Kenneth Tropin on Quantitative Hedge Fund Strategies

a quite a track record. Uh. He used to work with John Henry, currently the owner of the Boston Red Sox and another successful hedge fund manager. He worked with Paul Tutor Jones. The list of people he knows and has um trained with and under is quite astonishing. Uh. The firm that he's built is one of those very quiet, very successful um entities that without a whole lot of media coverage, without a whole lot of fanfare, just amass an enormous amount of capital because they've done so well

for their clients over time. UM. I found the conversation with Ken to be absolutely fascinating, and I think you will also if you're at all interested in macro investing trend following commodities, currencies, fixed income, various types of quantitative strategies. Uh, and most important of all, risk management. You're gonna find this conversation to be absolutely fascinating. With no further ado my interview of GCMs Ken Tropin, I want to start

with your background. You began at Sheerson in the nineteen eighties. Tell us a little bit about those days. Well, you know, uh, here we are um at a very different place and time, So it's kind of cool to reflect back on what was happening in nineteen eighty like very different universe, right right, Well, for example, interest rates were four uh when I started

at Jeerson, and those were those were treasuries. We're not talking jump on yeah, no, no, no no, And and in fact, I think we got as high as twenty earlier in my career, and so, uh, you know, it was a very interesting time to begin, which I did as an account executive at Sheerson, and then in night two, Dean Winter recruited me to join them and to really start managing what was their floodgling hedge fund practice, which was really with C T A S back in that year,

and then it evolved into you know, more macro style funds. So you eventually become director of managed Futures at Deanwood Reynolds. That's pretty early in the managed futures history. Tell us a little bit about that here. Sure, it was a you know, uh, it was an era where you know, first of all, the markets were really inefficient, right, um, So it was it was very fertile, uh to do what we do because markets moved a lot. There was

a lot of volatility. Uh. And I think it's almost the polar opposite of where the world has been the last few years, where volatility has been somewhat subdued, and you know, equities have been such a strong performer. But back in two um, you know, stocks were very quiet, they were in a trading range. Interestrates are super high, uh, commandity, markets were moving a lot, and there wasn't a lot of competition if you were a trader in that early

part of the industry's history. So let's talk about that inefficiency for a moment. Today, you wanna hang a shingle or you want to open your own proprietary trading, it's very difficult to find an edge and consistently make money. Back in the eighties, that wasn't necessarily the case. Yeah, I mean relatively simple trading systems made money and uh and and you know, they had volatility and people were

okay with volatility because everything was volatile back then. Um and so uh you know it was uh, you know, relatively I want to say straightforward, because I don't think generating consistent profits has ever been something that's so straightforward or so easy. But on a relative basis, it was easier. And of course, when you have a young industry, that's a great time to get involved. You had to say the very least. So after Deanwood Reynolds, you end up as CEO of John Henry and Company. Tell us a

little bit about that experience. Yeah, John was one of our managers, uh that we had, you know, our clients invest in and in um. He and I explored me leaving Dean Winder to join his pharmacy CEO. His company was in California at the time. I wanted to be in the East coast. We moved the firm to Connecticut. Uh and uh I was there for about four and a half years, and then he and I saw things differently.

In nine and a part of company and uh, you know, UH had a lot of time to think about what I wanted to do and ultimately decided I wanted to start up my own fund. And uh that's how Graham got, uh you know underway in the you know, spring of So we're gonna talk a lot more about Graham. But John Henry seemed to have done pretty okay for himself. Sure. I mean he now owns the Red Sox, and you know, he's done very, very very well. He's left the finance world,

but he's certainly not left the business world. And he seemed to have brought the same set of analytical chops to owning the Red Sox as he did in his own Hedge five. Yeah. I think that's kind of who he is, quantitative database and logical decisions, which you know, seems to have broken, uh, the curse of the Babe. Well, yeah, you know, let's face it, right, I mean, what was it? What was a year that every down three and out of the Yankees or something, and then they ended up

prevailing in that World Series. I'm a Yankee fan, so I can say I was rooting for that. But that's what happened. It's a hundred years was all it took to overcome that one mistake alright, so let's talk a little bit about founding Graham Capital. In you leave John Henry, you have a little time to think about what you want to do. What was the process like launching a new hedge funds in the early to mid nineties, you know it was, I mean, this is not an easy

thing to do. Ever, I would say it probably somewhat, um, you know, easier to do in ninety four than it

would be today where the world has become so institutional. Uh. And you know, I've been longtime close friends with Paul Jones and Mark Dalton, president and you know when pulled the founder and uh CEO of Tutor and uh, when I left Henry, we talked about should I you know, a couple of ideas I had about starting my own fund, and uh they were kind enough and uh and and eager to uh invest and helped me seed Graham, which made it a lot easier to get the fund off

the ground. And I am asking my prop capital alongside of their prop capital, and we began trading and you know, I guess it was July or something like that. What sort of strategies were you using when you first launched

the farm? Yeah, so it was trend following systems that I designed, uh and UH they had some features to them that, UH were intended to take advantage of what's very good about trend following, which is sort of capturing these big right tail moves, but we're also intended to not have some of the givebacks the people associate with trend falling when trends reverse. And UH. Those were techniques that I came up with that I thought would work.

They ended up being pretty successful. And that's you know, in the early days of Graham, Uh, like any new hedge fund, I did everything from designing trading systems to executing those systems. So so let's talk a little bit about trend following because people who are professional traders, or especially futures and commodities traders, are fairly familiar with that strategy.

I don't know if all our listeners are. The basic concept is when one of these asset classes starts a long move, they tend to go much further and much longer than people typically expect, and you want to capture as much as that move as possible. Is that too much of an order description? And think of it this way, that a good trend following system will identify based on momentum UH signals that a trend is underway. Let's take

a recent example, uh, energy prices. Everybody knows energy prices gone up in the last six months quite a bit. And you know, a simple trend following system is going to identify that this is a strong trend, and it's going to get you on the right side of that trend. Now, at some point, that trend is going to end, and that same trend following system is never going to predict the exact top, but it's gonna get you out of that trend after it's made some amount of profit on

the way up. And it's it's always gonna expect to lose some of those profits when the trend reverses, but still end up capturing the meat of the trend. So if you could say that the maximum size of a trend was say a hundred, maybe you might capture that trend. And UH if you're able to do that in a diverse uh number of markets and asset classes, UH while managing risk and the markets that aren't trending. You know,

that's in general how trend following works. It's much better to be involved in trend following when markets are moving and when markets are quiet and sideways, not as easy to make money and right, how do you avoid I'm thinking about how you catch the reversal at the end. Obviously you have to be willing to give back some of the profits before it's clear that the trend was broken. How do you avoid the false positives, the whip saws.

I can't count how many times when I was a young turk on a trading desk, you would get shaken out of a move, and then it would as soon as you're gone, immediately go back to the prior trends. So there are lots of It's a great question. There are a lot of technologies that people use that we use. Um you know. Some of those technologies can include having

multiple signals and multiple time horizons. So maybe your quick systems get shaken out on a on a sort of minor medium reversal, but you're longer term systems, for example, take longer to get knocked out. And so most people I know who do this do not have one time horizon. They use multiple time rides. That's just an example of a technique that's easy to understand. You guys, do everything from quantitative analysis to macro. Tell us a little bit

about your approach to trading the markets. Sure, well, there's as you sort of referenced, we do a lot of different trading styles of Graham. We do discretiony macro trading, which is typically a portfolio manager, and we have um some number of portfolio managers fifteen or eighteen different portfolio managers that independently manage a book of of you know, risk assets, and uh they uh will decide what they're

going to buy and sell. Uh, and they're going to live with certain risk policies and they're going to hopefully not be all doing the same thing at the same time. Uh. And then we also run a bit large annotative business, which is a model driven uh you know, computer uh you know, trading system business that uh is also really

diversified in the types of models that uses. Some are pure momentum based models, which people identify with trend following, but then there are some models that are value based, that are fundamentally based. Uh. Some that uh you know are smart systems that are learning systems. So there are a lot of different ways to hopefully make money in the macro markets that we are involved in. So let's

talk a little bit about that diversification. If you have eighteen different portfolio managers, and I know you're only half joking when you say, we hope they're not all doing the same things by design, the assumption is each of them are bringing a different approach to the assets they're covering, or is it possible that some of them are overlapping with others. Yeah, well the answer is yes to both.

So we currently have fifteen different teams, not eighteen, No, all other a couple of teams that are pretty close to joining us. And uh, many of them are going to be trading the most important macro markets, so that you know, that's fixed income markets. Uh, that's the equity markets, that's the foreign exchange markets, and to some extent, commodities, and uh, some of them are gonna have similar views

when really interesting big moves are happening. Uh. An example of that is there was a big move up in rates that sort of peaked in May, and a lot of our traders got involved in that and benefited from rates going up in Germany and rates going up in

the United States. UM. There are other times where they have very different time horizons and so one trader, uh might you know, be a long US fixed income and a trader right next to them is short, and they could both actually be right depending on the time arising.

So somebody who has a very short term trading style could be short for a week and get out and make a profit doing that, while the other trader who's long, is waiting you know, for six to eight or twelve weeks for his position to accomplish what he thinks it

should accomplish. So different different time horizons, different assets. We have traders that are involved in you know, a lot of interest rate derivatives, UH swaps, the yield curve, um, things that are trading systems don't always get involved in, but our traders will. So for example, as you know, there's been this giant flattening into the yield curve. That's been something that a number of our traders have been involved in, something that typically the uh you know, technical

systems wouldn't be so involved in. And and you sit on the risk management committee when you have all these teams with a lot of authority and a lot of independence trading their own models, how do you manage that? That sounds like that's a lot of balls in the air at once. It is. But you know, we have a lot of technology to support all of that. We have UM risk system ms that are live pian L reporting models that tell us what every trader's performances every

minute of the day that the markets are open. And then we meet every day at nine thirty and have since two thousand and eight to look at every trader's portfolio. How has it changed since the previous day. Who's added to risk, who's cut risk, what assets are they in? We run stress tests on all of their positions. UH. We see who's performing well, who's might be struggling. And you know, if we have to uh encourage a trader

to reduce risk or do nothing. Uh, we as the senior management UH team of the firm are acutely aware of exactly what the firm's risk is at any minute of the day. And I think it's that discipline to meet and have. You know, total transparency into risk taking helps manage uh. You know the outcome quite a bit. And you guys have been doing this for almost thirty years, so you obviously know a thing or two about risk management.

I look around this year, I see some quant focus head funds blowing up to say nothing of all the venture investments into crypto, and some of the crypto funds

really just losing in some cases their assets. As someone who is a professional risk manager, when you look out, what do you see when when the world around you has these frequent flare ups, Well, you know, it always gives you religion about managing risk, right, I mean, at the end of the day, Uh, it's it's awfully important to make money for our clients and on our proprietect capital for ourselves. But the only way you're gonna do that is by managing the downside. And so we're just

really conservative in our risk policies. We're not so conservative that there's no breathing room to make money, because if you're not willing to lose some money, you can't make any money. I mean, it's the age old thing and investing in trading. But uh, the question is how much and you know, and and and we're just very processed driven and how we look at risk, how we analyze it, and we we you know, we were we've learned that we just have to make some hard decisions, uh fairly

quickly at certain moments. And we've had moments where we've had traders lose more than we would have liked to have lost. We've had trading systems that have had bad cycles, but we have prevailed over twenty nine years because in general, we avoid uh you know, uh, some some really bad experiences that sort of as you alluded to, we try not to let that happen to us our clients. It's pretty clear that a number of the funds that have blown up didn't seem to have a whole lot of

risk controls in place. They just let Uh. It's one thing to take a loss, it's another thing to let a bad situation become a fatal one. Yeah, well, I think that, you know, it kind of speaks to who is Graham or a conservative firm. We've been doing this for twenty nine years. I've been involved in the markets for over forty. Uh. You learn all out over that amount of time that you know, you can't be in a hurry to try and make a profit. You've got to just you know, be a patient investor. You've got

to be an opportunistic investor. And if you manage conservatively your business, I like the odds of you finding the moments when it's good for what you do and capitalizing on it. You know, I'm gonna editorialize briefly, but I've had this conversation countless times about just be long term greedy, just be patient. It will come to you. And everybody that seems to get into trouble, whether it's a traitor or a fund or whatever, it's always that hurry that

seems to cause their disasters. Yeah, that that's a factor for sure. It's not the only one, right, Like, liquidity can change, and that is something that can bite you when something that was relatively liquid and easy to get in and out of becomes illoqui uh. And you know we've seen that in some of the situations you described earlier of funds having problems, and so one of the things we really scrutinize as risk managers is there is

what's happening with liquidity, How is it changing? And is it is there any adverse behavior as relates to liquidity that we should be very careful and thoughtful about. And last question about the various teams, does everybody have a different benchmark? How do you track performance? Is it strictly absolute returns or people working towards a specific uh bogey that they're they're comparing themselves with. Yeah, it's really an

absolute return business. And you know, we are trying to have our traders, you know, generate uh you know, call it high single digits, slow double digit returns with relatively moderate volatility, So annual volatility of four percent or something like that. And uh, that's a that's a pretty good ballpark idea of the parameters that we ask traitors to live within. And that's a pretty comfortable place for our clients, uh, you know, meaning the amount of risk they're willing to

assume relative to potential reward correct really really interesting. I want to start talking about the current environment with a quote of yours that I really like. Uh. You said, I can't recall a more interesting time to be a macro investor since the financial crisis. Tell us a little bit about that. I haven't heard a lot of people

describe this year two that way. Yeah. Well, you know, because we're a macro oriented fund, what we're really concerned with is what's happening with interest rates, what's happening with foreign exchange, what's happening with commodity prices, uh, and what's happening with equity prices and all of those four sectors have been moving a lot, and so that's a really fertile constructive environment for us to try and generate returns.

And if they're moving, you finding opportunities exactly what you know for us, it's nowhere near as uh productive an environment if asset classes are really quiet. Um. If you think about interest rates as an example, you know, today is a FED meeting, but uh, you know, think about that. Germany didn't raise rates for ten years until recently, right, So just practically speaking, there's gonna be less to do if you're trading German interest rates and the and the

central banks not moving them for ten years. Now rates are moving and they're moving a lot. Um. If you think about the US, you know, uh, the Central Bank uh started giving us something they never used to do, which was forward guidance, saying not only are we not changing rates today, but we're telling you we're not going to change rates for the foreseeable future. I'm so glad you said that, because I remember in the nineties nineties CNBC used to have the Greenspan briefcase in the cator.

How thick or thin the briefcase? He carried into the FOMC meeting was their hint as to what was going to go on with rates. That's a different world. Now. They literally say this is what we're doing. Earlier this last week or two weeks ago. Um, somebody at the FED said to Nick Timorris at the Wall Street Journal, Hey, we're going seventy five basis points. There's no misunderstanding. They are not just telegraphing, explicitly telling us what they're gonna do.

How does that affect your ability to find opportunities? Well, so, here, here's the thing. If they're telling us they're going to do nothing, that's not so helpful. If they're telling us that they're going to be moving interest rates a lot, and they're not just gonna do this at one meeting, but over some series of meetings and for the next year or something, then there's a lot to work with

in terms of the markets. They're gonna move a lot, they're gonna overreact, they're going to give us, uh, you know, trading opportunities, both on the long and short side. And so when I say that markets are more interesting, they've been for a really long time. It's for a variety of reasons. Markets are moving. Uh. We've got some banks all over the world, uh starting to move. We've got equity prices moving a lot. You know, there's a there's a big realization of of pe s to lower levels

right as earning to start to decline on the road. Uh. You've got commodity prices that went through the roof in the first third of this year because of supply chain issues, the Ukraine war and so on. Uh. And then you've got the dollar making one of the biggest moves that I've seen in a long time, like twenty years. I mean we we we've had a move in dollar again, it's we haven't seen that in a long time. So that that makes euro party is exactly. And so so

you've had great moves and a lot of markets. And what I'm excited about is I don't see that changing into a quiet moment anytime soon. So so let's talk about next year. But before we get to that, I want to ask you about last year. So one, for equity investors, hey, plus twenty seemed like a great year, but if you're a volatility trader, markets were never less

than five percent from all time highs. It was a shockingly quiescent year straight up, and hardly any move was one a less interesting year than Yeah, for sure, definitely. I mean we're able to generate on average returns last year they were positive year, but there's way more to do this year. Um. And you know, last year, if you were going to have a good year, you had to be essentially long data and we like from the beginning of the year and correct and just be patient

and stay with it. And you know we uh we we certainly did that on a portion of what we look at as our risk budget. But there's we're much happier, We're going to be more profitable, there's going to be more interesting environment when uh, you know, you're not looking at one asset class and that's the only game in town, but rather there's something to do in foreign exchange, or something doing rates, or something doing commodities, something to do

in credit, all of these asset classes. Now we're moving and moving a lot, so so not so interesting, very interesting. Why do you believe this high interest, high volatility environment is going to continue into next year? Yeah? So the question, of course is I expect there to be plenty of volatility next year. Will it be as volatile as twenty two. Maybe not, but it will it be bold enough for it to be fertile for what we do and constructive for what we do. And I think the answer that's yeah,

some cautiously optimistic that will be the case. And I say that because I think of some of the problems that the FED is trying to manage through, and central banks in Europe are trying to manage through these problems. I don't see ending at you know, when we when we flip the calendar in twenty three, uh, you know, the supply chain bottlenecks gonna end, will go away, exactly my point. So, so there are secular issues that are causing inflation that I believe the FED really can't do

that much about. And I think the problem that inflation causes for central banks are not going away so quickly. So I think this year maybe unusually good for for macro, but I think the upcoming several years are going to be also pretty interesting for what we do. So the consensus of economists have the FED using seventy five basis points today July and then another seventy in September, and

then I think, is the basis is that way? That's now moving back towards because the prior hints was seventy. I think the economy really seems to be slowing. We've got that really bad inflation print a few weeks ago, and and and then you know, we've gotten some weaker data since. And so I think people have priced in fifty basis points in the next hike, and then that's the thing they're pricing. And also cuts in twenty three maybe maybe not. You know, I'm you're not in that camp.

I'm waiting to see. I mean, I think we need to see inflation get a lot closer to the Fed's target. And you know, I don't see inflation coming down as rapidly as the market is pricing in Fed cuts. Oh really, that's very interesting, right, So in order for the Fed to want to cut, they're gonna need to see inflation and contract quite a bit. And it will contract from the very high levels it's at now. But will it go down to their target? I'm not sure. So so

let's talk about commodities. Lumber cut in half, copper down, oil under a hundred. What are we like thirty two days in a row of gasoline prices falling? Industrial medals also do um. Most of the commodity complex, that really random uck seems to be starting to roll over and soften. How do you view that? Is that? I view that as helpful for sure, But you know, have rents collapsed, No housing is really tight, labor still really really tight.

The employee still has the upper handed, you know, as relation. Is that still true? Because the scent seems to be you have layoffs at the tech firms. They were in a mad dash to hire, they over hired, and now some of the retailers are talking about easing Amazon and Walmart. It feels like the great resignation is over and whatever upper hand employees had, they seem to have lost a little hand over the past few weeks. I think that's a perception, not necessarily the reality. I think that will

become a reality. I don't think we're there. I don't think psychology changes so fast. So I think you know, employees here at Bloomberg you have a three you know, a remote work policy. Uh. You know we have perspect and and and and most firms you know have similar policies. Uh. And I think that's reflective of employee having a lot of leverage over employers and these policies will probably evolve, you know, because they all got birth out of COVID and and so on in an incredibly hot labor market.

But I don't see drastic changes yet and how employees are thinking and what their work expectations are. I think there will get to there, but we're not there. You know, it used to be how do you keep them down on the farm once they've seen gay Paris? And now it's hey, how the hell do you get them back into the city they want to work from the farm.

The world has changed. Personally, I can't help but notice how much more productive and efficient I am up into a point where, all right, I gotta get the hell out of these same four walls. I'm wondering how that extrapolates out to the entire labor market. Yeah, I think it really depends on what people do, right. I mean, I think, you know, some people can be very effective working remotely, and I think others are more effective when

they collaborate and there and there. And I think it's easier to learn right when you're around uh people who are very bright and very innovative, and you know, you can hopefully piggyback some of that knowledge and experience and you know, have it improve your knowledge base and your and your skill set. And so I'm a big fan of of UH, you know, people working UH in offices to a you know, a significant degree. UM, But I also understand that a lot of people really enjoy working

remotely and and and I understand that. I mean, it's it's it's very efficient, right right, But it's pretty clear that it's there's going to be some form of hybrid at most major employers going forward. The question is is it four and one? Is it three and two? It's not gonna be oh and five like it was for two years. That that's pretty much done. I have to

agree with that. Yeah, let's talk a little bit about some interesting trends that we've seen play out in two and what whether or not they'll continue for the rest of the year. We haven't talked a lot about equities, but if I think of anything in two, it's finally value has started to show it's UH advantage after lagging growth for practically a decade. Uh. Do you guys look at these sort of factors? Is that we do? I mean, it depends on you know, our A lot of our

training systems are sort of momentum based systems. But then we also have value based quantitative models, and our traders are definitely looking at value. Um. And I you know, I think, look, equities have come down a lot, uh, but I think the question is what's next? And you know, to me, we're do we test the lows? You know, we've bounced about seven percent off the lows uh in

the last few weeks. Uh. You know it would not surprise me as earnings slow down and and you know, the economy slows down and the effect of these rate hikes begins to kick in. You know, earnings should deteriorate, and the question is how much and how much we'll spending contract and things like that, and what kind of demand destruction are we going to see? So uh, I

think equities probably have some downside in them. On the other hand, the bookcases, there's not a lot else to do with money, and so you know, uh, the sell offs are are pretty well bought by institutional you know, investors said differently, what's already in the price. So let me throw a couple of things at you. Um. We talked earlier down more or less prices in a recession,

right or at least a mild recession. Is that a fair assessment the way you would think about the macro environment of of stocks as a leading indicator, You know, I don't. I don't know that that's the old priced in there, because think about it. We were up twenty eight percent last year, right, so there's a lot and we were down this year, um and up the year before.

So this is just a little mean reveal. So you know, I think this is sort of a very normal correction after the years and years and years of unusually good performance for equities. And I'm not sure that our recession is completely priced then. I think I think a slow down the economy is somewhat priced then, but I think we could see lower prices from here. So let's talk

about earnings. Both second quarter and third quarter. Second quarter earnings have started to trickle out a few disappointments, but stocks really haven't been punished the way when we saw a first quarter earnings come out in April. If you missed, you got shell lacked down. Walmart. Really, I can't say on radio what they did, but terrible. The stock was off eight or nine percent. It's really relative to how badly they missed. I was surprised that that's all they

were down. Um. So the question is what does it mean when stocks aren't punished when bad news comes out. So I think perhaps part of the actually a nation is that there was a de leveraging that occurred in the first quarter, and I think that is somewhat behind us, so meaning that very richly valued stocks. Yeah, so this is more multiple contraction than being punished by missing earnings.

I mean, you know, there were equity hedge funds that were pretty laverage, that had pretty highly concentrated you know, growth bats and you know a lot of technology companies and so on, and and and a lot of those equities went down a lot and those a lot of those funds had exit and a lot of investors and you know, exited some of those positions and they've come back to earth. And so I think some of the de leveraging has already occurred, and that's why the reaction

functions not as severe. Uh as you see new orrangs at the hit the tape really really intriguing. Um. So let's talk a little bit about third quarter earnings. If the FED goes fifty or seventy five in September, is the market pricing in a potential decrease from record highs for sp I don't. I don't think we're pricing that yet. Uh, and I'd be a bit surprised if we don't. If we have continuing uh, you know, erosion of earnings, I

think equity prices will follow that. Um. Well, I'm not forecasting another down, but I do think we could go down five or tending, right, I mean, what is that's a bad Tuesday? Down ten percent? We people forget it? What um or that's right? Or it's really just a fraction of that. So, so we talked about if this is pricing in recession, does it matter if we're in a recession or not now or will be next year? How do you contextualize the economic data? And the brew

would stamp recession when you're thinking about managing risk. You know, we obviously have to be concerned with it. And you know, uh, we we would not be at all surprised to see our you know, the economy contract, the Feds, rate heights

take effect. Uh, beta slips, um prices go down somewhat if you're talking about equities, uh, and then at some point buyers come back and invest because there's a perception and if you think about, you know, the last decade or more, UH, if you didn't buy the dips and equity prices, you're sort of punished by the market. And so there is a psychology that's been well trained into all investors, institutional and otherwise that when equities go down a lot, you need to buy, shut your eyes and buy.

And so I think we're going to continue to have that behavior occurring, and you know, we'll just have to see how it plays out in terms of UH, where the you know, what does the market do not just over the lext quarter, but over the next several You were rewarded for buying the dip in when we had the flash crash. You were rewarded for buying the dip in the fourth quarter when we were down almost if you bought into the end of the quarter of the

pandemic March Q one, you were rewarded. This seems to be the first year where the dip buyers really got their hands smacked by the market. How long does it take You've been doing this for forty years, How long does it take for that psychology of by the dip, by the dip, by the dip for that muscle memory to get broken. I think it takes a couple of years. Really, Yeah, I don't think definitely had a big impact on people. Yeah, I think it takes a couple of years. I don't

really think it happens. And the face, let's face it, five six months into the year or six seven months in the year now, I mean, I don't think we're there. Um. I think, you know, if we were to see two years of poor performance and equities that buy the dip, psychology would really erode a lot. But if you see seven months of poor equity performance, I'm not sure we're there. Huh. So we're halfway through two. We're looking out at the rest of the year and into three. Any particular asset

class or sector that strikes you as intriguing. Energy you mentioned earlier, had a great year the past twelve months. The banking sector really seems to have missed earnings. What looks interesting, Well, the dollars really interesting. I mean the dollars making a big move and it continues uh to be a currency right that has uh positive carry versus

uh it's it's counterparts. So you know, rates in the Ice States are are still and servedly higher than the rest of the world look at it, and that attracts capital. That's gonna track capital so that, you know, uh, until for when otherwise. I mean, you know, Japan has committed to you know, uh maximum rate of twenty five basis points. Uh, while the US is marching on up seventy five points today. So you know, I think the dollar continues to intrigue me. Uh.

You know, it's moved a lot. We have to be cognizant of that. We've seen you know, the dollar against the end, but could have go more I think so, and could have got more against hero I think so. So here's the pushback from my goldbug friends, um, who I have been tormenting for the past decade. Uh, yeah, the dollars up, but it's the only clean shirt and dirty hamper. We're gonna go the wand the end. The euro, everything else is junk. The dollar is just half decent.

How do you respond to that sort of criticism to dollar strength? You know, I guess my question is doesn't matter. I mean, if the if the dollars going up because uh, you know, well, because it's got a much higher interest rate than other currencies. Uh, I don't know if I call it that it has a clean shirt. I think it's just uh, it has favorable fundamentals, and uh and and and people should buy things that have favorable fundamentals

and not buy things that have allows the fundamentals. So if the dollar is strong, what does that say about our ability to export? What does that say about global macro travel. I had a buddy who in the late nineties and early two thousand's, the last time the dollar was this strong, was flying to Europe buying nine elevens and Z eights and other um European sheet metal. Ferraris bringing them back to the US, converting them and still selling them at a healthy profit versus what what the

dealers were asking for. Because of the strength of the dollar. How does this impact global trade and other economic facts. Well, it's a big factor. I think. You know, keep in mind, your supply chain bottleneck problems are as persistent as ever, so you know, our ability to do what you just said, right to go and start buying Porsche's or something that's not happening because you can't get them. Uh So some of that stuff has to work itself out independent of

the currency. But you know, one of the things that's causing inflation is secular trends such you know, such as supply chain problems and what have you. And that's one of the reasons I think inflation is gonna be around for a while. It's those secular trends are slow moving. So when you say inflation, we're obviously, or maybe not so obviously, we're not talking eight, but we're talking elevated

above FED target of correct So four or five percent inflation. Yeah, maybe we get down to four or five, but that's the number of the FED doesn't like. I like four better than nine. Um, but that still means that they're gonna right direction. But but we're gonna move as fast as the FED would like. I don't think so. And that's why I think people who have this expectation that the FED is going to be cutting rates, uh, sometime in the first or second quarter next year. I'm not

sure that's realistic. So so let's assume you're right, we've seen peak inflation, but transitory takes much longer than expected, and we slowly work our way down too. Maybe there's a six hands ale by the end of the year, five hands ale, and then sometime next year four percent? What does that mean in terms of wages and people demanding higher salaries? What does that mean in terms of consumer spending? That has to mean mortgage rates are going to be much higher. What does that mean for housing?

And lastly, what does that mean for politics? I can't imagine the present occupant of the White House is happy with that sort of inflation forecast. Yeah, I'm sure he's not. And I'm sure you know, the Democratic Party is not very happy going into you know, a midterm election with really high inflation. And uh, you know, I'm not sure for good or for bad. Politicians are really bad involved

in managing inflation. Right, it's not what they do the central banks really but but but they but they will take credit or blame accordingly, as you know, depending on what side of you know, the policy you're on. But I think, you know, we're going to have a pretty thorny issue, which is that inflation and the uh thing, the things that need to happen for it to go down just they're going to move slowly. And um that's you know, that's my base case. I could be wrong.

We could we could really contract quicker. I mean you mentioned that energy prices will come down some you know, other commodity prices will come down a lot. But let's also not forget you know, crewdel still about a dollar, uh you know right now? Uh? And uh you know, could it could it come down? Sure, but it hasn't come down that much. Are we going to get down to eighty cents or something like that? Maybe, but we're not there. Really really intriguing. And and last um market question.

So we've seen equity valuations come down. I get the sense you're expecting cheaper valuations, if not much cheaper valuations. Well, I wouldn't go so far as to say much cheaper evaluations, but I would say I think the risk is to the downside more than the upside. How do how do we get there? Do we get there through multiple contraction or do we get there? I think it's really choppy price behavior. I mean, yeah, a little bit. I mean you look at some of these rallies have had vicious

bear market rallies. Is here right where the market was up, you know, three percent one day, and soon we were three percent the next day, and and so and so forth, and then the next week's the exact opposite. So I think that kind of erratic behavior. Um maybe out quite as volatle as that is what I would expect. And I think, you know, there's a lot of money that

needs to get deployed. And uh, if I'm an investor, I'm an institution, I'm gonna have so much in hedge funds, i'na have so much in private investing, but I need to be in liquid markets and I'm not gonna do every I'm not gonna just exclusively invest in, you know, alternative assets if you will. So there is going to be a continuing bid for beta um because institutions need to invest a lot of capital. But where you know, will the economy continue to support ever higher evaluations? Who

did the last ten years? I don't think we're there. H So you one one last thing I have to ask. You mentioned institution sitting with capital. Did you imagine I don't even want to go back to the eighties, but even two thousand, that there would ever be this many trillions and trillions and trillions of dollars looking for a home. I never, in my wildest dreams, imagine that so much capital would be amassed. How do you contextualize all this money looking for a place to be well, treated Yeah,

I mean it's alms hard to fathom. I mean you think about all of you know, the quantitative easing that's gone on, and all of the stimulus and all of the capital that there is, all the cash in the world. It's it's it's it's really huge. And um, I think that is something that is a positive fundamental for equity prices,

that cash has to get invested somewhere sometimes, somehow. So even if earnings aren't great, even if the economy continues to look slow, even if inflation is too high, I think there is an argument to be made that, uh, there's a lot of cash out there looking for a home and that and that that cash is going to periodically be deployed in equities. Yeah, no, that makes a lot of sense. All right. Before I get to my favorite questions, let me just throw a curve ball at you,

Graham Capital Management's headquarters. Is that a site named rock Ledge? This used to be the office of General Douglas Macawthurd. Tell us tell us first, how did you find rock Ledge and make it the home of of GCM? And tell us a little bit about the place. Yeah, no, it's a back in. Uh. When I started Graham, we moved into Stanford, and we were in Stanford, Connecticut for some number of years, and that was a really good

place for us to recruit and retain talent. And a lot of people you know, enjoyed as I did, uh, the ability to have access to New York City, but you know, also have good school systems and what have you in the suburbs of New York and in Connecticut. And a lot of hedge funds were in Connecticut. We outgrew the space and Stamford and so, uh, somebody called me and said, you know, this building in Row eight

in Connecticut is available and it's pretty amazing. And I went up and I saw it and it's just, you know, beautiful campus setting, you know, about a hundred thousand square feet of office space, and you know, it needed a lot of work, but it was really pretty cool. And so I thought, Gee, what a better place, What a great place to try and attract the best people you want to you could find, uh to work in your fund.

Uh from a quality of life work life perspective, this was just an amazing place to run a hedge fund to attract really talented people. Um, you know, the success of a hedge funds. All about the people who worked there, and having a great place to work is not unimportant. It looks like a college campus. It's it's quite beautiful. Yeah, it's been fantastic. We've been there a long time now and I've enjoyed every minute of it. Huh, well, glad

to hear it. Let's jump to our favorite questions that I ask all of our guests, starting with tell us, what kept you entertained during the pandemic? What were you uh watching or listening to? Well, mostly the markets, uh you know, so obviously being in the position a man of of monitoring risk and performance and you know, uh position taking of all these traders and trading systems, you know, that's always front and center and my uh you know, uh conscious but uh, you know, uh, there's been some

really good shows that have come out. I've enjoyed, uh you know that. There's recently something I've been watching. It's called Tehran. It's on Apple Plus. It's a pretty good show. Jeff Bridges in a good show. I think it's on FX or something like that called The Old Man. That's a great show. So uh, you know, uh, everyone needs a break from the markets. Once a while. It's a couple of things I've been watching. Uh tell us about

your early mentors who helped shape you a career. Well, uh, you know, I think about some of the people who uh really uh were just you know, great great mentors and great people to learn from. Paul Jones comes to

my mind. I met Paul about forty years ago, and uh, you know what an amazing person, philanthropist, great trader, visionary for the world of finance, and you know, it was very fortunate to have him help me get Graham going back in he's he's been an insane role model, not just for me, but for a lot of people in finance. When I was a teen winner, I had a really tough boss named Charlie fum Afraido that ran asset management,

Charlie Brook no nonsense. Uh. He had a Monday morning meeting at eight a m every Monday, and you know, uh, all of his division heads, I was one of them, had to be down there in the World Trade Center at eight o'clock. And man, I left my house at six because if you got to that office at eight oh two, you waited for an hour till the meeting was over. Outside his office and then got to explain what you were doing, uh, you know, a one on one,

which wasn't that much fun. So you know, he was he was a great boss because he was no nonsense and tough as Now, tell us about some of your favorite books and what are you reading recently? You know, Uh, I like spine novels. Uh So the Portrait of an Unknown Woman David Silva just came out. That's that's a great book I've always uh you know, loved uh you know, uh, the Trilogy I told him was something I read when I you know, I'm totally stressed out and I want

to get into another world. That's a it's a great place to go. Uh. And then I just devour all financial news and technology news and things like that. Interesting. What sort of advice would you give to a recent college graduate who is interested in a career in macro investment or quantitative trader? You know? Here, the advice I would give is try and get a job at a really good macro fund that has some really bright people. And if you want to get a hat and you

want to be successful, it's really simple. You show up before anyone else, you leave after everyone else. You never are screwing around on the internet. You're paying attention to everything that's happening. And trust me, if you have brains and creativity and innovation, there is no industry that rewards you better. Quite quite interesting. And our final question, what do you know about the world of investing today? You wish you knew forty years ago when you were first

getting started. You know, there's a tough question. I mean, obviously, on one hand, our trading systems are traders are so much more sophisticated and so which it's more complicated. Uh, And you know, we've learned a lot of lessons about managing risk. We've learned a lot of lessons about being opportunists in certain market cycles and really conservative in other market cycles. And you know, the only way to learn those lessons is through experience and making some mistakes and

overcoming those mistakes and ultimately prevailing. So you know, it would have been great they never have to learn through, uh, you know, making mistakes. But that's the way the world works. And I think we've been successful because we've been intellectually honest with ourselves. We when we make a mistake, we own it. Really really intriguing. Thanks, so much Kenn for being so generous with your time. We have been speaking with Ken Tropin. He is the chairman and founder of

Graham Capital Management. If you enjoy this conversation, well check out any of the previous four hundred we've done over the past eight years. You can find those at iTunes, Spotify, wherever you get your favorite podcasts. We love your comments, feedback and suggestions right to us at M I V podcast at Bloomberg dot net. Sign up from my daily reading list at rialts dot com. Follow me on Twitter at rit Halts. I would be remiss if I did not thank the crack team that helps these conversations come

together so well each week. Sarah Livesley is my audio engineer. Artica val Bronn is my project manager. Paris Wald is my producer. Sean Russo is my head of research. I'm Barry Riholts. You've been listening to Masters in Business on Bloomberg Radio.