SI360: The Fed, the Fiction, and the Fight for Control ft. Alan Dunne

When official data starts serving politics, markets lose their anchor. Alan Dunne and Niels examine the quiet shift unfolding as the U.S. edges closer to emerging market behavior - firing statisticians, sidelining inconvenient numbers, and pressuring the Fed ahead of a consequential leadership reshuffle. With labor supply falling, growth stalling, and tariffs acting as stealth taxes, the Fed’s playbook no longer fits the moment. Behind the scenes, hedge fund power brokers position themselves to shape what comes next. Plus, an unvarnished look at trend following’s drawdown, the lazy critiques making the rounds, and why so many allocators still miss the point.

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Episode TimeStamps:

01:32 - What has caught our attention recently?

08:53 - Dunne's global macro overview

13:31 - Is our understanding of growth and GDP outdated?

17:52 - The Fed is under threat from multiple angles

21:38 - Dunne's impression of Kevin Warsh as a candidate for Fed chairman

26:43 - An odd juxtaposition with hedge fund titans' influences on the Fed

32:35 - Industry performance update

37:30 - Our takeaways from The Wall Street Journal's article on Trend Following

43:35 - Why should investors even consider managed futures in the first place?

45:40 - Has Dunne ever been on the verge of cutting trend?

52:08 - Do long term investors really need diversifiers?

Copyright © 2024 – CMC AG – All...

Episode Transcript

(00:01):
You're about to join NielsKostrup Larson on a raw and honest
journey into the world ofsystematic investing and learn about
the most dependable andconsistent yet often overlooked investment
strategy.
Welcome to the SystematicInvestor Series.

(00:23):
Welcome or welcome back tothis week's edition of the Systematic
Investor series with Alan Dunnand I, Nils Castro Blasn, where each
week we take the pulse of theglobal markets through the lens of
a rules based investor.
Alan, wonderful to be backwith you this week.
How are things in Dublin?
Oh, good here, thanks.
Yeah.
Enjoying the summer, bit ofsunshine today.
So yeah, all good.

(00:43):
Has your summer, just out ofcuriosity, been as wet as it has
on mainland Europe?
Because it really has been wet.
Not unusually, no.
I mean, July has been a bitdreary, but no, not, not terribly
wet, but it hasn't been a bad summer.
Okay, pretty good.
We've got some really goodtopics as usual, dare I say.

(01:07):
And of course they are goingto be related to some of the latest
papers but also some articlesthat's been featured include including
one of your own, by the way,regarding, you know, the, the environment
for, for CTAs and trendpredominantly today.
I'm sure we'll, we'll weave insome other stuff because we're also
going to do some macro stuffinitially but before we get into

(01:31):
that, and I will say Istruggled a little bit this week.
So I hope you got somethinggood and that is what's been on your
radar for the last, you know,recent time.
Anything exciting that you'vefocused on?
Well, the one thing I pickedout was not it's not a left, left
field.
A lot of people have beentalking about it but it is quite
dramatic in some sense.

(01:52):
Obviously Trump fired the headof the BLS last week in the aftermath
of the weak payroll numbers,which it's funny having done that,
I heard a bunch of people onCNBC defending it, saying, well,
actually maybe it wasn't thewrong thing to do.
But it does raise all mannerof questions like how far is the
administration going to go interms of if they don't get the right

(02:15):
answers on the economic data front.
But it has obvious marketimplications too if the administration
really started to tamper witheconomic data.
Take for example TIPSinflation protected securities.
They are priced on the basisof the actual CPI print.
So I had a look.

(02:35):
I didn't see any meaningfulreaction in the tips market.
I saw it being referenced onBloomberg that some participants
there were concerned.
But you could have investorsdemanding a higher risk premium in
the tips market because theyFear that the CPI might be manipulated
lower than the actual.
If we start to see higher inflation.
That Trump felt wasn't correct.

(02:56):
I saw him on the tv, I thinkit was yesterday, saying, oil prices
all.
Not oil prices.
Oil prices in the economy aredown, except stock prices, which
are up, which obviously not correct.
But for somebody who has thatbelief, then, you know, maybe they
could start to tamper with data.
And obviously lots of thingsare linked to cpi, contracts are

(03:16):
indexed to inflation, et cetera.
But I think, I mean, thebroader narrative here is that it's
just another example of the USkind of becoming more, at least in
terms of how it appearsexternally, more like an emerging
market.
It is the kind of thing thatyou hear more and more in emerging
markets.
Obviously, for years, China,nobody trusted the growth numbers

(03:38):
in China.
They felt they were manipulated.
Now we've got a developedmarket where they're firing the set
decisions because they're notcoming up with the right answers.
And bear in mind, Trumpobviously challenged the election
results because he didn't likethose as well.
So where does it end?
I think it is quiteinteresting and potentially worrying.

(03:58):
Yeah, I completely agree.
I think it is disturbing whenyou, when you, when you look at it
with that lens, for sure, very disturbing.
Here's my question to you,since you probably know much more
about this than I do.
I think recently, not entirelysure who I spoke to on the, on the
show about this, but there wasa. I think I read it in an update

(04:22):
from the Odd Lot Skies, andthey talked about the percentage
of the statistics that werenow being guessed.
They use guesstimates ratherthan actual data.
And it had gone up quitesignificantly recently.
And so, and, and I don't knowwhether this is part of the Doge

(04:43):
thing that we're, you know,we're getting rid of people, so there's
not enough resources to dothis in, in a proper way.
I have no idea.
But when these numbers comeout, and I think the revisions were
large.
Is.
It not possible to actuallyprecisely say why and where these

(05:05):
revisions came from?
I mean, so kind of todemystify whether it's a political
number or not a political number.
Is that not possible, thatprecise question?
I don't know.
I think it probably is.
I know there are more revisions.
There's a whole bunch ofrevisions that come kind of annually,
I think, in early September,the kind of the annual benchmarking.

(05:25):
So there will be morerevisions coming, I suppose.
Important to bear in mind thatthese are all statistical measures.
It's not that they've countedup to 200,000 jobs or whatever.
It's that they've done asurvey and they come up with an estimate
based on the survey.
So it's not an actual number.
It's a statistical measure.

(05:47):
You're right in what you sayabout the lower response rate.
And I mean, that's in two ways.
For example, in the cpi, thepercentage that's imputed now as
opposed to actual market ratesthat's been going up.
But the bigger question ispoor response rates, and people are
less inclined to respond tothese surveys.

(06:07):
Whether that's, you know, Imean, it started in Covid.
I mean, maybe they're usingoutdated ways of contacting people.
I think I saw Jeremy Siegeltalking about this, and they were
sending out faxes.
I mean, I don't know if that'sa thing still.
But anyway, they're sendingout faxes and.
They'Re surprised they're notgetting a response.
Exactly.
Yeah.
I mean, that does sound odd.

(06:28):
But I mean, you know, shouldpeople be, you know, should it be
mandatory to respond if youget this?
You know, should you be finedif you don't?
I mean, I think there is ageneral growing skepticism of government.
So if somebody calls you upand wants to ask you about your wages
or your.
Some people generally don'twant to answer.
People don't want to answerthe phone at all.
There's so many bots.

(06:48):
So I think there's a wholerange of things there that have made
the job of assembling thesestatistics and data more difficult.
But, you know, I suppose onthe other side, maybe in defense
of Trump, you might say, well, maybe.
Maybe a new approach isneeded, and maybe that's the point,
to get more reliable stats.
Yeah.

(07:08):
Yeah.
No, you're absolutely right.
I hadn't thought about this,but I know that from personal experience.
I mean, every time you get oneof these calls from a number you've
never seen before, and thefirst thing they start is asking
personal questions, you kindof just hang up and delete and block
the number.
So.
Yeah, no, that's.
That's actually a very good,Very good point.
Anyways.

(07:29):
Okay, very interesting.
Now, as I said, I kind ofstruggle a little bit, maybe because,
you know, I've been movingaround so not focusing too much on
what's going on in, in the, inthe news flow, but also because I
think in.
In many respects, so manythings is happening in, in the news
flow, but I obviously couldnot help noticing that Trump, on

(07:49):
the birthday of my homecountry of Switzerland, actually
put on a very large tariffrate for that country maybe I think
one of the biggest ones we'veseen so far of 39%, which will be
interesting how they untanglethemselves from that.

(08:12):
And I know from the Swiss newsthat people have really been very
critical of the current primeminister or head of the government
for, for that negotiation.
So, yeah, that's something Ithink is, is very interesting.
Although, and I don't know ifthis is true or not, I just seem

(08:32):
to remember it like this thata lot of the trade deficit that the
US May have with Switzerlandis actually due to gold being, you
know, coming from Switzerlandinto the US So I wouldn't really
call that necessarily a realtrade deficit.
But anyways, it is what it is.
So.
So we'll see.
We'll see.

(08:53):
Okay, well, we're going tostay with kind of the, the macro
theme for a while and, andwe're going to get into a, maybe
spend a little bit more timethan we normally do on this section
because this is where you havesome thoughts on the global macro
situation.
And I'll try to, to chip inwith a few things that I've noticed

(09:14):
and so I'll hand it over toyou, Alan, and talk about what you're
seeing.
Sure, yeah.
Well, I just want to talkabout two things in this section.
Firstly, just kind ofappraising where the US Economy and
policy is kind of six monthinto Trump and then linked to that
is the Fed.
But I think a bigger questionthen is what the Fed is going to
look like over the coming years.

(09:35):
And we'll get to that in a minute.
But it is interesting.
You know, we've obviously gotthe weaker data lately in obviously
payrolls was disappointing.
We had negative revisions.
And I think it's interestingto look at how the economy is performing
versus maybe what expectationswere at the back end of last year
when Trump came in.
Bear in mind, the idea wasTrump's going to run the economy

(09:56):
hot.
We're going to have strongergrowth, deregulation, possibly fiscal
stimulus.
It's going to be a positivebackdrop for the markets, possibly
inflationary.
And actually, I think whatwe've had is actually a much slower
economy in the first sixmonths of the year than probably
what most people anticipated.
And the reason for that isobviously tariffs are a tax increase.

(10:19):
So I mean, we're seeing thatin the data.
Obviously consumer spending isrunning at just about an annualized
rate of 1% or even less.
So, you know, you'd normallyexpect that to be around 2% or so.
The savings rate has increasedsince last year, about 4.5%.
Now back in the late 2010s wasmore like 5 and a half, 6%.

(10:40):
So it still could go a littlebit higher.
But I think if you think aboutit, what we've seen with Trump's
policy is we've seen areduction on the supply side because
of immigrants.
So people are being deportedor else immigrants are not coming
out and working becausethey're afraid of getting deported.
So you're seeing a smallerlabor force, actually lower labor

(11:02):
force participation, and atthe same time weakening job growth.
So it kind of creates a littlebit of a policy challenge for, for
the Fed because the economy isclearly weakening, demand is slowing,
but supply is slowing at thesame time.
So from, you know, in terms ofthe Fed's mandate, it's maximum employment
and it's still more or lessnearly there at 4.2%.
But the problem is that on thedemand side, you're seeing weakening

(11:29):
demand and slowing job growth.
And I guess the general sensenow is that trend growth in the US
might be more like 1%, whereaspreviously it was 2 to 2 and a half
percent.
And bear in mind that I thinkit was 2023.
Yeah, 2022, there was a lot ofpessimism on growth.
And 2023, the economyrebounded very strongly.

(11:50):
And that was largely driven bya surge of immigration into the U.S.
i think from the perspectiveof what's different to what we expected,
maybe at the start of theyear, the tariffs have had a more
negative impact, I think, ongrowth that was partially uncertainty,
it's partially on demand.
But at the same time, theimmigration policies have had a meaningful

(12:10):
impact on supply.
And then on the other levers,there was hopes of kind of fiscal
stimulus and the big beautifulbill, et cetera.
We're not really seeing that.
There might be a little bit ofthat next year.
And then obviouslyderegulation was the other side of
it.
I'm not really seeing anythingmeaningful on that side yet.
So kind of the six monthscorecard on Trump is actually been

(12:31):
more negative for the economy.
But actually this impact onthe supply side, if the economy was
to rebound in 2026, that wouldmean that the threshold for raising
rates would probably be lowerin the sense that because you've
got a smaller labor force, ifthe economy did rebound, you would
expect to see stronger wagegrowth down the line.

(12:52):
So I think it's interestingthe consensus now is that the Fed's
going to ease in September.
Hard to argue with that.
We've got two more CPI numbersbefore then but certainly the Fed
is already under a lot of pressure.
It had been saying that thelabor market is solid.
The most recent data doesn'tseem to support that, that it would

(13:12):
be hard to kind of go againsta rate cut.
At least 25 basis point inSeptember could be more.
If the CPI was kind of in lineor not rising, that would have the
case for a bigger cut.
But yeah, I think the Fed iskind of painted into a difficult
spot here.

(13:32):
So I'm imagining that when yousay growth is slowing, maybe not
just in the us, maybeelsewhere, I don't know.
And I imagine, correct me ifI'm wrong here, that we look at GDP
as the measure of growth tosome extent, maybe to a large extent.
My question to you is when youthink about this, and I guess it

(13:56):
ties into a little bit aboutkind of the whole Fed discussion,
but when we think about growthin gdp, I mean that's a number that
was kind of designed a longtime ago and the world or the economy
today has changed a lot.
You know, we have a lot moreservices, intangibles.

(14:19):
We have a whole economy thatmaybe is very hard to measure.
I mean, for example, does aninfluencer count as someone who's
employed.
Yeah, I'm just asking that question.
Or this morning when I went tothe, you know, to buy some groceries,
I mean, I do the checkout.
I mean there's no one checking out.
That's right.

(14:39):
Yes.
My work is not being countedanywhere but I do the checkout.
Right.
So I'm just thinking sort ofout loud here is that it might not
be so easy anymore to really,even with the best intentions, to
really rely on a lot of thedata we're, we're served up.

(14:59):
And I'm not an expert.
I know we have an expertcoming on the show very soon on Kevin's
series.
But I do think it raises aquestion in terms of, and of course
as systematic rules basedinvestors, of course we don't care
whether the numbers are rightor wrong for that matter.
But I imagine that most assetmanagers who don't do what we do,

(15:23):
and investors in general, it'spretty tricky to figure out how good
is the real economy, so to speak.
It's true.
And we had Paul Donovan at UBSon before he was big on this topic
of, you know, as you say,doing his groceries and swiping him
at Tesco and obviously notgetting paid for that.
And it's true.

(15:44):
And obviously there's lots ofkind of activities in the economy,
TikTok content generators, etcwho are providing podcasters.
Podcasters, yes.
We're not employed.
Unemployed.
Yeah.
All of the value add that'sbeen generated here doesn't get counted
in the GDP numbers.
And it's all true.
And I mean, I guess frompolicy's perspective, if you think

(16:06):
about the Fed's mandate, atthe end of the day it's maximum employment
and price stability.
So they're the things toreally focus on.
Obviously, everything elsegoes into helping them think about
that.
And they acknowledge obviouslythe challenges of changes in the
economy over time and how thatmight be influencing.
And I guess with all the PhDsand economists that they have at
the Fed that they aregrappling with how to address these

(16:28):
issues.
But I mean, certainly we haveseen divergences as well between
the GDP numbers, even betweenGDP and production and income, as
well as between those numbersand employment over time.
So it is something that you dosee periodically.
As I say, I think the Fed haskind of concluded that for their
purposes, although they saythey look at a wide array of labor

(16:50):
market data, the unemploymentrate is probably the most important
number that they watch.
So that somewhat simplifiesthe task for them.
But what you say is true, butthey're kind of structural issues.
I guess they'll say what we'relooking at from a cyclical perspective
is the changes kind of monthto month, quarter to quarter, which
shouldn't be overly impactedby those kind of structural trends.

(17:11):
Yeah, well, of course, of course.
And I'm sure we'll come backto this in future episodes.
We're still probably yet tosee the real impact of AI.
I heard Jim talk aboutrecently kind of the changes you
see in unemployment amongreally young people in certain, I

(17:33):
think college graduates, youngcollege graduates was really increasing
a lot at the moment and so onand so forth.
So anyways, definitely worth watching.
You mentioned Jeremy Siegel.
Did you want to talk a littlebit about some of his stuff?
And I know you also want totalk a little bit about the Fed as

(17:53):
well.
Well, it does.
It's probably a, a naturalsegue into the discussion on the
Fed.
There was I, he, Jeremy Siegel.
He, he's.
Well, he does a number of things.
He's a Wharton, but he's thechief economy economist.
So when it was in three, he,he had an op ed recently just talking
about the need for reform atthe Fed.

(18:17):
And his whole point is around,it's kind of a technical point that
basically after a financialcrisis, the Fed went through to this
kind of ample reserves systemwhereby because they're doing A lot
of qe.
The banks have a lot of reserves.
It's not a reserve constrained system.
The Fed pays interest on thereserves and that's an income to

(18:39):
the bank.
But what it does mean is thatthe Fed funds market, which used
to be the traditional kind ofindicator of how tight or how loose
monetary policy was, the Fedused to do open market operations
to kind of target the fedfunds rate.
That's kind of become a littlebit defunct in the last while.
And he's saying they need tochange this approach because it's

(19:01):
not kind of serving theirpurpose as well, but it's kind of
part of a broader narrative.
I think at the moment that theFed is under threat from a number
of different angles, obviouslyfrom President Trump, which has kind
of been more so than weprobably have experienced in any
kind of Fed president relationship.

(19:21):
But we knew this would happen,or we had a good sense because it
was a case in Trump 1.0.
He's been more vocal this time.
But it's not just Trump.
I mean, there's kind of anunusual coalition of kind of hard
money and easy money peoplecriticizing the Fed.
On the one hand, you have thelikes of Trump saying policy should
be easier, rates should be lower.

(19:42):
The likes of Jeremy Siegelsaid you need reform.
And at the same time, you'vegot Scott Besant, Treasury Secretary,
saying you need root andbranch reform of the Fed.
And then Kevin Warsh, one ofthe leading candidates to be Fed
governor, also talking aboutregime shift.
And I mean, partially thiscomes from the fact that obviously

(20:02):
they missed the 2021 surge ininflation that were too late to respond
to that.
So they're still kind ofliving with the consequences of that.
But also there's a view that.
So that's kind of the hardmoney crew saying that we're too
easy all along with policy.

(20:22):
But equally, some peoplesaying you've had mandates drift
at the Fed as well, becausethey started talking about climate
change, they started talkingabout, well, it's inclusive maximum
employment, so we want to havelow unemployment for minorities as
well as kind of for thebroader economy.
So I think it's interestingthat the Trump is about to make his

(20:43):
decision on the new Fed chairat a time when the Fed is generally
under criticism, not just fromthe administration, from lots of
people.
And then when you look at thecandidates, they're quite interesting.
So I do think it could bequite consequential.
I mean, there is a view out there.
Oh, yeah, it doesn't matterthat much.
I mean, the Fed chair, he'sonly one vote on the fomc.

(21:07):
There's governors, there's theregional presidents, but I don't
agree with that.
I think it is quite consequent.
I mean the Fed Chair is hugelyinfluential in setting the agenda.
You can, you know, at themargin guide the direction of policy.
So, so I think it is veryinteresting and we're getting to
the point now where, wheresome of the, the candidates are,

(21:27):
you know, we're really seeingsome of the credentials of the candidates.
Plus there's actually an extraspace that's become available.
There's someone who resignedonly a few days ago, a lady as far
as I recall.
That's right, yeah.
So there might be two, twoseats there.
Talk to me a little bit about you.
Send link to a CNBC interviewwith Kevin Wash there.

(21:50):
The thing is, it's a littlebit confusing.
There are actually two Kevinswho are up for the Fed Chair nomination.
This one I think is the leastfavorite of the two but not nonetheless
probably important to, tolisten to him.
What were your takeaways from him?
Because I've, I've made acouple of notes myself but I'd love

(22:12):
to hear your.
What were your main takeawaysfrom him?
He's an interesting guybecause he's a former Fed governor.
He was a governor during thefinancial crisis so he had, you know,
he was heavily involved withQE and the bank bailouts.
He had worked at MorganStanley earlier in his career in

(22:33):
M and A and he was quiteinvolved in at the time Morgan Stanley
was changed into a bankholding company.
So he was kind of involved inthose discussions and he was kind
of live quite close toBernanke through the period because
of his Wall street connectionsand also he had served in George
W. Bush's administration sohe's quite connected politically

(22:56):
as well.
So he's very kind ofinfluential in that time.
So he does come with thatbackground as a Fed governor.
Now he's not an academiceconomist and historically the Fed
Chair has tended to besomebody with strong academic credentials
like Volker or Greenspan orBernanke Yellen, all kind of PhDs

(23:16):
in economics and you know,have published, etc.
Powell wasn't like that.
Powell obviously a Swiss bybackground and Warsh isn't a trained
economist either.
So he's more of a, I mean he'sprobably more of a political mover
I think he also works withStanley Druckenmiller so if he has

(23:37):
Stanley Druckenmiller as ear,he's obviously saying something relevant
and Interesting.
When you listen to him, it'squite interesting.
He's very much in the kind ofmore of what you might call the hard
money school.
I mean, he's very critical ofthe use of QE in the last 10 to 15
years.
He was an advocate of itduring the times of crisis, but he's

(23:59):
opposed to it in terms of anongoing policy tool because of the
potential distortions itbrings to the capital markets.
I mean, at the moment, he iskind of.
He seems to be in favor oflower rates.
He seems to be embracing theproductivity, the potential productivity
boom from AI, and he seeslower prices.

(24:21):
So it's kind of, my impressionis he's aligned with Trump at the
moment, at this point in time,because he is in favor of lower rates.
And a lot of what he says, Ithink will resonate with Trump.
He's very much critical of Powell.
So you've had mandate shift atthe Fed, which I've talked about,
which you shouldn't have had acrisis of confidence.
He pointed to the fact thatthe fed cut rates 100 basis points

(24:42):
last year and long and Yieldswent up 100 basis points, and he
highlighted that as a lack of credibility.
But one of the other things,he did a speech earlier this year
called Central Banking at the Crossroads.
And in that, he was actuallyquite critical of the Fed for kind

(25:03):
of facilitating US Fiscal profligacy.
I guess from the QEperspective, if you're doing a lot
of qe, then that allows thegovernment to issue a lot of debt.
So, I mean, I think, as I say,I think it's quite aligned with what
Trump's mandate is at the moment.
But I could see it turningmore problematic down the road, particularly

(25:25):
if the administration islooking to the Fed to finance the
deficits with a lot of bondpurchases, then that wouldn't fit
with his worldview.
And I think the other thing,that's a big unknown, he says the
Fed should have tightenedpolicy in 2021.
There was a lot of moneyprinting from the government.
The money supply was growing.
But that leaves open.

(25:47):
What is his model?
Is he going to bring backmonetary aggregates?
Is he going to look at credit growth?
So he has a very different perspective.
He's been critical of theFed's models.
He said the models that theyhave are back from 1978.
It's kind a Keynesian Phillips curve.
You get inflation.
If you get wage growth, youget inflation.
And that's the only thing youneed to look at.
He's kind of saying, no, youneed to look at Money growth, you

(26:08):
need to look at credit.
But that would be a veryradical departure from what we've
seen in major central banks inthe last while.
So as I said, I think he wouldbe the more interesting candidate
in terms of more uncertain asto how things could go radically
different.
And I think actually from amarkets perspective, he could be
a lot less favorable in thesense that if he's less in, you know,

(26:31):
less inclined to do assetpurchases, less inclined towards
bailouts, more inclined formarkets finding their own level that
that could be.
There is a certain scenariowhere that could be quite more, quite
a bit more challenging for,for equity markets.
So a couple of things I tookaway from that.
Some of it you've, you'vealready mentioned, but a couple of
things he was very good atreferring to Paul Volcker and, and

(26:55):
kind of the things that hedid, but he forgot to.
He left out one importantpoint and that is that actually that
Volcker specifically toldCongress that they had to cut deficit.
And that's a very importantpoint to leave out, I think if you
want to go down that route.
The other thing I noted was hecompletely denies that the pandemic

(27:18):
and the Ukraine war hadanything to do with the inflation
that came.
It was all down to the Fed.
Now I will agree because wetalked about it at the time on the
podcast that yeah, I mean, theFed was out of touch and, and we
could all see that inflationwas going to come if they kept interest
rates at zero and, and all ofthat stuff.
But to say that there was noinfluence from the fact that we had

(27:41):
supply issues and, and all ofthat stuff, I think is that just
kind of shows your.
The color.
Now the final thing, and thisis something that when I hear you
talk about this, and I did payattention to it when he said it because
again, he mentionsDruckenmiller as a name.

(28:02):
We know Scott Bessant has aconnection with Druckenmiller and
so on and so forth.
There seems to, when I hearmore and more about what's going
on, there seems to be verystrong links back to Drachenmiller.
Or you could say maybe it'sback to Besant, I don't know.
But it kind of feels likethere's now going to be this new

(28:22):
small group, elite group ofthese hedge fund titans who may be
extremely influential in termsof Fed and monetary fiscal policy
going forward.
And given the fact thatthey're all billionaires, I'm not
so sure that that's actuallygoing to be in the country's best

(28:45):
interest.
But what's also interestingabout that is that as far as I remember,
and, and so don't take it formore than, than my recollection here
that that both Drachenmiller,I certainly Paul Tudor Jones, whom
I think is part of that kindof group of, of, of people.

(29:08):
I mean they really talk abouthow they expect much higher rates
in the future because of theballooning deficit.
So that feels, that sits alittle bit odd with me in, in the
sense that they, they actuallyexpect things to get much worse,
but they're being put incharge to kind of solve the problem.

(29:30):
But if you have your ownpositions in one way, how, how likely
are you going to go against that?
I don't know.
Yeah, no, you're right.
And I mean, I think the likes,as you say, Druckenmiller and Paul
Tudor Jones, they allappointed to the coming wave of challenge
with entitlement spending, et cetera.
And that has gone away andit's going to get worse.
On the back of the bigbeautiful bill, you're already at

(29:54):
a huge deficit.
So I think that's where, as Isay, that's where it could be a challenge
point if you had the likes ofWarsh in there because he has been
critical of the Fed forfacilitating this fiscal proficiency.
But what's he going to do ifthey stop doing that?
Does that push up?
I mean, in theory that wouldpush up bond yields and kind of naturally

(30:16):
force the administration to dosomething, but the Trump administration
has already had a chance totry and do something on the deficit
and they haven't.
So yeah, you could have a kindof a stress point there at some point
in the future.
So yeah, I mean, I do thinkthey are all in, in the camp of kind
of deregulation as well andmore kind of right wing types of

(30:41):
ideas.
And you know, and Besson'sphilosophy seems to be to try and
grow your way out of the deficit.
Whether that's achievable ornot, who knows?
Probably seems optimistic.
So yeah, I mean your point onexcessive influence from hedge fund
managers.
Yeah, interesting.
Yeah.
But I mean it doesn't really.

(31:02):
Nothing really surprises youwith this administration, does it?
No, no, no, no, no, no.
I mean linking it all back tokind of our world.
Right.
And for sure it seems like theFed and maybe other central banks
as well, seems like they'velost a little bit of their control,
which is not unusual.
I think you go through cyclesof strong central banks and weak

(31:24):
politicians.
We are in the reverse at the moment.
Strong politicians and weakcentral banks.
I don't think that's anything new.
But obviously these cycles are long.
But I mean systematicstrategies, we do try to build models
that ignore the, the noise.
But maybe what we could say,and it kind of leads into our later

(31:45):
discussion about thechallenges we're seeing is that maybe
at the moment, actually it'sthe noise that generates the signal.
It's the signal.
The noise is the signal.
So because we're not reallygeared for, for that kind of environment,
maybe that explains part ofwhy this narrative driven world is
a bit more challenging for us.

(32:06):
Like it was really under Trump 1.0.
Frankly, if you look at theannual returns during that period,
it wasn't the strongest as faras I recall.
But anyways, let's move on.
Let's do a quick update on theoh by the way, interestingly enough,
I know you'll follow it it butfor those who don't follow it later
on this month we're going tohave Jackson Hole coming up, which

(32:29):
will always be quite of fun tohear what central bankers are thinking
and, and all that good stuff.
Anyways, from a trendfollowing point of view, my trend
barometer finished at 34 yesterday.
That's a weak, that's a weaknumber and I think it ties in very
early, very clearly whathappened early this month, namely
on August 1st with, with thejobs numbers and the big kind of

(32:52):
fallout we saw in, in ourindustry from that with a, with a
reasonably big hit.
And it was actually the dayafter Trump had come out with the
copper tariffs which also ledto a big drop in performance because
of these reversals.
So I think the weak number wesee right now reflects that.
But I also want to add thatthis week actually has been much

(33:16):
better, much more constructivefor Trend followers and CTAs.
So we're kind of digging ourway out of that initial slump as
far as I can tell.
But it has been a period sofar where it's been a story of a
few themes.
One is that equities recentlyagain are doing well well for trend

(33:38):
followers, well by themselves.
But we did have of course ahuge correction in, in, in in response
to the Liberation Day.
And that kind of that, thatscrews up the, the overall annual
performance because we had tocut back a lot of exposure during

(33:58):
that period of time.
So the recovery we've seen inequity markets have not been captured
fully in terms of performance.
So that's the struggle.
But it is definitely one offew highlights this year.
And the other highlights thisyear has really been focused on Very
few markets as far as I cantell, such as gold, we know that
that's been pretty steady,pretty good.

(34:21):
A smaller one that most peopleprobably won't trade, but we do,
that's live cattle.
That's definitely been areally nice trend in, in that market.
And then some of the grainsmostly to the downside, but I think
is it soybean meal thatactually is going the opposite direction
or.
I can't remember.
But soybean meal actually hasbeen a pretty good trending market

(34:41):
as well.
So it's been selective to saythe least.
And one of the big sectors,bonds, has been very difficult in
terms of transitions.
I think we're transitioningright now again to become mostly
short in the fixed incomespace, so we'll see where that leads
us.
But it's definitely been a challenge.

(35:02):
And currencies, although we'reseeing probably more volatility in
that area compared with recentyears, it certainly hasn't been a
straight, an easy ride.
So I, I imagine that's alsowhere we're seeing some, some of
the losses so far this year asof the 5th of August.

(35:22):
So a couple of days agoTuesday we saw the following numbers
which were pretty flat actually.
Beta 50 up 5 basis points forAugust down 3.93% for the year.
SoC Gen CTA index down 33basis points, down 7.76 for the year
year.
The trend index up 10 basispoints but still down just shy of
10% for the year.

(35:43):
And the Short Term TradersIndex maybe That's the surprise one
down 72 basis points but downalmost 6% so far this year.
So clearly these narrativequick market moves we've seen has
not even been able to becaptured by, by shorter term models
and, and on a volatilityadjusted basis they're actually struggling

(36:05):
more so I would say than, thanthe longer term trend models.
MSCI world of 40 basis pointsas of last night up 11.7 for the
year.
The US aggregate bond index Sand P from s and P of 80 basis points
up 4 and a half percent forthe year.
And the S&P 500 total returnup 10 basis points in August up 8.7%

(36:27):
so far this year.
So before we jump into thearticles, Alan, anything you want
to add to, from yourperspective to performance?
No, I mean obviously thingswere looking much better in July
until we hit the last few daysof the month.
The last day of trading.
Yeah, exactly.

(36:47):
And then obviously with thepayroll that impacted in straight
markets as well.
So I mean it did feel likesome of the Managers that maybe had
outperformed a little bit,maybe by being a bit slower had lagged
a bit and maybe the managerswho had been underperforming were
doing better in July.

(37:09):
So it'd be interesting to seeif we see that.
I mean it certainly has beenthe case that kind of faster and
more medium term has struggledparticularly this year, whereas it's
paid to be more longer term.
So I mean, I think that'ssomething to monitor as we go a bit
further out there, if that is sustained.

(37:31):
Okay, well, let's dive intosome of these gloomy articles we're
seeing.
Well, they're not all gloomy,but certainly Wall Street Journal
had a one that was a littlebit gloomy in terms of trend following
performance, to no surprise.
But of course, whenever anarticle starts out by saying something
like, oh, the trend followingindustry has, has the worst start

(37:52):
since 1998, you know, youobviously think, okay, that's, that's,
that is, is awful, that'sawful news.
But let me just put it incontext for the people before you,
you take over a couple of things.
First of all, I did notice,and I'm just curious about this,
I did notice that they wereusing an index called the Pivotal

(38:13):
Path Managed Futures Index.
I've never heard about thePivotal Path Managed Futures Index.
So I don't know how reliablethat is in terms of an industry benchmark.
But even if it is reliable, Imean this is only like the sixth
down year so far since 1998.
So you know, that's prettydecent for an industry to only have

(38:35):
had six down years on that.
The other thing that when youstart an article by saying, oh, it's
been the worst period since 1998.
Now of course we don't havethe Soc Gen Trend Index to reference
back in the 90s, so I was justlooking at our own performance at
dawn and just looking at the 90s.
Yeah, okay, well actually 1998was an up year.

(38:58):
Yeah, it was a little bitrocky in the beginning.
It was an up year.
Well, we also had an up year,a very Strong1 in 1995-1996-1997-1998
as I mentioned, 1999-2000-2001-2002.
So all I'm just saying whenyou use an article, a pinpoint like
that, maybe you need to say,well actually this was just a bad,

(39:21):
that six months out of a runfor something like six or seven years
that we're all positive forthe industry.
So anyways, just, just puttinga little bit of a caveat out there.
But anyways, tell me what youtook away from, from Caitlin McCabe's
article.
Yeah, so I mean, I think maybethe most interesting thing is when,

(39:42):
when trend followingperformance justifies a big enough
article in the Wall StreetJournal or I mean, that's probably
the main point.
It's not every, every week,every month that it is such a big
focus.
I think that's the first pointthat I would make.
I mean, the article I thinksummarizes well the challenges and

(40:02):
some of the debate that's beengoing in the industry.
And I mean it's not justpurely focused on the trend following
industry.
It kind of zeros in on Mana HLand the challenges they've been having.
And it highlights their recentresults where I think their AUM has
been growing.
They've had very stronginflows, but their fees have been

(40:23):
going down because of notbeing in performance fees.
And obviously they've beenchallenged on the trend following
side.
And the article has somequotes from the CEO and the CFO highlighting
that it's been one of thetoughest periods for 25 to 30 years.
And there's the classic linein there that trend following is
not broken.

(40:43):
So how many times have we hadto say that?
It does highlight as well.
It's not the first time thestrategy has faced criticism.
All true.
And it quotes somebodyhighlighting the US 10 year yield
very much up and down in a range.
So I would agree with all of that.
It's been very rangy for threeyears now.
It does highlight in the paperthat it says it highlights one of

(41:06):
the weaknesses of trend following.
It doesn't work when marketsare choppy.
Well, yeah, you can't disagreewith that.
As I say, you know, it'sprobably more interesting to think
about, you know, are thesearticles a country indicator?
Is this, you know, is this thedark darkness before the dawn?
Possibly.
You know, if you go back,there was an article in August 2018,

(41:29):
Lawrence Fletcher wrote in theWall Street Journal the big hedge
fund strategy that isn't working.
So that was definitely trendfollowing was in the midst of a very
serious drawdown and 2018 wasa tough year as well.
And then Lawrence Ditcher, Ithink he must have moved TFT because
in 2019 he wrote an articlewhich is quite a. I think this is

(41:50):
the article where basicallyDavid Harding kind of says they were
downgrading or they were lessoptimistic, they weren't exiting
trend following completely,but he was saying that the outlook
wasn't as positive for trendfollowing anymore.
So that was September 2019.
But actually in 2019performance was starting to improve.
I would say by kind of themiddle of 2019, performance for the

(42:11):
industry was starting to improve.
So maybe we need a secondarticle like this in the next six
months to mark the bottom.
I'm not sure.
But certainly there is a sensethat in the midst of drawdowns you
will read more of this.
I don't think there's anythingthat people in the industry would
disagree with.
We've seen the challenges before.
I think it is hard to arguewith the narrative that as you say,

(42:33):
markets in the currentenvironment are choppier.
You've got these about turnson policy in relation to copper,
et cetera.
So.
Yeah, but equally back in 2019I heard plenty of people telling
me, oh, trend following is notgoing to work anymore.
Central banks manipulatemarkets and they dampened the volume.
You're not going to have bigtrends in markets anymore.

(42:55):
And then we had goodperformance in the industry, 2021,
22 for a three to four year period.
So markets change.
We will eventually come out ofthe cycle.
But, but, but, yeah, I mean Ithink it's interesting that CTAs
are back in the headlines onthe Wall Street Journal for the,
for the wrong reasons, as usual.
Yeah, no, absolutely.

(43:16):
And there was one quote that Ithought was probably very.
Summed it up pretty well andthat was the case for trend following
hasn't changed, but the burdenof patient has gone up.
I think that, that, that istrue, but here's the thing and, and
maybe they'll tie into ournext conversation.
Next topic, which is aLinkedIn article you wrote as well.
But, but there are a couple ofthings that I think about when I

(43:41):
read these articles.
Right.
So why do people in the firstplace want or why should they in
the first place even considermanaged futures?
Trend following.
Right.
It's because it's non correlated.
So you can do all your studiesand it improves the overall portfolio.
There's no discussion.
There's never been anyevidence to suggest otherwise.

(44:02):
So, so what surprises me isthat a lot of people is quote unquote
unhappy with theirdiversifying instrument or strategy
in say an equity portfoliothat it's not firing on all cylinders

(44:22):
during a time where the equitymarket itself is compounding at 20
plus percent in the US at the moment.
I'm thinking this is wonderful news.
This is the best time thatyour diversifier shouldn't be, you
know, first of all, itshouldn't be making money necessarily.
It could do, but it doesn'thave to.
And you're making all thismoney in 60, 70, 80% of your portfolio.

(44:45):
Why do you even worry too muchabout your 1 or 2 or 5% allocation
to trend following?
So from my point of view, Iwould flip it completely and, and,
and, and look at it differently.
But of course the problem isalso, I guess to a large extent that
you have certain, I don'tknow, election cycles in boardrooms

(45:07):
where people sit for a coupleof years and they have to kind of
defend something.
And, and, and maybe it becomesa challenge if you, if you just hit
that wrong 24 period, 24 monthperiod and if you're a believer in
trend following and every timethere's a board meeting you have
to kind of of make excuses for it.
I understand that, but it'sjust, you know, then we're talking

(45:29):
about again, kind of decisionsbased on the wrong basis really.
So yeah, those were some of my thoughts.
There was one thing, by theway, one thing that, that came up
in my preparation.
I was thinking of, I mean, youobviously been on the side of, of
the, of the allocation world.

(45:50):
You still are for that matter.
And I was wondering, is therea moment in your career where you
have been the closest tocutting trend, maybe because of a
period exactly like this?
I mean, is there something youcan recall just to.
I definitely remembered itlike the 2019 period as well.

(46:15):
You know, at the end of theday it's, you know, after a period
of time, a tough performance.
You have to kind of go back tofundamentals and say it's kind of
like what's your worldview?
How do you believe markets operate?
If you don't believe thatmarkets kind of operate in a way
that will eventually produceopportunities for trend following,

(46:37):
then it would be hard to stickwith it.
I mean, you can point to thestatistics, but the statistics just
tell you that you can provethat something is broken.
It would, would reject that hypothesis.
But I think you have to, ithas to come back to something more
fundamental that, you know,and I'd have that view that, you

(46:58):
know, markets will are kind ofinherently unstable.
You know, you go to periods ofstability, but then something eventually
will cause a trend.
But you know, I mean, even inthe last few weeks I have been thinking
about this, you know, forsure, you know, because it's, you
know, performance, it's threeyears of, of meaningful, meaningfully

(47:19):
negative numbers.
And I mean, I think the thingthat's really frustrated me in this
period has been, you know, that.
Well, can I just stop you there?
Can I just stop you there?
You say it's been three years,I mean a year and a half ago yes
most managers was making newall time highs so I disagree with
that.
I think it's been a 14, 15month period that's been challenging.

(47:42):
Yeah the drawdown is nothingbigger than what it's been before
so I view it a little bit differently.
I viewed more specifically asa period of just a number of big
reversals happening in a fewbig sectors at the same time combined
with lots of noise, politicalnoise leading to equity V shaped

(48:04):
sell offs.
That's how I see it.
I don't see it any other thanthat really.
Well my point is if you takethe three year period performance
has been poor flat andactually if you take the 10 year
period the 10 year show up inthe stock gen trend is 0.1 which
is like I knew.
You brought that up which ofcourse which is in your article and

(48:25):
which Andrew jumped onstraight away but then I looked at
the numbers and actually inthat episode I should correct that
episode because well I can'tcorrect the episode but I can correct
it now I mentioned an armorsaying well hang on I see that the
suction trend index being up96% over the last 10 years but when
I went back to check thenumbers because Andrew was saying

(48:47):
to me afterwards are you sure?
I actually looked at the 10year period but as of June last year,
not June this year so it istrue it's only been 30% in the last
10 years but hey a year ago itwas almost 100% so you.
Know and I made that point, Imade that point in my article that
these long term measures arequite sensitive like that a meaningful

(49:09):
drawdown does change thepicture and if you go as you say
if you go back to back 12months it looked I think it was at
annualized at 7% or somethinglike that quite respectable And I
mean I think if you go back to2022 from memory I think like say
in October 22nd if you did theanalysis of kind of S and P versus

(49:31):
soc gen trend like I thinksoccer trend was maybe ahead of S
and P as of that point goingback from 2000.
So these things long termmeasures do change But I do think
yeah, I mean I think there arereasons it's easy to see why people
might be concernedparticularly in environment I think

(49:53):
in my article I referencedthat the 10 year Sharpe and the S
and P is something like 0.8 orso you're at in a period where the
realized Sharpe is above thelong term expectations for equities
and it's below indication of trend.
But as you say, sitting in theboardroom, sitting in the investment
committee, if you decided toallocate a trend following 18 months

(50:17):
ago and you were some researchanalysts and you said hey I've done
a bunch of research, this isthe greatest strategy ever.
Look at this zero correlationcrisis alpha performance 2008, look
at 2022, let's invest and thensuddenly you're down 15%.
Well of course they're goingto, you know, it's so easy to exit
because people have careers,they got to look good in the committee,

(50:38):
they got to look good in frontof their peers.
So I mean I think narratives matter.
That's one of the points.
I said the narratives storiesmore than statistics.
Yeah.
Nothing is outside ofstatistical expectations.
But if the story is trendfollowing won't work because of choppy
markets and policy u turns,it's hard to argue, I mean hard to

(50:58):
argue with or hard to to comeup with a, a counterfactual to that.
It, you know what it remindsme of that thing you mentioned about
the boardroom.
It reminds me and this ispublic knowledge so I, I, you know,
even though I don't reallylike naming managers, but he went
on OD lots to talk about it.
So I'm going to do it.
And, and that is this oil verysuccessful oil trading firm, hedge

(51:22):
fund that suddenly last yearstarted taking bit bets, big bets
on Coco.
And at the time he was sayingoh yeah, but one of my analysts had
come, you know, come by a fewweeks ago saying look at this and,
and here are all the reasonswhy Coco is going to go to 20,000
and all of that.
So they start buying into Cocoa.

(51:42):
You know, at the same time theCTA's were selling coco because of
all constraints.
Right.
So they were buying into thisand of course they came out, this
came out in a news story this,this week or last week that that
particular fund is down 57% orsomething like that this year.
A lot of that due to you know,mistaking bets on, on Coco.

(52:04):
So yeah, I mean you can be,you can be, you can have bad timing,
let's put it that way for sure.
Now, is there anything elseyou want to highlight from your article?
People should go and read itof course on LinkedIn.
But anything else you wantedto, to highlight on that or do you
want to jump into to the lastpaper that you brought along with
you, which is from our friendsover at aqr?

(52:26):
Yeah, I mean from my own article.
It's Kind of in line with whatyou've said.
I mean a lot of it is aroundthe downside of zero correlation.
Right?
Exactly.
People like zero correlation.
But what comes with zero correlation?
It means that there will beperiods when equities are going up
and you're making money.
There will be periods whenequities are going up, you'll be
losing money.
And that's just.
But it comes back to thebehavior aspect.

(52:46):
But yeah, so it's called thehighs and lows of Allocating to trend
following and it's on myLinkedIn newsletter.
But the final piece then is anAQR paper called Diversifiers Forever,
which is an interesting topic.
It's back to this idea of ifyou're a really long term investor,
do you really need diversifiers?

(53:07):
And very often I get thisspeaking to family offices, long
term investors that say, oh,we're not interested in hedge funds.
Hedge funds are.
They're ball dampeners in a portfolio.
They're fine if you want aless smooth ride.
Exactly.
But for us long terminvestors, we don't need that.
But this paper takes theperspective of endowments who are

(53:31):
long term investors.
They've got their ultra longterm because you might have an endowment
or foundation to support a university.
So the portfolio is forever.
Basically the idea is tomaintain the real value of the portfolio
and try and generate a returnor an income that they can draw down
annually, say something like5% or the like.

(53:54):
So what AQR do in this paperthey look at the kind of the typical
asset allocation of UKfoundations based on surveys from
Mercer and Cambridge whichshow kind of, as you would expect,
kind of a growth heavyportfolio, 45% public equities, 20%
private equity, 10% realestate, hedge funds, bonds, a little
bit of cash.

(54:14):
And then they look at, well,you know, is there a case for these
types of portfolios?
Would they be better off ifthey added some strategies like trend
following liquid diversifiers,I guess, long short equity.
But basically in theiranalysis they use trend following
to represent liquid diversifiers.
Now it's a little bitcontentious what they do because

(54:37):
the analysis goes back to 1972.
They're basically looking athow this portfolio would have done
back to 72.
And how would adding liquiddiversifiers have done so?
I mean, to solve the questionwhich you alluded to the lack of
industry data in the 90s fortrend following.

(54:58):
It's represented by the SocGen trend index.
And then they used theadjusted to 10% volume actually.
And then they used the HFRISystematic Macro Index, they used
that between 1990 and 1999,but they discounted by 60% to reflect,
I guess that there's asurvivorship bias because it wouldn't

(55:20):
have been live back then.
And then prior to 1990 theyuse a hypothetical kind of in house
trend following system andthey also discount that by 60% but
in some markets they wouldn'thave actual futures markets.
So it's a bit hypothetical.
Were you going to say something?
Well, I was just going to saywhy don't they just look at managers
who have been around to the 70s?
Because there's still ahandful of those.

(55:42):
That might be, but they arethe survivors.
So you know, sure, they livethrough it.
Right.
You could use John Henry orsomebody as well.
And then you know, they wouldhave obviously hit a big drawdown
along the way and then goneout of business.
But anyway, what isinteresting, I mean I think the big
point of this analysis thatthey bring out is the importance

(56:03):
of more stable returns.
So if you think about it, ifyou're an endowment and if you have
an equity centric portfolio,if you go into an environment like,
like 2008 or 2000, 2002 or1973, 1974 bear market and that whole
period of really challengedreal returns, the value of your portfolio

(56:26):
goes down and you're stilldrawing down your 5% every year.
So a smoother ride means ahigher average payout for whatever
it is you're funding, whetherit's a university, university or
whatever.
So that actually hasimplications if you think about it.
For like in Ireland if youhave a pension, once you go into
retirement, you move it intolike a post retirement vehicle and

(56:49):
you have to draw down like 4%every year from that or 4 or 5%.
So again the same logicapplies for even you might be kind
of long term having thatstability is important.
So what it shows is that Evenobviously reallocating 10% of, of
the portfolio into liquiddiversifiers did improve the statistics,

(57:09):
the return, the sharp, et cetera.
And also they look at kind ofmore of a portable alpha approach
of leveraging up by 10% orallocating to liquid divers on an
unfunded basis.
And that also improved thenumbers as well.
I mean it's interesting whenyou talk about, we talked about Sharpe
ratios, et cetera.
I think it had the Sharpe forthe liquid diversifiers historically

(57:33):
at 0.44, which is that high orlow, who knows.
They also do a forward lookinganalysis based on some assumptions
and it was lower in that, butstill the results were the same.
So I mean, I think interesting analysis.
You might debate some of thereturn assumptions.

(57:53):
They are quite pessimistic onequities as well.
I mean, one point in therethat was quite interesting actually.
I mean, AQR have writtenplenty about private equity and the
downside of private equity.
So no surprise that they'remaking some comments negatively on
that.
But they did kind of highlighthow the cost of debt, the real cost

(58:14):
of debt has gone up from say2.2% to 4.5%.
And they reckon that thereturn impact of that on private
equity, it goes from a boostof the leverage boost goes from,
from 4 percentage points downto 40 basis points.
So about 3.5% reduction in theexpected returns in private equity
because obviously in the last10, 15 years we had close to zero

(58:39):
funding costs.
Obviously for riskiertransactions you would pay a risk
premium.
So I guess their point is inan environment of more challenged
equity returns, it makes sense.
I mean again, you might say,well this is very sensitive because
they've added in the 1970s,which are was obviously a very tough
period for traditional assetsin real terms.

(58:59):
Bonds and equities werenegative in real terms.
So what to do is to runanother analysis where to take out
the 1970s and to take out thelast 15 year bull market to kind
of say, okay, let's take areally good period and a really bad
period for traditional assets.
So that was whatever that was1980 to 2009.
And they say the results stillstack up from that perspective.

(59:20):
But I mean again, I think it'sone of these ones where people might
be a bit skeptical of theresults because it seems pessimistic
under return assumptions forequities and a bit more optimistic
maybe under return assumptionsfor liquid diversifiers.
So it comes back to yourbeliefs again.
But I think their point aboutstability of returns and how that
reduces the volatility of thepayouts and ultimately can lead to

(59:43):
a higher average payout.
I think that's a very validpoint and it's probably not something.
It's another way, I guess ofpresenting the argument for diversifiers
even for long term investors.
Yeah, no, absolutely.
And it really does help on thecompounding of returns if you don't
have these huge drawdowns.
Speaking of which, just lookedup some statistics while you were

(01:00:05):
talking.
If you take the period January2000 to June 2025 in terms of correlation,
again, we're talking about diversifiers.
But a lot of people tend to goback into things like long short
equity, well, the BarclayLongshore Equity Index Actually has
an annual correlation to a6040 portfolio of more than 60%.

(01:00:28):
0.6.
If you take some of the otherones, even Global macro is 0.34 correlation,
positive correlation.
Right, right.
But they're all these, they'reall positive.
Maybe with the exception ofmarket neutral, it's been pretty,
pretty flat.
But then comes the softenedtrend index.
In that period, it's negative0.38 correlation.

(01:00:52):
So you know, these things arereally important.
If you look at those fourcrises that we know of, the tech
bubble, the debt crisis, theCOVID the inflation period.
I mean again, most of theseindices that you have in terms of
traditional hedge fundstrategies, they're all down.
Maybe with the exception ofthe tech bubble, there's a little,
there's definitely a fewpositive numbers, but for the most

(01:01:14):
part they're down in that, in,during those crises.
And of course, you know, thesuction trend index were positive,
strong with exception of COVIDwhere it was just a little bit positive,
but it was very strong.
And, and of course what it allcomes down to, which you've alluded

(01:01:35):
to already, is of course, whatis the impact of these diversifiers
on a traditional portfolio?
That's what we really shouldbe concerned about.
And that just isn't any realcompetition when it comes to adding
20% of one of these strategiescompared to adding 20% of say a Soctin
trend index.

(01:01:56):
The improvement that you seein your overall portfolio chart up
is just, you know, unbeatable,comes out with the highest sharp
if you do that compared to anyof the other sort of Barkley hedge
strategies.
So it is.
Yeah, I mean the evidence is there.

(01:02:17):
It doesn't mean that peoplewill embrace it, we know that, but
I mean they will, after a goodrun they'll probably say, oh yeah,
of course we should have someof that, but, but it's the brave
ones, it's the real, it's thepeople with real conviction that,
that, that keeps, keeps it in there.
But also maybe, actually asyou say, maybe the, the, the articles

(01:02:41):
we're seeing at the momentcoming out is still some kind of
contrary indicator that we mayhave seen the worst and that things
get better.
It doesn't mean the world getsbetter, it just means that things
get better from a trend perspective.
I would not be surprisedpersonally, but only time will tell
for sure.

(01:03:01):
Yeah, I mean, I mean in 2022 Iheard a lot of people kind of saying,
oh, allocated trend following.
I'm not hearing so many peoplesay it now, but you know, the long
term characteristics of theasset class haven't changed, have
they?
No, no, absolutely not.
Anyways, this was fun and veryeducational as usual.
Thank you for preparing all ofthis Alan.

(01:03:23):
If you want to leave a littlenice message review for this episode
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It certainly helps more peoplefind the podcast as usual.

(01:03:43):
If you have questions for anyof the upcoming guests, you can email
them to me.
Infobtraders on plot.comUsually I would say who's coming
on next week.
I completely forgot to look itup so I have no idea who I'm speaking
to next week.
I know it will be a fun andgood conversation of course, but
I just can't remember exactlywho's on.

(01:04:04):
Anyways, from Alan and me,thanks so much for listening.
We look forward to being backwith you next week.
And in the meantime, as usual,take care of yourself and take care
of each other.
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If you enjoy this series, goon over to itunes and leave an honest
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(01:04:26):
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If you have questions aboutsystematic investing, send us an
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And remember, all thediscussion that we have about investment
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Also, understand that there'sa significant risk of financial loss

(01:04:48):
with all investmentstrategies, and you need to request
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Thanks for spending some ofyour valuable time with us and we'll
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