The Derivative - A Multi PM (Global) Macro Masterclass with Markian Zyga

Episode Date: November 13, 2021

In this episode, we shed some light on one of the largest groups you’ve maybe never heard of, whose new “mission” is to seek out incredible trading talent and blend them together in a multi-PM Global Macro approach. We get into just how this all works, and more, in our chat with Markian Zyga, Portfolio Manager of Mission Crest, which is a subsidiary of Lighthouse Investment Partners who oversee about 14 billion in assets across their own hedge funds, solutions and services groups. We begin by discussing Markian’s background and start in the investment world, his college soccer days, what allocators miss, and how to avoid falling for the narrative of a strategy. Digging in deeper we talk how, why, and when to allocate to Emerging managers, the fund of funds versus Multi PM models, the Mission Crest strategy, macro investors, this history of Global Macro, the current Global Macro environment, blending discretionary and systematic together, trading tactically on the shorter side of trade duration, capturing big macro trends, seeking out capacity constrained strategies and searching for Alpha in the markets they’re trading. But we don’t stop there... Markian explains Mission Crests’ Multi-PM model, how the process of finding top trading talent includes both trust and identifying an edge. Buckle up for an interesting discussion on their global macro approach to investing for absolute returns. Chapters: 00:00-03:38= Intro 03:39-16:16= Striker to Strategist, and avoiding the Narratives 16:17-25:40= Emerging Managers & the Fund of Funds vs Multi PM Model 25:41-46:44= The Global Macro, all Assets, all Regions, Sustainable Edge Mission 46:45-01:00:46= Finding Attractive Talent, Gaining Trust, & Maintaining the Right Mental Space 01:00:47-01:12:59= Fixing the Great Trader/Terrible Business Person Conundrum 01:13:00-01:20:21= Accessing A.I., Model Degradation & Machine Learning 01:20:22-01:24:55= Favorites For more information please visit lighthousepartners.com  Don't forget to subscribe to The Derivative, and follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2, or LinkedIn , and Facebook, and sign-up for our blog digest. And visit our sponsor, the CME Group at www.cmegroup.com to learn more about futures and options. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Thanks for listening to The Derivative. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations nor reference past or potential profits, and listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk

of substantial losses. As such, they are not suitable for all investors. Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. So you can almost envision a number of lumpy, idiosyncratic return drivers with positive skew that are positioned around the globe to take advantage of the opportunities within their market when they occur. And then we want to blend those portfolio managers

with trading strategies that can perform in a differentiated manner. And that's where the systematic piece comes in. And so today it's roughly 60% discretionary, 40% systematic. And so, whereas on the discretionary side, we're really trying to profit from views that occur over weeks, over months.

Albeit our portfolio vendors will trade tactically every day, but ultimately they try to capture longer views. We recognize that sometimes macro opportunities really occur over short trading horizons or at market inflection points. And to capture those opportunities, we wanted to use the systematic side to take advantage there. And so on the systematic side, we've been attracted to approaches that tend to be machine learning driven, some more sophisticated statistical modeling techniques that can recognize patterns that tend to have a better chance of

success in periods of expanding market volatility and in that way are very complementary to what we're doing on the discretionary side hello everyone before we get to our guest today, quick note that we'll be taking a break from publishing the pod Thanksgiving through the end of the year. Well, you guys get a break as the listeners, but we'll still be recording and setting things up for a killer new season in 2022. So we've got two more before the break, this one and one next week with some grayscale people talking Bitcoin ETFs. So we'll see you back here at the start of the year. Enjoy the last two episodes of the year. Thanks.

So today we're shedding some light on one of the largest hedge fund groups you've never heard of, probably, whose mission it is to seek out and find incredible trading talent. See what I did there, Markian? We've got Markian Zyga, and I forgot to ask you how to pronounce your last name. You actually pronounced it perfectly. manager of Mission Crest, a subsidiary of Lighthouse Investment Partners, who oversee about $14 billion in assets across their own hedge fund, solution group, and services group. So welcome, Mark. Yeah, thanks for having me, Jeff. Great to be here.

No worries. Yeah, so we've known each other, what, now 10 years or something? It's been too long. Yeah, it's been a while. We're getting old. And you're there in Chicago in the home office? Yep, here in the home office in Chicago. Love it.

We should have done this in person. Next time, next time. So let's get it started. How did you end up in this crazy hedge fund business? Yeah, so I think it's been a long time coming. Since I was little, always interested in statistics, making predictions, and even as simple as studying batting averages in the newspaper, you know, I think was always attracted to analysis, whether it be technical or fundamental.

I did come out to Chicago for my undergrad at Loyola University Chicago. Interestingly enough, originally was a pre-law major or started in political science, but somehow found my way in econ courses, started getting really interested in supply and demand analysis, understanding how economies work. And I think probably because I played a lot of sports growing up, this was the closest thing, i.e. competing in financial markets, trying to figure out how to ride trends. It was an accumulation of things that ultimately got me interested in financial markets. And I think that I was lucky enough just to be based in Chicago, futures market hub, clearly with the exchanges here. I actually interned at HFR while I was taking coursework at Loyola during my senior year, and then was fortunate enough to land with a good group in Lighthouse when I was graduating. Awesome. And where was hometown? You came to Chicago from where? where yeah I grew up just south of Cleveland Ohio in a small township called Hinkley in Medina County Hinkley love it um and then you

had some so you were like Alan Greenspan doing the batting averages on the fly in your head I wouldn't put myself in that same stratosphere but i would say i've always been fascinated with numbers and technical analysis and i i think it you know not that i knew that the cta or macro world existed at that point in time but it's funny how things work out and and you end up where you do yeah those are who knows if those are true right but he used to sit in the stands and say if he gets a hit here his average will be x or or Y, which isn't all that hard, I guess, but probably impressive at the time. And so you were an athlete, you played college soccer? I did. Yeah. No, that was part of the reason I think why I ended up at Loyola, the opportunity to play soccer there and then also be in a bigger city. So the polar opposite of where I grew up. So yeah, it was, it was a fantastic experience at Loyola.

The Ramblers? The Ramblers. What was, what position? So I played up front. I played as a striker. Nice. You hold the goals record at Loyola or not? I was not, I was not that good. But, but, but no, thankfully we had a good, a good group of guys had a little bit of success you know the guy that played next to me up front he scored a lot of goals so I don't know how much

credit I can take for that they all the defense was collapsing on you and he got the open shot exactly yeah I should I should say that more often and so then join up with Lighthouse so yeah it's sort of, I don't know if that's a good thing or bad thing, but sort of a, I don't think your everyday person would know it if they heard the name, right? Versus a Bridgewater or some huge group, but you got 14 billion. It's nothing to shake a stick at. So tell us a little bit about the Lighthouse story. Yeah, for sure. Yeah. So Lighthouse has actually been around for 20 plus years. The firm was founded by our current CIO.

His name is Sean McGould. Sean, as well as a few other senior individuals at the firm, actually started their careers working in different functions at a CTA called Trout Trading. So a pioneer within the systematic trading space. Were they with him out in Bermuda? Sorry. Yes, some of them actually were. And Sean's actual responsibility was taking some of the excess cash that they had since a lot of the trading that they were pursuing was quite efficient and investing internally and externally and other strategies and you know the first fund of funds multi-pm type of

type of outfit so yeah he developed experience there and then ultimately moved to a family office operating the alternative investment arm there and in 1996 started what became Lighthouse's flagship fund of funds, Lighthouse Diversified. And then since then, the firm's evolved and grown. So really building a separately managed account platform has been the backbone of the business historically and where we've ended up today. And so you had touched upon it, but today there are really three core business lines, still that traditional fund-to-funds business that we call Hedge Fund Solutions.

We have a platform services group that offers the pipes and plumbing for large institutions that don't have the infrastructure that we do, but want to invest the advantage account and leverage our technology. And then the third piece is because of that technology and platform that we've built, today we have two hedge funds, two multi-PM funds, one of which is called NorthRock, which was founded back in 2013.

And then a newer effort, a macro fund called Mission Crest, which we founded back in 2019. Nice. Um, and so we kept bumping into each other and your role at Lighthouse and kind of, uh, doing due diligence on CTAs, trend followers, global macro type traders. Uh, what are some of the lessons you took away from that role when you were pounding the pavement? How many meetings would you do a year? Hundreds, right? Yeah, for sure. And honestly, I think that's one of the huge benefits of landing in that type of position. So at the start of my career at Lighthouse was part of the, for all practical purposes, the CTA team. So we were evaluating primarily systematic traders within the futures space, but also commodity folks, foreign currency, macro traders as well. And the amount of osmosis that would happen as it relates to learning was quite staggering. to end up as a hedge fund guy or in this space. It was something that is naturally interesting given the mystique or prestige of the industry

historically when you're in school. And then also just the experiences and lessons that you learn, you know, making investments, working with different hedge funds, being a partner to these groups. And so what do you think a lot of allocators missed that you guys had, you know, some skill in doing or that you learned over time in that role of like really digging into these guys or being able to see through the facade sometimes? Yeah, so maybe saying that other allocators miss something is a bit harsh. Yeah. And the reason I say that Jeff is, yeah, honestly, I was really fortunate that Sean,

the broader lighthouse team, the platform that was built and the amount of data that I had at my fingertips, you know, I'd be blind to say that that wasn't an advantage in terms of everything that I got to see and learn as it relates to the interaction with the different trading managers that we had on our platform relative to other fund funds where you wouldn't have that exposure of that transparency. So I think I have to recognize that

you know that was an advantage for us. But having said that, I think looking back, one of the main things that I've learned is too often, whether it's because your clients want it described in a certain way or it's just easier, that a narrative just gets associated with why a particular strategy is working, why a PM is outperforming or underperforming, where really there's probably a lot of different principal components that are driving any particular price path at any point in time. And maybe we can get into this later. Ultimately, to me, it's a series of edges. It isn't just one star trader that determines whether you make money or not. It's a lot of different factors and functions. And I think not being reactive, but rather proactive is something that we see as a mistake and something that we've tried to learn from over the years.

And just going back into the data, was that both pre-investment and like, it makes sense post-investment, you're tracking everything in real time, but were you also ingesting as much data as possible and doing analysis before investment? Yeah, exactly. And in every situation, it's different. Certain PMs, certain funds, the amount of transparency that they will share ahead of investment will vary. And that will ultimately also drive the amount of conviction or decision that we would be making on our side. But I think what was really valuable is one,

seeing the trading live on an ongoing basis, because there's so much due diligence you can do ahead of an investment, but then post making that investment, there's a constant feedback loop of seeing the trading throughout the day further verifies whether you like something or not and whether it's meeting objectives. But then because of that approach or because of that process, building out naive models, really trying to determine what is beta and what is alpha within any particular hedge

fund strategy that we're trading across our platform, we can do that because of the live trading that we see. So I think they work hand in hand. Do you ever, do you think of it as like, I'm going to take a taste? Sometimes I try and talk investors out of that, right? Like you're going to, the taste doesn't really matter, I guess in this scenario, maybe because you're getting, you want to see the live data first. Yeah, I think it's, I think it's hard. I think you have to have the structure to do it, if I understand the approach that you're trying to describe. And honestly, the name of the firm is Lighthouse Investment Partners. We want to be partners to each PM, each fund that we're working with. the business of bringing on a bunch of flyers and putting them on watch right away and then seeing which ones work out, you know, treating them like call options. It's really a different approach. And, you know, maybe some could argue it's a little bit harder from the standpoint that we need to be right more often from the standpoint of being more selective as it relates to the groups that we're partnering with. But we think that the experience and the data and all these lessons learned helped get us to that

place. Yeah, I always talk investors out of that because whatever time period you're looking at is going to, by definition, be some abbreviated period, right? Maybe they got lucky over those two months you're testing and then you ramp up the allocation and or vice versa they were unlucky you don't do the allocation then they go on to prove their stripes so it seems it adds a bit of timing luck to the equation yeah it's a tough model and in particular you know the space that you and i know quite well the cta space a lot of those strategies have negative auto correlations so yeah that type of approach is almost the worst thing you'd want to do exactly and so you mentioned kind of not taking flyers and call options but at the same time i feel like you guys are a little at the forefront of talking

to and allocating to what i would consider kind of emerging managers. Right. You're not going only to, right. You're not like a CalPERS RFP where it's only billion plus and yada, yada, yada. So talk to me a little bit about emerging managers and how you guys view that space. Yeah, that's exactly right. So investing with emerging managers, younger groups has always been a part of our process. One, because there's a lot of value in terms of building relationships with those types of firms as it relates to where they're at in their life cycle. But two, if we think about the fund to funds business going back 20 years, that was a place where we could develop an advantage. And what I mean by that is when you're an early investor, there's inevitably a more intimate relationship and partnership that you'll have from supporting that manager early on. And I think ultimately that benefits the clients.

And that also extends to potentially negotiating better fees, having capacity in something that ultimately might be more constrained. So I think inevitably, all those things led us to always be attracted to making those types of investments. I think earlier when we were talking about things that allocators miss or where we've tried to be more progressive, we're also able to make those investments with emerging managers because we have all the data and because of the platform. And so without that, I think it'd be much harder to do it successfully. And ultimately, that experience, partnering with hedge funds, investing with groups on an early basis was really the evolution that led us to building the multi-PM business and essentially deciding that we wanted to go down the path of building our own hedge fund as well. I'll get to that in one minute.

Just brought up a thought in my head. Do you ever on that emerging side and you're their largest client probably by far in the beginning ever, is there any, any scenarios where kind of your bias leaks in of like, are you sure you want to be taking that kind of trade? Are you sure you, right? Does the partnership extend that far of kind of helping them structure, maybe not trade by trade, but kind of, Hey, I see what you're trying to do with this type of trade. You could do it in the options more cheaply or something of that nature. So yes and no, I think we need to be honest with ourselves as it relates to what we're ultimately good at. And I think for me personally,

that's building trust, building relationships with the PMs, observing trends, what's going on across the broader market, and then putting the PMs in the best position to succeed. Having said that, though, inevitably, we would like to think that our experience within the space and everything that we've seen can also be a sounding board for RPMs. And I think what you're touching upon is actually one of the differences between moving from the fund-to-funds model to the multi-PM model, where in the fund-to-funds model, that's not really our job. But within the multi-PM model, we're building every part of the process out in tandem with the team or the pod. And yes, inevitably, we are involved in the research and where we take that strategy, but it's different, right? Because in that scenario,

we are the PM's only client and we're working hand in hand. Whereas in the fund to fund situation, the PM will have multiple clients and they're essentially trying to come up with the optimal solution for the aggregate, as opposed to what we directly would need for our clients. And we could, I was going to jump into that multi-PM later, but maybe since we've touched on it now, so help explain the difference there between fund to funds and multi-PM. You just gave us a third of it, but tell us the difference between those two. Yeah, sure. I mean, look, I think it is an evolution

of moving from a fund of funds to multi-PM type of approach. I don't think we could have gotten here without all that experience, you know, having been investors previously and then moving to the structure that we built. But I think structure is probably the right word to start with. That is the biggest edge and advantage that we have from the standpoint that the managers are exclusive to us. We are working in tandem, in concert, in lockstep as it relates to not only the trading strategies, but risk management, how we can upsize or downsize positions. All of that, you know, we think is advantageous.

And I think as a part of that, too, the costs are better because there's synergies in terms of paying for data, paying for servers, setting up execution. And I think not only does that lead us to a better outcome, but it also gives us a much deeper understanding of developing conviction within a particular PM. And so what I mean by that, we've even talked internally about this, that if we go back 10 or 15 years ago, there are things that are critical to us today or that we think about when evaluating hiring a prospective PM that we previously wouldn't have necessarily

considered. And that was just because we hadn't built a hedge fund from scratch and just hadn't thought of every single thing that can go wrong as it relates to technology, infrastructure, execution, research, and how all these things fit together. And that's really what I mean when I talk about all these small edges that ultimately make the difference between something that, you know, would struggle to generate returns and something that I think could be much more attractive. And so I think in doing this, though, it wasn't evolution, but it was also making an observation of what are different asset managers that we interact with and observe, and what are the pros of those different approaches,

and how can we bring all those things together and put it into one unique solution that we think is attractive and so i guess just explaining that a little bit further there is a very strong advantage for funded funds from the standpoint of the breadth of talent they have access to all the different things they could potentially invest in now if i think about a prop model where you have a number of traders that each are managed to tight stop losses, they're organically taking down exposure when they're losing money and bringing it back up when they're making money, that can work quite well. And then on the third side, with a very successful hedge fund that has a lot of resources, that can be adaptable, that can move and change with the market environment, there are advantages there too.

And so ultimately, taking those pieces or those pros of each one of the approaches that I described is ultimately what we were trying to do when saying we wanted to transition and build out a multi-PM platform or this infrastructure that could house traders. It seems like it's the confluence of a couple of different things, right? Like the manager, the hedge fund manager himself that the fund of funds might have allocated to, things are just progressively getting more and more expensive, right? Compliance, data, technology, talent, like all that stuff. So you have that issue. The investors are kind of saying, I don't want to pay extra layer of fees. And then as you're saying, your knowledge came in. So it seems like those could come together and like, hey, we don't have the extra layer of fees necessarily. We can provide all those shared services for all these managers, right?

And maybe the manager's managing 100 million internally for you versus 300 million externally, but it's a better deal for them because they don't have to deal with all the headaches. Exactly. And I think in terms of achieving our objective function, which is trying to maximize risk-adjusted returns, I really feel like this structure is absolutely necessary. We wouldn't be able to do it in the other structure because each one of the traders is an extension of what we're trying to accomplish, whether that's risk constraints as it relates to a drawdown level or the amount of exposure that they're taking, but then also how they adapt and evolve.

That's an ongoing and constant dialogue that we have, and we're helping shape their business. We're working together. in terms of achieving those objectives for our clients, I do think it's the optimal route because the focus is solely on, on the exposures and positions that they're taking within the partnership with us. Let's zoom back out and talk. So we kind of got into the inner workings of mission crest there but let's zoom back out in the mission crest strategy overalls multi-pm global macro uh give us kind of the the elevator pitch of of what you're trying to do with mission crest

sure um yeah so i guess taking a step back it's a global macro multi-PM, as you noted, trading across all asset classes, all regions. And ultimately, we're trying to exhibit limited correlation to not as macro investors towards pursuing those strategies or approaches that we think have sustainable edges in trading across the macro space. And so that means equity indices, fixed income, currencies and commodities. We want to have exposure across all those areas. And then I guess just taking that a step further. So how are we attempting to accomplish that? We think it's a combination of both discretionary and systematic approaches. We want the ballast or the core part of the portfolio to be asset class or regional experts. So today we have an inflation specialist, we have a commodity specialist, we have an emerging market specialist. And, you know, each one of these individuals needs

to be very experienced, expresses his or her positioning in a positively convex manner, is used to managing risk very tightly on the downside. And so you can almost envision a number of lumpy idiosyncratic return drivers with positive skew that are positioned around the globe to take advantage of the opportunities within their market when they occur. And then we want to blend those portfolio managers with trading strategies that can perform in a differentiated manner. And that's where the systematic piece comes in. And so today it's roughly 60% discretionary, 40% systematic. And so whereas on the discretionary side, we're really trying to profit from views that occur over weeks, over months. Albeit our portfolio managers will trade tactically every day, but ultimately they try to capture longer views.

We recognize that sometimes macro opportunities really occur over short trading horizons or at market inflection points. And to capture those opportunities, we wanted to use the systematic side to take advantage there. And so on the systematic side, we've been attracted to approaches that tend to be machine learning driven, some more sophisticated statistical modeling techniques that can recognize patterns that tend to have a better chance of success in periods of expanding market volatility, and in that way are very complementary to what we're doing on the discretionary side. And then so from here, today, we have 10 teams that trade for us, 10 senior risk takers that may be supported by sub-PMs or researchers. And we actually have two

new teams that will likely join us over the coming months that are sitting out there now in competes and really excited about where we're headed from here. And so why label it global macro? Like instead of all weather or absolute return, right? It's sort of in those, but I'm guessing it's because it's trying to have this positive skew. It's trying to have that kind of classic macro profile. Yeah, I wouldn't disagree with any of the terms that you described. We do view it as an absolute return fund. The intention is that the strategy could perform regardless of the market environment whether we're in a bullish or bearish type of environment but ultimately i think those terms that you used absolute return

all weather positive skew i guess to me that's ultimately what a global macro approach should be doing yeah and and and so that is ultimately what we're trying to accomplish here. And we want the ability to be able to go anywhere and trade opportunity sets as they evolve. And, you know, one example I've used this year is heading into 2021. I think we were really interested about the opportunity set with important exchange. And ultimately, the opportunity set has been more fixed income and commodities for the things set within foreign exchange. And ultimately, the opportunity set has been more fixed income and commodities for the things that we're doing. And I think that just kind of shows you why we need to have a diversified set of risk takers

that are positioned to take advantage when these things present themselves. And talk a bit about that for a second. So if I have all these positive skew kind of, right, and the concept there, they're going to take a lot of small losses and have some outsized gains. Mixing those together, what do you do when they're all, like, do you have any negative skew or any kind of carry strategies in there to cover the bleed during the times when they're not seeing those pops? Yeah, it's a great question. So we do have a little bit. We want to be very mindful that each portfolio manager serves a specific role within the portfolio. We do think that there are opportunities within macro to provide liquidity, to take advantage of convergence opportunities, i.e. related assets that have some fundamental or technical relationship that could drive those two securities or baskets of securities

moving in concert with one another. And those strategies tend to have a more consistent return profile. But on the downside are probably the one place where we need to be aware of liquidity risk, just broad-based liquidations and changes in market regime. And so just the same way that I was describing the systematic part of the portfolio where we're trying to take advantage of bursts and volatility changes in market regime. The part that you touched upon, while we're not really trading outright carry, approaches that are based more on reversion and liquidity provisioning, when those types of approaches struggle, which are in more severely stressed market environments, we would hope that the other strategies have a better

chance of success. And then does each, is each strategy informed as what the others are doing? Do they see the whole book or do you try and silo them and say, no, you just concentrate on your piece? Yeah, they do not. So the pods and teams, which continue to grow and has been an effort of ours, clearly they're working as colleagues with one another, but the 10 teams are siloed. And that was done on an intentional purpose from the standpoint of the value proposition that we're trying to provide to portfolio managers or that we think is attractive as it relates to why they should join Mission Crest, be a part of what we're trying to do, is flexibility and really more of an entrepreneurial environment. So we've been long-term investors within the macro space.

We believe we have a lot of insights as it relates to how to successfully build a macro fund. And so ultimately providing that infrastructure, that backbone to a very senior trader to take that next step in his or her career and to have the support of our platform as it relates to achieving their goals, which would mean to line up with how we're trying to ultimately generate returns for our clients as well. And do they have netting risk if they do really well, but the rest of the managers don't and the fund overall doesn't get an incentive fee or whatnot? Yeah, so the portfolio managers do not.

So the portfolio managers each have their own specific budgets and deals. Some of those costs are shared. Others are not, but ultimately they will be paid and incentivized based on their own individual performance. Perfect. They like that, I think. And then, so you mentioned it's kind of go anywhere, like expand on that. Do you all the way into NFTs and things like that, or it's just more broadly sector-based, geography-based? Yes, I think the starting point is, is it liquid and is it exchange-cleared? And then we go from there. So something like NFTs, not at the moment.

Do I think the decentralization of finance is potentially a large macro trend that provides opportunity over the coming years? I do think that is a possibility. So to the extent that those securities can be traded in a custodial manner that we're comfortable with, in a liquid manner that we're comfortable with, potentially in the future, but that is not something that we're doing today. So liquid futures that are exchange cleared, foreign exchange, cash, swap, futures, expressions of fixed income. That's really where the bulk of our exposure is. But having said that, if we think about equities, fixed income, commodities, currencies, we do think we're

touching, broadly speaking, most asset classes traded across the globe. And across the globe, that's a key point too. So while we think there's plenty of opportunity within developed markets, we also think that there's a lot of opportunity across emerging markets. And that is a place where we want to have adequate exposure. Because at times, information travels less slowly in those markets, there might be more movement or greater price ranges. And for some of our strategies, that's quite attractive. And is that mostly client based? Like I always sometimes give global macro a hard time or be like, hey, you didn't catch the run up in Canadian real estate or NFTs or crypto, right? Like all

these things that are sort of big macro moves, but aren't in the exchange traded world. So they kind of get ignored by macro and by CTA and all the rest. So it's kind of always to me of a, you know, why is that? And I know the answer is because it's not exchange traded and it's hard to scale, it's hard to allocate to. But what are your thoughts on that? Yes, we have liquidity objectives. The liquidity is the strategy that we're pursuing is quite liquid. So it needs to fit there.

There is an assessment of risk made with any trade, anything that our portfolio managers may hold. And so I think that all goes into it as well. Having said all that, though, I think there are also derivatives that you can trade of a specific view. So even though you may not be able to trade a specific asset, there may be other ways to express that particular view. And that's what we are hiring our quote unquote experts to do on a daily basis. And I think part of it too, is when we think about the overall objective of the fund, when we were talking about exhibiting low correlation, managing drawdowns tightly and exhibiting positive skew, at times we may have to pass on certain trades that we think ultimately can make money,

but may not provide the profile that is in line with the return objectives of the strategy that we're trying to pursue. Right. And crypto could probably be a good example of that. Like, sure, it might increase 200% or we could lose 80% tomorrow. Exactly. Yeah. Do you feel you're on the shorter side compared with some of the other groups? And what drives that? Yeah, I think so.

We do believe we trade relatively opportunistically and tactically. And so it would be fair to say that roughly half of our strategy is short-term and how we classify short-term is anywhere from minute to hour type hold periods. And we're not really holding positions for more than a few days and in a particular direction, but we're actively trading. And I think that was critical to us when we were thinking about how do we ultimately build the type of macro fund that we desire. It's that diversification that we had talked about across regions and across asset classes, but also across timeframes, because macro trends will occur in a variety of manners. And we want to be positioned when things occur over very sharp or drastic periods, and then also when things trend over longer timeframes. So I think it's both. But I think you would be accurate in saying that having a short-term component

has been a key focus of ours. And look, ultimately, that also means that the capacity of what we're trying to do within macro isn't infinite. But we do think that there's enough to do and we have enough talent accessing different opportunities to make something that is potentially attractive. I'm going to come back to capacity in a second, but it seems to me a little counterintuitive, right? Like how do you capture these macro moves when you're going minutes to hours? So is that, right, to say there's a huge move up in oil or something, you're getting back into that every day, essentially, for a simplistic way to view it? Yeah, so I wouldn't say this is true for all

of our strategies, but we do have systematic strategies that may flip the direction of their exposure in a particular market like crude oil multiple times throughout the day. And so to that point, there is a place where that strategy starts to degrade because of trading costs and the amount of impact that you would have on the market if you become too big. And I think that goes back also to what we were talking about earlier as to why we felt we needed to build our own multi-PM hedge fund is for a specific manager to trade that strategy for multiple clients, there probably wouldn't be that much capacity available for multiple clients, there probably wouldn't be that much capacity available for multiple clients, but for trading it solely for mission crest, it becomes much more interesting.

And then if you find a few groups that are uncorrelated to one another, put them together, you know, that's how we're trying to approach the Nirvana type solution. Does your technology, do they place the orders direct or does it come through a platform and net them out and then place them, right? If you have one guy buying and one guy selling crude at the same time, do you net those out and or not place the order? Yeah. So today, because the teams are siloed, they're largely executing upon their own. And that's why it's critical that each one of the teams is pursuing something that's distinctly different from one another and are focused on different opportunity sets.

I think longer term, as we think about where Mission Crest grows to, what you're describing will become a part of what we do. And then I also saw a lot of it is in emerging markets. What's the story there? Just there's more opportunity there? So we like liquid markets, we like volatile markets, we like large price ranges. And there are certain emerging markets that fit as a part of that. I think, you know, for systematic trading strategies, those things are quite important. Then on the discretionary side, it's where do we think we can take advantage of mispricings relative to the market,

relative to what central bank policy may be suggesting and where our portfolio managers may be forecasting that certain market prices move. And at times, emerging markets may provide more opportunity than developed markets where information just travels much more quickly

and prices get aligned or convert to the fair value much more quickly. But having said that, I wouldn't say that we're focused on emerging markets. It's just it is a place that we find just as attractive as the other regions that we're focused on emerging markets. It's just, it is a place that we find just as attractive as the other regions that we trade. And so we want to weigh it accordingly from a risk perspective. Right. I view it as it's probably easier to find some great trading talent who knows Brazil or some other market versus trading the E-mini S&P or something, right? That's, you can kind of get a better signal to noise ratio probably. I think that's probably a more eloquent way than what I was saying to describe it, right? It's potentially, there's more opportunity to be rewarded for having good analysis and

good forecasting ability in some of those markets relative to the E-mini or the US 10-year. And then that leads to, we mentioned it, that some of these are capacity constrained strategies. And even it seems like you seek out capacity constrained strategies maybe because there's not going to be as much competition in those. So the edge might last longer. Two-part question, why do you seek out the capacity constrained? And two, how can you not yourself be capacity constrained by combining all these different capacity constrained guys? So I think you did touch upon a number of important things there. As it relates to the capacity side, what we're ultimately searching

for is alpha within the markets that we're trading. And maybe taking a step back, what is alpha? In my opinion, it's that part of return that is not describable by other market factors. And so within macro, that would be momentum, reversion, carry, some type of price pressure from an event that occurs, principal components that you can identify and associate some type of return and benchmark and then ultimately access them cheaply and efficiently as an investor. And so we want to focus on those returns that aren't necessarily as easily explained or are a function of understanding when you want to trade any of those factors that I want to describe. And so in doing so, I think by definition, an alpha-oriented strategy can't be very large in its capacity, right? Because then everyone is trading it, it becomes a factor, and it's understandable by others. So I think that's implicit to what we're trying to do. So it's not that we need to have a strategy that can only manage a certain amount, but I think that's partially why we end up where we do. The other main reason why we've taken this

approach is managing risk. And so one of the risks that we think about frequently is not just the direction of our positioning, but the positioning of other market participants and what occurs when those participants all act in a similar fashion. And so the idea is that for pursuing these approaches that we do think are distinctly different from what other participants are trading, that we will be less impacted by periods of broad-based market liquidation when there really isn't any place to hide because good positions are being sold, because people just need to raise cash. So I think it's really those two pieces that have driven why we're attracted to these types of approaches. But having said all this, the capacity is still meaningful enough that when you can hire a diversified group of teams and put them all together, you get to a place that I think can provide enough capacity in an attractive format for our clients. And that's ultimately what we're trying to do.

I think there's been some recent this year or last year research on once the factor becomes a factor, it loses its ability to be a factor, right? Once it becomes known and everyone piles into it, it loses most of its usefulness for the short term. Digging in a little bit more into the multi-PM model. So you mentioned there's 10 of them. We talked a little bit about the difference between the PMs and the fund-to-fund. A PM is portfolio manager, right? Correct. Yeah. So talk a little bit about like what's most important for you in hiring. What are some of the things you're really focusing in on, on their skill level or their track record,

or their, some of these might not even have a track record that that's their own, right? So yeah, let's start first of like how are you finding them how are you hiring them yeah so we really leverage the experience of the broader team and firm the fact that we've been involved in hedge funds for close to 25 years has built out a pretty broad network as relates to where we think attractive talent may exist. And then in the same vein, on an ongoing basis, as we continue to build out our efforts and scale our efforts, there's a certain level of branding that occurs. And we're using different sell side, buy side, you name it type of relationships to introduce talent that we may not know or be aware of.

RCM. Exactly, on an ongoing basis. And I think the interesting part about where we're at today is there's also a significant amount of reverse inquiry. So assuming that we do our jobs well and are good partners to the PMs that we're hiring, they'll recommend to the respected peers that they should consider working with Mission Crest or with Whitehouse. And I think that's been to our advantage as well, in particular over the recent time. I guess to answer your question, though, what are we looking for when we're hiring a portfolio manager? There's a few things that I think stick out to me your question, though, what are we looking for when we're hiring a portfolio manager?

There's a few things that I think stick out to me. So number one, there has to be a level of trust. If we're hiring a portfolio manager into our hedge fund, inevitably there's going to be a drawdown period. We need to be on the same page as it relates to how we think about risk, how we philosophically think about the opportunity set for that particular strategy that they're pursuing, and the pros and cons. And we need to be in sync as it relates to managing through good periods and bad. And so I think that becomes pretty apparent. Philosophically, are we speaking the same language pretty early on in our conversations? That gets us to the second point, though. There needs to be an edge. There needs to be some definable reason as to why we think there's efficacy in an approach. So on the systematic side, why do we think the research

process is robust and will continue to evolve and is capturing trading opportunities that other competitors are not. And then similarly, on the discretionary side, is it because of the structuring of trades that a PM pursues? Is it because of the market set that they're trading? Is it because of their experience within the markets that they understand how price moves. To give you an example, one of our portfolio managers worked on the buy side, worked on the sell side in terms of building out trading desks at the different banks, and then worked at a real asset manager where he was managing one of the largest fixed income books on the street. And that experience in its totality, I think, gives them a pretty good understanding of how different participants interact or react to prices when they occur.

And so we need to identify those things as it relates to making any type of hiring decision. We are quite selective, as we talked about previously and so um we do think about these things from from a long-term perspective as it relates to the to to the talent that we're ultimately trying to bring into the fun uh but it is somewhat limited uh on any given year do you have a uh i don't know a nice way to put this a no asshole rule like i was we met with a manager the other day and I had some lunch and we were talking outside and we're like, Hey, is it, is it hard to separate the man or the woman from the model? Right. Sometimes you think you love the model. You love the structure. You love everything you just talked about of like, I get it, how they do all these trades. I like that. And then the

person themselves rubs you the wrong way. I'm Just curious if you ever go through any of that stuff. So I think trust is the word that I would use. And that's why I mentioned it previously is that inevitably there's going to be an environment or a period that we haven't anticipated and we need to work through that period and ultimately hopefully manage risk in a very effective fashion so that we can then go on the offensive and I don't think we we can do that successfully unless there's a mutual level of respect and relationship between the PM and myself and yeah it's a critical piece so that I don't

think that means we need to be best friends or see everything eye to eye. I think on the contrary, when I talk about wanting to hire diversified types of trading opportunities, it's attractive to me to have portfolio managers that think about the world in different ways, that come from different backgrounds. Because I think inevitably that does seep into how he or she may be putting on a position. But in the same vein, we have to work very well together. Otherwise, I don't think the process could work long-term. And now the flip side, which it sounds like you don't do a lot of this because you're partnering

long-term, but even back in the fun-to-fun days, like how do you think about firing? And you go into those drawdown periods, you go into those, there's new risks you hadn't thought about, like what are some of the guardrails you have in place and some of the metrics you use to say, this model is not working anymore. Yeah. So for Mission Crest, for any individual portfolio manager, there's a really strict stop loss. That's agreed to ahead of time. So everyone's on the same page, i.e. Jeff, if you lose X amount for us, we know that the relationship likely ends. And inevitably, the portfolio manager will start taking down risk ahead of that level. But ultimately, we're looking for professionals. And so if through a more challenging period,

the portfolio manager has not managed risk in the way that we thought he or she should, that is an issue for us. But managing risk is not only from the investment level, it's also in infrastructure and research and execution. So if we think just because a strategy has been working, it may not continue working. And if the portfolio manager is not researching new types of strategies to trade, continuously thinking about how to evolve, that may be concerning for us as well, just as much as the technology side. If execution doesn't continue to improve, if they aren't aware of their place within the ecosystem, these are all things that feed into the process. But at a high level, there are a series of risk constraints, not only stop losses, but exposure limits, liquidity limits, margin limits, that all are critical and apt as those guardrails that you would have been hinting at.

And how do you view, naively, I think of stop losses as like you crystallize the losses. If all 10 of them go under the, right at the same time've crystallized if they're 10 each you've lost all your money um which you obviously wouldn't have it that far down to lose all your money but how do you view that um crystallize the losses and still giving them the upset yeah so that that is an ultimate risk i guess if every pm team just didn't make any money but i guess we have bigger issues if we're in that scenario. And so I think that speaks to, so if we look at, so both from a qualitative and quantitative basis, we do want to have teams that are distinctly pursuing unique opportunities

to one another. And the pairwise correlation across our teams is expected, or we target something that should be quite low over time. And so that can be tracked quantitatively, but qualitatively, that needs to be the case too, i.e. when we're thinking about the book, when we're thinking about the opportunity set, the positions that we're coming into the market with on a daily basis, are there actually, is it one or two principal components that we're trading or are there actually seven or eight different return drivers that, you know,

will determine whether we make or lose money on a given day? And so ideally we're trying to target the latter and that's ultimately a part of this process as well. I do think it's different though by strategy type. So with a systematic team, I think we talked earlier, some of these strategies exhibit negative auto correlation and having drawdowns on a frequent basis is part of the strategy and then they exhibit outside. And so I think the key is we try to offer

a large amount of flexibility when we're recruiting the portfolio managers into mission crest. And that flexibility extends to how we partner with them in the structure. It also extends to how do we put them in the best place to succeed, whether it's location or resources or data. But ultimately each situation needs to be treated differently because I don't

think there is a cookie cutter answer to trade all these different approaches within macro. And I promise I'll get to the point that I'm trying to make, but it's with a discretionary trader. If Jeff, you're trading for us and the last three CPI releases, you've just been done wrong, or you're consistently not predicting which direction monetary policy is headed in, in a particular sovereign that you're looking at, I think we'll have conviction that you're probably not going to get the next one right. Whereas with a systematic strategy, I think it's a little bit different.

It's a little bit more complicated. And I think what we spend a lot of time doing is thinking about what really is the appropriate benchmark for a trading approach? Has that approach exhibited alpha? And then really thinking about the market environment and did a strategy make money or lose money, but really over a coin flip type of event that really isn't representative of whether that strategy should have performed. And so we're trying to think about all these things,

not only as it relates to being fair to the talent that we have trading for us, but also ultimately in terms of making thoughtful decisions and not jumping to that narrative to describe why something worked or didn't work that we would have talked about earlier. And then digging in a little more on the discretionary guys, like one, are these main single person right do you think about like bus risk if they get hit by a bus and they can't keep placing their trades you just replace them with someone else um but then two like do you

have to go through a different level of due diligence of like they're getting divorced their trades are off or things of that nature to come into a more personal space? Yeah, it's all critical. The headspace of a portfolio manager is absolutely important and clearly critical on the discretionary side of the business. So I joke, sometimes for some of our portfolio managers, I feel like I do act as a life coach where we have to check in regularly, not only to talk about markets, but anything else. And look, if that's what helps them succeed, then definitely happy to do it. where we have very seasoned individuals that don't want to be micromanaged, know what they want to do and accomplish on a daily basis and are harder on themselves than I may ever be.

And so from that perspective, that kind of goes back to the flexibility in terms of how we manage each portfolio manager and these relationships that we have. But you're right, all these things, it's part of a mosaics. I think earlier I was touching upon more the concrete statistical things, i.e. what's the quality of your execution? What's your hit rate? Have you gotten your forecast right? portfolio managers to be fully passionate about the opportunities that they're pursuing and that they're trading. And there will be good times and bad, and we need to work through each one of those accordingly. You think you'll ever get to a place where you're like a NBA team and they have, right, you've got hired trainers and whatnot to keep them in the right mental space? So it's interesting that you ask. A few of our PMs have stated that prior employers, they've had something like that. And I think some have actually found use in it. So look,

I would say never say never. If we think that it's beneficial and we think that it'll improve performance, then I think it's something we would have to look at. Right. I think of that Twitter meme that's like, guys will do anything except to not go to therapy. Guys will buy a tungsten cube to not go to therapy. You guys offer some very unique things in terms of your structure, right?

I think they can keep their track record things of that nature. I don't know if that's still the case. They can work from wherever they want. So talk a little bit about how you're unique in some of those regards. Yeah, exactly. And so I think I'll be the first one to say, Jeff, anything that I'm going to describe here in isolation probably isn't rocket science or a particular edge, but I think holistically our offering may be attractive to certain individuals

that are looking for something more entrepreneurial. And so what I mean by that is, as it relates to Mission Crest, we do hire traders, researchers directly to be employees. But separately and more meaningfully, we do partner with experienced portfolio managers that would have been part of a larger operation or another hedge fund somewhere that maybe should be running their own hedge fund. And in that way, we'll help in allowing them to set up their own trading advisor that trades exclusively for Mission Crest for a period of time. We're supporting the cost of their business and ultimately providing an on-ramp that allows them to achieve their ultimate dream and objective, which is running and owning their own hedge fund. And so I think there are many forms of that geographic flexibility, intellectual property, just support for the business and getting the resources that you need.

I think all those things can be quite appealing to the portfolio managers that we're speaking with. I think in addition to all of that, just on an ongoing basis, trying to be good partners and evolving and growing, that's something that's quite critical to us as well too. And do you think there's like, so if one guy's in Asia, I don't know where they all are. If one guy's in Europe, one guy's in Asia, you got someone here in the U S could that have existed five, 10 years ago? Or do you think like the push to technology and even in the last year, the push to cloud-based and Zooms and everything has made that so much easier so technology has definitely

helped i would say we did launch northrock back in 2013 and many of the things that i've described are similarities so in a way you know call it five seven years ago we had been doing something similar but everything that we're talking about as early as to mission crest is growth from the experience of building the broader lighthouse platform and so i think to that extent we couldn't have gotten to this place without all the investment in data operations resources technology all those different types of things to to be able to ultimately do this successfully to manage risk to provide the resources uh that the individual pm teams need um and i i think as a part of that it was also a natural recognition that

this path that i'm describing is potentially ideal, not only for us in terms of the objectives that we're trying to achieve for our clients, but also for the underlying talent. And what I mean by that is an individual that may have had a lot of success as a trader at a hedge fund that wants to go out on his own. In most of those situations, there's going to be a period of time where that individual needs to be active in marketing, spending time on administrative functions, working on building a business. All those things are not related to trading. And basically we're providing that path to build the track record, to have all the support, to continue focusing on why they're in that position in the first place, and then being in a position to succeed from

there. And you and I have seen that a thousand times in meetings, right? Of a great trader, terrible business person. Exactly. Terrible marketer. And flipping that on its head a little bit, did the clients, right? You deal with some huge client type people, right? Pensions, endowments, the biggest institutional investors.

Are they in the 10 years ago versus now? Would they have been, would they not have passed operational due diligence of having these teams around the globe in this distributed kind of model? So I think it goes back to, if I think about Mission Crest, in a way, I actually, actually not in a way, I would argue that it's a much better structure and operation than investing externally in other funds within the CTA and the macro space. And so I'm sure you've seen this, Jeff. There were times in my prior life as an allocator where I would be pitched about a revolutionary technology platform or a very sophisticated systematic approach. And then you start digging under the hood, demo the systems, and they don't even know what their intraday canal is

or what their currentraday canal is or what their current exposures are. Or it's just a model being run out of Excel or a few simple Python libraries. And my point is the fact that we can put in those controls, that's kind of what I was hinting at previously in terms of what happens when data outages occur? What are all of our backups? How do we maximize our efficiency and execution? You know, fees are one thing in terms of what you're paying to a portfolio manager, but there are so many implicit fees that you're paying at the trading level. So what is slippage? What is our cost of impact? What are we paying and how do we control that wallet across the street?

You know, all those things are part of those other edges that I was referring to that we just think is necessary and why we went down this approach. So I don't think it's any one given thing, but the point is we went down this path because we thought it was a better way or more optimal way to run a portfolio of trading strategies. Yeah. And do the clients get it? Are they excited about it? Are they that thorough that they actually understand that this is a better model? Yeah, we've been fortunate. So we were fortunate from the standpoint that we we interact with a lot of very sophisticated institutions. And I think as a part of that understanding that it's ultimately the net return that we're trying to get to. And there are certain costs that are associated with accessing talent, accessing the technology

or the infrastructure that you need to get to that point, but that ultimately those investments are worthwhile and that we need to continue to invest in those types of things. And then I was thinking, I'm circling back,

we talked before about the pairwise correlation. Everything in there is very lowly correlated when I'm looking at your correlation matrix, which is by design, obviously. But would you, if there's another guy or girl that comes on and they are going to do something that's highly correlated, but you really like their talent, you think they have skill, would you split that bucket, so to speak? Or you just want to say, no, I've got a talent in this area.

I'm going to keep that one talent. It's a combination of both. I would say to date, it's really been more, we're hyper-focused on having industry leaders that are trading distinct opportunity sets from one another. And that was important to us because when we thought about building a macro hedge fund, when you thought about disappointments with macro prior to doing so, it was really that a lot of traders would get congregated in the same views, and you really wouldn't be

holding a diversified set of exposures. And we really wanted that to be part of the objective function, i.e. that we had idiosyncratic drivers within the portfolio on an ongoing basis. And so ultimately that also caps the capacity of what we're going to do. But we think that's in terms of achieving those objectives, being absolute return oriented, trying to be all weather, all these different types of things toward trying to accomplish those goals. We think that it's necessary that you need to have a number of uncorrelated return drivers. And then, so going to your second point, you know, would we consider having two or three teams trade a similar opportunity set? Yes, we would. I think they need to fit all those other boxes that we talked about as it relates to hiring decisions. But we also need to be very mindful of how they work

together when we do the positions in aggregate, because we don't want to get into some of those mistakes that we believe would have occurred in the past across the macro community, which is just, you know, holding one single position. And, you know, if the yield curve steepens or flattens or breaks into a certain direction, like that just determines whether you make money or not. And that should be one of our trades, but it shouldn't direct all of our performance. The, and speak a little bit about the history of global macro, right? Like we can think back to like a Soros breaking the bank of London or like

things like that. Bank of England. So in the, it seems in the old days, there were single huge larger than life macro traders, but then it's kind of morphed into, there were these teams of traders under one macro umbrella. You have any thoughts on the history of how that has gone down? Yeah, I think it's a little bit of back to the future, honestly. I think there was a push towards the multi-PM model as opposed to the single risk taker, just because of, or at least my perception of what end investors ultimately were seeking from their macro allocation, i.e.

really dramatic drawdowns or swings in performance weren't as interesting or attractive. And I think that there's a certain clientele that I think desires that type of exposure and very punchy performance. And so there will always be a place for single risk taker type funds. I think part of that push towards multi-PM was also a function of the market environment. And I think more recently, you know, it's been a much more constructive environment for a single risk taker, in addition to the multi-PM macro side. And so I think there's a place for both. I think it really boils down to what ultimately are your objectives and what's most important to you as an investor, i.e. return to volatility and drawdown and those types of things. Yeah, I think some of the single names basically just systematized their

models and became more of a systematic macro in a lot of cases. Yeah, that's another side of it. And I think actually probably the biggest change, I'm glad you brought that up is the introduction of systematic trading and how that forced certain individuals to have to evolve their trading or, you know, the trading strategies no longer work because they were essentially trading a slower version of the systematic process that took its place.

But in the same vein, I think it goes back to what we were speaking about, where if a lot of different market participants are trading in a similar fashion, hypothetically, does that also create new opportunities? And I think to a certain extent it has, i.e. the flows of systematic capital into the broader financial market space. Last bit here. We were on a panel once and you said some really smart stuff about how to assess AI and machine learning models. Not sure if you remember any of it.

You mentioned there's some machine learning components inside of here. So just how do you, right? How do you do due diligence? How do you interview a PM that's going to do machine learning? What are your thoughts? Yeah. So it's still a whole podcast in and of itself. Sorry, but yeah.

Yeah, no, it, it, it could. Um, so I'll try to organize my thoughts or answer as simplistic as I can. So to the extent that we can receive as much data as possible, that's important to us, um, in terms of doing a back test or modeling that would have been done, I don't really know that the performance side is as important as what it appears that the model has efficacy in forecasting and what types of trades it appears to be pursuing. So when we observe a model that is pursuing an approach that appears idiosyncratic and unique we'll begin to get more interested personally i do think that to have success within this space an individual needs to have extensive academic experience or industry experience and then also

financial market experience, because applying these approaches within financial markets, it's a quite bit more challenging. The signal to noise ratios are quite different. There's a reason why we trade over short trading horizons. Once you start to move longer term, it tends to look more like filtered momentum as it relates to what a machine learning model would pick up on and that has less value to us. And so I think the best way to describe it, Jeff, would be it's a constant feedback loop. So there's all this diligence that we're doing. We need to see the program evolve because that's inherent to the process. And ultimately, on an ongoing basis, the trading activity will inform our level of conviction.

Having said all this, model degradation is the most challenging part of allocating to these types of approaches. And that's where the risk constraints, the drawdown losses that we talked about previously, those guardrails are absolutely critical because if it starts moving in the wrong direction, you need to have the ability to make sure that it's a single line item that doesn't hurt the overall portfolio

or aggregate objective too much. But, you know, at a high level, these approaches are cutting edge, utilizing technology that continues to evolve, have shown predictive success in other parts of industry, whether it's healthcare or accounting or law. And I guess my point would be, why wouldn't we be attracted to these things that also should dynamically evolve over time? But there are plenty of risks with it as well. The last point I'll make is, I do remember that panel that we were on,

I think that was back in 2017. And I think if you would have asked me back then where we were in late 2021, I probably would have thought that these approaches would have proliferated a lot more across the quantitative trading space. And they've definitely been incorporated and everyone's researching these types of approaches. But I think what I'm trying

to get at is the ability to succeed with these types of approaches is quite challenging. And that's why I think there's still a limited amount of groups that are really trading AI or ML approaches in significant fashion and in a successful fashion. Yeah, I totally agree. You think, right, there was a lot of, we're doing AI on Twitter feeds and yada, yada hedge funds that never went anywhere. You'd think by now we would have had a Bridgewater type size, pure AI machine learning hedge fund that's printing incredible numbers day in day out

but maybe they're out there and they don't advertise it but it's more likely the case yeah and what would you ever take or do you use the machine learning to analyze the the PMs and kind of glean new insights into you know what their exposures are and whatnot? So we do, I would say, I would hesitate to say that it's an important part or a driving part of our process. It's one of many things that we have in the toolkit. At times, excuse me, at times it may, it may flag something that would not necessarily be initially apparent from a risk perspective. But I think we've spent a decent amount of time on it. It's hard without a qualitative process to fully trust it from a portfolio construction perspective, i.e. we're not going to upweight or downweight risk to a

particular trader because of the machine learning output. But having said that, I think it is implicit to all the systematic approaches that we have that there is at least some type of Bayesian component. So in a way, at the building block level, we do have some of that. And the database doesn't exist for you to do machine learning on every trader at every huge hedge fund and bank and like pick out the ones you want to make an offer to right yeah exactly i mean we're fortunate from the standpoint that we've been doing this for a long time so we have a lot of internal data that we could review but in the context of actually running a machine learning model, it's still quite small.

And then last bit, I want to ask you, you know, in your seat over the years, 300 meetings a year, only one or two or three get hired. Like as a manager, what would you recommend or what hacks do you have?

I won't call them hacks. What good advice do you have for kind of making it to the next level of those meetings? Or are there any tricks or it's just the talent shines through? It doesn't matter what you say in the meeting. I think the talent typically shines through. Inevitably there's going to be some part of, depending on how eloquent of a speaker one is, I think that probably helps. But in my personal rating process, I try to associate zero value to that because

that's not why we're hiring someone to trade for us. So I think, you know, really just being concerted in terms of describing, as far as what I was going back to previously, why we think there's edge in the process, why on a forward-looking basis we should have conviction in the opportunity that's being targeted, and then their ability as risk managers. And I think when individuals don't progress, it's because we can't answer either of those questions. Some quick fire favorites here, which we end all the pods with. So you've got a young one at home, right? I do. He'll be three in December.

Nice. Favorite thing to do in Chicago with the kid? So, playgrounds along Lake Michigan, seeing the water, watching him climb. It's pretty fun. No broken bones yet? Not yet. He's a wild man, though.

Yeah. The playgrounds are so much better than when we were kids. These things are unbelievable now, right? No, it's impressive. I don't know how he climbs that stuff. He does. You got to get him. There's this new one over here at bradley place near me and roscoe village they're building one of those indoor climbing uh climbing areas uh favorite children's books that doesn't drive you crazy dragons love tacos oh yeah i remember that that's one of his favorites and there's a sequel too so i guess i guess there's, yeah, I remember that. That's one of his favorites. And there's a sequel, too.

So I guess there's two of them. I remember that one. Favorite allocator slash manager event. You were on the circuit for a while there. Do you have a favorite place you look forward to going to? Or was it always a pain because you had to go through all the meetings? Yeah, I mean, I guess on the positive side, a number of the events. So I think about the end of January, Florida events that always seem to change in name.

They're always very efficient. I think you needed some Advil and a cocktail at the end of the day because of the amount of meetings that you get. But it's good to see everyone. But honestly, outside of that, I don't know if it'll continue post-pandemic. Some of the FCMs, they would put together research conferences where maybe 10 or 20 PMs that aren't directly pitching their product, but talking about avenues that they're exploring or thinking about. And so I think at times those actually provide a decent amount of value or got you thinking about a different place. So maybe those would be at the top of the list. And when a bank PM is talking about a new factor, that's like exit off your list.

Exactly. Yeah. Favorite manager wanting an allocation follow up. I don't even know if you get any. Does anyone send you swag or take you golfing or try and schmooze you over the line i wish i was a better golfer so it's not it's definitely not golf um but no yeah don't really accept anything and yeah that yeah it doesn't really happen part of the part of the process you don't have a good answer there yeah i'm trying to get you in trouble with

compliance exactly um we once sent a guy blackhawks jersey and he was a st louis blues fan i think You don't have a good answer there. Yeah, I'm trying to get you in trouble with compliance. Exactly. We once sent a guy a Blackhawks jersey, and he was a St. Louis Blues fan. I think that went well. I can imagine. We were like, you said you were a hockey fan. He's like, yeah, a Blues hockey fan. I don't want a Blackhawks jersey. Like, all right, sorry.

Favorite Chicago pizza? I think I would go with Pequod's's I like pepperoni pizza in any form it comes But I think I would go with that one Pequod's is the answer For sure Although it's so hard to get into these days There's always a huge line I haven't been there in probably three years

I gotta go back And then lastly Ask all our guests Favorite Star Wars character Go with Yoda uh and then last week lastly ask all our guests favorite star wars character go with yoda yoda nice just the wise the wise one yeah pretty pretty agile nimble that's right yeah can do some spins yeah i love it uh as you have you had your son watched any star wars games too too young probably too young we're into we're into truck videos um he's reciting his abcs so uh we're working on the building blocks i love it all right mark and it's been fun

um we'll talk to you soon and see you around chicago yeah appreciate it jeff thanks a lot the derivative is brought to you by cme group cme group is the world's leading and most diverse futures and options exchange. For more information and educational resources about futures and options, visit cmegroup.com. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at rcmalts and visit our website to read our blog or subscribe to our newsletter at rcmalts.com. If you liked our show, introduce a friend and show them how to subscribe. And be sure to leave comments. We'd love to hear from you.