Year-End Roundtable: The Future of Trend Following and Market Dynamics (Part 2)

[00:00:01] Intro

You’re about to join Niels Kaastrup-Larsen on a raw and honest journey into the world of systematic investing and learn about the most dependable and consistent, yet often overlooked investment strategy. Welcome to the Systematic Investor Series.

[00:00:23] Niels

Welcome and welcome back to this week’s edition of the Systematic Investor Series with Katy Kaminski, Cem Karsan, Rob Carver, Mark Rzepczinski, Richard Brennan, Alan Dunne, Nick Baltas, Andrew Beer and myself, Niels Kaastrup-Larsen.

As you can tell from this introduction, today and last week are very special episodes because it is the time of the year where all nine of us get together for one big conversation and debate. We’ve recorded our conversation on December 4th and last week we published part one of the conversation and today you will be joining us for part two.

We really had a great lineup of topics across the episodes and just to mention some of the topics that we have been covering last week and this week, they are:

• The biggest investment mistakes of 2024
• The US dollar under the new Trump administration
• The efficacy of replicating trend following returns
• The meme bubble
• Managed futures beta, does it exist?
• The return dispersion between CTAs this year
• The role of social media in raising AUM
• Are systematic strategies becoming overcrowded and other markets becoming less efficient?

So, it really was a packed agenda, but I hope you will enjoy it. Now let’s rejoin the conversation.

All right, we are back with the second round of our year end group conversation, so I’ll switch up the order a little bit this time. So, since we had to wait a long time to hear from you, Rich, in last week’s conversation, I’m going to ask you to go first this time.

What do you want to bring up in terms of your second theme?

[00:02:04] Rich

Well, this is a bit of a different one. Now because of this sort of this growth of social media and also the growth of podcasts, et cetera, I just want to sort of open the question to everyone on the panel about when comparing, you know, what’s being achieved today with awareness of your products, your programs, et cetera these days compared to say 20 years ago, do you find that these platforms, like X and LinkedIn and also the podcasts, et cetera, significantly increase awareness of your programs and does it help you sort of grow your AUM?

[00:02:48] Niels

So, if you don’t mind, Rich, and I don’t want to put anyone on the spot, but I would like to hear from you, for example, Andrew, because I know you have kind of used social media during certain periods of time, then you’ve taken a little bit of a breather and recuperated your strength, and then you’ve come back strong. And I don’t know if you’ve used different media as well. I see you on LinkedIn at the moment, enjoying yourself there.

But tell us a little bit about your experience.

[00:03:19] Andrew

Sure. So, I was drag, kicking and screaming, into the social media world in early 2022 when I was about to do a podcast and somebody said, you know, well, and I said, like, what do I do now that I’m going on a podcast the first time? And they said, well, you know, you’ve got to get it out over Twitter. And I don’t think I had a Twitter account at the time. So, I ended up going on Twitter and LinkedIn.

At the time, the audiences were very different. There was a well-established, collegial, active community on Twitter in the ETF world. And ETF people in the US kind of believe that ETFs are this great innovation, this social good, et cetera. And so, there was this kind of sort of very interesting supportive community. And so, I went on it, and I got quite active on it because what it did was that there are certain opinion leaders in the ETF space. And, you know, pretty quickly, over time, I could see who I was philosophically aligned with and who I wasn’t. And actually, I developed friendships with people on that basis, like Jerry Parker and I, I think, because that’s how we first really started to engage.

And then I also, been on LinkedIn for a little bit longer than that. You know, LinkedIn is more stayed, it’s more international, it’s more kind of professional people. The Twitter or X now, on the ETF side, is very, very valuable for that reason, at the time. The platform itself, I think, has degenerated and I spend very, very little time on it today. I flipped some switch on my feed and I ended up getting all these horrible videos of people getting crushed by construction equipment and stuff. And so, I just kind of pulled back.

But I do use LinkedIn and I think what people look for is an authenticity and a consistency of messaging. And the whole idea of it is that there’s this vast universe of people out there. And rather than the old marketing model where you kind of wade into that sea of people; you wade in and you try to go kind of person by person and you say, do you like what we have to offer? Do you like what we have to offer? And if they say yes, then you kind of paint them green and then you follow up with them.

The whole idea of this is how do you get the messaging out? And this is one of the channels for doing that to a broad enough range of people so they self-select and they come to you because there’s some sort of a philosophical alignment of it. So, I do use it. I don’t do political posts. I don’t do personal things. It’s really just about kind of conveying sort of a philosophy and message about what we do and then seeing if it resonates with people.

[00:05:52] Niels

You are prolific on X, Cem, and with a huge following. So maybe your thoughts on social media.

[00:06:01] Cem

Yeah, I mean it’s still the best way to reach the most people that don’t know you, and to expand your reach. I mean it’s pretty simple. I have met so many people outside of my immediate sphere and been able to spread something that is a very, I think niche, seemingly niche, but has an effect on so many people. I’ve been able to spread those ideas, I think, simply because of the existence of social media.

I think if it did not exist, I would not be able to get that much. And I think the ability to do that is very powerful, A, and then B, the amount I’ve learned as a function of similarly reaching out. I mean this is a great example, right? Who would have brought all of us together if it wasn’t for that broad social media network. So, I continue to lean into it.

Obviously, there’s some toxic political elements in social media. We all know how much the algorithms can get us in one channel. But I think as long as you’re willing to push against that kind of natural pressure, I think it’s incredibly powerful.

[00:07:26] Niels

Cool. Great stuff. All right, Mark, why don’t you take the lead now on your second topic that you brought along for our year end conversation.

[00:07:36] Mark

Okay. Well, this last year, and actually for the last more than two years, I’ve been spending a lot of time thinking about the differences between risk and uncertainty. And so, and we’ll say risk is something that is countable. Okay. I can measure it. And uncertainty was maybe more subjective. It’s non-countable. And this goes back to the old Frank Knight views of uncertainty.

Now, technically we’re supposed to say, if we believe in subjective views, we could always sort of figure out what are the probabilities and events and then we could come up with an expected return. But, you know, in the context of what we do in model building, how do you decompose risk and uncertainty, and how do you incorporate that into your thinking?

So, I’ve been grappling with this and I’d be interested in how other people view this, this issue.

[00:08:40] Niels

Absolutely. Any takers on risk and uncertainty? Katy?

[00:08:47] Katy

I’ll take it because I love that particular dichotomy between the concept of risk and uncertainty. And I think because we have so much data, because we have all these things that we think we know, we think that a lot of our lives are about risk. But actually, my personal view, and this is part of the reason I think trend following, as a strategy, works very well, is that a lot of life is really about the unknowable types of risks; the uncertainty that we face.

And I think, if you look back at sort of any year, it would have been very difficult to actually understand some of the circumstances that actually occur. And so, I think that’s why, for example, systematic trading, although it’s very quantitative in nature, that some of the most robust simple rules, like trend, are not about knowing what’s going to happen, it’s about moving with what’s happening because it’s really hard to know, especially when there’s a lot of uncertainty about the world. So, I would agree with you, Mark.

[00:09:51] Niels

Cem.

[00:09:51] Cem

Yeah, I mean, almost by definition, what I kind of do day to day is manage risk. That’s what a market maker essentially does. They absorb liquidity and try and look at risk from every angle.

I think the key, I think it was Donald Rumsfeld, here in the US, that said, there are known unknowns and there are unknown unknowns. And I think the way you deal with that is stop thinking in two dimensions about what the risks are, and try and manage those risks, and start thinking about broader distributions and what those distributions might look like, across every vector that you can, as a function of pressures and potential dynamic broad changes. So, I think the distributions are easier to predict than people expect or understand.

And I think there is real edge to be had in properly ascertaining what those broad vector distributions look like. So that’s what we try and do. And I think we are seeing changes in distributions that are meaningful. I think that’s part of what we’re talking about, especially across certain vectors. And I think that as long as you take that approach and don’t have any true bias other than to say there is some structural pressure we know, and moving your distributions accordingly, I think is the right approach.

[00:11:26] Niels

Yeah, Rich, before I jump on, I just want to make sure whether you want to add anything. I know you’ve written and stuff about this, any short comment? And also, Nick, if you want to have a short comment, feel free as well.

[00:11:42] Rich

Look, I suppose the way I’d view it is risk is something that can be quantified. Uncertainty is something that is unpredictable, can’t be quantified. And in my particular area that I’m focused on, which is more the sort of chaotic regions of the tail regions of the distribution, I’m obviously weighing higher the value of uncertainty there. So, I think in that environment you must address it with positive convexity.

And I think, you know, particular techniques that divorce the responsibility of this positive convexity. I think when they hit uncertainty, they come undone. So, I do have a concern with some models that don’t take uncertainty seriously. Even though they historically can’t see it in their backtest, historically, they can’t measure it. There will be events in the future which will occur from left field, and the only way I see you can deal with it effectively is through positive convexity.

[00:12:43] Niels

Sure, makes sense.

Nick, any thoughts?

[00:12:45] Nick

No, I mean, actually, I think it’s mentioned almost anything I wanted to say. I think the last point I would make here is that risk, we typically think of it as volatility correlation. And maybe some sort of statistical error underestimates uncertainty. I think of it as whatever goes beyond and how we can equip a portfolio, from portfolio construction standpoint, to not necessarily see the unseen, but be cognizant of the possibility that things are not as they appear to be.

So, I also think of the uncertainty as the additional higher order effect of what is not any more measurable, even in the statistical error of estimating the inputs. That’s another angle.

[00:13:20] Niels

All right, let’s jump on to Rob for your second big topic of this year end conversation.

[00:13:29] Rob

Yeah, my topic can be summarized with a very short sentence, that the world has gone completely mad. There is a company called MicroStrategy which is in the business of issuing bonds, which they then used to buy Bitcoin. The company’s listed at a massive premium to its nav, which mostly consists of bitcoin and a tiny residual business. And it’s also possible to buy an ETF, a leveraged ETF on this thing.

This is amongst the kind of general sort of state of the world where we have meme stocks, we have crypto coins with stupid names that allegedly have market capitalizations of billions and billions of dollars, although it’s quite easy to achieve as market caps. We just issue the coin and retain 99% of the supply and then if one person buys it for a few hundred dollars, then you’ve got your billion-dollar valuation.

I’m old enough to see a few bubbles in my time, but this is really, really stupid, right? I mean, this is completely bonkers. Is this the future now? I mean, is Trump coming in, which obviously has pumped a lot of money into bitcoin generally. I think there’s a bit of an overlap between the sorts of people who support Trump and the sorts of people who buy silly stuff on the Internet, and meme stocks, and Elon Musk and Tesla, and there’s a Venn diagram with him right in the middle there.

Is this like the peak? You know, in next year is this going to pop and we’re going to go to the sensible world, or is this just it? Or am I just going to go and live in a cave for the next 40 years? Because there’s no way I can cope with the world if this is what we’ve come to.

[00:15:05] Rich

If we’re historians, Rob, we would all be wearing togas and watching Rome burn at the moment, as we’re sort of entering the Coliseum to see the next gladiator fest.

[00:15:16] Niels

Andrew, you had some thoughts on this?

[00:15:18] Andrew

Yeah, look, I completely agree with the insanity. I’ve always been sort of a value investor at heart, and I believe in intrinsic value, and that doesn’t seem to matter very much anymore.

There is just sort of something interesting that I think is going on in the US that I was talking to a senior guy at JPMorgan about yesterday, which is that I’ve been doing this for a long time in the US. In the 2000s, there was a sense of optimism in the US that if you were starting a small hedge fund, which I did, I did it twice. and you went out and talked to a family office, they were excited. They loved to hear the new idea. You know, you’d walk in, you’d talk to a family office and they’d be like, hey, you know, you sound like a smart kid. That sounds like a good idea. Here’s a million bucks.

And there was just this general sense of we can do things; the sort of animal spirits as risk taking back to kind of risk versus uncertainty. But people generally believed that things would be okay. When the GFC hit, there was a massive, massive change in risk tolerance and expectations. And during the 2010s, also just the weirdness of the 2010s, now even a small family office needs a consulting firm to put them into the very, very largest hedge funds they can possibly find. It became very, very weird.

And in the context of it, you’ve also had this industry where kind of the traditional jobs that were good 10 or 15 years ago, if you lose your job you’ve got nothing. I mean there are 43 people who are qualified to get your job. So, there’s this kind of like great conservatism.

I think what’s really interesting about the Trump thing, and I’m not a Trump guy, whatever, is just that is, is the Musk/Ramaswamy; the people he’s surrounded by, they’re rapacious, full blooded, capitalist, entrepreneurs who are all self-made. You know, like the ambassador to (not to the UK) like most different places, the positions are people who believe that the outcome is going to be good.

You take somebody like Musk, yeah, he starts another company, it’s now it’s worth 350 billion. Yeah, he starts another company, it’s now worth 50 billion. I, it just, it is absolutely, the wealth creation is absolutely insane.

And so, what I feel is that, even as we got through this election (and the best thing about this election unquestionably was that we’re not fighting about it for the next two years), it was at least a clean decision one way or the other, however you think about it, even with liberals, who are distressed that we have this presidency. But at least we’re not fighting about it for the next two years.

There is to me a broad-based sense of a resurgence of animal spirits that’s going to hit how people look at the government, how people look at things. I have no idea how this all plays out and whether this all comes crashing down in a bubble which, since I’ve now made this statement, it’s almost certainly is going to happen tomorrow. But it strikes me as almost like a social and cultural difference that gets drowned out in kind of the acrimonious political air that we have.

[00:18:20] Niels

All right, good stuff. Cem, I would be surprised if you didn’t have one comment or two.

[00:18:26] Cem

Yeah, really quick. I just think this is so important. I’ve talked about this on our podcast a decent amount. We are in a time of disruption that is driven by a generation or two, millennials on down, that have been disaffected. It is a function of inequality. It is a function of Federal Reserve monetary policy driving inequality.

That frustration, which is again generational and we’ve seen before, you’ve seen it in the 60s and 70s, late 60s and the 70s. That does not go away in a matter of years. That is generational. When that happens you get disruption, you get change. It is youthful. It is angry. It is all kinds of things. It leads to change and it seems insane, but in some ways it is part of the long-term cycles of things. So, I would expect more of this to come, for better or worse.

[00:19:30] Niels

Alan, I’m excited to hear your second topic. Do you want another one of mine or do you have one yourself?

[00:19:36] Alan

I’m going to use one of my own. Just stick my neck out. Spice it up a little bit with this one. So, this is on replication, and I want to get the views of the non-replicators here because obviously we hear from the replicators all the time about replication. So yeah, I just, you know, when replication came on the scene maybe three, four years ago, there was a lot of skepticism. You know, they’re going to be too slow in reacting. They don’t trade enough markets. Yeah, okay, they’re doing it cheaper, but the fees generally are coming down anyway. So, you know, the general view, I would have said, speaking to investors was yeah, it’s not going to work here. There’s going to be some kind of situation where they’re going to be just too slow to react.

But as time has passed, performance seems to have been reasonably good. It’s now become a feature of the landscape. Now we have new entrants coming into the space. It’s becoming more established as a valid way of running managed futures programs. So curious to get the thoughts of the trend followers, the original trend followers themselves, and how they now view replication.

And I think actually, coincidentally I haven’t read it, but I think Rob has written a blog post, somebody told me about this recently. So that might be a good place to start. Is replication now a thing and is it going to be a feature of the landscape going forward and will it be as good as the real thing?

[00:21:02] Rob

Yeah. My blog post was specifically on discussing top-down and bottom-up replication, which are kind of the two main ways of doing it and saying, look, if you are going to replicate, then in my opinion, bottom-up is a better way of doing it. And I won’t get into the technicalities. People are welcome, of course, to go and read my blog and see that.

In terms of my views, generally, on replication, I do think generally that what the world needs is cheap exposure to basic kinds of CTA type strategies for normal people via, you know, an ETF wrapper or something like that. And you know, I’m not really that bothered about how that’s made available. If replication is a way of doing that, then that’s great.

But I think there are probably other ways of doing it which could be explored more as well. Certainly, in Europe we really lack that kind of product. There’s a few in the US but in Europe it’s really lacking.

[00:21:56] Niels

Rich, I know you are not a replicator. Nick, I’m not sure whether you do any replication. Katy does some. So, it’s a very narrow field that’s left to talk about these things. And of course Katy, you can talk because you’re both. But Rich, you have any thoughts on replication?

[00:22:15] Rich

Look, as much as I love Andrew here, I’m not a big fan of replication. I think that there is replication risk in there, and I don’t think we’ve got a sufficient enough track record to come out with a verdict yet.

So, you know, I’m a bit more conservative. I’d be saying, you know, when Andrew’s got a walking stick, and on this podcast, you know, then I might have to accept that this is a way forward. So yeah, look, I do like the fact that it is available for the retail investor getting exposure to CTAs. So that is a big tick. I think it’s wonderful.

But you know, I do like the tried and tested traditional method. I do think it’s got a valid long-term track record. So, you know, I’m open to changing my mind of course, but I’d need a bit more data and a few more regimes to go through before we can clearly get a verdict on the merits of replication.

[00:23:17] Niels

Oh, that’s fair. Katy, why don’t we hear a little bit from you? You do both and then maybe Nick has a comment as well.

[00:23:24] Katy

Yeah, I mean, I think I tend to think of things in a very diverse way in that I think that the exciting part with replication is that it’s just one way to get exposure to managed futures. It tends to be a little slower, but it does sort of give you generalized dynamic exposure to overall themes and trends in CTAs.

I’m obviously also a staunch fan of sort of the classic trend following technique about sort of diversifying across different parameter sets and coming up with a sort of unique way to capture trend following and get that sort of crisis alpha type of exposure. So, for me, the question for me about replication is more about just different access points.

And I think I go back to what Rob says, is that it’s really exciting to me that we’re in an age or in a time, particularly in the US, where now one of the goals is having these strategies to a wider audience when so many investors have very little tail protection. They don’t have access to things that can be uncorrelated and diversified. So, I think for me, replication techniques are just one way to get CTA exposure.

And I think there’s a lot of ways, and you know, Nick already mentioned this, there’s assets you can choose, it’s the speeds you can choose, it’s the different strategies you include. And I think there’s different, like they say, different strokes for different folks I guess out there. I’m just happy there’s lots of ways to access the space.

[00:25:01] Alan

Niels, can I ask, I mean, you’re the one who brought in the whole replicator into the set, so what’s your view on this now?

[00:25:10] Niels

I mean, I think my view, I wouldn’t say it’s changed over time. You know, clearly as we’ve talked, and we’ve had the pleasure of being very close to the whole process through Andrew, I was probably more skeptical in the beginning, let me be fair on that. But I’m still skeptical.

And I still think that probably, as you alluded to Rich, we need a bit more time, we need a bit more data. But maybe I need to think about it slightly differently in a sense that just as we have developed our models to deal with this, you know, uncertainty and markets behaving in different ways, maybe there is another way of doing it and that’s the way Andrew is doing it. And it doesn’t matter that you don’t measure the underlying price data, maybe you can just get it through the performance data of managers.

Do I see risks in these models? I do, but I’m not a mathematician, so I can’t sort of say specifically what those risks might be. But yeah, I’m obviously, like Rich, I’m open to be proven wrong. And maybe the reality is that there’s room for all of these types of strategies and, at the end of the day, it’ll be up to the investors to decide what fits best for them. I will also agree with, I can’t remember who mentioned that, but I do think it’s a great thing though that we have made CTA strategies more available for retail investors. That’s a great benefit.

But I will say, now that you asked me, Alan, one of the things I’m a little bit concerned about and that’s actually this thing about it has to be so cheap. And I know that replicators didn’t start the evolution of lower prices because we could just point out flat fee mutual funds and so on and so forth, but I’m concerned about that we have to do everything for free because that’s kind of how I feel it’s going. But that’s not just a replication thing, I will admit. So that was my view, Alan.

[00:27:25] Nick

I agree with Katy in the sense that to the extent that you can broaden the scope and the access, I think that’s beneficial and in a parameter optimal setting, we should all benefit from it. The only point that I would flag, and it’s not necessarily a risk, it is more about that I guess the nature of the replication is to succeed as well as the underlying does. Now, if this underlying is underperforming, the question is do I outperform in the underperformance? Even more so, if tomorrow they all change their profiles and they become, I don’t know, reversion traders, is the pitch still the same? But you know, that comes with itself, being a replicator, you just want to be very close to that.

So, I think this is more of an existential nature rather than anything else. That’s the only thing that I would say. But beyond that, I think whether it’s replication bottom-up or top-down, I think it has helped the industry to a good extent to increase awareness.

[00:28:22] Niels

Well, luckily we’re going to hear from Andrew next, so I have no idea whether he’s changed his topic because of this or not, or that he’s going to stick to the plan. But Andrew, over to you.

[00:28:33] Andrew

Well, I think first of all I would like to propose that we have this conversation again in five years and we will and put that on the agenda. So, I mean all the comments are taken.

You know, I think to me what’s interesting, you know, obviously I have a different view on a lot of it, which is really not the point of this. But I think one of the things that I think spend a lot of time thinking about is what this industry is going to look like in five years.

But that’s something, you know, that basically the last half of my career in the hedge fund industry has been trying to think about. Okay, so where does it go? You know, do we get this democratization of hedge fund investing and how does that happen? Is that a good thing? Is it a bad thing? What strategies are worth including in the democratization process or not?

And so, you know, the reason we got interested in this whole space was because that when we looked across the panoply of hedge fund strategies, this is the best as far as we found. It’s the best combination of you get no correlation to either stocks or bonds. That didn’t matter for 20 years, you know, but now it matters tremendously.

Now when stock and bond correlations are positive, you get every dollar you generate as a result of that shows up as alpha, which people love. And it does best when you need it the most. Plus, you don’t have debt dated and suspended. You don’t have to tie up your money for five years. You know, it’s not millennium at 800 or 1,000 basis points a year where you’re going to find out in five or 10 years if it was a good call or not. So, it’s an astonishingly attractive asset class.

And it also strikes me as the most underinvested asset class that I’ve seen in that, despite that, if you look at a typical institutional portfolio, they’ve got maybe 8% of their portfolio in hedge funds, of which maybe 5% of that is managed futures. So, one of the best things you could add into their portfolio is capped at 50 basis points, let’s say.

But to take a step back in terms of thinking what the industry is going to look like. We’ve talked a lot about the growth of ETFs and what they mean. But I think just by general observation, there’s this tremendous heterogeneity of investors, even within the ETF world (which I know pretty well) and the UCITS world (which I’m getting to know better), the preference functions of investors, even with people who have very, very similar business cards, can be very different.

So, what’s driving a lot of the insane proliferation of products is that people are looking and saying, hey, even if I identify a relatively smaller, narrow subset of this massive pool of capital, there are enough people that maybe I can identify through social media or other means, there are enough people who can buy it that it actually becomes an attractive and large scalable product for somebody in their particular business.

So, I know Katy’s jumped into the ETF ring and, you know, I was just on a panel in Stockholm six weeks ago or so with Katy where we’re talking about the differences and how it’s changed.

And I think what we saw, and, you know, curious to hear what people think about this, is that what we’ve seen is that a lot of the large firms in this space have almost become portfolio consultants for their clients. You know, they’re sitting with their clients and they’re saying, how do we shape and build a portfolio just for you?

And if you’re at Man AHL, you’ve got various different products and levers that you can pull together and put to some sort of integrated package. So, it’s much more of an enmeshed, symbiotic relationship between the clients and the funds. And that, I think, is an evolution. And I think that’s going to continue because it’s very valuable to the clients.

You know, Nick is sitting there with a business where they’re trying to again, build customized solutions, whereas other people are trying to build ETFs or access vehicles. So, I’d love to hear anybody’s kind of comments or thoughts on this because I just think you are going to see this continual broadening of people trying to build different things to return stack products to meet people’s different preference functions.

[00:32:31] Niels

Go ahead, Cem.

[00:32:32] Cem

Yeah, I would, I’d love to jump in here. This is such a big thing. It’s the whole market, basically, with interest rates going from top left to bottom right. For 40 years, stocks and bonds were a natural place for the whole market to go. They outperformed for lots of reasons, right? Particularly in growth, particularly in March markets. We can go through the whole thing.
As you have pressure on interest rates to least mean revert, if not go higher over this coming period (and we’ve already kind of taught from a global macro why that’s more likely), you begin to decrease the expected return of the bond market, you begin to decrease the expected return of the equity market, and you also begin to expand risk.

The alternatives? The market needs true alternatives. Private equity, venture capital, real estate are not alternatives despite what they’ve been marketed as. So, it is natural for the global world, which, by the way, there’s $450 trillion of global assets. About $350 trillion are essentially bonds or equities or type. It is natural for the world to want an alternative to that.

Derivatives were created in the 60s and 70s and broadly became part of the investment conversation because of higher interest rates at the time (People don’t realize that) because A they’re capital efficient but B because they represent a non-correlated alternative. And so, what we’re seeing when we see the boom (and it is an incredible boom in structured product issuance and ETFs tied to managed futures, volume products, et cetera) is the beginning, and it really is just the beginning, of the adoption of non-correlated investments.

It is a gold rush. You have had a doubling in size of structured products annual issuance, and a 7x increase in ETFs tied to options. That’s just one example. It is happening across the board, and it is going to continue as people begin to experience… Again, this year was a bit of an exception in the last several years, but I believe that trend is going to… You know, this unattractiveness of 60/40 broadly on a risk adjusted basis that they’re at least managing money that way.

As the world begins to see that and experience that, I think we are in the early first innings of a major adoption of alternative, true alternative investment.

[00:35:24] Niels

Alan, what are your thoughts on this?

[00:35:26] Alan

Yeah, I mean I’d agree that there’s a trend increase in interest in alts. So, around the world 60/40 was dominant for so long and now, you know, particularly after 2022, how many papers did we read about that it’s no longer 60/40, it’s 50/30/20, it’s 60/25/15, whatever it is.

So, I think that idea that bonds and equities alone are enough, I think that definitely has been shifted and there’s definitely room now for alternatives. And that’s been a trend that’s come in. I mean you could say that there was a trend into liquid alts and mutual funds in the 2010s that kind of petered out and reversed, and it’s been replaced now by the ETFs.

But I think it is interesting like within managed futures, you know, five years is a long enough period where we do see significant changes in the industry. Like if you went back 25 years, the end of 2019, return stacking as a concept hadn’t really been embraced. That has come in. I’d say in the late 2010s people were still skeptical of QIS. Now that is more of the mainstream. Certainly, replication wasn’t accepted back then. Now it is. So, over a five-year period you do see those evolutions.

I mean the other big trend we’ve seen in the markets over five years which dominates everything is the rise of the multistrats. So, the question is that going to be a feature of the hedge fund landscape? Back in 2019, their assets under management would only have been a fraction, even though it had been around for a long time.

I was at a conference recently in Zurich. With every single panel the discussion was around multistrats and their influence on the hedge fund industry more widely. So, I think it’s interesting. Why do people like the multistrat so much? It’s, you know, consistency of performance, not necessarily convexity, not necessarily very strong returns, but kind of 8% returns on 2 or 3 vol, that seems to create a lot of interest.

So, on the one hand you have this trend increase in alternatives and diversifying strategies, but at the same time institutions love to have these kind of ‘steady Eddie’ strategies anchoring their hedge fund allocations. So, I think you’ve got a bit of a tension there between those two trends. But certainly, I would be optimistic on the view for alternatives.

And also bear in mind if you go back five years, to 2019, managed futures was totally in the doldrums. It was the end of that whole decade of tough performance. I think we’ve definitely shifted away from that in terms of investor perception after 2021, 2022. So, I’d be optimistic on trend following managed futures becoming more embedded in portfolios over a five-year view.

But you know, a big question is are we at peak multistrats yet or not? I mean, I know that has been suggested, but it remains to be seen.

[00:38:17] Niels

Mark, do you want to jump in before we go to the next topic?

[00:38:20] Mark

Well, I was going to say that this issue of multistrat is probably one of the biggest issues we’re going to be facing in 2025 of how this really fits into portfolios. And going back to some old concepts I thought about, this is the ultimate convergent versus divergent set of strategies.

Multistrats in general do not do trend following. They abhor trend following. Their whole idea is to try to say, how do I get as low a volatility as possible, high alpha, and then lever the heck out of it. That means they’re the ultimate convergence guys. And they sort of don’t follow trend following.

And then you have trend followers who are the big divergence guys who say, look, I’m looking for taking higher risk because I’m looking for dispersion, spread, movement away from whatever the fair value is.

And so, what we’re going to be seeing is that this is the ultimate battle between two different views of the world and views on how you can make money in markets.

[00:39:26] Niels

Great stuff. Andrew, a quick comment from you?

[00:39:29] Andrew

Sure. So, I’ve written and talked a lot about the multistrats. First of all, they’re magicians, what they’ve been able to do. I mean it’s the return profile that they’ve developed has completely defied all expectations. But the analogy is what I was talking about before. It is that diversified portfolios, where you’re adding 180th pod with $60 billion in AUMs, you’re not supposed to be able to do well anymore. Right? That guy, by definition, has to be worse than your 20th guy.

The opportunity said you’re too big to make this kind of money over time, they’re doing something different. And I think the analogy that I raised before about the equity markets that’s very, very difficult to look through, to just look at the top line numbers on it, is what an Amazon can do as both an operator and a capital allocator.

In a sense, the multistrats are doing, as managing these teams, recruiting, managing, building these teams, building infrastructure, having the best, most favorable lines with Wall Street on anything that they do, they’re doing something different. It’s a different business model because the analog before that were fund of funds which were terrible at doing it, or institutional allocators who in general just picked things that end up looking roughly like the broad industry when you get through all their picks over time. So, I think that it’s part of the innovation.

I just think the multistrats have defied everybody’s expectations because they really have just raised the bar to a completely different level.

[00:41:03] Niels

Cem, a quick comment?

[00:41:04] Cem

Yeah. We run a multi strategy. It is not magic. It is capital efficiency of derivatives. That is the core tenant of this.

If you can allocate a fraction of your capital to a strategy to get exposure, and there is some incremental edge, and then you can diversify, you’re able then to leverage for free. And that ability to leverage for free is what is generating these returns.

And the higher interest rates go, the more you can make on that leverage. So, expect that if interest rates continue to increase that the magic will continue. It is tied to the capital efficiency of derivatives.

That is why multistrats continue to succeed. And as interest rates are going higher, they’re doing even better, especially relative to the alternative.

[00:42:02] Niels

Good stuff, all right, let’s jump on to Nick for your second round question or topic I should say.

[00:42:11] Nick

Yeah, I think this is going to go maybe hand in hand with this conversation and maybe just adding an extra comment that is going to be a good bridge to my question, and that is that the whole multistrat, in my mind, is no different to the cross-asset risk premier pitch that happened maybe 10 years ago.

And what happened is that this premise potentially did not succeed primarily because of the VIX Volmageddon, or maybe the equity factor winter, or maybe 2020. But it came back specifically because of the need for diversifying returns, specifically when stagflation came along and the macrodynamics are such whereby there is no return to be harvested in conventional markets. And I think all this appetite for alternatives at some point will make the alternatives not being alternatives anymore.

And I think this is just a tag that you attach to something that historically was not part of the core. And I think where I agree with the rest of the group is that cash efficiency is key – is absolutely key. The leverage ability is the one that makes them, to a good extent, very attractive.

But beyond that, I think ultimately this space, the more liquid it becomes, the more markets we can trade, the more systematic approaches we can deploy, and the more wrappers we can allow investors to allocate to, would start solving for more specific objectives.

And that’s how we have seen our business kind of evolving over the years whereby there are more specific objectives that are much more, I would say, well defined, whether that is yield enhancement. Whether that is defensive flash corrections, defensive longer-term corrections, I think this is where the space is moving. So where is my question now?

My question takes a step back and if you like being self-critical, not just myself but the group here, we kind of live in a bit of a filter bubble because we all tell ourselves how good CTAs are, and so on, and so forth. It’s been maybe two, or three, or four, or five, or ten years. Different people have been involved with different tenures here.

But let’s say I look into Berkeley Hedge. I know Niels, you do not necessarily believe that this is a good representation of the universe, but it’s still kind of fluctuating around the 350 mark that has been around for the last maybe 14 years. Andrew has helped substantially with this I guess social media, if you like, push towards making policy portfolios evolve and add the alts and so on and so forth. I think we have all been having those conversations with investors, and education, and marketing, and discussions, and so forth.

Maybe VTF is probably, at a very smaller order of magnitude development that I’ve seen in the last two years, but frankly the deployment is still at the levels that was back then. Maybe there is a bit more understanding. Maybe ‘22 was a good example. But have we failed?

And I’m not necessarily putting myself, I’m talking about the industry as a whole. Like are we missing something? So that’s my question. I am not going to point to anyone, whoever wants, pick the mic.

[00:45:10] Niels

I think it’s a great question. I’m happy to point at someone else, but I will just say, the only comment about the size of the industry (because that’s the one that I kind of have a little bit of an issue with) is that there is one firm in that number that makes up a very large part of it, and I don’t consider them as a CTA, and that’s Bridgewater. But that’s the only thing that I think is a little bit odd about the index itself.

But I think it’s a very interesting topic about why is it not growing, or maybe why is it not being captured by these databases? Because I’m pretty sure that there are more people doing similar strategies, you know, at the local pension fund or in some kind of family office themselves, but they’re not being recorded as AUM in these types of strategies. So, I’d love to hear like you, Nick… no, you know, I’m going to.

[00:46:03] Nick

No, no, you know, I’m going to say one thing. I have actually stolen (he doesn’t know), I’ve stolen Andrew’s comment that he made in the podcast maybe, I don’t know, a month or two ago. I think investors do see the value add statistically. They do see the backtest. They do see the value add even in real time. I think it’s this lack of economic conviction that it should work in the first place. And I think that’s the one that has put me to peace with our attempt and we will keep on trying. But anyway, Andrew, back to you or over to you.

[00:46:33] Andrew

I spent a lot of time talking to people about this space and I’m stunned with how low my hit rate is, honestly, because, as you say, it is statistically obvious, right? If you start a conversation saying, I’ve got stocks, bonds and this, and that, and the other things, what can I add to it to improve my Sharpe ratio, my efficient frontier, whatever, whatever? It is absolutely statistically obvious, whichever index you use, whichever funds you use in order to do it.

The problem is, I think a lot of people on the other side, the way they’re trained to think about alpha and excess returns is about there’s a… You come out of your second year of investment management class or something, and it’s about somebody has an information advantage, something that nobody else knows. Or alpha is this finite pool, and they’re going to find it and get that piece of information, and they’re going to find a way to find the right stock or the way to do it. And the idea is that there’s some natural intrinsic value and there’s this mispricing both above and below that over time.

And so, when you describe managed futures to them, there’s just this kind of collective sense of disappointment. Well, you know, because people say this like, why are you short the yen, or why are you long the euro (I guess we’re the opposite right now). And the answer is like, because it’s been moving.

What they want to hear you say is, you know, this is where inflation’s going to peak and, you know, this is what the world’s going to look like in two years. Because that’s so important for them in terms of their narrative that they go back to their invested committee, et cetera, with this.

So, I think the second thing that I think I’ve struggled with is that my sense is that there is a core group of very, very loyal investors in this space, who are statistically minded. They bought into this space over some period of time, and then the only question for them is which fund do they buy? Do they buy QAS? Do they buy funds, ETFs, funds, whatever, whatever. And that’s been a relatively finite pool for a long period of time.

Outside of it, the problem that I’ve had is that I have trouble convincing somebody who’s got lots and lots of clients as to how to convince the clients they should be happy that 3% or 5% of their money is in this strategy and how they’re going to talk to them about it. So, it’s a very weird paradox that Nick is talking about, and I haven’t, obviously, found a solution to it yet.

But I think that there is this, it’s this broadening of this idea of what alpha generation is, and why these things are in in your portfolio, and how it completes everything else you’re doing. I think that if you we can figure out a narrative around it that makes people like it and want it, then that will follow the statistical benefits.

[00:49:23] Niels

All right, let me jump in here because in the interest of time, I do want to go over to Cem and then Katy for the last two topics because we still have the very exciting round of the outrageous predictions for 2025 that we need to cover.

But one thing I just want to comment on this particular topic, something that Rich and I actually briefly touched on in our recording last week. And that is, to me what’s interesting is if you are someone, would you rather know the why or the when a market is going to move? I would have thought the when is more interesting and more profitable than knowing why. And so, it is very curious to me that as you say, Andrew, that the adoption rate is still pretty low.

Anyways, Cem, you have been waiting with another interesting topic, I’m sure. So, let’s hear it.

[00:50:23] Cem

Yeah, my biggest areas of interest as we approach the New year, as I mentioned, my first question is, you know, what are the big global dynamics that are shifting? We are seeing an historic dislocation between the United States and performance relative to the rest of the world. And if we can kind of glean some insight into when and how that might normalize, if at all, I think there’s tremendous money to be made.

So, given that, I’d love to explore, and part of the driver that is the US Dollar, right? It is central bank policy in the US along with other kind of global policies. So, I brought up the China/US question first of all, but I’d love to follow up with maybe a more direct question about the dollar.

What will the dollar likely do in the coming year? What will US policy likely be on it and how will the world react? And then kind of an add on is what do we think the global markets, aside from the dollar, how do you think maybe these global markets will normalize if they do at all? So, I’d love to hear people’s thoughts.

I know this is a macro topic again and not pure quantitative trend following, but I’d love to kind of discuss that because at the end of the day, these are the big things that can drive major trend, can drive dramatic shifts in all assets.

[00:52:13] Niels

So, while everyone is thinking about who wants to really jump in on this because it is one of those very difficult questions. And I will come to you, Katy, in a second. What I will say for my part, not so much about where I think the dollar will go, but the topic you raise is something that a lot of people have spent a lot of time talking about. You know, how the breaks will
lower the dollar’s value, and remove it from the world’s reserve currency throne, and all of those things.

So, all I want to say is that I think that topic will be widely discussed, continue to be widely discussed, but I wonder a little bit whether it’s going to have any effect whatsoever. Maybe, at least for now. A lot of things can happen under a new administration, but I wonder if we’re going to be just talking about this next year and say, well yeah, it was a big topic but nothing really seemed to have changed.

So anyways, Katy, you jumped in first and then I think Alan, you have some thoughts as well.

[00:53:22] Katy

Yeah, that actually kind of leads into my topic. I was really interested to talk about what are the trends and themes that we need to think about for 2025? You know, I’ve kind of noticed a couple of key things, especially as a trend follower, it’s been really interesting to see the positioning, especially in the last six weeks. Moving trend signals have moved very long equities, particularly US, short fixed income, but also long the dollar in size. And the dollar, let’s just be honest, has taken a big V shaped move. I mean it was in a downward trend now it’s just been really, really strong recently.

Couple that with what Cem was saying also that you have this dispersion across different regions where the US is looking much stronger, and growth relative valuations, growth numbers, are very different across the globe. So, I think as a trend follower, even though we don’t predict those things, we still ask ourselves the question, like what does that mean? How long can that particular theme continue? And sort of how much is this dependent on a change in regime in the US?

But I think for the US dollar, there’s definitely one key thing. The US dollar is always tricky because it’s a combination of sentiment, it’s a combination of monetary policy, but it’s also a combination of like strength and growth of the US economy. And so right now people seem to think of things are pro-growth and they’ve also seen the Fed as a little reticent. So that has created a really strong recent trend in the dollar. So, I do think there seems to be some chance that that could continue for some period of time.

But I think over a longer horizon it becomes more and more unclear all of the themes that you’re talking about. I think, for me, where this all comes back to is what you said earlier, Cem, which we were talking about cross-asset correlations. And for me it’s inflation uncertainty and sort of how much a change in policy and deficits and things have the ability to create more disruptive correlations and also change those narratives over the longer term.

So, for me it’s how is inflation going to react and how is the Fed going to react to that and sort of how much more volatility are we going to have around these macro themes? I think we’re going to have a lot of it.

Can I tell you the direction? Probably not, but I do think we do have a lot of potential for a wider range of outcomes given sort of the potential for inflation and sort of the current regime that we’re in with this dispersion across different global regions.

[00:56:03] Niels

Sure. Alan, your thoughts?

[00:56:06] Alan

Yeah. I think you can draw a distinction between kind of the cyclical picture and the secular picture. Cyclically, as was mentioned, the dollar is rebounded, the V shape rebound, the market is reassessing the outlook for the US economy. If we go back to the summer, the first week in August, people were on recession alert. Now that’s behind us.

People are now looking forward to Trump 2.0 and saying maybe we’ll get animal spirits being unleashed. It could be very positive for the economy. And then what does the Fed do in that scenario? They may have to raise rates again.

And in contrast to Europe, which is totally in the doldrums, rates are definitely going to be cut in Europe. So, that’s the kind of the cyclical dynamic is looking dollar positive for the moment.

The structural or secular issue is the dollar is overvalued by most measures and there is a desire… The US kind of has a dilemma because they want to have a lower dollar to balance trade. But at the same time, if you have a weakening of the dollar, then who’s going to fund the deficit and then does that bring the dollar’s reserve currency status into question? So, I think a big thing to monitor over the next number of years. Well, can those different conflicts be managed?

In the global macro series a number of people have suggested we may see a plaza type accord at some point, particularly if the dollar appreciates again say over the next year and pushes it to even more overvalued levels. You know, back in 85, you had the plaza cords between the US and the G7 to bring the dollar’s value down in a managed fashion. So, there’s some expectation that we could see that again at some point. But the challenge with that is you need coordination. It needs to work for everybody.

And the ideal scenario, from US perspective, would be a managed decline in the dollar where the reserve status isn’t impacted. You continue to see flows into the US Bond market and trade gets normalized. But that’s kind of great in theory. In reality, it’s very hard to manage that. So, I think yeah, more volatility for sure. But I would say yeah, it looks positive in the short term, the cyclical picture. But I think these will be the big topics over the next couple of years.

[00:58:23] Niels

Good stuff. All right, Katy, you kind of already started one of your last topics, but I will give you a chance if you have anything else you want to bring up before we go to the outrageous predictions.

[00:58:36] Katy

No, actually, I mean I’m excited about 2025 for exactly the reasons that Cem brought up is that, you know, where we look at trend position right now, you’ve definitely seen long equities. I think the long dollar trade also has potential for a steepener in the yield curve at some point. I think it is interesting. So, I think there’s a lot of interesting cross asset themes that could be very interesting going into 2025. We kind of already went over my topic so I’m okay to move on.

[00:59:08] Niels

Sure, yeah. Yeah, that’s fine. That’s fine, Katy. I appreciate that.

All right, let’s jump into the outrageous predictions for 2025. I don’t know if anyone wants to declare themselves a winner of the 2024 outrageous predictions. I did ask ChatGPT to review all the predictions. It came up with no winner, just so you know, no clear winner. And anyway, I felt I was close. I mean I said that not neither Trump nor Biden would be on the ballot. So at least I got 50% right. Maybe, luckily, I didn’t get 100% I guess. And so anyways, I’m going to come to you Alan.

Let’s start with A for Alan, what is your outrageous prediction for 2025?

[01:00:01] Alan

It’s a little bit tongue in cheek, but to follow up in our earlier conversation on replication, my outrageous prediction is that SocGen will launch an index of CTA replicators within the next 12 months.

[01:00:14] Niels

Ooh. Okay, fair enough.

Katy, I see you smile. Do you have an outrageous prediction for 2025?

[01:00:24] Katy

I have to admit my outrageous prediction last year is that the curve would steepen. So, I guess I’m not that outrageous. So maybe I’ll say that perhaps the outrageous thing would be that the curve would steepen this year again. So.

[01:00:43] Niels

Fair enough. Fair enough.

Cem, 2025. I know last year you predicted something about where yields would be and go and all of that. Are you going to stay in the same theme or do you have another outrageous prediction?

[01:00:59] Cem

I will say that despite the expectations that Trump will be strong and hard on China, that after an initial period of tariffs and bluster, that Trump, much like Nixon, reaches across and makes some grand compromise with China, which means the reversion of Chinese assets relative to the rest of the world. I think that will be one of the biggest trades of the year that people are not yet seeing.

[01:01:32] Niels

Yeah, yeah. Interesting. Very interesting. Andrew, your 2025 outrageous prediction? Last year I thought you went very safe by saying that we’ll realize that forecasting does not work very well. I think something like that.

[01:01:32] Andrew

I think I won.

[01:01:32] Niels

You probably did. Anyways, we want to hear something really outrageous this year.

[01:01:57] Andrew

So, I think I have zero special information or knowledge. I think what happens with the Trump administration, with sending in Musk, and Ramaswamy, and other hardcore people who are completely untethered to standards of normal, established business people. I think you could see them go after entitlements in the US and start to deal with the really meaningful structural issues in the US Budget deficit, which could result in a very different interest rate outcome than I think people are probably expecting from a Trump administration.

[01:02:38] Niels

Good stuff.

Nick, what’s your 2025 outrageous prediction?

[01:02:45] Nick

That we’ll come here in a year from today and we’re going to be talking about how did we manage to get CTAs in the policy portfolios. So.

[01:02:52] Niels

Okay, so we’re going to win this year. Okay, good to know. Yeah.

Rob, what’s your outrageous prediction?

[01:03:00] Rob

Bitcoin $200,000, and I hope I’m wrong.

[01:03:04] Niels

Yeah, well, for some it probably doesn’t sound that outrageous, I guess.

[01:03:08] Katy

I thought about that one too, Rob, that’s a good one.

[01:03:12] Niels

Rich, what’s your outrageous prediction for this year? Give us something juicy.

[01:03:18] Rich

I’m pretty hopeless at this. All right. I’m hopeless at this, but I’m going to go, the first low-orbit commercial space station launched next year.

[01:03:29] Niels

Fair enough. Fair enough.

Mark, what’s your 2025 outrageous prediction?

[01:03:35] Mark

I read a book called Shocks, Crises, and False Alarms this year that came out from chief economist from the BCG. He said that we naturally have a bias always to be negative. We always want to be doomsdayers.

So, my outrageous prediction is that I’m going to be an optimist about 2025, that things are not going to be as bad as what most pundits think. We’re not going to have a crisis, we’re not going to have gloom and doom, and that we’re actually going to have a positive world for at least 12 months.

[01:04:13] Niels

That’s a nice optimistic way to end.

Mine is not, I don’t know if it’s optimistic or not, depending on what side you’re on, but my prediction will be, and it’s a little bit along with I can’t remember who mentioned the yields, but: US 10-year treasury yield crashes to 1% in recession of AI. Prediction: a sudden economic downturn triggered by widespread layoffs due to AI automation sends the US 10-year treasury yield plummeting to 1% and fears of a deflationary spiral and sluggish consumption outweigh concerns about inflation sparked by a rush to safe haven assets.

I’m not sure I really believe it, but that’s the outrageous prediction. Time will tell, I guess.

On that note, let’s wrap up part two of our year end group conversation. We hope that you’ve enjoyed it as much as we have making it for you.

And if you want to show your appreciation for all the hard work the amazing co-host put into making these episodes each week, I would encourage you to head over to Apple Podcast or Spotify or wherever you listen to podcasts and leave a nice rating and review. We really do appreciate all of them.

Next week I’ll be back with Alan to kick off the New Year in style. So, this is your chance to have him tackle some of your questions and as usual you can email them to info@toptradersunplugged.com.

From all of us at Top Traders Unplugged, thanks so much for listening. We look forward to being back with you in the New Year. Until next time, Happy New Year and take care of yourself and each other.

[01:05:53] Ending

Thanks for listening to the Systematic Investor podcast series. If you enjoy this series, go on over to iTunes and leave an honest rating and review. And be sure to listen to all the other episodes from Top Traders Unplugged.
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