You're about to join Niels Kaastrup-Larsen on a raw and honest journey into the world of systematic investing and learn about the most dependable and consistent yet often overlooked investment strategy. Welcome to the Systematic Investor Series. Welcome and welcome back to this week's edition of the Systematic Investor series with Rob Carver and I, Niels Kaastrup-Larsen, where each week we take the pulse of the global market through the lens of our rules-based investor.
Rob,it is wonderful to be back with you this week. It's been a little while, hope you're well. How are things in the. In the UK? Hot and sweaty, in summary. It’s a little bit early for hot and sweaty. Yeah, my, my wife and I went to France over the Easter holidays to get some sunshine but it turns out we needn't have bothered because there's plenty here as well. Well, that's global warming for you, I guess. Anyways,we've got a few topics lined up for today.
It is, of course, the 2nd May, meaning there will be some focus on the month of April, which in our world was interesting. It was quite quiet. I don’t think much happened. But no, I mean the S&P was flat pretty much. So, I guess nothing happened exactly. Anyways, so we got that.
We got a few other topics which we will tackling, and then of course, as we always start out with, I just wanted to find out a little bit about what's been on your radar the last period of time, outside what we're going to be discussing, of course. Yeah, yeah. So, actually, an interesting article popped up in my Financial Times feed this morning.
So, as you know, I have a couple of degrees in economics which is quite fun, actually, because there's this old joke that if you ask two economists for an opinion you'll get three answers. I guess if one of them has got two degrees you'll get four answers. Butanyway, I saw a phrase in the FTO I haven't seen for a while which I'm feeling I haven’t seen since I did my undergraduate degree in economics which is a Giffen good.
So, a Giffen good is an interesting product because it doesn't kind of behave sort of with a normal rules of economics. So, the idea is that it's, rather than it being… The normal thing is obviously if prices go up, people want less of a product. Right?
But the Giffen good behaves in a slightly weirder way because it turns out that things that are kind of, what you call, quite basic products (and the article uses the example of the potato, although with inflation at the moment, I guess even potatoes are expensive), the idea is that the US treasury bond is a little bit like the Giffen good for the financial markets because traditionally when things are getting scary, what people want is plain wholesome potatoes.
And the analogy of that is when risk is arising in financial markets, people want US treasury bonds. And,of course, one of the more interesting aspects of the recent excitement that we have had in markets is the fact that people temporarily at least, didn't seem that keen on owning US treasury bonds. So yeah, it was an interesting article for me because it threw in this economic buzzword I haven't seen for a while.
And also another take on what we might call the mystery of the US treasury bond market, which is kind of… Imeanwe might get into the discussion later but I guess it's hard to know in this crisis, if in this situation, rather, that we're in at the moment whether we should buy US treasury bonds or not. Whereas, in previous financial crisis, it's been the go to asset. It's like, oh my God, the world's ending. Let's buy some US treasury bonds because they're a safe asset.
Just argue that it’s the safest asset in the world - maybe not at the moment. Well, I mean, so, you're touching on a topic that I've actually raised, a couple of times at least, over the years and that is what is a safe haven asset nowadays? And you're absolutely right, bonds has been one of the things that people have tended to go to.
Nowit seems to me that one of the few things that I, at least, I still think is somewhat consistent in that is actually something like a Swiss francs seems to still be having that ability. Are you talking your book, Niels, here? Because I assume you've got a few Swiss francs stashed away, given that you live there. You know, I'm not talking my book here, but I'm just being as objective as I possibly can.
But having said that, I wonder, and I don't know that you and I know this but, but maybe you do have an opinion about it. I mean, I wonder if we are again just using kind of recency bias, meaning that we think about bonds as a safe haven because we've been in a 40-year cycle where interest rates just went down sort of.
And maybe they're actually not going to provide much cover if we are just on the other side of the 40-year cycle, meaning that interest rates generally are going to be going higher. Is it as simple as that, do you think? I mean, it could be. I mean, I sort of have two competing explanations in my head.
One is the unique nature of this particular period we're living in, which is, you know, the policies of the US Government seem deliberately designed to create stagflation; economic stagnation combined with high inflation, at least temporarily, when the tariff products come in, and then with knock-on effects that will have on wages and so on.
Andso, it's not obvious that the sort of normal central bank reaction function will apply which is, you know, oh my goodness, the economy's getting bad, let's reduce interest rates. That's the playbook that we've been using for the last, well, 40 years maybe, you know, something like that. As you say, if it's recency bias, it's recent in the sense that it's pretty much my entire lifetime. Sure. So, maybe we need to go back further than that.
And then, of course, the other explanation is what you might call a more kind of flows of technical based explanation which is the source of people who've traditionally been buying their treasury assets aren't necessarily going to want to do so. Maybe because they, you know… So, maybe it's the Chinese and they want to actually punish the US government.
Or maybe it's because people say, well this is a crisis that's sort of born in the USA (if I can quote from Mr. Springsteen) and therefore, you know, it seems likely that the path of the way this is going to play out is going to hurt the US much more than any other economy. So, the fact that, you know, having a US treasury bond as a safe haven asset no longer seems to make sense. Well, time will tell. We'll see.
You and I talked, just before we hit record, a little bit about that I said to you, “nothing has really been on my radar.” And then you kind of reminded me in our chat that, actually, I mean there's so many extraordinary things. And you know I try not to be political as such on the podcast. Having said that, it is a little bit tricky for me not to notice things like, well, first of all, I was surprised when Trump issued a meme coin. I didn't expect that.
Butnow there are some articles out, which I guess are true, that if you hold a certain amount of these meme coins, you can actually get to dinner with the President. And I thought that's just taking it a notch further. So, I'm not expecting you to comment because I think that might, you know, take us into uncharted territory. But I am surprised about the things that we're seeing.
And,you know, I had a conversation, by the way, I had a recording a few days ago, which will come out in about 10 days or so, but it's a really important recording. It is with Cem, whom you know, but also it's with the Demetri Kofinas, who has a podcast called Hidden Forces. And it's a conversation about much, much bigger things, what’s really going on, and so on, and so forth.
Andone of the things that I asked them about (and I'm not sure why I'm going in this tangent in our conversation today, but hear me out) was, you know, what happens to society when you go from thinking that people, say, officials, are probably lying to you to the point where you expect them to lie to you. And I think this is kind of how I'm moving along the whole kind of curve of what's going on in society at the moment, that things are getting more and more crazy.
And this thing about the whole, you know, meme coin stuff just triggered my mind to think about that. Butanyways, you are, of course a crypto advisor, Rob, so you may have an opinion about this. Well, I know, and I actually can't believe I'm doing this, but I sort of feel duty bound to say what a supporter of Mr. Trump would say, which is something like, well, you know, he's breaking a lot of rules, but that's kind of the point, and I guess they're unbothered by that.
Me,I'm massively bothered about it. I think the breakdown in kind of institutional frameworks and rules is a terrible thing for the US, for people who live in the US but also for the markets, I've talk about that before. Sure, okay, good stuff. All right, well, let's move on to a little bit of a trend following update. So,we might stay on this topic for a little while today because we've just finished the month of April.
First of all, my trend barometer, yesterday, finished at 52, which actually is a good reading. And it kind of coincides with the last 10 days having been a decent recovery for the CTA space, even though April will come out as a negative month for sure. But that's why people might be a little bit surprised to hear the number. It is, actually, a decent number but it is a more shorter-term measure.
Anyways,I think we all know by now that CTA and many other strategies, many other investors were caught on the wrong side of the reversals we saw in markets following the Liberation Day announcement, which was I think on April 2. We know of course that stocks sold off quite strongly. MSCI World Index, for example, dropped 11% peak to trough, and still it managed to end the month of April positive. So that's a bit of a roller coaster ride for sure.
Atthe same time we saw, as we also just discussed, more safe haven assets selling off like the dollar. We saw bonds were sold quite hard initially, but then they made some kind of meaningful recovery.
And as far as I can tell, from the very early indications that I see, there are reports out that we see, among the largest trend followers, returns in the range of say minus 1 or flat to about down 10% for the month which puts those bigger managers being from in a range of slightly up for the year to down meaningfully 15%, 18%.
Andthat's obviously quite interesting even though last week I spoke with Nick about dispersion and returns and actually they're not unusual, once you sort of look at it in historical perspective, at least according to CFM who had done some research on this quite recently. But still, it feels like people are being you know, delivering quite diverse performance numbers.
Now,of course, this is not surprising because speed, risk management, and the markets you trade will be the usual sources of differentiation for sure. I think what we may be able to say, more generally speaking, is that we all face some headwinds in equities for sure, currencies most likely as well. And then there were some single markets that I think, whether you traded them or not, would have a big impact on your performance.
And it's things like Japanese government bonds, copper, silver, those were actually specifically tricky markets to trade as a trend follower in April. Idobelieve, on the other hand, that we did get some relief from short-term interest rates. I thought they behaved reasonably well. Maybe even some of the other non US bonds, there could have been some profits for the industry there - softs, meats. But again, depending on your speed and your risk management systems.
I also think that this month (maybe you're going to talk about this later), I thought this month particular could be quite different from whether you use a stop, hard stop system or whether you use continuous signals. I think that could have meant a big difference. Ofcourse, as we've talked about many times on the podcast, commodities really won the day again in April, at least from my vantage point.
And you know, as they've done in the past, this time around, things like energies grains to some extent was important. Andthen the dollar and treasury, as we already mentioned, they were pretty ineffective in terms of hedging capabilities. In terms of speed, again, love to hear your thoughts on all of these things, but in terms of speed, short-term models certainly enjoyed the first half of the month much better than the longer-term models. But the reversals have been also quite meaningful.
So, I wonder if some of that benefit really disappeared again. I think it did. Andalso, maybe some of the moves were just simply too fast for even fast models because there were some gaps overnight and stuff like that. And the last thing, before I keep quiet now, is portable alpha. Those strategies have been very popular the last year. But in April, probably, I imagine that most people would have had negative alpha from the portable side and maybe the beta side actually ended up pretty flat.
That is going to make these products look like they didn't do a good job even though they probably did exactly what they're designed to do. Okay,let me let you speak for a while here about your experience in April specifically. So, in April I was down 5.50% maybe. In line with the industry, actually. Yeah, I mean, actually, and if I kind of go back, for example, if I look at say what's the November 2021, Niels. That was actually a worse single month return for me.
What has hurt more, I guess, is actually the fact that, you know, I was at a sort of high watermark in November 2021. I'm actually down from my high watermark of May 2024. So, I've already talk, and that’s one thing I've done, actually, recently is an analysis for my performance from the UK tax year which interestingly ends on April 5th. All right, okay. It kind of gets the initial like move… Which we'll talk about, by the way.
Yeah, so, I've not actually looked at kind of individual market P&L but I can tell you that, you know, looking at for example things like speed for example, my very, very fastest models, it looks like they made a little bit of money in that initial up, you know, that Initial bounce in April. But, you know, my expectation is that I would have been whipsawed afterwards. So, yeah, to be honest, the 12 months coming into April 5, which is when I kind of closed my accounting period, weren't great.
And there's a little dip at the end, and that dips just continued. So, yeah, but it has flattened out. So, you know, basically I've kind of gone pretty much sideways for the last 10 days. So, this is actually one thing I wanted to pick up on. I think this is perhaps where we can talk a little bit about it.
So, we talked about some of the differences, the usual differences, but one thing that we don't talk so often about, specifically on specific calendar months, is this thing about maybe the type of trend following. So yeah, in lack of a better word, classic trend with a stop. Are you going to talk to me about the size of your pants? No, I'm not, not today.
But,but this thing about actually if you get stopped out and then you get this bounce and sometimes, you know, it's great to have, you know, a simple trigger and you're out, and sometimes it works against you, so to speak. And I have a feeling that this month actually be quite different between the two methodologies, which is not always the case frankly for most of the time. But I think, specifically, because you mentioned one thing where you say, well, the last 10 days it's been pretty flat.
And I've seen that with other managers, but I've also seen markets and performance with some of the other managers that you have access to on the Internet, have pretty good bounces in returns. So, I'm imagining, in my little mind here, that that could be because, if you get stopped out, there's just no way for you to come back until you get a new signal. Yeah, yeah. So, there's sort of a conflation here of two things which is speed and, as you say, the way you kind of capture your positions.
So, you can imagine that a manager who managed to be short on that initial kind of sell-off and then, somehow, got into the bottom on, I don't know, on the following Tuesday pretty much. So,that was like what, April 8th or 9th, I think the bottom, very bottom was. And obviously it's quite hairy. just talking about stocks as well, you know, just purely on stocks because that's what I think most people have followed. And, so, how could you capture that bounce?
Well,the only way that would have been trading fast and also very, very fast indeed. And the problem is if you were trading just a fraction too slow, you'd have been whipsawed. You'd have gone short on April 9 and then been hammered basically on the way up again. So, you don't want to be doing that. Now,if you're someone with a very wide stop, then you'd have still been hanging on. So, you wouldn't have done anything to a position, so you'd have hung onto your position.
Then April the 9th happened, I don't care, I've got a very wide stop and you just hang on to position as it goes back up again. So,your P&L for S&P 500 at least would have been just slightly up for the month. Nowlet's say you were running a stop loss trend following system but your stop was a bit tighter. And let's not forget that the S&P, you know, had already started to sell off. So, you know, it was already in a drawdown.
So, it wasn't like, you know, that two days of returns pushed it into a position where it might get a stop. So, it's not inconceivable that you know, you'd have had a stop that would have been triggered on April, say the 5th, or the 8th, or the 9th, because the market had already, at that point, I think it pretty much got to 20% off, roughly.
So, if your stop had hit say 18% down, which means you'd have been closed out on the Monday, well, obviously now you've got no position on, and you've got that loss booked in, the rest of the month, as you say, your position's flat. So, your P&L curve is just going to be a sharp downwards thing and then a flat spot. Now,for someone who adjusts their positions every day according to risk, which is what I do, it's less likely to have to be one of those two extreme events.
It’s more likely to be something in the middle. So, probably most of my panelists shut me down but then kind of, sort of went sideways because my risk has reduced dramatically. I'mrunning, currently, at something like a third of my normal risk levels. And in equities, probably much less, again, because it's very unclear what the pattern is. You know, it's very unclear what the trend is.
So,as a kind of hand waving academic argument, running with variable position sizing essentially makes your distribution returns closer to a normal distribution to a nice bell curve without extreme outliers. Using stops makes you more likely that you'll have bigger outliers. And, of course, what you want is those outliers on the upside because you want that big fat positive skew on the upside and that's what these funds try and capture.
Thedownside of that, of course, is you'll have more outliers on the bottom, because you will have these times when you just cut at exactly the wrong moment and just close your position, take a big loss, or alternatively be in a market that's gone up a lot.
And when you've got huge exposure and risk (this is obviously what happened with cocoa), you've got a huge risk exposure to it and then when it moves against you, that has a big effect on the overall P&P of your fund because it's such an outsized position.
The other thing that I see so far in the early data, that also goes in that direction, is just to see that some of the high flyers we have seen in the last few years, one or two funds that did really, really well, much better than anyone else, at least one of them that I saw the numbers on has really been hit very, very hard in April.
And, you know, this is something that I think I've mentioned in the past and I think this is where, when you build up a lot of open profit, which of course is great for the investors who are in the fund, but for anyone coming into the fund at a time with a high amount of open profit, obviously runs a much larger risk for give back. And I think that's what we see in some instances, and in particular one that I noticed. And that's something investors should be very aware of, I think.
Absolutely, yeah. I mean you basically, when you're signing up to these guys, you're signing up for potentially making over 100% a year in the good years. But yeah, in the bad years you could be down 30%, 40%, 50%, 60% potentially. Andnow and mathematically, and I can talk about whether that's kind of Kelly optimal or whether it's not Kelly optimal, but that kind of goes out the window as to whether you've got the stomach to cope with that kind of loss. No, no, absolutely.
Allright, well, let me just run through some numbers that I've collected so far this month. April BTOP 50 down 3.49%, down 3.54% for the year. SocGen CTA index down 4.47% in April, down 6.88% for the year. SocGen Trend down 4.98% and down 9.41% for the year. And the SocGen Short-Term traders index down only 86 basis points and down 88 basis points so far this year.
Andone more index that I just saw tick in, because it is kind of relevant in some ways, it's the Bridge Alternatives Index which is sort of a flat fee trend managers, -6.24% in April, down 10.58% so far this year. And,as we already talked about, surprise, surprise, MSCI World Index actually up 74 basis points in April, only down 1.41% for the year. The S&P 500 down 68 basis points, only down 4.92% for the year. And the S&P US Aggregate Bond Index up 36 basis points and up 3% for the year.
Soclearly not how people will remember the month when they look at the end result. Lots of volatility, lots of stress testing going on, I think, of different strategies, not just in the CTA space. And we'll see how all the chips fall out when we get the numbers. Butwhat I do like about kind of the early indications we see is that, for the most part actually, managers did well and risk management systems held up as they should, and those who follow their process were fine in the end.
Okay, it's a down month, but it's nothing unusual, so to speak. Rob,let's quickly deal with a question that came in from Nile. Nile writes, “Apart from reading and, of course, paying for all of Rob's books, what would you recommend for a young quant entering the CTA space today? If you were just starting your first role in the industry now, how would you prepare for it and hit the ground running, both technically and in terms of mindset and market understanding?” Soover to you, Rob.
What would you do? I hate these kind of job advice questions because I feel like, you know, people of our age, Niels, I don't feel qualified to talk about the job market at the moment and, you know, I wouldn't want to think about starting a new job and what I need to learn for it. I mean, so obviously, you know, you're going to need to be able to program. Find out what language you're going to be using. Get lots of practice on it.
Justread and be aware and I think be prepared because, you know, starting at the bottom, going from school, effectively, you may be surprised to find how unexciting it is. You're going to essentially be doing things like cleaning data and sort of pouring through lots of graphs and numbers and understanding them. So yeah, be prepared for that, I suppose. I don't know, Niels, maybe you've got a better advice.
Well, no, I mean, first of all, I would really think about exactly what role you want to play in this industry. I think things are changing. And I think, even though I'm not an expert in this, I think that the role of AI makes a difference in terms of what roles might be needed more than others. Even in our little niche industries. I would really think hard about it.
Andeven if you have a technical interest, a technical background, some sort of research background, maybe you have other skills, maybe you have great skills talking to people, other people, which not a lot of quants do and therefore you can fill a role, and be that in-between person, so to speak. I mean, there are some classical books out there besides your own, of course. Ithinkthe one Katy Kaminski wrote with Alex Graserman. I think it's a great book to start with.
Obviously, Michael Covell, maybe more from an historical point of view of the industry, have done some books. So, I mean, there is so much information out there, really. But it very much depends on what part of the industry you really want to… It may also be worth looking at the sort of less, what I call the less glamorous but more useful things like knowing, for example, things like, you know, the US bonds trade on 32nds or 64ths rather than on decimal fractions.
Knowing that kind of stuff because the worst thing in the world is when someone looks at you like you're an idiot for not knowing that kind of stuff. And, you know, quants, famously, in their ivory towers, don't know that. So, if you don't want a lot of abuse from the execution traders for not knowing these things. So maybe spend a bit of time on that.
So,I think, potentially, reading Jack Schwager's book on futures, for example, my own as well, to get into the nitty gritty of things like how actually futures trade and settle, and things like that, to understanding the mechanics of the market, is definitely worth doing. One final thing, actually, I publish every year, roughly, something called the Ultimate Guide to the Best Investment Books.
There are more than 500 books now in that they're not all managed futures/trend following related, but if you go to the top traders unplug website you can download it for free and that will give you a lot of ideas for books by the way. I completely forgot about that. Anyways,now we go a little bit deeper into kind of your annual review. So, I'm excited about where we're going to go with that. Obviously, it's been an interesting 12 months. Right? Let's face it because.
And the reason I say that is, for whatever reason, the tricky part for trend followers really started in April of last year. The first quarter was so strong. The best, I think it was probably the best quarter in the last 25 years and then it became much more challenging. And, of course, your tax year is exactly that. So, there's no surprise that it's probably going to be also a little bit challenging for you to explain.
It was my worst ever year since I started doing this with my own money, which my first full year was April 2014 to April 2015. So, it's a one-in-ten-year event is one way of thinking about it. Soyeah, I was down sort of 15% so I had a little bit of an additional run going into the first few days of April. My high watermark was probably late April, and so I was up 5% at that point, plus the money from earlier on. So, it's all looking good.
I don't remember the timing of it, but last year I think you told me you were increasing your allocation to trend, is that right? Yeah, I did that sort of at the end of the tax year. So, yeah that wasn't my greatest timing but anyway,. So, unfortunately, the money I lost last tax here was with a larger amount of capital than I had before. So yeah, thanks for reminding me. No, no, I mean, come on, just trying to give people the full picture of it. So, to try and describe the P&L graph.
Obviously, people want to come and look at my graph. But, essentially, I have a leg down from May down to mid June, and then it kind of makes that back, and I had a really big leg down, basically, for July, which I think was mostly related to the yen if memory serves. Yeah, and Just to put it in context, so, that total leg down, in sort of size, is roughly 12%. Okay. Over about three weeks.
So that really puts April, you know, when I was down 5% in two weeks, in context, you know, so April, although it did seem like, a big event, and the markets were going crazy, actually, in terms of my P&L, if I was to plot my P&L month by month, you barely see it, to be honest. It's not by any means even one of the biggest changes in the last 12 months. And then I sort of a gently drift down to October. And, basically, then I go pretty much sideways.
So, actuall,y April doesn't even take me back to my low. Ithinkmy low was in October, and I kind of touched again in February and April. So, yeah, kind of two or three weeks during the year when things went really badly wrong, unfortunately. But such is life. Anyway,so that's.
That, I guess kind of interesting though is I do some benchmark comparisons which, you know, people are welcome to look at and which kind of makes me feel a bit better about myself because, obviously, it's one thing losing money, it's another thing if you've lost money and the rest of the industry's done really well. So, fortunately that wasn't the case.
, for the sort of end of April to end of April, for example, you know, something like… Well, without mentioning specific performance of other people, Rob, maybe just relative performance. Yeah. So relative to, well, I can mention, so the SGCTA index for the period I looked at, which was to end of March. End of March was down 10%. I was down, for that period, about 14.7%. And I run at a much higher volatility.
So actually, on a vol adjusted basis, I was quite happy with my performance, to be honest. So,then let's sort of dig in a bit more. So, one thing that you notice when you have bad years is you have bad years. And so, if you've got a very well diversified portfolio, which I have, across lots of assets but also across lots of trading speeds and things like that, you notice that when you have a bad year, it's because everything's gone wrong. essentially.
It's rarely because you're overexposed to one individual market because I just don't have positions that big in any individual market. So,actually, if I look at where I made money last year, I made money in ags and that was it. Yeah. So, in equities, I lost money, energies, FX, metals, bonds, vol across the board, I lost money in every other market. Although, interestingly, I did make money in the S&P, which was quite interesting. But there we go.
So, that's the kind of… So, our worst market, for what it's worth, was natural gas. But yeah, it's just a kind of general malaise across all the asset classes. So, let me ask you a couple of things then. I think when you go through the difficult times, you know, it also will probably ask questions in terms of design. I know you did this change a couple of years ago with how you select the positions from a much bigger universe, and so on, and so forth.
Isthere anything that you've seen in the past year, now, doing your review of it, that has given you ideas to where you think you might want to tweak things or not? Yeah, I mean, this is a dangerous path, but it's the obvious question you get asked if you've had a bad year. Well, you should also ask yourself if you have an exceptional year, you know. Yeah, yeah, definitely.
I mean, I guess, if I also look at… So, I think on an instrument, first of all, to answer your question directly, I haven't actually looked. So, if I look at the performance of the dynamic versus what I did before, from year to year, there's a lot of noise and I don't think I can make a judgment about what's better. I think the dynamic is better at risk targeting. So even if it doesn't give me extra return, I'll probably stick with it.
IfI look at the sort of performance by different indicators, if you like. Again, across something like 50 different things that I used to forecast with, pretty much all of them lost money, apart from three, which was fast relative momentum, relative carry, and relative value skew. So,it's not really a surprise that they're all relative, I suppose, potentially.
So, you know, I guess there is an advantage to having diversification across styles to an extent because if I was a pure trend follower, I would have been doing worse because I wouldn't have had these things in there as well. But,you know, even carry, which arguably is normally a bit of a diversifier, even that that was down particularly the very slowest carry I run. So, yeah, it was just one of those years where nothing worked.
So, the only question one can ask oneself is, well, is it just the case, you know, the question, does trend still work? Yeah, we may come to that, actually. We may come to that. The other thing I'm just reminded of, as I hear you talk, a couple of things actually. WhatI've noticed at the end of April are that a few managers are hitting their worst drawdown ever, even though they've been around for 30 years or so. Yeah, I'm in the worst drawdown, certainly.
So, I think that's kind of interesting. And I think I spoke with Nick about this, or maybe Katy, I can't remember, where you kind of think back, and say, well, if you've been around for 30 years, you would think you've learned a lot and you've tweaked your systems along the way. And you would kind of think that your strategy and certainly, then, the subsequent research have been going through pretty much anything that can happen.
Imean,this is, kind of, how you would feel about it, but clearly it's not. And I'm not suggesting that even though you would want to say that your worst drawdown is always ahead of you, and you kind of think, ah, that's probably not true, but sometimes it is true. But, all I'm trying to say here, in a not very elegant way, is that how do you think about that? How do you think about this idea that you've been around doing this for so long.
And many firms have been around for decades, yet some of them are still, only now, getting to their worst max drawdown. How should we think about that, do you think? This is more, maybe, a philosophical question. Well, actually, mathematically, the, the longer you run any trading strategy, the bigger your worst drawdown will get over time. That's just maths.
Okay. Basically, in the same way that, if you're drawing returns from a distribution, the worst return you've seen will always bet bigger over time because you've got statistically more chance of seeing it, in expectation. You may get unlucky and have your worst possible return on day one. But in expectation, the variance in your returns will grow with a square root of time. And the worst drawdown will grow (not sure if it's square at a time) but it will grow over time.
So, actually, mathematically your worst drawdown is always both of you in expectation. You know, you just have to be really unlucky to get a really bad drawdown when you first start trading. Imean,it is tricky because of course, you can do things like, for example, do an exercise where you say, well, this is my backtest. This is my worst drawdown in my backtest, and maybe I'm actually currently even exceeding that.
I haven't checked but somebody else checked it for me and said, you know, this is actually worse than the drawdown you had in 1975. And obviously I wasn't running my system, I was only a baby. But,you know, you can do another exercise which is where you say, well, what's the probability of getting a drawdown this size in say a 12 year trading period? And it will tell you that, you know, it's about a 30% chance. So, it's not very unlikely that you could see a drawdown of this size.
Nowif I had a 50% drawdown, which you know, touch wood, fingers crossed I won't get to, I might be much more concerned because that's well beyond what I've seen in my backtest, and well beyond mathematically what I'd expect to see. I mean at the end of the day the sort of efficacy of particularly trend following signals is quite low. The Sharpe ratio is not that high compared to, say, faster systems that are more negative skew and therefore it takes a very long time period of time.
Ifwe could say sort of mathematically, no, this looks like a really bad thing is happening now and it's not working. And therefore, to be honest, it comes down to a matter of faith, which sounds like a weird thing to say as a quant. But actually, you either believe that these systems will continue to work or you believe that they won't. And I'm always open to, if I see a new system that's not necessarily trend following, I'm happy to include it in my portfolio.
If I'm confident in it, I'm happy to have more diversification. I'mroughly around 50% or 60% trend following. So, I'm probably more diversified than a lot of people out there. So yeah, I mean, it's a tough one because, you know, it's the million dollar or the billion dollar question. If things start to go against you as a systematic trader, in theory you should do nothing, but in practice it's very hard not to correct.
The other thing that might be even harder is for the investors to do nothing.
And one thing that comes to mind here is that when managers, and let's just talk about trend followers, for example, go through a difficult time and a difficult month like April, I think it's very human, actually, to start projecting as a client, as an investor, not someone who's running their own system, saying, oh yeah, I think this market is probably going to be very choppy for the next six months, so I'm just going to redeem and see what happens.
Youalso reminded me of the November 2021 event which happened right after or before Thanksgiving, I can't remember if it was before or after. I think it was after, actually. Which was, for many managers, one of the worst one day performances they've ever had. But it was also the beginning of one of the best 12 months returns that they've ever had.
So here's practical question, Rob. How do we get investors not to start projecting what they may think the markets are going to do and what they may think this will do to trend following performance? How do we avoid that? Because I think this is how a lot of people might be thinking right now.
Yeah, I mean it's very difficult because you'd think that once someone had sort of given money to a systematic fund that they'd be signed up to the idea that relatively simple trading strategies can often do a better job of predicting the future than human beings with their emotional biases can. But yeah, you're right, that doesn't stop people.
Andalso, let's face it, there are plenty of people working within funds as well who potentially think that they have some kind of ability to sort of meta time the market by timing when strategy is going to do well or badly. I mean, whenever I've tried to do that in a quantitative way, I found very few things that sort of tell you whether a trend following is going to do well or badly. Again, I'd be very rich if I knew that right in advance, to be honest. So yeah, it's a tough one.
Iguessyou could do things like say, well, you know, well, these are the sorts of conditions we're seeing now. Here's some historical periods when similar conditions existed and trend following seem to do okay. So, maybe we shouldn't panic too much. It's a combination of kind of providing visibility and providing comfort, I suppose.
Final question before we move on to the next topic, or the first paper actually, is I think you, maybe in an email to me, just mentioned that actually there are other parts of your portfolio you've made changes to. That's a bit of an understatement, actually. Before I finish,, can I just say one thing, actually, which is about the annual review. And this is very important because I think people often overlook it.
The one thing I don't do every year is calculate my costs, both commissions and slippage, and check that's in line with what I expected it to be. Soyeah, I was just under 100 basis points, which is kind of in line with what I expect in my backtest. So, you know, I'd get more concerned if that, well, that was higher than it should be than if my P&L was, because P&L is pretty much random. Costs should be predictable.
Maybe just one follow-up question on that because I think people have different methods of doing that. How do you define slippage? So, for me it's the moment when I come to make an order, I look at the mid-price in the market, and then I look at where I actually get filled. And the difference between the two is my slippage. So if, let's say, I just place the market order, I'd probably get roughly half the bi-out spread as my slippage.
If I have more market impact than that, then I'd get a worse number, and if I had less market impact than that, I get a better number. Itendto get a better number because my execution algorithm doesn't just blindly submit market orders, it does actually submit passive limit orders and then switch if necessary. So, my slippage bill is actually lower than it is in my backtest. My backtest is conservative and assumes I always pay half. No, I mean I saw your numbers and they look fine.
Okay, yeah, well, I was guilty about saying this, but anyway. So, as I said on my last appearance of podcast, I've had quite big reservations about the direction of the US economy under its current leadership and people should go back and listen to that. AndI've actually been underweight US stocks for some time anyway, to be honest. And so, at the beginning of the Liberation Week, before Liberation Day itself, I actually sold all my remaining US stock exposure.
And then, essentially over the next three days, I actually reduced my exposure. I went basically when completely to cash in my long-only portfolio. And is that permanent? Is that a permanent thing? Or just because you think as long as there's no visibility on tariffs and trade and stuff like that? Yeah, so this is the biggest discretionary investing decision I've ever made, just to put that out there. And I wish I'd done what Warren Buffett did and gone to cash, you know, in February or March.
But we can't all be blessed with this perfect market timing. And obviously right now that decision is looking bad because the market has rebounded since then. So, I guess my plan is to probably wait till… Yeah, I don't even want to be going to the market when everyone else is leaving. That's the ideal time. I mean, you want to try and catch the bottom. That's quite hard.
Myexpectation is that because of the fact that tariffs have affected goods that only left China a couple of weeks ago and companies, have got stockpiles and so on, and so forth. There's an article in the FTA. I think it might be Martin Wolf, I'm not sure, but he uses the analogy of roadrunner, you know, the Roadrunner cartoons, where they… Where they run out in thin air? Yeah, so, they run out thin air and then they suddenly notice there's nothing below them and they kind of crash the ground.
To me, it feels like the US economy, and I think it's myself. It's his analogy, not mine. But it feels like the US economy has kind of run out, and it's just not realizing that there's nothing below it, and it's just going to crash. So, although we did print a negative Q1 GDP number, a lot of people are waving their hands and saying… I mean, to be honest, a Q1 GDP was completely unaffected by tariffs because tariffs came in a few days after Q1 had ended.
So, the only effect Trump had on Q1 GDP was maybe a kind of general economic malaise and uncertainty and so on, and so forth. So,these things take time. And I don't think we're going to see real economy numbers, things like corporate earnings projections. I think a lot of company CEOs who are in a really sort of… I mean, the classic example is Jeff Bezos recently. So, you know, Amazon planned to put the actual cost of tariffs on the screen. Until they didn’t. Until they didn't, exactly.
So, I think there's a real sort of culture of fear among CEOs in America who don't want to kind of say… So, when an analyst says, what your forward earnings? They're going to be like, probably OK… Because they're not going to say, well, you know, the truth is I'm probably going to get smashed because tariffs are going to destroy demand in our economy. Soanyway, I'm quite bearish on the US Economy. I do think we're going to get a technical recession, 2 quarters GDP printing negative.
We've had one quarter. Okay, it's a bit technical because there's gold, which messed things up, and then there's the spike of imports prior to the tariffs. And you see people on Twitter arguing about how imports affect GDP calculations, which is, again, as an economist, quite amusing. Butno, I think we are going to see a technical US recession. And I think it's going to be deep enough that there's no way the market's going to stay where it is.
Imean,at the end of the day, so now my money's in cash, it's earning 4% or something a year. Do I think the market's going to be 4% higher? I mean, maybe, but the risk is just astonishing. Well, I mean, it's your money. You can do with it what you want. That's the good thing, isn't it? That's the good thing. But as a system, as a sort of, you know, systematic trader, it is a bit… But your systematic hasn't changed, right?
So, if equity markets start moving higher, you're going to be long equities in your systematic portfolio. And it's not like I've actively gone short. So, the worst-case scenario is I'll be up 5%. So, you know, it took up… I mean, I'll be honest, it was April, those first few days after Liberation Day, when I did actually go to sell, for example, there were some positions I couldn't sell. There was no bid in the market. It felt quite scary.
And although it's been the wrong decision so far, I do feel I can sleep a lot more comfortably, you know, having kind of closed out and having currently no kind of Trump risk on. At least you didn't have a 3x ETF, which we may come to later on. You never know. Indeed. Anyways, let's move on. We have another 15 minutes or so left. You sent over a paper that you wanted to just talk about, which is trend related. It's written by Sebastien Valeyre, I think, was the name.
And I think Sebastien actually has forwarded papers before. Can you talk a little bit about that? What caught your attention with his paper? Yeah, so, the basic idea behind the paper is that lots of people use different ways to pick up trends, but they're sort of all kind of quite similar.
And if you actually look at the correlation of the various… So, you know, for example, I've got about five or six different trend indicators in my system, and then they run at multiple speeds, and actually they're pretty highly correlated, and there's not a lot of benefit to having one of these things. So, one thing that always amuses me when you see traders say, oh yes, well you must use RSI, or whatever, or you must use this, it’s is the best way of picking up trends.
I mean, that's probably nonsense to an extent. Andif you're running your system in any kind of automated way, and it's actually coded up, then the cost of having an additional signal in there is zero. So, there's a bit of complexity and intuition, but the actual physical cost is zero, so you might as well add them in.
ButSebastien did something actually quite interesting which is to say, well, you know, that's all true, but what if we were to just pick up one single indicator that would sort of summarize, or represent, or be the best, you know, not necessarily the most profitable, but which kind is the best representation of sort of the trend universe, if you like.
So, what he essentially did was to get an exponential moving average and then to kind of calibrate it to try and sort of get to the point where it was, you know, sort of representing the… Andactually, there's the sort of maths involved in this because, for example, there's a mathematical relationship between exponential and simple moving averages.
And you can kind of combine and weight them in different way to reduce what you might want to think of as like a response function or an impulse function. So, some of this is empirical, some of it is mathematical. Soyeah, I kind of found it quite interesting. So, for example, he says that if you use just an exponential moving average with 112 days as the parameter, that's optimal at capturing trends. So, basically, I can throw away my entire system. I wouldn't do that, of course.
Butyeah, and I found it a little bit theoretical, but even if you don't go down the route of replacing everything with a single trend indicator, which I personally wouldn't do for the reasons I've explained, but I think it was really helpful for me to kind of almost rethink from first principles what we're actually doing when we're running these indicators, what they're actually picking up.
So, yeah, I found a really nice, cute little paper, to be honest, and I feel like there should be more papers like that out there. Youknow, a lot of papers are very long and overcomplicated, but this is a great paper. This is a very simple idea. Here's the analysis. There's a result. Beautiful. And I should say, by the way, that the paper is called Breaking the Trend: How to Avoid Cherry Picked Signals.
And I think we've talked about this over the years, of course, that oddly enough, there is a very fine balance between simplicity in your trend system and overcomplication. And it's really about getting that balance right because it makes a huge difference. So, it is worth giving that a read. And Sebastien, clearly, is doing okay because the company works for, they're actually based in Cannes, so in the south of France. Good stuff. Which, you know, it's not a bad place to live. Absolutely.
Allright, well, let's move on. You decide how much time you want to spend on each. I'm just going to kind of guide you to the ideas we had for this conversation. There is another, I wouldn't call it a paper, it's a Substack called The Trend is Your Friend, that's one choice you can go for. You can go for all of these. There is one on leverage ETFs that you had found interesting, to say the least. And there's a little bit about technical analysis.
So, we can do all three, we can do two, we can do one. It's up to you. Yeah, let's talk about the Substack one first. So, the chap that writes is Substack, he used to be a, I think he used to be an equity analyst and one of the companies he covered was my old shop, Man Group. So,he's kind of got an interesting perspective, and he's written a couple of articles, actually, not just on trend following but also he writes about Citadel, and Jane Street, and so on, and so forth.
So, it's a very interesting little Substack. It's called Rupak’s Substack, which is obviously a very original name. Butyeah, this is a really nice little article and, actually, I've spoken about this before. So, I had this sort of idea of the fact that if you look at the various trend following firms, you can always put them in sort of a family tree.
AndI think one of the reasons why there's some differences in opinions, we discussed earlier, about how we should sort of size and change positions and so on. A lot of it comes to the fact that actually there's almost two or maybe even three sort of original parents or grandparents in this family tree and they're on different sides of the Atlantic. So,you know, the sort of the American wing, if you like, came much more from the sort of pit trading.
So, you know, Richard Dennis I think you could describe as the godfather of that particular wing. The British wings is sort of… So, you're talking about sort of Mint, AHL, kind of a bit more quanty, a bit more sciency. And then you've got the crazy Scandinavians, of course, who just do their own weird stuff, potentially. But I guess they're more European than American.
So,yes, but I love history, and I'm very interested in the history of our industry as well because it's not been around a very long time, but it's been around long enough to have some history. And there is a famous saying that if you don't… And we're talking about looking at backtests, going perhaps back many decades, I think it's important to understand the history of the industry.
Soyeah, it's a really nice article because he does talk about people like Richard Dennis, John Henry Campbell, which obviously is the sort of the US wing, if you like. But then, on the UK side. and actually, Mint was founded by Larry Hyde, who's American, and that's sort of the embryo potentially for AHL because Man bought Mint, and then they bought AHL. And then of course there's been lot… And what's quite funny to me is, so, there's this idea of the tiger cubs.
You've heard this phrase about the tiger cubs, right? So, these are the people who used to work at Julian Robertson's firm and then set up on their own. So, he talks about the AHL Cubs. Of which you are one. Well, I mean I'm a cublett because I'm not managing anyone else’s money. Sure. Obviously, there are quite a few firms now, who I won't mention, who've got large preponderances of ex-AHL people at them. So, like Gresham would be an example. So, that's quite funny. But yeah, it's nice.
Butone thing he does touch on, a little bit, is, you know, I think he’s quite an interesting guy because he's kind of got a bit of an outside perspective. He's got a really good understanding of the industry and the history to it. But yeah, he kind of leaves open this question which we've already asked ourselves which is, you know, does this thing still work?
And obviously most people have diversified, to a degree, into other systematic strategies either within the fund or launching separate funds and trying to get people to buy them. Yeah. I didn't have time to read it super carefully but the impression I got was that there was a little bit of, kind of, as you say, is trend following dead kind of question out there. Of course we've survived many of those in the past. I'm not worried about that.
Butthe other thing I will say, just for completeness, because I think a lot of people kind of forget that although he does mention Keith Campbell. But frankly, Richard Dennis and John Henry were not the pioneers. They were people, in addition to Keith Campbell, people like Bill Dryes, from the mid-70s, PhD Bill Dunn, of course, that I work for. Yeah. Unfortunately passed away and I'm actually sorry to hear. I hadn't realized until I read this article that Bill actually passed away.
He did pass away. Commiserations on that. Absolutely. So yeah. But people often forget that it wasn't really the Turtles, although they were very early, but not the earliest in the US wings. So, I'm going to read a little bit out. That's true. But on this question of does trend following still work? I'm going to read a little bit out from the article, and this isn't on Winton particularly, I'm just reading from the article here.
“Winton'sAUM peaked at over $30 billion over a decade ago, where there was increased competition in areas of zero interest rates, Wynton pivoted. Harding stopped describing the firm as a CTA and expanded aggressively into other systematic quant strategies. By2020, only a small part of Winton's flagship fund was in traditional trend following. When the CTA industry did well, Winton did poorly and was more correlated to the equity market.
Winton's AUM troughed at $7.5 billion, although it has since recovered.” Conversely,Aspect, which is, of course, another AHL cub, both Marty and Anthony Todd stuck to their guns and were rewarded with a 40% year in 2020 and now manages nearly $10 billion. So, you know, I think there's a little lesson there potentially about sticking to the strategy. True, but in fairness, actually, Winton has really done a great job in rebuilding the trend side and manages a lot of money in trend now.
So, you know, yes, of course these decisions have an impact for sure. Yeah. But anyway, I found it interesting. I found it interesting. I think we get bogged down in the day-to-day stuff and it's often useful to kind of take a long historical perspective. Absolutely. All right, well, let's just quickly deal with the last two things that you had mentioned. One is leveraged ETFs. So, you sent me this link to this Tweet.
He talks about the Nasdaq being up 7% every year and if you have a 3x leverage Nasdaq ticker, you can make 21%. Yeah. Now, I'm not completely sure whether this guy's exactly sure… I was just going to say. But one thing that worries me about Twitter is that someone might randomly click on that and say, Oh, yeah, yeah, that's a good idea. I'll do that. Doing this without ever considering whether, A, this guy's even being serious and, B, whether it's remotely a good idea, which it really isn't.
So,maybe it's a bit too early to start kind of plugging my book, because I've only just started writing my new book, so I won't start plugging it yet. But in the process of doing so, I've recently been downloading some ETF data because one of the things the book's going to cover, potentially, is ETFs. And I thought, well, you know what, I'm going to have a look at leveraged ETFs and just see what's out there.
Andyes, well, it is terrifying because I did know that there were obviously double leveraged ETFs out there. But I was staggered by not just the number that were out there, but the kinds of things you can buy leverage on, which means you're essentially compounding your leverage even further. It really is quite astonishing that they think these things get approved by the SEC.
And maybe, you know, in the new universe of regulation being taken away, because obviously all regulation's bad (tongue slightly in my cheek there), we'll see even more of this. Butyeah, so just to kind of pick some random things that came out when I was looking at leveraged ETFs. Hang on a second. Okay, so you can buy leveraged ETFs, obviously, and boring things like S&P and, you know, Nasdaq.
You can also buy a leveraged ETF on Bitcoin, because bitcoin's quite a boring pedestrian asset, obviously has quite a low volatility. And so, you know, you need to juice that up a bit, right? You need to get higher leverage on that. I'm being obviously being incredibly facetious. I was just going to say people probably should note that you're not being completely serious here. I'm not being completely serious here. But you're like, you know what?
You know, Rob, I think double leverage is a bit boring. I want to go up. But that's good because you can get triple leveraged Nasdaq. You can get triple leveraged S&P 500. You can get, you know, triple leveraged just semiconductor shares because, obviously, they're relatively safe. You can get triple leverage South Korean… So,that's kind of interesting.
And I thought, well, this surely, you know, this is the end of the madness, but no, no, it's not the end of the madness because you can also get triple leverage shorts. So, you can get triple leveraged shorts, Nasdaq, Bitcoin, you name it. And I managed to find, there's only one, but there is one, you can get a quadruple leveraged S&P 500 ETF. Now,Niels, I want you to guess what the performance of that thing is year to date. As of yesterday, or as of the 9th of April.
Well, let's say as of yesterday. We’ll be gentle. Honestly, I know there's a lot of math involved in… Well, let me give you some help with that. So, the S&P, according to my calculations, is down about 4.5% year-to-date. So where do you think this quadruple leveraged ETF is? Well, it's not down 16%. No, no, no calculators allowed. And I can't call a friend because you sprung this on me. I'll be generous and I will allow you a 5% window either way.
So, you’ve just got to get it right within a 10% window. It's down 35%. Oh, if only that was true. It's down 52%. So, it's lost over half its value. And that's, of course, because of the way that these things compound. They have a daily reset and they compound. And so, you know, if it starts to go against you on the long side or the short side, it's basically game over. And the other thing that's extraordinary about these things is the actual cost of them.
So, the expense ratio on that is incredibly 295 basis points and only 3% in costs. Now,of course the people who sell them to you will say, well, you know, this is designed as a short term tool for managing your exposure. Sure. But you know, these are very, very dangerous things. I cannot overemphasize how toxic they are. And the Kelly criteria suggests how risky the things you should invest in should be.
We had a debate earlier about whether certain CTAs kind of go beyond that and are almost too risky for their own good. But one thing's for sure, two, three or even four times, something that's already quite risky, like the S&P, is insane. Absolutely. And double leverage on Bitcoin… Or triple leverage Microstrategy, but there we are. Yeah. Rob, let's leave the last one for another day because I think we are just past the hour now.
And, of course, you can now go back and write your next chapter on leveraged ETFs in your upcoming book. Butanyways, appreciate all the preparation, all the topics, all the very transparent thoughts on your own last year. So, I'm sure it's useful for people to know that it has been a difficult time, but it's not unusual at the same time. Allright, well, next week we have Cem coming back on the podcast.
Last time he was on the podcast he made some very bold predictions about equity markets, which people, I'm sure, would love to hear an update on. A lot of that has already happened, but not necessarily entirely as he predicted. So, there may be more to come. If you have questions for Cem, send them to [email protected] and I'll do my best to bring them up. But do send them early so I can prepare for that.
Otherthan that, show some appreciation for Rob by going to your favorite podcast platform and leave a nice rating and review. That's it for now from Rob and me. Thanks ever so much for listening. We look forward to being back with you next week. And in the meantime, as usual, take care of yourself and take care of each other. Thanks for listening to the Systematic Investor podcast series. If you enjoy this series, go on over to iTunes and leave an honest rating and review.
And be sure to listen to all the other episodes from Top Traders Unplugged. If you have questions about systematic investing, send us an email with the word question in the subject line to [email protected] and we'll try to get it on the show. Andremember, all that is discussion that we have about investment performance is about the past, and past performance does not guarantee or even infer anything about future performance.
Also, understand that there's a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions. Thanks for spending some of your valuable time with us and we'll see you on the next episode of the Systematic Investor.