TTU135: Yao Hua Ooi, Principal at AQR Capital Management

[00:00:06] Yao

The most exciting thing is that investors are now waking up to the fact that we do need additional tools within our portfolio that are truly diversifying. Trend is obviously a huge, good piece of that answer to that question, but as I said, AQR also runs multiple other strategies that also fit the bill.

It’s been exciting in terms of being able to be engaged. There’s a lot of energy, I feel like, both on our side and also on the investor side of wanting to delve deeper into these questions on how do I really diversify my portfolio, how do I really make an impact in my portfolio if inflation stays high, if equities go through another tough period. So, that overall recognition of the fact that diversifiers are important and we want to learn more about them and engage with them with our clients, that’s very exciting for us.

[00:01:04] 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 will 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 product before you make investment decisions.

Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:01:54] Niels

Hey everyone, and welcome to another edition of Top Traders Unplugged, where today, Alan Dunne and I are joined by Yao Hua Ooi, Co-Head of Macro Strategies at AQR as part of our mini-series focusing on the one investment strategy that beat everything else in 2022, namely, trend following and managed futures more broadly.

First off, Yao, it is fantastic to have you on the podcast. Thank you so much for joining us today. We really have been looking forward to our conversation, not least because one of the topics we’re going to be talking about today is something that you’ve co-written with Cliff Asness, so we can’t wait to dig into all of that. But first off, I hope you’re doing well where you are.

[00:01:54] Yao

Yes, thank you for having me and I’m doing very well. It’s a very warm, unusually warm, winter in New York City where I am based.

[00:02:48] Niels

Yeah, exactly. Good stuff. Now, before we dive into the topics, Yao, I think it makes sense to maybe set the stage a little bit for the audience to get a little bit more background. Of course, a lot of people are familiar with AQR, but why don’t you give us a few of the highlights in terms of where you are in terms of the strategies you run and also where the business stands as we’ve entered 2023?

[00:03:17] Yao

Sure thing. AQR was started in 1998 so we’re coming up to our 25th year this year. We are a large quant asset manager with a very wide range of strategies as it pertains to trend following. We have been running trend following strategies on a standalone basis since 2008 or so. So that’s coming up to about 15 years, and it forms an important part of our overall business.

AQR manages about $100 billion. Roughly about a little over half of that is in more traditional long-only equity portfolios and the rest are in different forms of alternatives. As we head into 2023, trend following represents somewhere in the order of about $4 to $5 billion depending on what you count of our overall AUM.

[00:04:10] Niels

Excellent. I appreciate that. Now, our conversation today will be on various topics that we want to dig into and find out what your thinking is, and we’ll kind of alternate between us. So what we normally do at this stage is really let Alan kick it off with the first topic. Over to you, Alan.

[00:04:31] Alan

Great. Thanks, Niels. You mentioned AQR has been a very large manager, $100 billion or so. I suppose you talked about being a quant manager. You’re running trend but a range of different traditional and non-traditional strategies. Is there an investment philosophy, would you say, that underpins all of the strategies or the majority of the strategies that you run?

[00:04:55] Yao

Yeah. I think that we think of ourselves as fundamental investors that use systematic tools to try to take advantage of inefficiencies in markets. So trend following, it’s interesting because you could argue that people don’t traditionally think of it as fundamental and what you typically think about fundamental research. However, what we mean by that is we think there’s strong behavioral biases and things that you can look at that give you a strong fundamental basis for being able to explain why the strategy makes money through time, and that’s important.

[00:05:39] Alan

Obviously, you’re trying to unearth lots of different returns, I guess, risk premia. Obviously, there’s not a belief that trend is the only thing that works. Where do you think a lot of these inefficiencies come from, would you say?

[00:05:54] Yao

I think that AQR, beyond trend, we also have been very active in writing research, publishing and running money based on a number of different broad categories of risk premia, including trend, but also things like carry, value, low beta defensive quality type themes across our strategies. So, when we think about what underpins these different risk premia and why these strategies make money over time, we do think that it’s a combination of human behavioral biases that we see. You can see it in the patterns of how markets behave over time, and also structural reasons.

We do think that most of these active large liquid markets have a range of market participants. Not everyone is a trend follower or a speculator and some of those other players in the space also tend to have certain behaviors or certain structural features that lead to these opportunities. So if you think about trend following, we think that at core of it is going to be the tendency for investors to underreact to new information. That’s quite well-known, well-studied. We see that hasn’t really changed even though trend following has been a strategy that’s been run for a very long time, that human behavior at the core of it still exhibits those properties.

When you think about the structural side, you can think of certain market participants like central banks or commercial hedgers in the commodity markets that may have certain trading behaviors that are not designed to maximize short-term trading profits but are designed to try to achieve some other outcome. That also may lead to trends existing. So these both behavioral and structural reasons are the reason why we think these types of risk premia exist in markets.

[00:08:02] Alan

Broadly speaking, it’s the same types (maybe not exactly the same reasons, but the same types) of reasons for the existence of these risk premia such as value or carry in equity markets as well.

[00:08:15] Yao

Yes. So, when you think about value in equity markets, I think investors’ preference is for more exciting names. Maybe, again, our tendency to extrapolate high growth into the very near future and maybe perhaps a very aggressive rate leads to some consistent (on average, not all the time) overvaluing of growth stocks versus more value stocks, and that creates the opportunity to take the other side of that trade and make money by being long, cheaper stocks versus more expensive stocks, over time.

[00:08:49] Alan

The existence of these premia (if you want to call them style premia), risk premia, or return streams, it seems to be evident in the long-term data series. But obviously, there’s a cyclicality or they tend to fluctuate over time. Obviously, I think AQR, for a long time, have been calling for a return of value added performance and it felt like a long time in coming. But why is that? In the same way, why does trend work for periods and then seem to have tough drawdowns? What’s your intuition behind that?

[00:09:25] Yao

Yeah, I totally agree. The last five years have felt like a long time because of the difficult period some of these risk premia, particularly value in stock picking, has had. It is true that these strategies, these different risk premia strategies, while they work over the long term, they aren’t stand alone, extremely high Sharpe ratio or high consistency strategies and they do go through these cycles.

To the question of, “Why do they exhibit these cycles?” It’s a little a bit hard to know for sure because we can only take our best guess. So, for example, when we look at trend following and its struggles from post GFC, the decade from 2009 through 2018 was an unusually poor period for trend following overall. It still made money over that decade, but just not at the same rate as we had seen in the decades prior to that.

At AQR, we like to, as much as we can, do a systematic study of whatever reasons people might throw out as possibilities for why a strategy underperforms for a long time. So for trend, we wrote a paper called You Can’t Always Trend When You Want back at the end of that decade. Our finding from the paper was that the strategy (when you look at long-term history), that particular decade was tough mainly because the percentage of market moves that were large, in any given year, was unusually low versus history.

I think upon more study, we’ve also made some connection to why that happened; to the low levels of macroeconomic volatility in that decade. So when I mean macroeconomic volatility, I mean the rate of uncertainty or the standard deviation of things like developed market GDP, changes or inflation changes.

Everything was quite muted for a decade, and coupled with that, you ended up having a relatively much lower percentage of markets, in any given year, show large moves. That’s sort of like the necessary ingredient for trend following to do well. You don’t need all markets to move a lot, but you do need some proportion of markets to have some larger moves to make money, and that was missing in that decade.

[00:11:56] Alan

Sure. I believe you guys have written a paper, and there’s been a number of papers around it, but 100 years of trend following and 200 years. I think 100 years was your one, if I’m not wrong. So looking at the 100 years, how tough was that decade in that 100-year period?

[00:12:15] Yao

We wrote that paper in 2012. Actually, it still was the earlier part of the decade. So I think when we wrote it, it wasn’t so evident yet that trend following, for the next five or six years, was still going to be quite a lean stretch. Because we had the ability to go back much further, we did see that there were some other decades, much more earlier in the sample (closer to the 80, 90-year period prior to when we published the paper) where you did have some long stretches; decade long stretches, where the Sharpe ratio or performance of trend following also similarly struggled for a considerable amount of time.

One of the points that we tried to make in the paper was that underperformance for some long stretches is not something unprecedented. It has happened before, it can happen again, but that, historically, we had seen the strategies recover and do well after that lean stretch. It’s just helpful to help people understand that.

It doesn’t mean that just because a strategy struggles for a while, it doesn’t necessarily mean that it’s been arbitraged away or that somehow the risk premia has been eroded. That’s a common question that investors have after long periods of underperformance, which is a legitimate question. So I think the paper helped show some empirical evidence that following long, lean periods, there were resurrections or revival periods for the strategy as well.

[00:13:56] Niels

I think the higher powers knew that we were going to talk to you today, Yao, because in my Twitter feed this morning, and it wasn’t even from Cliff himself, but there was a quote from Cliff saying, “Nothing is linear. The world doesn’t move towards what we think is rational a little bit every day. The best way to manage volatility is to have a strategy that you can stick with. If you believe in it, it wouldn’t matter how poorly it did for a while.”

So, it kind of brings me back to this question that I teased up earlier because it is a question we’ve asked all the managers and it relates to a paper you wrote with Cliff. I think it came out in Q4 of last year. Partly, you raised the question about whether managers, in general, and trend followers in particular have become too concerned about Sharpe. Then you also talk about this dual mandate whether managers really should both be able to deliver high absolute returns but also some level of crisis alpha. Given you’re here as one of the authors, I’d love to hear your thoughts on that, and then maybe also why you’ve chosen (and this is from memory, so correct me if I’m wrong), why you have chosen to say, “No, we’re going to stick with pure trend.” Tell us a little bit more about that.

[00:15:22] Yao

Yeah. I think the point we were trying to make in that piece was that there can be a trade off when it comes to trying to improve the Sharpe ratio, improve the consistency of a trend strategy, by adding something that is different from price trend. Many of the strategies that we see, just through our analysis of, let’s say, the SG Trend Index or other manager returns, is that some of these different additional return sources may compromise or dilute the convexity payoff profile that comes with a more traditional price trend strategy. I think that most investors today, especially institutional investors, do care about this dual mandate. They do want positive returns from a trend strategy, but they also care greatly about its performance during periods of large equity market drawdowns.

So I think our point in that paper, I would say, wasn’t so much that pure trend is the only right way to do trend following. In fact, in the same piece, we explicitly talked about how AQR has also evolved our own thinking on this in trying to add other types of return streams that are not simple, pure price trend to our own trend following strategies in hopes of delivering a more consistent return. But I think we have chosen to be very selective on what type of additional return streams we think make sense to marry with price trend in the trend following offering.

So we’ve sort of chosen, consistently over time, to exclude things that we’ve been running in other style premia, risk premia strategies like carry, which we know has a Sharpe positive return feature. It’s not highly correlated with trend following. However, it does tend to suffer during periods of equity market stress. So we’ve chosen to exclude strategies like currency carry from our trend offerings and that’s still the case today. But in recent years, we actually have been quite active in adding what we think of as still trend-based strategies with a convex profile, but not your traditional price trend in liquid market offerings within our trend following strategy.

The two things I would say that we feel we like that both keep the properties of trend following, the convex positive Sharpe, low correlation, and help improve the Sharpe ratio of a trend strategy are what we call economic trend following, which is the idea of looking at macroeconomic data and the trends in that to forecast price movements going forward rather than just past price returns. The second is alternative market trend following which, again, is really an application of trend following to much less trafficked markets. So, that’s not a different investment philosophy, clearly. It’s more of an extension of the same investment philosophy but you do get some meaningful diversification when you go away from the large liquid, equity, currency, and commodity markets into smaller markets as well.

[00:18:53] Niels

You started out by raising the question, have managers become too concerned about Sharpe? I think in the paper, you talk about that certainly, there’s a risk because some managers did include other stuff to deal with this issue. But if I understand you correctly, you’re now also acknowledging that you have to be concerned with Sharpe because it’s a business decision to some extent, right? It’s too painful, because that’s what we hear from a lot of the guests we’ve had on that I think we all love trend following but there is definitely a growing acknowledgment that perhaps it is just too hard to hold for investors in its purest form.

I think also, to some extent, that there’s a little bit of a business consideration, because nobody wants to see their AUM fluctuate too much because the return streams are so lumpy. So is that fair? Even though you’re saying we’re doing it slightly differently, but you also have to acknowledge that Sharpe (and we can talk about that a little bit more), but it does play a role in terms of people’s ability to hold on to it. I guess what Cliff said in the quote I mentioned earlier, and I guess also my own conviction is, that the best strategy after all is probably the one you can hold on to at the end of the day. So yeah, feel free to talk a little bit more about how you weigh these things up in the end.

[00:20:37] Yao

Absolutely. I think the point of the piece was to say that when thinking about how to make a trend strategy have a better Sharpe, which it’s important for people’s ability to hold on to the strategy, I think we just want to be thoughtful about trying to make sure that things that we include actually enhance or at least retain the same convex profile (the second part of the dual mandate), and not compromise. That really was the main message, not so much that pure price trend is the only form that people should consume trend following in. I think, to your point, we saw ourselves through that lean decade for trend following from 2009 to 2018 that the whole industry suffered large redemptions, especially toward the end of that period from trend following.

It really was a pity, because in 2022, when trend had its best ever year in history, I can’t tell you how many clients or ex-clients probably had some measure of regret that they couldn’t hold on to it. So, I think the ability for us or any other manager to try to improve the Sharpe ratio of their trend offering by being thoughtful about ways to enhance it, while still trying to make sure that that dual mandate is being fulfilled, is a very important business consideration. But also, again, frankly, at the end of the day for the end-client, if they can hold on to it through a leaner stretch for price trend, we think they’re going to be better positioned to actually reap the benefits in the portfolio context of allocating to it in the first place. So I totally agree with your sentiment on that.

[00:22:25] Niels

Yeah. Now you mentioned something that I think is really important, because you mentioned the word portfolio context. I’m thinking here, I know that when we talk about Sharpe, we talk about how we can improve the Sharpe of the individual strategy, meaning people will look at line items. But first of all, I don’t think (and you will know this much better than I do), I don’t think Sharpe was invented for single strategies. I think it’s a portfolio tool. So are we being too short-sighted by saying, “Oh, well, let’s try and improve the Sharpe of our strategy so people can hold on to it.”?

You guys, obviously, are the masters of putting out great research here. Shouldn’t we try and change the narrative and say, “Listen, let’s talk about what this strategy does for the portfolio Sharpe. Forget about the individual line items. What it’s really about is how the Sharpe ratio of your portfolio changes when you include this strategy.” I think we all know (because this is just going back to John Lintner’s 1983 paper), and so you could say nothing has changed in that long period of time, 40 years, but it really is what it’s all about. I have to take that on my own shoulders since I’ve tried for the last 30-plus years. How come we have failed to get investors to see it in a different light instead of looking at us as a single line item?

[00:23:56] Yao

Yeah, that remains a challenge, as you said, after 30 years of educating and trying to advocate for that portfolio view of the value add of trend following as opposed to being so solely focused on the standalone returns. I think that’s a battle all of us, as trend following managers, are still continuing to fight the good fight. I think there are still a lot of continued efforts to try to remind investors that when you look at the value add of trend following, don’t look at it in isolation, look at it in the context of the overall portfolio. Yet, I think the reason why that continues to be difficult, some of it probably has to do with the way organizations are set up.

We work with predominantly institutional clients. As much as we would love to have the clients ultimately care most about how the overall plan assets are performing, the way things are structured in the real world, oftentimes investment staff is split up into different segments where they have responsibility over only a subset of the investments within the broader portfolio. So for example, you have the public markets team versus the private markets team, and then within the public markets team, you might have the hedge fund team, and within that, you might even have for a larger plan, people who focus on specific quantitative or global macro trends strategies.

Then you have the issue of benchmarking, which is another interesting topic for any strategy, but trend in particular as well, which is that people have a benchmark that they often need to list when they make any kind of asset allocation or investment within the broader plan. A lot of times, the focus is on how the performance of their specific investments beat the benchmark without a lot of regard to whether the overall portfolio benefit is great enough.

In other words, in a given year, if trend following was hugely additive to a portfolio like we saw last year, sometimes, the investment committees or boards may be more focused on, “Did your trend allocation beat the trend benchmark?” As opposed to taking a step back and saying, “Wow, this trend allocation overall was hugely helpful for the portfolio.” So, I would say there are a few structural reasons that make it more challenging, in real life, for allocators and investors to really say, “Well, I really only care about the overall portfolio impact and I can pay a little bit less attention to the line-item risk.” In reality, the line item risks matters a lot, and that’s the practical reality.

[00:26:46] Niels

Absolutely. Alan, before I turn over to you, I do want to stay with this a little bit longer, Yao, because I’ve started my travels this year talking to clients and potential clients. With the potential clients in particular, there are two themes that strike me. One is that they really do look at trend following as a trade. So they try and kind of time it, and then once you get that sense, then the argument is also, “Not sure we want trend following now because it did so well last year.” So again, given all your experience with talking to investors and writing great research, how should we help people get away from thinking about an allocation to trend following and also their lack of ability, of course, in reality to time it, but then their wish to try and time these investments? How do you deal with this?

[00:27:50] Yao

That’s a challenge that I think is still prevalent today. I feel like we try to talk to investors and educate them in a few different ways. One is showing some just empirical evidence based on past trend returns. For example, in a recent piece we put out called Trend Following: Why Now, we tried to address one of these questions, which is, should I expect some underperformance in trend going forward following such a good year in 2022? One of the simple analyses that we show in that piece is showing what the returns to trend following strategies tend to be following different performance periods; following a good period, following a bad period. We showed that there’s really not a whole lot of predictability or relationship there.

So it’s one way to say, historically at least, there doesn’t seem to be any empirical evidence that trend following is going to underperform following a good year. So at least the data is on your side. That shouldn’t be a major concern. The second thing, which is maybe more fundamental, is the more long-term nature of the strategies. I think it’s a strategy that’s difficult to time. The way that I think I like to try to make that appeal to investors is that it’s really no different from any other strategy. An easy way to contrast it would be to equity markets because everyone is familiar with that.

Most people, I think, have lived through enough cycles to admit that they’re probably not very good at timing their overall equity allocation. They’re better off holding a more consistent allocation through time rather than getting completely in and out of the equity market. That’s a pretty difficult thing to get right. Trend following is really no different in that sense. It’s, in some sense, maybe even harder because you don’t have, for example, a valuation metric. Even though that’s not a very powerful timing metric, a very accurate timing metric, at least you have some fundamental valuation based measures, you could argue, you want to use to decide when to be overweight or underweight equities or trend following. There’s even less of any kind of fundamental metric you can use to decide when to time the strategy.

So, I think just helping people reframe it and think about it more similarly to how they would think about allocating to stocks and bonds. I would say most people are more conditioned to believe that it makes sense to have a strategic allocation to stocks and bonds. I think trying to appeal and make the same argument for trend following is helpful as well.

[00:30:39] Niels

Yeah, I appreciate that. Alan, let’s dig in.

[00:30:42] Alan

Yes. Well, maybe just to follow up on a couple of points there before we go on, just around the whole idea of economic trend following. I can see the logic for it in your explanation of trends and underreaction, that presumably, we’ll see trends emanating in the macro data that investors will underreact to. But is there a risk, from a purist perspective, when the pure trend followers would believe in the price alone and following the price?

Obviously, you have to make some kind of connection between the economic trends and then expressing those into a trade. So how do you think about that risk of moving away from the purity of trend following by going down (what other people might call) effectively a quant macro approach?

[00:31:34] Yao

I agree that it is definitely not a conventional path. In fact, when we look at the SG Trend Index, and again, the returns of most of the managers in that index, we don’t see a big loading or a big exposure to this economic trend idea. I would say AQR is probably a bit more different from the peer group, probably at this moment, from having a much more significant allocation to this idea of economic trend.

Even for us, that’s been a process of evolution. We didn’t start off this way. We did start off very much as more pure price trend managers 15 years ago, and over time, as we’ve done more research and lived through more market cycles, we have gotten more comfortable, more confident in the benefit of diversifying away from pure price trend and also using these economic trend concepts. So definitely, I totally agree it is not a purist approach to price trend. But I think the reason why we see it as still being very much in the same family of investment strategies, as you said, it’s because of that underreaction premise.

So if you think of it, on one hand, one of the core reasons why trend following makes money is because investors underreact to new information and take time to absorb the new information to prices. You can think of that as a phenomenon that is hard to measure very accurately, and so we think looking at past prices is one way to measure that underreaction. But looking at the economic data itself that drives prices could be another way to measure it that is diversifying. To give you an example, at the beginning of 2022, we saw a big divergence between price trend following and economic trend following signals in the equity space.

That’s probably pretty straightforward for price trends. They wanted to be very long equities because we had a fantastic 2021 for most global equity markets. However, on the economic trend following side, what we saw was a rising inflationary environment and tighter monetary policy trends that had been forming throughout the last half of 2021. So again, from a classic underreaction perspective, the economic trend signals were essentially saying these tighter monetary policies, higher surprises to inflation, tend to be bad for equity markets and bond markets too but let’s focus on equities. However, investors weren’t reacting to that yet. So it hasn’t even shown up in the prices yet. In that sense, it gave a very different signal from price trend following.

In that particular case, it ended up being the leading indicator and prices eventually caught up after the first couple of months of 2022. Price trends also switched to being short equities fairly soon after that. So I think it’s another way of measuring underreaction. In hindsight, we can say that clearly inflation was a big problem. It took a while for markets and investors to really understand that in 2022 and that’s why prices didn’t really start falling till the beginning of 2022 even though the inflationary pressures have been building since 2021. So it’s an interesting kind of contrast to think about that concept of under reaction.

[00:35:15] Niels

Can I interject something here? Sorry, Alan, to interrupt your flow here. What you’re mentioning is very interesting, but then I look at the fact that the FTSE and I think the DAX recently made new all-time highs and inflation is still here. So here, you could say price action actually got something… We’ve seen a few surprises, let me put it this way, where the data in the last three or four years starting with COVID, where you would think if you looked at the data, you wouldn’t expect equities to do what they did. Now we have again a situation where high inflation and history may say one thing, but actually, when you look at the prices, we’ve ended up seeing record highs in a few equity markets.

So it is, for me, a big departure away from price when you look at that. How do you get comfort from that because I also remember (sorry to be throwing all of this at you, Yao), but I also remember, a few years ago, there was this love for what’s called systematic global macro. Everybody loved it because they could talk about GDP numbers, unemployment numbers, etc., etc. But then we went through a period of like six months, and these strategies just kind of fell apart. So how do you get the comfort in terms of prices reacting to the economic data the way you think it would?

[00:36:37] Yao

I think that those are all totally fair points. Just to be clear, I don’t think that, in our view, it’s not that economic trend following is going to get it right more often than price trend following. We see both strategies, long-term, as having probably a similar efficacy in being able to predict market trends. So, even in the way that we construct our portfolios, we do give them fairly equal importance when it comes to thinking about weighing the allocation to these different signals. So, to your point, you can think of plenty of other examples where the economic data perhaps was too slow to react or perhaps got it wrong and markets behaved in a completely different way from what the economic data would imply.

In those cases, potentially, price trends would have done much better than economic trends when it came to predicting those trends. So I think the way that we get comfort with the economic trend following concept, it’s quite similar to how we get comfort with the price trend concept. There is definitely a lot of empirical research that we do that starts off with a fundamental premise. For example, with price trend, it’s the idea of underreaction. So we believe that price movement should continue. We have a hypothesis, then we can test it.

Importantly, we can test it in many places, not just in one or two markets, but in many asset classes and many individual markets and we see a consistent pattern. It’s not perfect everywhere. It doesn’t work in every market all the time. But over a long history, over many markets, you clearly see that price trend following has strong empirical backing. So when it comes to economic trend following, I think it’s very much the same concept. We gain confidence through being able to study these economic trend indicators over long histories, over many different markets. I would say, one, there is a little bit more complexity perhaps versus price trends because price is very straightforward.

Every asset has a price and if you look back at the last 3 months or 12 months, that’s the same for every asset class. Here, you have to do some mapping, as you said. For example, inflation is rising. Is that going to be good or bad for stocks and bonds? You do have to make some assertion and test that. You do have that one extra link you have to make between the data and the asset class performance, but what we see is that that link is actually quite consistent over time and very intuitive. So I think that helps us gain confidence around the efficacy of these strategies as well.

[00:39:22] Niels

Okay, I appreciate that. Back to you, Alan.

[00:39:24] Alan

If we talked about the 100 years of trend following, any plans to write 100 years of economic trend following? Is it as robust would you say?

[00:39:34] Yao

Yes. Well, being AQR, we like writing and we actually already published a piece, about six years ago, I think, called A Half Century of Macro Momentum, which is based on this concept of economic trend following. So that paper is out there and it does look at these concepts applied over the last 50 years. We don’t have 100 years because we don’t have good economic data for a lot of markets going back much further than that.

We are planning to put out a new piece, in the next few months, that specifically looks at economic trend following as a standalone strategy. Again, we’ll look back using as much data as we can and try to show both its longer-term history, robustness, as well as its relationship to price trend following. So that should be an interesting piece to contrast with the century of evidence piece that we wrote on price trend.

[00:40:27] Alan

It’s kind of interesting that it works so well because you would nearly think that it wouldn’t, in the sense that if you pick up the newspaper where the simple, naive commentary is that the economy is getting better, it’s going to be good for stocks or inflation is coming down, it’s going to be good for bonds. You say, “Well, come on, that’s all priced in so you can’t trade off that.” But actually, what you’re saying is that these trends are persistent enough, that those simple analyses may have some validity.

[00:41:02] Yao

Yeah, it’s pretty interesting. I’m sure people say the same thing about trend following like, “It’s such a simple strategy, how could it still work? As technology, as information processing happens faster, shouldn’t the prices reflect information already? Why would it take three months or two months to reflect some new information?” So I think yeah, it’s very fascinating to see that with these strategies (while they may be well-known and our technology or information flow has gotten faster), there are still some behavioral biases like anchoring to the past, having a hard time changing our expectations. It’s the same thing if you think about investors having a hard time, maybe, thinking about yields at 4% when it used to be at 2% for a 10-year bond, and it takes some time to mentally adjust to that being the norm.

You could also think of it from the economic data side. For people to really believe that we’re moving into a different regime, it’s not instantaneous, and so asset prices don’t reflect that. I think another interesting piece about the economic data is also that you find that it tends to be autocorrelated as well. Meaning that when you think about, for example, how professional forecasters might change their forecast for next year’s inflation target, you’ll see that economic forecast doesn’t change overnight even if we’re in a regime shift. It tends to sort of gradually catch up.

So that itself is also a feature of how central banks change their tack on tightening or loosening. As we all know, it’s not overnight. It is more of a gradual let’s wait and see, let’s adjust based on the data approach, and that often leads to trends itself in the data as well.

[00:42:57] Alan

Obviously, this evolution in this trend system is a product of research. So I’m curious to hear more about the process for how you unearth and research this economic trend following, particularly from the perspective that it seems a lot of the style premia that you look at at AQR is very much the academic factors; Fama-French type factors and trend, things that people have known about and have documented in academic literature where I don’t know if economic trend following is documented to the same extent. It strikes me, maybe not.

So, was that something that there was always a suspicion that was going to be something, an opportunity, and it just took time to exploit it? Tell us about the process for deciding that this was an area of research and finding that it was successful.

[00:43:56] Yao

I think that, for us, we had been researching and trading, more in our global macro, quant macro hedge funds for a long time, on these types of data, these types of signals. Yeah, to be fair, when we started trading them a long time ago, I don’t think we thought of them as trend. We didn’t call them trend. They were just part of a quant, global macro strategy. I think it’s over time, as we saw some of the return characteristics of the trend component of those global macro pieces (the ones that were betting on underreaction, the ones that were betting on continuation), we started, in our own work, to make the linkage to price trends more closely both from an investment philosophy standpoint and also from an empirical returns relationship standpoint. We did see that correlation.

Economic trend following is about 0.4 or 0.5 correlated to price trends, so it’s not a completely distinct strategy. It’s definitely closely related. But again, as I mentioned earlier, if you think about the fact that we’re trying to capture trends and it’s noisy, we don’t always have such a great measurement. We just think that using more measures, beyond just past prices, actually helps a little bit to diversify the ways that we try to measure what the underlying true trends in markets are, whether that is reflected in prices, reflected in fundamental data. Potentially, that’s why, using a combination, it maybe gives us a better prediction of where markets are going to go in combination, over time, on average. But really for us, it was more of a gradual process. We didn’t set out to say, “Okay, we need a new trend strategy that’s not prices. Let’s try to invent one.” It was more the case that we had been trading on these strategies for a long time already, not calling them trend, but then over time, making that linkage between the two.

So I think when I come to your question on the academic factor piece, I think it’s interesting because for AQR, we’ve always thought of ourselves as trying to actually bring a lot of this research that we do into the academic space. So when you say trend, it’s a well-known academic style. While there were papers on it, I think when we wrote the first paper on time series momentum, I co-wrote it with my co-authors Lasse Heje Pedersen, Toby Moskowitz, at that time, there wasn’t a lot of, I would say, academic rigorous papers actually focused on time series momentum. So now, it’s obviously well-known. There are many, many academic papers on that investment style.

That’s one of the fun things about the job I think as well is that we’ve been able to take some of that research and put it out into public and actually get a lot of engagement through that process as well. Things that maybe were once thought of as more black box, today (just like Fama-French in value or size), we have that trend academic factor that’s commonly accepted now.

[00:47:06] Alan

Maybe just one final one on this topic before we hand it back. Obviously, a lot of this is premised on the underreaction of investors. Intuitively, we also observed the overreaction at the end and trends extending, and obviously, you’ve been big proponents of value in equity investing. But has that concept been more difficult to find in the futures markets in terms of exploiting overreaction in markets and mean reversion would you say?

[00:47:41] Yao

Yeah, I think that’s been an interesting area for us. I would say in the futures space, we find that mean reversion and valuation metrics tend to be more useful when it comes to applying them in a relative value context. Comparing one equity index versus another, comparing one market, one country’s bond markets versus another, we do see that the concept of mean reversion or reverting to fair value does have some predictive power there.

We do use those types of valuation metrics more heavily within our relative value global macro strategies. But when it comes to directional macro or trend-based strategies, I would say that our research so far has shown that long-term mean reversion strategies are less profitable. It’s harder to make money on them compared to relative value comparisons.

[00:48:41] Niels

I want to try, and I don’t remember all the details here, Yao. I need your help a little bit on this. But how I remember, right this minute when we speak, is that AQR came out (and I don’t exactly know the year), and basically said, “We have this premia called trend momentum and we can offer this in a much cheaper package.” That’s how I remember it. I don’t remember exactly what fees you offered back then, but as far as I recall, you were one of the first to come out with a flat fee, essentially, management-fee-only version of trend.

So I guess what I’m trying to say here is that do you think we’re shooting ourselves a little bit in the foot when we make investors believe that what we do is so easy that we don’t have to charge very much for it? Because when we speak to a lot of our peers (and I have a question that I always ask them, and I’ll ask you again later today), in terms of what’s the one thing they hear about trend following that they really disagree with? A lot of them have actually come back and said, “Well, I really disagree with people thinking it’s easy. It’s not and it’s expensive to do.”

Now, you had a lot of success with that. You raised a lot of assets from coming out because probably you were disrupting our industry to some extent. So my question is twofold. One, do you think we’re giving the wrong impression to investors that this is so easy you don’t have to pay much for it? Also, it leads me to the question about capacity, meaning, how much money can a manager manage, in trend following, without it actually becoming a little bit of an issue, so to speak? I’d love to hear your thoughts on these two things.

[00:50:41] Yao

This is definitely, I think, is something that we were known for, maybe in a not very popular way among the manager community, but it was very popular for investors, I think, if you think about the evolution that we had 15 years ago, before AQR was a trend following manager. I believe the fees for just any trend following strategy were quite high. Fast forward to today, investors sort of have a pick of great managers, great strategies, not just in the hedge fund space, but even in the mutual fund, the UCITS space, the more daily liquid format.

I think that was also one of the things that we pioneered was sort of saying not only can we run this in a flat fee manner with more transparency on what is actually underneath the strategies, but we can do it in a more liquid format. That has also, I think, given investors much better choice and much better options, frankly. So I think we’ve done some good for the investors of the world and maybe at the expense of some excess profits for the whole industry and ourselves in that process.

But to answer your questions more directly on your first question, “Do you think that investors now maybe believe this is easy and perhaps it kind of devalues the strategy to some degree?” I think it’s quite clear that these strategies are not easy to run. Obviously, running a real-life strategy is very different from running a paper portfolio or academic paper. There are a lot of actual real-life considerations when it comes to trading: implementation, risk management, data, systems, everything that’s involved. You know it quite well that it is expensive to run and so there is a compensation that managers need in order to be able to run these at an excellent level. That’s no different from AQR than any other place in the world.

So, I think the point of trying to demystify or put out academic-style versions, again, it’s not meant to devalue the strategy. It’s really meant to say that, at the core of the strategy, here’s some explanation of why trend following has worked for 100 years; why it has this type of return pattern. Here are some of the ideas behind why these patterns exist and here’s some empirical evidence if you run a simplistic or simple version, what it could look like in history. But that’s really just a starting point. I think any serious allocator who then decides it’s helpful to look at that evidence and get confidence, especially from a portfolio construction, asset allocation perspective.

That makes it into a more useful tool for allocators rather than just a manager saying look at my great returns, trust me. When it’s sort of more isolated, it’s a little bit harder to get a lot of confidence that this is something that you want to allocate a large piece of the portfolio to, but I think when you are able to show some more strong academic evidence, put it in a public domain where there’s a lot of debate around it, you can get broader adoption.

So in a sense, you could say, if we successfully make trend following more widely adopted because there is more academic evidence that people can lean on to make a case to investment boards, investment committees about the allocation, I think that’s a good thing even if the net result is perhaps there could be some misinterpretations that this is easier to do.

I think, again, most allocators after actually allocating realize there’s this huge dispersion across managers and that it’s not a beta in any sense of the word because there is no simple version you can buy off the shelf that gives you the same return as another manager. So I think it’s been an interesting area for sure. But I think our belief is that there is a core strategy, there’s a core factor behind it, but when it comes to practical implementation and trying to actually generate profits in markets, it’s never easy.

[00:55:03] Niels

It’s interesting you say there’s a factor behind it because we’ve also had great guests on who say that there’s no factor. It’s quite interesting. The other thing I wanted just to ask you, again (not to kind of pick on and egg you up for doing something that I disagree with, because in a sense, I don’t), but when we go out and we put these strategies into super liquid packages, daily liquidity, we all know that no investor should use daily liquidity really for anything, especially not when it comes to a long-term strategy like trend following. So are we helping investors by doing it, really? Why do they need daily liquidity?

[00:55:49] Yao

A lot of that has to do more with, I guess, in different jurisdictions in different countries, what structures are most accessible for investors. So for example, in the US, depending on whether you’re invested in an LP or a mutual fund, they are a very different process, I would say. In general, it’s fair to say that being able to invest in a mutual fund is a much more a plug-and-play kind of approach. You don’t have to meet as many requirements, you can get it on platforms, the process is quicker.

The goal is not for people to trade in and out of the strategy on a daily basis. But it just so happens that in order to provide that much more straightforward investment structure, it has to be in a daily liquid vehicle. So it’s not so much that there’s something about the daily liquidity that makes it especially suitable or attractive for investors, it’s more that the mutual fund structure is a very good one.

Now you have, also, ETFs in the managed futures space, and structure does matter for increasing access. So, if you think about pre those days, it was probably much less likely that a traditional investor, who’s not extremely wealthy and who is not institutionally investing in LPs, would invest in managed futures at all. Whereas today, again, I think it’s a much easier choice, and there are easier processes, and there are actually good options in the US 40 Act space for someone to be able to invest in managed futures without a huge dollar commitment. That is, I think, valuable for investors.

[00:57:27] Niels

Yeah, I agree with that completely. I think it is good that we can get a broader adoption for sure. That is a positive thing. Just before I hand it back to Alan, I wanted to ask you a little bit about, in your trend strategy and in trend strategies generally speaking, there’s a lot of focus on the signal generation part of it. We always get questions on that. I also think there are a few unsung heroes that are very important, when you do trend following, such as how you deal with correlations, how you deal with volatility, maybe even volatility more so now, because we’ve had unusual periods of volatility, frankly, in the last decade or so.

Can you talk a little bit about how you approach this part of developing a trend strategy on your side?

[00:58:16] Yao

Yeah. Definitely, the portfolio construction involved in building a trend strategy is important, especially as it relates to diversification and risk management. I think that it’s funny because sometimes you see articles, these days, that will say CTAs are going to buy hundreds of billions of equities today because the moving average of the 20-day has passed the 200-day. Even until today, with all the information out there, there’s a lack of appreciation for all these details that go into actually building a real trading strategy that takes into account transaction costs and market liquidity and risk conditions. So that’s a big focus for us as well.

We do think that beyond trying to come up with new signals, beyond trying to add new markets to a portfolio, those are things that could be helpful absolutely. If you are able to have better models to forecast correlations, volatilities and be able to manage your risk at the portfolio level better, that is also crucial in being able to run and generate a better return stream over time. So yeah, I think that in real life, there might be a lack of appreciation for how much these things matter and that could be one difference.

I’m sure a lot of managers on your show will talk about that there are people who can say, well, I can just take a bank swap or bank index that has very simplistic rules, but they may not be adaptable to changing correlations, changing market conditions as much as a manager can with a more sophisticated underlying set of models for forecasting risks. So, that’s another aspect that I think is underappreciated at times.

[01:00:10] Niels

Yeah. Great point, Yao, for sure. Where do you want to go next, Alan?

[01:00:13] Alan

Well, I might dive in and ask one of your questions, if I might, because trend replication has come to the mutual fund world. We’ve been talking about better access to mutual fund investors, and obviously, the fund that raised a lot of assets in the mutual fund space last year replicates trend following and I guess approached things from a similar philosophy of trying to bring this type of return stream in a liquid format at a lower cost. What’s your perspective on the merits and pitfalls of replication as applied to trend following? It’s not just replicating the CTA index.

[01:00:58] Yao

I think that’s an interesting area. I feel like even call it 15 years ago, I think there was a strong interest in hedge fund replication, not just in trend, but more broadly. I think there were quite a number of products and offerings on just replicating the hedge fund universe in general. I think AQR is at an interesting place within that whole conversation.

We think that there are ways to try to model and capture the essence of certain hedge fund strategies. Trend is one example, time series momentum, kind of saying, “Okay, we’re going to look at 1 to 12-month returns applied over a set of liquid markets.” If you repeat those rules, you’re going to get a return stream that looks and feels quite like what you see in historical trend following live returns. That’s one way to do it. Whereas I think with hedge fund replication, one particular format that was popular back then (and maybe what you’re seeing now in this more recent mutual fund space and managed futures) is more use of a regression approach or some fitting approach, where you’re using a small set of liquid futures to try to approximate the positioning of some index. I would say they have different merits.

One of the challenges with the replication approach is just conceptually, you wouldn’t be able to benefit if there were trends in markets outside of the liquid markets you’re using. To give you an example, if you’re only using oil and gold as your commodity proxies, if there are big trends in oil and gold, you’ll probably do a pretty good job capturing those profits as well like traditional CTAs. But if the trends are in natural gas or electricity and you don’t have that exposure, even if crude oil is correlated to electricity prices, if electricity prices go up 10x and crude oil prices go up 20%, the profit potential is quite different in the replicated portfolio versus the actual portfolio that mimics what a trend following strategy would do.

So I guess in short, I would say the replication approach, using a narrower set of liquid futures, works well if the major trends end up happening in those large markets, which, for example, last year, obviously, fixed income was the most important trend. Most of that happened in the most liquid treasury US market. However, if there are other periods where trends are happening in a more diverse set of markets, that are not represented in the replication set of futures, there could potentially be a larger discrepancy in the returns.

So our view overall is we still always prefer (even if you’re taking a common investment style and trying to replicate it, using that word) trying more to actually do the strategy rather than just run a regression and try to mimic the statistical properties of the strategy. So, I think those are two very different ways of “replication” of a strategy. The main flaw with the narrow set of futures is that you can’t actually necessarily get the returns if your set of futures doesn’t include the actual trends that are happening.

[01:04:27] Niels

What about the risk management, Yao, when you do regression? Again, I’m not a quant here so you’re the expert. I’m thinking out loud that if you’re just trying to guess what people’s positions are, you don’t really know what they should be because you’re not running a model. How can you even apply risk management to that?

[01:04:47] Yao

Yeah, I suppose that you can still do some risk management after you do the regressions to look at your final output and try to scale it. But if you don’t, then you’re probably relying on your estimates of what the risk of the index is. If you get that wrong, you could be running at much lower risk or higher risks than the actual managers are doing. The other thing that’s challenging with any kind of backward-looking replication rather than a model is that if there’s an abrupt shift in trends or abrupt shift in risk-taking levels, it’s going to take a little while before your regression picks that up.

So again, there’s lots of reasons why you would expect some pretty healthy tracking error between the two. So, I agree that from a risk management perspective, we think that being able to actually run the underlying strategies allows you to do much better risk control.

[01:05:42] Alan

Maybe just to follow up on the theme of number of markets and also from the perspective of the alternative markets (which you’ve added now as part of the diversified trend strategy), have you given consideration (I’m sure you have), tell us what the findings are in terms of adding these peripheral markets. What’s the ability to achieve the convex risk profile from the perspective of when we get a shock (COVID-type thing)? Obviously, economically sensitive markets will react, but in some of the more alternative markets, you might think they may not. They may trade more in idiosyncratic factors so you might be less likely to get a particular trend in those markets. Has that been a consideration? Is it a valid point or not?

[01:06:38] Yao

Yeah, it is a valid point. Because of our focus on this dual mandate, we do pay a lot of attention not just to if you add a new market what the additional return is going to be, but we also care greatly about how it will affect our overall strategy’s expected performance during a shock or during a downturn for equity markets. So, I think when we have looked at alternative trends more broadly, and again, being AQR, we have a paper on this which we wrote five years ago called Trends Everywhere that looks at the academic evidence for these alternative market trends strategies.

What we see is there is still a convex profile for trading in alternative markets. It’s perhaps a little slightly less pronounced than the traditional liquid markets because you are not trading directly. Let’s say you’re not short equity markets when the equity markets are falling, because you don’t trade equity markets. But there are enough related markets that you still do get these big moves happening in many disparate areas of different asset classes, different markets, that lead to profits for trend in a big enough move.

So when we’ve looked at our live experience trading alternative markets, let’s say in the COVID period or throughout the first nine months of last year when equity markets were suffering, we saw some very large moves happen as well outside of traditional markets that led to strong profits for alternative markets. So I guess you would say, in conclusion, we think alternative markets still retain that convex profile, but perhaps in specific situations, it could be a little bit less direct than the traditional market set. Nevertheless, as long as there are large moves happening in these alternative markets as well, during periods of market stress, that creates opportunities for that same convex payoff.

Last year was a great example. You saw equity markets really struggle, and as part of that, you also saw more alternative markets, like electricity markets in Europe, really go up. You might say, well, those are not necessarily soul related. The European summer was unusually warm. But there is some link in the sense that the war that broke out wasn’t because of market volatility; both for equity markets and commodity markets. The high inflationary overall picture that affected equity markets, obviously, also affected people’s expectations of how much energy prices would need to go up over time as well. So, I think there are linkages there as well from a fundamental perspective.

[01:09:21] Alan

Fair enough. Can I just say, we’re running up on time. Maybe if I could ask just one more before I pass it back. It’s really from the perspective of, obviously, AQR is a big asset manager, you mentioned running long-only and alternative strategies. So really, you have the full gamut of building blocks available to you. I’m just curious if you’re generating, hard to say, the best portfolio but say for a long-term investor and you’ve got all of these style premia, alternative risk premia, long-only factors available to you, how do you think about what that portfolio will look like and specifically what’s the role of trend following in it? Particularly versus other alternative strategies, do you think it would weigh more heavily on trend versus others?

[01:10:11] Yao

Yeah. Well, we have very real-life implementations of this because we do run broad, multi-strategy, alternative portfolios for many investors and trend is a pretty important component of them. That comes from the standpoint of it is one of multiple return streams, alternative return streams, that we think are diversifying to traditional portfolios and diversifying to other alternative portfolios. The convexity profile is quite unique to trend that shows up much more strongly in trend versus let’s say equity market neutral strategies or arbitrage strategies, which almost in some cases, arbitrage strategies tend to suffer more if there is a liquidity shock or something like that.

So trend is very valuable in providing diversification as well to other alternative strategies, not just traditional stocks and bonds. So they feature quite prominently in all the multi-strategy portfolios that we construct for investors. If anything, I think over time, we have moved towards increasing the importance of trend over the last 25 years because of some of those attractive characteristics within those multi-strategy portfolios.

[01:11:24] Alan

Yeah, but I guess the real question is, is there still a value to having the other alternative strategies when you go to combine these with ,say, equity factors? Are you picking up some kind of equity beta or bond beta with some of the other alternative risk premia or are you very conscious of trying to avoid that?

[01:11:46] Yao

So it really depends on what the client or investor objective is. I guess at a broad level, if you have a multi-strat hedge fund where trend is only a part of it, then the convexity profile of that overall hedge fund is going to be less pronounced than a pure diversified trend following offering. It really depends on the end investor’s objectives. We have investors who really want to focus on a trend solution and care a lot about the convexity and there we would recommend just focusing on the trend elements that we provide.

The clients who are in the multi-strategy portfolios, where trend is only a portion of the risk, do understand that in equity stress periods, it’s not going to perhaps look as convex as a pure trend solution. So it’s again, that trade-off we go back to, the higher Sharpe ratio versus the convexity dual mandate. So think of a multi-strat AQR fund as being maybe a little bit more heavily tilted toward the higher Sharpe, a little bit less weight towards the convex profile. Whereas for trend, it’s much more balanced between the two, maybe even a little bit tilted toward higher convex and Sharpe.

[01:13:10] Niels

Just a couple of questions before we wrap up. I wanted to ask you one thing. It’s a little bit about liquidity, it’s a little bit about capacity. But in the last 10 or so years, you’ve had a big difference, let’s put it this way, in the amount of money you had to deploy in trend. What have you learned from seeing these changes? Is there a limit to how much firms can run in trend without it having an impact on performance or have markets just become so liquid today that the limit is much bigger than any of us really will ever get to?

[01:13:51] Yao

We have had experience running these strategies at a very large size. So what I can say is that there are definitely capacity limits or considerations for all strategies, including trend, but it’s really the function of the underlying size of the market. So if you were to run trend following on US Treasuries and the US stock indices and major stock indices, I don’t think that trend as a whole, even as a whole industry, ever came close to being too big of a part of those markets. So I don’t personally believe that we’ve seen any evidence that the trend strategies’ difficult performance, in that decade, was due to the size of the industry.

Again, doing academic studies or simple studies, there isn’t really a strong relationship between the AUM of the industry and the actual returns. It has a lot more to do with underlying macro movements. That being said, I think when you go to the smaller markets, these things don’t go linearly. The difference between the liquidity of a US 10-year treasury and an emerging market bond is very different. It drops off quite quickly. There is definitely a consideration for capacity as it relates to both the amount of transaction costs that you have to pay once you get past a certain size, that can go up quite quickly, and also the ability to have a large enough position to matter within a fund.

I absolutely think that capacity considerations are more pronounced for things like alternative markets. Clearly, you do see that in like the industry, the way it’s fallen out. Alternative markets programs are much smaller to get capped much earlier whereas the liquid piece is in order of magnitude larger in AUM. I don’t believe that any manager, large manager, really says in the liquid markets we are anywhere close to closing our funds. So I think it’s a pretty big difference depending on the size of the underlying markets.

But we are always concerned about capacity because any good strategy, with too much capital behind it, it’s going to make it harder to generate returns going forward.

[01:16:06] Niels

Yeah, for sure. Absolutely. I mentioned this question to you earlier, where I said that one of the things people say when I ask this question is that they disagree a lot when people say trend following is easy. If I were to ask you what’s the one thing that you hear about trend following that you disagree with the most, what would that be?

[01:16:27] Yao

I think that’s one of the things that we had talked about earlier, which is people have a sense that it’s easy to time, I think. They may not say that outright but in their investment decision-making you hear comments like, “Well, I like the idea but I don’t think I want to get into it now because I think markets are going to start recovering and trend is going to dilute my returns.” That’s implicitly saying I think the returns of the stock market or the bond market are going to be higher than trend following and that’s maybe timing a bit of both trend and timing traditional markets as well. So I think that really undermines the usefulness within the portfolio. We’ve also heard the opposite.

In the last few years, there are some investors who say, “Well, I think trend is probably not going to do well going forward for a little while because there’s no volatility. I’ll get it when volatility gets high.” But then now you’re seeing volatility is very high. It just had a very good run so maybe I’ll hold off until there’s some mean reversion. So, I think the whole concept of looking it as a trade rather than a strategic allocation is something that we really try to convince people not to do because we haven’t seen that really lead to any good outcomes.

[01:17:51] Niels

No, absolutely. The final question, Yao, for you. I’m really just curious about what you’re most excited about as you look into 2023 and if there’s any concerns that you might have. It can be an old topic.

[01:18:07] Yao

We are excited about the resurrection of recognition that diversification beyond stocks and bonds is crucial. I think 2022 was a wake-up call and we have a lot more investors talking to us about what should I do now that the stock and bond correlation is no longer negative as it used to be. Last year, fixed income didn’t help as much or it hurt a lot, actually, in a year when I had hoped it would help my equity allocation. So I think the most exciting thing is that investors are now waking up to the fact that we do need additional tools within our portfolio that are truly diversifying. Trend is obviously a huge, good piece of that answer to that question.

But as I said, AQR also runs multiple other strategies that also fit the bill. So it’s been exciting in terms of being able to reengage. There’s a lot of energy, I feel like both on our side and also on the investor side of wanting to delve deeper into these kinds of questions on how do I really diversify my portfolio? How do I really make an impact in my portfolio if inflation stays high, if equities go through another tough period? I think for a while, the whole world had been lulled into a sense of complacency when the 60/40 portfolio was just doing extremely well for a very long time. So that overall recognition of the fact that diversifiers are important and we want to learn more about them and engage with them with our clients, that’s very exciting for us.

[01:19:48] Niels

Yeah. I think that’s a great place to end our conversation for today. Yao, thank you so much for being on the podcast and for sharing your thoughts and insights. Keep all the good research coming that you, Cliff and others at AQR produce. It’s certainly very helpful to keep these conversations going and we hope we can do this again sometime in the future.

To all of you listening today, I hope that you were able to take something from today’s conversation on to your own investment journey. If you did, please share these episodes with your friends and colleagues.

From Alan 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 deep dive into the CTA industry. In the meantime, go check out the show notes for this episode and all the other resources you can find on our website. Of course, not least, take care of yourself and take care of each other.

[01:20:42] Ending

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