The Derivative - Is Trend Following Dead? (Again…) A Deep Dive with Crabel’s Grant Jaffarian

Episode Date: May 29, 2025

In this revealing episode, Jeff Malec sits down with Grant Jaffarian from Crabel Capital Management to dissect the current state of trend following. They explore the declining performance over the past 6 months, challenges in maintaining positive convexity, and the critical need for innovation. Grant offers candid insights into how trend following has evolved, why its sharpe ratios have decreased, and why he remains optimistic about its future. From discussing market execution nuances to quantum mechanics, this conversation provides a deep, unfiltered look at one of alternative investing's most intriguing strategies. Whether you're an investor, researcher, or market enthusiast, this episode offers a provocative examination of trend following's past, present, and potential future. SEND IT!Chapters:00:00-00:45=Intro00:46-08:19= Trend Following’s in the Family: Exploring Grant Jaffarian's Background and experience08:20-21:44= The Algo Trade Execution Game: Navigating Latency, High-Frequency Trading, and Trend Following Strategies21:45-37:03= The Evolving Landscape of Trend Following: Analyzing Sharpe Ratios, Assets, and Market Changes37:04-47:24=Trend Following Under Pressure: Adapting to the Changing Dynamics of Positive Convexity47:25-01:02:04= Innovating Trend Following: Developing Dynamic Strategies for Market Adaptation01:02:05-01:14:07= Trend Following's Esoteric Markets: Expanding Beyond Traditional Boundaries01:14:08-01:23:13= Looking deeper into Quantum mechanics & Staying True to the StrategyFrom the episode:Salem Abraham on The Derivative PodcastTrend following whitepaperRoy Neiderhoffer on The Derivative PodcastFollow along with Grant on LinkedIn & X(Twitter) @GJaffarian and check out crabel's website at crabel.com for more information! Don't forget to subscribe to⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, follow us on Twitter at⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and our host Jeff at⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@AttainCap2⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, or⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ , and⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, and⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠sign-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, visit⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠www.rcmalternatives.com/disclaimer⁠

There's a reason why trend following works. It captures beta, it captures carry, and it has the potential to capture that convexity. None of that has gone away. It might be muted, but there's nothing else like it. Welcome to the derivative by RCM Alternatives. Send it. I'm Grant Shaparian. I'm here to talk about trend and alternatives on the derivative. Hey Grant, how are you? Good. I just saw you, was that yesterday or Wednesday?

Wednesday. It all muddles together these days, doesn't it? I think it was Wednesday, yeah, Tuesday, Wednesday. Tuesday, Wednesday in Austin. We'll throw a quick shout out to Meg Bodie and the Talking Hedge event. They're great events. If you like what we talked about on the podcast, it's basically two days of all sorts of conversations like that.

So shout out to Meg and Talking Hedge. Absolutely. And so you had some, I don't know if I'd call them hot takes. They were getting hot. They were warm takes on your panel that I flagged you right away I'm like, alright We got it We got to expand on those because you didn't have enough time up on your panel

So we'll dig into that but uh before we do give us a little personal background Yeah, I know the story but tell the listeners how you got into this industry and and where you're at and all that good stuff Oh, wow how I got into it. Well, uh you got into this industry and where you're at and all that good stuff. Oh wow, how I got into it. Well, boy, I've been sort of adjacent and or involved in the Manage Futures side for a while, 30 years. My first job was a runner on the Chicago Mercantile Exchange in high school. And that was really an extension of my father. My father was a trader on the SIBO for Chicago Research and Trading. That's an old name probably for some. Before there was HFT, there were some pretty fantastic

option shops. CRT was maybe top of the list for a while there in the 80s. He was a trader for them. So I was familiar with futures from a very early age. After I ran, I went to college at Wheaton College outside Chicago and ultimately then I just wanted to trade right away. So I joined a small trading shop actually out of Belgium called the Analytic Investment

Management. Luke Von Hoff was the founder there. I think he's still trading. I haven't spoken to him in a bit, but anyway, that particular shop was folded into Robico at some point, which folded into the shop after that. Long story short, I ended up at my father's firm. He is the founder of Efficient Capital Management, which is also Chicago based. I think they're in Warrenville, the western suburbs of Chicago. Ultimately, they still have that nice big office you see off the highway. Yeah, exactly. They have a sign right off 88 there.

If you're familiar, I drive by it. I'm like, come on, are these guys doing that? Well, they have this whole building here. Come on. Well, they're doing great. They're fantastic. Yeah, no, it's still there. Yeah, that's their building. They're still around doing great, great work on the manage features side, multi-manager allocator. Ultimately, I was the CIO there for a number of years and then in 2012 I left to form an early manager seeder. So I started doing early stage manager startup sort of seeding, worked with a couple groups throughout the space. Ultimately, I think we seeded maybe 10 if my memory serves. I was joined actually in that

operation by Rick Russon who was formerly at Rotella and Chesapeake and now is the COO with us here at Crayball Capital Management. So we did AlphaTyr together which was acquired by Crayball in 2014 and then I started doing research again and that's when it got really fun. We launched our trendflying product, Advanced Trend at Crayball in 2014. Been there ever since and it's gonna be hard to leave. We just have a lot of fun building product over there. So that's the quick summary. I love it. Let's give a quick shout out to Rick if he's gonna listen.

Hey buddy, haven't talked to you in like a year and a half or so, but let's reconnect. And you mentioned CRT and all those old Chicago firms. I'm dying to read a book. Nobody's going to do it. So maybe I have to do it about like O'Connor and CRT, all those groups. Like if you just, just the tree that came out of that and all the billion dollar prop firms and hedge funds and managed futures groups is enormous to me.

Right. And it's like, nobody's told that story. We touch on it on a few podcasts and whatnot. But just the O'Connor side alone, and I hadn't even thought about CRT and all those different options groups. A lot of them were equity options that became prop that got back into futures. Some of them were pure futures. So I'm preaching to the choir. But like that's a little known story that needs to be told eventually.

Well, I think a couple of people told it. Obviously, that was before my time. I'm far from being an expert on their legacy. I was still sort of, well, I graduated high school in 97. So they were sort of their prime was was over at that point. But I think Mark Ritchie was featured, one of the two brothers, right as well. So there's a little bit of the story out there, but it's a good one and it's not told enough. That's for sure. And they're getting old. I'm like, we need to, right? All these people that were there, we need to interview them before they're gone. Sobering. They're doing great work. No, no, no, you're not wrong. But anyway. And touch a little bit on the emerging manager. So I won't say the event we were just at, but some events, I'm on these emerging manager panels,

and it's like talking with some institutional allocator. They're never going to actually allocate to emerging as I would consider emerging. So where do you separate those two, like emerging, evolving, seed? How do you view that, and what were you guys doing back then? Well, in fairness, I'm a little bit removed from that process, obviously, being at Crabill for some time. But I think one of the reasons Rick and I were so excited to join a group like Crabill

was because they offered a lot that was becoming increasingly difficult for early stage managers to access. Obviously, there are always going to be the exceptions, right? You're going to be, I mean, if you're world quant spinning out a millennium, that's a wildly different sort of scenario than perhaps starting an early stage, let's say, managed futures fund, depending on your legacy and your relationships. But the hurdles are serious, obviously. Institutions are going to look for your counterparty relationships. It's hard to secure those with name brands they like if you're small. Let's maybe even go so far as to say impossible.

So you're sort of recruiting assets from a different pool to begin with. It's much more difficult to get going. You're a bad six-month stretch away from not having a chance ever. Then, of course, when it gets down to the execution level, do you really have the sophistication? How do you access these markets? The microstructure of markets has changed dramatically post 08, 09 financial crisis.

And it's just very, very difficult. So there's a lot we could talk about there. And it's not why it's more challenging. But yeah, some of the rules save that for later. But my frustration is that and maybe it's my naivete of like, people talk about investing in emerging, like you have to have 2 billion, you have to make all these checklists. I'm like, well, that is that emerging? Like, and you'll have these investors who think that these managers who like, I have 25 million, I'm emerging, can you look at me? And there's, there's just no way an institution is really going to look at him, right?

No, so they need to come on a platform something like that where they can get can build out better scale. Yeah Let's talk through Crabill I still have a dream that someday when you were Rick will get Toby to come on the pod, but that's probably a pipe dream. Well, I mean, we'll throw it out there. You never know. But yeah, he's a guy. But tell us like the legend of Toby and what he built and give us the quick rundown on Crabill before we get into Trent being dead.

Yeah, yeah, for sure. And I'm pretty sure you've had Michael Pomada our CEO on the on your pod before right? I have not we know we were trying to get that done and didn't get that done So we'll get Michael at some point. Yeah. Yeah. No. No for sure Right Toby. So obviously, you know I have interacted with Toby a little bit up until joining the firm and then obviously quite a lot sense, but So I might have some of the details wrong, but he was a floor trader himself. He spent a little bit of time trading with Victor Niederhofer and overlapped with a bunch of folks that have done some really successful stuff in our space as well.

Left to do his own trading. He initially founded Crabill in Milwaukee, which I believe is hometown. And not a hotbed of hedge fund activity, which was always cool. No, but you know what's interesting? Talking to folks that aren't from the Midwest or Chicago like you and I, people don't realize how close Milwaukee is. I mean, it might as well be a slurp of Chicago. That's insulting to Milwaukee.

I don't mean that literally, but it's close. It's close enough. Yeah. I know people who commute from Kenosha. So yeah, it happens. Oh, absolutely. Yeah, for sure. But anyway, I think he was quite different from what we were seeing in terms of new hedge funds in the early, say, 90s, late 80s, because they were predominantly of the turtle trading generation of sort of long term trend and Toby was not, he was very much an intraday trader. And really, I think he was a pioneer in short-term trading.

In thinking about markets in a very quick fashion, how can we take advantage of maybe minutes, hours, maybe a day or two at the most, and developing patterns in a systematic fashion to exploit those inefficiencies? He was very much in my opinion, at least a pioneer there. And we hopefully remain one in terms of our core products. Our core products even flash forward 40 years almost, 30 years, remain intraday in focus.

Our multi-product, as an example, which is our flagship, has about a one-day average hold duration. So we certainly do trend. I think we do it in an interesting way. I'm involved in that product as are all of us on the research side. But our bread and butter from the very beginning, thanks to Toby, was really around short term trading, which we really broke into momentum and reversal trading with short term patterns. And did that like ran up to high frequency trading? Like did it ever get into high frequency and radio wave towers and all that?

Or it was like up and up to that. Limit where you had to start spelling, spending tens of millions of dollars to compete. Well, candidly, we do spend tens of dollars to compete, but it's not because we're putting in radio towers and trying to launch balloons or satellites and get a little bit faster, running our own cables across the Atlantic, we don't do any of that. We get fast enough so that we're not sort of the sucker at the table. So for instance, our latency now on major exchanges is

down to low double digit microseconds. But the reality is I think some of the HFT community is faster than we are there. But we're fast enough that they're not going to scalp us, they're not going to take advantage of us. That's extremely important. We're not doing the hundreds of millions of dollars a year like they are to shave off one or two microseconds. We're getting in the zone that we can do with maybe the tens of millions number and not be taken advantage of. So I think creating a bifurcation between what is HFT and what is directional trading is a nuanced sort of conversation. We are definitely not high-frequency traders. I think some of the ways you could maybe create a difference between the two

avenues would be maybe in sort of throughput rates and also maybe an inventory. For instance, high-frequency traders are not going to maintain very large inventories. They're not taking long-term directional bets. They're sort of in and out very quickly. So they might do, I don't know, a thousand trades over the course of a day, just making up numbers, right? And they might not have more than 10 contracts

on at a given point in time. They're short 10, they're long 10, they're long five, they're short five, and they go back and forth and they create quite a bit of volume, but their actual absolute position at any one point in time is relatively small. So that ratio of inventory to transaction is very low, whereas we're directional takers. We're going to take bets, we're going to hold it maybe for a couple at an extreme couple seconds, but generally we're going to hold trades for about a day on average across the entire portfolio, which creates a very different ratio of inventory to trading. It's a much higher ratio.

Just the fact that you call your positions inventory is interesting to me, right? Like most people are saying positions and my whatever. That's an interesting fact. I mean, like in the high frequency guys, even probably view it more as inventory. Like we have this stuff we have to get off the shelf. We don't care. We don't care what is on the shelf. We just want it off the shelf.

Yeah. Right. They don't want risk. They don't want to manage it. Whereas we are in the business of taking risk in a directional way. And I think in a lot of ways, that's what creates the convexity and the skew that we're going to talk about and the benefit

Data perspective to institutional portfolios. So you got to take that risk to benefit the portfolios in the way We're trying to I think what you'd find reasonably often with the high-frequency trading community Is they're not particularly interested in direction taking even for seconds minutes or hours? Because it just opens up too much risk. They'd rather not do that. So to a detriment, I think you hear these stories in the option markets, especially where if it gets out of a certain band, all the sesquihana, all those guys kind of pull back, right? Just say, I'm off, I'm out for today. I'm out for this hour, whatever it is. And that creates these kind of air pockets where things can start to jump around. Yes, yes.

It's playing a role in what's happening on the Manage Futures side and some of the difficulties that it's facing. Absolutely. Alright, well dig into that. I have one more question on the short-term side. I've argued before, and I think you're about to tell me that I'm wrong, of like, well, if you're holding days to weeks, like, what does it matter what your latency is? Right? Like, how do you talk about that? How do you think about that? Like, it always matters. And you're probably gonna say even on your trend holding for weeks, it still will matter. Yeah, I am gonna say that. Well, maybe some simple math just to try to get a sense of

the numbers here. Just ballpark numbers. So let's say as an example, you're a long-term trend follower that does about a thousand round turns. So a thousand contracts traded per year in your trend following product. That's around a million dollars, let's say. Okay. So a thousand round turns per year. I think generally trend is a little slower than that these days. So these are ballpark numbers. Let's just make it simple. So let's suppose a thousand round turns per year. I think generally trend is a little slower than that these days. So these are ballpark numbers. Let's just make it simple. So let's suppose a thousand round turns per million dollars

of invested capital. Well, we know a tick in the S and P as an example, the E-mini S and P is 12 and a half dollars. So let's say you tell yourself, well, latency doesn't matter. I'm going to just simply buy at the offer and sell at the bid. I'm going to do market orders.

And let's assume you're at least fast enough. You can take the liquidity that's offered on the offer itself when you buy, which is frankly an assumption to begin with. But let's suppose you can do that. Well, let's say that therefore you're willing to pay a tick slippage on entry and exit versus your hypothetical fill.

Well, one tick is $12.50. If you do that on the exit as well, that's another $12.50. If you do that on the exit as well, that's another $12.50. That's $25 per round turn. Times a thousand round turns is $25,000. Into a million dollars of trading capital is 2.5%. So how much is one tick worth to a trend faller? Yeah. It's worth 2.5%. 2.5%.

So now let's suppose you're a trend faller and you're generating, you're a really good one, you're generating 8% returns with a 10% vol, you're giving away 2.5% of that. And frankly, generally, I would suspect maybe more than that, because slippage is very difficult to get to the bottom of as an investor. I know when I was sat on that side of the table, it's really difficult to know. Everybody's going to tell you slippage isn't a factor or in fact they have positive slippage somehow or there's going to be some form of a slippage assumption. So you don't really know. But let's suppose that they really are only paying one tick on entry and exit.

You've cut 8% down to 5%. You're charging what, 0 and 20 or 2 and 0 or 1 and 0 even. You've effectively halved your sharp from a 0.8 sharp to a 0.4 sharp. Well, in sharp, let's talk about risk adjusted return. Right now, you wouldn't even have that with the risk-free rate from a sharp. But latency doesn't necessarily mean not crossing the spread.

That's where I'll push back a little bit of, even if I have the best latency, I still need right. I still need to have someone accept my bid or whatnot. Well, OK, so let's think about latency in a really pragmatic way. So you see liquidity that you want to capture. You press the button to buy it. Latency would suggest it would take a while for that to populate in the field. So and the second you hit it, maybe you want to do more behind it.

Right. Let's say 100. You don't want to flood the market with 100 right now, you're going to flood it with 10. That delay to get those initial 10 there, first of all, the offer could change before you get there. So you want to hit that faster. Other people might be interested in buying that at that level if it in fact is a good level.

But if you only do 10 and you have 90 left, the market's going to start to vacate and run away from you. So if you're slow, it's going to take you longer to catch up with it. Or let's suppose you're willing to be passive, which I think is more often the case. You're willing to say, okay, I want to buy 10 at the bid because the market's bouncing a lot around a lot. I want to place it at 10. And as long as the bid is relatively thick, I know that that's a real price. But the ratio of your quantity at that bid relative to the entire volume that's resting at that bid is relevant.

If you're the only 10 that exists at that bid, you're really kind of holding up the market at that point. And what you want to do is actually not get filled at that price because the only reason that bid exists is because of you. Because of you. Can you cancel it if you don't have speed? Absolutely not. You're not getting out of the way of it. So speed matters a lot. It matters if you're passively trying to get a price. It matters if you're trying to aggressive price. And it all sort of

steamrolls one way or another, particularly these days, because what the high frequency trading community typically does is they're either passive or aggressive, and they will be passive if they can bounce you off the bin and ask, and you're just taking the liquidity as they provided and paying that tick, or they'll aggress and just get rid of it, or aggressive price that's the wrong price that you're holding up the market with, and then you're stuck trying to get the tail end of that execution done. So I would, we'll get into trend now next. But I think a lot of most managers know that.

And they're using algorithmic execution. And they're doing what they can to solve that problem. Right? I think maybe you guys say, well, we do it better in our short term. And we have our own models that do it better. But I would say it's not a, well, tell me if I'm wrong. Like is it a known problem? Right? Oh, it's absolutely a known problem tell me if I'm wrong. Like is it a it's a known problem, right?

Oh, it's absolutely no problem. And I think there are plenty in our space to do it extremely well. Yeah. Whether we're better or worse than them, I have a bias, but not one that I'm going to say publicly because we don't really know. But what we know for sure is that our volumes are generally a lot higher than you find in the Managed Futures space. So as an example, our flagship trades well in excess of 10,000 round turns per million, which depending on

how quickly your trend far navigates the market is somewhere in the vicinity of 10 to 20 x the volume of a typical trend follower. Right. So when you run one and a half billion in your flagship, that's like running, I don't know, a $30 billion trend forward. Plus, we have a trend forward on top of that. Plus, we have a middle frequency product we call Gemini. So, by nature of the volume we trade, it becomes a really pressing need of ours. And obviously, when you're doing 10,000 round turns or more per million, a tick becomes a lot more expensive than just 2.5% of your NAV. We need to do better than that. And we do do better than that. we need to do better than that and we do do better than that. And that's demanded a huge investment, not just on low latency and co-location, which is expensive in its own right, but also algorithmically what you do with it when you have it, which is a completely different discussion that we can also save. But yeah. And my last bit on all this would be with why doesn't the CME,

why don't they lower the tick size? Right. Like that would be to everyone's benefit, it seems. Well, I mean, you change the tick size and change the notional value, therefore, probably. And when you do that, you just everything just shifts proportionally. I don't know that that has a big impact when we're in that. That's what you're saying. Yeah. Well, not that not that. But yeah, I guess the bid ask is still going to be whatever it is. It might be if you made it a penny. Right. Like they figured out in stocks a long time ago. Let's move to pennies

So we're not right the really active stuff. You're only crossing a penny. You're not crossing a quarter away Yeah, but anyway, we'll solve that problem another day you got it. So Trend, we were joking at the conference that let's do a pod called, is Trend following dead? Because every time that seems to come up in the past, as soon as people start talking about that, articles are written, it tends to bottom and things get better again. So let's start with kind of that historical premise and what you've seen in the past with like, can trend die? Is it dead this time? What happened last time when people thought it was dead? All that

good stuff. Yeah. Well, I, there does seem to be a correlation between the discussion of the death of trend. what happened last time when people thought it was dead, all that good stuff. Yeah, well, there does seem to be a correlation between the discussion of the death of trend. I don't know if it counts when we that implement trend products talk about dead in hopes that we somehow create enough- Right, a double negative hoping. Yeah, but probably can't hurt.

Well, obviously here at Crayball, we're practitioners of trend. I'm the portfolio manager of our trend product. All of us, as mentioned, we have over 20 on the portfolio management side. We all work on the trend product. We are firm, firm believers in the value proposition. This has been a tough stretch, though.

I think you could certainly say over the past, when we've had tough stretches, we've had recoveries that have been very useful. Even recently in 22 or 2014 or obviously 08, 09, there are plenty of examples we could point to. And just I'll give a quick back, like the SOC Gen Trend Index is I think at new max drawdown all time. If it's not, it's within 10, 20 bips of that. And a lot of managers, we both know a lot that have been on the pot are at new all-time max drawdowns, like 30-year plus new max drawdowns.

So it has been super painful. Sorry, just giving the backdrop. Yeah, no, you're not wrong. I think it's important to actually say that out loud. It has been painful. It's particularly bad right now. And generally speaking, I would guess some decent percentage of all trendfars

are at their max drawdown. I don't think we quite are, but that could be because our droughts were a little worse in the past than others, who knows? But the reality is it's really difficult. And I think in these moments, you can't really excuse it away or not talk about it. We need to go right at what could be the issue here or at the very least why we're optimistic

there's going to be a recovery to cut to the end. We are pretty optimistic there's going to be recovery, but I don't think it's going to happen by just sort of hoping and sitting on your hands. I think the world's evolved away from that. Yeah. And that the and we're guilty of this. Did a few blog posts and even another podcast of like right this whole they're not the first responder trend. They tend to show up in the second half of the crisis and oh, a 22.

And then they pay off on the long term drawdown. I in actually that one blog post where we were talking about that, it tends to show up, I kind of caution in a a paragraph like but as this particular thing is setting up if it's a rip back to the upside in equities You're likely going to lose more before anything happened. So to me that whole scenario has kind of gone out the window a little bit And just curious your thoughts of like is that Pollyanna and we're just, oh, every time it did this, it tends to bounce back because we have this extended drawdown. I don't know if there was a question in there if I'm just babbling, but what are your thoughts?

I mean, there are a couple of things that are a little bit more painful about what we're experiencing right now than in the past, although April ended up being very sort of a different result than we expected. As an example, I think equities ended up being generally almost flat, certainly not down significantly. So from the classic managed futures charts where you post the worst months in the history of S&P and how trend did relative to that, we're not going to see April on that. It's not on that chart. Yeah, It's not on that chart. And had, at least in the way that we run advanced trend, our product had markets continued to sell off and not bottomed out on April 8th, we probably would have had a very, very different result as well. And we can

talk about why that is and what does second response really mean in the context of trend and why might it have been different? And we don't know. And I'm not going to speak to our particular product. I just think in the case of trend, let's suppose that equities didn't bottom out on the eighth and rebound, but in fact, tripled the size of that drawdown. Would trend have ended in a different place in terms of the absolute return in April? It certainly would have. My guess would be it would have been a lot better than it ended up being. So it could have been another case example for us of trends saving the day, but that's not what happened. Sorry, you were telling me in Boston, like, okay, you had two trend followers, one that was long,

hadn't reversed short yet on August 7th, one that was short, that's pretty much just a coin flip of that bottom that day and what happened to those two track records the rest of the month. Yeah. Yeah, no. I mean, in the case of faster responding trend, I think a lot of managers may have actually gotten net short equities by the 7th or 8th of April. But if you were not responding as quickly,

you probably stuck to that long exposure and you end up in a similar position maybe at the end of the month. So the time schedule of trend and how that's evolved over the last couple decades is really relevant to this discussion. And as is things like risk management and how that's deployed.

All of these things create a lot of differentiation from one trend manager to another. So to me, that doesn't mean we can sort of look at trend and say, well, trend is not behaving the way that it has historically. I think it has more to do with how the strategy itself has evolved and what it's targeting, which is a little different.

And then it's a little unfair to say it was just an equity issue This year even right it was more in bonds and currencies so we can all point to the equity rebound and say that's Was why they made or lost money, but probably the truth of the matter is more bonds have been crazy volatile Rates are going down rates going up back and forth It's been seemed to me just from afar like trend has had a really hard problem this time getting on the right side of bonds, when historically they've generally been on the right side of bonds.

That's been like a tailwind for them. It has. I mean, this gets into maybe a dangerous trend conversation around how much of trend is beta. Yeah. The reality is a lot of trend returns are derived from capturing carry term structure, obviously being in the right direction in that regard when it comes to interest rates or let's

say the yen as another example, that has been very difficult because of course, trend forest have been short interest rate futures, which was very rewarding 2020 through 2024. But when bonds start to chop around and you don't have a lot of movement and they don't capture the carry anymore, yeah, it sparks some questions. Yeah, Roy Niederhofer, I'm sure you read that piece, Roy, not Victor. I think they put out that piece of like the next, right, this much of trend over the last 30 years was from being long bonds short yields the next 30 years you're not going to have that carry and it's going to be basically i can't remember his conclusion but he was like it's going to look nothing like

the last right even if you just totally reversed the trend and it went straight back up you'd make half the money or a quarter of the money i can't remember its conclusion but yep yeah uh you agree with that that's what you're saying with there's you don't have the caring? Uh, I don't know if it's a matter of agreeing or disagreeing. It's just a path dependency question. I mean look what rates did. Um gosh I think what how long did it take us? I should know this off the top of my head but to go from essentially zero to 4% in 10 year, how long did that take us? Less than, did you have Jeff off the top of your, like 18 months? I don't know if that's on my hands.

It wasn't on. Yeah. Well, how long did it take us to go from 4% to zero? You know, it took years and years and years, right? So the path dependency is a factor here. And so if the move in rates was exactly identical, it was a reflection of itself, yeah, I think Roy would be right on that, of course, because you're really not capturing a lot trend-wise. If you're moving 10, 50 basis points at most a year, you're paying for that carry being short

interest rate futures the whole time. That's going to be tough. However, that's not what happened. It moved far more quickly than that. So the trend dramatically overcame the carry expense. So I think trend is very path dependent. And now that you're up to this level, let's not forget some of the amazing benefits of trend, which can't be ignored. I mean, it's extremely cash efficient. So you might not have the carry as a function of your futures holdings being short interest rate futures, but you certainly do have it on the cash side because margins are going to be well less than 20%. So you're able to capture all those benefits of carry really on the cash side, even if

you're giving it away on the positioning side on an interest rate. So the benefit is still there in a way. So let's talk some of your warm takes that were starting to get hot on the panel. Let's start with the numbers that you've seen and the research you guys have done of the decline in sharps over the years. Oh boy. Well, and again, in fairness, you say some things on panels that I believe to be true, but you're trying to make it a little bit more interesting for everyone. So I should probably hedge a little bit, but I'll try not to. Okay. Yeah. I think there's some things that are undeniable that we just need to acknowledge, because it should be informing the research process and how we think about building these products to best benefit institutional portfolios, which are, that's our goal. We want to produce returns that benefit institutional portfolios. That's why we do this. At the end of the day, that's, you know, why we wake up in the morning and want to do more of it.

We want to benefit. So, right, to give them something when stocks and bonds struggle, this is what they're supposed to be, is supposed to be helping. Yeah, yeah, yeah. And if it's not, we want to fix it. While not having strategy drift, which is a nuance. The hard part. But the bottom line here is, once upon a time,

and it depends what markets you use for your analysis, what data you're relying on. But let's say something that is probably reasonably easy to defend. Yeah, we won't hold you to these. But as a general concept. In the 80s, turtle trading, the classic trend technique was probably relatively easily north of a one sharp.

If we look at trend returns from let's say the 2000s post the dot com collapse 01 through 0809, I think you can get pretty close to a 0.8 sharp, you know, probably around there, some down to 0.6, some up to one, 1.1. We have not seen sharps in excess of 0.8 since then. In fact, I think depending on what benchmark you're looking at and, you know, what fees you pay, et cetera, and whether

you're thinking about it from a sharp or risk-adjusted return perspective. From a risk-adjusted return perspective, we're probably south of 0.5 cents. It's almost impossible to deny the overall degradation of risk-adjusted return and trend over the last 40 years, generally. If you plotted that against the growth in assets, is it right? It's opposite each other? The last time I really looked at those numbers, it seems to always sort of top out at what's, I'm trying to remember the numbers that it kind of 300 billion comes to mind where it's

sort of like we have 300 billion in trend or something. Has it really grown that much over the last five years? I don't know. No. And I used to do a bunch of those posts on like, Barkley Hedge was using, what's his name, Dallio Bridgewater's numbers in that trend number. Like, right? I'm like, I don't think, and they were 30 billion. So like a 10% of it was, was risk parity, not really trend. So yeah, yeah. The numbers are hard to believe to begin with, but yeah, right. And that's one of the classic tropes of trend falling dead. There's too much money in trend. So just talk to that

for a second. Do you think more like surely, but from the eighties to now, there's definitely more money in trend. And is that what has pushed that sharp down? I don't think that's what's pushing, pushing sharp down. I don't think there's definitely more money in trend. And is that what has pushed that sharp down? I don't think that's what's pushing sharp down. I don't think there's enough assets. To your point, you kind of confirmed what I had a suspicion about, which is it's not as though trend assets have grown a whole lot over the last five to 10 years, if at all.

Maybe it's difficult to know just in terms of what some institutions are doing internally, but I don't know that we've seen a lot of growth and yet the returns are more challenging now than they were pre-08, 09. So that would almost definitively suggest that that is not the causal factor. There are a couple caveats, however, I don't think there's any doubt that as a single trend follower, managing more assets is more difficult than managing less assets. If you change no other variables. Of course, you manage more assets, you theoretically have more revenue, you can invest more in research, you can do more on the execution side, and you can combat that. But if all variables are held steady, and the only thing that changes is you're managing

more in assets, of course, it's going to be more difficult to implement that. So you can't really argue that away. You could almost make a counter-example or a counter-argument however that more assets and trends should be more helpful than hurtful in the sense that they can exacerbate the moves that benefit them. They're like they're a flywheel effect they're pushing it one way which is what you see every time there's blame going around in the I can't remember the name of that guy who writes those articles I'm like he's big on CTA positioning and they're the ones, they've gone short equities, it's pushing equities down. I always kind of take that

with a grain of salt, but from seeing what's actually going on with actual positions, but that would talk to that, the more money it is, the more it would feed into itself and push the trends further. Yep. Yep. But then that's like a race to zero because then now I got to get ahead of that guy and I got to get out first before everyone else gets out. Yeah. And again, I think trend is behaving a lot differently than it did 10 years ago, certainly 20 years ago. And so is the 300 billion or whatever it is that's in trend today the same as it was 10, 15, 20 years ago? I don't think it is. Certainly the volatility expression is

not now maybe that's a function of volatility of underlying markets declining generally over time. But whatever it is, the reality is, it's just a different sort of expression. I would argue those that's the institutional investors don't want the old 60 vol or 50, right? They don't want that big number. They want to plug it into their models and people have gotten more sophisticated. They have better risk controls. They have better risk. So they've just modernized and when you modernize, your vol comes down. That's it. I agree. So your other take was right I'm talking about all the time that trends positively convex. Before we get into that I have one other thing on sharp

like it shouldn't matter necessarily to an institution, even if it's zero sharp, even if it's a little bit of a negative sharp. If it's providing that non-correlation when you need it, if it's path dependent on those extended drawdowns, on those long losing periods in stocks and bonds all through and it shouldn't matter what the sharp is, because it's providing that

return when you need it, right? It's path dependent in a good way there. And that's been the biggest struggle of this period is it's not showing up when you need that. So now if it's going to drag at the same time, now I'm really ultra concerned about its standalone numbers. Well, I think people are always concerned about the standalone number. And I, of course, I think you're right. If you have something that has a zero return and negative correlation, it's still obviously going to benefit your portfolio. But that's unfortunately, pragmatically not how it works. Certainly not with institutions.

And we know this. And I think as we become more sophisticated in understanding what investor needs are, we've had to acknowledge that reality. One of those realities is our investors are professionals just like us. They go home to their families. They're earning a paycheck. They don't want to lose that paycheck. They have to go in front of their boards and they have to defend things.

And their boards are going to say, this guy loses money. Why do we have him? We're paying him this amount of money, him or her, this amount of money. Why do we want to retain this investment? So it would be nice to think that we could just simply slap the reality of diversification in front of them, regardless as to the absolute return and that should be sufficient, but it is not sufficient. And I think that that has caused a lot of trendfars to have to evolve in a lot of these ways we've discussed. They cannot sustain the drawdowns as easily as they once could because they're forcing their investors to defend something that's quite difficult for them to defend. Don't you think that lessens the brand,

so to speak, overall? Then you're going to move to longer term, long equity bias, you're going to do all these things to smooth the ride that when the next crisis happens, when the next oh, wait, happens, you're not probably going to be in the same position. And I, yeah, sorry, that has a lot of assumptions in it of like that people can't pivot and change their models on on some directional change. But that's always been my fear of like, from a from an allocator standpoint, I want you to do what I need you to do. And you're kind of saying the opposite of like, I want you to do what I need you to do. And you're kind of saying the opposite of like, I want you to do what I need you to do. But

I also want you to have a smooth, consistent positive return when you're not doing what we need you to do. So that's the trick right there. Like, okay, how do I do that? And how do I do both sides that which seems to me somewhat impossible. But what are your thoughts? Well, yeah, no, I think you're describing exactly what's forcing evolution in our space. And it's meaningful, but it's being done, I think, in a very thoughtful, deliberate, slow way so as to not exhibit strategy drift. I think the fatal flaw, fatal flaws, let's make it plural, in quant trading are starting with, I was going to start with number two, but number one being you just don't make money, right?

You don't generate returns and included in that lump, I'm just going to say drawdowns, et cetera, et cetera. The second fatal flaw would be strategy drift that allows your investors concerns. Who is this guy invested in this particular sort of strategy and he or she is not running the same strategy anymore. You want to avoid both those things. But those have been to your point, I think, sort of attacking one another trend by nature of what it was, was positively convex. And I use that in the historical sense. And we can discuss whether it still is or not. And it was a much higher sharp, and that we know fairly clearly based on benchmark data.

So it was those things, but by nature of being positively convex, you have long seasonless return seasons even back then. How do you defend that? So the more you look like buying an option, the more you're going to have a return that looks like buying a lot of options that turn out useless.

Yeah, yeah, yeah, yeah. You can't allow for that bleed so that they can't hang on to you when you finally have that payoff for them. Which forces that evolution we're talking about. And I think what that evolution has generally looked like, particularly in a heavily beta-driven environment,

which has been the case post financial crisis 08, 09, with very minor blips really, and I don't even know if they're blips like COVID and inflationary concerns circa 2020 to present. Generally, it's been a very beta- driven environment for the last 15 years more. And what that has meant is that trend followers that favor long-term hold durations have been benefited versus those that are more reactionary. And that's simply because if you're more reactionary to trends and the key trend is beta driven,

you're reversing out of beta, you're doing the opposite of beta, you're paying for it by often having to pay that term structure carry and other factors against beta or even equity beta by going short it. And when it constantly reverts back to beta, everybody who was longer term and just sort of rode it out and never flipped ends up making money, whereas you lost on the way down and now you lost before you could get back on the beta ship again. And so there's been this movement towards longer term trend away from medium term trend. And of course, that's compounded by the best performers getting more assets. As we've discussed, all else equal, it's more difficult to trade more assets and less assets.

And depending on how quickly you adapt to that, a lot more difficult. And so that puts you in a position where it would be awfully nice if you could spread out your execution risk over let's say multiple days or even weeks as opposed to right now, I have to do something. And so you see that also pushing duration out. But that's been such a steady, slow evolution that you can do it in a way that is, I think, reasonably correctly arguing that it's not strategy drift, it's just maximizing the sharp. And then when you layer that with tighter VAR controls and risk management controls, which of course has to exist, particularly for institutional portfolios in the modern era, let's say, those things compound on each other. And what are your quick thoughts on that of like there was a dig up the tweet. We'll put it in the show notes of

some tweet saying it was like European trend, which is far controlled, all that versus old school US trend like Jerry Parker or now the Mulvaney is kind of the example of old school US trend, which is ironic, but right of like they're shooting for the sky, they're going to have these big volatile numbers. European trend was more concerned with VAR control and like we're going to make sure the volatility is controlled. Like you think you can do both? Do you think you can have the volatility control but still have the convexity to the upside? To some extent, that's like saying there's no such trade off

between return and risk. Yeah. There's always a trade off, but the flip side of it is if you're gonna invest in managed futures, I think you really have to decide you believe in something called trader skill as well. So I think there's room despite the risk return trade off,

which has to exist and always exists. If you want to be more long-term, that's fine. Your risk is you're not going to be able to reverse onto risk off moves as quickly, for instance, but there are ways in which you can be more thoughtful. But this is kind of what I said on the panel. I think the reality is trend has steadily evolved to be more palatable to investors and it has steadily evolved to create

a slightly higher sharp and that has meant a steady evolution away from positive skew and positive convexity. And there needs to be an awareness that that is how the evolution of trend has manifested. So if you want to still be old school US trend, turtle trend, like some of the guys you mentioned who are fantastic legacy folks in our space, unfortunately, I would say if you want to talk about those folks and some of the absolutely incredible shops that exist in Europe that also do trend, I probably shouldn't name any names, but great, great respect for all of them. One of those has won and one is lost. And the Europeans have won. If we're going to create this sort of... Just well in terms of assets, I guess, yeah, if you put the track record side by side. In terms of I think the competency of their research, that sounds insulting of some amazing

legacy talent. I just mean to say if you look at the numbers and who's generating the returns and some amazing legacy talent. I just mean to say, if you look at the numbers and who's generating the returns and the income, I think one group has won. Although both sides are in these max try downs now, which makes it such a weird period. Yeah, yeah, yeah, yeah. Anyway, I'm meandering too much,

but I think that the bottom line here is, I believe you can be more creative and more thoughtful, but it demands an awareness of this evolutionary cycle and deciding what you want to try to provide the investor and really think about it in a very active research oriented fashion. So to put it simplistically, wouldn't it be great if you could have trend that still has that positive convexity in a really meaningful way that still has a positive skew because it's targeted But is cognizant of the needs of our investors who are people professionals

Just like you and I who need to defend their investment to their board. Can you balance those two things? There's there's trade-offs there doesn't mean you're always gonna win. But but I would say from a research perspective We definitely believe as a shop led by Michael Pomada, our CEO, that we just have to get better. We have to get better on the research side, and it takes an active research process. So I'm not going to go and say, oh, you can absolutely do both, and you can do it better than anybody else.

It's not easy. But I do think it starts with the mentality to believe that maybe you can. It's just going to take a lot of work to get there. You're adding these pieces, and a lot of people have done this with Portable Alpha, like I can't sell this to the board, I can't have this line item risk. Let's slap 50% Tram, 50% stocks, beta. Now I've gotten rid of the line item risk, let's slap 50% tran 50% stocks beta. Now I've gotten rid of the line item risk,

but now I've added all this negative convexity in the stocks, right? So that's the far one side example of that. Let's just throw pure beta in there to make it more palpable. And I guess on the far other side would be I'm doing research on timing or volatility filters or like, what does that look

like without giving away the secret sauce of like what can you do besides adding pure negative convexity to the positive convexity to make it neutral? Yeah by the way those those I think are really sound ways to implement trend particularly from a retail perspective combining classic equity exposures in the form of maybe some sort of S&P sort of latent expression with trend. I think those are great. But yeah, I'm talking about something a little bit different. Despite this quarter, hang in it. For all those who invested in it, hang in it. Yeah. Unfortunately, again, April, equities weren't down that much. Yeah, it's not the way you want these things to start. Of course, the worst drawdowns are always going to be.

Right when all these assets flooded into those programs. Yeah, exactly. Okay, I think there are a couple things to say on what can you do. And again, I think it has to start with just a general curiosity and willingness to test common assumptions. And I think one of the reasons I was sort of deliberately, I don't know, deliberately, I don't know, challenging on the panel for fun was I'm not so convinced in the positive convexity of trendflying anymore, nor am I, I'm certainly not particularly convinced of the positive skew. I think it starts with an awareness that maybe that assumption needs to be challenged as a function of looking at the data. I believe when you look at the data, yeah.

Just for my friend George, as I say, can you explain what you mean by positive skew and positive convexity real quick? Yeah. Yeah, and I'm not a physicist. So I tend to explain things in the simplest fashion. I'm more of a pragmatist. Positive convexity in the simplest form

suggests that as things start to go your way, you add to the position. It's going my way. I'm going to do more of that and more of that and more of that. It's going my way, I'm gonna do more of that and more of that and more of that, you know, it's, I don't know, a simple example. Like if you're Mars and you come up with a Snickers bar and it's beating the classic chocolate bar,

we just need more Snickers in shelves, right? Let's do more of it, more of it, more of it. You're creating more positive convexity around the margins and the value of one particular approach. So in trend, that would look something like wow, equities are falling, let's go short. And they're still falling, let's go more short and more short and more short. So you create that gamma, that optionality to your expression, that would be sort of in a very... In a classic though, that just the option becomes more

valuable, not like buy more options. But I get what you're saying. On the trend, it has trouble doing that without adding more positions. I mean, the way that historically, I think trend did it classically is by having positions sort of cascade in the same direction. So you may be in different markets, but basically the same trade. Yeah, you're trading you're trading 10 equity indices, and they're all long, but then one of them is short, and then two, three and four, and ultimately all 10 of them go short and that creates this cascading,

positively convex orientation around equity selling off because you are adding in the form of positions rolling up from long to short. And that is in fact positively convex. But as an example, in a shout out to Mark Laren, I was talking to him, new Hyde Park Capital there the other day after this event. He said, you know, VAR plays a role in this too.

I think he's absolutely right. In the sense that what happens now, however, very often in trend is we all have, and we should, VAR restrictions and VAR caps across the portfolios. You need that, that's important. In no way, shape or form am I saying you should be a reckless cowboy with VAR. It needs to be controlled. But what that does is when when obviously bar is a function

of two vectors, right, we're talking correlation and volatility. So if you have increasing volatility, and now you have increasing correlation in a risk off event, and positions are toppling over what's happening to your bar, your bar is exploding right into your bar cap, which forces a reduction in size, which to the people who hate that concept and trend like that just eats at their soul it's like no this is the time when it's most profitable when like the voting machine is all signals go all ten of these are ago right that's what drives them crazy

like how can you be reducing right into that best possible time? Yep that's right that's right. But your answer would be, I'm putting words in your mouth, well test it and long term it reduces the volatility and it keeps returns roughly the same and you're better off for over the long term. Well, maybe. Yeah, I mean I think we need to think about the implication in a more, you know, unfortunately it's a lot more nuanced of course and I know you weren't saying it so specifically, but actually, you know what? This reminds me of I'm going to take a side channel just because I haven't seen in a while, but Salem Abraham back when love the guy.

Hopefully he listens to your podcast. I wouldn't be surprised. He's been on the pod. We'll put him in the pot. He was so good. He's the best because basically there's none of this crap we're talking about. He's just telling stories about like, drinking over a bank in Texas and yeah. That's it. So back in my efficient days, I did due diligence with him in Canadian, Texas. And he was telling me a story

about how one of his investors was complaining about his being long life cattle. Canadian, Texas, of course, he's surrounded by cattle ranches everywhere. And he in fact took us on a tour of a couple of them, which we don't need to discuss But in any case he said, you know, my investors were complaining about live cattle and he said, you know They were doing an on-site visit. He said okay Well, let's go down to the steakhouse downtown and ask my butcher what he thinks about live cattle price

So like how could you keep buying this stuff? It's at all-time highs. This is ridiculous No, it's cattle worth this much. You couldn't possibly go higher. They know everything about cattle. Yeah, right. I just I kept the position. In fact, I added to it. Right. So they go down and they ask the butcher, you know, hey, what about live cattle? And he's like, I don't get it. I'm surrounded by ranchers. I'm trying as hard as I can to get my hands on beef and I can't. And it's like, I don't know where it is. It's like I'm tempted to like start knocking on doors. I just can't get the stuff point being, of course, that some of the best trends are those that are running away from you, and it might not make sense fundamentally. And that's the whole point of trend now for 50 years and why it's been so effective, at least for 40. So does VAR move you away from that core mentality?

And I think we know that it does. And in no way am I suggesting that that is a bad thing. In fact, we have very strict bar caps on our own positions, which we monitor very tightly, in fact, on an intraday basis. So you've got to have it. Can you have your cake and eat it too? Well, there are going to be trade-offs there, like I said before, but there has to be an awareness of what you're controlling for. And would it be fair to say it's like a, I'm giving up, and these are random numbers, I'm giving up an 80% year for not having a 50% drawdown, something of that nature. Like I'm, right, I'm capping the, I'm trying to cap the risk, but I think I'm capping the return less. Yeah, I mean, that that would be the idea. But when you start

looking at the data, and I think there are two things that are combining, but when you start looking at the data, so I don't think it's just VAR capping, the data basically suggests that the positive convexity we love in managed futures is not what it once was. In fact, maybe it's gone entirely. And certainly the positive skew, which we used to love, is not as positively skewed, definitely on daily returns as it once was.

In fact, last time, and I think it's more difficult to get the Soxgen trend index daily data now, I'm not sure why, but anyway. Yeah, I don't know what they did with that. Yeah, but we still try to track it a little bit. It's negatively skewed, last time I checked. And I interrupted your two definitions before. So quickly on positive versus negative skew,

we covered the convexity. I mean, if you create a normal standard deviation, a positive skew would suggest that when you look at that normal distribution, you look over to the right, that you have a lot more large, nice-looking blips over to the right, and you have very few over to the left, because your big winners have a lot more large, nice looking blips over to the right and you have very few over to the left because your big winners are a lot bigger than your average losers. Negative skew means you might look great day after day after day selling puts

in the S&P as an example. But God forbid that something happens and you blast out that position because you're going to have that big bar over to the left that looks pretty ghastly. And that's the classic definition of trend. They cut losses, let winners run lots of small losses, and you have these big outlier, lumpy positive returns causing the positive skew. Correct. But you're saying you're now seeing it is not there in the data. It's not there in the data recently. And again, what's happening? One year, three years, what are we seeing? Well, I mean, the last time I ran it,

and again, please don't hold me to any of these numbers because it's all gonna depend on what benchmark you're looking at. I'm sure some managers don't look quite the same. Some are gonna be positively skewed, some negatively. But overall, I'm suggesting that phenomenon looks like it's pointing more negative than positive overall. The reason is principally, I think, two things.

One, long-term trend versus medium-term trend. And secondarily, what's happening in terms of bar caffing. Because instead of things being allowed to run, what's happening is a couple of things. One, if you're extremely long-term, that simply means you're more entrenched in the trend and it takes longer, let's say in a risk-off move for you to switch your position over

to short equities as a classic example, because you're so embedded in this multi-month, even maybe multi-year look back, it takes more of that retracement. We believe, and I think the data still supports that risk off events tend to be coupled with higher volatility than risk on slow maturing sort of asset appreciation moves. Therefore, the high volatility which should produce outsized returns for trend is entirely missed in the early stages because you're trading for long-term trend versus medium-term trend is you're trading a higher sharp with long-term trend, which is quite clear because you're more often with the beta and we've been in a beta driven world, but you're trading that convexity potentially and you're trading that skew maybe because you're less reactionary. But isn't that a problem?

A lot of investors or me would say, well, I think that's a problem. I want that positive convexity. I need trend to do XYZ, which comes back to, well, they say that, but then they really want it to have a higher sharp on their line item when they're going before the board. In a vacuum, they would say, no, I want as much positive convexity to protect the rest of the portfolio. So that to me is the big problem. Like how do we square those two things? It's a very difficult thing to square as you become bigger and your investors become entrenched. I think one of the things that happened for us here at Crayball is we sort of looked at this question in 2012, that sort of air and we said, okay, if we were to redo trend all over again, what

are some of the things we'd want to see in this product? Well, we'd want to see a product somehow that was able to maintain that positive convexity, that positive skew. We'd love to have a product that was sort of balanced in a modestly different way. In other words, we'd love to marry our ability on a short-term basis to think about risk management and controlling the downside with a desire to maintain that positive, convex personality of trend that we think is extremely important. I think it's more difficult to do potentially if you're sort of entrenched and modestly or even more significantly successful in trend because you open up, it's just a different sort of mentality in trend. So we basically said, well, how do you do that? And for us, it came down to being more dynamic in time frame expression. That's sort of one of the key principles that we started looking at a lot more aggressively.

Like based on the and the thought process around, well, when are those two times different? You could say that that's kind of trader skill to some extent. And that's not easy, trader skill, but that's what we're after. We're an alpha-based shop, so that's what we're trying to target. And we had a lot of legacy research that tried to do that exact thing, and so we were able to leverage some of that. But then it also is a willingness to say, okay, how do you both control for downside risk while understanding that moments of high VAR expression are not necessarily bad? So we took a different approach

to VAR risk management as well. We basically said, well, we want to do two things. And we're not convinced they're mutually exclusive. Now we're going to, we ran a lot of tests, obviously we continue to do that. But for instance, we said, well, maybe we should have a wider VAR range. Maybe we should allow VAR to go a little bit higher. Certainly not to the moon, but modestly higher. We will tell all our investors exactly what those levels are. They'll know. They'll monitor.

We'll do it on an intraday basis. But then we'll also deploy intraday stop management when markets move against us. Can we do both? Because obviously, our legacy is short-term trading. We have a lot of work done on how you should think about risk management on an intraday basis. That would take, you know, that's a different conversation.

So we basically said, well, let's marry, because we're short-term traders, we had the benefit of marrying those two things together and that's what we tried to do. Now it's not always going to be optimal. Sometimes let's think Silicon Valley Bank, it's kind of a bummer because, well, no, it's very good overall. But obviously, Silicon Valley Bank had rates shift dramatically early in the month, and then they completely reverted by the end of the month. For us,

that was reasonably painful because we were very reactionary to that move. In fact, we were ready to go. It's sort of like, okay, let's go. Let's let's, you know, maybe we're back to long rates. That didn't happen. And so we got chopped a little more than others. So it's not a permanent winning strategy. But it's our desire to sort of combine the old with the new and acknowledge that what we have today is not going to be good enough next year either. So how does that how does that thought that was the legacy thought process that

got us started in 2014. A lot has happened since then to enhance some of those central tenants that I'm describing. But the goal was again, an awareness that, hey, I'm not sure Trend is going to deliver the convexity people are looking for. Let's make sure we do and then continuing to deploy additional research to try to get better at it. What are your thoughts on the seams? The move, a couple of managers have said their solution to this is go into esoteric Turkish Lira swaps and basically I'll trade trend on non-exchange traded stuff, which still exhibits more trendiness.

It's the product itself is longer term, so maybe you don't have to move your models longer term. You can get into a less reactive product. So are you guys moving in that direction? Have you researched that? So, yeah, yeah, extensively. And by the way, some of these products are phenomenal and they've done extremely well,

maybe 20, 25 aside to some extent, they've been great. And I think if you're a responsible sort of asset manager, you're always asking the question, what are other people doing that we should be doing too, particularly if they're doing better than us. And some of those trend following they're doing better than us. And, you know, they're there, some of those trend following products have done better than us. So why is it just purely a function of the market side? I think, and often it is now here with advanced trim, we're a little bit different because, again,

our short term legacy allowed us to trade just about every market we could, we're co located all over the world. So our execution latency as discussed is put us in a position where we can trade some of these smaller esoteric exchange traded products, maybe with a little. Yeah, even that seems to be like, well, you're talking like Japanese rubber or something like that, or that's probably a little more popular, but something like that. Sure, Indonesian palm oil, you mentioned the Turkish lira as an example, Brazilian futures, some of the smaller interest rate products trading in Taiwan, etc. So it puts us in a position where we can do that and we have done that. So as an example, advanced trend already trades 270 markets to begin with. Depending on how you splice it, it could be that

anywhere from 100 to 200 of those are generally found in some of these esoteric trendfine products anyway. In fairness, they're not going to disclose the market list, nor should they. I don't know how they overlap. And we're not doing any OTC derivatives outside of FX. So they're doing some of those that are unique. I have not been so ingrained in OTC derivatives to be able to answer the question as to whether or not the nuances of the benefits of doing that, except to say that some of our best performing markets are some of our smaller markets. We tend to get higher sharp expression out of markets that are relatively new to our

portfolio of markets. And we don't shy away from it in advanced trend. We think that's one of the benefits we can offer because of what we do throughout the entire firm. We can add these new markets a lot more quickly than we do. So we basically say, well, trend should marry all of it in as much as they're exchange traded, at least on our part. That's our decision.

Right. If you believe in the concept of trend, you should do it on as many markets as possible, right? Yep. Yep. But that brings up the question. I'd like so you're in Malaysian palm oil, all these smaller markets, how can you have the proper sizing for it to really make a difference to like, so you said 240, say 100 are these esoteric markets? All do 80 of those need to have profits in a year for it to actually add to the bottom line? Like what does what does that look like? It again it's all about throughput monitoring. So

it's it's a mark by market question that's had has to be answered in a systematic fashion on a day by day basis. So essentially let's say you're trading a small derivative market and your throughput rates go beyond our thresholds, and I won't discuss hard numbers on what that exactly looks like. Then yeah, you're right, you would throttle that back, you don't want to be more than a certain throughput or volume expression in a given market. And of course, we patrol those really carefully. We want to be hidden, we don't want people to know what we're doing. And we certainly don't want outsized risk, and we never allow for that. So,

so that definitely is real for us. However, we do get really decent attribution from, let's say, the not hundred largest markets we trade. And we do try to target equal exposure to all of our markets if we can get it. So what happens is you could sort of take two approaches. Well, there are a lot of approaches you can take obviously to portfolio construction, but just to overly simplify, our view is sort of the bigger markets we can trade a lot of different ways. You can trade crude oil a lot of different ways, a lot of different expirations, a lot of different derivatives that are related to it. You can only trade some of the smaller commodity markets maybe once in sort of a single market. So

you end up with far less exposure risk, even if you trade, let's say, prompt month crude with the same size as you do it. It's just trade, you're trading a lot more expirations on the crude side as an example. So we do try to get decent exposure and it's been rewarding. I will say that has been frustrating over the last year or two. I'd say some of these smaller markets have been a lot more challenging than they once were. And maybe that's because they're crowded. We sort of monitor the microstructure really closely. We're not seeing strong evidence of that in terms of our slippage numbers or anything. In fact, our slippage is at all-time lows right now, which is exciting for us organizationally. But maybe, maybe that's part of what's happening.

On the flip side of that question, do you think I'll see some of these, right? Here's a list of 40 managed futures or trend follower and like one, right? Everyone averaged down 10 and there's this one up five. So right as you're saying, like, OK, what's that person doing? But a lot of the times I put my negative hat on, I'm like, oh, they're they're doing something that's not trend, right? They're obviously doing something different. And it seems to me usually it's probably not a good different.

So I don't know how you think about that. Don't throw anyone under the bus. But like, at some point there's adding what you talked about before, you have to stay true to that. You're aiming for that positive convexity. Do you think some groups are just saying, screw it, we're managed futures, we're not trend, and we're just gonna do whatever it takes

to post a positive number? I don't know, but honestly, Jeff, I would say probably not. I don't think that's necessarily where the dispersion comes from. I think for the most part, trend followers remain very much trend followers. I could be wrong in that, and again,

I know Crayball really well. I know the guys almost not at all anymore, except much trend followers. I could be wrong in that. And again, I know Crayball really well. I know the guys almost not at all anymore, except for their numbers. And I'm not dismissing the point, the dispersion is significant. I would guess that the dispersion is more related to two things. And those two things are timeframe selection

and asset allocation mix. Yeah. I think that that is probably what you're seeing more than anything else. There are years where if 50% of your risk is interest rates and you're trading zero commodities, you could have a 10% better year than somebody who has 25% risk to each of those two sectors.

So. Yeah. But that's kind of to my point. If you're like someone's at the top of the list and they trade seven markets and one of them was cocoa like great you did better But should assets as an allocator? I'm gonna warn people like they sort of just got lucky. They were in the one right? Whatever one seventh is that? 14% whatever that is of the portfolio was in The one best trending market so great they look great

But is that gonna you know is that gonna repeat itself? So that's kind of more to my point of like it it always makes me raise a red flag or yellow flag of like, okay, let's dig in and see why they outperformed and is it repeatable. And to me, it's almost by definition not going to be repeatable, because whatever they captured there was was something special. something special? Yeah, very much potentially. Take a case example, let's say, of crude this year in 2025. So crude finally broke out of a really tight range last year. Over the last six months, it was consolidating, and it finally rallied through the end of the year last year. We all got long.

We all being in the trend-flying community got long. I need my little bat to know now and the knees got taken up. Yeah, yeah, but I forget the exact date, one or two weeks into January, the wheels fell off, the bat got taken out, and we've been selling off essentially ever since then. Well, the question then is when did trendfowers go short? Because that by itself is anywhere from a 1% to 4% NAV swing from one trend far to another, just in that single market. Yeah. So if you're a very reactionary medium-term trend far, that was fantastic for you probably by February, you're getting positive attribution. If you weren't, you might've been struggling hanging on to that long exposure all the way through early April or

later. Well, think about how big of a bifurcation of returns that one market could have made depending on your reaction schedule and trends. So I don't know from my perspective there's enough data. I think trend typically is trend. But I keep saying I think you need to be more creative with trend. So let me try to answer that real quick because I think I would not be an advocate for adding fundamental models to trend or just saying, I know I'm going to take all the short-term stuff I have and I'm going to thrust it into the trend following portfolio because that's going to

be this great diversified. I'm sort of against that sort of just throw it in the bucket mentality. I think you need to be more thoughtful in what you're doing. But some of those- You mean like I'm adding swing trading and mean reversion and all this stuff, put it into my trend model and- Yeah, yeah. Like we were talking about. Or my trend portfolio to smooth out the journey yeah yeah exactly like you were talking about on the mutual fund side i you know it's a great idea to have 100 exposure to s&p plus 50

exposure to trend and we can do it because of the cash efficiency that's great but that is a very deliberate allocation decision yeah you don't they're They're doing 100, 100 now even, but yeah. Or 100, 100 that you don't need, you don't need Crabill to make that decision. You can make that decision on your own. You have the tools, you can give us 50% and 100% equities. So to me, I'm sort of paralleling that to like, let's add this other thing that's alpha into this thing, because then it becomes less predictable, I think, for investors and maybe even less predictable for you, because it's not as though risk parity and and trend aren't gonna suffer at the same time as an example They could in ways that they didn't before just like stock bonds stocks and bonds might not be negatively correlated

Just like they always happen and suddenly you have last couple years or stocks bonds trend which is yeah Oh exactly, so I am generally sort of well, maybe it's safer to say I'm kind of agnostic towards that approach. I'm much more interested in saying, well, what can we change right now that we think we can add value to this thing? So it means constant evolution on things like execution. I think it takes constant evolution on deploying new tools to get better at what we do already. So obviously, we don't have time today, but the world of LLMs is meaningful. And it's creating more than ripples. I think if you're not using some form of large language modeling now, every day all day for all sorts of tasks, you certainly

will in the next couple of weeks, and you're probably behind at this point. It's a huge focus for us here at Crayball. Those should be informing how you cannot get away from trend by adding different components, but rather express trend in the way that you want it to be manifested better. And that looks like more positive skew and less significant drawdown. And that's kind of a sucky thing to say right now

when we're in the midst of one of the more difficult drawdown cycles. You're not going to be able to avoid it, though. I mean, trend is trend. And we're not trying to not be trend. We're just trying to get better at it. and there's a lot you can do to do that Yeah, we keep circling back to it unless everyone shifts to that right of unless they've all shifted to negative skew then trend isn't trend So I could almost wrap it up. I like is trend dead

well, yes, the people who've moved to massive negative skew and and aren't convex anymore maybe that is dead because you need to stay more on this side more on the keep well you're saying that not me Jeff I think in the space are fantastic and they are I'm probably sure changing them across the board in all sorts of ways because that's not what I mean to say I just mean to say perspective we perspective, we don't get it. Yeah. Yeah. Yeah. Exactly. I want to say like we were just in Austin. So it's like keep Austin weird, like keep trend weird. Don't neuter it to the point where it's just like long short equity eking out 4% returns a year.

We'll finish with some fun. Ask you what rabbit hole you've been on a YouTube crusader, magazines or record listing. Like, what kind of weird rabbit hole you've been down lately. Weird rabbit hole. Yeah. weird rabbit hole. Yeah, I've become strangely fascinated with quantum mechanics, which is, which for someone who hardly remembers scientific terms to begin with, or could explain to you exactly what an atom is, that's probably a weird path, but I just find the whole thing wildly fascinating. I think the world of quantum physics is rapidly changing with an awareness that things aren't what we always thought they were. The laws of thermodynamics

maybe are slightly complicated, maybe entirely refuted by things like quantum mechanics and zero point energy. And we're finally acknowledging things like, well, gravity is a wave. What does that mean? We've acknowledged that for several decades now, but what is that? You know, exactly when we talk about bosons, how do they work together and how do you monitor them? And are they real and is a vacuum really a vacuum or what's really going on and what does this mean? Is this touch on string theory? Is that part of quantum mechanics? No, no, no. Well, again, you're talking to somebody who has no right to talk about any of this. Well, I'm asking as even more of that.

Yes. String theory, to the best of my recollection, is one way to define things that we can't understand. So the basic premise here is the world is composed, and I think this is largely agreed on by the world of science, that you have fermions and you have bosons. Fermions being matter, atoms, protons, neutrons, and then electrons circling around them that can dive down into the corks. They have mass. You can see them, you can touch them, you can do things to them. They can't occupy more than one thing at one time. Spacetime is confined to them. You can't stack them as an example. But then we have all these things that we just don't know what's going on with them.

And so we've come up with weird ways to describe them. And so this is the world of bosons, it's the world of maybe zero-point energy, or what some people call the ether. We don't know, but we do know that you create a vacuum and you get rid of all the fermions that exist in that vacuum and there's still energy there. How is that possible? There's no matter, there's no mass. And isn't that from law of thermodynamics, there doesn't, there have to be some form of mass for some form of energy, but in fact,

we know we can quantify that that's not the case. But the complexity that that opens up, now you start talking about things like wormhole and time travel and of course I'm gonna sound like a nut, but these things are becoming increasingly acknowledged as Real and we're trying to understand them. So we start slapping names on things. Well, gravity is explained by gravitons Well, what are gravitons? Well, we don't know

It's just what we're calling this thing that we observe from this thing called zero point energy that we don't really know what it is So anyway, it's wild. Yeah, and it makes you think that maybe Marvel characters aren't so wild. So we thought, yeah. And then does that go into quantum computing? Like if we write a workbook, if people can create a quantum computer, then all the encryption goes away and all that's scary to me. Like what does that look like for our space and everything? Like, yeah, that would just, to me that takes AI and like a thousand degrees into the future once you get the quantum computing.

Yeah, I mean again, I'm far from an expert on these things, but entanglement is basically the principle that things can be attached to each other when they're not, you know, Hermian sense attached to each other. And in fact, there is no... Or they can be two things at the same time. Or they can be two things. You can do things like boson coupling, and you can stack these things on top of each other in the same time space and create more energy there.

So entanglement would suggest, like Google had their big breakthrough that they think they proved the metaverse because they could do a computation that should take all of the power that exists in the universe times 10 or Something and they did it in a matter of hours. And how is that possible? Well, maybe there are metaverses that did it and then passed it through Yeah, well, it's doing it across all of the universes and right. Yeah. Yeah

I mean instead of taking a thousand years in this universe. I did it and one year across a thousand universes Yeah instead of taking a thousand years if you had all the power in the entire universe and then still it would take you a thousand years it took them a matter of hours. How is that possible? So it was you have a universe stacking on top of each other but my contention would be that you didn't define the problem correctly that it wasn't a thousand years impossible. Well, I'm not a scientist, but you can see why it's a rabbit hole because it's like, I don't understand any of this. But what you got any books or podcasts or things where you dive into all that? Um, I mean, what's that guy's name? Kalpautik. I think he's shown up in a couple

podcasts. Like I think he was on Joe Rogan and a couple others and he what there was a guest on Joe Rogan for insight I listened to both sides of the ledger. I'm not particularly political but And he had he had an energy device. I think a microchip that had actually theoretically zero point energy where it created its own energy Without any without any outside force, you know You should only be able to produce energy if you put likewise energy into it somewhere. You know, fission and fusion are two ways in which you can do this, obviously. And yet, you didn't have to charge it,

it wasn't solar, it wasn't anything like that, it was a chip that permanently refreshed itself from an energy perspective by pulling from the zero point energy field. Basically, it was a boson. I just watched The Saint when Val Kilmer died. Remember that movie? Oh yeah., Elizabeth's shoes like creating cold fusion Oh, she was believable as a yeah, she was believable as a cold fusion

PhD professor not yeah. Well, you're talking to an MBA. So I really shouldn't even have this conversation, but No, that's why we asked like it's interesting. Like okay And you mentioned Marvel you got a favorite Marvel movie before we let you know. Oh gosh but no that's why we asked like it's five years now because they're the same oh I will say supposedly this last one was good I didn't see it I didn't it either. But I will say one of the TV shows with who's Thor's brother that's what's that guy's name? Yeah, whatever. The other Helmsworth Liam. No, no, no, not not not actual. Oh, Loki, Loki, Loki. Loki. So there was Loki show on Disney. Yeah, that was good. That was awesome. That was really good. And Owen Wilson. Yeah. Yeah, that was great. They did great.

Agree. All right, and I'll ask you to, we went dark there, so give us hope for trend following in a closing epilogue here. There's a reason why trend following works. It captures beta, it captures carry, and it has the potential to capture that convexity. None of that has gone away, it might be muted. But

there's nothing else like it. And it will absolutely revert I think we're dealing with an unparalleled season of time of uncertainty in the markets, we all feel it every business in America and the world is feeling it. But it's going to break one way or another. And Managed Features has a pretty darn good chance of capturing it. We have a we had a complete trend reset in April. That tends to be a pretty good demarcation of an interesting period to come and I know we here at Crayball are really optimistic about it. We're actually very excited and passionate about trends so we think it's a good space to be in.

All right, we're going to lead with that. We'll put that to the top. It's a good space to be in. All right, we're gonna lead with that. We'll put that to the top. Thanks, it's been fun and hope to see you soon at the next event. Sure you will, thanks Jeff. All right, thanks Graham. Take care, bye.

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 rcmults and visit our website to read our blog or subscribe to our newsletter at rcmults.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 purposes only and should not be relied upon

as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM alternatives their affiliates or companies feature. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations nor reference past their 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.