The Derivative - Finding Alpha in Unexpected Places: Doug Greenig on Trend Following Beyond Developed Markets

Episode Date: March 28, 2024

In this in-depth conversation, Jeff Malec picks the brain of veteran quant Doug Greenig about pursuing trends on a truly global scale. Greenig takes listeners on his fascinating career journey, from cutting-edge fixed income modeling at Goldman Sachs to managing risk at MAN AHL's pioneering CTA firm. He explains how this experience led him to establish Florin Court Capital and develop novel ways of accessing over 500 international markets. Greenig and Malec engage in a lively debate about capturing narrative shifts, the effects of high-speed trading, and how allocators can balance exposure to alternative trends. Listen in on unique insights into operational challenges like structuring swaps to trade illiquid assets. Greenig also discusses how Florin Court scales risk across a massive portfolio while still delivering the crisis protection allocators seek. This revealing episode pulls back the curtain on one firm's quest to follow profits wherever macro winds may blow. SEND IT! Chapters: 00:00-01:48=Intro 01:49-04:21= Diverse economies 04:22-22:25= Economist turned PH.D, fixed income derivatives & trend potential in emerging markets 22:26-37:00= Alternative markets/Alternative trend: Exposure to CTAs, global orientation & unique opportunities 37:01-51:20= Refining models, when narratives change, signal strength & volatility targeting 51:21-01:01:34= What drives trend, removing the narrative & moving into a complex world 01:01:35-01:06:59= Florin Court...the apartment building? From the episode: History of Managed Futures whitepaper Guide to Trend Following Follow along with Doug on LinkedIn and for more information on Florin Court and their team visit florincourt.com 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. Happy March Madness to those who celebrate. I hope your brackets aren't too busted up. What is decidedly not busted up was this pod, where I was lucky enough to pick the brain of Doug Greenick of Florincourt Capital

and hear more how they seek out trend opportunities in more than 500 markets across the globe. 500? What? There's not that many liquid futures markets, are there? But what about OTC, swaps, cash, and more? We get into all the details with Doug, including if there's a law of diminishing returns in so many markets, are there? But what about OTC, swaps, cash, and more? We get into all the details with Doug, including if there's a law of diminishing returns in so many markets, if trend followers need chief risk officers, whether Florin is the best out-of-sample trend following test we've ever seen, and how allocators should think about trend in general and alt trend markets specifically.

Send it! This episode is brought to you by our really old, but still quite good, I think, white paper on the history of Managed Futures. Doug spent some time at AHL before Florin, and our white paper talks about the three founders of that shop and how they went on to become Managed Futures royalty in a way. Go to rcmalts.com slash mfhistory to download it today. That's rcmalts.com slash mfhistory. And now back to the show. All right, everyone, we're here with Doug Greenick. Doug, how are you? I'm well. I'm well. How are you doing, Jeff?

I'm great. Thanks for joining us. You're on a little bit of leave, I hear. So thanks for joining us on your day off. It's my pleasure. You call it a day off or no? I don't know if we can call it a day off. I had quite a lot of work today. I had a risk meeting, a call with an investor, as well as several conversations with people in the office. So I've actually been quite busy. I hear you. And where do you call home? London, right? I spend about half the year in the UK and half of the year in Abu Dhabi, chasing good weather, as it were. Now, we have offices in both places of almost similar size.

So we sort of have co-headquarters, and that's one thing that allows us to trade markets around the world, almost around the clock, having those two different time zones to work out. I've never been to Abu Dhabi. Worth the visit? Oh, absolutely.

It's probably not what you expect. I'm sure it's not. In what way? It's an incredibly modern, advanced society. It has some of the features of singapore and it's a but its own unique culture and and uh history and trajectory i would say that um the uae is emerging along with some of the other gulf states as incredibly powerful, interesting economies that are making big plans and big strides

for the post-petro economy and information economy and so on. They see the writing on the wall, right? Hey, we got to modernize. We got to get away from oil. Oh, yes. They've seen that for a long time. And indeed, they've done it. These economies are increasingly diverse. And remember, of course, the economy of Dubai from oil oh yes they've seen that for a long time and indeed they've done it these these economies

are increasingly diverse and remember of course the economy of dubai was never based on oil dubai has always been a diverse economy with tourism and many other business activities and sort of being a it's also a gateway to africa yeah awesome you could argue it's based on oil money perhaps but i get your point so you have quite the resume let's dig into your background a little if we could so we'll start at where do you want to start goldman i'll start you can start earlier than that all right so uh so I began as an economist but ended up getting a PhD in mathematics from Berkeley oh that sounds easy no it was yeah I I remember I remember back in those days wondering if I was going to make it through the PhD as I worked on my dissertation.

And a lot of it came to be one morning on Polk Street in San Francisco in a cafe after I'd had like five cups of coffee. Nice. And just suddenly I thought, right, how to solve this problem I've been working on for about two years. Oh, wow. And it was a very famous problem, moderately famous, not very famous, a well-known problem in mathematics called the Marcus-Yamabe conjecture. And so I made a great deal of progress that one morning. And I thank determination, a lot of work and caffeine.

Caffeine paid a definite role in shaking things loose that day. Anyhow, during that time when I was getting my PhD in mathematics, my field was dynamics and differential topology. I was also working part-time, a considerable amount of time at Barra in Berkeley, California. And I had a chance to work with some very notable people,

Ron Kahn, you know, Peter Muller, and a lot of very interesting characters on the quant equity side. And that set me up for my job at Goldman Sachs when I finished school

fisher what year was this roughly 1993 okay so early days for quant anything sort of yes yes and indeed uh and so i came to work with fisher black as sort of his assistant at Goldman Sachs. And so I worked with Fisher and later Bob Litterman, some of these folks, and had some very nice years at Goldman Sachs. And I always ask Goldman alums when they're on the pod if they think of it as the vampire squid that was portrayed in the press back in the day. Of course not. Yeah, exactly. Goldman is a commercial organization.

But when I was there, there were tons of absolutely fabulous, talented people. And most of us worked together very well. And it was a very collegial environment for the most part so i actually i think you know it's a it was a great organization but obviously they're commercial and you know the goal of the goal of a company is to make money and so the good is but we we felt that we worked better work together better in different areas than our competitors. And that was our edge, the superior teamwork. I can't speak for Goldman today, but

Goldman back then was a terrific organization for sure. One lady I had on said it didn't matter if you were male, female, black, white, green, purple, alien, if you could make money, they had a spot for you. Or if you could help others do it.

Again, the teamwork aspect was very, very big, and I've carried that forward in the jobs and roles that I've had over the years. Awesome. So parlayed Goldman into where? So I then went over to RBS Greenwich Capital, which was an absolutely terrific fixed income shop. Now, when I was at Goldman, I did fixed income arbitrage over several years,

the Goldman Bond arb desk in New York. And we used things like term structure models, OK, to trade fixed income and currencies and so forth. And it's very, very interesting stuff. It sort of grew out of the study of fixed income derivatives. How do you trade the idiosyncratic deviations from the yield curve. So it was very hardcore quant stuff. We used stochastic calculus and all sorts of different term structure models,

but there was also a discretionary component because you needed to understand why something might be a deviation or at an unusual point relative to history before you just dive in. So then I went over to Greenwich Capital Markets and I became the head of their mortgage arbitrage desk. And then I was promoted, which expanded. So it became kind of a fixed income arm desk. And then I also got responsibility for the customer business and mortgages, where I managed agency mortgage trading and research. And was that the heyday of packaging all the mortgages right before 08? Well, I was not involved with the subprime side,

the credit side. I was involved with traditional agency mortgages. And so it didn't involve that kind of credit risk, but it did involve a lot of trading of curve, volatility, mortgage spread. And I had a wonderful, wonderful team there, many great people whom I learned from and helped from my side. And so it was a very, very successful experience over, I guess it was about six years. In simple terms, what was the goal? To strip away all the volatility and credit risk and

interest rate risk and just have a fixed yield? No. If you strip away all of the exposures typically in a mortgage derivative, the costs of doing so are prohibitive. But what you do is you strip away the ones that you can hedge cheaply or the ones that you can hedge cheaply or the ones you really don't want to have and then of course in the customer business with mortgages

there's obviously the market making business you can buy from me at one price and I'll buy from you at another you're the customer and I'm the dealer and so there's a certain value to that business. But it's a very interesting business because there's a kind of, for want of a better word, adverse selection. If somebody comes to you and wants to trade, what is it that they might know that you don't know? Yeah, if they're trying to sell you that mortgage what what's the red flag yeah that you know the what do they know about the market or the product that you don't uh so so if one is

careless uh as a market maker you can end up on the wrong side because you're willing to supply liquidity to everyone, really. Sorry, was there the concept of Citadel these days of I'm not going to get in front of the smart money, right? I'm just going to book the dumb money trades? Did you have that concept of okay, they're bringing... This was the professional's market.

This is all institutional. There isn't much dumb money. You just want to make sure there isn't much dumb money yeah okay you just want to make sure you're not the dumb money so it was a wonderful experience that's another great firm i've been very lucky because i've had a chance to work with amazing people at amazing firms and experienced a lot um i didn't amazingly we haven't even mentioned trend yet so you were doing all this stuff and was trend even a gleam in your eye or it was out of your mind well yes because we also i also had some quants who were doing some uh quantitative systematic trading and so we looked at variables

like that and then when i went to fortressress Investments later, you know, we had a systematic macro program within their macro fund that was an interesting thing. And trend was one of the things that we did back then. In any case, I probably should wind things more toward the present because the really formative thing because you can tell as i go over my career i've been in the markets an awful long time yeah and i've seen that don't try to flatter me okay i'm like father time here i i was in the cretaceous era the raptors and stuff but but more recently, my big exposure to Trent was when I was hired to be the chief risk officer at AHL, which is obviously a very distinguished name in the Trent following and quant space. And that was a terrific job. And I learned a great deal because obviously I came in

with a lot of experience that was across quant space, the macro space, the fixed income space, and some exposure to trend. But certainly my knowledge was very much deepened by my experience of working there.

And, you know, and there's... Was everyone out of there? experience of working there. And, you know, and there's... Was everyone out of there? This was a long stint. Tim Wong was the CEO. And so they had left, but their tradition, the way they looked at the world, was part of the DNA there and the models. And so, you know, I looked deeply at that. I asked a lot of probing questions, did my own research, and it was a very good experience. Sorry, I was just going to say for the listeners, AHL is the last names of David Harding, Martin, and I can't remember the A.

But we'll put a link to our history of managed futures. We have a paper on that. Two of them were in the dorm room in Cambridge and kind of came up with this. So it's an interesting, interesting story. I tell you that these were very very bright created people arm and there was an earlier tradition of course trend following in the US yep the turtle traders the phone very I'll go and all that and that was very much

oriented toward breakouts okay and a particular way of doing things. And then the European CTAs sort of all flowered out of the three gentlemen that you mentioned. And with similar methods, they tend to use a smoother and more continuous form of momentum in most places. And that's generally better behavior. The drawdown characteristics of what are called oscillators, okay, are better in general than what you find with breakout systems.

Although, you know, most good CTAs use a little of both, depending on the circumstances. You know, a rule of thumb is that smooth momentum, as I call it, based on an array of oscillators, will have a max drawdown of something like 1.7 times the annual vol but the number can be well over two for breakout systems where it's kind of student body left or student body right you can get the thing very very wrong under certain circumstances your UK people understand that analogy student body left student body right I have no idea if they understand that analogy? Student body left, student body right? I have no idea if they understand that. I do. By the way, the UK

is a different animal. It's a little bit of a different culture from the US. Just watch the Guy Ritchie series The Gentleman on Netflix. You'll see that it's different. It strikes me, it seems like an easier, right? It's weird to get, it seems to me the mortgage and the fixed income and the yield

curve stuff was way riskier, way in more need of a risk manager than trend following at AHL. I mean, they were getting into other stuff, right? So was it a, I don't want to say easier, but it was just different, right? Like there shouldn't be that much risk in a properly run trend program ah but that the mod the risk you have is model risk that you haven't organized your trend following models and your allocation in an optimal way there's cta and decentlyfollowing programs don't have very much blow-up risk. They can bleed, but they tend not to blow up because at the end of the day, it's a kind of, as you probably know, a long convexity strategy. You're synthesizing volatility. In effect, buying higher prices, selling lower prices on the idea that there will be a continuation

and and the trouble when you get into trouble it's a different kind of trouble it's because it's chopping back and forth at the so-called frequency of death some wrong frequency with respect to yours where um you're getting crossed up now when you go over to the world of fixed income and so on the key is trying to manage that tail risk that comes from short volatility positions that you may or may not be aware of right and so so the typical thing with a fixed income derivatives portfolio is getting all of those risks, all of the Greek

if you will, to use an option terminology, in the open figuring out what you can live with, figuring out what risks you're getting paid for and which ones you're not getting paid enough for and then managing that dynamic process through time that's trickier yeah

it's you mentioned an interesting thing there like the model risk but then also right if you get chopped around and you change the model at the lows, you might just exacerbate the thing. So there's also kind of firm wide model risk, too, right? Of course. So, you know, one of the big lessons is that the trend speed that worked last year may or may not work this year. This is one of the reasons it's so difficult to make significant improvements in trend-following programs on the classical liquid markets. Everyone's been working on this since time immemorial.

And the people working on it are, give or take, as smart as you are. They're all pretty smart. And it's tricky. It's very tricky to make improvements. The low-hanging fruit is finding new, diversified, uncorrelated sources of alpha new markets where the trends are less correlated with the trends in the in the standard markets that's the low-hanging fruit in this space and but it requires a heavy operational lift yeah and and some people have gone the other way right of like hey everything's known out there we're not going to find anything new in the trend space.

Let's just go with a basic trend model that gives us roughly the beta of the space, right? So whether that be replications. That's not a bad thing to do. People sometimes ask me, what should they, you know, Allocator would say, what would you do in the cta space and and and i can make a case that you're supposed to have some cta exposure it's one of the tried and true methods to hedge your tail risk but what you know one very reasonable thing to do is to get a low cost get low cost cost developed markets trend, just as you're saying. There are also some very good developed market trend programs that are worth the fees they charge. You know, for example, Lynx, you know, they're related to us.

They're another Brummer fund and they're. And they generate a lot of gamma. And you might want a high-speed CPA in the mix. And, you know, we all know. They've struggled the past couple of years, but yeah. Yeah, I know. But they're good things to have. And then I think you want an alternative market CPA because it complements this other stuff.

And over the past seven years, market CPA because it complements this other stuff. And over the past seven years, you get a sharp ratio in the neighborhood of one instead of a sharp ratio in the neighborhood of 0.3. And you still have the crisis alpha and the other characteristics, depending on where you want, depending on where the crisis happens. So my problem with kind of, well, let's talk, let's define alternative markets, alternative trend if we can. Right. So we're talking, and you've mentioned the developed markets. So my view, there's, call it 75 tried and true developed futures markets that most trend followers operate on. Maybe you can take that out to 150 or more. And so with that background, explain how Florent Court does it a little bit differently and says,

hey, there's a whole nother universe out there of these alternative markets. Well, that's exactly what we say. And by the way, I think you're supposed to have exposure to CTAs on the 75 to 100 markets. You're supposed to have those. Then the question is, can you get any benefit from trend following electricity around the world, from trend following Turkish interest rates, Malaysian palm oil, onshore Chinese commodities, Bitcoin, you know, Colombian interest rates, California carbon emissions. Okay. Wet freight from the Middle East to the China Gulf.

Right. All right. Now I need to know what wet freight is. Yeah. It's stuff that's shipped in tank tankers okay on the ocean got it yeah well you know and um and and and so you know the the answer is there is a benefit to that you can look at the returns over the last seven years that we've had in these markets. And, you know, there are some even longer track records out there.

And so it works well and is additive. And then the question is, how much do you want of each? And that's really up to the allocator, depending on their level of interest in alpha versus the extent to which they're trying to hedge their S&P exposure or their kind of U.S. recession risk. We give has a problem, we're more likely to do well with a dislocation there, probably than standard CTA. Whereas if there is a major dislocation in the US, the standard CTA might have the edge. But we cast our net globally and we cast it wide. We have nearly 500 markets. Preston Pysh

This is interesting to me because say the theoretical allocator you have there, so you touched on the main difference of I want trend, I want this extra alpha that these alternative markets bring, but the more of those i add the less i move away from the classic trend crisis period performance or at least the u.s crisis period yeah you get other crisis periods we do very well when turkey has the crisis not that i want turkey to have a crisis to love the country they seem to have a lot of them. Yeah, they're about 75% inflation now. And actually the world where we work, that area in general is more crisis prone than the United States.

The United States is a remarkably stable, well-organized economy, you know, with some world-class companies that are essentially global monopolies. You know, you think about a company like Microsoft. If you're looking for trends and dislocations, you might be well advised to look at Turkey, Colombia, Chile, you know, Indonesia, and all of these other places that, as wonderful as these countries are, they're on less, the footing is less firm. Which is interesting, because a lot of trend managers were complaining, right? Oh, the Fed's suppressing volatility, and we're in this 09 to 18 period where everything's kind of messed up because of the Fed.

It sounds like you guys were like, well, then screw the Fed. Let's move over to markets where they don't have as much influence, if any. Exactly. Exactly. And going forward, you know, I was of the personal view that we probably would have a pretty tough, hard landing in the U.S. But the U.S. is turning out once again to be this incredibly stable place. Take a look at growth over the last couple of years. It's really hovered around 2%. I think a quarter three last year it went higher.

But it's been in that two or three zone. Remarkably stable to find these calls for recession. And I find that really, really interesting. And, you know, we don't see the same stability in Europe.

We don't see the same stability in emerging markets. The US has something special going for it. There's no denying it. So why not, if I'm an allocator, just go full hog into these alternative markets, into alternative trends, right? Like, hey, this is where the alpha is. This is where the instability is. This is where everything we just talked about. I want more and more and more of that. Well, I wouldn't mind reaching that conclusion. But if I were an allocator,

I want some CTA stuff as a risk mitigation tool against my equities, my fixed income, my private equities, all these other classes. Yeah, 2022. Yeah, I'd want to have that stuff. And then I'd want to have some exposure to China, emerging markets, electricity, idiosyncratic stuff. There's absolutely nothing wrong with passing your convexity net wider when the alpha is there

and do you want speed diversification too so you know as i as i said right there if i were an allocator i'd have i'd have some alternative market cta stuff i'd have some developed market cta and i would have something on the fast side too yeah that you know and then you that you can figure out the right balance based on your views about the world right but that's the trick to me that right balance because you're like hey this is a a lot of allocators i feel like will come to the conclusion okay i'm going to put five percent into this alternative trend stuff but that doesn't really move the needle right so they're getting a little bit of alpha on the edges which i think happens in main trend followers portfolios too.

Like, okay, I want to add these alt markets, but I'm only going to risk this little bit. And it's only this little bit of the portfolio. And even when Turkish interest rates run, I made 40 basis points portfolio wise on it. So I think they come to the conclusion, it's just not worth it. It depends on how big you are as an allocator or as a fund. If you're an allocator that's absolutely gigantic, it's not even clear alternatives will move the needle for you. Yeah, agreed. Okay, right? You can't do enough.

On the other hand, there are plenty of important medium-sized institutional, small and medium-sized institutional allocators where a $300 million allocation to someone like us is meaningful. It really just depends. The other thing is the standard market CPAs are not as good at the operational lift. They don't have nearly as much experience dealing with these markets as we do. We're going to be better. We're specialists. My two partners, David Dennison and Tony Vinitsky, they're specialists in this. This is something we do that's our bread and butter. So we do it a little better, we say, than somebody who

wants to throw in just like Felix electricity contracts into their standard. But in a perfect world from an allocator, I want you guys to run it like 80% vol. Right? And hey, I can throw this into the portfolio to give me this

extra diversification and they they run this super high ball and i i get what i want without having to put too much money over there but yeah well that's in a perfect there are many perfect you and i would both like in this in this perfect world and by the way that that would not be at the top of the list if I'm allowed to go for perfection. The issue here is there's more margin involved with the alternative markets business. It is very difficult to run this stuff beyond about a 15 vol without the margin to equity ratio getting too high yeah but the returns have been excellent in uh versus you know standard cpa programs the soft you know the various sg indices over the last seven years so let's dig into that a little more of these this as a practical matter so sometimes you're going into the over-the-counter markets.

Sometimes you're doing swaps. How are you accessing these different unique opportunities? Exactly. Some of them are exotic futures on different exchanges. You know, the Baltic Exchange for shipping, the European Energy Exchange. In other cases, we're doing total rate of return swaps with people on things that are hard to access directly. We're doing interest rate swaps, Turkish interest rate swaps. So we do a lot of different things to get the access that we have.

Everything is managed to pretty good liquidity conditions. If we had to wind up what we did, what we do, we could do so in a week or so, okay, without undue market impact, assuming the world has not ended or something. So, again, we're a liquid fund, you know, monthly cycles, you know, and we're not as liquid as you might think, but it's operationally difficult. You know, for example, there's several ways to access Chinese commodity markets, which are among the most liquid in the world. But whatever method you use,

there's a lot of operational stuff. Yeah. And that's the knock, right? If I'm the traditional CTA, like, oh, there's no liquidity there, I have to do swaps or I have to do... And then there's a huge barrier of entry too, right? Like, how did you guys even get started with some of those? You have to be big enough in order to have the credit backing in order to get the swaps. Well, that's where Brummer came in. Okay. By the way, you cannot do this starting up with two guys

and a Bloomberg and a dog and a Siberian forest cat. What's the dog and the cat do? I want to hear this. It just adds to the theme. I'm helping people visualize this. You know, maybe somebody has, they do it in their study in Rye, New York, you know, or maybe they rent a little office in town.

Okay, and you got to have a cat and a dog and stuff like that. So, no, it's not like that. To trade the stuff we do, you have to have a bunch of money. So we began with Brummer and Partners, and we started trading, I think the year was 2016, where we relaunched, and we started with $2 270 million in capital from them now they've known me for years and years and years going all the way back to greenwich capital where they were a

customer of the firm and i used to go up to sweden for midsummers to give them some talks on macro and fixed income. They've known me forever. And so when I left AHL and was starting to look around at things I might do and people who I might partner with, Brummer very quickly rose to the front because they're like, we know you, Doug. We're very, very interested. What do you have in mind? And I said, hey, let's get out a clean sheet of paper and try to design the best CTA that I've had to design with new infrastructure, new everything. And it seemed to me that the real opportunity, since they have links, which is the developed market CTA,

and a good one, would be to do these operationally difficult markets because I had some experience with these markets. And ever since then, it's been a wonderful success story. I'm very grateful to have the partners and the team that I do. Great group of people. It seems like you'd go around and be like, I've got an idea. We're going to do trend following in 2016. And everyone's been like, what? We have plenty of that. It seems like you'd go around and be like, I've got an idea. We're going to do trend following in 2016.

And everyone would have been like, what? We have plenty of that. That's all you got? Well, you know, the thing is, it helps a lot when somebody knows you well and trusts you. This is not coming in and doing some cold pitch to someone who doesn you know doesn't know you it's the you know i i built i at least with some people i built up a reputation yeah you know and

and so i'm very grateful for bummer support why did you leave hl to go hang your own shingle to go do your own thing in the end yes um AHL was in the process of shifting there was new management and a lot of changes taking place and you know it was it was sort of time it was kind of time for me to do something a little different I read somewhere doing some research, you guys are looking at 50 more markets every year. Is that still the case with anyone? We will if we can. We're always looking for new stuff. And there are new things, whether you're talking Japanese power markets, Indian commodities,

there are a lot of things that we're looking at and you know as you would as you would suspect the marginal benefit of of adding 50 more markets is smaller now than it was when we had 200 yeah okay and it's harder to find stuff that's independent okay so we're also doing a lot of work refining our models looking at what we do seeing how we can trade the markets we already trade back the it was pretty low-hanging fruit, as I like to say, to go from about 200 markets to 250 to 300. And these markets are really, they really are diversifying. But there is some diminishing return at a certain point. And so we continue to look for new markets and find them. But we are also focusing a lot on making sure that we're right at the cutting edge with the best models that we know how to build and portfolio allocations. So what's that look like in terms of you guys weighing the risk reward of that law of diminishing returns?

Right. So you're like, OK, I mean, it seems like you would have hit that a long time ago, back at 200 or 250 or 300. So even in those early days. Well, remember, because of our reputation as the alternative market people, alternative market guys, people bring them to us. Because they know that we're nimble.

We're 24 very experienced people, many of whom have gray hair. Premature gray hair in some cases. Or no hair. No hair. You know, the reflective scalp, right? And we're nimble, and we can make a decision to look into things, research things more quickly than large bureaucratic organizations. And so they bring stuff to us and we look on our own.

And so we do continue to find things to do, new things to do. New markets, new way to combine markets, new ways to do things, and improvements and refinements of our models as we go. But, you know, it's harder and harder

to find 50 really new things. Yeah. But back in the day when you went from 200 to 250, what was the metric for, this is additive to the portfolio? You're running it portfolio-wise? Well, first off, there's a conceptual method. Like, are Turkish interest rate swaps, how correlated are they with other things? They know freight markets uh how correlated with these with other things that we have are they sufficiently liquid can we get the size we need um how quickly can they be traded

what constraints are there uh what's the volatility like what's you know what has trend performance been in general we believe any market that is not artificially suppressed or fixed in some way can trend but some markets are better behaved than others it's certainly true and markets where fundamental value is more uncertain and the future is more uncertain they're more prone to that kind of hurting and trending behavior than other markets. Trey Lockerbie, And do you feel like this has been a test of trend following in general? Right? Like this is the ultimate out of sample test. You're trading real live billions of dollars, real live money on all these alternative markets with, I'm going to assume, classic kind of trend models, not to belittle them, but, right?

So it seems to me this is the ultimate test of trend following. Well, that's an interesting point you make. Because one very good thing to do when you're building models is to take the same model and apply it to a different universe. Exactly. If you're doing, for example, a systematic macro, like relative value, these cross-sectional models, change the cross-section.

Do a global cross-section and then do a cross-section in Asia, let's say. Does it still work with the portfolios being very different? But I don't think that there's any real question that trend following works at least okay. I mean, there have been some papers, you know, about a century of trend following. Yeah, AQR. And I've seen another one that extended it further.

I haven't seen one that goes back a millennia. It goes back millennia, but... A lot of assumptions and going back a millennia. Well, indeed. But the fundamental thing that makes trend an evergreen strategy

is what moves prices is narrative. Narratives move prices. And because this is how people think. They tell stories. We're telling stories now about AI. And I'm not, by the way, I'm not deprecating those stories. And I'm not trying to say you shouldn't take AI incredibly seriously or NVIDIA is incorrectly priced. dislocations in the labor market where you can replace a lot of customer service and outsourced activities with technology. It's a big narrative out there.

Two guys, a cat and a dog, and AI does the rest. Maybe. But that's just an example of a narrative. There was a narrative about inflation. There were narratives about the pandemic, and narratives move markets. Now, what happens when narratives start to change or get heavily subscribed to? So that kind of there's in a sense, there's no one left to join the ranks of the believers. What tends to happen is something new happens in the narrative changes. And there's usually a burst of volatility right around those narrative turns, the narrative corners, if that makes sense. And it is that burst of volatility ratio or approximately half from trend following. And it's kind of it's a kind of brilliant.

Insight into a summary of it, it's about in a way, Minsky moments occurring in many different contexts. You have a narrative, you have a trend. Oh no, the trend's changed. There's a burst of volatility. Now maybe ride the new trend. And it doesn't always work that way. But it does

enough of the time that trend following does have a pretty, pretty decent long term Sharpe ratio in light of its positive skew. OK. I was arguing with someone on Twitter about that. I think we published something of here's trend over the last 20 years. And it's like.

Average 6 percent. Right. This was the normal indices average six percent drawdown of 18 and someone's like this is this thing sucks what do you want this one like you're if you could get a positive carry of six percent for something that performs in an 08 and a 22 and right that's the holy grail that's what you're looking for everyone else is paying carry for that insurance i know i was a little bit dumb because at certain points I had looked at trend early in my career and I was accustomed to higher sharp ratio by, you know, a sharp ratio of 0.7 or 0.5, 0.4 and a positive skew.

And then over the course of my career, I kept seeing the unthinkable happen. I kept seeing dramatic tail events. Typically related to leverage. OK, but again and again, and then there was a pandemic then there was over stimulus then a tightening and you have all this stuff going on and um you know it's it's a very powerful thing to combine volatility synthesis through trend following with these other forms of investment where you're kind of betting on the continued growth and good health of the world. Yeah. And I can give you a 50 sharp strategy, right? A buy today and sell when profitable. If you just marked it to market on the end on the end of the trade you'd have a perfect shot

but a lot of volatility in there so a few things back to popped in my head do you think the u.s right if we're saying the power of trend power of you guys is these narrative turns so question one are you saying you need to capture the early part of that turn to keep that sharp eye? No. And as a trend follower, it's very difficult to catch the early part. It's very hard. What you need to make sure is that you don't get ruined at the early part of the narrative turn. Because think about it, you're doing trend following following and you're probably going to be quite big as the trend develops and in the late stages of the trend trend followers will stay with things longer than other people do because other people may have anchoring bias and they may think that a one and a half percent 10-year treasury is as low as it can go.

You know, I shouldn't use that example, I'll use the example, a 3% 10-year treasury or 4% is as low as it can go. It can go a lot lower than that, as you've certainly seen in other countries. It's gotten very low indeed. And so trend followers will stay with things for a long, long time, you know, until it turns. And then the problem is if it turns when you're large, okay, you can get very hurt with that initial part of the turn. If you've detected an increase in volatility and shrunk your position very quickly around that turn, that gives you the protection so you don't lose all of your gates. You're probably going to lose some of them, but you don't lose all of them.

You know? It's a nice thing. And what do you mean by gates? Your entry point? The profits that you made in this extended trend. And so if you lose some of them, that's life. But it's actually easy to lose. You can just do an experiment

where you don't do this volatility profit capture method. If you don't do that scaling, you can show that you will tend to lose quite a lot when things turn instead of a more modest amount. So are you guys, and some people would derogatorily call this volatility targeting? Would you agree, disagree with that? Is this volatility targeting? No, this is volatility scaling in individual markets. It's done very rapidly using short-term measures of volatility. Volatility targeting is when you try to make sure your portfolio has the same vol all the time,

regardless of signal strength. That's a different story. If you don't have much signal strength, we make our positions essentially proportional to signal strength. Okay. You know, the risk we take in a position proportional to signal strength. And so in individual markets,

we don't target vol. In the portfolio as a whole, we have enough different markets, enough different trends that actually we are able to achieve the advertised volatility over six-month periods and three-month periods typically. But in individual markets, we can be very small and we can be reasonably large up to certain limits. And you're achieving that target ball by just how you're combining them and what you're risking per trade, you're saying?

It's the overall combination. Yeah. I think the derogatory part is people, okay, you're cutting your, right? Trend wants to let profits run. If you're ball targeting, you might be cutting positions short, not letting them run. So right, if you- But it's a misnomer. Trend is as

traded by good CTAs is not about letting profits run. It's partly about letting profits run. And it's partly about recognizing when volatility has risen. Okay.

And when narratives and price action is about to turn. I want to circle back. You made, when we're talking about these narratives and what drives trend in general, do you think the move in the US, right? We have these prop firms,

we have high frequency trading, we have co-located servers at the CME. Do you think all of that infrastructure has allowed US firms to kind of remove the narrative and there's more computerized trading versus some of these alt markets where it's less prevalent? I would say that in the developed markets, the unpredictability and choppiness is pretty extreme. that in markets like electricity and markets like emerging market interest rates, you see, in general, more directional movement relative to the amount of chop that's there.

The way to visualize this is imagine you're going, let's say, from the lower left to the upper right. In some markets, you have a price graph. And in some markets, you could imagine going there and there's a big directional movement, a big change from beginning to end. And the wiggles are not too extreme. In many developed markets, the amount of up and down, back and forth, and volatility that gets you nowhere is quite high. And so the alternative markets tend to be a little better. But I should point out, of course, that some developed markets that are very efficient can sometimes trend magnificently. There have been periods when you

co-colored U.S. Treasuries at times. Certainly, we've seen a pretty strong trend in U.S. stocks, especially the Magnificent Seven. But in general, more operationally difficult

markets with fewer speculative players, I think they tend to do a little better. And now with these 500 markets, and you said you'll scale by signal strength, what does that risk per trade look like? Everything's 10 bps or is it up to 1% of the portfolio? What's the range of possibilities there? Oh, in general, it's pretty small per market because you have 500 markets. Right, that's what I would assume. But there will be kind of clusters.

For example, European electricity. Okay, you have Scandinavian power. You have French. You have Scandinavian power. You have French. You have German. You have Spanish. You have all these things. Then you have the inputs. You have Dutch natural gas.

You have UK natural gas. You have this stuff. You have European carbon emissions. Then you have US power, which is a different animal altogether. But that European complex, it will tend to move together collectively. That can be a decent-sized part of our portfolio. That could be just the positions that you have on in a given moment. In European-related power markets, markets could be a 4% annualized

vol position, which is meaningful in a fund which has 10% annualized vol. By the way, you can't just add the vols up as you know, because the correlations aren't perfect. And that's why there's a multiplier. That goes back to your risk days with the interest rates, until they do become correlations aren't perfect. And that's why there's a multiplier. That goes back to your risk days with the interest rates until they do become correlated. The thing is

the stuff that we have is less prone to that. French electricity is not prone to get correlated with Latin American interest rates. You know, it's not that prone to get correlated with Latin American interest rates, which is not that prone to get correlated with base metals in China. Right.

So the markets that can really, really get kind of correlate and de-correlate quickly are actually some of the big developed market themes like U.S. Treasuries, developed market stocks. They can go to correlated and anti-correlated and go to extremes very fast. Less so where I play. Preston Pyshko Why not do this, right? How many listed equities are there in the world?

50,000, let's call it 20,000. Why not delve into trading individual equities, there in the world? 50,000, let's call it 20,000. Why not delve into trading individual equities or do you? We don't do that. We don't do that, but this is an idea some CTAs have explored. The first thing about individual equities is you need to limit yourself to a liquid universe. We are, at the end of the day, trading liquid assets. I said they were operationally difficult. The trick is not trading some crappy future that you've never heard of that kind of trades by appointment almost in Chicago.

Muni bonds. Muni bond futures back in the day. The widow maker, I think they were. That's not the idea. The idea is to do the work so you can trade freight and Chinese commodities. And some of them are more liquid than others, but they're all within the realm.

So you're not talking about gazillions and gazillions of stocks. It would be a smaller number that would reach the liquidity requirements. However, it's legitimate to ask, why don't you do those? The first thing is the common factor in equities driving them is very very high factor one beta it's it's a it's a very very big component number one number number two most people come to cpa looking for a different set of exposures than equities they have equity managers coming out the wazoo with every single style on the earth. You mentioned it. All the way from quant equity long short, discretionary equity long short, discretionary long situations. That are, okay, you know, five to 15 day holds, high frequency, you know, which in many cases is sort of merged with market making.

You have all this stuff going on in the equity world. And we want to compete where we think we have a little bit of an edge. I'm not sure we do in equities. But

cash equities, there are angles people can take. It's not an idea completely dismissed. Yeah. But you do have stock indices in the portfolio? We have some ETFs that express sort of non, you know, like an ETF for the Vietnamese market. Got it. Just the sort of stuff that's a little more consistent with, you know.

Right, you're just not just long NASDAQ futures. Yeah, now, by the way, it seems to me in retrospect that just being long NASDAQ futures. That was the case. You know, it's not a ridiculous investment strategy. Or just Nvidia. You know, I find it very easy of people to be dismissive of things and say, well, it's not going to be that easy in the future in equities. I don't know. The U.S. equity market and the U.S. economy is just different. I remember a friend of mine who is a public intellectual in China,

kind of a well-known guy. That sounds dangerous. He's a good guy. And he was there at Berkeley with me. And he was explaining why he thinks their government is very good, efficient at what they do, in comparison to sort of the messiness of Western democracies. And, you know, he made some good points.

But then he said, the thing you have over us in the U.S. is you have the best companies in the world. And he said, nobody can replicate that. They're innovating so fast and so hard. It's unlike anything else. And that the world is going to become a bipolar world. You're going to succeed, and we're going to succeed too, but kind of for different reasons. You know, our government is going to drive some of our success, and your private sector will be your crown jewel. And we see that those big tech companies have kind of reached a level of size and excellence and innovation. They're just shocking yeah they're

bigger than many economies right many of the things you're trading in vietnamese whatever yeah exactly exactly and uh so it's it's a remarkable world but it's also an unstable world that is developing um Europe is doing that well. Okay. In terms of the geopolitical situation, the U.S. may be absolutely dominant economically, but our ability to be the unipolar power determining events everywhere

is smaller than it had been. And so it's going to be a very complex world with a lot of macro trends. And that's kind of where we come in and other CTAs to exploit those. We never got into official flooring court. So give me the quick 10 minutes, how it was founded, where you guys are, your London, Abu Dhabi. Give me a quick five minutes there, because we never got into the deets on the program. Oh, okay. So the Flooring Court Capital Program began in 2017. The forum was really put together over the prior year or so. We have about $2 billion in assets under management, give or take.

We have about 24 people. Does that feel small to you, $2 billion, based on where you'd come from? It's not that small. It's a little small, but you know what? When you have, as I was going to say, we have about two dozen people, and we're a nice size. We have offices in London and Abu Dhabi. The London office is a little larger, but it's not a lot larger, so we have a real presence and Abu Dhabi the London office is a little larger but it's not a lot larger so we have a real presence in Abu Dhabi

with trading research, everything there as well, I've got two partners amazing guys David Dennison and Anthony Benitsky Brummer was our cedar as I mentioned back in the day

and still they've been happy with that one theater, as I mentioned, back in the day. And still, there's a big part of it. They've been happy with that one. Where did the name come from? Ah, yes. When I came to London, I was very intrigued by the place. And I found a really interesting place not that far from the city of London. It was called Charter House Square.

And it's one of the most ancient parts of London. It was just outside of the old city hall, city walls, excuse me. And there was a very, very old monastery going back, I think, to 13th or 14th century. On that square, there's an apartment building that is the residence of Hercule Poirot in the Agatha Christie's. It had curved windows. Anybody who remembers the television version of that series might remember his building with the curved windows. It's an Art Deco building from 1930.

It's called Floor and Court. Oh, I love it. I just watched that Murder in Venice, the latest one on the plane the other day. How was it? I think the worst of those ones with him, but still pretty good. I don't know if they had Floor and Court or not in this thing,

but on the television thing, you see floor in court all the time. It's amazing because it's a quiet place. It's this very quiet, nice place. Off to the side, but not far from the city of London. It's next to Midfields, which is a very lovely place to live. And that was the origin of the name of the fund. And now I've got the title for the pod,

the billion dollar manager named after an apartment building. I think that's a first. Well, thanks so much, Doug. It's been awesome. Best of luck with everything. And I'll try and come visit you in London or Abu Dhabi would be fun since I've never been. Well, either way, you're entirely welcome. And if you come to London, I'll show you Charterhouse Square and Florin Court.

We'll get dinner nearby. And if you come to Abu Dhabi, I'll show you all the wonderful developments taking place in the UAE. Let's do it. I love it. All right. Thank you again. Thanks. Okay, that's it for the pod.

Thanks to Doug and Florin Court. Thanks to RCM for sponsoring. Thanks to Jeff Berger for producing. We'll be back when we're back. Peace. 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.

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