The Derivative - The Doctor who Traded Pork Bellies: Patrick Welton's Journey from Stanford Oncologist to one of Trend Following's Quiet Legends

Episode Date: May 21, 2026

In this episode, Jeff Malec sits down with Dr. Patrick Welton to trace his remarkable path from Wisconsin kid to Stanford oncologist to veteran futures trader and founder of Welton Investment Partners. Patrick shares how trading pork bellies and interest rate futures in the late 1970s to pay tuition evolved into a decades-long career shaped by mentors at Commodities Corp, relationships with legends like Paul Tudor Jones and John Henry, and a unique “outside inside trader” role that let him keep practicing medicine at Stanford while managing money. He explains how his medical background and scientific training influence his approach to risk, uncertainty, and decision-making, and breaks down Welton’s strategy mix across trend following, macro, short-term flow trading, and equity selloff protection. Along the way, Patrick and Jeff dig into the myths around trend following “dying,” why diversification and staying power matter more than narratives, how capital flows really drive short-term moves, and what it takes to survive for 30+ years in a business where most firms disappear. SEND IT!Chapters:00:00-02:03=Intro02:04-09:40=Doctor to Trader: Patrick Welton’s Origin Story, From Wauwatosa to Futures and the ER09:41-30:03= From 1987 Crash to Commodities Corp: How Patrick and Annette Turned a Side Hustle into a Trading Career30:04-43:19= Doctors, Scientists, and Traders: Embracing Uncertainty, Reflexivity, and the Real Drivers of Trend Following43:20-56:16= AI, Innovation, and the “CTA Winter”: Cycles, Flows, and the Future of Trend Following56:17-01:14:19= Building Welton’s Playbook: Diversifying Alpha, Short-Term Flows, and the Art of Surviving as an Asset Manager01:14:20-01:29:48= Alt Data, Capital Flows, and What Really Matters: Patrick Welton on Research, Edges, and the Future of Trading01:29:49-01:37:47= End-of-Month Myths, Market Microstructure, and the Limits of Short-Term EdgesFrom the Episode: Leverage Is Bad. Except When It Isn’t. Morningstar Just Made the Distinction OfficialBook: Richer, Wiser, Happier: How the World’s Greatest Investors Win in Markets and Life Book: Market Wizards, Updated: Interviews with Top TradersJack Schwager on The DerivativeFollow along with Dr. Welton and Welton Investment Partners on LinkedIn and be sure to check out Welton's website at welton.com for more information!Don't forget to subscribe to⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, follow us on Twitter at⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ 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

Welcome to the derivative by RCM Alternatives. Send it. Hello there. Welcome back to the derivative brought to you by RCM Alternatives, where we put up a new blog post this week, talking about leverage in ETFs and how it's not always a bad thing. But the interesting part this time is it isn't just us talking about it.

Morningstar finally got on board with that concept and came up with a new category that accepts that. Go check it out. RcMaltz.com slash. blog, rcmults.com slash block. On to this episode where I get to chat with one of the OGs in the managed future space, who also happens to be one of the nicest guys in this futures business. You don't get that combo too often.

It's Dr. Pat Welton of longstanding standout Welton investment partners, of course. Pat lives in Carmel, California, beautiful spot and has one of the best origin stories we've heard on this podcast, having his early trading when he was in medical school, sent along to Commodities Corp, one of the earliest kind of fun-to-fund pod shop type of groups way back when in the 80s, had that sent to them for a look while he was still a medical student and then continued on with his degree while also trading capital for them and eventually launching Welton. But don't take my word from it. Hear it from the man himself. Send it. So let's start with this lovely office, this in your home. Where are we?

It is in our home. It's my study. libraries that way and this is where I spend my best thinking time. Love it. Lots of books back there. Are they all finance or you got some fiction? What's your mix? Oh, it's my mix of I want to read, I want to reread, and I haven't gotten to in a while. It's quite a mix of fiction and finance.

Some of which are really good titles for your audience if they're interested in trading. Yeah, like such as what you got, one you can rattle off. Wow, I have a, I have a lot of titles that I recommend to people. But if, you know, I think if somebody is interested in interviews with traders, for instance, I think this book over here, Rich or Wiser, Happier by William Green, does a great job, I think interviewing traders if you're looking at the underlying philosophic perspective and values they had when they were trading. which is a little different contrast to the whole like Shwager series that was Market Wizards,

which are wonderful trader interviews. Jack's been on the podcast. Yeah, I remember talking to Jack back when he was writing by, I think, volume two or something like that way back when. You didn't make the cut? Were you supposed to be in there? Well, he did talk to me about it, but I don't know if I ever would have made the cut. I told him I don't think I was worth interviewing.

I was a physician out at Stanford who, you know, trades for CC. I don't know that I. I should have been in that esteemed group, but some of those people were actual mentors of mine, so. Love it. So you just hinted at the great origin story here. So, well, first, let me remind everyone, you're there in Carmel, California, probably one of the most beautiful places on planet. Was that always the plan, or you ended up there? You were Midwestern originally? I grew up in Wisconsin. There you go. What part of Wisconsin?

I grew up in Lovatosa. Well, my mom would grow up in Wawatosa. Where did you go to high school? Wavitosa West. I want to say she was Tosa East, where there's East and West. What were the two? Yeah, Wawatosa East was the crosstown rival, and I will not hold it against her. Okay.

Love it. But so then somehow ended up out in the beautiful Carmel area. How did that all go down? Oh, is a, you know, left high school at 17, and like a lot of people went to a, from one college to the next to the next to the next. and along the way, you know, traveled around the country. And so my last duty station before coming to Carmel was my wife and I lived in Palo Alto. And that's where we moved from. And you were at Stanford at the time.

So your college hopping ended at Stanford? It did. Yeah. Love it. Actually, sort of a long time. It landed there for postdoc residency and then faculty and clinical faculty for, I guess, about 20 years. That's great. So I don't know how many, if any, I've talked to about this of going from doctor to trader. So how did that all come about? You were on the doctor path. You wanted to be a doctor and then somewhere in there began trading and decided I want to be a hedge fund manager also. You know, the short version of that story is hard because it's now, I started my first futures trade in 1978. So it's coming up on 50 years. So it goes back a ways. But in many ways, it's sort of. an amazing, improbable series of turns of events for us that opened up a whole new world.

But kind of the quick summary is maybe is the student years from 78 onward. I traded here and there as an undergraduate and then a graduate student and then a medical student, mostly out of need, just tapping markets when I needed to for, you know, making ends meet, filling a tuition, paying a rent, learned a lot along the way. And how did that even start, though? Were you like, instead of saying I'm going to work at a garage or being a paperboy or whatever, you said I'm going to be a trader? Well, my dad was a small individual investor.

He's a stock trader, not a trader, a stock investor. So I had, you know, been looking at things like value line and all kinds of various types of printed materials you can imagine from the early 70s and mid-70s. But when I went to college, I realized with the size of the capital, that I would have, having been a swim coach and lifeguard for many years, that if I had a several thousand dollar deficit I needed to make up to stay in school, I wasn't going to be able to do that most likely on a two or three thousand dollar account. So the leverage and liquidity of futures I learned about and decided that that's where I should learn to trade. So I opened up a futures account with Lynn Waldock. Know him well. At the very minimum, who, you know, that's one of those

pathways in life that you never know when you're going to open it up that 15 years later, you'll be dining with the founder of the firm and visiting his office and being guided around. But we were. But, no, I was just the minimum account you could get and started during the Hunt Brothers Silver Run, mostly the decline of the Hunt Brothers Silver Run, back in the late 70s, early 80s, a couple of good interest rate trades every now and then dipping into a market that I still smile today when I see pork bellies because every now and then I'd make a handle on a pork belly

and a couple hundred dollars would come in and it would come right out and I'd be using it to pay my bills. By bacon. Or not by bacon, but... Those are the student years. I was just golfing with a guy who was, he's like, what do you do for work?

I'm like, oh, commodity futures, blah, blah, blah. And he's like, pork belly. That's the first thing everyone goes to. Like, actually they got rid of that contract. I know, but it was a, you know, And it still leaves me smile a little bit from way back when. But in any event, when we, so I got married in 1985 and Annette and I moved up to Palo Alto. We had been at UCLA where I was actually an MD PhD student at UCLA.

And then we came up to Palo Alto after doing a year of trauma at San Diego. And we're up at. You're actually in the ER? Well, I was in surgery and in medicine as my first PGI one year when I came out. And in that hospital, one of the reasons I went was you could be on the trauma call team and ICU teams all year long to give a lot of experience. If, you know, if you, if I would commend anybody who wants to know what it's like in a modern setting, though highly compressed, is to watch the pit on HBO Max.

It is the most realistic medicine I've ever seen. Just remember that one shift in even that ER is about a week's worth even in an L.A. County Hospital, which is where I spent time. So that, for drama, they take a week's worth of action into 24 hours. They do. Yeah, they do. But still, a week's worth, that's crazy. It seemed like to me watching that, it would be a year's worth of action.

Oh, no, not in a busy county trauma center. Those, it's a very realistically advised show. Obviously, very complicated cases at time, both socially, ecosocially, and medically. It's kind of cliche of a doctor watching the doctor show, or that's fine? No, I, um, well, I haven't been a practical. practicing doctor in some time, but I'm really impressed with how realistic it was. It's a, I can't watch the doctor shows that aren't too realistic. I mean, when I was, my children were small and I would be driving up to Stanford.

They would ask me what I did. And, you know, that was the time when House was on the air. And I'd say, well, you know, dad is kind of like Dr. House with these residents, but he doesn't have a cane and he doesn't take pills. I was, and then what, what type of doctor were you? In oncology, wasn't it? Yeah, radiation oncology and radiation. radiology. Though a lot of the times I attended, I was attending on a medical oncology service.

They use multi-specialty attendees at Stanford for Med 10. And then was the plan always, okay, right, did the trading get so good that you said, oh, I can push this doctor stuff aside? Or were you always saying we can do both simultaneously? Yeah, so we got up to Stanford and we decided really just to try our hand to be a little more consistent in trading. We began to systematize some of the basic things I had done. We were hoping it would be a secondary source of some income to supplement my postdoc salaries, which is quite low. And that was a really important time. You know, we had very constrained resources, did everything ourselves. And, you know, Annette did the trading. I did some of the programming and researching. And it included really important times of trading, too, including the 87

crash, which was a watershed trading moment for people of that era, much. like the global financial crisis was for people in the 2008-9, which came back in my early years to greet me over and over again because as I then entered the business professionally, I met mentors and I met other investors who traded that very same crash with a different set of results. And I always compared how the different people did. And it really was like a window for me for the rest of my life

at every market event that occurs. I realize there are multiple sets of people. trading around that, and I still think of people like, you know, Paul Tudor Jones or Blair Hull or John Henry or myself and what we did in the 87 crash. And before anybody didn't mean anyone who blew out. We were sitting on a lake in Lake Tahoe completely out of the market, having been short on Friday, and having to listen to an older gentleman with an AM radio that I think he brought on the Tahoe Queen boat to listen to sports.

And everybody was gathered around his tiny AM radio listening to the stock market crash. I was worried about this is. They were worried about maybe pension money they were losing and I was worried about the short S&P that I closed on Friday night and how much money I could have made had I kept it. Man, I mean, A, you're proud that you were short, but then shortly after that, that you would no longer during the Monday as well. But did you ever meet anyone who got blown out in 87, right? No, not blown out, but for instance, like later on, well, we'll talk about the transition. but we just to skip forward, we were introduced through a gentleman that we met in Palo Alto was actually a senior member of a brokerage firm we just happened to be trading at.

And he and my wife spoke one day when I was at the hospital, and he had looked at our trading and wondered who we were and why looked at the last couple years and we had been doing pretty well and wanted to get together. And so we ended up getting together. And he turned out to be a very influential guy in our lives, a guy named John Kratz, And it turns out, you know, he wasn't really, I won't say he was just a broker. He was at Shearson Lehman at the time, but he was there because he was actually the National Director of Futures for E.F. Hutton, before E.F. Hutton was acquired.

And that, he ended up retiring at Palo Alto. And so he knew everybody. And he looked at, spoke with us, and he introduced us, asked us if we had ever heard of a company called Commodities Corporation, which we had not. And he introduced us to Elaine Crocker, who is the head of trading there and trader selection. And she became a very influential person in our life. So she invited us, had a long discussion, then said, you know, we might like to hire you as a trader and explained what that meant. We went to Princeton, really learned of this incredible new world that was outside of our world of universities and science and medicine. And even they were unique inside the trading world, inside Wall Street, right?

They were doing something nobody was doing really. Yeah, you know, that was founded in the late 60s, early 70s. I'd have to brush up on the origin story, but I think Calumet Weimar or somebody else, I think they might even have run Cocoa trading or some sort of stuff trading at some cash principle. They all centered around MIT. They basically were MIT connection. So Paul Samuelson, famous economist from MIT was eventually a founder on the board. All of the founders were centered there and their idea. They started with just a couple million dollars of trading capital. And they, over time, by the time we joined them, they were hiring and developing. trading talent, having already hired and developed trading talent that some are very well known today. So things like Lewis Bacon from War Capital or Paul Tudor Jones, people who are well known to myself because of CC lore, but I don't know if they ever publicly managed money like Michael Marcus.

Yeah. I think he was in one of the early trading wizards since Jack would have known him. And they just were marvelous. And anyway, we came home from our trip, and they had offered us a contract to trade some assets. Now, we were trading $20,000 or $30,000. They offered us to trade a million five, which seemed improbable for us. Right. Was there a little panic there when you heard that number?

No, no. And then they, but they said we'd love you to come to Princeton and become an inside trader. And that's when it was both an honor to receive the offer. And then it was automatically very deflating because the, The salary they offered was, I think, triple my postdoc salary before any profit share. But we were committed to staying, you know, in medicine and near family. My wife's family was from the Bay Area. And we, you know, it was a mixed feelings evening, but we called back and turned it down very reluctantly

and kind of dove back into our routine until we got a call the next day. And they, Lane said, hey, how would you like to be our first outside, inside trader? In other words, be an inside trader. than a stay where you are at Stanford. Yeah. Did you say it's better than an inside out train? Well, that's what I would. I didn't mind the oxymoron of it all.

It's like, sounds good. What's an outside inside trade? So they came back and offered us to stay in place at Stanford, gave us a generous amount for fixed overhead and a roadmap for getting more capital. And honestly, it opened a whole new pathway for us, as did John Crass, because, you know, he introduced us early on. We drove down to Newport Beach and got to. to know and befriended John Henry, which, you know,

was like a 25, 30 year relationship after that and other people who were in the business at the time, like Gary Davis, who ran a company called Sunrise. Yeah. Which was an offshoot of Cresta, which was another, and by the way, Gary Davis was a radiologist at UCSD, so in the early years. So we, the CEC contract was, you know, just amazing for us.

It was a portal to entering the industry. You know, we got that. And you weren't playing coal. turning it down? It wasn't a negotiating tactic? It was not really a choice. It was come move to Princeton and trade for us. You know, it wasn't even thought that there was an option for something else. So, and, you know, medicine was really the goal and what we could do with medicine was the goal at the time. So anyway, we got started and that went out and grabbed a satellite dish.

I installed it on the third floor porch of our Stanford graduate housing apartment complex, pointed it to the sky, ran data cables inside. and we began to trade. And the capital growth contracts and their expectations I smile at, I know my staff smiles when I tell them, you know, especially in today's light of institutionality and views on risk management, but, you know, just for fun,

did you want to throw out a guess as to what level of return they expected on their capital to get our next advancement? I'm going to, since you mentioned, John Henry, I'll base it on his early 80s track record, which was in the 30s to 40s, so I'll say 35%. Well, you, that's brilliant. The goal was, it was quarterly, it was,

you had to get seven and a half percent a quarter. So you had a gate, seven and a half percent and a quarter. So you couldn't just blow through the seven and a half percent. You had to per quarter. And then you got your next, in our case, 1.5 million. So it was about 34 percent a year. So return on capital was very important for the way CC was set up. And I still look at them as kind of the true origin story of the multi-strategy

and I'll call it risk takers fund, because, you know, it would probably move too much in any modern sense for institutions. Oh, yeah. It was developing traders and bringing them together to get a high return on capital. Which is a common, right, the Chicago prop firm, that's a well-known model here in Chicago, but back in those days was not. One that I knew nothing about until these doors opened, in which case, once they opened,

I just met the most wonderful people over the last 30 or 40 years and still know many of them today. And then it probably wasn't as advanced at that point. Were you able to own the track record? Like so when you finally did pull out, you could show people that track record? We could, which is beneficial. A lot of days, a lot of times now, they want to own that track record. But we also, what did that?

We had multiple business lines that we eventually were introduced to. So early on, it was probably the same for all traders. And you would know, I'm sure you would know many of the traders who are, some of them aren't trading any longer, but you would know many of them from great trading careers. Yeah. And, but they had many lines of business. So you could trade for their private book, their directors fund. Then eventually they had clients or their own Bermudery insurance company.

They had funds with Wall Street firms like Dean Witter, I think Prudential as well, where they became managers and supplied traders for it. So we ended up with multiple accounts over the years till they eventually were, management started to change and they were sort of groomed for sale and sold to Goldman. And then that was your trick. to go off on your own, and your own jingle? We started taking some outside accounts. We had, that was a decision we had to make,

we felt we had to make, and we made it about in 1992. Should we take a few more outside accounts? We had one professional trader as an account. A guy was a CBOT member. We had another professional trader as an account through a dedicated fund for his prop capital. But we didn't have many other accounts, but by this point, we had spent the first three

or four years. We do our twice a year pilgrimage in the industry to go to a winter conference and to go to a summer conference where we began to meet people with all of these brokered introductions. And in the process of that, again, began to form a lot of relationships with people, some of whom we still trade for today. Or even if the principal is retired, we trade for the firm that they formed in those days. At this same time, you're still wanting to be a doctor. Still in this case, in the, So 89.90 would have been my last year, you have postdoc, and then chief residency, and then went out. And that was really the transition of either staying in Palo Alto or in our case, we moved to Carmel. My chairman at the time got a call from a hospital in the Monterey area that was looking to, that did not have a comprehensive cancer center, looking to build one and basically was looking for someone who could potentially be a leader from a more pedigreed oncology. that could help bring the disparate parts together and get qualified as a comprehensive of cancer center. And I said, as long as we could still stay affiliated to some degree with

Stanford, it was great for many reasons, but it was great for my wife whose family was still close by. Just now they'd be north instead of south of us. It was not too far away from where I wanted to stay. And it was a challenge for a young, you know, physician to be able to build a program like that, you know, on a patient volume of 600 to 1,000 cases a year or so in that area. So we did have some reticence, at least I did initially compared to job offers, say, to go to Sloan Kettering or some other major center. But I was persuaded by the people I met down there of something that's turned out to be completely true in that while the area is absolutely beautiful, right, the sea and the setting,

low-crime, you know, very healthy place to live and raise a family. I was worried it might be too remote, but I was convinced that by people there, they said, no, no, no, the place attracts some of the most talented and most interesting people in the country for retirement or for second homes. You'll have a fertile ground to meet people or serve. And, you know, 35 years later, it still amazes me who I meet here. And I've met and befriended, worked with, collaborated, all kinds of notable people, either very publicly known or just very senior and talented people in Silicon Valley, private equity, national government, Nobel laureates, law, medicine, Wall Street. You know, it's not as concentrated as being in, say, New York City, but it's amazing and it's been a blessing.

And Carmel has one famous mayor actor. Yeah, Mayor and Landlord for Welton investment partners. Landlorn. that building a long time ago. No, when we need, we had our first office in our home. That's actually where we had our first due diligence visit in the third bedroom of a small Carmel home. When Dean Witter was looking to add traders to their fund, and that's a whole fun story unto itself. But given the person who came out as a junior due diligence team member, later on became the president of Graham Capital Management and retired as the president of Graham.

So that he probably tells that story from the other side. He's like, I once allocated to a guy that a meeting was in their third bedroom. Really great people, he and Ken and, you know, somebody we've known for, you know, again, almost four years. Then we, yeah, we got our first when we started taking some outside capital and we wanted to hire print some out some other employees. We needed an office. So we were looking around in Carmel, saw some empty space. It said the eastward building and we didn't put two and two together right away, but we ran into Clint and his. business manager or his development manager, a guy named Alan, who said space was open. And I said

we have a small company and we need some space and we don't need a front end of our store. We could use the back, you know, least expensive space you have and we'll be a good, quiet tenant. And I'm afraid we're going to have a very variable business. Our cash flows go up and down. And I said, hey, could you, would you mind if we just paid you annually in advance when we had the, had the money? And before we got, say, taxed at year, end, we'd have prepaid our rent for a year. And Clint said yes, and it was just a handshake deal for almost 20 years. It was only when he was selling the building that his business manager called up and said,

hey, for your protection, you need to get a lease. But we've been fine for decades the way we own. I mean, you read the lease. You're like, what is this? Yeah, it's a lot of days. Handshake deal. How's his handshake? Like, one of his westerns was like stern or was?

No, he's a nice and friendly. A couple dozen times that I met him. He's been a, I mean, he's sort of a civic fixture in the Carmel area. You know, he's known by a lot of people and he's contributed a lot to the local area and he's soft-spoken. In fact, I remember introducing him once to my father-in-law because I knew they had both served at Ford Oard roughly in the same time. And Clint was and is and was a jazz aficionado. Loves jazz music. In fact, he pro bonoed the jazz radio station in that building for many years.

And my father-in-law happened to be a professor of music with a specialty in jazz and ensemble. So I introduced them one time at Tahima, which is a country club that Clint founded. Well, I was completely superfluous to this discussion in about 10 seconds. I stayed around for about four or five minutes as they were reliving 1950s in Ford Ord, just and faded away and they were having a perfectly good time. Backed out. Exactly. Quick question, because you mentioned your wife was doing the trading.

Did you ever get in some fights? Like she had a trade error or anything? That could have gone bad. You could have been divorced if there was an error. Oh, she was a complete co-founder partner. You know, when you're just doing things together, you don't necessarily attach business terms like that to it. But when you start hiring other people,

that's what it turns out to be. I still remember, you know, we did out our first SEC audit in our Stanford apartment. And when I went on the NFA board 10 years later, of course, the CFTC decides, hey, we better audit the firm if we're bringing him on the board. We have a zero, zero zero error mark for our whole history. She was wonderful in running everything. I was on the board in like 2015.

I saw that in your bio. Yeah, it reflects our age difference. I was, say, 95 to 99. Bob Wilmuth days. Yeah, yeah. And then quickly I want to understand trying to make money running a hedge fund, trying to save lives being a doctor. Do you find those at odds over time, or was it, right,

you kind of thought they complimented each other? How did that work out in your brain? You know, when we decided to try to put more structure to our trading and then when we accepted the contract from CC, which then opened this door, you know, we pretty much decided that the opportunity that could happen that might hopefully happen is that the trading business would likely be small and with a limited number of clients, but probably much more remunerative than anything we might see in medicine

just by its nature of what it does. And that if we did this right, we might be able to have a real economic freedom to pursue medicine, academia, teaching, seeing, you know, patients who couldn't afford to pay, anything that mattered. Just the economic side of medicine wouldn't have to matter. It would be very pure because, you know, the vocation and the evidence, could be separated. So it seems naive in retrospect, but yet even when I say it today, that was what we were thinking in the late 80s and all through the 90s for the most part, that how blessed we were, that this is something that we could do on both sides and run them in parallel, and each with its own set of goals. And they did not interfere with each other in any way. What makes my brain go to a

bad place of like, what are all the doctors doing that have to do it for money? But no, there's a whole other That's a whole other series of podcasts. Exactly. That's not even a, and that has evolved over time, and our health care system could be better is the summary that I could give you for your. Of the 12 series. Yeah, for sure. And then as you became a firm, you started hiring PhDs.

You were an MD PhD? Was an MD PhD when I went to UCLA, so I took a scholarship from the NIH for that. So I was a biophysics graduate student in MD. And in fact, that's the summer I met Annette. I came out the summer early for graduate school and to get into a lab and join the lab of Phelps and Maziota, who were innovating. What is now known today as a PET scanner, so Positron emission tomography was pre-clinical then, and we were advancing scanners and advancing their use, scanning, functional brain imaging

in, you know, primates as well as early brain imaging in humans. Wow. Doing the computation, image analysis, you know, metabolic rates with fluorine 19 imaging technologies. That was all the work that was doing then. It was like an MRI, basically? You know, it was interesting. MRI technology was also coming online at that time. And at that time, the separation that you would explain to somebody is that the MRI was a very advanced way of scanning somebody's anatomy.

And the PET scan was a very advanced way of scanning the function, the metabolic function of what's going on in the bubble. You weren't just imaging a brain or a heart. You were imaging how fast a brain used glucose or how fast a heart used free fatty acids. The wonderful part about those technologies is those have fused. You have scanners that can do two things at the same time or do functional studies with anatomic studies.

Everyone in the world has benefited by the technological climb in imaging. So you mentioned earlier, early 90s, you moved to, what did you say, 92, move to managing client money. So the first thing pops in mind, like, how have you survived that long, right? Like hundreds of firms come and gone through that period. So is that a, do you think it's because of your philosophy or you were good or lucky, or how did you survive this long in this crazy business?

You know, I don't know that I'm going to have a perfect answer for that, but I can tell you that there's a couple of things that maybe ran to our advantage. I think one trading from California and maybe twice a year for like January and then June or July conferences, we would sort of make our way through the financial worlds of New York and Chicago. And I think by having enough connection with people over time, but not too much, we were able to steer our own course and stay, you know, well charted on that. We knew our, I also think we were a lot of doors opened for us, maybe that didn't Commoddy's Corp and the relationships and the mentors and traders I met really opened a lot of doors. It was a whole new world.

But I think some of those doors stayed open because we weren't a competing hedge fund next door. You know, I was the, I was that the Stanford doctor out on the West Coast. It was less threatening to just oftentimes sit down and, you know, share really deep business stories or even learn many. of the principles names of people you would know not only about their business successes and maybe near-death experiences, but even about their families and their history. So I think we, I think our position helped our longevity. It probably didn't help our growth because, you know, there was, you know, if I think if you wanted to grow, you, you moved to the center. But we were very happy in that equilibrium we were talking about earlier, where if the trading business could really be,

you know, our vocation and be our economic engine, then medicine and the peripheral aspects of medicine in the community could be something we could pursue really without ever having to worry about their economic consequences. But it seems like you're saying there, you didn't want to move to the middle, so that's like lowering the quality maybe of the program? But was that also a pure focus of like we can't have these massive drawdowns or low drawdowns? Well, I think that's the question. The question is, would it be lowering or raising the quality and raising the consistency. You know, one one observation I have had, and it's a shared one that I have inherited from other people's experiences who have evaluated traders, is how often a trader is

steered off course either by demands of clients, what's currently in demand, so they'll change what they do to try to cater to that demand, but because it's countercyclical, oftentimes it takes them into a blind hole, and that's when they get their biggest drawdown, or that's when they lose their confidence. The other one, too, is I think what you mentioned earlier about pod shops, some pod shops liking to isolate their traders so that they don't cross-fertilize each other.

You know, I think from the traders standpoint, many of the egos are they don't want the other guy to steal my ideas. I think from management standpoint, what they really don't want is one trader influencing another with their own self-doubt and begin to change what they're doing. They were hired to have an independent line of thought,

and that independence goes away. So I think it helped us very much to both have, you know, one foot with deep relationships in the industry, but then another where we were, you know, we could hire independent thinkers, mostly hire people from California and the Silicon Valley kind of area, and stay true to what we were trading, whether that was in, you know, our programs at the time, which were kind of a mix of trend following and shorter term trades or, you know, a volatility. Our program I traded for about 10 years.

for a Swiss client and a Japanese client. You know, we are able to just do things and try to be consistent with them. And I think all of those helped with longevity. Has the, so you mentioned getting some of the talent from the area, has that been hard, right? Like, you're not going to get a bunch of IV, probably groups, like coming in

and wanting to work out Carmel? Or do you get people like, yeah, I'd love to work out that? Like, has it been hard to get and retain the talent? We have always... We've been blessed with the talent we've found. It might be the case that we might have had to help develop the subject matter-specific, you know, knowledge when we've hired somebody. But we've never had a quality of person problem. We've always had really good people.

It is true that we probably, you know, we probably don't have people, nor have we necessarily looked for the kind of people where you're going to lift out an entire group or lift out somebody's entire business from someplace and bring it in. that's never a market we've really competed in. So I have really no comment on that. You know, they're both six, those can both be very successful and, of course, be short-lived and very expensive. We've mostly tried to hire people who wanted to stay for long periods of time as long as they were productive and happy. I had lunch and dinner in Miami with Dr. Oren, so I can speak to his quality and talent.

It was off the chart. Speaking of that, do you ever, is there like a competition between medical doctor and economic doctor on your PhDs? Or you're an MD and a PhD, so you're saying? No, no, though I, you know, in my, when I'm still young at 65 years old, I feel like I should go back and finish my PhD. Oh, okay. So I'm just an MD. No, I left my PhD work just before the dissertation. Oh.

After I got married and we decided. I'm going to give it to you. You got them both. I mean, how many more years did, you know, Annette want to tolerate me, you know, being in a university setting like that? But you, I remember, you know, that you had raised that question

when we spoke a while ago, and I realized I have probably done 100 or 200 public interviews and press interviews at least. I have probably spoken at five or six dozen major conferences. I have no idea at this point. Yeah, yeah. No one has ever asked

that question and it's it's an interesting one that I'd actually like to answer because I think it reveals potentially a weakness it maybe puts a spotlight on potential weaknesses in trading personalities then let's do it yeah so you know generalizations really never fully work so we really can't say you know a medical doctor is like this and a PhD is like this but you know if if if we create two simple archetypes I think it's really educational for where the strengths and weaknesses of traders in my, at least in my current view, looking back over these 48 years, and I could highlight them. You know, if I were to characterize a scientist as principally an objectivist

who really pursues the reduction of uncertainty. Most people know that as the scientific method, but the scientific method is not, you know, there's no eureka we found it. Each cycle of a scientific discovery is really reducing uncertainty and making something that's more predictive of your hypothesis. If we characterize the medical doctor, the archetype, as a more of an empathicist, but medical doctors never have precision and much reduction of uncertainty. They're always having to embrace

consequential decisions despite uncertainties, complete unknowables quickly as their priors change. And they sort of, you know, they traverse a Bayesian landscape whenever they're taking care of a complicated patient through time. And I, as I think of those things, they're a compliment for what makes a good investor because a real major, major weakness of trading is hoping or caring for an outcome. You know, being objective is the axis of strength there. But a major weakness, another major weakness of trading is those really who come to it with an expectation of a level of precision or a level of prediction, which is the core of science, that they will never find. Yeah. It's not a point of precision that the astrophysicist would think are five orders of magnitude

too small. Small. And the trader's trying to decide if it's just going up or down. And those uncertainties change. And the embracing uncertainty under fire and rapidly changing as conditions change

is really another axis of strength. So I hadn't really put that together, but I realized in earnest that inside of me, you know, if there's ever a weakness, it's time to be more objective. And if there's ever another weakness, be less precise

and less prescriptive and, you know, react to the changing of probabilities as they occur. Those are success pathways for a trader. And that's somewhat speaking to me personally and some of my family and friends. Like we get frustrated with doctors when they just start to rule things out, right? You kind of want them to tell you exactly what it is. And they're like, I don't, right? A good doctor's like, I don't know exactly what's going on. But per my examination here, I can tell you it's probably not this, probably not this, this, this, right? And you see that? Like, the doctor's coming at it from that way and the

Quants may be coming at it from the other way of like building on things they know to get to this point versus the doctors coming down of like eliminating things they don't know. It's true. And the precision is not hard to understand, I think, for those who've traded for a long period of time or who've been in markets because I think one of the one of the assumptions and of a young quant coming in the business and maybe one of the conceits of some of the older quants that just still wish the world were as precise as it should be. They typically come in and most people approach the field and they have some sort of expectation is that if they analyze all of this

data, they will have some sort of way of then deciding that this is how the markets will then respond. So they may have one variable. They may have, you know, several million variables in a small LLM. But at some point, they're taking the data and expecting the input of the data to move the markets. And I think I've seen this, the light bulb go off so many times where I say there's really, I call it the three-body problem after the new science fiction novel, you probably know well, but more of the planetary problem. Yeah. So there are more than data and what happens in the markets here.

In between those two things are the market participants. It doesn't matter to the markets what's happening to the data. It matters to the people who are buying and selling in the markets what happens in the data. And there can be entire, you know, many years at a time, people may focus on money supply, and many years at a time forget what it even is. The other times they may be focused on unemployment, and then they're no longer focused on unemployment. In any other complex case we could create for your audience, it's really the loose joint in that system is how market participants' sensitivities to that data is reacting. You know, you can even see that in any kind of an,

aspect like we've seen recently in war or in current administration announcements that are quixotic from left to right. You know, the first ones may have a large effect, and then the second and third and fourth are sort of self-dampening and become less and less of an impact as that group reacts less. Just today, I think they launched some more missiles at UAE and everything, and everyone's kind of brushing it all. But, and that's typical. I mean, the market reaction. It's the 12th event or something. And I think it's actually the, it's the source of what, you know, know, many people get up in their sort of prediction machines and their story crafting and they say how the regime has changed from this to that. That's the underlying story of the regime

is really the underlying story of how market participants are reacting to that information flow and what they're focusing on. We always call, right, from, I was on the trading floor and work with a lot of guys who were on the trading floor and they, it was kind of this battle between the quants, don't get it, their deer in headlights as soon as something real starts happening. And then like, well, they do have some really good ideas and some, right, things that can work, but there was always that push and pull, the quant thinking it's a clock that, you know, if only they could see under the, they could look at all the gears and see how it works and figure everything out, but not necessarily the case.

I used to, I gave a lecture 20 or 30 years ago, I would show these advanced forms of like astrolades, these increasingly complex devices that were able to sort of capture motion in the universe and time and date and, you know, you know, cycles of darkness and light. and every navigation and everything else, these incredibly clever mechanists of the 14th and 15th century. A benefit of being a professor at Stanford. You had access to that stuff. Or you just get, yeah, you just see, you just have pictures.

You basically are bringing to the point that all of that precision and all of that cleverness was based on something, and then a guy comes along and says, no, actually the Earth isn't the center of the universe. It's not even the center of our solar system. The sun is go back and rework out. No wonder each one of them had to be adjusted and then compensated for and adjusted.

The underlying assumptions were wrong. Do you think that we move towards a point, right? Like, say we humans are getting ever replaced with AI or enhanced by AI. And if the computer's making more of the decisions, right, does it become more of a clockwork machine and less human-driven? And maybe there is a way you can, the quants can perfectly figure it out. Oh. Just a simple no would be funny. I think no.

I think there's a couple of threads. One could go down when one talks about the AI question. One of them is more the impact into trading and maybe the other one is, is it a big deal or a small deal? But you know, kind of stick in the trading part. You know, I've always appreciated the sentiment of people's questions when they ask about the new thing.

Oh, what about 24-hour trading? You know, what about algorithmic speed? What about AI? And I've always, I mean, over the decades, I've appreciated the sentiment of the question, and I get the fact that changes have been profound, and generally all of the changes have been in the direction of speed or in the direction of, you know, making everything feel more frenetic. The once-a-week weekly chart service of the 1970s is a thing of the past.

But I wouldn't worry at all about the innovation stream. In fact, I actually always try to rename things like that as the opportunity stream. So you might remember from your trading background, do you remember a gentleman named Leo Malamid who? Oh, yeah. Yeah. So I remember being in a small group presentation with him a long time ago, probably in the 90s. But when I remember the most was he described the early days in the 70s and in the 80s of things like the IMM creation and some of the background of how it was getting done and how politically charged some of the decisions were between things like. Treasury and SEC and CFTC and the spawning then of the currency futures and interest rate futures

and ultimately stock index futures. And, you know, basically every, my net memory of that was that all of those had to really swim upstream against, you know, currents of like, why do we need these things? Are they bad for investing? You know, are they too expensive? Are they mispriced? And in due time, are we just gambling? All those. Yeah. Everything we're saying about prediction markets, right now. And now it's like saying, well, how would the global financial system plumbers, you know, not have pipe? I mean, they're just core necessary instruments in what we do. Now, a lot of things fell by the wayside and died. But, you know, I think that's like all new front-end innovations. There are some things will be questioned. They'll be expensive. They'll be inefficient.

There'll be more losers than winners. In fact, I think I just saw some report that on polymarket that less than 1% of the accounts account for all the profits. Yeah. But over time, the most useful innovations are going to persist, and they're the ones that are going to get scaled. But you see in returning your trend following routes, you get a lot of arguments of like, oh, the markets are too quick now, right? Like all the participants can ingest the information much quicker, which doesn't lead to these more lengthy trends. So it kind of shortens and makes it choppier. Might be one, as you talked about earlier, of a narrative trying to fit the price action.

but it seems like there is something to that. And you guys do have short-term programs and have been more shorter term over your career. So anyway, we can tie those threats together. We should tie that one into why some people perhaps have done poorly and they've shaped how they've traded to feedback that they hear in the story. Yeah.

You know, I remember when we were trading for CC and then we started to look for outside accounts, there was a gentleman that worked for one of the big brokerage firms who was at a, we were all having dinner at the time. And they were sort of like, nope, you don't want to do that. I said, you know, as a trader, you're used to thinking about P&L first, defining your process, and then if you have to describe it, telling your story. He said, when you become an asset manager, you're going to tell a story.

And then people are going to buy performance and they're going to sell the, they're going to sell the entry point. And I thought he was just a cynic. But he was. Yeah. But there was a lot of threat of truth to the cynicism. that was there. And if we look at what you were just talking about in terms of trend,

I think trend following is misunderstood because everyone, I think, puts on to trend following whatever they want to see in it. You know, trend has really four big drivers of return. And we would have to create the most incredible counterfactual for them not to be true over any like the time. Now, two of those, if we look at economic trends, changes, just long-term accumulations. forget not the changes long-term accumulations of economic growth productivity growth things that change asset prices two financial carries so small amounts of profitability but they accrue each day

three um it's got different names and finance theory from different people who've written papers but it's essentially an information diffusion model a new report comes out monthly quarterly weekly that information has some instantaneous reaction and then a diffusion over time and And then lastly, sentiment. So buying begets buying, selling, begets selling until it can't. So the big dramatic trends in different asset classes have different shapes for that. But trend following really hasn't gotten faster. In fact, there are a lot of times when people have said that, and it's turned out that the slowest reactive and most holding power strategies have done the best. It just becomes a market story when people are seeing a limited amount of performance, they have to create, you know,

their version of a story as to why. And oftentimes it's a narrow view because they might be seeing that this through one or two types of managers that they've used. And maybe then what their understanding has been crafted by the manager. But, you know, momentum is just holding positions for profit through time. It's the master strategy. Warren Buffett's a trend follower. You know. Yeah. And an option seller. But that's never not going to work. But it will definitely have periods that are up and down. And in fact, at the risk of turning around your audience, Annette was going through some things and found this paper I wrote. The title of it is, has trend following changed?

I've probably written this paper three or four times. This one was from like 1999. And people were worried about had trend following changed like over the prior 20 years. Too big. Well, you know, trend. What were the arguments in there? Yeah, it was kind of the same ones I just summarize. You know, they weren't maybe.

as clean as to what the sources of return were. There was more coming back to the pieces, like have the sources of return changed, have the magnitudes changed. I mean, trend following has two major cyclosities, right? One of them is the actual cycle of returns is pretty long. There are one and two-year periods that are great returns and often followed with one or two-year periods that are not.

And those can lengthen. You could have three or four good years, and then in periods like the CTA winter, right, 2015 to 2018 is the four years of zero return. I've never heard it called the CTA winter. I like that. Oh, well, see, other people have called it that. So I'm just reconvening a term.

Yeah. I think the people who are not, who don't like trend following might be trying to ascribe that there are many more winters than, you know, one time a year. But that cycle is true because the cycle of how it gait picks profitability of multi-asset class long and short is cyclical. But there's another cycle, and that's the cycle of the demand for it. And it probably would be no surprise to you that knowing human behavior is those two cycles are out of phase. Hugely so.

It's only after there's been some performance that there's then a rise in the demand, which is almost precisely where people have averaged in at a time when they probably should be averaging out. Yeah, 08, 09, classic rebalanced allocation, which would do the same thing as averaging them in and out. But do you think that's the, those are two separately happening things? Or do you think the money coming in and the rotation out of those other assets into managed futures are like causing that reversal of some of the trends? No. The markets are way too big.

The participants, you think they're changing trend following. They're thinking too much of themselves as participants. Which brings me to another point. 100 billion dollars coming in over, which has never happened. But $100 billion coming in over a year, say, like in 2000. after the 2008 crash of managed assets. There are individual fixed income accounts larger than that in some big money manager.

And along those lines, do you ever ascribe validity to some of the articles of like, oh, the market's down because trend followers were selling and trend, right, we get a lot of blame for when things are going poorly, which I've said on this podcast

a ton of times I never get thank you notes for when corn's at an all-time low or something like that. Right? All we do is get blame. when things are high. Well, it's not wrong for someone to think that a market goes up because it's been purchased by an increasing number of investors nor down if it's sold.

But then the question is, does it have anything to do whether it's trend followers or short-term traders or hedgers or some mix of all the above? That's a harder thing to, it's for a journalist, you know, it's easy to, you know, write those anodyne, you know, market summaries that used to be in the Wall Street Journal for like 30 years that, you know, there was profit taking today. There was consolidation today. They just had the same four words they would use for flat markets, declining markets, and so forth. They had no idea where the money was coming from because they didn't ever have any window or insight into flows. So I wouldn't blame somebody who wants to try to guess where the flows are, but as someone who

trades flows in one set of our strategies and someone who trades trend elsewhere, they are almost completely, they're almost a completely non-overlapping set of skill sets. They're almost fully diversified from each other. And they have very different characteristics. In trend following, for instance, typically your edge, either your direct edge or some measure of edge for risk, like say information ratio or a sharp ratio, rises as your holding period rises until you get to some sort of, you know, asymptotic plateau. And you might still be making more money for holding longer because we're talking about return per unit of volatility, but you're not getting more return per unit of volatility or per unit of downside risk. When you look at, and in many cases,

by the way, for most trend following models, it would, the cost of entering and exiting, which we could go into further, and I don't mean the brokerage costs, I mean the timing and market imposed cost. It's a little bit like any business that has a fixed operating base and a variable profit. There's a fixed operating base. So in flatter markets, there's not much. left to net out for trend following. And you need to be in typically longer. So it takes usually in the neighborhood, for most sectors and most asset classes, 15, 20, even 50 days of holding period is about break even for a robust trend following over the last many decades. And if you look at shorter term trading that trades on flows, you know, your peak holding periods are typically

in the neighborhood of two to seven or eight days. If you start getting too far out, you have a rapid decline in your edge, the opposite of trend following, just a completely different signature. Because those flows are less meaningful at that point. Because, you know, correct, the flows are... Well, the flow you... The flows of impact... The liquidity of demanding the flow has moved the market to accommodate those flows, and at some point, the market has moved enough to accommodate them.

Now, the market may or may not mean revert. The market could just accommodate them at a new level and go flat. You know, that's been the, that's been the bane of the instability of short-term traders since I've, since the 1980s in the early days. You know, there's, mean reversion is tough to time. I'm sure there's probably been 10 times more mean reverting managers who've been in business than exist today. The failure rate is very high just given the fact that the edge is unstable. it's not wrong. It's just that it's more stable when you take the mean reverting down time scale into HFT or into medium frequency market making.

You have much greater statistical probability of matching those flows for less directional risk. So take us through from back mid-90s, what the program, what the suite of strategies look like today. You've mentioned the shorter-term flow-based stuff, but what was then, what's still in play now? And then we'll dive into some of those. Yeah, so we trade a lot of strategies. So let me start top down. And then I think that'll give the most clarity. Then we can dive in any place you want to dive in.

So while there's many strategy names, short-term trend, they can sound confusing when their purpose really is not. So as a firm, we actually really only have one strategic focus. And, you know, we crystallize that after a few years of being in the market. You know, we research, improve, and trade diversifying alpha strategies in liquid markets. That's what we do. If we've ever gone slightly illiquid or we've gone into things that picked up too much beta, we've essentially retreated and we focus on diversifying alpha strategies in liquid markets.

And by alpha, I mean, I'm using that term in the looser sense that these are fully uncorrelated return to asset betas. usually the big asset betas are potential client bases are comparing us to our equity, credit, sovereign rates, real assets. You know, if you're, you have four levels of non-correlation to those, you're a valuable diversifier, especially if you're uncorrelated over a wide time horizon. And that's another dimension we should talk about because trend can both be correlated and negatively correlated. And that has caused some reactions among investors that, didn't understand that it wasn't always non-correlated.

Yeah, I try and tell people, the non-correlation is the average. Correct. Even if it's at plus one all the time and negative one, then it averages to zero. But you've got to be able to live through the other two parts. And other strategies have a different footprint for that. So there, if you measured things that just have more of a statistical flavor, like their skew or their convexity or, you know, some other matter of conditional, you know, profitability.

When you look at that daily or weekly or monthly, there's a different fingerprint for strategies than if you looked at it monthly, quarterly, or annually, which might be more in the realm of longer-term investor evaluation. But yet, teams that have to manage it sometimes are living in the realm of daily, weekly, and monthly. So it causes its potential friction for making good manager decisions. So all of our strategies fall into that diversifying alpha category. they all have the same four core strategy success traits. Those would be the same ones that we might have discussed in the past where each one should have a definable edge, each one should have a definable process that supports that edge.

Each one can articulate its risk management. Each one has to be able to cover its exceptional risks as best it can, its tails. So that's the common part. So then what do we have? keeps away from like buying orange juice futures on Tuesdays because the back test looks fantastic. Well, if you could, what's your edge? Well, that's what I'm saying. If you can't define the edge.

Good. You know, yeah. Again, if, you know, if you can't go through the gauntlet of understanding your edge and then what your process is and what your risk is, you certainly wouldn't have been funded in the old Commodities Corp days. And you probably wouldn't be funded by anybody who was trying to run a book. of really professional traders. So in our case, we have different classes of strategies. So we've talked about trend. We have multiple trend following. We have strategies that are more macro-based. They're on fundamental indicators, both inside of one asset and cross-asset. We have a strategy group that is dedicated to equity sell-off. That actually gives us a very specific,

positive skew, high-convexity, negative correlation asset to blend in. We have non-directional strategies where the hope is that we have profitability where we have neutralized, the biggest source of principal component risk. We have strategies, for instance, that might be long and short commodities. A nondirectional strategy might be neutral overall commodities. We might have long and short currency strategies, but a nondirectional might be neutral to the dollar. And then lastly, we have a collection of strategies that are short term. And for us, those are holding periods. Now we're naming things by the holding period and not by the type of strategy. Yeah.

But between two and 10 days, average trading, you know, some trades lasting a little longer, some trades lasting a little shorter, but sort of the average in that realm. But they all share in our firm, they all share the same technology platform, same tracking process, same execution stream, same team, same evaluation framework. So a few questions that. We covered trend. macro is the main difference there, trends looking at price, essentially macros looking at non-price inputs?

Yes. And I'm glad you actually use the word trend. Because again, if we use the word trend, not as some physics metaphor of momentum, but just simply holding positions through time. Yes, that's using fundamental inputs. So things that might be classified as an economic trend by some groups would fall into macro. Things that are more macro cross-asset that you might see some banks trade. what's the impact or impulsive rate of changes of things like economic surprise or growth changes

in, you know, how bond spreads change. That would be macro cross-asset for us. And those holding periods, they can be in the two to three week range and they could be two to three month. They generally don't get that long in our shop. It's really a long, long-term trade. It's more likely in our trend bucket. And then those two have a lot of overlap. Like, what does that correlation look like?

Not necessarily pretty good. It's less than 0.4. Really? Yeah. Depends on the actual asset class or the sector, but it can be even as close as in some cases, zero because, for instance, some of our macro cross-asset equity strategies

are about equal, long, and short exposure, whereas something like by definition, a trend strategy is going to, in equity indices, is going to be long more often than it's short because the economic carry and undergirding those returns and equities is long. Yeah.

And then while the macro even, say, like, crude supply is constricted right now, it's like taking in those kind of factors and be long. In our case, we don't happen to use crude supply because we haven't developed an edge to know it. But that could be, for instance, that could have been a model like that. And that's when it looks the similar. Like, okay, trend is obviously in this. Macro's getting into it. Right.

Equity sell off. We do have some cases where, in fact, you know, you point out crude, where, you know, in some of these recent events in the first quarter, like the macro cross asset was long energy is a lot faster and with a better position holding than trend was would have been later. They do oftentimes have a footprint. There's a tendency for them to be left shifted in time. They tend to enter a trade a little earlier and exit a little earlier than many classes of trend following strategies. And this comes back to the long history of us in this space, not defining things well, right? Like, I feel like people are still confused of like they think of George Soros when they hear macro and like big, huge concentrated bets, right? And you're like, no, we're just basically doing this huge multi-market model, but with different inputs than price.

Yeah, and it's interesting you bring him up because, you know, George Soros was, there's another person who you, if you're trading long enough, you bump into him or his children or other things. but I didn't know who he was in the late 80s, but he published a book about that time that people refer to now, and he liked to call markets feeding back on themselves. He gave it the term reflexivity. So most, you know, is sort of a formal construct

of what most people knew to be true already. But that is an important part of all markets. It's important part of trend following of short term. And it has a fairly decent signature. You know, when the output of someone's trading feeds back into the input, But that's an exponential function. You know, most of anyone's audience will have seen charts in their life that look parabolic

or look like they either go down or up at an increasing rate. There's really good evidential stream for when reflexivity is engaged and when you may have an unstable forward return profile as a result because you're consuming, you're bringing forward a lot of liquidity that will at some point potentially be an air gap. You know, Wiley Coyote did run off the cliff at some point. Yeah, exactly. It all looks good. It's all good until it isn't. So the next one, you mentioned equity sell-off. That's, we're owning VIX, you're owning puts. No, it's something totally different. We have explored, so the purpose of that is for our clients to engage more size and faster when there are severe equity sell-offs, especially ones that occur at shorter periods of time and are more violent.

We don't really try to cover in that category long-term equity sell-offs. Bear markets are very well covered by trend and macro strategies. But their fault, many of those strategies can have increased risk at the tops of markets or when markets are very strong. So in our case, it's a shorter term reaction. So think COVID-2020, you know, these strategies can be in some trade on five and 15-minute bar frames, some trade a little bit daily. But they can be in rapidly and they can be in.

out more rapidly. We tend to use a signature of stress where we see spreads that are reflective of people spending increasingly large amounts of money to have to hedge their exposure. So anybody who's spending more money, more rapidly to hedge their exposure is really a market signal for where people's fear and risk lie. So we tend to use a smattering of indicators that give us that impression. And then on top of that, we put some of our models of when to sell. So there's short-term, short equity strategies that if we're doing them right, they probably only engage 5% of the time because they're meant for fast, large equity selloffs. They're not meant for normal everyday price movement. So it could go years without it signaling. It's an easy mistake for us to make,

to engage them more often is one, it dilutes their purpose and two, it actually dilutes their net profitability. Yeah. But like you go years without it signaling? Well, I don't think we've ever actually seen a year worth it out signaling, but it definitely can go many, many, many, months without signaling, as it should. I think we had a few of them fire off. I know we've had a few fire off in the last 12 months, but there's none on, haven't been any on in the last, you know, a couple of months. Even at the start of the war?

You know, start of the war, I don't think quite triggered us in. I'm not sure. I'd have to look at that, but I don't think so. And then we'll finish on the strategy with the short term. I mentioned Oren before I did a whole hour-long lunch of him trying to explain it to me, and I wasn't quite smart enough to figure it out. So, but a lot of cool different stuff that you're, doing inside of there? So that's some of the flow information you talked about?

Yes, exactly. You know, I think in our short term, if I were to just look at the whole short-term space, I would encourage people to think of the construct that there is a primary driver to short-term trading and that is absorbing capital flows in the market. The secondary impacts of those are oftentimes things that I have seen short-term managers, you know, their companies on like how does it affect the option price how does it I've discovered some pattern I have looked at opening range breakouts I have and we could just keep going on I've looked at you know some other form of what's a secondary impact of what the capital flow does and I think that there are there are

there are regular and routine fundamental capital flows in the marketplace think new dollars that are invested with every payroll cycle into like your 401k contribution, whatever. There are episodic or event-driven capital flows where some piece of news or some large need pushes a market hard enough that a lot of size comes through in a marketplace but is absorbed in the next, you know, a few days at the most. And then maybe as a wrapper to where there might be reverse capital flows

or some continuity might be behavioral sources. So there's been, I think there's a decent success basis for looking at extremist moves, two, three, four sigma moves in both ways, both as non-sustainable ways of reverting them or as an increased signal

for deciding that this is an abnormal forward capital flow where the market's not keeping up with liquidity supply and can I take advantage? Can I scalp it in the same direction? But I would, in our case, we've liked to focus our short-term strategies on capital flow movements. And for us, because they're a primary driver, they've been incredibly reliable for the last decade.

It also is reliable for us because they are extremely non-correlated to macro and to trend and to the non-directional strategies that we trade. So they're a good portfolio role player as well. And so the normal or the naive playbook, maybe, it would be a better way to say it would be, hey, I've got all these great trend and macro models. Let me just put them on five, 10, 15 minute bars, right? And now I can use these great models on this shorter time frame, and I have a new program, a short-term program. Why does that not work or doesn't work? Yeah. And what I think the evidence chain shows is that they'll fail. And they'll fail on cost.

So in looking at daily data, I mentioned that trend following has sort of a similar net profitability model as a fixed and variable operating cost business. And you see that, because if you're really trend following, you're buying strength and selling weakness. So at some point, you know, you never could buy the absolute low or sell the absolute high. That would be a mean reverting trader. You're buying the market when it's already beginning to rise again and fall again. So what is the minimum amount of market movement, even if you were theoretically perfect, of when you'd buy and sell highs and lows? And you could do some work on that, and we've published on that in the past, but you could even create an idealized retrospective trend following system,

one that absolutely knew in retrospect when to buy and sell. But if a market's moving up and down two or three or four, the equivalent of two or three or four daily trading ranges, the kind of market that might meet the human eye saying that's kind of a flat market that's wandering, that is a nonstop series of losses for a classically designed trend following model that uses some form of a smoothing approach to holding a position, say a moving average or a regression. It's actually not such a toxic market for a model that might use something that abstracts time away from the market and just uses geometry or uses distance. But it still would be an unprofitable period because the profitable periods come from markets that move 5, 10, 15, 30 equivalence of ranges

that, that somebody looks at a graph of invidia and goes, that's a trend. We didn't need to actually be a mathematician, right? Coco, that's a big trend. You know, they, people get it. Is it another way of saying that that's too noisy, basically, on the short term? Like, the ranges aren't big enough because they're. Yeah. I think from the perspective of people with kind of an engineering mindset,

that would be their way of thinking about that is noise. To somebody who maybe is like a pure investor mindset, you know, in the longer term scheme of things, you know, if we could channel a quote from a Warren Buffett, they might say, well, you know, over 20 years, this is still a good investment, but you're right, you know, Coca-Cola didn't go up for two years and was it noise or was it just part of the long-term market trend? What's the perspective? For most trend following, I think for our types of clients, they are looking for the diversification that trend can provide to an institutional portfolio.

So they are looking at the kinds of models who can contribute in the positive, you know, skews and good convexity in like a quarterly semi-annual sort of time frame. They're not looking for ones that you say that. Those things are true, but it takes 10 years for it to develop. That's too long. They'll be fired by that time they're really. Well, if they're hired, yeah, they might be. Or they just might have too difficult time explaining,

especially when it's allocated to. You'll be fired. Not that. Well, especially if it's allocated to with real dollars, because if all allocators were rational and they're not all, depends on, I mean, they're all rational, but they're model for how they decide. decide to allocate capital is different. You have to listen to that. But if, you know, if you were just

using a theoretical example, if you're allocating capital from a core part of the book to some other part of the book, the cost of your capital would be keeping it in the rest of your book, the easiest theoretical way of saying it. Or you might say, you know, that my cost of capital is treasury bills, because I, for all of my book, and at least I could be in treasury bills, there should always be a cost of capital that one should overcome. And that, you know, that gets into users that have the governance flexibility of whether they can use portable alpha, whether they can use cash efficiency, whether they can use non-borrowing leverage, you know, position exposure, but not actually having to borrow money versus, you know, typical leverage where you're having to actually borrow,

and now you're introducing a secondary risk of your creditor. How do you view all these pieces, like in your flagship? All of these strategies are firing in the flagship? We allocate to all of them, yes, and we have fairly steady allocations to them over time. they will the area we're allocating potential exposure right and so at any given time

if we have a portfolio that is realizing in our case for one of the portfolios is realizing about a 13 volatility it might be that there's 5% volatility is allocated to one group and another 5% to another group and those may sum up to a number

like 25 or 30% but because they have either non-correlation or even negative the net core, the net volatility is like a 13 vol. So we're always reserving space for them. So when the systems themselves find their edge, they can engage. We don't have to have a, we don't have to have a person involved that says the system has found their edge. We want to budget for it ahead of time. Or we wouldn't have followed one of my own rules that says, how do you handle risk management and how do you handle tails, right? So. But how do you view that in a, right? Could you could go maybe, like how many

this could you add? Say you had 50 of them and they have a 50 vol. but they're all non-correlated and have a 13 ball. Like, what's there? As a math, have you done work on that where your limit, as you could just keep going. Right. In practice, there aren't finding 50 non-correlated return streams,

truly non-correlated and non-correlated in stress periods. You know, I would just offer good luck with that. Yeah. So that's the trick. That's not going to happen. If you were to look at, there's still a great deal of diversification, however, you know, say some of the largest pod shops might have two or three

allocation sleeves, even though they might, in terms of principal components of risk, might be grouping those down into, you know, 20 or 15 or 20 categories in their own version of cluster analysis exposures. And then those might condense even further on a correlation, on a conditional correlation basis. But there's other reasons to have, you might have two or three or four or five strategies plying the same water because they have different strengths and weaknesses. Inside of our firm, for instance, some of the most consistent fingerprint of any strategy would be trend. So if you take a trend method A and trend method B, and you know they're truly a different trend method because you're managing both of them. It's not behind the wall of another

manager you don't know. Right. You know they're different. And you know you've applied them to the same markets and you've applied them in the same percentages. So you don't, you're not measuring market differences. Oftentimes you still see about a 0.8.7 correlation between models because much of the correlation is driven by the trend portion and the noisier parts. Let's say one model is quite successful at never being involved in the noisy part and another model is quite successful or loses during the noisy part. That's a more minimal contribution to P&L than when they both capture the other than better oftentimes because of the day the diversification of their entries and exits, the sum is still better than the parts. But you're also saying they both are

likely to capture the same outlier move, the cocoa. You know, in our case, we try to have strategies where we would convert that likely to they will because, but that's definitional to our firm. We want trend to capture markets that excessively rise or fall. If we want to have models that may or may not capture them because of certain fundamental relationships or because they are in some way, shape or form, you know, not as good or relative values and other. We have other strategies for that. Right, right. Yeah.

We want trend to live its purpose. Which is not that hard, not to offend. Sorry, but like, that's just you're going to get in almost every trade to make sure you get the one that's the outlier, right? Right. And then the, you know, the experiences is how do you have, how do you have enough of a holding power? Because in trend, you're paid to hold through volatility. That's what most people, Mr. Market wants you to lose your trade using a Benjamin Graham term. And that's why most people can't do it.

You're paid very handsomely, actually, to hold your trade through noise and volatility. And that way you can get paid in markets other people won't participate in. But it's good to have different designs. So we, for instance, do have a trend following model that is designed like many others that uses some form of information smoothing, like moving averages. And then what you do with them in terms of risk managing and things, there are certain standards in the higher aspects of the industry. and we have one like that.

We also have one that is completely, is substantially different because it statistically bifurcates trends so that the sentiment-driven parts of trends or the information-flow-driven parts of trends, not just the carry or the economic trend, which is very nicely picked up by the long-term smoothing

and is oftentimes whipsawed, late, or flat-footed by the sentiment and information-driven. This model does well in those. So it actually has a big edge, for instance, in commodities compared to some, more financially driven markets like, say, currency. Yeah.

And then we have a third classification of model that doesn't use either. It actually uses, it tries to not have the same time-leg characteristics of most trend-following models by just taking time out of the equation. We would trend-follow a model that moved in a simplistic sense, we might say if a market has moved this much, whether it was over one day, one month, or one year, that's the move we're going to it in, the time doesn't matter, which of course obviously matters for something like a moving average or regression because those are recalculated using time embedded in the calculation. Together they work really well.

It gives a rock-stable representation of trend following as an asset class. Three strategies on four sectors, long and short, with information, it does a good job. Do you think that applies to the investor level too, right? of like trend, you make money in trend by surviving that volatility. Do you think the, right? Yes. But everyone from- That's true more widely.

Yeah. Not just of trend following. That's true of all investing. Yeah, I think TD Ameritrade had a report of like their most successful investors had, they'd lost their address or something, right? So they hadn't gotten the statements and they just held whatever they held. You know, Vanguard tried, I think Vanguard did a great public service, but I know others have done it. I'll just quote the Vanguarded, but it can be easily resourable.

where they'll look, they'll abstract names and accounts from their client base, and they'll look at their current book, current returns with their current holdings, and then they'll look backwards in time as to what they did hold. And of course, everyone's book holds a set of positions that did would have done, that did better historically in retrospect looking than their actual record because they moved into them because of performance. That is also true at the institutional level. So I know some institutions, for instance, that have actually analyzed their fires over long periods of time over decades. And one that I know the CIA well revealed to me that they feel they left on the table about 400 basis points per year by leaving managers at their lows.

Was this cowlars? Because they out there's fires after they left, which by the way is really similar to the Vanguard data by self-managed accounts, not by ones that are put into target date funds and so forth. So those are mostly self-managed. Yeah. The biggest source of negative alpha has always been the investor and it probably always will be. Yeah. And giving themselves the framework to survive, there is big difference, by the way, between an investor and a trader and an allocator. Those are, they have three, you know, a classic basis, those are three different

participants in the market. If one wants to be a better investor or a better trader, having some way to stabilize your emotional participation will be one. of the first things you'd love to research. Do you still think of yourself as a trader? Yes. I think of all the things we do is trading. I mean, it's nice to think that when people buy our whole product,

they're actually buying an investment. They're buying a portion of things, a tool that they can use in their portfolio for very specific characteristics, but we're really focusing on diversified alpha strategies. So we're trying, we have no correlation to asset betas. We're long and short, we're in multiple asset classes. And whether that's for many, many months or quarters, and whether that's for just several days. To me, that is all still trading. I would always define, I like the biggest difference between an investor in my mind and a trader. The trader, I think, is looking at a recurrent edge,

and let's just set aside what that might be. An investor, in the classic sense, is looking for value. There is some sense of value in what they're entering. And if they're really disciplined, which is impossible, so it's a thought, it's a thought experiment, every single day. Holding that position, they're asking themselves, do they still have an undervalued position? Or I shouldn't be holding it, right? If it's overvalued, I'm no longer an investor. I'm a hoper, and I should have gotten rid of that position a long time ago. But one can't convert that into things like priced earning ratios and everything else. There are many investments that grow, where revenue lines maybe are growing 100, 200 percent a year, and there's no earnings, and they're

probably undervalued if one thinks about it in any estimation of their 10 or 15-year discounted cash flow or their, you know, the value, the brand of their building. These are, you are complex and totally imperfect analytical questions. But to me, and that's an investor mindset, a trader mindset, I think, is, you know, the easiest ones are, you know, hey, a new instrument opened up and no one's trading it and the spreads are wide. So I'll just keep, I'll take a little trades out of it until it becomes an inefficient market. It's not something I ever did. Let me get in. A floor trader, but that's just a classic, right? I mean, that's just a real trader. But I feel like a lot of hedge fund managers these days would bristle at being called a trader. Like, it's too

simplistic, right? It's like a negative connotation to it. It's okay. They can be termed however they would like. Exactly. And anyone who listens to this is going to realize you're not simplistic. We could just convert the vocabulary that, you know, right before there's a large capital flow into a market, it's better value than after the capital is flowing and the prices go up. But it's a stretch of the English language to call that value. Yeah, no. I got it. Right. I'm like thinking of Bill Ackman. If you called him a trader, he'd probably take great offense. I haven't followed the trades. Though we had an office in the same buildings. In fact, Soros was on one side and Ackman was two floors above and I'm thinking, this is great. Where was this? I sort of spoke with the

guy a little bit. He's certainly very colorful and he's all over social media. But I don't, he certainly holds investments for far longer than than what a trader might hold. You know, I, I, I, I suspect he, if he's calling himself an investor, I would probably agree. We have a blog post. We'll put it in the show notes. I think it was called like billionaire investor, millionaire mistake. And it was like when he held that one health care company to basically down to zero over many years, we're like basically just a simple 200-day moving average crossover, like get out, trade's done.

Would have saved him a couple billion dollars, but he's done right. That's hard in value investing. That is a hard one. Yeah, for sure. That's a brainer. That's not a no-brainer to think of that. So it is, that is true. So what's next for you? Like two questions. One, how do you, have you always been this deep into every aspect of the business? Like, you take pride in that. You want to know every model, every, what the profile is? Or do you ever be like just be the general or the head coach and you've got your coordinators taking care of each of the models? Like, you seem to know it very well. I hope that I'm a little bit of both. I we have a very talented staff they fully are capable of when I was saying things earlier like we have a you know unified way of approaching how we think about trading to be resilient over time we have a unified platform of tech stack to work on we have you know a unified way of trading we have QA we measure our executions measure our tracking that's unified that's all done by staff so if you looked at our chief trader and quant analysis some of our you know senior

PMs, but they all work together as a team on that. Now, that said, I do personally need to and want to understand every strategy that we do trade and present to clients. It's your name on the door. By no means does that strategy have to start with me, and many of them have not. Sometimes they've started somewhere else, maybe because I've traded a long time, I offer one, you know, slight improvement here or there or one, you know, valuable piece of advice here and there as it gets guided along, but it is my responsibility. There's, you know, I mean, there's a difference between being a prop trader or just a personal trader and being an asset manager.

And when people ask me what that is, I said it has nothing to do with trading. You know, there's really a moral responsibility. The day you're an asset manager is the day that you've decided that your investor's goals are the goals that you're serving. Full stop. If they, you know, and they are different. I mean, when I first started learning of some of these things, I probably two or often could be dismissive and think, well, why would they do that? Or that's not very smart.

Or why would they shut that program down? Like we could talk about the state of Virginia, which helped make my business in 1993 or so. You know, we had, we had, they hired three RIAs to do a portable alpha program. And all three of them, all three of them called us up and gave us an account. So we had three. I even called the state of Virginia and said, I don't even, I just feel a moral obligation that I know you did this for a diversification, but all three have hired us. Do you want us to withdraw? They said, no, we hired three. If they picked you, that's the way it goes. I'm like, really, thank you. I wanted that answer, but I did feel I wanted to report that. Now, if you're an asset manager, their goals are the goals you work on. So if they need a stable

vol, stable vol is what you need to, you know, supply. If they wish to have, you know, a diversified set of strategies, they're the only ones who can know what their real needs are. You know, you You can't ever presume you know them better. And we just, but do you feel like sometimes they're kind of have a loaded gun? We talked earlier, the investors have the worst alpha. So they do, but you need to serve their purpose. We also have been blessed that we've had, obviously, investors that have come and gone. And we had an investor, I think it spent two years to get the account.

It was gone in about three weeks. And we made the money. But because they lost money else where in the market, they closed all their accounts. But that's the exception. Many of our clients, we've had for 20 years, 10 years, or have gone through both run-ups or drawdowns. We've had clients, you know, pull money from us when, you know, $100 million of P&L and they take it off the table and put it in their pocket.

And as I tell the staff, I'm like, that's just that is a victory. That's why we're here. Exactly. That's why we're here. We'd like them to give it back if we are, you know, in a value. buying position, you know, when you have a diversified book, really diverse to happen, obviously a drawdown is a value entry period. A run-up is perhaps lower value. That's a hard thing to pick as well. What's next? What research is on the table? What's next

for you personally? Let's say research first. You know, I think, or just personally, probably the business, I think the business is just stays on the same focus. I don't think, you know, everyone is united by that vision. Our clients expect us to. We really, focus on diversifying alpha strategies, especially ones in liquid markets and ones where we have a unified team. We've tried partitioning teams. We've tried having a stat arb team for a few years. We tried, you know, having, you know, some individuals work in their own computing environments, for instance, and then bring things and translate them over. We could understand the attraction to try those items, not really interested anymore. I think each one of those is a potential

detriment to the central quality of all of them. So that's where we stay. We do have a tremendous maturity in our trading strategy range. So when our clients are interested in something that's systematic macro or trend following or short term or even some combination with equities in a kind of a return stack product that we're managing, each one is a solution for somebody. So we want to make sure we're totally consistent with it. You know, that said, we always have one or two or more research projects going on. I would say that in the realm of our capital flow-driven strategies. I would say that I think we have some incredibly rock-stable areas, for instance, like I mentioned,

that might be benefiting or even strengthening as we have seen a steady conversion from active management to passive management, money in equities and money and bonds and how it comes into the market and when has evolved over the 10 or 15 years as that fraction has risen. I think we have another rock stable, one that we've traded for years where we understand how the impulse of some more rapid need for liquidity, how long it takes for that to dampen out. I do think that we have potentially some ability to explore some second. indicators of flow edges in different sectors. And I'll be able to tell you more if that research bears fruit.

Yeah, but I don't know how many there will be. There won't be an infinite number of these because, you know, flows have to be fairly significant if you want to have a decent enough net P&L after you trade it to help your clients. And it's the trick and all that to identify the flows, right? It's not clear where they're coming from. You have to do some sort of inference of correct. There's almost always an inference, and some have higher degrees of confirmation.

Some are more directly measurable, and others you have to infer, which is why I think it's a limited set, but it's a powerful one. It's trading the primary edge instead of trying to trade some sort of back-tested echo of what it might be in that you may or may not be on the primary edge. I think another part of our shorter term and even our broader macro strategies, are we always look for new sources of information? that might help our models, but they may not. We might already be capturing that information.

We don't know till we look. So market-derived spreads, asymmetries and option skews, asymmetries. But not like satellite measurements of oil tank or... No, yeah. I think that the only problem I have had for years with alternative data is that it's a game of ever-shortening half-life. So, for instance, our Stad Arb team had done well for a decade, getting ever quicker estimations of earning estimates and then building Stad Arb models. The first couple of years they traded for us, they did fine, and then they basically gave that back because it was in an era when you could pre-estimate what everybody thought earnings would be by beginning just to do natural language processing for everything that gets published on the web.

Instead of having a gate by having an exclusive contract to see IBIS data six hours before the other guy, right? And all data is like that. The more we have high-speed networks, the more we have high-speed data, the more we have high-speed everything, including things like AI. I think of almost all of the alt data in the universe that could be extremely valuable. I think everyone who uses it just has to be aware that it may be on an extremely short half-life before somebody else detecting this. It'll become widely available and extremely...

Or not be, yeah. Well, of course, this is the most wonderful oxymoron of somebody who... I go in and a client of mine says, hey, one of your, we're talking to a manager that, you know, just got, you know, just hired and I won't name a company. But they're supplying them with this really useful information. And I said, and I said, oh, yeah, I know that, that firm has multiple salespeople selling all that information. So if you've had multiple people selling the information, how long is it going to have an edge, right? It's self-fulfilling proposition. By definition.

But no, I love things that actually can be measured as impulses in the market. it has the same thing as a betting strategy. You don't have an impulse and so somebody's put money on it. So if you see a, I mean, for instance, if you see things like skews and see all on options data, or you build your own version of those kinds of skews where, you know, those go widen and not. It took money to move those. So in a sort of a hyacchian sense that price is not just supply and demand,

price is a information transmission mechanism, are those pieces of information useful to model. We always like to look, and most of the time we don't see an extra edge, but sometimes we do. It's part of our job to look. I have a pet theory that nothing matters until the end of the month and or quarter. Is there some, you guys done any research into that, right? Like, that's the same thing of like, sure, we have these up and downs, but if the real money hasn't pushed it that way by the end of the month. Yeah, there's also a good theory that, you know, was definitely true. I remember when the European derivatives markets were beginning to open up in liquid futures and things. And there was just an extremely consistent pattern that I know some traders traded from, you know,

just before London closed into Chicago hours because it was the tail wanging the dog and they were evening up, you know, they were dating moves in Europe coming back. Yeah. And but, you know, that's those kinds of things last for a few years and then they, they go away. All right. That's it for the pod. Thanks so much to Pat. and everyone at Welton, thanks to RCM for sponsoring. Thanks to Jeff Berger for producing. We'll be back next week talking copper. All the hubbub about base metals and everything, gold, silver, copper kind of gets lost, like your old pennies.

So we're going to talk copper what it means to the market. That's it. Peace. See you next week. Listening to the derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at RCMaltz and visit our website to read our blog or subscribe to our newsletter at RCM. If you liked our show, introduce a friend and show them how to subscribe.

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