Episode 216

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Published on:

9th Dec 2024

Elevate Your Return Stacks with the Combined Power of Trend & Carry

In today's complex market environment, finding genuine diversification and consistent returns has become increasingly challenging. What if you could harness two of the least correlated strategies to traditional portfolios available to investors today?

Join us for an exclusive webinar where Rodrigo Gordillo, Portfolio Manager and co-founder of Return Stacked ETFs, reveals how combining trend following and carry strategies as stacks may create a whole that is much greater than the sum of their parts.

In this educational session, we will explore:

  • The Fundamental Drivers - behind trend following and carry strategies - understand why these strategies work and how they can enhance your portfolio's performance
  • Beyond Traditional Diversification - learn how managed futures can provide true diversification benefits when equity and bond correlations spike
  • The Golden Combination - explore why the synergy between trend and carry strategies creates a more resilient portfolio across different market regimes
  • Real-World Applications - examine historical analogues and practical implementation strategies for your investment approach
Transcript
Corey Hoffstein:

Hey everyone, thank you for joining us.

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My name is Corey Hofstein.

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I am the CIO of Newfound Research

and Co Founder and Portfolio Manager

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on the Return Stacked Suite of ETFs.

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I am delighted to be joined today by

Rodrigo Gordillo, President at Resolve

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Asset Management Global as well as

Co Founder and Portfolio Manager on

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the Return Stacked Suite of ETFs.

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In this presentation, we are

going to be talking about two

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systematic macro strategies.

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The commonly well known trend following

strategy and the slightly less well known

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in popular vernacular but Equally popular

among systematic, uh, investors carry.

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And we're going to dive into what

these strategies are, how to think

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about them, how they differ from

one another, and maybe actually

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even share some similarities.

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Both empirical and theoretical ideas for

how they perform in different economic

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environments, and then how you can

think about incorporating them into your

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portfolio, either as standalone components

or in a return stacking framework.

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And some of both the return and behavioral

Frictions that go along with those ideas.

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What's really important for this

webinar is that you should feel

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free to ask questions at any time.

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Uh, you can type in the chat box and

I will be responding to questions

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either in real time or bringing

them up to Rodrigo as we go along.

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I may hold them to the end depending on,

on the nature of the question, but we

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want to make sure that this is engaging

content for you here to hopefully

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educate and teach you something a little

bit about these strategies, but want

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to make sure you feel comfortable.

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Uh, and answering and asking

any questions you have.

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with that, Rodrigo, I'm very excited to

turn it over to you here to dive right in.

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Rodrigo Gordillo: Thank you, Corey.

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Really appreciate it.

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and thanks for the intro.

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Yes, we got to put up the slide that

Corey was talking about, but these

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are the things that we will cover.

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and what really, what I want

people to take away, from this,

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whole presentation An intuitive

understanding of both trend and carry.

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So just to kind of understand the similar

areas and really intuit and really like

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get deep into what makes them different

and what's, uh, what's the same, and then

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ultimately I want you to be as excited

about that combo as I have been for a

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decade, and hopefully we can, uh, get

that across to you and you're able to take

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something away from this presentation.

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So with that, let's start by actually

trying to understand the basics of like

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the two components of price of an asset.

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and so let's start by decomposing

these, the two sources of return that

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I think we all understand and know for

each asset class, the first source of

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return is the price appreciation of the

underlying asset class through time.

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There's the capital appreciation

when you buy a house, it's the, you

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know, the increase in land value.

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and the second one is the yield.

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Or carry of that asset class

as it distributes a yield or a

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dividend or a carry over time.

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So in a, in a house example, it

would be if you're renting it out,

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what you rent minus your costs

of, running that unit would be.

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And so for all intents and purposes,

when we talk about trend managers and

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carry managers, Trend managers and

trend following managers tend to focus

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on the former, on the, the appreciation

or depreciation of capital for each

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asset class, while carry strategies tend

to focus on the latter, which is just

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simply focusing on what am I getting

paid if I hold this and nothing changes.

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And so both are actually using

these markers as, the parameters to

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decide whether to go long or short,

the different asset classes, right?

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So they're looking at price appreciation

recently or the carry or the change

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in carry in order to, to try to

estimate what's going to happen in

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the future and make predictions.

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But before we get into all of this, I

do think it's useful and important to

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really try to understand how futures

markets work and how specifically

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futures contract pricing works.

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So what I'm showing you here on the

screen is just a fictitious price

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term structure of a futures market.

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A term structure of futures contracts if

you've never heard of that term or don't

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haven't really understood it It really

refers to the way that prices of futures

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contracts vary depending on expiration

dates So think about it like looking at a

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calendar of prices contracts that expire

sooner Might have a different price than

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those that expire later and you can see

here in this chart that the, the idea here

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is that, when you look at, prices over

time, December 24th maturity, this is a

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contract that's going to deliver whatever,

market that is at the end of December.

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This one at the end of January,

all the way down to June.

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In this particular example, you

can see that this is a calendar,

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uh, differences of return.

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Now the question is, Why is there

a difference in prices over time?

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And this is depending on the contract

has to do with a number of things.

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The first one is the cost of carrying

a commodity, for example, right?

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If you're going to have, you're

going to store a commodity for

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delivery into the future, there are

costs associated with that, right?

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There are expenses like storage, like

insurance in that storage, financing costs

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of holding the underlying asset class.

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There's also supply and

demand considerations that,

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that create these shifts.

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If there's short term scarcity.

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For example, like we saw in COCO this

year, because of a supply issue, the

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near term futures contracts might be

more expensive, and that'll lead to

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kind of an inverted term structure.

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Uh, market expectations

of, of future, prices.

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For example, if there's a geopolitical

issue and geopolitical tensions might lead

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to longer dated oil futures, uh, having

higher prices, and then there's also

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the, um, the idea of convenience yield.

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So this is the concept of when an asset

class is in short supply, generally

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speaking, the convenience of having

immediate access can make the near term

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contracts much more valuable, creating

a downward sloping term structure.

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Okay, so term structures can be normal,

Upward sloping, or they can be, uh,

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where, where longer day contracts are

more expensive, or they can be inverted

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and downward sloping when shorter

day contracts are more expensive.

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So that's kind of the, contango

and backwardation that you've

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heard in the past, I'm sure.

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All right.

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So let's get back to the concept of like,

what does this matter to trend managers?

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Now, the reality is that for trend

managers, it's, um, it doesn't matter

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much, trend managers really tend to

only focus on that front month contract.

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And they.

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They really care exclusively about

how that, price has shifted recently

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in contrast to the recent past.

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So when we talk about trend managers,

they're looking back at 20, 30, 40,

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120, 240 or more days and comparing

today's price to the historical price.

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So they're really looking at a shift.

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In movement of the front month

contract to make some decisions.

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If it's, if we see across all

those look backs that the price has

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continuously shifted upward, then

generally speaking, trend managers

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are likely to go long that asset.

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If the price has shifted downwards, then

they'd likely to go short that contract.

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So something that has recently moved is

likely to continue to move as the concept.

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That's all the trend managers

are looking at when they're

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looking at futures contracts.

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Okay, now moving on to

the concept of carry.

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Okay, so in this chart here,

carry managers actually care

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about the full term structure of

the market that we're looking at.

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And really the, what we care

here about is the differentials

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across the whole term structure.

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Cause the idea behind carry is that what

does one expect to receive when holding

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an asset class, if nothing changes.

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And in this case, from a visual

perspective, what we want is that

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our assessment today, that the

carry in this case from the back

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month or the front month of 3.

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2, we want that to continue.

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We want this shape to stay the same.

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over the next six months as prices shift.

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So in the case here, if I buy a

June 25 contract, I hope that the

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shape of the curve stays identical

so that the next month, you know, it

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appreciates and appreciate some more.

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And if I go along this asset and it

keeps on appreciating until I receive my

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full yield, that is, that is the idea.

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That is the hope.

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you know, if you think about this, think

about it from a perspective of a, somebody

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that owns a dividend paying equity, Let's

assume, let's just make the math simple.

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The equity pays 12 percent a

year and it issues it monthly.

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What you would expect is that

every month, you're going to get

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delivery of 1 percent of that

expected 12 percent dividend yield.

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And if the price of that stock

doesn't change over the next 12

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months, my return is going to be that

12 percent dividend yield, right?

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Now, because really futures

contracts do not pay a dividend.

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in fact, a lot of people ask the

question, well, when I buy a futures

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contract, do I not receive a dividend?

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Is it just a stripped out, contract

that only gives you price appreciation?

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The answer is no.

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It's embedded in, in that term

structure as price goes up the curve,

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if you're going long or down the curve,

if you're going short, then you are

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going to be receiving or getting that

appreciation for that carry as time

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goes by, assuming nothing changes.

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Okay.

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But of course that doesn't always happen.

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the, the idea that you're going to

get a 12 percent return and that's it,

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is uh, you know, the same idea of a

dividend stock, not changing in price.

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They do change in price.

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Sometimes it's, it's going

to be in the direction of the

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yield that you're getting.

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Sometimes it's going to be in that

12 percent example, you're going to

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have years where that stock is down

12 percent and you made zero returns.

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but that the idea here is that the concept

of, of yield is that it's an indicator

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that if you, Choose high yielding things,

or short, very low yielding things.

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Then you are likely to see that

asset class appreciate more than

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others that have lower yields.

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Okay.

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So what's interesting here is this is the

first time that I think everybody needs to

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focus and try to internalize the benefits

of these two strategies on, on their own.

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Okay.

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the benefits here is.

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In the case, in the case of the chart on

the right, you saw that there is a price,

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a shift in the yield curve here that moves

up the amount of carry available, right?

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So it really is looking at that

yield and the expansion of yield.

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If in the second period, it increases.

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When trend managers go long their

asset class, they really are

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looking at price appreciation.

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And, you know, I've been in

situations where, we've had

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signals to go long gold on trend.

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But because gold tends to have the

opposite type of equity, uh, term

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structure is this, when you hold gold on

average, you're going to lose, in carry.

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And there are times where you are right

about the price appreciation of spot gold,

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but because the carry was so negative, you

actually lost more in carry than the, um,

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than you made in the price appreciation

by selecting it based on trend alone.

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Right?

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So you can see that by having these

two man, these two ideas and these

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two concepts in one spot, they kind

of help fill each other's blind spots.

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So what are further similarities

here between these two asset classes?

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Well, there's I've always said that

managed futures, whatever type of

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managing of futures that we're doing,

tend to have one thing in common is

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that they want to maximize diversity,

they want to maximize breadth.

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And so both trend managers

and equity managers.

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Invest across dozens of global

equity markets, global bond markets,

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global currencies, and commodities.

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All of these major asset classes

react to different economic

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stimulus in different ways.

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and they offer different term

structures and they offer different

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price appreciations at different times.

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So it creates, I would say that these

strategies tend to be the most diversified

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thing that people have in their

portfolios when they do allocate to them.

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and so I think what's, uh, what's key

here is the understanding of that.

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We're not, carry is often kind of,

categorized as this, uh, widowmaker

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trade of, of a currency carry,

specifically the yen carry trade.

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This idea that you can clip a coupon by

getting paid more in a local currency

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and less in another currency over time.

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But then when economic, situations

arise that you just lose all of

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those returns that you made, and

it's, it coincides with an economic

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shock and negative economic shock.

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Now that tends to be true for certain,

currency pairs, but it's not necessarily

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true for, you know, If you're

looking at carry across commodities,

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currency, other currencies, pairs,

other bonds and equities, right?

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So having a diverse set, a wide

variety of asset classes to invest

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in, much like trend managers

do, is the key to all of this.

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All right, now getting down to,

you know, I just told you about

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trend and I told you about carry.

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The question is, why

do we think it exists?

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Why do we think it'll continue to exist?

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And I think we can, you know, when

it comes to, to trend following

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here, there's a risk based theory, a

behavioral theory, and a structural

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theory that I think all have merit.

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the risk based theory is really

the concept of you as a speculator

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that are looking for trends.

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you're providing liquidity.

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You know, during periods of market stress

or imbalance, trend followers offer

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liquidity by taking the opposite trade of

those that need to buy or sell urgently,

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for whatever reason, whatever, uh, you

know, active market participants, it could

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be a producer, it could be another manager

that needs to hedge out certain risks.

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And so the idea of risk transfer

here that other participants may

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be willing to, uh, Pay a premium to

hedge in order to offload some risk.

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Trend followers take the

opposite side of that.

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They take the price variance in order to

receive and get compensated for, in a form

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of higher expected returns in the future.

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So that's kind of risk based.

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I think that makes sense.

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Behavioral, I think this is the one

that resonates most with people when

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they think about trend following, right?

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This idea of herding behavior.

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A lot of this has come from the,

uh, the works of Danny Kahneman,

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Amos Traversky, behavioral finance.

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and there's a wide kind of variety of,

of, ideas here, anchoring and adjusting

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the idea that when you get information,

Uh, you know, you, you anchor to the

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recent past and you adjust a little bit,

but not fully, the idea of sequential

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decision making or information cascades

where information goes from the back of

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the newspaper all the way to the front.

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It takes time to disseminate and that's

why if you get on the trend early,

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you're able to ride it up or down.

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depending on whether you're shorting.

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And then structural inefficiencies

is an interesting one that I've

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always found, um, valuable.

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And this is just, again, intuitive, right?

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If you're an advisor that's ever had

to deal with a large order, you're not

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putting it in at market and hoping for

the best, you're actually working that

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order over time, and if it's a big order

and you're buying, you're going to over

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time bid up that price on average, right?

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So, uh, this idea of

order execution delays.

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creating the trend is, is

very, um, uh, intuitive.

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The other one is queuing dynamics.

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If you look at, at the idea of, how

information theory works and the idea of,

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you got the same amount of information

across, let's say three different tellers

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trying to get through, a, uh, um, to pay

for, for anything in the grocery shop.

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Then what will happen is if everything,

if every one of these individuals

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goes in the line at the same time,

in the same sequence with the exact

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same delays and everything clears.

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But if the moment that any one of

these people go to different lines

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and they create more delays or

the queue moves faster or slower,

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you're going to create imbalances

that need to clear out over time.

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Okay.

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So delays in sequencing is another one

that I like in order to understand why

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trend is likely to work in the future.

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Now let's get to yield.

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how do we actually measure

futures yield first of all?

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And then why do we think that there

is, this is likely to continue?

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And I think for us, this is really

a risk based approach to carry.

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let's, let's go through it one by one.

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So for equities, we talked

about it a little bit already.

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It's the dividend yield.

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That is the carry of equities.

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We believe that.

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Ultimately, this is a measure

or a proxy for fundamental risk.

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So for example, when there's

economic stress, like in:

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will happen is you will, you'll

bring a higher future yield, right?

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As prices go down, the yield of that

expected dividend is going to be higher.

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And that higher dividend yield is a sign

that you will be bearing excess risk in

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order to ultimately get compensated for

that risk and get rewarded for that.

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So it's a good signal telling

you that it's a good time to

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buy, the, uh, dividend yield.

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And so the other one for bond is the

coupon yield plus the roll down yield.

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And so here again, intuitively we

would demand higher yields and a

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steeper yield curve as compensation

for things like country credit risk,

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illiquidity risk, monetary policy

risk, and inflation risk, right?

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So all of that kind of makes sense.

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And the further out you go in terms

of duration, you're also expecting

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to get higher yields on that.

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On the commodity side, um,

we talked a little bit about

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the convenience yield here.

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So if you think about it from the

perspective of being a producer of a

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commodity, if you're a producer of a

commodity and you're running a business

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on, you know, gold or, or corn, you

really, you're going to ask yourself,

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do you want your company to Success

to be defined by the vagaries of the

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price movement of your underlying

Commodity or do you want to have more

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control of that and really be about

are you a good operating company?

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You know, do you keep costs low?

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Are you efficient with

uh with your assets?

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And I think everybody would agree that

the latter is more approachable and uh

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and acceptable by market participants.

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So what tends to happen is People

want to hedge out those risks.

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Uh, there's a convenience that

you're willing to pay to hedge

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those future price fluctuations.

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And the moment you stabilize and you

sell forward your commodity and you have

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some certainty, you can then go back

to the banks and get better financing.

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You can go back to the capital

markets and get better pricing and

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a better valuation for your company.

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So by, by paying on hedges, you actually

increase your market value and your

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ability to participate in capital markets

much, in much more, in an easier way.

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So I think the convenience

yield year makes a lot of sense.

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and on the currency side,

we're effectively capturing

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the spread in interest rates

between the different countries.

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but you know, it captures things like,

funding liquidity, like consumption

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growth, growth risk, and a number

of other smaller associated risks.

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But again, all of the risks, uh,

we're ultimately, we're ultimately

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bearing, and that's why we really think

it's a true measure of risk premium.

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And this tie between carry measures and

risk provides a very strong intuition

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as to why we think that carry is

likely to inform us about future total

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return of any asset in the future.

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and also gives us a confidence as to

why we think this sort of strategy isn't

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really going to be arbitraged away.

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There's always going to be players willing

to compensate speculators for their,

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for this type of service over time.

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And so unlike trend and many other

strategies, the, that depend on the

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misbehavior of investors, to, to provide

that premium, we actually believe that

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this is largely compensation for bearing

risk and a risk premium based strategy.

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so, that's, uh, obviously why I think

it's worked so well in the past.

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And when we look at the CTA space and the

managed future space and the different

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strategies available in trading futures

contracts, what we actually find is

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that the two most used are trend.

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So this graph, what we just did is we

just went through the current managers,

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that exist in this auction trend index

or this auction CTA index, uh, went

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through the brochures, fact sheets

and websites, um, and in order to find

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out what they kind of use the most.

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And we can see that, you know,

trend is first, very intuitive, very

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easy to articulate carry second.

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Part of us having this conversation

today is, It's a little less

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intuitive than just following a trend.

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The trend is your friend.

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There's not a lot of things

that rhyme with carry.

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and so it's, it's likely the

reason why it's, uh, it's a second.

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And a lot of, things that have been

miscommunicated when it comes to the

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risk of running a carry strategy.

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All right.

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So now we're going to

get into some analysis.

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the, but maybe Corey, before I do get

into this, are there any questions

354

:

that I think that, that we should

cover before I move on to the, to

355

:

the analysis of the strategies?

356

:

Corey Hoffstein: Not at the moment.

357

:

Rodrigo Gordillo: All right.

358

:

So before I get in, I just

want to kind of set it up.

359

:

What we're doing here is we are

going to be, comparing the benefits

360

:

and, and correlations and, and

the history of these strategies by

361

:

comparing the, the SocGen trend index.

362

:

as a representative index for

the trend following industry.

363

:

So that's an easy one.

364

:

The harder one is how do you

compare a proper, well diversified,

365

:

multi asset futures yield or carry

strategy, as it, as it's used by

366

:

a lot of multi strat managers.

367

:

But sadly, there aren't any clear indices

like there are for, for trend following.

368

:

we've, scoured the universe.

369

:

We always find that they are

very, uh, you know, they're only

370

:

commodities or only currencies.

371

:

And they're only doing, you know,

relative value or cross sectional.

372

:

Like they're, they're not cohesive.

373

:

They're not well diversified.

374

:

And so what we had to do is we

actually used the index that was

375

:

provided in the, in the Resolve Asset

Management, paper called Managed

376

:

Futures Carry A Practitioner's Guide.

377

:

The link is in there.

378

:

We'll share the presentation if you

guys want to take a look at that paper,

379

:

and, and I'll just kind of provide

some key highlights as to what really

380

:

differentiates this carry approach to

many others that we've seen in the past.

381

:

I think the, the first one is the

idea that it is cross sectional.

382

:

and so when you think about.

383

:

If anybody that has really looked at

the risk premium strategies or think

384

:

about momentum and trend, right?

385

:

Momentum managers versus trend managers,

especially like market neutral managers.

386

:

momentum is just kind of grabbing

the top decile, grabbing the bottom

387

:

decile, making sure that you have

equal risk across them and go along the

388

:

top decile, short the bottom decile.

389

:

And you get kind of like a,

a market neutral approach or

390

:

a sector neutral approach.

391

:

And then the time series is more

like trend following, which is just

392

:

ranking from best to worst, all

these asset classes based on their

393

:

trend momentum and allocating long

to the things that are going long.

394

:

And then allocating short to the things

that are kind of having a negative trend.

395

:

When it comes to carry a lot of these,

indices that we've seen in the past,

396

:

really just focus on sector neutral,

um, you know, cross sectional.

397

:

What we.

398

:

think is more valuable as a diversifier

to equities and bonds and trend is

399

:

to really focus on using carry from a

time series perspective where we, you

400

:

know, we can be in theory, net long,

all asset classes, net short, all

401

:

asset classes are somewhere in between.

402

:

Generally you're somewhere in

between, but we are not forcing

403

:

a market neutrality here.

404

:

the other thing that is I think

different and we don't see any really

405

:

indices use this is The readings for

carry that we just talked about, you

406

:

know, the differential between the back

month and front month, that type of

407

:

like absolute carry number is very, uh,

normal in order to, um, to assess what

408

:

type of, what the carry measures are.

409

:

What we've also added to the mix

is the concept of, Hey, how is

410

:

the carry of this asset class?

411

:

Let's say gold compared

to its own history.

412

:

Is it really above average?

413

:

Is it really below?

414

:

And what we tend to see is that.

415

:

The more, the further away it is to its

own historical norms, the more likely it

416

:

is to appreciate, if it's a positive carry

and depreciate if it's a negative carry.

417

:

And again, that's a key

differentiator, differentiation here.

418

:

the other things are that we, this series

targets a 10 percent volatility target.

419

:

the index, the paper was

written in January, mid January.

420

:

So for the purposes of this paper,

for this, of this presentation, we

421

:

end the analysis in December, And

this is all net of trading costs

422

:

and expect a transaction slippage.

423

:

All right.

424

:

Let's talk about why they work together.

425

:

I mean, the obvious one, if we take

the 10, 000 foot view here is that

426

:

they're non correlated to traditional

assets and to themselves, right?

427

:

So you can see that carry has a low

correlation to trend and basically no

428

:

correlation to us bonds and us equities.

429

:

Again, this is a view, from a 10, 000

foot view, this idea of, you know, on

430

:

average, the correlations are really low.

431

:

But in reality.

432

:

Do we always want to have zero correlation

to bonds or zero correlation to equities?

433

:

If at that time, bonds are providing

positive returns because the

434

:

carry is positive or equities are

providing positive returns because

435

:

the equities are positive, right?

436

:

What we see when we look at not

the average, but the movements

437

:

over time, is that this concept

of conditional correlations.

438

:

Here I've just given I'm showing you

the 252 day rolling correlation of

439

:

carry and trend, against the S& P 500.

440

:

And what we see here is that this

idea of time series momentum and

441

:

time series carry allows the system

to breathe a little bit, allows.

442

:

The system to kind of be on the same

side momentarily, if need be, of certain

443

:

asset classes that are working rather

than, than taking out all of the beta.

444

:

So surfing some of those waves,

but they do it at different times

445

:

and they do it for different

reasons that we've already covered.

446

:

and so the, I don't want people to take

away that, carry and trend always have

447

:

very like zero correlation equity bonds.

448

:

So what I want them to take away is

that we will be sometimes negatively

449

:

correlated, which is sometimes great.

450

:

And sometimes possibly correlated,

which is sometimes great.

451

:

Not always, right?

452

:

On an average, it's better.

453

:

the other interesting thing to note is

that, you know, trend is correlated.

454

:

quite known for its quick shifts in

their longs and shorts over time.

455

:

Whereas you'll note that carry

in black here tends to maintain

456

:

its correlation over time.

457

:

Uh, you know, it doesn't, it's

not as quick to change and

458

:

there's a bit less whipsaw there.

459

:

Okay.

460

:

Now let's get to the, the returns on a

calendar year basis of these strategies.

461

:

This is the history from 2000 to 2023.

462

:

And the one thing I want people to

take away from this is on average,

463

:

we see that they both provide

positive outcomes on calendar years.

464

:

They're not the same outcomes.

465

:

They're, they're very different

every year, but on average, they

466

:

both provide positive outcomes along

with, the, uh, we're looking at

467

:

the, the blue one here is the combo.

468

:

So you can kind of see

over time how well it does.

469

:

Now, the second thing I want

people to notice is that on

470

:

average, when one has a bad year.

471

:

The other one has a good year.

472

:

Again, this concept of filling in each

other's blind spots, based on, you know,

473

:

whether trend is aware that it has a

negative carry while going long an asset

474

:

or not, it clearly works to have two

different points of view for the same

475

:

asset class there, you know, in reality,

people think that a lot of people think

476

:

that investing is about hitting it on

the bulls eye 90 percent of the time.

477

:

The truth is that.

478

:

In any one of these quantitative

strategies, you're hitting it, you know,

479

:

52 to 54 percent of the time, correct.

480

:

And so what you want is when you're

hitting it right and carry, you know,

481

:

the other 48 percent of the time or 46

percent of the time where trend might

482

:

not be hitting it right, you, you have

at least a chance to offset some of that.

483

:

And we can see that from the

calendar year basis that it is, they,

484

:

they clearly work well together.

485

:

And that blue line tends to be

much more stable than if it was

486

:

just the green or the black.

487

:

The other thing I wanted to point out.

488

:

Uh, that I think is useful to understand

about, uh, carry and, and some of

489

:

the carry indices that you've seen

in the past is that there's a, you

490

:

know, from January, 2000 to 2023,

491

:

you can see the carry has, If a

phenomenal, return profile, right?

492

:

We're looking at a sharp ratio of 1.

493

:

15, which is a very,

very tough thing to get.

494

:

And where as trend is looking at 0.

495

:

42, which is about right.

496

:

This is kind of what we expect,

maybe, you know, depending on, on

497

:

the rolling periods, higher or lower.

498

:

The reality is that there's a kink in

hat return stream on, in, um,:

499

:

And the reason we think that there's

a kink there is because, you know,

500

:

carry was relatively unknown.

501

:

Very few people were using it, but

in:

502

:

uh, written by Khoijin that really

described a way of looking at carry

503

:

across all these multi assets and how

it would be useful for portfolios.

504

:

And from 2013 on, we saw that kind

of a bit of a reduction return.

505

:

Again, we expect this, This risk premium

to be in reality in the future, much

506

:

more similar to what we saw from 2013 to

now, and it's similar to that of trend

507

:

again, both for, you know, on the trend

side for behavioral and economic reasons

508

:

and carry for the economic reasons that

we described, is it going to be the

509

:

heyday of, you know, a sharp ratio of 1.

510

:

15 unlikely, is it going to

be more like trend probably.

511

:

Is it is the fact that it's not

correlated and that it provides an

512

:

upper sloping equity line over time

over a portfolio, a good thing.

513

:

Absolutely.

514

:

Right.

515

:

So I just wanted to make sure that

everybody, kind of understood that and

516

:

it's something that comes up quite a bit.

517

:

The other thing, we're going

to really talk about the, um, I

518

:

really want to focus on how Carry

really does in economic downturns.

519

:

Uh, and we all kind of know, and

we've seen all the literature about

520

:

how trend following has a great

reputation of being crisis alpha,

521

:

of providing positive outcomes when

there's big negative economic shocks.

522

:

and I want to show how Carry

does during those periods.

523

:

actually, before I get into

the slide, we do have a poll

524

:

that I'm interested in running.

525

:

and, Ani, could you run the poll,

with regard to, Carry and, what

526

:

people expect during downturns for us?

527

:

So the question is, how do you

think carry strategies tend to

528

:

respond during economic downturns?

529

:

Do you expect negative returns, positive

returns, or an equal chance of a

530

:

positive or negative return for carry?

531

:

All right.

532

:

This is actually quite interesting.

533

:

So expect it to have negative returns.

534

:

11%.

535

:

We have a very educated audience here.

536

:

That's fantastic.

537

:

Expect it to have positive returns.

538

:

We're looking at 25 percent of

people expect a positive return

539

:

outcome and an equal chance of

positive or negative returns, is

540

:

about, uh, 63%, which is, which is

an interesting point of discussion.

541

:

So let's get into that.

542

:

Let's, let's talk about what

is the likely case here.

543

:

So again, before I get into that,

I just wanted to, address one thing

544

:

when it comes to comparing apples to

apples, uh, when I'm comparing carry

545

:

and trend, we really want to make

sure we're comparing apples to apples.

546

:

And the problem with doing that, just

as a, you know, blank slate, or just

547

:

as a comparing that stock to trend

index with a 10 percent volatility

548

:

targeted, carry equity line is that

The CTA universe and its volatility

549

:

profile has really evolved over time.

550

:

There was apparently in the beginning

of, uh, CTA trend followers, a lot

551

:

more appetite for risk, in the late

nineties and early two thousands

552

:

than there were in the mid nots than

there were, uh, in the last, decade.

553

:

What I'm showing you here is that, you

know, in the first few years of the two

554

:

thousands, the average, CTA manager.

555

:

It was running at an 18.

556

:

4 percent average, annualized

standard deviation.

557

:

So quite, quite hotter, right?

558

:

And what does that mean?

559

:

It means that if trend does well

and equities are doing poorly, then

560

:

the, the, return that you're likely

to achieve with a higher volatility

561

:

strategy is going to be much higher.

562

:

IE is going to provide much more

protection on a higher level of risk.

563

:

And in the mid noughts, that

protection number would have gone down.

564

:

And then in the last 10, 10 years, given

that the variance in volatility is, has

565

:

kind of like settled in at around 11%,

we would expect the kind of crisis alpha.

566

:

When it works to be lower than if we were

running an 80 percent volatility strategy.

567

:

So what we've done for this analysis

is went for those periods of market and

568

:

economic downturns, we've just matched

the volatility of the carry strategy

569

:

to that of the CTA, index in order to

get a good sense as to what carry would

570

:

have done at the same level of risk.

571

:

And what's interesting is.

572

:

So let's just start.

573

:

This is in chronological order.

574

:

So we got the 2000 to 2002.

575

:

this is the tech crisis.

576

:

Corey Hoffstein: Hey, Rod, can I do a

quick interruption here for a question?

577

:

One of the questions that came up

is how much do you think the decline

578

:

in volatility among trend managers

is a result of manager choices?

579

:

Versus a decline in

overall macro volatility.

580

:

Rodrigo Gordillo: Well,

that's a good question.

581

:

I generally tend to lean on the former.

582

:

I think as we have, ourselves in a

resolve kind of landscape, I had gotten

583

:

a sense of that landscape, even talking

with Cliff Assets at AQR, the reality

584

:

is that there's no appetite or there's

very little appetite for high volatility

585

:

managers and, um, The way to think about

this is what are the repercussions of

586

:

having a 20 vol manager where a 20 vol

manager, assuming like you have a normal

587

:

distribution and a sharp ratio of one

would mean that your drawdown is going,

588

:

that your three standard deviation

drawdown is 20 minus 20 is zero minus 20

589

:

is negative 20 minus 20 is negative 40.

590

:

Sometimes a four standard deviation

event, probably not, but if it's

591

:

normally distributed, you're looking at

negative 60 percent drawdowns, right?

592

:

So those drawdowns.

593

:

Are going to happen in alternative

strategies, not at the same time when

594

:

everybody else is getting hurt, right?

595

:

It's going to happen at a different time

and people are going to give up on it.

596

:

Not based on, they don't

care about volatility.

597

:

They care about like, look at

those returns are down 60%.

598

:

What's going on?

599

:

And so I think the, it's very painful

to, for any allocator, whether it's

600

:

professional pensions or individuals

to really go high ball, we know a few,

601

:

right, but it is an acquired taste.

602

:

And I just think the industry

has recognized that a 10 percent

603

:

volatility is just right below

that of a balanced portfolio.

604

:

equities run between 15 and 20.

605

:

You know, nobody really has a

hundred percent equity portfolio.

606

:

Um, you know, they

generally have a 60, 40.

607

:

You still want the drawdowns to be

slightly lower than that of 60, 40.

608

:

So I think everybody's kind of settled

in an eight to 10 percent volatility.

609

:

That is an active decision by

managers trying to be as commercial

610

:

as possible in my point of

view, Corey, what do you think?

611

:

Corey Hoffstein: I think part of this

comes down to how trend managers have

612

:

changed their implementation over time.

613

:

Historically, you had, I'm going to

use a phrase here, what we call loose

614

:

pants trend managers who were trading

breakouts and letting position sizes grow.

615

:

Those sorts of managers have taken

a backseat, at least in terms of

616

:

total AUM to vol control managers

and vol targeting managers.

617

:

And so when you have a whole bunch of

managers who have flagship products,

618

:

You know, targeting a very specific vol.

619

:

even in high vol events, they're

selling their positions down.

620

:

and then when you blend 10, 15

vol managers together in an index,

621

:

you get a vol around 10, uh,

because of correlation differences.

622

:

So I think part of it is how

managers have evolved their

623

:

portfolio construction over time.

624

:

Rodrigo Gordillo: Yeah, I

think that's a good point.

625

:

I mean, there's, You know, the

turtle traders were guys that were

626

:

looking at their screens and making

decisions based on moving averages.

627

:

And it was just about price appreciation.

628

:

And I think as the quant started taking

over this concept of a correlation

629

:

matrix and, you know, the impact of, uh,

volatility sizing becomes more and more

630

:

prominent and you do get a, uh, much

more focus on not only, you know, return

631

:

profiles, but also the diversity and,

and, uh, balance within the portfolio.

632

:

So that's a good point, Corey.

633

:

All right, let's continue on

this uh, review of drawdowns.

634

:

Um, you've all had a bit of time

to take a look at these bars.

635

:

Just quickly, black is U.

636

:

S.

637

:

equities, uh, green is

trend, and blue is carry.

638

:

and what we notice is that It

turns out that Carry seems to do

639

:

a pretty good job during the most

abrupt bear markets here, right?

640

:

In the 2000s, 2008, the credit

crisis did a pretty good job.

641

:

And then during the Ukraine war, we

saw a similar outcome, which is kind of

642

:

interesting because I think most people

would consider Carry to be disastrous

643

:

and, um, and pro cyclical, much like, you

know, again, the yen carry trade can be.

644

:

And when it comes, because we call it

a risk premium, I think a lot of people

645

:

equate that to the equity risk premium,

which we know, you know, hurts a lot

646

:

when there's an economic downturn.

647

:

And so they think, okay, well, if equities

are down and that's a premium, then carry

648

:

a risk premium is also going to be hurt.

649

:

But the reality is that

the ability to short.

650

:

The ability to be directional and the

ability, to move quickly because these

651

:

systems update every day, allow for as

much, opportunity to transition to things

652

:

that are working away from things that are

not just like trend does in its own way.

653

:

And if you think about the concept of

an absolute return strategy, and you

654

:

think about the concept of the length of

a bear market in equities, for example,

655

:

it really shouldn't care too much about

what's happening to a single asset class.

656

:

If it's a strategy that's just trying

to harness some sort of premium,

657

:

whether it's the trend premium or

the carry premium, you just need

658

:

to give it time to manifest, right?

659

:

So in one of the, I think the

question that was answered

660

:

the most was a 50 50 chance.

661

:

You know, that is very true any

single day, any single day, there's

662

:

roughly a 50 50 chance of carry

being positive or being negative.

663

:

Now.

664

:

Because we have a positive expectancy

and we assume 52, 54 percent

665

:

hit rate, then we're actually

going to be slightly positive.

666

:

So we have a, in both carry and trend, we

have, a weighted coin that's in our favor.

667

:

And so.

668

:

Overtime that price movement in any given

day is roughly 50, 50, but actually more

669

:

than 50%, likely to be positive and the

longer the bear market to any single asset

670

:

class, whether it's corn or the S& P 500,

the longer an absolute return strategy

671

:

is going to, you know, migrate around

its long term expected positive return.

672

:

And so you can see that

over a three year period.

673

:

There's likely a much higher chance

for carry to provide positive returns,

674

:

like in the tech crisis, then it would

over smaller kind of drawdowns, like

675

:

in 2010, 2011, 2015, where if you

really kind of squint here, you'll

676

:

see that what actually, you know,

carry had a negative period during

677

:

2020, but provided positive returns.

678

:

But you know, not big enough to really

provide any, concrete conclusions as

679

:

to whether carry is better than trend.

680

:

And certainly we only have eight

observations here for economic

681

:

downturns and what it does.

682

:

So I think I want to take it back to

the concept of, Hey, if we expect this

683

:

to provide a positive sloping equity

line, positive return over time, every

684

:

day, there's roughly a positive coin

flip to the upside, the more days

685

:

that go by, the more likely we are to

have a positive return, regardless of

686

:

what's happening to any single market.

687

:

I hope that makes sense to everybody.

688

:

speaking of other markets that

people care about, I just found

689

:

the two periods where the aggregate

bond index had lost more than 10%,

690

:

and again, similar outcomes, right?

691

:

Um, this period here from

September 10th to October 12th

692

:

of 2008, very short period.

693

:

Trend, you know, eked out

a slightly positive return.

694

:

Carry did nothing.

695

:

You know, not enough days to really

manifest its upward slope in equity

696

:

line period from August 11th, 2020 to

th,:

697

:

to continue to, you know, aggregate

that expected positive equity line.

698

:

And we're looking at compound

total returns of just under 60%.

699

:

Right.

700

:

So I, I hope that this really helps,

in, in, in really dispelling the myth

701

:

that carry is, good, but you know, you

want to be careful because it might

702

:

be pro cyclical and might hurt my

portfolio more guaranteed when things

703

:

go wrong, depends on the duration,

depends on whether you get lucky.

704

:

you know, I think broadly speaking,

we can expect to be similar to trend.

705

:

Uh, maybe there's some slight convexity

and trend in shorter periods because of

706

:

the concentration that it can have, but

you know, it is a pretty good, protector.

707

:

It's a pretty good crisis alpha strategy.

708

:

It turns out if you're diversified

enough and you apply it the right way.

709

:

Any questions, there, Corey, before

I move on to the next section?

710

:

Corey Hoffstein: Nope.

711

:

No questions here.

712

:

Rodrigo Gordillo: So the, what I've

just kind of showed you is, I think

713

:

hopefully a very compelling case

for using these two alternatives.

714

:

Why I always like them both more

than anything else before I start

715

:

getting into other strategies.

716

:

but the question is why

isn't everybody using this?

717

:

And I think this comes down to a concept

that we've kind of talked about often.

718

:

and it's a concept of the

funding problem, right?

719

:

This idea that investors

committees understand.

720

:

Buying long, only equities and long

only bonds understand the return

721

:

drivers and they really compare

themselves against those two markets.

722

:

And what we're asking them to do using

all the math and all the financial

723

:

theory as to, as to why it's valuable

to use non correlated alternatives in a

724

:

portfolio is we're asking them to sell

their favorite toys and add this obscure

725

:

one, this thing that kind of makes some

sense, but I don't really understand it.

726

:

Right.

727

:

Is this idea of addition by a subtraction.

728

:

And if that 20 percent allocation

that you gave to the alternatives

729

:

happens to outperform the 30 and

the 50 here, then you're great.

730

:

It's it works out fantastic, but

because of the nature of it being

731

:

non correlated by definition, it'll

have periods where it does worse than

732

:

the equities and the bonds combined.

733

:

And if we look at going back to the charts

here, what I'm, what I'm going to show you

734

:

now, the black bars here represent a U.

735

:

S.

736

:

balance fund is a Vanguard fund here.

737

:

And the green bars represent

an equal weight portfolio.

738

:

of equity and trend.

739

:

Okay.

740

:

And so I've just kind of really

walked you through and got everybody

741

:

really excited about the benefits

and how amazing these two things are.

742

:

But when we actually live it, it

just kind of changes it all, right?

743

:

It has made it so that it's Most people

don't own trend and certainly very,

744

:

very few people that own carry within

a, um, an ETF or mutual fund today.

745

:

And I'm going to highlight

the periods of pain, right?

746

:

We have 2000, 2013, where the

underperformance was double digits.

747

:

And then, you know, if two years,

wasn't enough, From:

748

:

way to 2021, out of all these years,

there was only one year where the

749

:

combination did better than, than 60 40.

750

:

And that was in 2018.

751

:

The other years was drastic

outperformance by a very simple

752

:

portfolio, even though volatility

was reduced on the portfolio level.

753

:

And the, um, the return of the green line

through that period was a positive one.

754

:

It just wasn't as positive

as people want it to be.

755

:

Right.

756

:

2022, obviously a very different

outcome, but that, Doesn't matter

757

:

when you go through this, you don't

want to go through it again, right?

758

:

It's this idea when you think about the

relative returns here of a 50 percent

759

:

equity, 30 percent bond, 20 percent

alternative versus a 60 40, you know, when

760

:

they're working, you love alternatives.

761

:

When they're not working,

hate alternatives.

762

:

And this is what, um, the major

issue is and why the adoption

763

:

has been very, very low.

764

:

and it's why we are talking about

return stacking today, right?

765

:

This idea of yes, and-ing the problem

is, I think, going to be a revolutionary

766

:

concept that If people here haven't really

absorbed it yet, it really can change

767

:

dynamics of how you look at your own

portfolio or your clients look at your

768

:

portfolio by not taking away those asset

classes that people truly understand that

769

:

60 40, and rather stacking the return

profile on top, you really are giving

770

:

yourself a behavioral leg up where you

can provide the return of the 60 40.

771

:

And.

772

:

If we assume everything that we just

talked about is correct and that we

773

:

do expect a positive returns on these

strategies, we do expect to be positive

774

:

most years, not all years, then it

will add value most of the time.

775

:

Uh, the question is how do you do it?

776

:

how do we stack 20 percent on top?

777

:

And the answer here is, you know, you

would The easy answer is you borrow some

778

:

money and you invest in the security.

779

:

It's, it's like, it's like when, you

know, the vast majority of people

780

:

don't own their home outright.

781

:

vast majority of people, I know what vast

majority of clients that I've had in the

782

:

past have had a house with a mortgage.

783

:

And an investment account, right?

784

:

They, they, they aren't selling down

their investment accounts fully to

785

:

pay for their mortgage most of the

time they're diversifying risk away.

786

:

And so they're borrowing money

from the bank to buy a home and

787

:

buy an investment portfolio.

788

:

They're really stacking that

investment portfolio return on top.

789

:

and the return they're going

to get on that portfolio is the

790

:

return of the portfolio minus

the cost of the mortgage, right?

791

:

It's the same idea here, but we can do

it in a much more efficient manner using

792

:

derivatives, using futures contracts,

and, uh, and it's specifically for

793

:

carry and trend strategies, you know,

there's many ways of doing this,

794

:

there's many ways of creating capital

efficiency and return stacking.

795

:

but if you are already using

strategies that, that are capital

796

:

efficient, that invest just in futures

contracts, It's even easier, right?

797

:

So the way that this is done from a

technical basis is this is one way, right?

798

:

You have your 60 percent equities.

799

:

You don't sell out of your equities.

800

:

you keep 15 percent of your, of your

traditional bonds and you have a

801

:

margin, in cash buffer of the amount

of cashier that represents, 25%.

802

:

Right.

803

:

So with this, a portion of it will be

used as margin for the futures commodity

804

:

merchant, dealers to provide you with.

805

:

an extra 25 percent of a U.

806

:

S.

807

:

treasury index future, right?

808

:

So we, I can put a little bit of

money in those FCMs to get a full

809

:

25 percent exposure of treasuries.

810

:

And that's how I top

up my 40 percent book.

811

:

With the rest of the margin, I will

invest in my futures contracts.

812

:

Same thing, the commodity merchants

will provide me, Exposure to these

813

:

asset classes, long and short

with just a little bit of margin.

814

:

So the portfolio really looks

like 60 percent equities, 15

815

:

percent bonds, a bunch of cash.

816

:

Some of it's for margin requirements

and some of it's just safety

817

:

buffer in case margin goes up

in a period of economic duress.

818

:

We have a little bit of buffer

there to, um, to help us out.

819

:

And so what does this

look like at the end?

820

:

You know, you got your 60, you got

your 40 and you got your 50 percent

821

:

in a managed future strategy.

822

:

In this case, we're

showing trend and carry.

823

:

That's, that's the magic of

like being able to deal in these

824

:

markets in the future space.

825

:

And so why is this useful

from a behavioral perspective?

826

:

Because returns stacking is

a yes and solution, right?

827

:

All of a sudden, when I highlight those

:

828

:

the 2016, all the way to 2021 period,

all of a sudden we go from a mountain of

829

:

pain to, for most people, pretty happy.

830

:

Right.

831

:

Even during these periods where there's

a slight underperformance, I don't

832

:

know if that gap in returns between a

traditional 60, 40 and the 60, 40 plus

833

:

50 is enough to really sway them to quit.

834

:

and I think this is why, you know,

pension plans like the Delta pension

835

:

plan and many others that we describe

on our website have really adopted this.

836

:

You can't do this in size.

837

:

So it's kind of pension

plans that are 20 billion.

838

:

Um, Really have been adopting this

and using it to their advantage

839

:

because there's not a lot of pain in

providing diversifiers as a stack.

840

:

And when it does work,

it's beautiful, right?

841

:

Corey Hoffstein: Can I

interrupt really quickly?

842

:

There was a question on the last slide

as to why are you using treasury futures?

843

:

Why aren't you replacing

S& P with S& P 500 futures?

844

:

Rodrigo Gordillo: Right.

845

:

So you can, so there's many ways of

implementing a futures portfolio, right?

846

:

This is just a way.

847

:

And I think one of the reasons

that on average people using or

848

:

institutions using capital, portable

alpha or return stacking would lean

849

:

on using bonds is because the margin

requirements for bonds are much lower.

850

:

And because the margin requirements

are much lower, if there is a blowout

851

:

in volatility and treasuries, you

are going to be required, that

852

:

safety buffer, it can be a lot lower.

853

:

You're not going to be forced to sell

out of your main, you know, let's say

854

:

you have that 15 percent of us bonds is

tied up in private credit, or, you know,

855

:

longer dated duration that got hit more.

856

:

you don't want to be forced to sell these.

857

:

And you certainly don't want to

be forced to sell your equities.

858

:

Now we could, and people have done this

and they continue to do a combination of

859

:

some bonds and some equities, but again,

if you, if you were just to sell your

860

:

equities to get exposure to SPY, which

you can through the e mini contracts.

861

:

You are going to be required to, to

provide higher margin requirements.

862

:

You are going to, you're going to see

blowouts in volatility, and you're

863

:

likely to see more opportunity to get

margin calls and be forced out of the

864

:

equities that you, that you, that aren't

based on S& P 500 futures contracts.

865

:

Again, private equity could be part

of the U S allocation, and then

866

:

you've got to be forced to sell that.

867

:

Can't get out of your private

equity for six months.

868

:

All of a sudden you're forced to sell

out of your alpha that's providing

869

:

you all that protection, right?

870

:

So I don't want to be prescriptive here.

871

:

You're right.

872

:

You could use us equities, but there's,

you know, pros and cons to all of Can

873

:

Corey Hoffstein: I, can I add two other

really quick, much more simple points,

874

:

which is one, the U S equities, typically

if you hold them passively are going

875

:

to give you long term capital gains

treatment versus if you implement them

876

:

with futures, you're going to get 60, 40.

877

:

Tax treatment.

878

:

So futures are far less tax efficient.

879

:

The other part is there's an

implied funding rate in futures.

880

:

And typically the funding rate in

equities is much higher than the

881

:

funding rate implied in treasury

futures for a variety of reasons.

882

:

Today, for example, the funding

rate in equities in S& P futures is

883

:

about SOFR plus 100 basis points.

884

:

Whereas the implied funding rate in

treasury futures is less than SOFR.

885

:

So in terms of being thoughtful about

how much you're paying for leverage,

886

:

historically and today, treasury futures

have afforded a lot of benefits, both from

887

:

a net of tax perspective, as well as the

implied funding rate that you're paying.

888

:

Rodrigo Gordillo: Yeah,

that's a great point.

889

:

I don't want to freak people out

thinking that the S& P is always

890

:

costing a hundred basis points.

891

:

These numbers vary depending on

market participants, supply, the need

892

:

to hedge, you know, the more supply

there is, the lower the funding rate.

893

:

I think historically we've seen that

it's, so for plus 30 or 40 basis

894

:

points, but sometimes it can be as

high as a hundred percent, definitely.

895

:

Bonds will provide a lower cost of

financing than equities on average.

896

:

So that's a very good point, Corey.

897

:

Thank you.

898

:

All right.

899

:

So just to finish off on this slide, the,

let's, let's look at the statistics here.

900

:

If you just own the U.

901

:

S.

902

:

balance fund over this period, this

whole period, you've annualized at 6%,

903

:

which is kind of surprising, right?

904

:

You invest, uh, for the long term,

Everybody's been telling us that it's

905

:

a eight to 10%, but in reality, when

you include a couple of bear markets,

906

:

maybe three bear markets, you end up

with a 6 percent annualized return

907

:

volatility profile of around 12%.

908

:

So it's 11.

909

:

64.

910

:

This number is going to be important.

911

:

Oh my, I'm going to run out of time here.

912

:

So we may not even cover that part.

913

:

we, uh, sharp ratio of 0.

914

:

53 and a max route out of 36.

915

:

When you include that 25

percent carry 25% Stacks on top.

916

:

What we find is that the

return differential is 3.

917

:

87%.

918

:

So you increase your returns by almost 4%.

919

:

Your volatility increases, but

it doesn't increase by 50%.

920

:

Right?

921

:

Which is interesting.

922

:

It only increases by 1.

923

:

29 percent.

924

:

Your Sharpe ratio, improves.

925

:

actually that Sharpe ratio is incorrect.

926

:

Oh, the difference in Sharpe ratio.

927

:

The difference in Sharpe

ratio is an improvement of 0.

928

:

24.

929

:

And the, uh, maximum drawdown

is an improvement of seven.

930

:

Okay?

931

:

So the, let's, let's address, very quickly

why We were able to stack four percentage

932

:

points of return on, averaging up.

933

:

And while we were only, increasing

volatility by one point.

934

:

1.

935

:

29, because I think a lot of people tend

to just do general arithmetic, right?

936

:

If you added 50 percent of risk

and that risk for the trend and

937

:

carry portfolios is, you know,

9%, it's only 50 percent of that.

938

:

So you're, you should be

adding four plus the 11.

939

:

64, the balance fund, that's 60.

940

:

And that's where your

volatility should be.

941

:

That's really not how the math works

because, the reason we got to 12.

942

:

93 percent on the portfolio is

because The portfolio volatility

943

:

is the weighted average volatility

of the two asset classes.

944

:

divided by the diversification ratio.

945

:

So weighted average of the S& P in this

case is 100 percent times its volatility.

946

:

The other one is 50 percent

times its volatility.

947

:

And then you divide, divided

by the diversification ratio.

948

:

I won't get into how to calculate that.

949

:

It's, uh, you can, you can look it up,

but the more diversified the assets,

950

:

the higher the diversification ratio,

the lower your portfolio volatility.

951

:

So when you are looking at ETFs, When

people talk about leverage, the first

952

:

thing that comes to mind is double

bull, triple bull ETFs, and the carnage

953

:

that comes with levering into the

same risk, most blow ups that I know

954

:

of in the financial markets happen

to be a levering of the same risk.

955

:

What you want to use leverage for

is for defensive measures, right?

956

:

You want to have diversified asset

classes stacked on top so that you can

957

:

have a high diversification ratio and

keep your portfolio volatility low.

958

:

Okay.

959

:

So.

960

:

With this discussion of, you

know, increasing or stacking

961

:

returns or versus stacking risk.

962

:

There's always a discussion of

the, um, the variance track.

963

:

I'm sure a lot of people have

heard about variance track.

964

:

And so just broadly speaking, the

actual money in your pocket, your

965

:

portfolio compound annual rate of

return is the simple arithmetic

966

:

return minus half of the variance.

967

:

Right?

968

:

So if you add up all those bars on

a yearly basis, you get a number.

969

:

Then you have to subtract the cost of the

volatility, which is half the variance.

970

:

And that's why the arithmetic return is

higher than the portfolio compound return.

971

:

If we think about the a hundred

percent us balance portfolio, and

972

:

we multiply its standard deviation

by itself, we get a variance of 1.

973

:

35.

974

:

If we were simply to lever up the

us balance portfolio by 50%, the

975

:

variance actually goes up by half.

976

:

Significantly, it's, uh,

it's over two times, right?

977

:

The, the variance that just went

up by levering the same risk.

978

:

In contrast, when we add the 50

percent trend carry that are non

979

:

correlated, that diversification

ratio being higher has meant that the,

980

:

the, uh, variance has gone from 1.

981

:

35 to 1.

982

:

67.

983

:

Ultimately the diversification

benefits of the stack portfolio lead

984

:

to a variance increase of only 0.

985

:

25 versus a 2.

986

:

25.

987

:

For the increase in the balance fund.

988

:

Right.

989

:

So that's, we get asked a lot, you know,

variance drag, you know, what this really

990

:

means at the end of the day is you're

going to get an 80 basis point drag

991

:

from levering your us balance portfolio

by 50%, and you're only going to get

992

:

a 16 percent basis point drag on your

arithmetic return by using a 50 percent

993

:

stack in a diversified strategy like this.

994

:

Okay.

995

:

I hope that makes sense.

996

:

you know what I think.

997

:

We are going to leave it at that as

we're at the top of the hour, Corey.

998

:

just, I'm going to kind of wrap

it up, this real concept, return

999

:

stacking, you know, we've known

about portable alpha forever.

:

00:57:24,116 --> 00:57:26,196

It's a very complicated,

has many facets to it.

:

00:57:26,196 --> 00:57:32,386

I think we've really zeroed in on return

stacking being using, instruments that

:

00:57:32,386 --> 00:57:37,416

give you 1 dollar of something diversified

on top of something else and using that

:

00:57:37,436 --> 00:57:41,426

as tools in your portfolio in order to

create the stacks that make the most

:

00:57:41,426 --> 00:57:45,866

sense to you and the, the, the amount of

stacking that, uh, that you want to have.

:

00:57:46,036 --> 00:57:47,496

You know, we talked about

50 percent stacking.

:

00:57:47,756 --> 00:57:49,536

Some people are using a

hundred percent stack.

:

00:57:49,536 --> 00:57:51,356

Some people are using 20 percent stacks.

:

00:57:51,789 --> 00:57:55,749

you can do that now in a way that wasn't

really available in a couple of years ago.

:

00:57:56,926 --> 00:58:00,526

And so the way to practically implement

this, if you have a 50, 50 stock

:

00:58:00,526 --> 00:58:03,816

bond portfolio, and let's say that

there's a fund out there that has a

:

00:58:03,816 --> 00:58:05,836

hundred percent of something and a

hundred percent of something else.

:

00:58:06,246 --> 00:58:09,452

Let's say it's a hundred percent of bonds

and a hundred percent of, managed futures.

:

00:58:09,832 --> 00:58:11,392

Well, what you could do is you could sell.

:

00:58:11,742 --> 00:58:15,962

You know, 20 percent of your bonds

and buy this hundred, hundred fund.

:

00:58:16,662 --> 00:58:20,262

And what you would see, what your

clients would see is three line

:

00:58:20,262 --> 00:58:22,282

items here in the most simple way.

:

00:58:22,872 --> 00:58:26,162

But if they put their x ray goggles

on, what they're actually getting is a

:

00:58:26,172 --> 00:58:30,322

prepackaged solution that provides them

that stacking of the alternative on top.

:

00:58:31,682 --> 00:58:32,282

so.

:

00:58:32,829 --> 00:58:36,429

Let's just key takeaways that I

want everybody here to, I want

:

00:58:36,569 --> 00:58:38,009

everybody to be roughly on time.

:

00:58:38,359 --> 00:58:42,779

The key takeaways here is clearly

carry and trend offer diversification

:

00:58:42,779 --> 00:58:45,769

benefits, both to each other and

to traditional asset classes.

:

00:58:46,189 --> 00:58:50,089

And it's my two favorite premiums

since the beginning of my career.

:

00:58:50,669 --> 00:58:55,329

And contrary to the popular belief, the

idea of cross sectional carry that we

:

00:58:55,329 --> 00:58:59,919

discussed has actual strong potential,

of protection during economic duress.

:

00:58:59,919 --> 00:59:04,229

So I want to put that one to bed, take

that away, you know, think it through and

:

00:59:04,249 --> 00:59:06,669

assess whether it makes sense for you.

:

00:59:07,119 --> 00:59:10,469

And regardless of the behavioral

barriers that make it difficult

:

00:59:10,469 --> 00:59:14,229

to hold these in isolation, I

think return stacking can help.

:

00:59:14,719 --> 00:59:20,199

And, um, And by stacking these diversified

returns on top, my last point is that yes,

:

00:59:20,519 --> 00:59:22,329

we are stacking, we're using leverage.

:

00:59:22,709 --> 00:59:23,279

That's okay.

:

00:59:23,279 --> 00:59:26,899

We're using leverage or stacking

returns by leverage, but the leverage

:

00:59:26,899 --> 00:59:28,839

we're using is a defensive leverage.

:

00:59:28,839 --> 00:59:33,299

Is it we're stacking things that are non

correlated so that that increase in stack

:

00:59:33,349 --> 00:59:38,469

return shouldn't, have a commensurate

increase in portfolio volatility and with

:

00:59:38,469 --> 00:59:42,819

that, um, if anybody's still sticking

around, we can open up for questions.

:

00:59:43,979 --> 00:59:46,239

Corey Hoffstein: There are

quite a few questions here, Rod.

:

00:59:46,239 --> 00:59:50,789

We, uh, we went from almost no questions

in the first half to getting bombarded

:

00:59:50,789 --> 00:59:52,899

with questions in the second half,

and there's some great questions.

:

00:59:52,909 --> 00:59:56,589

So, two of these questions are sort of

similar, so I'm going to blend them,

:

00:59:56,639 --> 01:00:02,149

from Eric and Jonathan, saying this, this

presentation so far looked at an equal

:

01:00:02,149 --> 01:00:04,389

weight treatment between trend and carry.

:

01:00:05,009 --> 01:00:07,714

Can you talk a little bit

about what happens if, uh, You

:

01:00:07,714 --> 01:00:09,414

tilt towards one or the other.

:

01:00:09,424 --> 01:00:11,754

How do portfolio characteristics change?

:

01:00:11,784 --> 01:00:15,764

Are there reasons to tilt towards

trend versus carry or reasons to

:

01:00:15,764 --> 01:00:19,264

tilt towards carry versus trend

for certain investor profiles?

:

01:00:19,724 --> 01:00:23,474

And is it anything we've written

on this topic that we could share?

:

01:00:24,691 --> 01:00:27,511

Rodrigo Gordillo: So I think this is a

similar conversation to factor timing.

:

01:00:27,607 --> 01:00:31,947

it's a very difficult thing to do in

a clean room setting, which is, just,

:

01:00:32,157 --> 01:00:36,927

machine learning speak to can you, can you

figure out a way or some indicators where

:

01:00:36,927 --> 01:00:41,457

the strategy as a whole is likely to give

us any signal that it's gonna do better

:

01:00:41,457 --> 01:00:43,407

than another strategy in the next round.

:

01:00:43,901 --> 01:00:46,301

and the answer is we haven't

found a good solution for that.

:

01:00:46,891 --> 01:00:47,191

Right?

:

01:00:47,221 --> 01:00:54,256

Really what I think everybody needs to

think about when it comes to allocating to

:

01:00:54,256 --> 01:00:59,266

anything, to asset classes or strategies

is the idea of being broadly correct.

:

01:00:59,876 --> 01:01:01,986

Cause you don't want to

be specifically wrong.

:

01:01:02,556 --> 01:01:07,196

And I think way too many people want

the data, want the minutiae, want

:

01:01:07,616 --> 01:01:11,966

to see what happened in these two

periods or eight periods, and based on

:

01:01:11,966 --> 01:01:15,216

that data, then decide to overweight

or underweight one or the other.

:

01:01:15,861 --> 01:01:20,561

The way we see it is that it's so

difficult to assess that if the

:

01:01:20,561 --> 01:01:24,741

characteristics in terms of sharp ratio

or Certino ratio are fairly similar.

:

01:01:25,001 --> 01:01:25,131

Right.

:

01:01:25,191 --> 01:01:28,231

And I think I made a case for why

they're like the sharp ratios are likely

:

01:01:28,231 --> 01:01:31,521

to be very similar going forward at

the same level that that means that at

:

01:01:31,521 --> 01:01:35,527

the same level of risk, I can't tell

you which one's going to be better.

:

01:01:36,182 --> 01:01:38,782

I can tell you from a fundamental

perspective, why they're likely

:

01:01:38,782 --> 01:01:40,622

to be different in any given day.

:

01:01:41,182 --> 01:01:45,202

I cannot tell you with any certainty,

which one of them is likely to outperform.

:

01:01:45,702 --> 01:01:50,672

And in the absence of that knowledge, the

do no harm approach is the thing that you

:

01:01:50,672 --> 01:01:53,262

could take, which is just equal weighted.

:

01:01:53,592 --> 01:01:58,892

And that's at this point, but this

type of kind of meta allocation,

:

01:01:58,932 --> 01:02:00,142

I think a prudent approach.

:

01:02:01,506 --> 01:02:04,166

Corey Hoffstein: Another question, Rod,

do you expect the tax treatments or

:

01:02:04,166 --> 01:02:08,906

distributions to be tangibly different

on trend products versus carry products?

:

01:02:10,381 --> 01:02:14,011

Rodrigo Gordillo: No, on, you

know, if you're on publicly traded

:

01:02:14,011 --> 01:02:16,191

products, it'll vary every year.

:

01:02:16,331 --> 01:02:16,651

Right.

:

01:02:16,834 --> 01:02:19,314

because there's a few components here.

:

01:02:19,324 --> 01:02:25,204

There is the financial instruments,

which are going to be taxed 60, 40.

:

01:02:25,584 --> 01:02:28,704

And so no matter what return, like if

all the returns came from financial

:

01:02:28,934 --> 01:02:33,734

instruments and carry or trend, then

you would get the exact same tax remit.

:

01:02:34,494 --> 01:02:34,944

But.

:

01:02:35,329 --> 01:02:39,779

We have to take into account the fact that

you can actually hold commodities within a

:

01:02:39,788 --> 01:02:42,179

RIC, a registered investment corporation.

:

01:02:42,609 --> 01:02:48,326

And so every fund that runs, managed

futures has to have a Cayman fund for

:

01:02:48,326 --> 01:02:52,116

25 percent as a Cayman blocker that

basically allows you to trade commodities

:

01:02:52,116 --> 01:02:55,181

and transform that into, ordinary income.

:

01:02:55,881 --> 01:03:00,101

And so depending on whether Carry made all

of its money on commodities this year and

:

01:03:00,101 --> 01:03:04,481

trend made all of its money on financials

this year, you will have different

:

01:03:04,501 --> 01:03:06,781

outcomes in terms of tax treatment, right?

:

01:03:06,791 --> 01:03:08,801

So in every year, it's

going to be different.

:

01:03:08,851 --> 01:03:10,551

And it's really tough to

tell who's going to win.

:

01:03:10,571 --> 01:03:13,481

Again, it's kind of like answering

the same questions before over

:

01:03:13,481 --> 01:03:15,761

time, they should be fairly similar.

:

01:03:16,461 --> 01:03:18,301

Any given year, they

could be wildly different.

:

01:03:19,682 --> 01:03:21,542

Corey Hoffstein: Two somewhat

similar questions here.

:

01:03:21,542 --> 01:03:24,382

So I'm gonna, I'm gonna ask them both

Rod and let you answer them in one.

:

01:03:24,942 --> 01:03:27,872

Uh, the first question is doesn't

return stacking work only if the

:

01:03:27,872 --> 01:03:32,112

risk premium strategies have a return

higher than the cost of financing?

:

01:03:33,032 --> 01:03:34,032

Rodrigo Gordillo: It's

a very good question.

:

01:03:34,392 --> 01:03:35,112

Corey Hoffstein: And then hold on.

:

01:03:35,112 --> 01:03:40,002

I'm going to, the related question is

what percentage of the com does the

:

01:03:40,002 --> 01:03:44,662

combination of hurdle rate and high

expense ratio eat into a strategies alpha.

:

01:03:44,772 --> 01:03:48,472

So both of those touching on

the financing hurdle rate, and

:

01:03:48,472 --> 01:03:50,082

then also including expenses.

:

01:03:51,309 --> 01:03:53,916

Rodrigo Gordillo: Those are very

good questions, often asked and

:

01:03:53,946 --> 01:03:57,726

indeed what you, what you stack, you

want to have some expectation that

:

01:03:57,726 --> 01:03:59,686

it's going to do better than cash.

:

01:03:59,826 --> 01:04:00,036

Okay.

:

01:04:00,036 --> 01:04:02,436

So let's just go back to

what the Sharpe ratio is.

:

01:04:02,496 --> 01:04:06,756

The Sharpe ratio is the return

per unit of risk, but it's

:

01:04:07,046 --> 01:04:08,916

above the risk free rate, right?

:

01:04:08,916 --> 01:04:14,366

So if you have a risk premia that

is expected to provide positive

:

01:04:14,366 --> 01:04:16,899

returns over time, you should.

:

01:04:17,049 --> 01:04:20,649

If it has a positive Sharpe ratio, it

means that you should expect it to do

:

01:04:20,649 --> 01:04:25,729

better than the, than the rate of, of the

cash shield and in futures is actually

:

01:04:25,729 --> 01:04:31,109

quite interesting because you don't really

trade these managers when they looked at

:

01:04:31,129 --> 01:04:36,699

their performance, remember what they're

trading, they're trading the excess return

:

01:04:36,699 --> 01:04:39,159

lines of each one of the securities.

:

01:04:39,634 --> 01:04:47,204

So if you were to put a S& P 500 mini

futures contract, stitch together returns

:

01:04:47,254 --> 01:04:52,684

versus the S and like the iShares S& P

500, return total return profile, you

:

01:04:52,684 --> 01:04:57,394

will see that the, the returns of just

owning the futures contract is going

:

01:04:57,394 --> 01:05:03,194

to be lower than that of owning the

actual total return ETF, because it, it

:

01:05:03,194 --> 01:05:05,064

includes the cost of financing already.

:

01:05:05,444 --> 01:05:07,554

So what managed futures managers.

:

01:05:08,234 --> 01:05:10,934

What they're trading is

already the excess returns.

:

01:05:11,824 --> 01:05:16,634

And what they're trying to assess

is does carry or trend allow me to

:

01:05:16,674 --> 01:05:19,994

pick these excess return lines in

a way that over time I'm going to

:

01:05:19,994 --> 01:05:22,314

make an, a return above excess cash.

:

01:05:22,674 --> 01:05:26,694

And that's exactly what you get when you,

When you look at managers and when you

:

01:05:26,694 --> 01:05:30,764

assess managers on both types, anything

on the managed future side, you're

:

01:05:30,764 --> 01:05:32,654

really just assessing the excess returns.

:

01:05:33,241 --> 01:05:37,591

and, and really that's the, the cost

of financing doesn't really matter

:

01:05:37,591 --> 01:05:39,231

at all to an excess return manager.

:

01:05:39,231 --> 01:05:44,601

We don't see a correlation between periods

where the cost of borrow is really high

:

01:05:45,021 --> 01:05:48,961

and the excess return profile of a trend

or managed future or a carry manager.

:

01:05:49,136 --> 01:05:53,426

Uh, whether it's been in the mid

noughts where rates were five or now

:

01:05:53,426 --> 01:05:57,526

with rates are low, roughly speaking,

the excess returns are fairly similar.

:

01:05:58,156 --> 01:05:59,516

I don't know if you have

anything to add to that.

:

01:05:59,686 --> 01:06:01,466

I know that there's another

question there, Corey.

:

01:06:02,026 --> 01:06:03,736

Corey Hoffstein: And this is a

question that comes up a lot, which

:

01:06:03,736 --> 01:06:07,176

is don't, don't these strategies

have to overcome the hurdle rate?

:

01:06:07,731 --> 01:06:10,171

And the answer is that that

hurdle rate is already baked

:

01:06:10,171 --> 01:06:11,711

into the return of the futures.

:

01:06:12,461 --> 01:06:15,501

This is something we've written

a number of pieces about in the

:

01:06:15,511 --> 01:06:18,001

insights section of our, of our blog.

:

01:06:18,001 --> 01:06:20,601

So maybe I'll share a quick

link to some of those articles

:

01:06:20,841 --> 01:06:22,251

in answer to the question.

:

01:06:22,651 --> 01:06:26,991

But it's, it's a common misconception

about how the hurdle rate works.

:

01:06:27,421 --> 01:06:31,606

Again, it's already, you're already,

priced into the futures, it's in the

:

01:06:31,606 --> 01:06:32,816

return of the futures themselves.

:

01:06:32,876 --> 01:06:36,426

And if the hurdle rate is high enough,

such as it drags down the return

:

01:06:36,456 --> 01:06:37,816

of the futures contract, great.

:

01:06:37,816 --> 01:06:40,196

We can short it and earn

that financing rate.

:

01:06:40,666 --> 01:06:43,196

Um, so it's actually something

we can take advantage of if it is

:

01:06:43,196 --> 01:06:45,746

high enough, it's already baked

into the return of those futures.

:

01:06:46,946 --> 01:06:51,226

another question here for you, Rod,

trend and carry both incorporate bonds.

:

01:06:51,286 --> 01:06:54,766

Can we aggressively eliminate

bond allocations and simply rely

:

01:06:54,766 --> 01:06:58,316

on an allocation distract to,

to, to these stack strategies?

:

01:06:59,946 --> 01:07:00,486

Rodrigo Gordillo: Oh, I see.

:

01:07:00,486 --> 01:07:04,346

So because they already include

allocations to bonds, why not just get

:

01:07:04,346 --> 01:07:05,986

rid of bonds and replace it with this?

:

01:07:06,406 --> 01:07:09,706

well it's, at the end of the day, it's

because it's a different return driver.

:

01:07:10,286 --> 01:07:13,386

Do you expect positive outcomes

from your bond allocation?

:

01:07:14,416 --> 01:07:18,356

Is that bond allocation return going to

be similar to that of carry and trade?

:

01:07:19,086 --> 01:07:21,616

And also importantly, is it going

to be, is it going to move, is it

:

01:07:21,616 --> 01:07:23,236

going to zig when the other two zag?

:

01:07:24,036 --> 01:07:25,976

And I think we can answer

yes to all of them.

:

01:07:25,976 --> 01:07:30,736

They're going to be, I think we should

expect, in any bond portfolio that

:

01:07:30,736 --> 01:07:35,806

has any duration at all over time

for that risk of buying something in

:

01:07:35,816 --> 01:07:38,756

the future, or that's that, you know,

loaning money for the future, you

:

01:07:38,756 --> 01:07:40,196

should expect a higher return than cash.

:

01:07:40,739 --> 01:07:42,069

you want to capture that term premium.

:

01:07:42,719 --> 01:07:42,979

Right?

:

01:07:42,999 --> 01:07:45,909

It's a different premium

than carry and trend.

:

01:07:46,549 --> 01:07:50,599

And the problem with assuming that, okay,

well, I got trend and carry together.

:

01:07:50,609 --> 01:07:51,788

They have a bunch of bonds.

:

01:07:52,139 --> 01:07:57,038

Forget about my traditional bonds is that

you then will go through periods like

:

01:07:57,049 --> 01:08:06,409

:

uh, one, uh, where bonds did really well.

:

01:08:06,799 --> 01:08:10,309

And carry and trend as a

combo didn't do so well.

:

01:08:10,479 --> 01:08:13,259

And then your clients are asking, I

thought we had a 60, 40 portfolio.

:

01:08:13,889 --> 01:08:14,119

Right.

:

01:08:14,119 --> 01:08:17,679

So I think, I mean, this is

portfolio construction 101.

:

01:08:17,959 --> 01:08:23,086

The magic here is finding as many, in

my opinion, liquid, asset classes as

:

01:08:23,086 --> 01:08:27,986

possible that are, that you can expect

a unique return that is not correlated

:

01:08:27,986 --> 01:08:32,816

to the other things that you own

and do it at a, at a level of risk,

:

01:08:32,992 --> 01:08:37,242

volatility that you can handle so that

you can also achieve as much return per

:

01:08:37,242 --> 01:08:38,572

unit of that risk that you're taking.

:

01:08:38,612 --> 01:08:43,072

So I definitely, um, espouse

more diversity rather than less.

:

01:08:44,276 --> 01:08:46,556

Corey Hoffstein: Maybe

last question here, Rod.

:

01:08:46,685 --> 01:08:49,026

Uh, and this one goes back

to, to the question of.

:

01:08:49,350 --> 01:08:52,804

Carry, and again, people's perception

of carry potentially as a risky

:

01:08:52,804 --> 01:08:55,863

strategy, though this one a little

less risky, but this person asks

:

01:08:56,283 --> 01:09:00,774

any thoughts on the impact in carry

strategies if the Bank of Japan does

:

01:09:00,774 --> 01:09:03,004

hike rates and the Fed starts to cut?

:

01:09:03,634 --> 01:09:06,073

I think maybe you can talk a little

bit here about the diversified

:

01:09:06,073 --> 01:09:07,943

nature of, of carry programs.

:

01:09:08,464 --> 01:09:08,774

Rodrigo Gordillo: Yeah.

:

01:09:08,794 --> 01:09:13,774

I mean, the first thing that came up in

that, when was it March, when there was a

:

01:09:13,774 --> 01:09:19,577

bit of a, uh, yen, carry trade online, the

first thing that came up is like, okay,

:

01:09:19,657 --> 01:09:22,237

how bad is it for your carry strategy?

:

01:09:22,636 --> 01:09:27,057

And the answer, when we kind of looked

into carry strategies in all the different

:

01:09:27,077 --> 01:09:32,437

types of strategies that we run is yeah,

it got hurt that the end U S dollar trade

:

01:09:32,466 --> 01:09:33,917

was we're on the wrong side of that.

:

01:09:33,917 --> 01:09:34,966

And we lost money.

:

01:09:35,707 --> 01:09:39,594

The beautiful thing was that we

had dozens of other, trades on at

:

01:09:39,594 --> 01:09:42,184

the same time that more than offset

the loss for the end carry trade.

:

01:09:43,154 --> 01:09:43,304

Right.

:

01:09:43,304 --> 01:09:45,504

So again, this is about

the key thing here.

:

01:09:45,504 --> 01:09:51,054

When we say carry is really moving

past the very concentrated definition

:

01:09:51,054 --> 01:09:57,374

of carry of a single trade or a just

currency carry, and really understanding

:

01:09:57,374 --> 01:10:01,844

that we have a wide variety of assets

that we can capture carry from.

:

01:10:02,129 --> 01:10:04,789

That all respond differently

to the same economic impact.

:

01:10:05,259 --> 01:10:09,979

And so that positioning creates

a breadth and diversity that

:

01:10:09,989 --> 01:10:14,779

tends to have a very, you know,

robust equity line, uh, over time.

:

01:10:15,119 --> 01:10:17,189

I don't know if you want to add

anything to that, Corey, because I

:

01:10:17,189 --> 01:10:18,249

know you did some analysis there.

:

01:10:19,469 --> 01:10:19,649

Corey Hoffstein: Yeah.

:

01:10:19,649 --> 01:10:22,139

I think generally the perception

with carry is that it's going to

:

01:10:22,159 --> 01:10:23,669

be dominated by currency carry.

:

01:10:23,669 --> 01:10:29,859

And actually, if you go and look at our

live results, uh, when there was In the

:

01:10:29,859 --> 01:10:33,789

end, back in late July and early August,

you'll see that our carry strategy

:

01:10:33,869 --> 01:10:37,259

held up quite well and it's because

of the diversified nature, both long

:

01:10:37,259 --> 01:10:39,479

and short of what we're investing in.

:

01:10:39,489 --> 01:10:42,769

And if you go to the return stack

ETF website, you can actually go

:

01:10:42,818 --> 01:10:46,899

to the carry ETFs and you'll see on

any given day, there's a wonderful

:

01:10:46,909 --> 01:10:48,994

graph that says how we're allocated.

:

01:10:49,254 --> 01:10:50,554

On a risk basis.

:

01:10:50,554 --> 01:10:53,784

And you can see there's considerable

diversification in what we're

:

01:10:53,784 --> 01:10:57,554

allocated to far beyond just

sort of a single currency pair.

:

01:10:57,564 --> 01:11:03,074

So historically, yes, the yen dollar,

or you really yen anything has been

:

01:11:03,443 --> 01:11:08,974

the quintessential example of a carry

trade, but we think carry commodity,

:

01:11:08,974 --> 01:11:13,277

carry bond, carry currency, carry,

and even equity carry, will, will

:

01:11:13,277 --> 01:11:16,937

continue far beyond no matter what

happens with the yen specifically.

:

01:11:18,077 --> 01:11:18,617

Rodrigo Gordillo: Any other questions?

:

01:11:19,677 --> 01:11:22,457

Corey Hoffstein: I think we've

hit just about all of them.

:

01:11:23,007 --> 01:11:26,597

Rodrigo Gordillo: can I just do

one in the room and all of it in

:

01:11:26,597 --> 01:11:29,317

the room that I want to address and

cause I know people are thinking it.

:

01:11:30,294 --> 01:11:31,064

I think it's important.

:

01:11:31,124 --> 01:11:33,344

This analysis ended in:

:

01:11:33,537 --> 01:11:36,377

:

:

01:11:37,221 --> 01:11:39,607

in the beginning, there was a

lot of, things that went right

:

01:11:39,607 --> 01:11:41,017

in the beginning of the year.

:

01:11:41,407 --> 01:11:45,034

And in the context of like,

Carry has done phenomenally

:

01:11:45,034 --> 01:11:46,044

well over the last three years.

:

01:11:46,674 --> 01:11:50,994

And as we like to, uh, to do, when

we start talking about trend, you

:

01:11:50,994 --> 01:11:53,854

and me, Corey, we immediately, not

trend, when we start talking about

:

01:11:53,864 --> 01:11:58,684

any strategy, we immediately find

that, uh, it has a drawdown for

:

01:11:58,874 --> 01:12:00,274

a period that is uncomfortable.

:

01:12:01,037 --> 01:12:01,547

so.

:

01:12:02,032 --> 01:12:04,612

You know, that the reality

is that the last six months

:

01:12:04,612 --> 01:12:06,262

for Carry has not been great.

:

01:12:06,292 --> 01:12:10,636

It has, it has probably been one of

the worst strategies to, uh, invest

:

01:12:10,636 --> 01:12:14,666

in, in kind of the, uh, the number

of strategies that we run, but in the

:

01:12:14,666 --> 01:12:18,756

context of the last five years, it is

just a correction of a phenomenal run.

:

01:12:19,336 --> 01:12:23,536

so I just want people as they examine

Carry and kind of get to know it and,

:

01:12:23,996 --> 01:12:26,456

and see it that they don't feel like.

:

01:12:26,766 --> 01:12:30,309

You know, there's something wrong with it

now, that we've started talking about it.

:

01:12:30,338 --> 01:12:32,268

it is a fairly normal correction.

:

01:12:32,668 --> 01:12:35,278

It just happens to be highlighted

by the fact that we are paying

:

01:12:35,278 --> 01:12:37,968

attention to it at the wrong

time, as, as we like to do, Corey.

:

01:12:38,938 --> 01:12:41,598

Corey Hoffstein: As tends to happen

whenever you launch a new product.

:

01:12:42,111 --> 01:12:44,291

Rodrigo Gordillo: and if anybody

wants to see kind of a larger history,

:

01:12:44,291 --> 01:12:46,411

you can go to InvestResolve or QEP.

:

01:12:46,771 --> 01:12:49,895

You can look at the carry strategies and

see, just to get an indication of it.

:

01:12:50,721 --> 01:12:51,881

Or even this presentation.

:

01:12:52,339 --> 01:12:52,818

Corey Hoffstein: Okay.

:

01:12:52,849 --> 01:12:53,509

That is it.

:

01:12:53,519 --> 01:12:56,989

Rest of these questions, we will try

to follow up with people individually.

:

01:12:57,079 --> 01:12:59,649

Uh, we really appreciate everyone's time.

:

01:12:59,649 --> 01:13:01,889

Thank you for tuning in and

taking the time to educate

:

01:13:01,889 --> 01:13:04,179

yourself on trend and carry.

:

01:13:04,649 --> 01:13:07,489

Again, these are strategies that

we think can have the potential

:

01:13:07,489 --> 01:13:08,789

to have a profound benefit.

:

01:13:09,049 --> 01:13:10,269

Uh, in your portfolio.

:

01:13:10,269 --> 01:13:13,099

And so Rodrigo, I want to take,

thank you for taking the time to

:

01:13:13,099 --> 01:13:16,789

walk us through this and thank

you everyone for staying late.

:

01:13:16,849 --> 01:13:19,389

Uh, the vast majority of you

are here 20 minutes after this

:

01:13:19,389 --> 01:13:20,409

webinar was supposed to be over.

:

01:13:20,409 --> 01:13:22,739

So we, we really sincerely

appreciate your time.

:

01:13:22,769 --> 01:13:22,889

I'm

:

01:13:22,929 --> 01:13:23,599

Rodrigo Gordillo: so sorry.

:

01:13:24,116 --> 01:13:26,246

I, I was a little under

the weather this week.

:

01:13:26,246 --> 01:13:29,546

So, uh, not as focused as normally it

was, we normally are, but hopefully.

:

01:13:29,831 --> 01:13:31,751

The content with content

was useful nonetheless.

:

01:13:32,541 --> 01:13:34,898

and you can always find

us at, returnstacked.

:

01:13:34,898 --> 01:13:35,258

com.

:

01:13:35,538 --> 01:13:39,228

It's a contact us button there,

and you can schedule a call.

:

01:13:39,228 --> 01:13:44,628

If you want to us to take a look at

your portfolios or, um, or help you

:

01:13:44,628 --> 01:13:48,318

out with any sort of, uh, conceptual

understanding of the, of return stack.

:

01:13:49,571 --> 01:13:49,921

All right.

:

01:13:50,291 --> 01:13:50,951

Thank you all.

:

01:13:51,544 --> 01:13:52,344

Appreciate you, Corey.

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About the Podcast

Resolve Riffs Investment Podcast
Welcome to ReSolve Riffs Investment Podcast, hosted by the team at ReSolve Global*, where evidence inspires confidence.
These podcasts will dig deep to uncover investment truths and life hacks you won’t find in the mainstream media, covering topics that appeal to left-brained robots, right-brained poets and everyone in between. In this show we interview deep thinkers in the world of quantitative finance such as Larry Swedroe, Meb Faber and many more, all with the goal of helping you reach excellence. Welcome to the journey.


*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.