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105 The Many Flavors of Trend Following with Niels Kaastrup-Larsen of DUNN Capital (Europe)

“As an industry, I think we tend to overcomplicate what trend following really is.” - Niels Kaastrup-Larsen (Tweet)

We're changing things up on today's episode of the podcast: we have with us Frank Conway from the Economic Rockstar Podcast interviewing Niels about trend following strategies, asset allocation, and more. Listen in to find out what changes need to be made in the trend following space, the importance and benefits of your asset allocation when it comes to your investments, and new publications that can take you farther in mastering trend following and managed futures.

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In This Episode, You'll Learn:

  • Why Niels has worked hard to keep his explanation of trend following as simple as possible
  • Why at the end of the day, all investors are trend followers
  • What really sets one trend follower apart from another

“People overestimate ideas and underestimate execution.” - Niels Kaastrup-Larsen (Tweet)

  • How trend following techniques have evolved over time
  • What traits Niels sees in the company he works with as most important in their 40+ year success
  • The challenges and difficulties of trend following
  • Why trying to do it yourself in trend following can hurt rather than help
  • Why successfully executing a trend following strategy is not something that Niels believes everybody can or should do

“Very often, the seduction of safety is often more dangerous than the perception of one's certainty, and I think people need to be aware of that when they decide on their investment strategies.” - Niels Kaastrup-Larsen (Tweet)

  • Why despite their successes, many trend followers feel an embarrassment in showing their track records
  • How the right asset allocation can build safer and better performing portfolios
  • Why it's important to have "skin in the game" as an investment manager
  • The importance of COI versus ROI
  • What Niels thinks of cryptocurrencies and how it relates to trend following

“You don't need to be perfect to get started with trend following; you really just need to get started.” - Niels Kaastrup-Larsen (Tweet)

  • Why DUNN Capital trades the VIX and its importance in their portfolio
  • What inspired Niels to write his recent books on trend following and managed futures
  • The purpose behind Niels outreach, whether it's podcasts, books, newsletters, or anything else
  • What Niels hopes people will get out of his books

Connect with our guest:

Learn more about Niels Kaastrup-Larsen and DUNN Capital

Download your own FREE copy of Niels' new book with Hari Krishnan, "The Many Flavors of Trend Following"

Find out more about Niels' new publication with Katy Kaminski, "How To Master Managed Futures"

“I truly believe [trend following] is the most dependable and consistent investment strategy.” - Niels Kaastrup-Larsen (Tweet)

Full Transcript

The following is a full detailed transcript of this conversion. Click here to subscribe to our mailing list, and get full access to our library of downloadable eBook transcripts!


Welcome back to Top Traders Unplugged. My name is Niels Kaastrup-Larsen. I’m recording this introduction to today’s episode, and you’ll notice that it’s a little bit different than my normal introductions and there’s a reason for that. The reason that today’s episode will be different from the usual episodes you come to expect from Top Traders Unplugged is that, normally, as you know, I tend to get a really great guest on the show to share their expertise, and where we can put the focus fairly and squarely on their experience, and their history inside the investment world. But, today it’s actually me who will be the guest. 

Now, what happened was that [I became acquainted with] a podcast called Economic Rock Star, where Frank Conway has built a really great set of interviews over the last four years. In fact, Frank and I started podcasting, more or less, at the same time, on different topics but slightly related.  

So, I had the pleasure of being on his podcast a number of years ago. Recently I was invited back and, since he was doing a series on trend following, I thought this would be amazing to have the chance of telling my side of the story and therefore we recorded this conversation in about May of 2018. 

So, I would certainly encourage you to also check out Frank’s podcast, Economic Rockstar. There are a number of very interesting guests that he’s had – Nobel Prize winners like Eugene Fama and Vernon Smith, among other very distinguished guests indeed.  

It was definitely fun to be on the receiving end of the questions. I really do hope that you enjoy this unusual episode which was a chance for me to share some of the things I have been pondering when it comes to trend following investments and other things that we brought up.  

Now, there is in the conversation a reference to one of the two books that I recently published, and there is a link being mentioned and, of course, as a loyal listener to Top Traders Unplugged, go ahead, use that link, and download the book for free. It is my privilege to be taking up some of your time when you tune in and listen to the podcast. It is a delight for me if you would take me up on the offer and get the book. I hope you will learn something from it and, more importantly, that it will inspire you to take some action when it comes to this investment strategy.  

So, anyway, enough about me, for now at least, I hope you enjoy this conversation I had with Frank today. Thanks so much. 


Hello Niels, welcome back to the Economic Rockstar podcast. 


Thanks so much Frank, it’s great to be back after all these years, actually. 


Yeah, I was just looking up the date and episode, and it seems to be all fifteens: episode fifteen, on the fifteenth of January, 2015. So, it’s been quite awhile. 


It has been, it has been. 


So, it’s great to catch up again. I’ve done it recently with some other guests, and they’ve written books, and they’ve moved on, and I wanted to catch up and see how things are going, and likewise with yourself. How have you been keeping? 


Yes, it’s been busy, I would say. Like some of your other guests, for sure, part of that is that I have been, not only podcasting like yourself but putting words on paper. I released a couple of books with a couple of really good co-authors. One book, called How to Master Managed Futures, I wrote that with Kathryn Kaminski, who’s obviously well known in our industry for having been co-author to the bible of trend following with  Alex Greyserman of ISAM. Also, I did a book called The Many Flavors of Trend Following with a really smart guy, Hari Krishnan.  

So, those are some of the recent events. No, besides my day job at DUNN Capital, podcasting, family life, it’s been good – hectic but very rewarding for sure. 


We’re going to touch on those books in a little while, but maybe we’ll catch up on a conversation that we had recently. This is turning into a mini-series of trend following because I have another guy coming on next week, actually, Niels. He says he knows you from DUNN Capital as well – Michael Mellissinos. 


Yes, I have certainly come across Mike in my path. Of course, I’ve come across your previous guests who was also a Mike - Mike Covel, of course. So a theme of Mikes and a theme of trend following, it sounds like. 


Yeah, yeah. I suppose it’s a personal interest of mine as well. I’ve read about some of this work. I’ve put them to the test, personally, rather than doing any academic work on it, so I really put my money where my mouth is. So, I’d love to find out more about trend following, especially given the work that you do in your industry. 


Sure, absolutely. I think that one of the things is that, as an industry, I think we failed our community of investors, a little bit, because I think we have a tendency to try and overcomplicate what trend following really is. It certainly, in my almost thirty-year journey in this space, I’ve come to appreciate more and more trying to keep things really simple.  

I think, deep down, we’re all trend followers even though a lot of people don’t think of themselves like that or even want to admit that they are. Any investment that we make, we buy or we sell, and we hope the market will move to a different level, whether it’s in the short term, medium term, long-term, and we can define that as a trend. I know you can make it more complicated, and people talk about zero correlation, momentum, and all of those fancy words, but I think, deep down, we just want to look for price, action - directional price action that creates trends.  

Then the question is, how can we exploit that? I think with the two books that you mentioned earlier, I think one of the things that I have really tried to do, along with my co-authors, is to try and write it in a language that you rarely come across in the finance world. There are no fancy words or formulas. It’s really plain English. Hopefully, it will explain not only trend following but also the whole concept of what we know as managed futures and why it’s so important to have as part of your portfolio. 

Now, you asked about trend following in the context of how we do it at DUNN, and of course, through my own Top Traders Unplugged podcast I’ve interviewed a lot of my peers. So, I’ve seen different ways of doing it with varied success, for sure. What I do find, generally, about the concept and the approach is that I truly believe it’s the most dependable and the most consistent investment strategy, even though when people look at the track records they’ll say, “Oh, that’s not very consistent at all.”  

Well, it’s consistent in the way it behaves over long periods of time, unlike many of the other investment strategies, where you see it behaving in a certain way. It could be a very smooth performance track record for five or ten years and then suddenly it drops eighty percent. As we saw earlier this year, Frank, some of those strategies that had been performing very consistently, and were very popular in the volatility space, well, some of these firms went out of business despite having a more than twenty-year track record, but in one day they went out of business. That’s something we rarely, rarely see in the trend following space.  

So the robustness of the approach I think is really undervalued by people. We all, as human beings, want to buy something that’s nice and smooth and just goes up in a straight line. What has always been curious to me is how people believe that they can successfully and consistently, over time, take markets that are inherently volatile by themselves and then suddenly magically put them through a formula and then all the volatility disappears and you’re just left with all the good stuff. I don’t think that’s reality. It could be reality for five or ten years, but the people who have the really long track records, in our industry, for the most part, are the systematic trend followers who apply, not the perfect approach all the time, but over time it seems to be working very well. 


I know each trend follower may have their different approaches to entry and exits, but what would be the typical type of signal that someone could get into in a certain trade, or what would they have to lookout for? 


Sure. I recall part of your conversation that you had with Mike Covel, recently, and I think you talked (and correct me if I’m wrong) you talked a little bit about using moving averages as some kind of indicator for trend following. There was a little bit of debate about that.  

For me, that definitely is an approach of trend following, and I think that a lot of people incorporate moving averages in their signal generation. Without listing all methodologies of how to do trend following, I think that there are a few different ways to do it (not many, maybe five or six different ways).  

In the old days, say the seventies, this industry really came from the U.S., and in the old days in the U.S. where there were a lot of traders who migrated from the floor and into the more systematic rule-based approach, a lot of them were using some kind of breakout methodology. It could be price. For example, a lot of people have come across the Turtle story, with Richard Dennis, and what he taught the Turtles (what we know today as a price breakout methodology) that you are essentially just looking at how high or how low has a market been trading for a certain period of time. You, combining different lengths of time or lookback periods, you can have smaller sub-signals build up to an overall position by following those kinds of rules. 

I think that’s a perfectly valid approach that still works. The other way, back in the seventies, something we actually used at DUNN, which we still do, and what Bill Dunn came across, was not price breakout, but actually breakout using momentum. So, looking at volatility and that you have some kind of upwards or downwards penetration of a volatility level around a price, using different lookback periods, that would be your signal. But, again, using different levels of volatility, different time lengths, that would, overall, build up your confidence in your position and your position size. 

I think those methodologies were dominant back in the seventies and then the eighties. Then, starting in the eighties a more scientific approach, if we call it that, came from the Europeans. I’ve had the great pleasure and fortune to interview the founders of AHL, which really is where I think a lot of the trend following/managed futures industry in Europe can be traced back to. I think they were taking a slightly different approach.  

They came from it more scientifically. They started using things like what we call time series momentum today, which I feel that it’s more of a European invention. I think, today, we use a variety of these things. Certainly, we do at DUNN, and I think most people use a combination of these signal generators. 

What is really interesting, Frank, that I’ve come across in my journey, both from the insides of the firms that I worked with, but also from talking to my peers, is that I think a lot of investors believe that the entry point of a trade is the most important thing we do because it must be important as to where you get into the market. My experience is that I think most trend followers, at least, we probably identify the beginning of a trend more or less at the same time. I don’t think that there is a big edge that you can be a little bit early, you can be little bit late, over time it doesn’t make a difference. I’m not so sure. 

What I do find, and I think my peers will agree with me, is that the exit is the most important thing that we do in trend following. The exit is really what captures or defines how much of the trend we can capture. So, this is hugely important when it comes to the profit or profitability of your strategy.  

Now, we need to combine that with risk management. So, risk management is also very, very important. The risk, by definition, shouldn’t really be the same across the time that you hold onto a position. You need to adjust it during the time of the trade based on certain things. 

So, I think the things that have made some managers really successful has been focusing on exits and risk management. It’s certainly something that we have done a lot of work on at DUNN. For me, it has always stood as the weakness of trend following.  

As much as I love trend following, I also recognize that there are weaknesses in the strategy, The two main weaknesses in the strategy has always been reversals, when markets suddenly go against you; and also the non-trending environment. So, what do you do when there aren’t enough trends? Many strategies, because they are geared towards delivering a certain level of volatility or value at risk for that matter, they run pretty much at full speed all the time.  

Now, I live in Switzerland, so I’m surrounded by mountains. So the best analogy that I can think of right now is that it’s like me driving on the motorway here, in Switzerland, and I go at one hundred and twenty kilometers an hour, which is what we’re allowed to do. Then I get to the mountain roads, and I continue to do one hundred and twenty kilometers an hour. At some point, I’m going to have an accident.  

Trend following is the same thing. If you don’t adapt your risk levels, from when there are lots of trends around to when there are fewer trends around, you will have “an accident” whereby your losses will be disproportionately large. So, I think that those are some of the things that have set some managers apart - those who have successfully found ways to deal with these two weaknesses of trend following. They seem to be delivering much better returns, much better risk-adjusted returns.  

Here’s an interesting fact about trend following. If we think about the industry of CTAs as a gauge for trend following. The BTOP50 Index, which is not the fifty largest, as you might think, but actually around the twenty largest managers, that index started being compiled in 1990. So we have about twenty-eight years of data. Seven of those years are negative years. Now, what’s really interesting is six of those seven have come after 2009 when QE started.  


That’s very odd because you expect, with QE that it almost acts as a plus. 


What QE has most likely done, and I’m sure there are different opinions on this, I think to a certain extent we can say that the central bank intervention has, to some extent, compressed the trading ranges. Therefore, it’s been harder for medium to long-term trend followers to do well in this environment.  

Also, the other thing is, central bank policies became coordinated. I think that’s not necessarily a good thing. In fact, Katherine Kaminski, with whom I wrote one of the books with, has done a lot of work on this whole thing about convergent and divergent risk.  

Actually, you and I talked about this on our first podcast a few years back. So, convergent risk (just for people who may not come across this) is risk that you think you know. If you think of a certain event or a certain economic environment will mean that the price of a stock or a market will go up, you’re really sure that is what’s going to happen. You can make certain decisions based on that view. 

In the trend following world, we come from a completely different point of view. We look for divergent risk. We acknowledge that we know nothing. We have no idea what is going to happen tomorrow. So, we build systems accordingly. Therefore, what I see now in the world of central bank policies starting to go their own way and do their own thing, I see more divergence coming back to the market. That, actually for me, is really important. I think a lot of people believe that strategies like trend following are just long volatility and as long as it’s volatile we’ll do well. That’s not really the case. 

What we are long in, I believe, is divergence. Meaning we want markets to do their own thing. We don’t want markets to be highly correlated, necessarily, because that also creates risks for when the reversals happen like we saw in February of this year. So, I’m cautiously optimistic, generally speaking, for our industry about what’s happening right now with a bit more divergence coming back into the markets. 


There’s a time element, and you touched on it earlier on. For example, when QE started, if anyone looked at a chart, whether it’s in a log form or in price levels, and they see that on stock market charts (say from 2009 up to present day) there’s been a couple of dips along the way. But, effectively the returns on the markets have been double digits, year on year really. It almost looks like a trend line if you were to draw a line through it.  

So, why is it that trend followers are having a tough time during this period with QE and central bank intervention? I know you touched on divergent and convergent risk, but if you were to put in a straight line you could see this trend having emerged over that time period, or is this something that trend followers look at a shorter time horizon and try to spot trends within price action and that price action moves and disrupts your views, yeah? 


Sure. I think that there are a couple of things that are important in that sense. When we look at trend following, as a whole, we don’t just look at equities, right? We look at a variety of markets.  

Most of the larger firms today are invested in all sectors. The really big ones probably can’t get enough exposure to the sectors like commodities, etc. etc. So there may be more reliance on equities and bonds and foreign exchange. But equities, I agree with you, if you just look at a big chart, it looks pretty orderly. It has been orderly - part of that journey has been orderly, for example, 2017. I would guess that most trend followers made most of their money in equities. We certainly did at DUNN. But it’s just one sector.  

So, if you have all of the other sectors not doing so well, overall, it’s not going to be well. But, I will say (and I have to caveat that a little bit) it’s been difficult for the industry. It doesn’t mean it’s been difficult for everyone. I don’t want this to turn into a promotion for the company I work for, but we’ve done very, very well. So, it’s not all bad news, it’s just that when I look at it as an industry it’s been challenging, and the returns have come down. Also, we should not forget that in the track records that you see from managed futures managers, and indeed probably for most hedge funds, the risk-free rate of return is part of that track record. Most of the cash, certainly in a futures portfolio, most of that cash is just earning interest, and that interest has gone out completely due to the low-interest rate environment. So, part of the lower return also comes from the fact that there is no return on the cash.  

Now, that actually leaves you with the question of, “What is the real alpha of these strategies?” I think that’s where we, as an industry, have to look at (as an investor for sure), you have to look carefully at who has delivered real alpha and who has delivered risk-free rate of return plus a little bit of alpha. So, it’s a good time for people to analyze different strategies.  

So, you mentioned time, and time is important because a single sector... Actually, you bring up something that I think is important (just to deviate a little bit), I think part of the challenge with trend following is that there is a lot of opportunities for people to say, “Oh, I’m going to buy a book on how to do trend following,” or “I'm going to buy a piece of software on how to do trend following.” They may read that book, and that book may have some general rules that have worked in the past. I’m not saying that they’re bad, but I think that if you don’t explain what is really important to have success in trend following other than deep, deep research into the rules that you use, there are two other elements: one is time, and the other one is diversification. 

So let’s start with diversification first. People who buy books on trend following or systems, and say I’m just going to trade the S&P and it will be great. I fear that there are some people out there exploiting this where they offer these types of approaches suggesting that people will make money from a trend following system by just trading stocks. I don’t think that necessarily is the case because one of the key elements of successful people who have been around for thirty, forty years is the diversification of the portfolio.  

We can, for sure, have four or five years, even at our firm, where we don’t make any money in equities. It’s not unusual. It doesn’t mean that the markets are bad and they won’t perform at some point. In fact, we truly believe that all markets have the ability to trend over the long run and actually over thirty to forty year cycles you should make the same amount of money in all markets that you trade if you follow the same approach. But, it doesn’t mean that you have a return for a five or ten year period for that matter, in a particular market or in a particular sector.  

So, you need all the other sectors to do their part in those situations, and very few individual investors can do that. Partly it’s difficult to build the systems and have something that you trust and that you can rely on, but the other part is to have that running 24/5 on fifty plus markets in order to get that diversification. You need a big portfolio, and you need to spend a lot of time doing it. I have come, in the last few years, to appreciate more, and more the “done for you” solution. I don’t mean DUNN, I mean “done for you.” 


That’s what I thought you meant. 


No, what I mean is that instead of trying to pursue this, “Oh, I want to be...” and I’m talking about private individuals who want to have success in their investment portfolio. I don’t know that it is the best approach to try and do it yourself and spend a lot of time doing it, rather than focusing on the slightly bigger picture which is the overall asset allocation and find really good funds.  

There are a number of really good funds out there who have been doing it for a long time, who know what they do. Yes, you pay them a little bit. Some you pay more than others, but you pay a little bit, but then you can actually focus on things that are much more enjoyable than sitting in front of your screen all the time. You can spend time with your family, kids, or whatever it might be. So, I think that’s one part of the issue.  

The other part of the issue is just time. We all think that if you start something like an investment strategy, that we want instant success. We want to make money on day one, or the first month, or the first year, etc. etc. We forget that some of the most influential and successful people in this industry, they didn’t make a lot of money in the beginning. I’ve seen quotes where about Warren Buffet, for example, where it talks about that ninety-nine percent of his wealth, today, was made after he turned fifty. It’s hard to believe, right? I can’t verify this, but I take it from a reliable source. We have to remember that he started doing this way before he turned fifty. He probably did it for twenty years before he turned fifty. So, the first twenty years compared to the next thirty odd years, it’s just completely different as to where the actual wealth generation came from. 

Ray Dalio, who started in the seventies at, actually, a pretty similar time as DUNN, after ten years he pretty much almost closed shop. He had some bad luck, bad drawdowns (whatever it was), and he had to borrow four thousand dollars to go on. He let all his employees go and then he started from scratch again. He ended up building the largest and is quoted to be the most successful hedge fund in the world. So, it just shows you that not all success happens on day one. It really takes time.  

We see it as well in our own track record. If you look at DUNN’s track record it is very successful, but we have to remember that half of that performance, given our return in the last five years, has come in the last five years out of a forty-four-year track record.  


Niels, you mention individuals like Ray Dalio, Warren Buffet and obviously DUNN and I’m just wondering how difficult would it be for an individual to do this again. I know you said that you’d be better off putting your money into a good fund and spend time with family rather than sit in front of your computer.  

For example, I explained to Michael Covel in the previous episodes that my own strategy at the time was a weekly trading strategy to remove the noise. If there was a drawdown I would do my best to ignore it and I’d revisit on the weekend and see where markets turn on the Monday. I suppose I was kind of late in the game in terms of the financial crash at the time. I was doing quite well up to that point, following that particular strategy.  

I know I came to the crash, I think it started around July 2008, was when the first big drawdown was happening, and that everything that I followed (all the principles I followed), I just effectively threw out the window. I tried to scramble and move away with my stop losses (which never got hit), then I tried to short the markets when I initially had a buy. Then Bernanke came out with an interest rate cut which brought the markets back up again and I was short, so I lost double on that.  

It was very chaotic, and instead of letting my stops hit and removing myself from the markets, I actually remember, to be honest, a few days before all that happened I got a call from the trading platform I was on just asking me about my trading positions. I think I only had about six. I wouldn’t have the fifty, obviously, that DUNN has. I wouldn’t have that spread in terms of the asset allocation. I remember having wheat. I think I had coffee, cocoa. I had an equity and the S&P in there as well. So, it was quite diversified. 

I based it, effectively, on price action rather than the actual commodity or the equity. I wasn’t trading for those reasons. I was trading to price momentum or the trend. But, I remember the call. It was on the tip of my tongue, and I was going to tell them to close out all of my positions and short them, and I never did. I don’t know why I didn’t. It was on the tip of my tongue, and I said, "No, no, it’s OK." 

I’ve always felt that I’d go back to the computer, and I think within about two or three days everything just turned. I think wheat at that time was over fourteen dollars. Now, I think it hit a low of three fifty. It’s about four fifty now, I think, I don’t know. Oil, you know yourself, I was in oil as well. So, things happen, and you have to really adapt to it and effectively throw out all of those principles that I was following at that point in time. 


Well, you know, there is a saying that most people overestimate ideas and underestimate execution, and I think that is so true. It’s one thing to read a book about trend following and build an approach, and it’s another thing to follow it. The discipline that these firms employ in order to be successful over decades is not something everyone, as human beings, can do. I think also there is a big difference. 

Let me talk to your initial question, can people still do this? Of course, they can. You work long enough and hard enough at something you can become pretty good at it. So, I don’t think it’s... We’ll still see new firms being founded, today, that in ten years time will be very successful, I’m sure, no doubt about that.  

There is a difference, also, between literacy and fluency. It takes a long time to be fluent in something. It’s almost like, if you think about it, whether you cook, or your family cooks, but if you open a cookbook and you look at a beautiful cake. It has all the recipe right next to it, and then you start doing it, I’m pretty sure that the first few times that you do it it’s not going to look exactly like the one you see in the picture.  

So, there is a lot of trial and error, or (as you might say) trial and terror. You need to find all the things that don’t work until you find the things that work. That is also something that will take time. So, I’m not trying to discourage people from becoming trend followers. I think the principles of trend following can be applied to many things even if it’s just asset allocation, even if it’s just something to be used as a tool, which I touch on, I think, also in one of the books, that you can use trend following for many things, really. 

I wouldn’t discourage people from doing it, but I also want to encourage people to sometimes focus on things that are, frankly, a little bit more important in life than sitting in front of a screen. There are solutions out there where you don’t pay an arm and a leg, and you get a lot of expertise.  

People have to do their research. They have to figure out the good guys from the bad guys and all of those things, but that’s the same with anything in life. Every time you choose a supply of something you need to make sure that they know what they’re doing.  

I’ve come to appreciate, and actually, from Ray Dalio’s book, also Tony Robbins' book where he interviews a lot of the most successful investors in the world. I think they all agree that asset allocation is really the key to their success. I think it’s worth taking into account, especially if you are relatively young and starting out on your investment journey if you’ve got thirty or forty years ahead of you a good asset allocation can do wonders for you. I think people underestimate this thing about the compound effect of a portfolio – how much good it can do if you allow it enough time. 


Niels, I know you touched on track record of trend following, but I’m not sure if you explained how someone could deal with the drawdowns that are expected and have been visible in a lot of these types of situations, or these types of portfolios. It takes someone with immense discipline or systems - automated systems that removes the irrational human aspect of trying to trade like the way I tried to do, personally. To be able to deal with these drawdowns and to also have proper risk management put in place to deal with them so that you’re not overleveraged. So, if I was to look at a chart and I saw nice returns and then this twenty or thirty percent drawdown and a reversal of it again, some people might be frightened of that and how that might put them off it. 


Yeah, that’s true, it is so true that this is one thing that I think keeps a lot of investors from fully embracing trend following. It is those track records where, from time to time, you’ll have a deep drawdown. They might compare that to the return stream of bonds, and they’re going to look at the last thirty plus years. We all know that interest rates have gone down for that period of time, which may not be the case for the next thirty years. But, it all looks very good and the same with equities.  

We’ve had now, almost ten years of nonstop markets going up. We’ve all forgotten how England was in 2008. But, with trend following these drawdowns come on a much more regular basis, and that’s why I think that some managers are almost a little bit embarrassed by showing that track record because they feel that investors will look at in a negative way.  

I’m going to tell you and share with you a very personal story about that which has to do with my son. So, my son, when he was nine years old, he had a cardiac arrest, and the fortunate side of this is that he is still with us, so that’s the most important thing, but as you may know, it’s only five percent of the people who suffer a cardiac arrest survive. So, it’s a pretty scary thing. 


At nine years of age? 


At the age of nine years. So, knowing what you don’t know and life will throw you the unexpected all the time. But, the story I wanted to tell you is that clearly when you have a cardiac arrest, as he did, and had to have major heart surgery, it leaves you with a scar. It leaves you, in his case, with a pretty big scar because not all scars heal equally as we learned.  

A scar is something that he will, at least to this day, will feel embarrassed about. He doesn’t want to show this scar. And I think track records can be viewed a little bit like that, even though it’s maybe an extreme comparison, but it is something that you can be embarrassed about. But, what people forget (and this is very, very important), the people and the track records who are still here to show those scars, what they really show is that they survived. 

All the track records of firms that went out of business, they’re not there anymore to have these historical drawdowns and make new highs, as you said. They’re just gone. But, those who have been around for a long time, and who can still demonstrate to you that they have been able to make new highs after having had some pretty big drawdowns from time to time. It, to me, is a sign of strength. It’s not a sign of weakness.  

So, I encourage investors to look at these track records slightly differently than maybe, as you said correctly, that the gut reaction is, “Oh no, this is not for me because look at that drawdown.” Well, you know, look at the recovery. The more drawdowns, the more recoveries you can make, the stronger, I think, the system is.  

Actually, there’s a great article by Dr. Druz that talks about that the more robust a system, the more volatile it tends to be, and I think there’s a lot of truth in that. You can optimize a system to, or a strategy to certain market conditions, and they look like we saw in a lot of the volatility space where many people made significant amounts of money for a few years being mostly short volatility, until February 2018 when VIX went up one hundred percent in a day, and they went out of business or were severally hurt in that twenty-four hour timeframe. 

So, what trend following does differently is that we don’t try to optimize for any particular environment. In fact, we try to make sure that our approach can deal with an ever-changing environment, which is what reality is. Things are never the same. So, that’s what you should be aiming for when you design these strategies.  

This is also why I’m a big fan of asset allocation because I think asset allocation can be used to build portfolios that are not only safer, but actually better performing over time because they’ll be able to deal with different types of markets. So, diversification is important to help dampen the volatility, but volatility is not necessarily a bad thing. I think, very often, the seduction of safety is often more dangerous than the perception of uncertainty. I think people need to be aware of that when they decide on their investment strategies. 


Niels, how much of the academic work would you seem to adopt or would you be well ahead in terms of being practitioners. Let’s say for example (one person who comes to mind even though he is an academic), Nassim Taleb also had a great track record, in terms of his investments, when he was dealing with volatility in 1987 when everyone else was saying that it was gone. He said there’s always the possibility that could happen because you touched on a few things like unknown risks. Is this something that you would, for DUNN Capital, take onboard? Obviously, you would. Do you try to manage these, if it’s possible, the unknown risks so that an account doesn’t get severely disrupted? 


Our research team obviously looks at a lot of different things in constructing models and putting together the portfolio as a whole. So, I’m sure they consider many of these things. As I said before, often it’s a matter of trying different things before you find things that really work.  

As a firm, we don’t make a lot of changes to our approach. Some firms come up with new ideas all the time, and they just put it in, but we’re very, very careful about making changes. Every time you make a change you might get it wrong. So, there’s a risk of that. So, we spend a lot of time typically two, three years in between making an improvement to our trading model.  

Our most profound improvements in recent time, at least, have actually gone to addressing the weaknesses I talked to you about earlier which is the reversals and the non-trending environment. We’ve certainly made a big leap forward in something that has been known for many decades as weaknesses. But, it’s something that I think most managers have not really found a way to overcome. I feel we have found a much better way or a new way of dealing with it. I think that shows up in our performance.  

I’m not familiar, to that extent, with all of Nassim’s work, but I know he’s done a lot of work. I actually came across, more recently, his latest book which is called Skin In The Game, which is slightly different, but is somewhat related to what we do, and certainly what we do a DUNN because we actually only share in people’s success. We don’t charge management fees or anything like that. We’ve never done that for forty-four years.  

Nassim talks about these things, how important skin in the game is on many levels. He also mentions, in the book, something along the lines that things that are designed by people without skin in the game, they often tend to grow more complicated. I don’t know whether that’s completely true or not, but I think there’s some truth to it.  

I think as we started out this conversation talking about, is I think one thing we’ve not done so well in our industry is we haven’t really explained in simple terms what we do. We have made it much more complicated and that’s also why it’s often been referred to as a “black box.” I think it’s pretty much the opposite.  

Most managers in our industry can describe their rules in very simple terms, and they can explain to people if this happened then our system will react this way and this should be the outcome. So, it’s actually pretty much the opposite of a “black box.” The only thing is we really don’t want to talk about the rules, specifically, because we try and keep that IP inside the company, but it’s pretty transparent, and it’s pretty easy as a concept as we talked about. When markets move up we want to be long, when markets move down we want to be short. That’s really how it works. 

The next thing that is being talked about, I guess, and maybe it will be talked about more and more is, of course, other types of intelligence like artificial intelligence. I’m no expert in that, but I have discussed this with some of the guests on my podcast, and some of them embrace it, for sure, and some of them – even the ones who are very successful, who run very large businesses with dozens of PhD.s, etc, etc. – surprisingly they were more cautious about artificial intelligence.  

Frankly, the fact that trend following has worked for so many decades, using relatively simple rules, I don’t know that it’s a good idea to make it more complicated than that. I do think innovation is important, and I think you should always have a philosophy of constant improvement with what you do, but simple things are often the things that work best in the long run, in my experience. 


Over a number of years, Niels, I still like the trend following strategy. But, I removed myself from the market, and now, in hindsight, which is terrible to look back on and we can always do backtesting, or look back and hindsight, I may have missed out on good opportunities. Now, I say maybe, because it could either have disrupted a portfolio again or blown an account. Some people may look at their return on investment, but if they decide not to participate in markets, the opportunity cost of not participating in the marketplace just could mean that your money just sitting in a deposit account.  


Yeah, that’s true. 


Before our conversation started you referred to the importance at looking at ROI versus COI, if you want to elaborate on that. 


Right, it is relatively new, and maybe I haven’t quite formulated it perfectly in my own mind, but I think we, as an industry and certainly in finance, we think a lot about return on investment and ROI is something we have a lot of focus on. Even if people think about it in that way it doesn’t always mean, as you point out from your own experience, it doesn’t actually mean that they do the right thing. So, I’ve started thinking more about COI which is, by definition, the Cost Of Inaction, or the cost of indecision and not doing what you probably, deep down, know you should be doing but are not doing.  

So, if you look at some of these firms that have had these very long track records, clearly, if you have not allocated to these kinds of strategies as part of your overall portfolio, the cost of not doing so is pretty staggering. I think in one of the books, we talk about an example of someone who allocated twenty percent to a trend following strategy. Of course, I used our own performance record as the representative of trend following and then bonds and equities.  

If you’d invested just twenty percent of the portfolio in the trend following side, the difference between only stocks and bonds, and compared to stocks and bonds and trend following, is pretty significant. On the surface, it may not look so big. It’s around two percent or a little bit more than that – two percent per year. Two percent per year for a twenty-five year period, or thirty or forty year period, that becomes significant.  

I think what we forget sometimes is that if you don’t do it, this can really mean the difference between retiring when your sixty-seven, or seventy years old and being on a pretty restricted way of living because now your income is gone and you have to live from your savings. But if you did it, and you built, and had the benefit of this extra return every year for such a long period of time, that might actually put you in a position where you could retire early, where you could continue to live the life that you’d always lived because your portfolio is worth so much more. I think when you start putting it in those terms, not just looking at pure numbers but what does it really mean on an emotional level as well, I think that then maybe the mindset can shift a little bit and perhaps more people are more open for it.  

The other thing, of course, that we shouldn’t forget is that if you do combine, like some of your Nobel Prize-winning guests have been working on, if you do combine non-correlated assets in a portfolio, it’s not only that your return side goes up, it actually also means that your risk goes down. That’s the beauty of it, in my opinion. The funny thing is that the first report I read about these things was probably back in 1983 when Dr. Lintner's paper came out about how to combine stocks and bonds and managed futures. Of course, they redid that study CME Group republished the story twenty-five years after. Of course, it still confirms the theory.  

So, there’s never been a white paper written to contradict this fact, yet so many people don’t really want to embrace it. That’s what I find interesting about how the human brain behaves and how we can look at things differently. For a lot of people, they haven’t quite convinced themselves that this is something that might look risky on the surface, but when you combine it with what they already have it actually reduces the overall risk of what they have, and it helps get them a better return. It’s something people should continue to explore, I think. 


Niels, you were saying that you’re all on for new technologies when you refer to AI and not even all on for AI but just new technologies and embracing them and exploring them and seeing if they work or not. What about new types of investments, not vehicles, but new types of commodities or equities. What I’m referring to here are the currency cryptos. Do you explore those, or how do you explore those as a possible means of integrating them into a fund at DUNN Capital or even on a personal level and how trend following actually applies to that? It is something that is extremely volatile and rather that suits your work at DUNN Capital? 


I can say, certainly for DUNN, this is way too early for us to get interested in, not as a concept. This is what I think is beautiful about trend following is that it’s completely agnostic to the underlying market. Whether it’s lean hogs, or whether it’s cryptocurrencies, or whether it’s the S&P, it does not matter. I think, again, it goes to the strength of the strategy at its core.  

Now, crypto may well be interesting over time because it’s a non-correlated return stream. So, that in itself is interesting, I think. The problem crypto has at the moment is implementation. Two, it’s simply not liquid enough. Even now that it’s on a futures exchange, which is great, but there’s not enough turn over, there’s not enough history for systems to analyze for you to do the research.  

So, it’s way too early for us, as managers, even though some managers have already done it. It’s not something we would look at from our point of view yet. On a personal level, I find it interesting, and I certainly wouldn’t discard it, but it’s not something that I have personally embraced. I follow it, and I think new markets will occur, whether you agree with them or not if you just look at it purely from an investment point of view and try and remove yourself from your own biases. That’s a big part of what we should be doing when it comes to investment is to completely remove the emotions from what we do, then I think it is an interesting development. I’m sure there will be some other markets, but they have to become liquid, they have to become fully legit, so to speak (if I can use that word, it may not be the right word to use). It has to be a little more like normal futures markets for us to be interested in adding it to our portfolio, or even to a point where we could start doing some analysis on it.  

Actually, another market which is kind of a good example is the VIX. So, the VIX came on board not that long ago, I think around 2003 or 2004 or thereabout. So, that’s only been around for fourteen years or so, and I think it’s one of the most traded futures contracts in the world today. So, yeah, with time (I keep going back to this point about time), things can change, and you find good opportunities in markets that might just be in their infancy today.  


I’m wondering, is trading the VIX somewhat like a risk management strategy given the volatility, because this volatility seems to come up out of the blue. Obviously that’s the nature of it, and the VIX spikes and it comes down and people get burned both trading the VIX strategy could compensate for any potential losses that it could hit in the market. 


Yeah, the VIX I don’t think you can trade it successfully as a trend follower. That’s the interesting thing because of the way it behaves like you said. So, we actually do trade the VIX at DUNN, but that’s the only thing that we do outside of trend following. So, we trade it in a different way, using different techniques and so on and so forth. But the returns that we can generate from the VIX are non-correlated to what we do in the trend following space, and therefore it makes sense to have a small allocation to this space.  

Actually, it did help us in February during those uncertain days we had. So, in that sense, we do like the idea of having different return streams as part of the overall program that we offer our clients. So, the VIX is definitely something because it’s liquid and there’s enough history to analyze and study it. So yeah, that’s an interesting market for sure.  

But again, going back to trend following, never put too much reliance on any one market. So, for us, it’s just one of fifty-four markets. Even if we allocate a little bit more than the others because it is so unique and so different, but it should never be a dominant part of any one portfolio. Also, going back to your initial experience trading six markets, so in trend following I, unfortunately, don’t think that that is enough diversification nowadays. You do end up having a lot of risk and exposure in one market if you only have six. If then all of them go against you at the same time, and you’ve got nothing else working for you, that’s where you can quickly, not only lose a lot of money, but you get discouraged by the strategy, and you end up selling the strategy you most need right before you most need it. 


Niels, I have to congratulate you on your two recent books, How to Master Managed Futures Even If You’ve Never Traded Before, co-written by Katy Kaminski; and also the Many Flavors of Trend Following, co-authored by Hari Krishnan. They’re great reads and something that I’m personally interested in with both of those topics: futures and also trend following. I’d love to find out how you got to write these books, or what was the purpose, or where did the content come from, or what’s the reason for writing these books? 


Sure, sure, before I forget, let me just say that why don’t we make one of the books available to your audience and your followers. So, I will, before we end our conversation today, I’ll give out a link where they can download one of the books for free, just so they can get going and there’s no barrier to learning about this strategy. So I’ll definitely do that.  

Now, I think, to answer your question, I wanted to write something or produce a different content other than just doing podcasts. I wanted it to be something very different from what you find in the investment world.  Specifically, I guess, I wanted to put passion into the finance world. I hope the books if nothing else, they demonstrate that there’s a lot of passion between me and my co-authors for this topic.  

So, it’s written in a language that I don’t think you’ll find any other finance books. So, people, be aware of that when you read it. But, I think it also has to be easy to consume. You can read it in an afternoon, drink a couple of cups of coffee or tea and you’ll probably work your way through one of these books because I also find that, even though there have been some great publications, and I mentioned one of them earlier today.  

Of course, your previous guest, Mike Covel has written a number of books on trend following and helped distribute the knowledge about this. However, I also know from personal experience that if the book is too long, I never get to finish it. So, I wanted to make sure that people did not run into that problem. So they’re not long, and they’re written in hopefully in a fun, engaging, but also, there is s serious message in them. Here’s the thing, you don’t need to be perfect to get started with trend following. You really just need to get started. That’s the thing. 

I think there’s enough in these books to get you started and that’s really what I wanted to achieve with them. But, like yourself, you produced a lot of great content by interviewing people. This is, hopefully, just another way for me to deliver content in a different format because some people, frankly, would rather sit and read a book that they can print out or physically buy compared to listening to people on their mobile phone, and that’s perfectly fine. Some people like books. 


So, some of the content that’s coming from your experience plus conversations that you’ve had on your own podcast, Top Traders Unplugged? 


Yeah, I think you and I started podcasting, more or less, at the same time in 2014. I don’t think any of us, at the time, knew how impactful that medium would become, or that media platform would become. Podcasting has really grown, and I love it. I really love that format.  

I think that the connection you build with your audience by them listening to your voice, I think that there is something, there’s an emotional connection that we can build that no whitepaper and even a book can’t build that. So, it’s not to be substituted for podcasting. I think that is still one of my favorite ways of expressing and creating content.  

But, I do also like, and I think this is coming back in the online space, that people go offline again, and instead of just creating online eBooks etc. etc. Now, I know the book that I’m going to give to your audience today, it is a downloadable book, but in theory, they could also... I have printed versions of the book as well, and I think that’s something that I have come to appreciate more that, instead of just reading an online newsletter, some people have now started to go back and print the newsletter and you receive it in your mailbox. 

There’s something wonderful, in my opinion, about that experience as well, almost going back in time to deliver things physically rather than just online. So, anyways, it’s just another way for me to try and share the message.  

What I found, really, is that in recent years there’s been so much focus on people trying to get more attention like how can I get a bigger platform? How can I get more likes on Facebook, or retweets, or more sales (if we’re wearing our commercial hats). Deep down it’s how can I get more attention? And that’s not an insignificant question at all.  

There’s another question which is, what are you spending all your energy focused on, or why are you doing that, getting the attention? What are you giving your attention to? That’s really the key question in my opinion. What’s worthy of our time that we will actually devote our attention to. If we are devoted to giving attention to our audience and people who want to learn more, I think a lot of the other things...  

Well, first of all, I think it’s a nicer way of exchanging things instead of focusing on what I can get. I like the idea of what I can give more. I think if we serve our platforms like you serve your platform and I serve my platform and we do that, I think everything else will take care of itself. Podcasting has opened a lot of opportunities for me. I host the managed futures podcast for the CME group – the largest futures exchange in the world. I’m privileged to do that and I meet a lot of really interesting people doing that and I still am fortunate enough that a lot of the most successful managers will come onto my platform and share their experience as well.  

I think what you do and what I do and what other people do in this space is that we add something to the conversation. It’s up to people to take away what they feel they can use and then apply it in their own world but at least there’s a lot more content, and I think a lot more good content out there than compared to before.  


Niels, rather than going alone and investing in DUNN, I know I could explore this myself but thought we can have the conversation now, is there a minimum to which DUNN would request your capital as part of their asset allocation? 


Sure, sure, I’m sure people realize when we start to talk about these things we have to make all these disclaimers about past performance not being indicative of future results, and all of that. That is true and people have to think carefully and read all the risks disclosures carefully before they make any investment. Once that’s done, and if they are comfortable... and the great thing and this not only applies to DUNN, but it does apply to DUNN, in the last few years more investment vehicles have become available.  

So, when I started in this industry, almost thirty years ago, it was really for the wealthy investor who could get involved in this industry or in hedge funds in general. Nowadays we have a couple of different vehicles that you can use. If you’re based in the U.S., for example, there are now mutual funds that people can invest through. I think it’s a thousand dollars you can start with and you can get exposure to not only DUNN, but also to some of our peers in their mutual funds or 40 Act funds, they are referred to.  

Also, in the European space and actually I think this goes for Asia as well because I think the UCITS Fund structure, which we know from Europe, which is again a mutual fund type structure, that allows investors, if the funds are registered for retail investors as well, to start with a little as a thousand dollars, or Euros, or whatever currency the fund is offered in to get started right. It’s all about getting started, getting comfortable. You shouldn’t start at full speed. You should build up your confidence like we tell our children with their young and they’re trying to learn to walk. Take it slow before you start taking a big leap. 

So, for DUNN, we also offer a UCITS Fund and people can invest in that. Of course, if you go to larger investment size, typically what I see in the industry is that, once you get to around one hundred thousand dollars or more, that’s where the fees come down significantly. As I mentioned before, we don’t even ask for a management fee, so it’s not really those fees, but I’m thinking about the cost of these platforms that charge a fee. They come lower as you move into the one hundred thousand dollar plus investment size.  

Then you have, for us but also for our competitors, there are offshore structures where, typically for regulatory purposes, it’s one hundred thousand dollars or more. Again, in those structures, because they’re offshore, and this is really where the industry got started. So, these other fund structures have been around for a long time. Typically you get slightly lower costs, again.  

So the onshore in Europe or in the U.S. are usually more expensive than the offshore funds. So, I would say, to answer your question in a very long-winded way, that you can get started nowadays even with smaller amounts, and for those who want to invest one hundred thousand dollars or more, you can get started at very reasonable and very low cost, in my opinion. I think it’s more important to just get started than anything else nowadays. 


Niels, what would be the main takeaways from your books? I was looking at it and you had conversations with Mike from AHL. 


Yeah, that was one of them. That was one of the quotes from the conversations that I did with the founders of AHL. Yeah, there’s a little bit of that in there. 


From your exposure in speaking with these trend followers as well as from your podcasts, what would you say were the top two or three main takeaways that you have seen from this and may even, personally, follow? 


Right, so I think one of the things that we try and do in the books is very briefly to explain what trend following/managed futures is all about so that people can understand it, hopefully, if not for the first time, but they should be able to follow what we write and say, “OK, so that’s what it’s all about.” That’s one thing, and I think that’s important because we do need to be comfortable in whatever investment decisions we make. So the first way of getting that comfort is to say, “OK, that’s what they’re doing.” Hopefully, people will take that away. 

The other thing that we try to do in the books is to explain the benefits of trend following, and the benefits of adding this as part of the portfolio - that we can actually really lower risks in the portfolios that you get invested in and also, at the same time, if you use the right trend follower you can increase the overall return of your portfolio. This is not a new concept, but it’s a very important concept. So, we make that point, and we explain that as well.  

There are some practical experiences. There are some examples where we’ve looked at what the returns would have been, again with all the risk disclaimers that we have to put when you do that. We’ve tried to put things together in a simple way where people have enough information. It’s not meant to be the total series on managed futures or trend following, but it’s enough information for people to get going, and hopefully, that’s actually the main takeaway for people is to take action.  

Again, we go back to the cost of inaction. I think it’s way too high. I think people need to be open-minded and, of course, look at all the research out there which will confirm what you and I have been talking about today. Also, give it enough time. This is not going to be an overall success necessarily, but over time it really does make a huge difference.  

So, if they want to get started, here’s a way to get started. So I created this link for people to freely download one of the books. So if they go to then they should be taken to a page where they can put in the details as we now have to under the new GDPR, I think it’s called. We have to get details and consents and all that. So, go to and put in your details and you will receive a copy of one of the books.  

There are some other free resources that people can start with. One of them which, I think it’s part of the end of the book. It’s a little tool that will help people maybe think about their own mindsets about investing, so a more general tool. They can see that on So, if they go and fill out those questions they’ll get a summary where they can see how they think they score themselves into these different mindsets about investing and where they want to go to.  

I think one of the biggest things in order for us to take action is that we need to convince ourselves. We need to become better at something. I think this tool will help people to identify where they may need to focus a little bit more of their attention when it comes to that. So, we need to convince ourselves rather than you and I trying to convince people. It’s actually better for them to convince themselves what to do next. 


I just clicked on the link there, just typed it in, so that’s Yeah, that’s absolutely fantastic. 


I think I forgot the .com. 


Yeah you did. 

Niels that is it. 


I’m very grateful and hopefully my listeners will click in and get this copy for free. I’m very grateful for you to share that with us. 


Well, I’m grateful that you wanted to invite me back on your podcast. It’s great to be here. It’s great to discuss these things. I know you share a lot of your knowledge. You teach you do lots of great things and I think the more we can do that collectively, the bigger the impact. I think that’s what it’s all about, right? We have a finite time on this earth and the bigger the impact we can have for the better, of course, I think that’s a very worthy way of living our lives. 


As well as that I think it’s great that my listeners are introduced to you now and your podcast. To be honest, I could listen to you all day - such a fantastic voice. 


It’s funny, people say, I’m grateful for your comment, but it was one of those things that I, and I don’t know that it is such a great voice, but it’s one of those things that I really had to get used to when I started podcasting was listening to my own voice. I’m sure you had the same. It’s so different from the way we think it is. I really, really, appreciate it, Frank. I thoroughly enjoyed our conversation. I hope we’ll do it again and I will do my best to share your podcast. You’ve had some fantastic guests, Nobel Prize winners and practitioners of things and I’ll certainly do my best to share that with my tribe, and we’ll hopefully spread the word as much as we can. 


Niels Kaastrup-Larsen, you are an Economic Rockstar, as always and an honorary member, I’m sure, at this stage. Thanks so much for joining me. 


Thanks so much, Frank. Take care, all the best. 


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