really in the foothills of this environment with where geopolitics is at.

So, I’m optimistic medium-term and long-term and I am cautious on liquidity, risk management, on sensible model choices in the short-term. But I think this is a really good environment for us.

[00:45:15] Niels

Yeah, it actually kind of nicely segues to the next topic that I actually also thought you might give us a little bit of background to because I remember when we spoke in order to prepare for our recording, we talked about a concept that was coming back in the conversation, the total portfolio approach. I’ve also come across this more frequently recently.

So, Alan, can you give a little bit of a context to what we mean when we say that or what it really means, and then I’d love to hear from you Razvan, in terms of how you see that fit into to some of these topics that we’ve been discussing.

[00:45:59] Alan

Sure, yeah.

It’s definitely been a buzzword in the asset allocation community, I think, and a topic, and a framework that’s increasingly being espoused by some of the larger endowments, and sovereign wealth funds, and public pension funds. And I know the Kaya organization has been very much writing about it as well. And I mean, on the one hand it sounds like very much common sense, but at the same time, once you understand how many organizations are set up, you can understand how it is quite a profound shift.

And I think, at a simple level, you know, historically portfolios may have been run on a strategic asset allocation basis where investment teams were very siloed and were given very individual mandates to, I suppose, essentially optimize within an asset class.

So, you had a private equity team, a public equities team, an alternative team, or a hedge fund team with everybody working on their own individual mandates to hit whatever their objective is within that particular subcomponent of the portfolio. But the problem with that is you’re optimizing within a category without being cognizant of what everybody else in the portfolio is doing.

So, the total portfolio approach is very much taking the portfolio and looking through to the underlying risk factors and then optimizing and deciding how to allocate risk based on that. I guess we talked a little bit about where products fit in buckets.

So, it’s kind of dismantling that, to an extent, because you’re less focused on buckets and products. You’re more focused on underlying risk factors and how they play together. So yeah, I think it’s definitely a theme. I’m curious to hear Razvan’s perspective on that. And is that kind of a driving force, maybe, even behind portable alpha adoption as well?

[00:48:00] Razvan

Yeah, it’s a really interesting sort of setup for the industry. As you say, I agree with you, total portfolio approach sounds like common sense, but actually it’s very hard to achieve when you sort of organizationally have to change sort of the asset class specialists to being generalists and really just solving towards the common utility.

The one organization has done it… It’s almost like a change of mindset really, where the outperformance is really about sort of the total portfolio achieving its goals, which actually should line up really, really well with CTAs. And in fact it does.

Organizations that have adopted this approach tend to find greater utility and a greater applicability of CTAs because we all know that CTAs are best represented in a portfolio context. So, if you say the single line item is noisy, but it’s got some properties, some structural properties that work well with other bits of your portfolio, and together, that the sum of the parts has lower risk, better return, better tails.

The challenge, of course, is that the majority of institutions are not set up in this TPA approach. They would like to, they’re aware of it. If you’re a very small organization, you can do it. If it’s flexible, if you’ve got investment staff of five or eight, you can say, okay, right guys, we’re all going to be generalists, we’re not going to be specialists and we can do it.

But if you’re maybe a little bit more entrenched, and you’ve got legacy structures, and it’s not for free to change this mindset, it does have implications for existing staff – some can shift, some can’t. And so, it’s not guaranteed that it’s easy to get there.

So inter-portable alpha, I think what we found is that those institutions that would like to sort of gravitate towards a more general portfolio, a total portfolio approach context but are still siloed in the asset classes, are trying to make those individual asset classes sort of work harder and take on greater properties. So, you could overlay, you can do these alpha extensions or portable alpha with a new fixed income sleeve or with a new equity sleeve.

You know, when I talk to allocators and some of them, if they’ve got these, (Alan, as you described) alternatives specialists. Now if you’ve built your portfolio through that lens, your alternatives bucket, generally, has very low equity beta. That’s what they’re trying to do. They’re not trying to introduce more beta there. So, they’re looking for low beta, market neutral type strategies, a lot of arbitrage. So, you come in as a CTA and the hedge fund team says to you, you’ve got too much variable beta. Your return profile does not fit my hedge fund bucket. The equity guy says, well, it doesn’t fit my bucket either. It’s got nice properties there, I like it. But it’s not equities, is it? It’s got commodities, got fixed income, it’s got FX.

And so really, it’s just really trying to realize how to get closer to a total portfolio approach without completely undoing the existing organizational structure. So, there is a bit of a link. We’ll see how these things… Again, it’s a slow moving process. Kaya’s doing it. And there are good examples. I think there are some reports of some major consultants saying it’s at least 1.5% to 2% per annum that you could outperform by having a total portfolio approach versus an SAA approach.

So, I am hopeful that good portfolio practices keep growing and I will not rest until every single portfolio, at least, has the ability to benefit from what we provide, which is a really interesting return stream that requires a lot of handholding. It’s not the most natural allocation, but it’s so good if you can get yourself some exposure to it.

[00:52:47] Niels

Yeah, absolutely, absolutely.

Well, speaking about getting exposure to it, in a different way, something Alan and I have also discussed a number of times on the podcast, another topic which is very hot at the moment, so to speak, but also a topic that I’d love to just hear your thoughts about, something we didn’t really cover, I think, with Anthony. It wasn’t really such a big thing maybe a year ago, or maybe it was actually can’t remember.

But it is, of course, CTA replication. And where, in my mind, people who listen to the show know that I have my reservations about it. But also, in my own mind, I’m thinking, can we really call it CTA replication? Because it doesn’t replicate that closely, and correlation to the indices tend to break down at critical times. But maybe we could call it sort of beta like, or CTA like returns because, obviously, there is a link there.

In any event, there are lots of products out there, and of course mainstream media may not really know, you know, how to tell the difference. So, anything in that category is now just labeled as a CTA product. And even that, to me, is starting to become a little bit of a sort of an issue because I’m thinking, well, shouldn’t there be some “rules” about what a product should contain in order to be called a CTA product? Or can anyone just call them CTA products if they trade futures? I don’t know. That may be slightly different. But I was just curious to hear your thoughts, Razvan, in terms of what you see in this area of our industry and how you feel about it.

[00:54:41] Razvan

That’s a broad topic, an interesting topic. Obviously, I come from an active manager point of view. I believe that with investment strategies, I believe in diversification, I believe in trading a lot of assets, focusing on risk management, portfolio resiliency, research. We think that our strategies are there to provide a certain utility in our portfolio and we want to make sure that we can deliver that in times of stress. And we’ve been a successful industry over the years. Resilient, I think that the CTA’s are one of the longest running alternative strategies out there.

And then you have some firms that have developed replication products. I think it’s natural, and it just tells me, on one hand, it’s good that people want to replicate this. That means that they think it’s useful, so they’ve identified some value.

If I’m thinking about this in a positive way for the industry, I think it will broaden the appeal potentially. It sort does a lot of the heavy lifting of a lot of these replication based businesses that have got more budget spend on marketing than on research. You know, we tend to focus our resources on research. We’ve got 90 people in research and development. We’ll continue to have that focus. But, if we’re getting the message out there that CTAs are useful, that the properties are being more broadly shared with a wider range of people, that can only be a good thing.

Where I hesitate a little bit is that as long as the properties that we’ve delivered, as practitioners over the years, are indeed available in these newer products. And I share some of your skepticism, Niels. It’s not quite the same thing. When you look at the strategies, they’re quite narrow, very few markets. You’re taking a manager risk.

It is another strategy that is trying to capture an effect in futures markets. Is it trend following? Maybe, maybe not. I think, as long as it’s positive for the industry, and I think it is, at the moment. We are getting a lot of airtime.

Given these model portfolios have the ability to create investable ETF based portfolios that have a slice allocated to managed futures, it allows me to go to that investor and say great, you’ve now got a model. I’ve got a really great CTA, so you’ve got a holding place.

So, I think it just gives us a more… It should broaden out the industry. And as with anything, any strategies out there, there are risks. And as long as we don’t have a spectacular unwind, or big risk management mishap from one of these replicator strategies that will taint the space, for now, I’m watching with interest.

[00:58:16] Niels

Let’s pivot to something slightly different but actually also a little bit of a new theme. Not maybe as new as some of these other things. But, Alan, you for example, you’ve dealt with investors through many years, maybe in a slightly different capacity. Maybe the conversations are slightly different to the ones that Razvan and I are having since we represent single firms and single products, so to speak. And historically, at least that’s been my experience, is that we go out and we offer a finished product, a finished strategy that people can buy.

But in recent years, more and more managers, I believe, including Aspect, are also now starting to focus on doing more sort of tailored solutions for investors. I’d love to hear your initial thoughts on this, Alan, what your own experience has been, kind of what you see the pros and the cons to be.

And then obviously I’d love to hear from Razvan too, in terms of their experience and the appetite for this. And also, how much choice should we give investors? I mean, how do they know what they really need? So, anyways, lots of things to dig into.

[00:59:36] Alan

Yeah, lots of kind of dimensions to that.

I mean, I think, you know, clearly there are a lot of building blocks out there for investors to use and they can either try and assemble the various parts themselves or they can work with an advisor or consultant. And I do that kind of work these days with clients. Or they could go to a fund of hedge funds as well, and say, well, let them kind of do it and assemble something. So, I’ve seen that side of the business too. Or else you can, now, I suppose the growth that we’ve seen more recently is some of the larger funds saying, well, we have capability across a number of strategies, so let’s not only offer you our funds, but we’ll offer you a consultative service as well.

So, I suppose it’s a little bit of a grain of the lines between the larger consultants do asset management, and maybe the larger asset managers are doing consultative selling a little bit as well. I mean, I think the value for investors is that there can be a value, I think, in having deeper relationships with managers that you can get to know and like more over time. Certainly, as an allocator, I feel that you can’t go very deep with everybody, so you have to make that decision.

Who are we going to get to know very well? And then there is a merit in really understanding the manager’s approach so that when they have their drawdown, you understand that. So, I think having deep relationships with a smaller number of managers makes sense. And then obviously there can be merit in terms of netting of fees across different products, particularly performance fees. So, commercially it can make sense both for the asset manager and for the investor.

I guess the flip side might be you might want to say, well, we want to have best in class in every bucket. And that’s where it might make sense to do it individually and select managers for various parts.

So, I think there are pros and cons there. And obviously, in relation to things like portable alpha, if you want to get a manager to do that, it can make sense to be partnered with somebody. You know, some clients won’t be set up to trade futures, and then allocate separately to managers.

So, I think it very much depends on the investor, what they want to achieve. I think to your question, you know, can we give investors too much choice? You know, I think for sure. But equally I think there’s a question, what do investors really want?

There’s always this assumption that people want the largest compound growth rate, but investor utility functions are complex, and solving for those short drawdowns, consistency of return, it seems that investors value that given the growth of the multi-strats, which are all based on delivering consistent returns. So, I think it’s reasonable to try and sit down and ask investors what do they value the most? It may not be what we assume.

So yeah, I can see the merit of it, but it very much depends on the types of clients. And I’m sure Razvan, it typically is an institutional offering. I guess it has to be given the kind of the cost of customization involved.

[01:03:07] Razvan

Super interesting topic. You’re right. Too much choice can be a bad thing, but almost no choice can also be a hindrance.

So, I think that what we’ve tried to do is we have to balance out our research capability. So, we focus on our core programs, on our core capabilities, and we make them as best as they can be. We don’t have too many different flavors of standalone programs. It’s really just a combination of trend programs, whether it’s on alternative or traditional markets in China, and then we have a more absolute return program. They operate on the same investment chassis.

So, for us there’s the research effort which tries to make those programs as good as they can be. But then the reality is that it’s very seldom that you come across an allocator that’s got nothing. You are their first allocation.

So, they’ve got something there already. Sometimes they’ve got a CTA or two or a macro manager or not, but it’s a portfolio, a living, breathing portfolio. And so, suddenly, what they’re trying to solve for may not necessarily be best served by the full breadth of your, say, your flagship program. Maybe they want to just do the commodities part of it. That’s what’s missing. Or maybe they just want to do the non-trend part of it. They’ve got one trend manager and they’re trying to decide where’s the best place to spend my incremental fee to complete my portfolio?

So almost the image I have in my head is like, you know, like playing Tetris and this dates me as well, but playing Tetris and having the ability to change the shape of that Tetris block as it falls rather than trying to force it in the existing. So that’s really, you know, there’s only a certain amount of customization that makes sense.

So, you want to preserve the integrity of the investment thesis. You’re not going to, you know, if somebody comes to me and says, Razvan, can you speed up your portfolio? No, I’m not going to do that. Can you introduce this really interesting carry factor? I’d really like that to be overweight. That doesn’t sound like a sensible thing to do.

What we would like to do is really have consistent building blocks that, on their own, we believe in and we think are viable portfolios that have a specific utility. And within the fund frameworks, our flagship fund, we try to keep that style pure. We have got legacy allocators. We’ve got investors that have been with us for many, many years. We don’t want to change the nature of the things they’ve invested in.

So, obviously we would like to grow the relationship. If they want to do more things with us, we can do that. That’s where the sort of customization comes into place. But really, fundamentally, it’s a limited amount of options really just to be able to best complement existing portfolios whilst keeping our focus on our core competencies.

[01:06:38] Niels

And you know, without stepping on any confidentiality, do you see an increased sort of uptake for solutions rather than sort of “off-the-shelf products”.

[01:06:50] Razvan

It changes. So, we’ve offered managed account functionality before it was popular. So, for a very long time we’ve had more of our investor base access via managed accounts. The moment you allow that, already the opportunity for customization is there and it goes through stages.

What I have found, as a greater sort of growth era has been in allocators combining a number of our strategies. So, the strategies themselves are not tuned differently but it’s just their combination and their proportions. And that is maybe growing a little bit, but I think it’s not the only way to raise assets. And, actually, we’ve got very much consistency in just a single product channels as well.

[01:07:57] Niels

Yeah, makes perfect sense.

Let’s wrap it up. I mean, it’s been fascinating, Razvan, thank you so much for joining us and giving your perspective to a number of these really important items and themes that are going on right now in our industry. Of course, always, thanks to you, Alan, as well.

And to all of you listening out there today, I hope that you were able to take something from today’s conversation onto your own investment journey. And if you did, please share these episodes with your friends, your colleagues. And of course, if you want to show your appreciation to Razvan and Alan, go find your favorite podcast platform and leave a rating and review.

With that, from Alan, Razvan, and me, thanks so much for listening. We look forward to being back with you on the next episode of Top Traders Unplugged as we continue our journey into the CTA industry. And in the meantime, of course, you should go and check out the show notes for this episode and all the other resources you can find on our website.

And of course, not least, until next time, take care of yourself and take care of each other.

[01:09:01] Ending

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