The Derivative - Adding Spreads and Options to Trend Following, with Moritz Seibert

Episode Date: May 11, 2023

We’re back in the trend space this week, diving into the pros and cons of classic trend following, as well as exploring new methods of trend, including building new “markets” with calendar spread data and trying to reduce the infamous trend open trade give backs with some option trades. Not to mention some talk on how investors have gone soft in their desire for low vol.   Jeff sits down with Moritz Seibert, the CEO of Takahē Capital, to talk about the rise of conditional payouts and payments, the peak of exotic structures in 2007 and 2008, and how to build a robust, diversified portfolio that can weather any storm (hint: trend following). Jeff and Moritz debate the importance of a systematic manager having an opinion on markets, whether a small market like OJ can actually make a different in a large, diversified portfolio of markets, and why the best trade entries are often times the painful ones. SEND IT! Chapters: 00:00-01:45=Intro 1:46-4:58= No snow for Europeans 4:59-20:31= Exotic risks, trading options & quantitative strategies 20:32-31:22= Adding liquidity & getting maximum exposure to outlier markets 31:23-50:55= Launching Takahe Capital: Resilience, diversifying your portfolio & finding spreads in trend markets 50:56-01:00:03= Factors causing spread moves, buying the high & the inconvenient trade 01:00:04-01:12:25= This is what trading is & the value of Trend following 01:12:26-01:17:01= Skiing Arosa Follow along with Moritz on Twitter @moritzseibert & Takahe Capital @TakaheCapital and check out his website takahecapital, and his free newsletter twoquants for more information! Don't forget to subscribe to ⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠, follow us on Twitter at ⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠ and our host Jeff at ⁠⁠⁠⁠⁠⁠@AttainCap2⁠⁠⁠⁠⁠⁠, or ⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠ , and ⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠, and ⁠⁠⁠⁠⁠⁠sign-up for our blog digest⁠⁠⁠⁠⁠⁠. 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

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. Hello there. No AI intros for you today. This is 100% pure Jeffness written intro, because the AI would never use a word like Jeffness. Anyway, we're 100% going to be getting deep into the weeds of trend following, strategy, design, and construction on the pod today.

We've got Moritz Siebert, who's one of the quants over at the Two Quants blog, and has recently launched a new firm looking to manage investor capital. He named it after an extinct bird, which is no longer extinct, which was interesting. We'll get into that. And we also get into his unique twist on classical trend following. Get into creating new time series for trend models to work on, on the futures curve spreads, whether a small market like OJ is all that important to a trend follower,

and who's to blame for investors no longer differentiating between losses of principal and losses of open trade profits. Send it. This episode is brought to you by RCM and its guide to trend following white paper. The guide to trend is a great compliment for this pod with definitions, examples, manager highlights, performance, and more. Go to rcmalts.com slash white papers to check it out. And now back to the

show. All right, everyone, we're here with Moritz. How do I say it? Moritz? Moritz? Yeah, Moritz is fine. It's a European name, but you know the ski resort, right? Think of that beautiful Switzerland-based ski resort. That is where it's uh it's a European name but you're you know the ski resort right think of yes beautiful Switzerland-based ski resort that is where it comes from uh where is that in relation to you're in where where are you I'm south of Munich uh wedged in between Munich and Garmisch Park and Kirchen if you know where that is so that's relatively close to the Austrian border um that's where I'm from, countryside, mountain type of boy. And so yeah, St. Moritz isn't exactly around the corner, but three hours drive, then I'd be there. And are you a skier? We've had an epic year this year in America, but I know

the European mountains didn't get much snow at all, right? You are well informed. That is right. I mean, it was so disappointing we love skiing kids love skiing I love skiing you know my eldest is now snowboarding so we're all about this but it's just like you know whenever we wanted to go this year there was no snow um we went at the end of February for a week to the Aalborg region um you know usually fantastic snow there I mean yes up on the mountain, there was enough snow so we could definitely ski,

but down in the village, it kind of like it looked devastating. It's like just gray and nothing. And so now we had a weird season, not enough snow. It was very warm winter. Talk about gas prices in Ukraine and TTF. Maybe we'll get into that.

I mean, that was kind of like lucky in a way as well that we didn't have too much of a cold winter. And now everybody was kind of like waiting for warmer weather and some sunshine here in Europe. And it's just raining on end for days and weeks on end. Like, you know, even today, just, you know, walk the dock and you get back home and it feels like October. Yeah. Now you're talking my language. that's what it's been like in chicago cold rainy 46 baseball games the kids are

starting like this is not the weather for baseball 46 rain uh and i see you're a big pelotoner i see the peloton in the background well i wouldn't call myself a big Peloton. I'm just, I'm just lazy. And it's kind of like, and everybody sees it on the zoom calls and goes like, yeah, I've got to jump on that bike again to, to get some of that, you know, extra fat off of the belly. Now I enjoy doing it. Look at me, this is an easy 30 minute exercise sometimes around lunch. And, you know, it's just motivating when you have that big screen and you have others kind of like you know cycling with you and you just you know you have this target i want to be in the top 10 or in the top five percent of that class and so you you just go a little bit faster

so that's not not the best stock as it turned out but you know i haven't yeah yeah i i haven't i don't follow that stock i sometimes i pick up a headline it's kind of like you know i haven't yeah yeah i i haven't i don't follow that stock i sometimes i pick up a headline it's kind of like you know i know it's one of these stocks that um went went mooning uh two years ago during the during the pandemic and um i'm not sure where it trades apparently yeah i think it's my off the top of my head it's maybe down 80 90 percent from its or something well that's that's junky. Yeah, that's a lot. So give us a bit of background.

I think people see you all around. You've been on Corey Hofstein. You do the Top Traders pod. You've done two quants blog. Give us the background, how that all ties together. We'll let you take it from there yeah well i'm not sure if there is a anything that ties it together it's just what i do but yeah i mean background is derivatives trader um um you know started as a trainee for hspc on the correlation trainer so so my in short my background really is trading exotics. And for RBS in the UK,

I ended up running equity derivative structuring for RBS then in the States as well. So I've been with these investment banks, essentially running exotic risk in the structured products arena, if you will. So every time there's something that needed to be warehoused, every time there's something

where there's an illiquid risk that you cannot move for which you need to find a price on your balance sheet to sit on it, whatever forward skew exposure, exotic correlation exposures, um, stuff that you couldn't even get a price for. You don't, don't even want to try to try to get a price for in the OTC market in the, like into, into dealer broker market. Um, that, that's the space that I was involved in the like inter-dealer broker market, that's the space that I was involved in, like, you know, rainbow replacement, click case, whatever type of, you know, structures with 20 underlines and all these things, which have a tendency

to make the bank a lot of money in smooth sailing times. And every time there's a little bit of a hiccup in the markets then these risks have a tendency of uh of showing up with a big price tag and usually in the wrong direction you just sit on it and um there's nothing you can do so you may have read a couple of headlines um in the last 10 to 15 years like every time something goes wrong in the markets socgen loses a bunch of yeah hong kong on whatever dividends right or uh deutsche bank loses a bunch of money on some exotic currency um exotic that that they have traded and so i was i was in that space that was um that was fun that was uh had to do a lot with uh local vol and stochastic vol and grade learning journey in terms of derivatives pricing and all these types of things. Let me jump in real quick. Why do those, right to your point, here in America, we're like, oh, the European banks are at it again doing some stupid trade.

And the correlations blew out and they lost a bunch of money. Why are they in there are they trying to just reach for yield are they trying to get extra yield um are they the bank right oh the bank or is it all the clients are doing something then the bank structures it and then they're left they have basically some leftovers yeah yeah there's so these products are sold right so yeah not as i mean by way, the peak of exoticness probably was around 2007, 2008, right around when the financial crisis happened. Like, you know, the structured product started as vanilla products in the late nineties, like, you know, call spreads and, you know, capital guaranteed notes and these types of things, but essentially vanilla exposures. And then, you know, volatilities increased, rates decreased, and that made the structuring of capital protected or even partially

capital protected payouts more complex slash even impossible, right? So you had to come up, you had to find derivatives that had a cheaper price. How do you cheapen the price of a derivative? You give it more underlies, you make the payout less likely, right? The less likely the payout, the lower the price. And you do that by putting, you know, vault control features on it, having conditional payouts, barriers, all these types of things. And so the peak of that, I think,

was in 2007 and 2008. And ever since the products have become more vanilla again, you know, we still see barriers in these types of things, but these are light exotics. The super, super exotic exotics, I haven't seen them in a long time

because the banks have also realized, hey, look, I mean, there's a lot of stuff that can go wrong and it actually eats up a lot of risk capital. It's a pretty expensive business for the bank to run. But back then, I mean, look, margins on these products, they were very rich and the European banks had a network, many of them through which they could sell these products, right? So they would go out to their clients, wealth management clients and say, hey, you want to have an exposure

to whatever the DAX index and the SMI of Switzerland and the FTSE at the same time, or we're going to pay you 10% a year. It's all the callable. If all of these three indices are higher than they are today in a year's time, you get 10 boom and you're out of it. I mean, some of these payouts are very appealing. So the client said yes, and the bank said yes. And this is how it started. So it became, turned into a big business.

It has shrunk since. I think it's moved over to america because that right a lot of buffered nodes and all these things yeah you're doing it in a little bit of a different way exactly through etns and etps and buffered nodes and um the structured products kind of like issuing notes otc uh private placement type of business has never been as big in the states um so that's spared you from some of that super exotic risk that was traded here in europe and by the way also in asia right i mean asia um japan japan even earlier than um than the european markets given the low interest rate environment of japan right so they were all keen on having you know aussie dollar exposure and whatever some autocallable features on the

nikkei index and then hong kong i mean hong kong was yeah hong kong had it all yeah and they have a big big you know wealth management network down there so lots of clients lots of money and um yeah this is um this is the space that i was in and uh but i always had a uh a knack for quantitative trading strategies ever since my college days where i for the first time coded a a vol arbitrage model which was complete rubbish to be honest i know that inside now but i didn't know it back then because I downloaded the data from the Eurex. Well, I actually didn't just download it. I needed to write to them and tell them that I'm a student. I'd really like to have their options data for free for an academic research project. And they gave it to me. And it was really bad programming as well, like VBA even. When I look at that stuff now, I can't even get it to run. And essentially

what the data told me is, hey, you have to sell every call and every put that you can possibly get your hand on, right? At minus 25 and 25 delta at a one month point to expiration. And when you do this, you just make a bunch of money. This is what the data showed you, right? And I'm like, well, that's fantastic.

Brilliant, yeah. Yeah, no, exactly. Surprisingly, right? And then I thought, well, it's probably a clever idea to solve for the optimal strike that you should sell, right? So that you never have a loss in the past. So I just created this magical equity curve, which back then in, I don't know, 20 years old,

I just didn't know better, right? I thought that that is the way you do it, right? This is how it's done um now this is 25 years in the past yeah I guess I've learned a trick or two and you know you would never touch that system but this is how I got started and and then even during my derivatives trading days I was just amazed like you play around with Bloomberg terminal you have all these studies like you know what happens if you run a 200 day moving average on the S and P 500, what happens if you run the golden cross strategy or not only the S and P

500, but on a bunch of markets. And, you know, amazingly, by the way, these strategies aren't too bad. I think they get a bad rap, but you know, when you run them by, you know, on a large number of markets that are uncorrelated to one another, I mean, there are definitely worse things that you can do than doing that. But again, you know, younger or at that age, you think that cannot be it. I must be able to do something

that is better than that, clearly, because if you can run it on the Bloomberg terminal- Right, it can't be that special. It can't be that special. Everybody can kind of like click enter and run the same thing um and and so you you know you start optimizing things essentially curve fit um and that is that is why i always say look i mean um trading and good behavior in the markets is a learning journey i don't think that you know you're just born with that you have to touch the stove a couple of times and get burned, hopefully not catastrophically.

But learn, that is the journey, that is the experience. And then also, you know, learn when and how to check your ego at the door and become very trusting in the systems that you run, even though they may be rough, right? And, but, you know, that roughness usually is a sign of resilience and robustness, which creates pain in the short term, but you have to be trusting that you can live through that pain. And if, and when you do, you know, you'll, you'll survive and, you know, being that professional loser and receiving that feedback all the time that, you know, you have 60% losing trades

and only 40% of your trades win. And now these 40, most of them are just scratch trades or they don't make a lot of money. I mean, this is not convenient. This is not a pleasant trading strategy. But when you, you know, step back from it and you look at the overall picture, it is a piece of beauty. It is the most protective system for my portfolio that I could ever find. And over the

years, I started to love it. It is absolutely amazing, but you have to do it in the right way. And sometimes you have to endure the pain and not lose your compass, not throw the baby out with bathwater, stick to your system, sticking to it. That is really, that is really where a lot of the edges, you know, people give up with these systems, good systems sometimes way too early, and then they miss out on the recovery. So I guess you need to have a little bit of a thick skin to do that yeah which is like why do we right and i'm in the same boat of like why did we pick this trend type career where it's like oh you got to endure all this pain in order to see the gain versus other groups or other people are building a system like oh this

one will make money for a lot of money for three years before it blows up. I'm just going to make that great money and then get out of there. Sure. But oftentimes with these systems, you don't see the risk, right? You can, coming back to the option strategy where you're selling options, the risk doesn't show up in the volatility as long as the system works well, right? The volatility is almost zero. It's very little vol, but obviously very high risk. So the risk doesn't show up in the vol. With trend trading, the risk is there and it shows up. You know, you're long and short some contracts. I mean, it's in futures and linear instruments. You get the feedback right away. And most of these trades don't make you money. So that is, and the other thing is, look, you don't, I mean, you know, this, we're not making stuff up as to why we're a long or short

market. I mean, we're long OJ, as I've mentioned ahead of the call, or I'm long OJ. And the only reason I'm long orange choose is because at some point in whatever January of last year it's actually a very long-term position the price started to go up I didn't have any knowledge of a you know possible bad harvest in Florida I didn't have any fundamental analysis as to the orange choose market and crops and you know all that type of stuff the only thing I had is the price the open the high the low and the close and average true range and that was all of that type of stuff. The only thing I had is the price, the open, the high, the low and the close and average to range. And that was kind of like it.

So there we take OJ for a ride, right? And it's become that amazing trade, but I don't have a story to tell you other than, well, at some point the price started to move higher and I got long. There's no other narrative, right? Which is why my trend trading friends are most in our community. I mean, it's usually not the place where you find a lot of

showboats and grandstanders that will tell you these amazing stories about their trend trading. It's kind of boring. You don't have the story. The stories are told by other types of traders, like, you know, Global Mac or whatever. Like, I forecast this, you know, rates need to come down because inflation is too high and the Fed's going to pivot. Yeah, maybe that's right. But, you know, the thing is, probably you and I, we could have a discussion, is the Fed done hiking or is the Fed not done hiking? And I can absolutely, for sure, listen to one person this afternoon telling me the Fed is done

hiking because inflation will come down and we're definitely going to have a recession. And that is what's going to happen. I said, well, that sounds absolutely logical. Yeah, that's what's going to happen. Five minutes later, I have another person come out, say, you know what? The Fed is not done hiking because inflation is stubbornly high. And this is not transitory. This is a longer term phenomenon.

We still have whatever supply bottlenecks and therefore it's coming back. So yeah, that makes sense too. Right, which one do I believe? Which one do you believe? It's funny, I've actually instructed trend managers before going in front of like giving a presentation or answering some questions with advisors

and I'm like, I know you don't care. I know you don't have an opinion on the market, but they're going to think you're dumb, right? They're not going to trust you if you don't have an opinion. So have, right? Because a lot of these guys be like, I have no idea, right? Because they'll ask like, where do you think cotton's going? Like, I have no idea. I don't care. If it goes up, we'll be buying it. If it goes down, we'll be selling it. And I'm like, just have some opinion, even though it doesn't matter to your model. And you can separate those and be like, I think cotton's going up triple. Our models don't do that. They don't trade like that. But here's what I think. Yeah, you could do that. You say, look, I mean, copper is going to go massively higher because

of the green energy revolution and everything needs to become electrified and the demand for copper is going to be massive. Yeah, maybe that is true. I guess that's a nice story, but does that story today impact the way I trade copper? No. It's not going to impact how I'm going to trade it tomorrow. Actually, copper is going down. Right. And even if you knew that to be true is kind of the whole point, right? It's all about the timing, right? If you mess the timing up, you could be out of that trade. And about the volatility as well, Jeff, like, you know, sometimes you have these trades that you're putting on and they happen to have a very low average true range or low volatility at the time you put them on. You know, OJ, by the way, is a good example. You know, that was actually relatively low ATR type of trade when I put it on.

So that means you have a relatively large position size compared to some of the other markets. All risk balanced, you know, that's the point of it. But, you know, these trades can really become outlier trades because of the way you've sized them at the point of trade inception. And sometimes you get into a trade that has already high volatility. So it's already a relatively smaller position and you don't feel it as much. So it's a function of those two. And I guess what you can do as a trend following

trader, like when people ask about your OJ trade, yeah, tell them about the bad harvest. This is presumably the reason prices went higher is because there's not enough juice coming around and there's essentially a crop failure as far as I understand, or just the worst crop in Florida ever. So yeah, tell them that. So your long OJ. Okay. But you know, why did I get in, in January of 2022? Well, I don't know. Price went up. That's it. Yeah. I could tell them. I grew up down there in Florida. And a lot of my friends, their families are selling, right? All these family groves have sold and they're strip malls now.

And so part of it is, right? There's just not as many acres in Florida anymore. Let's talk real quick about adding these markets like orange juice. A lot of groups wouldn't even touch that market. It's too illiquid. It's too small. So there's both a liquidity piece, which is less interesting to me and more of like, how do you think about, okay, I'm going to add all these diversifying pieces, but something like OJ, if I'm going to risk up to 1% per trade or 50 bps per trade or something, is it even worth it?

Even if I get the outlier there, is that going to offset the losses from seven bond trades that reversed? How do you think about that? I think it's absolutely important to trade these markets. My size PA is definitely small enough right now to be trading OJ or lumber or any of these other smaller markets without any problem, I think. I think I mentioned I'm about to launch a fund. I mean, let's see how big that fund becomes. And, you know, it's a question, of course, of underlying liquidity, how much can you trade? But

to your question specifically, I don't know how many ATRs OJ is going to make, right? I mean, I'm risking a certain amount of my closed equity, my core capital, 10 bps, right? But these 10 bps can turn into thousands of bps on the top side, because I just let that trade run. I don't know how much money that trade is going to make. I'm still long. I could be stopped out today, tomorrow, whatever, next week. Probably not today. Stop is still relatively far away. Or OJ could go north of three bucks, right? And I simply don't know that.

But it's very important for me to have OJ in the portfolio because it's behaving in a very idiosyncratic way. It doesn't have anything to do with crude or corn or the S&P 500 or any of the other markets. So it's really its own thing, very uncorrelated. And the way I go about adding these markets together is I'm essentially looking like I'm going through the list, start if you will with OJ and then find another market that has nothing to do with OJ, which is the 10-year note, and then find another market that has nothing to do with the two that I've already selected, which is corn, and then put in gas, and then put in blah, blah, blah, right? So

once you get to market number 20, you start to realize that you cannot do that trick anymore, that the 21st market that you're now going to pick will have some correlation, like a structural correlation to some of the other markets that you've already chosen, right? So you go like, oh yeah, I'm picking the five-year note now, but I have the 10-year note in the portfolio.

So these two markets are highly correlated. So what do I do? Will I risk the same amount on each of them, or will I view them as a cluster and say like, okay, you guys tend to be correlated. I'm therefore not risking 10 basis points on each of you. I'm risking 7.5 basis points on each of you, right? So rather than putting the total risk to 20, I'm putting the total risk to 15 to recognize some of the high correlation, persistent high correlation that usually exists, but not all the time. And I say usually, because sometimes they

decouple, right? If they were perfectly correlated, then in my example, I would give each of them a risk of five, because then they essentially go long and short at the same time. And it's the same market, right? They're're not they're not the same markets they're just like related markets um and and every once in a while you have related markets um disconnect completely like you know henry hop and ttf you know people it's natural gas natural gas is difficult to store but you know henry hop one's in the u.s the other one's here in in in europe um they're not you know immediately arbitrageable you can arbitrage them of course it's the same molecule but you know it's across the atlantic ocean with lng tankers and you know it takes a lot of time

to do that so um they're kind of like somewhat tied to the hip but boom all of a sudden they decouple because you know we have a war here here in Europe and there's not a war in the United States. So, you know, you want to be mindful of the fact that these markets can at some point just completely go off. Heating oil and crude oil tend to be correlated until the point when they are not. Kansas wheat and wheat, Chicago wheat, are correlated most of the time and sometimes they're not. So you want to give them a little bit of room to do their own thing. What about Minneapolis wheat? I don't think it's traded anymore. We'll have a rest in peace Minneapolis wheat.

Yeah, we have milling wheat here in Europe, which I trade. There's black sea wheat, which you can trade. I mean, all of that stuff is essentially the same grain at the end of the day. But it's not the same price behavior every given day. Right. But I guess, do you view those kind of what I would call outlier markets as they're going to lower the risk, they're going to help cover the carry of the kind of the core positions, or are they going to provide outlier gains? Yeah, that's what I'm hoping for. The latter? Yeah, yeah. I'm really hoping for each

of these markets and each of these trades that I'm putting on to be a complete massive outlier trade. Because I need them. I need these trades to pay for the six spend losing or even slightly more than six spend losing trades that I have in my portfolio. So I just want to hit the ball out of the park with some of these positions. Unfortunately, it doesn't happen as frequently as I would like to. But every once in a while it does. And you have to be, look, I mean, this is why you must not miss any of these trades as well.

This is why having a large spectrum or a large array of markets to trade is actually a good thing. It's not only about diversification. It's really about the raw number of markets. The more markets I have, the larger the spectrum or the probability of having one outlier among them. And this is what I really care about. And I really don't want to miss this outlier trade. If there is an outlier trade, I want to be a part of that. And then I want to have a very juicy part of it as well. Like, you know,

I'm not going to be peeling off some of that size because, you know, all of a sudden the market has become too big, or I have too much of an open trade equity in that position, or I kind of like, you know, need to trim my risk. No, it's really, you keep that position size, you really isolate that trade. It's one trade that you put on, you know, OJ in January of 2022, and it's still the same position size. Nothing has changed. That is the trade. That is going to, at some point, show up in the trade statistics. And unless there is a massive gap event and discontinuity to the downside, that is going

to be a great trade. So, you know, I should really step back from the desk and say, that is going to be a great trade. So I should really step back from the desk and say, this is going to be amazing. Like, this is going to be one of the nicest trades. Maybe there's going to be a lot of give back now as OJ goes lower. But I shouldn't be too whiny about this. Yeah, let it go lower.

I mean, it's going to be a positive trade, right? I mean, what's better than that? And putting your quant hat back on, it's always funny to me to see some quants come in and they'll analyze a trend portfolio. And they'll be like, why? We'll stick on OJ since we've been talking about it. Like, why in the world would you have that in the portfolio, right? If you'd back-tested that market only.

And I don't know what its back-test looks like, but a lot of these, if you back-test them, right, they're losing, they've lost over the last 10 years, 20 years, 30 years. Silver famously had like, I think 17 straight losing trades

before it had a nice one two years ago. Right? So if you back-test these individually, a lot of them don't look like anything. You would throw them out of the portfolio, but you need them all in order to create the quilt i think i once had a look at coco on its own and it's kind of like devastating i mean he's kind of like yeah what is it with this market you know it's kind of like a kid children that just never listen to you i mean that's that's that market just doesn't do what trend followers wanted to do.

But it needs to be a part of the portfolio because I cannot predict. I mean, maybe Cocoa is going to be the best market for trend following traders in the next 10 years. I simply don't know that. But what's so important, Jeff, is when you put all these markets together and you treat them all the same, you risk, use the same rules, same entries, same exits, right? Initial stop. You're not treating Coco different than OJ or the 10-year note. So then what you do is you create a large sample size for the overall system. And that is now sample size that is statistically meaningful because it's using the same route. It's using the same underlying rules. So now you can analyze that.

And it so happens that COCO plays a role in this. COCO is part of that system. It's part of the ensemble, if you will, or the market universe, right? And that system has produced whatever whatever a 0.6 sharp and is incredibly resilient it's incredibly robust during times of market stress with coco inside it so keep it in there i think is the quants answer because it's part of that system and you love that system don't throw coco out only because coco in and by itself hasn't performed very well but and even if you took it out the sharp maybe

goes to 0.65 or something could be right you could be good out and it might be massively it might have a massive diversification benefit at times you know maybe it actually shows up with a positive open trade equity and does perform well when other parts of your portfolio don't perform well. And still that cocoa trade that used to have a positive open trade equity could end up being a loser because it didn't make enough money to get away from my initial stop, if you will, the risk that I gave it. So no, I trade all of these markets and I don't think it has to do with the, kind of like the, you know,

if you want to mathematically calculate the diversification benefit, yeah, you figure out after the 21st or whatever market, right? The marginal diversification benefit of anything that you had as a portfolio is infinitesimally small. It is really about

maximizing your exposure to outliers. That is why you would go to 100 markets or 200 markets or 300 markets. Yeah, you would trade each of them smaller, right? Because now you're trading a much bigger portfolio. But given that you just have more stuff in your portfolio that all of a sudden can have a life of its own means that you have a better chance of at some point hitting the ball out of the park. And that is really, yeah, in a way what I'd like to do. So we buried the lead there a little bit, as I like to do. We got off track from your background. So you were finishing up the background and now you're, as you mentioned, launching a new fund, launching a new firm as well.

Correct. Yeah. Yeah. Well, actually, I just launched it. It's called Tuckahay Capital. Tuckahay is a flightless bird that lives in New Zealand. I don't have any connectivity to that bird other than i picked it up two years ago on on the deck um looking through twitter i was like this was kind of like

you know people are saying trend following is dead all the time it's like nothing could be further from the truth right so i just found i just looked up googled uh species that have been declared extinct but showed up over and over and over again and you know one of the the cutest things like the dodo bird basically a relative exactly it's a bird that cannot fly it actually looks kind of beautiful colorful type of bird um and even though it can't fly i mean this is kind of like a disadvantage for a bird to begin with right um it just doesn't go away it's incredibly resilient it just copes with everything um in in all sorts of environments and i thought this is just so fitting for what it is that that i do

from a quantitative training experience like it's all about resiliency it's all about avoiding to curve fit it's all about avoiding that over optimization which at the beginning of our conversation i told you you know i was just as anybody else probably keen to do, like finding the next, you know, best thing, you know, tweaking the system a little bit, making it a little bit more better, right? But then you start to lie to yourself because you're, what you're doing is essentially reducing robustness. And that is no longer anything that I'm willing to negotiate on. So things that I do, they need to be hopefully able to stand the test of time, but they need to have a resilient and robust design at its core. That means you cannot

have a lot of parameters. So I'm not using filters and overlays and this and that and the other thing like, and you know, five different rules to get in and 10 different rules to get out. No, it's like just a handful, a handful, if that, rules that determine the position, the direction, the size, and that's it across a large number of markets. But I also do it in spreads. I think this is where some of that stuff becomes a little bit different. Like I'm looking for trend in spreads and I'm bootstrapping futures curves so when you think about you know oj is now a bad example because oj doesn't have the most liquid curve but when you think about something like crude right crude has a very liquid futures curve um um meaning we could trade out to the d24 contract is still pretty liquid. You can trade DEC25.

So M and Z, June and December, are really the liquid longer-dated points on the crude curve, right? But for the next 24 months, you could trade any of the monthly expiries. So I can bootstrap that curve and say, rather than just pointing my system to the front-mouth contract, which is what many CTAs do, I would say what most CTAs do, because that is where most

of the beta is, that is where most of the action is, that is where most of the liquidity is, right? That is where the bid-offer spread is the least, that is where you can get the rollover done in the cheapest and most efficient way, right? Just clicking it away. Okay, fine. But that to me is one crude market. The second prompt, third prompt, the fourth contract, the fifth contract, whatever, all of these, yeah, they are very related. They are all crude oil markets, right? But they're kind of like child markets, if you will. But they have a little bit of a different behavior. They're positively correlated. Like DEC 24 that you've just mentioned or deck 23, yes, will probably go up and down

with, you know, the June contract, which is still the current, you know, liquid contract for the next couple of days at least, but not as much. The beta is way less, right? So when you think about creating just a simple rollover mechanism that rolls June to June, right?

Or June to deck and then deck to June. So every six months, as opposed to every to June, right? Or June to deck and then deck to June. So every six months, as opposed to every 12 months, right? Or roll every quarter. Then you pick up some different trending behavior, right? And that is a very simple trick to do. Now that is what I call bootstrapping. Now where that becomes even more interesting is when you create these spreads, right? So the first minus the second and the first minus the third and the first minus the fourth, and then the second minus the third and the second minus the fourth, all the way down like the 19th minus the 20th. You can get to one hundreds, hundreds and hundreds of permutations just in crude alone. Yeah. And you're going both ways on that or is always front minus back?

Each of, no, exactly. And each of these time spreads will have different trending behavior, somewhat similar, but different nevertheless, right? And I'm really interested in analyzing that curve systematically. This is what my system does. And then being long or short on that curve, whatever has the best trending behavior. So that now puts together a nice portfolio because using again, that crude example, by the way, I don't have a crude position right now because it's been just chopping around. I got kicked out of it, but let's just make an artificial example.

Let's just say that I was still long crude, right? And I was long the June contract right now, because that is the front contract. So my trend system tells me, Moritz, you want to be long June. Okay. So I have a position long June at the front end of the curve. My spread system could tell me, hey, Moritz, you want to be short July and long December. So in a situation like that, all of a sudden I have three positions, right? I have June, July, and December. So I have a distributed position across the curve. That is actually something that I like. So I'm trading different parts of the crude curve. Another possibility is for the position not to become distributed, but for the position to become netted in the sense that, oh, I'm still want to

be long the June front month and the outright trend system. But imagine my spread system tells me, oh, Moritz, you want to be short June and you want to be long December. Oh, so all of a sudden the June position goes away. That's netted, right? And I'm only long December. So that's fine. That's actually, I have less risk in the combination because I'm now only long deck. Or it could be a cluster position in the sense that my spread system tells me, oh, you also want to be long June versus short December. So all of a sudden I have two risk units in June,

which is a very high beta, high volatile position of the curve. And I only have one offsetting position further down the curve that has less of the kind of like moving the needle type of behavior. So when stuff like that happens you know when these when the combination of my systems puts me into these clustered exposures then what i do and by the way that is discretionary i'm using the background that i explained to you from a derivatives and options straightness perspective

and i see if i could modify some of the exposure that I have without changing the characteristic, right? I'm following the system. But I'm trying to optionalize or delta replace some of the linear futures delta that I have in my example on the June contract right now to have a nonlinear convex exposure in my favor. So I give an example when I actually did that in crude. I don't have it right now. But two years ago, when we essentially all trend traders started to go long crude, around $60 or so, right?

Fantastic trade. It went to a little bit more than $ 120, I think, on the first contract. So what that means is like you have one contract that's worth 60 grand, and all of a sudden that contract, you've rolled it a couple of times, is worth 120 grand because it's now at 120 level. As I've mentioned, I don't vault control. I don't adjust any of that position size. I still have the original size on, which was determined using an ATR at the level of 60. Now that contract has, say, twice the ATR. So the footprint of Crude Oil in my portfolio is much larger, and I'm fine to accept that. Now, what I could see in the options market at that point, record backwardation in the crude oil market, and still relatively low volatility. This was before the Ukraine war started. And so I realized, okay, I'm sitting on this massive gain, massive open trade equity. And let's just for argument's sake, assume that my exit is at 90. So I have $30 of a give back risk in crude. If I had one lot long,

then I would lose $30,000 if I go from 120 to 90. What I did do, and that is a data replacement trade, I'm replacing some of that linear futures delta through a nonlinear delta by buying a call option. Let's say a 25 delta call, I did that DEC24, DEC25. So long dated, they're not gamma bombs, there's not big of a theta issue, right? This is a long dated exposure. And so let's say I'm buying four of these call options at 25 Delta, that's a one Delta in aggregate, right? So I still have the same position on in terms of, yeah, I'm keeping the pedal to the metal, right? I'm not looking to peel anything off. What are the two outcomes? Now, the two outcomes is, and I don't predict crude goes to whatever 200, it goes much higher,

which didn't happen, but it could have happened, happened right yeah had it happened i would have even had a greater outlier position because the delta of these calls all of a sudden is no longer 25 it starts to become 50 right if it's if it's at 200 probably the delta is one right so i now have a four delta position as opposed to one delta position so coming back to hitting the ball out of the park, woo-hoo, that would be really nice. And you would let that run? You wouldn't readjust the delta back to... Well, it depends. One? Yeah, who knows, but yeah. Who knows?

You need to look at the market. These options are something that I observe. But also on the downside, like let's assume we go down to the stop, right? To 90. As we've determined, the futures position would lose 30K per lot. The options position is also positively convex to the downside, right? So we're going down to 90.

Yes, that delta, that 25 delta is now no longer 25. Maybe it's now eight or something like that. Right. But I will mathematically lose less of the option premium than on the futures. Right. So I also have a better, because it won't go to zero. Exactly. I have a better experience to the downside. Now, if and when the system tells me to get out of crude, which is what happened, then I follow the system, which means, okay, you know, I can't just sit on these options positions because I have really no business being long these options. We don't want to be long crude, right? So that is why I can only do these trades in markets that have a liquid options book. Like, you know, I need to be able to see a bit. I need to be able to get out of the position.

There needs to be open interest, right? There needs to be an on-screen book for me to do that. OJ has options, but OJ options rarely trade. So I would have loved to replace some of my long Delta on OJ with, you know, OJ call options, but I didn't even look at like vol and skew and all this type of things because the OJ options market is just forget about it. It just doesn't work. But what I can do in the case of the crude example, I'm selling 90% of the options, 90% of the calls that I was long, right? And on the 10%, and this is not a fixed rule, but sometimes I go like, look, I'm kind of like keeping a tall position. I'm keeping the foot in

the door. It's non-recourse leverage. I've paid for it. I've, you know, the option, I paid the option premium to be flipping around and whipsawing and I don't have to care. Right. In the futures, I would have to get in and get out and get in and get out. So here, you know, I can still sit on some of that deck 24 and deck 25, very little of it. Most of it is gone, but I still have some of that on the book. So if it's a big, if crude comes back at some point, uh, moves higher, I'm already there from the beginning. Um, and I just love the combination of these, you know, trend trades, spread trades, and then putting positive convexity with options on top of it. Um, um, but only where it makes sense you know the crude the crude calls they were they were just so great to trade because of that record backwardation the deck 24 deck 25

you know the i don't know we were at 100 or so and the forward price was at 70 i mean yeah and then is that why you wouldn't just do options from the get-go? Why not take that whole logic and say, okay, instead of doing futures, I'm just going to trade the options from the initial signal? That is not how I do it. I don't have any experience with that. I don't think I would even be able to test it. The options data is...

I'm not sure if you ever worked with options data, but it's... Crappy. Yes, to use the right word for that. Another example, just to show the other side of this, is last, just in March, when we had SVB and the bond markets. I mean, they had moves that I didn't like. I was still on the trading desk. We didn't see during the GFC. I mean, these magnitude type of whatever daily moves on the two-year, on euro dollar, on whatever the bubble. I mean, all of these markets, they just had, yeah, it was just big. I mean, eye grabbing, attention grabbing type of moves, right? And it was painful because we trend followers and most of us, including myself,

we were short every bond on the planet. I was, you know, short the bubble and short the bond and short the two year and short whatever. I mean, all of these markets, right? In the right quantities, all fine. But I had on some of them, on the boon, for instance, and on the 10-year, I replaced some of that short futures delta with long put options. So being long 110 put on the 10-year,

for instance, right? Sometimes I do put spread depending on how skew looks and how the thing is priced. That has helped me. I mean, it still caused the loss, but I lost less than some of the other trend following CTAs in March because I didn't have to take as much of a hit on the bond counter move or the interest rate counter move, given that those puts lost way less than the futures position.

And by the way, implied volatility in bonds shot through the roof. So even though that 110 put option on the 10-year was kind of like, yeah, out of the money. Yeah, it's far out of the money. It almost doubled in vol. So it still had a heartbeat. Now, in these markets, the option liquidity is much more tied to essentially front month liquidity, right? I mean, nobody's trading deck 24, 10 year. I mean, that's the

market, which we're not in. So I don't have the full curve available to me as I have in my example with crude oil, but still it helps. And then the new strategy is using both trend and spreads. So these are the spreads you're talking about, or you also have more of like a carry type spread trade that helps offset the bleed, if you will, in the trend. No, I'm not trading carry. I'm really fully focused on trend, but I'm finding trend in spread markets. You know, sometimes people create synthetic markets across asset classes, say, crude versus corn or the S&P in whatever wheat terms, right? So you're creating these differences between markets, synthetic markets and trade there.

And Jeff, I've tried many, many years to get that to work. And I just couldn't get it to work. Maybe other people can get it to work, but I didn't have a great experience with essentially changing the denominator on any of these markets. Even if it's like WTIti versus brent or something like that or the wheat we were talking about yeah i just uh i just couldn't get that to work and i've tried

look um correlation co-integration whatever classic turtle type of trading rules it it has a bunch of complexities like you know how do you then roll over it is it is um it kind of like sounds like a cute idea on paper when you think, oh yeah, that's something that I can easily do, but there's a lot of- Yeah, I can have 10,000 markets. Yeah. Yeah. It's actually less easy than you think.

Now, when you, when you go back to the time spreads and the calendar spreads, well, you're in the same zip code in terms of it. Yeah. It's crude versus crude, right? Brand versus brand, whatever. So the denominator issue goes away. And, but yes, they yes, they're more correlated. And I'm not really keen to get myself into anything that has to do just with carry type of trading and commodities or earning a liquidity premium by front running some of these index roles

or participating during a certain window, business day five to nine of the month, where a lot of that index trading activity happens to provide liquidity to others. That's really not what I want to do. I always wanted to use proven or robust trend and momentum-based type of trading rules with an initial stop loss and entry and an exit in the same way, essentially, but on spread markets. And I tried that for years, three years, something like that. Failed, failed, failed, gave up, took a break,

tried something new. At some point I found something that worked and where I could kind of like step back from the desk and say, okay, I can probably trust that system in the same way that I can trust my directional single market type of trading system because it doesn't have a lot of parameters. I've taken great care to build it in a resilient and robust way without forcing myself to find esoteric positions on the curve for a spread trade. That's not what I do. People hear spread trade, or not what i do and so it's not a right people hear spread trade or at least i do i'm like okay it's a convergent trade it's kind of the opposite it's meant to be negative skew and whatnot it's still you're basically saying it still has all the trend properties it's just with this spread i mean look at whatever like you know lean hawks june versus august right is August, right? I mean, that spread can go wild, right? It can have a very nice trend.

So I can trade that trend in that spread market in the same way as I could trade a trend in whatever, wheat. We may be getting too in the weeds here but that's what that's what we do here so right i've seen people get carried out on stretchers by sizing based on the historical spread volatility and then it blows out five ten times the historical volatility as you said like these things move together until there's a war. Hurricane Katrina was a classic example of all the gas was trapped down there at the refineries. So that front month was up 30% and the back months were doing nothing. So long way of saying, how do you assess the risk there? Are you measuring it per each market or are you measuring the actual volatility of the spread

itself? No, it is actual volatility of the spread itself? No, it is the volatility of the spread. There's one thing that I haven't mentioned yet. I mean, in some of these markets, you know, seasonality plays a role. Wheat, you've just mentioned, old crop, new crop, right? I mean, think about gas, summer, winter, right? If you're looking at whatever, August, September, Henry, hop spread, I mean, that is a very low vol spread. You know, that's a summer spread. It's kind of like whatever, two adjacent month, you know, nothing really happens. If you're looking at March, April, the widowmaker,

I mean, the volatility of that spread is really something quite different, right? So one of the things that I'm not allowing the system to do is to cross these analogies because then there is a tendency or a propensity for the system to get into a carry type of behavior, right? When you look at March, April and net gas, yeah, nine out of 10 times or eight out of 10 times, you make money by selling that spread, right? But two out of 10 times, you lose your shirt. So I don't want to have

these positions. So I'm not allowing to have these season crossing spreads. But then I can size and kind of risk the position in the same way as I would with a standalone market, simply because of the fact that I know that I have a stop. So what's the deal? I'm risking a certain amount of equity. Yeah, that spread might be, and sometimes they do, they go completely bananas, right? I mean, they have like, oh, whatever, the spread moves a couple of cents and then it moves a buck. And it does happen. Okay, so it happens, I got kicked out of the position. Try again. And do you trade the actual spread? There's a market that gets made in the spread

in some of these as well. Yeah. Or you trade the legs independently? No, no, I don't trade the legs independently because if I traded the legs independently, that means that for a very small period of time, I have a directional exposure. I have a fill risk, right? I trade one lex, I may not get filled on the other lex, right? So

no, I trade the spread markets. These spread markets work in all of them are slightly different. Like, you know, in some of the markets you have task markets, which is a traded settlement market where you can essentially work a limit order around zero during the day in order to get filled out the settlement price. I usually don't trade these markets, but they are available for people that, for whatever reason, want to get done at the settlement. If my system tells me to get into a spread, LeanHox, whatever, I mean, LeanHox, it's not like the S&P where like on Globex, it essentially trades around the Glock.

The LeanHox market opens early in the morning, Chicago time, but it's kind of like, you know, it's dormant during the night. So I see where it opens. I usually work limit orders and I give myself the day in order for that spread to get filled. And if it doesn't get filled, I become a little bit more aggressive toward the end of the day because I want to get into the position. It's like in the same way as with the standalone trades, not getting into the trade is,

that is the issue. You want to have the trade because the trade is part of the sample size of my system, right? If I don't do the trade because I'm too greedy on the entry price, or I think I can forecast the market and I can get in at a better price, then that essentially risks me missing the trade completely and not putting it into the portfolio and therefore not following the system. So no, I want to get that trade on, but I work limits in the spread markets and yeah, at specific points in time during the day, depending on the market at question.

And then do you use algorithmic execution for that or you're just working it yeah we'll chat about that all too small fish maybe maybe at some point yeah uh no more but um no it's just limit orders man and then part of me is thinking okay in the back to the crude example at some point are you just kind of getting an extra interest rate trade as well? Right? If the back months are moving mainly based off, in my Katrina example, of course not, that's like something new. But in normal times when there's no extenuating circumstances, it's probably the curve is just moving based off interest rates and the yield curve. Well, interest rates play a component,

right? Storage costs, level of storage, insurance, all of that, you know, fundamental features, whatever physical traders, hedging, Mexico hedging, their crude production, all of these things play a role. But I wouldn't disagree with you completely. I guess all of these factors can cause spread movement. For instance, if you traded gold spreads, you're essentially trading an interest rate. Yeah, I am. So yeah, I recognize that as part of the spread markets. I mean, it's part of every derivatives market. It's part of every futures market. Every futures market has as has has interest rate

drift implied in it right that's the cost to carry so yeah sometimes maybe these trades get me into a position because of um because of a rates move and okay so be it i don't judge i don't really care what it is uh it is what it is um i follow the system, whether that's driven by tank tops or whatever, running out of storage or interest rates changing. I don't really care. I just care that I've detected there's momentum, there's something interesting going on, there's possibly a trend developing. So I'm putting on a little bit of a probing trade and see where it goes. And then I was reading in some of your materials, your trend signals a little bit different than others, right?

It's not a pure moving average crossover, pure breakout. Explain a little bit how you're... No, it's not like... And again, I don't want to talk negatively about the moving average crossover. I think a moving average crossover, as simple as that sounds, across many, many different markets, it's actually kind of a nice system. So what I what I learned over the time, is, or well, my experience is that the tougher it is for me, psychologically, the harder it is to get into a trade to really buy the high, to really sell the low.

If I'm forcing myself to do this, to get into this kind of like inconvenient position to pick the highest price, that actually tends to be the better system as nuts as that may sound. So it's kind of like- Sounds backwards for sure. It sounds backwards, exactly.

And that is one of the things like I really want to see like, yeah, I just want to essentially buy the high. That is why that is different to a moving average crossover, what I do. I'm kind of like a little bit more picky. And can you say how that exactly works or no? Think about a simple example, right? So you want to see a market having multiple highs right uh i kind of like a sequence you know you want today's price to be higher than the price 20 days ago you want yesterday's price to be higher than the price 20 days ago right so

you want consecutive um consecutive highs um so that very much correlates to a breakout, like, you know, a breakout over a certain time window. And by the way, I also trade breakouts, kind of like gets you in it around the same price, but just me kind of like having that, I want to have that sequence. I really want to see that market move higher for a couple of days and kind of like show that it's moving in the direction. And only then do I get in. Gets me an even a little bit later on average at a little bit of a higher price if I'm long and a little bit of a lower price if I'm short.

So it's, yeah, forcing myself in a way to put on the inconvenient trade. What do the exits look like? Similar? I mean, you can't have it be similar, but I guess you could if you're short high in the opposite direction. I'm using a trailing exit. So my exit runs a couple of ATRs behind my entry price or behind the last price, right? Behind the last close or settlement price. That is a very simple exit. We can have a debate as to whether you should exit on whatever the next 100-day low or 150-day low or anything. It's fine. At the end of the day, to me, that has not made a world of a difference, right? The important thing is, is that you have an exit and that exit moves along as your trade develops and that you stick to that exit and you follow that exit and you don't second guess it. So that is, that is it.

Another thing is, is, you know, where is this exit? Like, you know? Do you want to have a very tight exit? Do you want to have a very kind of like loose pants type of exit? The latter is usually the better. It's the more painful, but that is where most of the money is, I think. I'm very tight. Sounds like you're more of a longer time frame from everything you're saying. Exactly. You get that with longer timeframes. And I'm very impatient with losers and tight

on my money with the initial stop. You grab into my wallet on that initial trade, I close that wallet right away. That's not yours. Go away. But when the trade develops, I mean, think about it, this is now money that the market has given to me in the form of variation margin, essentially telling me that I'm right, right? So it's your money or it's somebody else's money because it's a zero-sum game in the futures markets net of commissions, right? So I'm very free and liberal to go to the casino and play with somebody else's money, right?

That's not coming out of my own wallet. I know this sounds, you know, don't take the casino part out, but you know what I mean, right? That's not coming out of my own wallet. I know this sounds, you know, don't take the casino part out, but you know what I mean, right? That open trade equity is something that I can be much more risk seeking with and less tight with than my core capital, my closed equity. And so that favors that lose pants type of approach where I cannot predict these markets. If there is a longer term trend, then I don't want to be kicked out of that trend prematurely. And I recognize that sometimes you have these massive periods of give back and just markets do nothing.

They go against you, but you stay in them and they just, hooray, come back. And they follow the direction of travel and you're just so happy at that point in time that you still have the original position size on in the original direction and you didn't get kicked out of the trade. And that's what I do. And if it's open trade equity, fine, I'm much more willing to do that. Which this is interesting because that sounds more like the classic trend follower, turtle trader type mentality. And then I think over the last 20 years, as more and more investors, institutional monies come into the space, they hate that profile, right?

So I think they've been the ones that have pushed all these bigger firms to be like, we're going to vol target, we're going to exit, we're going to overlay whatever filters to make sure we're not in these positions. And their whole goal is to reduce that give back of open trade equity. I'm sorry for them. Happy for me. But you know what I'm saying? Because it sounds great here on the podcast, but as an investor, if I'm in my account and I'm like, cool, I don't really mind that in my account.

But for selling the track record, I don't think it works. Right. Because you have these large drawdowns, you have the larger givebacks, and it just isn't appealing to people. Yeah. Everybody got kind of like on, oh, everything needs to be 10 vol. Right. I mean, we used to be completely fine with 20% equity vol. And that was kind of like

normal. Nobody cared about it. 20% vol was fine. And that was what your portfolio was on. And I guess over the last 20 years, some whatever, mind shift, risk appetite, maybe too many accidents, you know, sovereign bond crisis in Europe, the gold financial crisis. People just don't want to have 20 vol anymore. They want to have the smooth, feel good, low vol type of profile without a lot of give back, straight line to the top, not a lot of losing. Now, that just doesn't come natural. If you're trying to produce that, what are you risking? What is the side effect of that type of behavior? You have vol control overlays. Don't get me started on that. It feels like I'm beating a dead horse on this. I've talked hours and hours and hours on why that

is not a good idea. But I think at the end of the day, and by the way, there's also business management behavior on the side of the investment management firm by the way, there's also business management behavior on the, you know, on the side of the investment management firm or the CTA is kind of like, oh yeah, we give this more like, you know, feel good type of profile that's well controlled and smooth. Right. So we can obviously get more assets, maximize the revenue stream, trade a larger capacity because we've reduced the vol, have a larger management fee footprint,

increase the value of the business and then sell it to BlackRock. That is all very logical. Now, from a trader perspective, and I'm firmly putting myself into the seat of the trader here. When you ask yourself, why are you doing this? I mean, why are you spending all this time researching and developing trading systems? Why are you sitting and look, I don't need to sit in front of the screen all day because it's a system that's running, but I'm spending time with my system. I'm spending time with the markets. That is what I love doing, luckily. So it doesn't feel like work, but it is nevertheless something that I put a lot of energy, a lot of time and mental power in. And it's kind of like, why would I ever trade this at 5 vol or 10 vol? I mean, I've done this.

And I think the only answer is to make money. If you give another answer, then whatever. I didn't do that to make money. Then I don't understand where you're coming from. Because the financial market is about making money, right? right and um so you have to accept a certain amount of vol and variation in your returns in order to make that money i you know i don't want to be spending all that time here at the desk in order to make three percent a year i'd rather buy the bond or you know whatever do real estate and you know okay that's actually risky as well. But you know what I mean,

right? I mean, the stuff that we do, trading futures, which in and by themselves have leverage, I mean, come on. I think the counter would be, right, it's a question of are you maximizing for most return or best risk-adjusted return? And whether we measure that with vol or whatever but it seems as for the return the risk adjusted is um everybody risks adjust in their own way whatever suits them right whatever sharp okay fine um but you don't get risk on you don't get rich on sharp you don't get wealthy on risk adjusted returns you get wealthy on returns right right? So look, I know it is unpleasant. I've been there a couple of times with these drawdowns, right? And you go like, okay, this is the point in time where it shows, you know, do you trust your system? You know, is that something that you can,

do you have the stomach to, you know, put 1,000 trades, given where you are today? If you can't do that, and it is difficult, that is, I think, where a lot of the alpha is, then it is really about the returns. Then you can make the money. And to me, this is what trading is about. It is not about the risk adjusted. Think about it. If you have a 0.5 sharp, people sometimes belittle that. Oh, you have a 0.5 sharp, right?

People sometimes belittle that. Oh, you have a 0.5 sharp? I mean, come on, take the next seat. You know, come on, give me another trader. I need a one sharp or a two sharp or a three sharp live track record. Okay, fine. Well, if you can find that three sharp trader,

first of all, I'd ask that trader, why are you trading outside money if you have a three sharp? I mean, just be very quiet, very secretive, right? Do whatever it is that you do. Turn it into 10 billion in four short years. And just buy that island and become the richest person on the planet.

But the fact that you are shopping a three sharp around to an external investor, kind of like it makes me a little bit critical. It's like, what is it that you're shopping a three sharp around to an external investor kind of like it makes me a little bit um you know critical it's like you know what is it that you're actually selling okay so 0.5 sharp that means at 20 vol to use our example again uh you expect the return is 10 not every year because it's a 0.5 sharp right so it's going to be minus 30 plus 20 minus 10 plus 5 plus 15 plus 20 in order to get to that so it's choppy right but you you can make 10 a year at 20 vol when do this for 20 years it's or 25 years or 30 years um you know compound uh 1.1 to the power of 30 i mean that that is a big number and i don't know what it is off the top of my head, but it's a nice number.

Yeah, I'd take it even further. I'm happy with a zero sharp on a trend follower if it has the divergent properties and if it performs in a 22 and an 08, right? If you have flat carry or even most of the time you have a little bit of positive carry, but I think a lot of people miss that point too. I'm like, hey, this thing is going to carry positively and it's going to pay out when you need it to pay out. It's bad for people in our business, right? Of like, hey, then they treat it as the piggy bank, take that and rebounce it into equities. But sure, go for it. It has that optionality, right? Which people kind of like say, rather than being long tail

protection or rather than being constantly long vol in order to protect an equities portfolio, you have the propensity for trend following traders to have that defensive, not guaranteed, but defensive characteristic and an expected positive payout, right? You don't have to pay premium for it. Now, but that forces you to view the entire thing within the context of a portfolio, right? So you think, okay, I have the 60-40 or whatever. I have a bunch of stocks, the S&P 500. And therefore, if I add a trend-following trading system to it, it just becomes this better thing. But yeah, it's just interesting to me, right? From your seat, from the trader seat, building the portfolio, all those thoughts of like,

you got to endure, you got to be able to put on those next trades versus the investor who has to come at it from a different angle. Like, is this system going to keep working? How do I know it's going to keep working? So they just have a little bit different mindset and challenges than you have. They do. And it's also different across the investor spectrum. I'm not talking to institutions at that point, and maybe I never will. Who knows? But obviously there you're talking about completely different dynamics. It's about the portfolio. It's about risk adjusted returns. It's about volatility. It's drawdown. It's all these types of things. Even more, I'll take it. It's about, do you check the box? Do you have this cybersecurity policy? Do you have this? Career risk. It's set up.

It's all these type of things, right? So you actually, in order to get there, you need to run a massive business. You need to have whatever, how many staff from payroll and this, then the other thing and also whatever. When you speak to my friends, family, high net worth investors, people in my network, also with kind of like a trading knack, some of the family offices, they get it. They don't necessarily have to be narrow minded and go like, oh, this needs to be whatever, 10 vol, and it needs to be the perfect smoothener to my 60-40 portfolio. But there are smaller groups, right?

I mean, it's who I talk to, but I enjoy that. Any last thoughts you want to leave the listeners? No last thoughts. I mean, check out Tuckahay if you want. if i can pull that block um it's just about to launch it's tucker hey dot capital you can find me all over the web um very classic trend-based trader with uh with derivatives on top or non-linear derivative instruments on top and spreads so that's what it is yeah and some and a little option action thrown in there which was interesting um i love it all right give me your favorite uh european ski resort before we leave uh that is a rosa which is a rosa i've never heard of it yeah

it's a r o s a that is um also in graubund and it's actually not too far away from davos and st maurit's kind of like um in that area but it's uh it's just beautiful it's um it's high up it's quiet it's um it's amazing that's that's where i love going but i love all these ski resorts i mean the in the tyrolean ski resorts with all these beautiful huds and a little bit of apreski and a good time and some music i I mean, this is just a great, great fun. Um, um, my buddy here keeps trying to get me to go. He's gone a few years. I can't remember the resort. There's some race, famous race. And I think it's Austria. Um, it's like a 16 mile race, like all the way down from the top through the village. Um, it's more of a fun it's not

an actual race but okay yeah well the the the world's most famous ski downhill race is uh is in kittsville um that's probably the one yeah the last weekend but that's not 16 kilometers that's okay but it's very steep very very fast that's the last uh the last weekend or second to last weekend of january each year uh but you're saying that's the world cup race yeah yeah yeah yeah i'm saying this is a race like i can go do or we could do it's like more of a drinking uh oh that's yeah it's one of those kind of boondoggles where everyone's 16 kilometers they become a long way right yeah there's and there's like 5 000 people people up there. Yeah. Yeah, exactly. Well, let me know when you're here. I mean, I,

I did ski a little bit in the States as well. We were, when we lived there, we we went up to Stowe, Vermont a couple of times, but that is, that is just different skiing. It's kind of like similar snow to the Alps. It's like a wetter type of snow, but I was really missing the kind of like these Tyrolean wooden huts and uh um just just the atmosphere so i think that is that is half the fun is just um yeah having having a few drinks with friends and just a good time after i hear you i hear you um all right awesome we'll leave you there we'll talk to you soon

absolutely thanks for having me on jeff yeah thanks so much for being here all right ski talk and trend talk that was fun thanks to maritz thanks to our sponsor rcm and their trend white paper and thanks to jeff berger who cranked this all out on rather short notice we'll see you next week peace you. 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 RCM Alts 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. This podcast is provided for informational

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