0:00

You're about to join

0:02

Nils Kastrup-Larsen on a raw

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and honest journey into the world of systematic

0:06

investing and learn about the most dependable

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and consistent yet often overlooked

0:11

investment strategy. Welcome

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to the Systematic Investor Series.

0:23

Welcome and welcome back to this week's edition of the

0:25

Systematic Investor Series with Andrew BNI,

0:28

Nils Kastrup-Larsen, where each week we take the pulse

0:30

of the global market through the lens of a rules-based

0:33

investor. Today's episode

0:35

is even more special as we are

0:37

also joined by returning guest Tim Pickering

0:39

for a good old-fashioned debate on

0:42

some of the most important changes that

0:45

we are seeing in the CTA industry relating

0:47

to how people access these strategies.

0:51

Andrew and Tim, it's great to have you both back on the

0:53

podcast this

0:53

week. Tell me what's going on where you

0:55

are today. Andrew? Thank

0:58

you. Well, first of all, thank you for having me back. Yeah,

1:00

so I think from a

1:03

macro perspective, I think what's been taking

1:05

a lot of time and energy is just the exhausting

1:07

nature of US politics and

1:10

what is going to happen over the course of

1:12

the next couple of years. It seems like we were in sort

1:14

of a little bit of a respite last year when it

1:17

was more about the Fed and

1:19

inflation, what was happening. I think a lot of attention

1:21

is turning back to politics and

1:23

it's just kind of a dreary and depressing

1:26

presidential

1:27

process that we're beginning. And I think what you saw with the

1:29

debt ceiling,

1:30

which again, it's these external events,

1:32

which just kind of keeps everybody

1:34

waiting in abeyance

1:36

while it feels like you have two

1:39

clown cars driving toward each other playing a

1:41

game of chicken. It's just,

1:44

I hope we just have a more interesting and productive

1:46

macro environment over the next few months.

1:49

Absolutely. And I was even thinking of just about

1:51

what's going on in New York where you are today and you're

1:53

laying out this whole macro picture for me,

1:55

which I wanted to ask you anyway, so I appreciate

1:58

that, Andrew.

2:00

Calgary,

2:01

what's going on? Anything exciting?

2:03

Yeah, we're a Calgary based manager,

2:05

which is a little bit of an outlier.

2:08

Obviously that's the focus

2:10

of the energy business in Canada

2:13

and arguably the largest oil reserve

2:15

in the world is in Northern

2:17

Alberta. So it is an energy

2:20

focused town. Yeah, it's an interesting

2:22

time for sure. We're seeing some weakness in energies,

2:24

which you've been seeing for, I guess, quite some time.

2:27

As far as politics go, generally

2:29

don't pay all that much attention other

2:32

than for entertainment value.

2:35

We don't do anything with it from an

2:38

investment perspective, that's for sure.

2:40

But it is interesting times. I think it's

2:43

probably pretty unlikely that we go

2:45

back to a world

2:47

of quantitative easing, zero

2:50

rates, no inflation, no

2:53

vol anytime soon. So that makes

2:55

it a more, what

2:57

I call normal time to be a CTA

3:00

or a co-op manager, somebody looking to capture

3:02

trends in the marketplace.

3:03

So these are interesting times

3:05

for what we do for sure, especially from a commodity

3:07

perspective.

3:08

Yeah. And actually

3:11

it's interesting what you say there, Tim, because I

3:13

think a lot of people don't necessarily think about

3:16

the last 10 years as being the anomaly,

3:18

but I truly believe it is. And so what we're

3:20

back now is in an environment where

3:23

these kind of strategies become even more important

3:25

for people who want some kind of true

3:28

diversification in their portfolios. So

3:31

I'm truly excited about

3:33

our conversation today. It's

3:36

going to be a debate where there's going to be some strong views,

3:38

strong opinions,

3:38

strong disagreement, I

3:41

feel. But nevertheless,

3:43

it's a really important debate because

3:46

it goes to the heart of how should

3:48

people think about accessing or getting

3:51

access to these type of returns that

3:53

we all love and hold dear to our

3:55

hearts. Before we go into

3:58

all of that, since we are recording.

3:59

of the last day of May,

4:01

let me just say from a trend following

4:04

update point of view, that, you

4:07

know, May has actually been pretty good

4:10

so far, as far as I can tell, you know,

4:12

although there's been a few surprises towards

4:14

the end in some of the markets. But you know,

4:16

in terms of opportunities, the

4:19

interesting thing about this month is that some of the best

4:21

performing markets and sectors has been

4:23

things like meats and base metals

4:25

and some specific equity markets like

4:27

Japanese equities and long gills

4:30

in terms of fixed income and of course

4:32

also accompanied by some

4:34

energies and trends in grains.

4:37

So an interesting month again

4:39

showcasing I think the strength

4:41

of what we do and more importantly the non-correlation

4:43

to equities and bonds as

4:46

we all love. Anyways,

4:48

let's dive into it. But

4:50

actually before we do that, let me just throw in some

4:52

numbers. My own trend barometer

4:55

finishes the month around 43, so

4:57

still stuck in neutral zone, reflecting

4:59

somewhat inconsistent opportunity sets

5:01

for this year so far. But

5:04

in terms of the indices we track,

5:06

the BTOP 50 index

5:08

as of close of business last night up 1.33% for the month,

5:10

down about 1% for the year. The

5:15

SockGen CT index up 2.76% for the month, down 60

5:17

basis point for the year. The

5:22

BTOP 50 index up 3.76% for the month, down

5:24

about 1% for the year. And the short

5:26

term traders index I have to say struggling

5:28

a bit this year down 73 basis points

5:31

and down 2.9% this year. This

5:34

in contrast to equities being down

5:36

slightly as of close of business last night, 36

5:39

basis point for MSEI

5:41

World, still up 8.5%. Bonds

5:44

came off but have recovered the last couple of days,

5:46

but still about 90 basis points down

5:48

for the month. And the S&P is

5:51

up just shy of 1% as of last night, up 9.5% for the year. Anyways,

5:56

now you've each kind of given me

5:58

a few topics that I could. bring up and

6:00

I will try to add maybe a few

6:03

comments along the way or follow

6:06

up questions. And then actually we have

6:08

a listener, Oliver, who wrote in with a couple

6:11

of topics that actually I think is very relevant for

6:13

this conversation. So I'm going to try and throw them

6:15

in as well. Now,

6:17

before we start really getting

6:20

into the meat of all of this, I'd

6:22

like maybe to start with you, Tim, because

6:25

if I'm not wrong

6:27

in my memory, you guys launched

6:29

perhaps the first or one of the first CTA

6:32

strategies within an ETF. And clearly

6:34

that's really a big part of

6:37

our debate today. So I'm curious

6:39

in terms of

6:40

why you did it and kind

6:42

of some of the experience from

6:45

those early days. But

6:47

then we'll get into the real topics.

6:49

Sure. Yeah. So we

6:52

are the first CTA ever to launch an ETF.

6:55

It was back in 2008. We started

6:57

with something very simple.

7:00

It was an exposure, beta exposure

7:03

to natural gas, Canadian natural

7:05

gas, what's called ACOGAS, which

7:07

is one of the largest gas supplies to the US.

7:10

And why did we do that? We

7:13

had launched Ospis, started

7:15

Ospis in, I left Shell

7:18

in 2005, first fund in

7:19

late 2006. And here a couple

7:21

of years later, we were launching this beta natural gas

7:23

ETF. What we were trying to learn

7:26

about is the delivery mechanism. We

7:29

recognize that as a quantitative,

7:31

systematic rules based manager,

7:33

that really was akin

7:36

to an index. And

7:38

could we find ways to get products

7:41

like commodities and CTA into

7:44

a format that we thought was

7:46

the where the puck was going and that is an ETF.

7:49

So learn

7:49

about indexing, learn about ETFs,

7:52

do it with a very esteemed partner

7:54

was Claymore. Claymore's net

7:57

was now then gobbled up

7:59

by BlackRock.

7:59

product. We launched it with Claymore.

8:02

They had a great distribution team and we

8:04

learned a lot. So that was kind

8:06

of the first thing was the beta product. The next thing

8:08

we did was more CTA-like and

8:11

that was we launched a trend

8:13

following long flat commodity

8:16

product linked to our

8:18

Ospis broad commodity index. There's a couple

8:21

indices or a couple ETFs now in

8:23

the world linked to that both in the US

8:25

and Canada. Trend following

8:27

volatility based position sizing, term

8:29

structure, all that fun CTA stuff that's

8:31

from our world. And again, we

8:33

were trying to break open

8:36

that retail space and really give access

8:39

to retail investors to something that otherwise

8:42

was a little bit opaque, definitely hard to get

8:44

their hands on. Being

8:46

in Canada, a very commodity

8:49

focused nation, everybody

8:52

will tell you they have commodity exposure

8:54

and what they really mean is resource equity or debt.

8:57

And that isn't commodity exposure. So we're

9:00

always looking for ways

9:02

to enable the investor, whether it's retail or

9:04

institutional, to have access to product. So

9:06

that was our first foray into it. We learned a lot.

9:09

I'll preface this by saying we really

9:12

believe in the ETF product line

9:14

is a delivery mechanism.

9:16

And again, these are just delivery mechanisms,

9:19

very pro ETFs and even pro ETFs in

9:21

the CTA and commodity

9:24

space. It accounts

9:26

for more than half of our

9:28

almost billion in assets. So

9:30

we really believe in that space in

9:33

general. And obviously, the product

9:36

that

9:37

Andrew and team brought out piques

9:40

our interest in various ways just

9:42

because it's a CTA

9:45

type of product and we

9:47

know this space. So we definitely applaud

9:49

the innovation and

9:53

the pioneering aspects. That's what

9:55

gets us up in the morning here at Osmus. Absolutely.

9:58

Now,

9:59

So the first topic really

10:02

comes from Andrew and

10:04

Andrew raised the question, what

10:07

is a Managed Futures Index and

10:09

why should anyone care about

10:11

whether something is an index

10:15

or not?

10:16

So I wonder if you want to throw

10:18

a little bit of thoughts to that Tim and then Andrew

10:22

you can comment from your point of view because I

10:24

know you wrote about this a few years

10:26

back. But

10:28

Tim, what are your thoughts about this?

10:32

Yeah, well, so if you go

10:34

back and I mean, I'm going to go way back to 2008, 2010.

10:40

We made the decision as a CTA to

10:42

take our strategy and actually publish indexes

10:45

linked to those strategies. So

10:48

we took a single strategy to carve out

10:50

from our flagship, took that IP

10:53

to the NYSE to an index provider

10:55

and they actually publish that index as a

10:57

third party. Why do we do that?

11:00

And the same was with natural gas. We needed

11:02

to create a benchmark index for that

11:04

ETF, one that

11:06

the strategy had a goal of

11:09

tracking instead of

11:11

us tracking or comparing to something off

11:13

the shelf. Why don't we create

11:15

our own strategy and publish that and that is the

11:17

strategy. And then if there's a deviation

11:20

in our strategy or in

11:22

our performance from theoretic,

11:25

i.e. the index, the investor can see that.

11:27

And that provided the investor some comfort, especially

11:30

way, way back when we were launching ETFs

11:34

in a very, again, opaque area, commodity

11:36

and CTA. It was really new at the

11:38

time. And it wasn't hard to do, right?

11:41

Because we have rules-based CTA

11:43

strategies, putting them in an index format

11:46

is pretty easy to do as

11:49

opposed to saying, look, what we want

11:51

to do is launch a product. In

11:54

the case of commodity, our first

11:56

product was could we beat the GSCI

11:58

or the BECO?

12:00

that was our goal. And we said,

12:02

yeah, we can. So the benchmark

12:05

could be B-commerce, GSCI, and we can

12:07

use trend following in terms structure and

12:10

volatility based position sizing to do that.

12:13

Or we can publish our own strategy

12:15

as the benchmark index. And that's the path we

12:18

chose that created some comfort for

12:20

the investor. And that's

12:23

just the path that made sense for us

12:25

at the time. So we do believe

12:28

in the space where,

12:30

and I know Andrew has some specific thoughts

12:32

on this, of taking a

12:34

strategy, one that we believe is robust,

12:37

that can be replicated as a

12:40

strategy, especially for the market makers and

12:42

putting that out as an ETF product,

12:45

as opposed to replication.

12:48

And I'm not saying replication is bad and we can go

12:50

down that path here shortly, but

12:53

that's just the path we chose at the time was

12:55

to take our strategy. We had a lot

12:57

of track record. We've been around 17 plus

12:59

years, a lot of track record in this. And

13:02

that's what we'll use as the basis for the strategy.

13:05

Okay. Now, Andrew, I have to

13:07

say, I have not read your article that

13:09

you wrote, but I think it's a few

13:12

years back in 2015.

13:15

What did you write about this topic? So

13:18

I'm endlessly fascinated by this

13:20

intersection. So

13:22

one of the most fascinating things from an industry structure

13:25

perspective is this debate between

13:27

active and passive. And a lot of things

13:29

in the asset management world

13:32

have kind of big words attached to them and people kind of

13:34

take it. So they look at the S&P 500 and they say, oh

13:36

my God, that's passive. But

13:39

the index changes over time.

13:40

S&P decides to change it. Now

13:42

they make relatively minor changes over a period

13:44

of time. And at the other

13:46

end of the spectrum, you've got a stock picker who

13:50

is basically trying to beat the S&P 500 by 100 basis points

13:52

a year,

13:53

and

13:55

he's deciding which ones

13:58

of those 500 stocks he wants to own.

13:59

own and put it together and try to do better. But

14:03

they're really not all that different as you end.

14:05

So what I wrote about, and I think

14:07

what –

14:09

there was a whole wave of products that

14:11

were launched in the mid-2000s that were

14:14

labeled as index products. And

14:17

they were systematic in nature. It was called the alternative risk premia

14:19

space. And

14:21

they sounded unbelievable on

14:23

paper.

14:24

Why would I ever invest in a CTA when

14:26

I can simply build my own trend following model?

14:29

And building trend following models requires

14:31

a great deal of experience, etc. But you can get

14:33

a lot of the way there

14:35

by establishing certain rules

14:37

and parameters. And this whole business

14:39

is based upon – we all learn from each other in different

14:41

ways. And so somebody figures out that

14:44

a certain window length or a vol adjustment or something

14:46

is better, over time other people are going to adopt it.

14:49

But what we found is when we looked at – so we loved the idea

14:51

and theory. Then we looked at the space and what we found.

14:53

And we said, all right, let's build our own. And

14:55

we started actually with merger arb. And we

14:57

said, let's build our own merger arb model.

15:00

And the argument that Cliff Asness and other people

15:02

were making was merger

15:04

arb guys generate high risk adjusted returns. They're really

15:06

not that smart. What they're really doing is harvesting

15:09

a risk premia.

15:10

Because most investors hate merger

15:12

arb deals and sell out too soon.

15:15

And so there's this big – there's just

15:17

a million guys are leaving pennies on the ground

15:20

and we'll just sweep them up. And

15:22

as we went through the process of trying to build it, what we realized

15:25

is my God, we have to specify these 35 different

15:27

parameters.

15:28

Do we want Japanese equities or not? What

15:30

happens when a bid comes in above

15:32

the offer? How do we treat that? What if it's

15:34

a cash deal? What if there's some weird security?

15:37

And when we got through all this, what we realized was that actually

15:39

those indices were single manager products

15:42

wrapped up as an index.

15:45

Now why would somebody do this? And what I wrote about was

15:47

basically the power of

15:49

it from a marketing perspective was

15:51

that people were creating indices that were essentially

15:54

systematized active management products and

15:56

then walking out with a 30-year track record.

15:59

Because the way regulatory

16:02

rules worked, and they still work that way, is

16:05

that you can publish an index

16:07

as your hypothetical performance,

16:09

but you can't show

16:11

a track record even if you're doing exactly

16:13

the same thing for the past 25 years, but it just wasn't

16:16

in XYZ vehicle.

16:17

In the case of DBMF, we started

16:19

it in 2016, identical

16:21

underlying strategy, rolled it into an ETF

16:24

in 2019. For the vast majority of investors

16:26

out there,

16:27

our world starts in 2019. The

16:31

appeal of the index products was

16:33

you could show somebody

16:36

how you think this would have done over a long period

16:38

of time without it being them having

16:40

to come and ask you for it directly, without all

16:42

this. What it got

16:45

to was this question of if you

16:47

create an index or you're using an index,

16:49

not what the asset

16:52

allocation bucket

16:53

that you're aiming for does, then have

16:56

you introduced a new

16:58

risk in your model. As

17:00

it relates to the manage-shooters phase, what we basically

17:02

concluded at the time, and I think the products

17:04

have gotten a lot better, and Tim's

17:07

yours may be far better

17:09

than what we looked at,

17:10

was that if everybody is saying

17:13

they're a trend follower, and this is the index,

17:15

and the indices are 30 points apart at

17:17

the end of two years,

17:19

that suggests that they're really single-manager products.

17:22

The problem that creates you as an asset allocator

17:25

is when you say index, it should be something

17:27

that you can fill a bucket

17:28

and know it's going to match that bucket

17:31

or come close to that bucket over the next two or three years.

17:35

We didn't see the rules-based ways of doing that.

17:37

There are people, I think, who've done it well, but we saw issues where

17:40

people hadn't. Good

17:42

points. I would say one aspect

17:44

that we learned about, and you're not wrong

17:47

in a sense about publishing an index,

17:49

and you can look back over time, and it's theoretic

17:52

and all the rest. The only correction

17:55

I would make to that is when you go to sell a product,

17:57

you can't allude to that historical

17:59

track record.

17:59

You can only look at that track

18:02

record, and this has gone

18:04

through regulatory. I've been through it for whatever

18:06

it is now, a decade, 15 years, where

18:09

from that point that there was product

18:11

and that index was published, then you can look

18:13

at it going forward. You can't look at the

18:15

back test and publish that alongside

18:17

product. At least that's what we've experienced,

18:20

and that's not only in Canada,

18:22

but specifically with our relationship

18:25

with direction in the US. So

18:28

that's one aspect. I think

18:29

there's a lot to unpackage here. I'd say part

18:32

of what I'm hearing is this thesis that

18:35

people like indexes,

18:37

and why would they be comforted

18:39

with an index? Well,

18:42

in the equity and fixed income world, they're very comfortable

18:45

with it, and this idea that people

18:47

want index exposure in

18:49

the CTA space, and I don't

18:51

believe that's the case. I don't

18:54

think in the CTA space that's what people

18:56

want. They want these benchmark indexes

18:58

of 18 or 19 or whoever the managers are.

19:02

What I hear from clients, both retail

19:04

and institutional, is they want outperformance

19:07

at critical times. They do not want index.

19:10

If they get index, they want it with far less risk

19:12

than even what the index shows, the vol,

19:15

the drawdown, but they want outperformance

19:17

at these critical times, and then

19:19

we can go down this wild door

19:22

of crisis alpha. To

19:25

me, all that means is can you

19:28

outperform the street

19:30

at these critical times when

19:33

a client is really looking for

19:35

negative correlation, non-correlation,

19:38

crisis alpha, and performance?

19:41

That's when you don't want to be benchmark.

19:43

You don't want to be index. This

19:48

is where the alpha debate

19:49

starts to

19:51

come in, is what is that element that

19:53

causes a manager to outperform,

19:57

even if they are systematic, rules-based?

20:00

Is it about their strategy that

20:02

causes them to outperform at these

20:05

critical times? That's what institutional

20:07

investors do. They go build portfolios

20:09

of CTAs that they think are better. They're

20:11

not looking for index. They're looking for

20:13

better. They're looking for these elements.

20:16

Yeah, of course, I think there are a million

20:18

different kinds of investors. And so

20:20

I think we have found zero

20:22

interest in general, or very little interest in general, for

20:25

our products from institutional investors,

20:27

because they do want to pick you and

20:29

five different guys. They want you and Neils

20:31

and three other people. And what they do

20:33

is they put together, they don't want five

20:36

guys who look alike. They

20:38

want five guys who do different things.

20:40

They're probably not going to do Neils

20:43

and AlphaSimplex and

20:46

somebody else who has very similar

20:49

return profiles over time. They're going to layer it with a man,

20:51

HL, or somebody else. They're also probably going to go toward

20:53

guys that they think are institutionally

20:55

credible and safe to invest in. What

20:58

I would argue is when they're putting together five or six,

21:00

so one step above that guy

21:03

is a guy who's building a consultant

21:05

or somebody else who's building a long-term asset allocation

21:08

portfolio. And there's

21:10

a decision that happens above that, where they decide

21:12

in the first place that they want a 3% allocation

21:14

or 5% allocation to manage futures.

21:17

And how do they make that decision?

21:19

I've never seen somebody look at that

21:22

and say, ah, what we need to do

21:24

is Bob.

21:26

We need Bob to be a 5% allocation.

21:28

They have to look at a long-term return

21:31

stream,

21:32

and then somebody feeds it into what are called capital

21:34

markets assumptions. And

21:37

they come up with all sorts of

21:39

assumptions about the future. This is the expected returns.

21:41

This is the expected correlations

21:44

to risk and asset classes, et cetera, of which negative

21:46

correlation or zero correlation to other assets is incredibly

21:49

valuable.

21:50

My

21:53

whole thing was up at that level, when

21:56

you're deciding to put something into

21:58

an asset allocation, when you're trying

22:00

to have an asset allocation bucket to begin

22:02

with, you are by definition talking about

22:04

an index of that strategy. You

22:07

don't say, I'm going to start with my US equity

22:09

allocation at 60%, and I'm going to

22:12

pick this guy because

22:13

he's been doing it for 10 years, and he's done

22:15

better than the S&P 500. You start with,

22:17

I want

22:18

a 60% allocation to equities, and then

22:21

decide you want a guy to beat it.

22:23

You just start with an allocation of bonds, and then you pick

22:25

this guy because you think he can do marginally better. You've

22:28

got to start with, I want managed futures, and

22:30

then they want Tim, or they want Neils

22:34

as the alpha generation relative to it.

22:36

Yeah, so I don't disagree. If

22:39

we go back to the start of this conversation

22:41

is in this ecosystem,

22:44

and I've heard you say these same things, I want us all to do

22:46

well. I think this is an important part

22:48

of asset allocation. It's fantastic to

22:50

see a bit of a revival in that regard. I

22:53

don't know if that's the right word, but there's obviously

22:56

a lot of interests. More assets have grown a

22:58

lot. We've got a big runway here, and it seems

23:00

like there's positive momentum

23:03

upon intended in this space.

23:07

However, I think there's a responsibility,

23:09

and you've alluded to it. You're not after that institutional

23:12

investor, or maybe they're not looking in this space.

23:15

However, I think there's a responsibility

23:17

in the message that we deliver in

23:19

terms of these products. You're

23:22

talking about retail investors, and

23:24

again, I accidentally found myself in

23:26

this space back from 2008 on with

23:30

retail-based commodity and ETFs. There's

23:33

a responsibility in how

23:35

we tell this story, and that we're

23:38

accurate in what we're describing.

23:42

You just mentioned the word alpha. This

23:44

is a real bone I

23:47

have to pick. That is this

23:49

idea that fee reduction is

23:51

the purest form of alpha. I

23:54

wholly disagree with that.

23:56

That is not alpha. I

23:59

think that perpetuating that story

24:02

that you're gonna put out a product, whether it's

24:04

replication or single strategy, whatever,

24:07

it doesn't even really matter. But that that

24:09

strategy, because it's got lower fees

24:12

than directly with the managers, is going to generate 4%

24:14

extra return over some period of

24:18

time. And

24:18

that's alpha. That's not what alpha

24:21

is. And I think it starts with that

24:23

we have a responsibility in this space

24:25

to the message. A lot of us have worked extremely

24:28

hard, 10, 20, 30, some

24:31

managers pushing 40 plus years

24:34

in this space. And at these times,

24:37

when people are looking in this space,

24:39

and we're given this opportunity to wave our flag,

24:42

I think there's a responsibility in the message.

24:45

And I'm cautious when I hear,

24:47

you know,

24:48

certain ways things are describing, you

24:51

know, that's kind of the look, I think

24:53

you misunderstood the sentence, then the

24:55

the point is that there is a, it's

24:58

a strategy that generates alpha,

24:59

right? There are two measures of it. There's alpha before fees,

25:02

and there's after alpha fees, there's alpha after

25:04

fees,

25:05

right? When you invest in a strategy that

25:07

generates 500 basis points a year of alpha,

25:10

and has 500 basis points of costs, no,

25:12

right. So, so if you

25:14

ask the most sophisticated hedge fund investors

25:16

in the world,

25:18

how how does a guy who runs

25:20

the hedge fund portfolio at

25:23

a sovereign wealth fund, consistently

25:25

do better than

25:28

almost every other investor who's out there?

25:30

It's because they walk into hedge funds, and

25:32

they say, I can give you a billion dollars,

25:35

and you'll raise $2 billion dollars just because I

25:37

gave you a billion dollars. But

25:40

you can charge two and 20 for everybody else. But

25:42

I'm going to do it at 75 basis points and 10 over

25:44

hurdle. They always do better. So

25:47

so the you know, it's like it's a simple

25:50

straightforward. Well, always, they'll always

25:52

do better if the manager performs, there's a big

25:54

if but there. And that's fine.

25:57

It's fees don't solve everything.

25:59

That's what made.

25:59

It takes fees, fees are not, you

26:02

know, cutting fees in my opinion and people

26:04

are going to debate this and I hope they do, fees,

26:07

you know, fee reduction is not a pure form of

26:09

alpha.

26:10

I disagree with that wholeheartedly. And

26:12

when you lead with that statement to the

26:14

retail public, I think that's dangerous.

26:17

And you know, frankly, I'm surprised you

26:19

haven't got a tap on the shoulder because I'll

26:21

tell you, you know, with the regulars we deal

26:24

with, I would be scared to make

26:26

that type of a statement. It's like, you know what I've

26:28

done here? I've launched Ospis,

26:30

diversified our flagships, been around a long time. So

26:32

now I'm going to launch an ETF, it's going to be at 95

26:35

basis points and I put out advertisements

26:37

saying this is this is alpha. You

26:39

know, that's a problem. Well,

26:42

look, I've written also a paper called Lies,

26:44

Damned Lines and Alpha. So it's

26:46

I think you're, how do

26:49

you define alpha? Like what do you, what

26:51

seriously, like what is your clear definition of

26:53

alpha and what makes you think you

26:55

can identify somebody who's going to generate

26:57

alpha in advance as opposed

27:00

to having picking somebody who has done it in the

27:02

past?

27:03

Well, look, I mean, it's a tough, this is

27:05

the thing about alpha. It's somewhat unexplainable,

27:09

unexplainable and not replicable

27:12

and not necessarily attributable

27:14

to a replicable factor. But

27:16

what is it about that strategy or that manager

27:18

or that approach that outperforms

27:22

benchmarks,

27:23

the status quo, whatever we're going to call that

27:26

at these critical times? You know, that's

27:28

what ends up being alpha. And

27:31

whenever I talk to a manager about an

27:33

allocator about alpha, it surely just isn't

27:36

about my fees. When I sit down with a pension,

27:38

you know, some of the biggest pensions in the world and they say, okay,

27:41

let's understand you guys have been around a long

27:43

time, you know, you still got capacity,

27:45

we're interested in what you do, you got this commodity focus,

27:48

you've outperformed at these critical times. Tell

27:50

us why you have that edge. What is that alpha?

27:54

They're not, they're not asking me. Now, if I answer

27:56

and say, well, you know what, why

27:58

don't we just forget about that? talk about

28:00

how you're going to carve me out on fees. And

28:03

then I'm going to go sell that story. That's not alpha,

28:05

right? They want to know what my edge is. They want to know

28:08

what the strategy edge is.

28:10

And even the most naive retail

28:13

investor, mom and pop at the donut

28:15

shop, get these concepts of

28:18

edge. You know, you put a nice fancy

28:20

term like alpha on it. But, but

28:23

you know, these are the things that people

28:25

start to identify with. You got to remember now

28:27

your product's going out there into

28:29

the world. It's being distributed. It's, it's

28:32

got this, this momentum. It's done well

28:34

at times. You know, all I'm saying

28:36

is I think there's, there's a

28:38

concern. I have a concern

28:40

that, that we're using

28:43

the right terminology and, and

28:45

that we're being responsible in the messaging,

28:48

you know, that we say.

28:50

Well, look, look, I mean, we're not, I mean the,

28:53

there's a lot of complexity in the messaging. I

28:55

mean, if you look at what I've said, there are, there are hedge fund strategies

28:57

where I'm a full advocate of high fees. I

29:00

am go read me in the FT and the

29:02

wall street journal and Bloomberg talking about

29:05

you paying a thousand basis points a year

29:07

to millennium is worth every penny.

29:09

They take a dollar of your capital. They leverage

29:12

it into 10.

29:13

They make two to 300 basis points per dollar

29:15

of capital and they don't blow up.

29:17

That is magic

29:20

from an investment perspective. They've done a 2.4 sharp

29:22

ratio for long periods of time. They deserve every

29:25

penny of that. But if somebody came to

29:27

you and said, I am, I will give

29:29

you money at a full fee structure

29:31

or I will give you a lot of money at a lower fee structure.

29:34

Would you deny the math that the guy

29:36

who offers you less is going to, is going to, is going to

29:38

do better over time? Absolutely not denying

29:41

the value of fees. I mean, bear in mind where

29:43

we started this conversation, I'm the first

29:45

CTA in the world to launch an ETF. And

29:48

when I launched that ETF and Niles

29:50

knows part of this story, you know, it

29:52

shook things up in that, you know, here

29:54

you're taking a strategy. This has been around a long

29:56

time. There's these nice big brand

29:59

CTA.

29:59

There's the London Club

30:02

and there's the Turtle Path and I'm

30:04

going to launch a 95 basis point ETF.

30:07

Why are you doing that? Why are you going to offer this transparency

30:10

and why are you going to offer this at a low cost? We

30:12

felt it was the right thing to do

30:14

is the bottom line. And

30:16

we still feel that for a certain

30:18

type of product, and

30:21

if there's this alpha to beta

30:23

spectrum, this product for us deserves

30:25

a fee and we can demonstrate

30:28

why there's alpha. And this product

30:30

is somewhere over on the spectrum

30:33

and it's going to be less fee. Maybe it's not performance

30:35

fee, it's just a management fee. Or

30:38

if you're really confident in your alpha, you go

30:40

straight performance fee or some combination

30:42

of management fee or performance fee. Either

30:45

way, right? There's the difference between

30:48

alpha. And my point is that we need

30:50

to be careful in what we're defining

30:52

to the public as alpha

30:56

and fee reduction is not it.

30:59

Can I intersect here? Because

31:01

I think we've discussed, I mean, I think, you know,

31:04

I certainly get the argument for both

31:06

sides, but I don't want this conversation

31:08

to just be about whether fees are

31:10

alpha or not. And

31:13

so, but I want to see, well,

31:15

I have a completely different view on people

31:19

selling CTA strategies at low

31:21

fees and giving all our alpha away,

31:24

but that's for another debate, maybe. I

31:27

want to take this point a little bit

31:29

and expand it because if

31:31

you want exposure to say

31:34

a CTA return

31:36

stream strategy, whatever we define

31:38

it. And I don't know if, if when people

31:40

think about it nowadays, they would say, well, just

31:43

pick the,

31:44

you know, whatever index that

31:46

is kind of the return stream. The

31:49

question is, what

31:52

are you better off doing? Are you better off building

31:54

your own rules, a proxy,

31:57

and then you can call it an index, whatever you

31:59

want. replicating what the big

32:02

managers are doing, like what Andrew

32:04

is doing,

32:05

picking a few single managers

32:08

or investing in a fund of funds. What's

32:11

kind of the, and we don't want to spend too much time on it, but

32:13

kind of your pros and cons

32:16

for each of these paths. Maybe Andrew,

32:18

I can put that to you first.

32:21

When you came into this space, you weren't dogmatic, right?

32:23

We were just trying, we were trying to figure out, we were basically

32:25

saying,

32:26

we want exposure to the manager's future space, what does that even

32:29

mean?

32:30

At the time, it was very

32:32

trendy to say that

32:34

the underlying source of returns of manager's futures is

32:36

trend.

32:38

What it did is it spawned this whole

32:41

wave of investment bank and other products that were

32:43

basically defining trend. They all

32:45

had kind of a similar objective, which is to

32:49

identify breakouts, identify things that are moving,

32:51

kind of rebalance your portfolio, maybe you do vol adjustments,

32:53

whatever the set of rules were around it.

32:55

All we wanted to do was get efficient

32:57

exposure to what we defined as the asset

32:59

class. The asset class for us

33:03

was not those individual funds

33:05

because of the variability of it. The asset class

33:07

was the guys who do it for a living.

33:10

That meant the SOC-Gen CTA Index.

33:12

At the time,

33:13

the view was when we started looking at it, trend

33:16

was unfavorable and then it

33:18

wasn't until really 2020 and March of 2020 when

33:21

trend did better that people started to look at trend again. Back

33:23

then, it was the non-trend stuff was supposed to do better,

33:26

Winton was pulling out of the space or claiming

33:28

that they were no longer trend, et cetera.

33:30

If

33:32

we went to an institution and we said, when you guys

33:34

think of manager's futures, what do you mean?

33:37

The answer was the SOC-Gen CTA Index. To

33:40

us, the definition of the space was

33:44

the average of what the big guys do.

33:46

No different than the S&P 500 is

33:48

what the big stocks are doing.

33:51

The question is, how do you get access to that?

33:53

Simple models work really well.

33:56

It's not a knock on

33:58

the Corey Hofstein.

33:59

has launched an

34:01

ETF in the US that combines a factor

34:03

replication with

34:06

a mechanical trading strategy with rules based

34:08

strategy around it. It

34:11

is a perfectly legitimate and credible

34:13

way of doing it. But when we looked at it and we said,

34:15

what we're really trying to do is get how do we get as

34:17

close as we can to what those 20 guys are doing and

34:20

do it in the most efficient way that we possibly

34:23

can. Because again, we're building it for a portfolio

34:25

in Europe.

34:26

We looked at doing factor replication, and it

34:28

worked the best

34:29

back then. And we started

34:31

doing 2015. And

34:33

by the end of 2022, it had worked far

34:36

better than anything else that we'd found. And

34:38

we had basically been aiming for

34:41

what we thought were kind of the pre-fee and pre-expense

34:43

returns and had outperformed,

34:45

I think, 19 of the 20 constituents of the SOC-Gen

34:47

CT index by the end of 2022.

34:50

It hasn't worked well this year. It hasn't.

34:53

We've missed something in the

34:56

markets this year, maybe it's the simplicity to the portfolio,

34:58

maybe it's

34:59

the timing. But it hasn't worked disastrously well. It just hasn't

35:01

worked as well as it had previously. Another

35:05

approach is you go to ABI.

35:07

Give all your money to ABI, because ABI is diversifying.

35:10

They're doing the decision for you.

35:11

And they have a great business model. I think they're the best

35:13

in the business at doing it.

35:15

A third approach is to buy

35:17

some sort of a trend

35:19

following index

35:21

type product or a managed features

35:23

index product. I think there you have to have

35:25

a clear view on it requires

35:27

a certain level of sophistication. You've got to get under the

35:29

hood on it.

35:30

Or you buy a guy

35:32

or a single fund.

35:34

And each one of those has advantages

35:36

and disadvantages.

35:38

And I think the positive thing, hopefully, when

35:42

we look back at this in five years, will be that

35:44

investors have a lot of really good choices. They've

35:47

not had good choices in the ETF world.

35:49

They have, going back to this idea of index

35:51

products, two of the earlier products that were launched around

35:54

indices that nobody would want. But

35:56

it was designed to kind of say,

35:58

oh, we're giving you access.

35:59

to an index, the problem was

36:02

as an asset allocator, where do you put

36:04

that in your portfolio?

36:06

How do you feel confident that that index is going to give

36:08

you what the

36:10

SOC-Gen CTA index

36:12

would give you over time? I think

36:15

there are lots of different great options.

36:17

I wish I had had all of my money done in

36:20

the beginning of 2022 and had all of

36:21

my money done

36:24

in the beginning of May of this year. We

36:28

never found out a way to figure out who

36:30

was going to have those banner years. In fact,

36:32

what we looked at is we'd say, who were the great guys

36:34

in 2010 and what happened

36:36

to them? Who

36:38

were the great guys in 2012 and what happened to them? It

36:41

just underscored how

36:43

difficult it is in this space to

36:46

get it right and how

36:49

much unexpected risk there was when you

36:51

picked the wrong guy at the wrong time. The

36:54

US managed futures mutual fund space is $20 billion

36:56

today. It was $28 billion when we

36:58

started.

37:00

Half of that was AQR. No

37:02

one is smarter than AQR. They

37:04

are unbelievable in

37:07

every sense in their business.

37:09

What people thought AQR could not

37:11

go wrong. I think AQR has lost more

37:13

in their managed futures strategies in terms of assets

37:16

than I'll ever run. There's a

37:18

comment to be made. They're good for them.

37:21

There's so much done packaged here. You're

37:25

going down the path of single

37:27

manager and fund to funds and mentioning

37:30

Abby. Full kudos to Abby. They're

37:32

a very smart group.

37:35

In replication, which

37:37

again, to be crystal clear, I think it's innovative.

37:40

I think if it performs, it's great. I love

37:42

the pioneering aspect. I love choice in

37:45

the space. We need more choice in the space, especially

37:47

ETFs. I 100% agree. I

37:50

personally prefer the single

37:52

strategy over. I'll get to a little

37:54

bit why. If it delivers good or better

37:57

returns with less vol drawdown

37:59

risk. then I think you've really got

38:02

something. And I think that's

38:04

where I start to see red

38:06

flags with the replication strategy

38:08

and why we chose not to go that path.

38:11

It's just isn't that we just took off the shelf, hey, you know

38:13

what, we can create, carve out

38:15

a strategy and put it in an ETF format and publish

38:18

an index. We looked at these things too.

38:20

There's reasons that we chose not to go the replication

38:23

path, for

38:25

various reasons. One thing is

38:27

single manager risk. I don't believe

38:30

you solve single manager risk,

38:32

which is real, right? Put all your

38:34

money in one basket, they could be the greatest, but

38:36

maybe there's something wrong there. Maybe there's various

38:39

other things hidden, who knows? But

38:41

I don't think this strategy replication

38:44

and providing a replication to

38:47

what the perceived positions are of

38:49

the big managers solves for single

38:52

manager risk in any way. In

38:55

fact, I think in many ways, I

38:57

think the risk is higher because

38:59

you don't have

38:59

frontline risk management and

39:02

this boils down to risk management.

39:05

You know, as a manager that's paying

39:07

attention to this on a daily basis, not just

39:09

trying to mimic what somebody else is doing, what

39:12

we're trying to do is put, it

39:14

starts with risk management. The bones, the

39:16

core of a CTA is

39:19

risk management. And

39:21

that's where I see a red

39:23

flag. Then you get to strategy.

39:26

What are those red flags? Well, that

39:29

lag on execution, that's a big deal

39:32

in terms of protecting the downside. There's

39:35

lots of research out there. You've probably read the same

39:37

papers and that is on

39:40

generating performance at these critical times

39:43

or protecting the downside when you get these dislocations

39:46

and being able to do that with a lag. Look

39:49

what we just saw in March. March

39:51

of this year, regional banking crisis was

39:53

hardly a tail risk event and

39:56

it beat up some of these, you

39:59

know, some of the big managers. managers, it surely

40:01

beat up a replication strategy. And

40:04

that to me is, again,

40:06

a red flag when I start

40:09

to consider the risk management aspects

40:11

to it. When you go replicating managers

40:15

that have big portfolios and you

40:17

do that with 10 or 12 things, to

40:19

me that concentration risk is

40:22

real. Concentration

40:24

is fantastic when you've got the right,

40:26

you're riding it and it's a great trend,

40:28

but when things dislocate that concentration

40:31

risk is an extremely

40:33

big problem, the lack

40:35

of diversification, the lack of commodity

40:37

diversification in the case of

40:39

CTAs.

40:40

So the very best replication this year has

40:43

one factor.

40:44

It's the two-year treasury,

40:46

right? You do a replication

40:48

of the stock gen CTA index with one factor, you get a 93% correlation

40:52

and you match it perfectly.

40:53

There's so much hand waving

40:55

around diversification. I honestly

40:58

don't even know how to respond to that because that

41:01

is patently ridiculous.

41:04

I look at the returns that we've provided

41:07

this year, and I can only speak to us with

41:09

intimate knowledge. We're up on the

41:11

year, the benchmarks are down, and our

41:14

returns did not come from two years.

41:17

They came from things. Because you're a single manager.

41:19

Of course there's going to be diversion. Look

41:21

at March, right? I mean, some guys

41:23

de-risked early,

41:25

right? We were looking at the portfolios in

41:27

March, and there were a few days in March

41:30

where we thought everybody had de-risked because

41:32

the stock gen CTA index wasn't moving

41:34

when the treasury market was going bananas.

41:37

It turns out actually, people

41:39

were a little busy. They weren't reporting the stock gen CTA

41:42

index

41:42

in the first few days after SVB. There

41:46

was delayed reporting, and when it reported in,

41:49

replications unfortunately

41:51

followed everybody down just pretty much the way the index

41:53

went down. What you just said is even another factor. Doesn't

41:58

that alarm you?

41:59

weren't reporting in, they were busy with other things.

42:02

So replication gets a little tricky, there's even

42:04

a bigger lag there. There's been, there's

42:06

again, it's pretty, pretty easy to

42:09

see the math and say, look, when

42:11

you start

42:12

looking at adjustments, and you get

42:15

into these lag periods, you

42:17

simply aren't going to be able to adjust

42:20

and and reduce risk quick

42:23

enough when you've got lag. So there's a

42:25

lag for a CTA that's on

42:27

top of things. And there's different, you know, again, there's a big

42:30

wide CTA space, there's agile, quick

42:32

CTAs. There's ones that vol adjusts,

42:34

there's ones that don't, Jerry and I can debate that

42:36

till no end. But then when

42:38

you start to get into

42:41

periods of this lag

42:43

in terms of adjusting to something that's going

42:45

on, that's a dislocation, that's a real big

42:48

issue, like region, you know, this regional

42:50

banking crisis, like Q1 of 2020, like

42:54

really the first quarter of this year, are

42:57

you going to be able to

42:59

a replicate those positions properly,

43:02

but really deliver on what you've

43:04

promised to deliver on. And that

43:06

is that you're gonna, you know, really outperform

43:09

this benchmark index through all,

43:12

you know, quote unquote, all periods. And

43:14

the reality is that you're opening yourself

43:17

up for times when you won't, you

43:19

simply won't be able to adjust quick

43:21

enough, you've already stated that. And

43:23

at those times of dislocation, that could

43:26

be disastrous,

43:27

right? I have trouble explaining

43:29

to my clients, retail or institutional,

43:31

probably even retail more, when I have

43:34

months when I'm down, you know, more

43:36

than four or 5%. Those are

43:38

red flags, I just completed a managed account

43:41

investment with a massive pension.

43:44

And you know, if it gets over 5%, it sends up red

43:47

flags. And, and so,

43:50

you know, those type of issues

43:53

start to point to the strategies like does this really

43:55

does what do what it wants to do. And then I

43:57

asked you this question, if you can

43:59

be the benchmark in terms

44:01

of returns.

44:03

4% would be great.

44:05

I look back at the returns, I say, well, one

44:07

and a half, one and three, great.

44:10

But

44:10

then you're doing that with higher vol and deeper

44:12

drawdowns. That's a red flag. And

44:15

that needs to be carefully explained

44:17

to investors. Look,

44:20

I would highly recommend you don't invest in our fund.

44:22

We coolly ran over your dog. And

44:25

look, this is your problem.

44:28

I don't think it has ran over

44:30

my dog. I'm trying to point out. You're

44:32

starting with conclusions. You're starting with conclusions

44:35

and then fishing around for arguments for it. Look,

44:38

we're not stupid. We

44:41

looked at derisking. We looked at vol controls.

44:44

There are no questions. It can hurt you at times.

44:46

But what we also found was about half the

44:48

time,

44:49

you hated having derisked. And

44:53

there was nobody on planet Earth that we found. We

44:55

wanted derisked before it goes down.

44:58

Guess what? No one's figured that one out.

45:00

I agree 100%. We're all 10. So

45:05

these are judgments that we make when

45:07

we build it. We start with

45:09

a very, very narrow factor set for a very specific

45:11

reason.

45:12

We want to have

45:15

the most efficient trading and execution

45:17

we can possibly have. We rebalance

45:19

once a week because we're trying to keep our trading

45:21

costs at 10 or 15 basis points. When

45:24

we spoke to institutional allocators, no

45:27

one is opening up their P&L to show us exactly

45:29

how that we trade. But when we were talking to

45:32

some of the largest CTA allocators in the

45:34

world, one of the frustrations some of them had

45:36

was when they had gotten in, they saw hundreds of basis

45:38

points of trading costs in certain circumstances.

45:41

And it doesn't show up in a TER.

45:44

It doesn't show up anywhere else.

45:45

But for us, it

45:48

wasn't about solving everything for

45:50

everybody. But what we found is when we looked at this

45:52

over a very, very long period of time,

45:55

the biggest positions

45:57

were the ones that really drove performance. And you ask about

45:59

the

45:59

diversification

46:01

through, again, our numbers go back

46:03

longer than the ETF. But

46:06

when we looked at it, we basically found that actually, you know what,

46:08

sometimes

46:09

having those other 50 positions that we don't

46:12

have sucked. Because

46:14

if you're in crude oil, and crude oil moved a little bit,

46:16

but you're also in natural gas and also in heating

46:19

oil, and those moved a lot because the markets were less

46:21

liquid,

46:22

sometimes that was worse for the real guys than it

46:24

was for us. There's no perfect

46:26

answer to any of this. You can

46:28

listen to, I'm doing monthly performance

46:31

reporting when we're talking about this. We talk about things

46:34

we missed this year.

46:35

January and February, I wished we'd had the Canadian

46:37

dollar, the Mexican peso, and a few other

46:39

positions.

46:41

We didn't have it, and that was one of those examples

46:43

when things that we don't invest

46:45

in really helped. We

46:48

didn't see a lag

46:51

issue in, even though we were worried that

46:53

we were going to see a lag issue in

46:55

March, we didn't see it. When you look at the

46:57

underlying hedge funds, we end up, we're pretty close to right

46:59

the middle of those underlying hedge funds.

47:01

This month, you

47:04

guys are up more than we are. I had this

47:06

correspondence with Niels this morning. There

47:08

are a lot of markets out there that are doing

47:11

really, really, really well.

47:12

It's not about coming

47:14

up with an all-in-one solution, but

47:16

I can tell you as an investor that

47:19

having a big head start

47:22

on what I think are fees and expenses on an

47:24

annual basis versus what

47:26

on the hedge fund side remains an expensive

47:29

area to invest in. If

47:32

we're getting it 90% right

47:34

most of the time, I

47:36

think we're going to come out ahead most of the time

47:38

with a correlation of

47:41

north of 80%. It's actually been

47:43

closer to 90%.

47:44

If you can do that in an ETF

47:47

and people can see their positions and can understand

47:49

their positions,

47:50

I think there's a place in the market for it, not for

47:52

the guys who want to invest with you. Listen,

47:56

I'm not saying in any way there isn't a place.

47:58

In fact, again, I go come out.

47:59

back to what I started with and that's I applaud the

48:02

innovation. What I'm just trying to

48:04

do is pick your brains on what

48:06

I see is some of the pitfalls here,

48:08

one of some of the reasons we chose not

48:10

to go replication when we started down

48:12

this path 15 plus

48:15

years ago. And and and

48:17

those are the things that concern me. And

48:19

and it's fantastic that there's been

48:22

even more attention on the space because of your

48:24

product. I applaud you for that. I'm

48:26

concerned with some of these some

48:28

of these aspects. You know, there's there's

48:31

there's other things you've talked about that,

48:33

you know, I think we've got to be careful

48:35

on capacities in one of them.

48:38

And and, you know, all strategies have capacity

48:40

and the CTA space is most

48:43

definitely capacity constrained.

48:45

It's more capacity constrained if you're a

48:47

commodity tilted manager like us for

48:49

sure. But, you know, these are things again,

48:52

we have to be very transparent about

48:54

when we talk to investors,

48:56

especially especially retail

48:59

investors. The one

48:59

point I wanted to comment on that you made there was

49:02

trading costs. And it's

49:04

an interesting point about, you know, talking to

49:06

big investors, institutional investors

49:08

and, you know, generating all these these

49:11

fees from from, you

49:13

know, over trading or just trading, whatever the

49:15

strategy is, I have never

49:18

in my, you know, almost 30

49:20

years trading institutionally

49:22

and running hospice for pushing 20 years

49:24

ever had an investor

49:27

of any type complain about my

49:29

trading costs at times when I'm

49:31

either capturing trends or reducing

49:33

risk. They don't care. That has never

49:35

come up not once ever.

49:37

Again, we're not talking the same investors. I

49:40

think this is the part you're missing is we

49:42

are talking about the same investors because

49:44

again, I went down and we went at hospice

49:47

down the path of retail starting in 2008 2010. The

49:51

funds we run in in Canada are

49:54

our public funds.

49:56

As of this year, they are public funds

49:58

available to the kid with a pay.

49:59

daily liquidity, but not

50:02

an ETF traded on exchange, but anybody

50:04

can buy them on a discount channel. They're

50:06

purchasable by any investor,

50:08

public full prospectus. So

50:11

we are talking about the same investors and

50:13

I've been on both sides of this. I have half

50:15

of my assets are coming out of the retail ETF

50:17

space right now. So I know this space

50:20

too. What I'm pointing out is you

50:22

think again, replication,

50:26

this is smart, you guys are smart guys,

50:28

but I see some holes in this. And I

50:30

think that they are red flags.

50:33

What investment strategy doesn't

50:35

have holes,

50:36

right? I looked at, I looked, you're bang on, but this

50:38

was the debate. This is the debate. It's supposed

50:41

to be a friendly debate. And I'm happy,

50:43

you know, I'll tell you a quick story and Niles knows

50:45

this is, you know, one of my close friends is Jerry

50:48

Parker. And Jerry and I met because

50:50

we have diametrically opposed views on

50:52

being a CTA. He's been around far

50:54

longer than I have, great success, admire

50:57

him incredibly. He's got a very

50:59

different view on volatility based,

51:02

volatility position adjusting, completely

51:04

different than mine. He says what I'm

51:06

doing is wrong. And I say what he's doing wrong.

51:09

And here we joust and we become great friends and

51:11

I respect his side of the equation. And,

51:14

you know, perhaps he respects mine, I don't know. But

51:17

we have a fun debate. And

51:19

I think, you know, again, the idea

51:22

of replication is smart. It

51:24

works really well in a lot of areas.

51:27

What I'm doing is challenging

51:29

some of the issues. And the reason

51:31

I'm doing that,

51:33

Andrew, is because this is how I

51:35

put food on my table. This is how

51:37

I've developed a long track record. This

51:39

is how my company, you know, has success.

51:43

And I care about the ecosystem incredibly.

51:46

So here's the issue that I have, right? How

51:50

does an allocator measure success

51:53

in most circumstances? I'm talking about the guy who oversees the

51:55

whole portfolio who runs model portfolios. So

51:58

we got approached back.

51:59

2009 about launching an ETF around

52:03

our strategies. These are actually before we got into the

52:05

manager future space. The issue

52:07

that I've always had with and the

52:09

problem with, like so for

52:11

all the hedge funds

52:13

in ETF space is a disaster

52:16

area. Okay, it's and

52:18

so the question is why? Like why

52:20

is the $7 trillion space have

52:23

like no assets

52:24

in hedge fund strategy ETFs?

52:26

And because most products are- It's hard to replicate

52:29

alpha. No, that's that's

52:31

that's silly. That's like that's like the 19.

52:33

That's like the 2003, you know, like

52:36

second year business school definition of alpha. The

52:39

I guess I went to a different business school than you.

52:41

It's the so look, the I

52:44

looked briefly at your index product, right? It's

52:46

called a managed futures index. Okay.

52:50

And and there was a period it looked like just eyeballing

52:52

it where you want to perform the sock chan CTA index

52:54

by by 30%

52:56

over a two year period of time. Right. That's

52:59

not an index to me. If I'm an allocator,

53:01

right, you're it's an index because you're telling

53:04

people what your rules are, but you can be an active manager

53:06

and you can say these are my rules and I'm going to follow them blindly.

53:09

Right. And and and then you have to answer

53:11

to well, what if the world changes? Are you going to change it? No,

53:13

I'm not going to change it because it's an index. What if your

53:16

vault constraints are wrong? No, I'm not going to change it because it's

53:18

an index or I'm going to keep changing it in which case

53:20

you're an active manager and you're not an index anymore.

53:22

Right. So so so so for

53:25

me as an allocator, the problem is

53:27

you're not going to hold it until 2022

53:30

when you need it. If you go through a period

53:33

of meaningful underperformance relative to the

53:35

benchmark, you may not like the benchmark.

53:38

But but I'm talking to

53:40

people, the people who like what we do like

53:43

it because they have a high confidence. Now

53:46

this year, we are underperforming the benchmark

53:48

more than we ever have. That is,

53:50

and we are having a larger drawdown

53:52

than we expected. And we are talking a lot

53:54

about it and what happened because it is

53:57

different than our expectations.

53:59

And And we are being very, very clear and upfront

54:01

about it. But

54:04

the thing is, when you look at the US mutual

54:06

fund space, what we're also looking at is, why

54:08

did so many people get out? AQR

54:11

had $14.3 billion in

54:14

their manager's mutual fund, and

54:16

around a billion by the time 2022 hit. And

54:20

that didn't go all back into PIMCO and

54:22

MAN-H-L and DONE and everybody else who's

54:24

in the space. People

54:27

fled because after five

54:29

years, not only had the index done zero, but

54:32

their one bet on the space had gone down 20%. And

54:36

so

54:37

that's the issue, right? Is how do you get people

54:40

to hold it? We could be in for another

54:42

long winter in the space. And

54:45

so look, you describe

54:48

this as a debate. It doesn't feel like a debate. It

54:51

feels like you have a bone to pick and

54:53

you want to be confrontational and you want to pick arguments.

54:56

I'm not going to,

54:57

I can tear apart things that

54:59

you're saying. It's not the point. It doesn't

55:01

help. You have an audience who wants to hear what you have to say.

55:04

I think you are hand waving

55:06

around terms like alpha,

55:08

that I don't see people,

55:10

the guys that I respect, I don't think about talk about

55:12

it in those kind of mysterious

55:15

mythical terms, like it's

55:17

somehow conjuring up fairy dust.

55:19

These strategies have definable

55:21

ways of getting to a particular result. Otherwise

55:24

you couldn't do it as an index.

55:26

And the question is, what are the excess

55:28

returns? What are the expected returns? What's the correlation

55:30

profile

55:31

of this strategy over time? And is it valuable

55:33

to people?

55:34

And I intend to be a very,

55:37

very loud standard bearer that

55:39

this strategy has more diversification bang

55:41

for the buck.

55:43

If you do it with Neils, if you do

55:45

with us, if you do with you, it should

55:47

be in everybody's portfolio. Don't,

55:49

don't, don't disagree. But

55:52

it comes down to that biggest hurdle in

55:54

this, you know, one of the biggest hurdles in the space

55:56

is, you know, what is, what is that hurdle for retail investors?

55:59

institutional investor and it

56:02

really is the same to invest in this

56:04

space. And the biggest hurdle has

56:06

always been that unless you launched

56:09

at an ideal time like 2019

56:12

or early 2020 and had that performance,

56:15

CTA performance hasn't exactly sold

56:17

itself. We go through these periods when

56:20

it is challenging to do what we do. And

56:22

as you pointed out, you know, the index that

56:24

we started publishing back in 2010 has

56:27

definitely gone through periods of

56:29

underperformance

56:29

versus the benchmarks. And

56:33

in a way, that's kind of exactly

56:35

what it's designed are our strategies. That's just

56:38

one of our strategies, but it's designed to do. It's

56:40

commodity tilted versus financial.

56:43

The index doesn't have equities

56:45

in it. It is going to at

56:48

times really, really underperform

56:50

the financially tilted CTAs

56:53

or if the only thing really ripping is

56:56

equities or just bonds or just

56:58

equities and bonds, 6040 land. So

57:01

we are going to have those periods of outperformance. But

57:03

here's what matters to my business. And

57:06

I can only speak to our business and

57:08

that is do we perform

57:11

at those critical times

57:13

for our investors? Did we perform,

57:16

you know, if that money that did

57:18

stay with us up until beginning of 2020, it

57:21

was a very hard period of time for all CTAs,

57:23

pretty much all, I would say, you know,

57:25

there's a big wide scope, but

57:28

most anyway.

57:29

The ones that stuck with us were pretty happy

57:32

in 2020 because we not only performed,

57:34

we outperformed in Q1. We outperformed

57:37

in the rest of the year. It was

57:39

an absolutely pivotal year. Right.

57:41

But what were you up last year

57:43

in 2022? You're up like 8% or something

57:45

in your index, right? So

57:48

you underperformed so pre-feed that these guys

57:50

were 20 points ahead of you

57:51

last year and the year when you needed it the most.

57:54

Like it's just, I mean, like it's it's 20

57:57

to 2022. So this is what I think you're getting

57:59

wrong.

57:59

2022, pretty much all CTAs in some capacity

58:02

had a good year.

58:06

And our strategies were up,

58:09

whether we underperformed a little bit or, you

58:11

know, whichever, that's a bit neither

58:14

here nor there, because that's not what

58:16

my clients are coming to me saying, you

58:18

know what, you didn't keep up with the SOC

58:20

Gen CTA index in 2020. You

58:22

were positive, but you didn't quite keep

58:25

up. The question was,

58:27

how did you do in Q1 of 2020, 2020? How

58:31

did you do in March? How did you do

58:33

at these dislocating times? That's

58:36

what they're asking,

58:37

right? They're not asking for

58:40

just those Lottie die years. How did you do in 2019? Well,

58:43

they know CTA struggled, right? It's

58:45

not what our clients are asking. What our clients are asking

58:47

is, I like this space.

58:49

How do I have it for the next 10 years? We

58:52

entered the space in November, 2015. The

58:55

winter was just beginning. It was a

58:57

horrible time to enter the space.

59:00

The next five years, the space did zero,

59:02

might mean the SOC Gen CTA index did zero. You

59:04

think 2019 was a horrible time to enter? If you're

59:06

financially tilted, see. 2015, 2015.

59:09

2015, yeah. No, that

59:11

was, you know, couldn't have worked. Yes,

59:14

right. And so during

59:17

the next five years, fee

59:19

efficiency saved us because

59:22

if you were zero or you

59:24

went through big drawdowns over that period of time, you

59:26

weren't around in 2020, right?

59:29

And last

59:31

year, we were, I mean,

59:33

whatever. I mean,

59:34

you can look at the performance of the index, but basically

59:37

SOC Gen CTA index, I mean, SOC Gen CTA index

59:39

was up 20. In order for it to be up 20,

59:42

and as far as I know, everybody who's in the index

59:44

still has a 20% fee structure, meant these guys were up

59:46

about 28.

59:48

That's a year when replication should outperform

59:51

because if you're getting 90% or more of what these

59:53

guys are doing before fees, but you're

59:56

only charging 85 basis points, you're gonna

59:58

do 400 basis points, 300, 400 basis points.

59:59

basis points better. There

1:00:02

are going to be periods of time when it's not going

1:00:04

to. But the question is, do you

1:00:06

have the wind at your back? I think we do. You

1:00:08

think we don't. But

1:00:09

the questions your clients are asking

1:00:11

you are, it's not the conversations I'm having with

1:00:14

people. So to be clear, I actually

1:00:16

disagree that it's not that I don't think you have wind at

1:00:18

your back. I think you're in a CTA

1:00:21

space that is in a very

1:00:23

positive environment

1:00:26

for the next three, five, seven, maybe even

1:00:28

a decade. I think the CTA

1:00:30

space is the right place to be. And

1:00:33

whether it's a single strategy, a multi-strack

1:00:35

like our flagship, whether it's replication,

1:00:38

I think the wind is at all of our

1:00:39

backs, Andrew. I think this is what you're missing about

1:00:42

what I'm saying. And I think there is room.

1:00:44

This is one product. Pick your other

1:00:46

products. And you've been highly critical

1:00:48

of the other CTA products that I've heard.

1:00:51

So what products do you think have been critical

1:00:53

of?

1:00:54

Let's put that on the record. Well, I

1:00:56

mean, I'm just if I listen to

1:00:58

past interviews where you talk about the

1:01:01

other products in the space, I'd

1:01:03

say you've been pretty darn critical.

1:01:05

I

1:01:06

mean, which one are you talking about?

1:01:08

You called one of them absolutely a terrible

1:01:11

product. Oh, no, no, look,

1:01:13

they're there. Look, there's some ETFs. I mean,

1:01:15

Wisdom Tree launched a fund in 2010. But

1:01:18

they're not a CTA. So how are you a

1:01:20

CTA? And they're not a CTA? Oh,

1:01:22

look, look, I mean, they they they

1:01:24

this it's actually a very good example of

1:01:26

an index product

1:01:28

that that use the term index.

1:01:30

So they originally started following something called

1:01:32

the Trader Vic Index.

1:01:34

It was a single manager product. And the fund was

1:01:36

positioned as a

1:01:37

one stop solution for the manager

1:01:40

space. And I think people who knew the space

1:01:43

knew that if you're picking one guy's

1:01:45

named index, you

1:01:46

were taking single manager risk. And it's you talked

1:01:48

about appropriateness.

1:01:50

That's not appropriate

1:01:52

in a retail portfolio,

1:01:54

filling an asset allocation bucket. You're

1:01:56

saying hold on, you're single manager risk. So

1:01:58

you're saying that's inappropriate, but you're single manager.

1:02:00

So it so is Abby. No, they're not. Abby

1:02:03

is as single manager. Absolutely.

1:02:05

Abby is not a single manager risk, which

1:02:07

you're hiring Abby to do as one

1:02:09

of the most tenured fund of funds in the space

1:02:11

has used their expertise to pick put

1:02:13

the right combination of CTA managers

1:02:16

together

1:02:17

and they were down to 37% drawdown in their flagship

1:02:19

fund in the early

1:02:22

2010s.

1:02:23

When the index was down 14%. Everybody has risk in

1:02:25

every

1:02:29

single product. We're trying to minimize it the extent that

1:02:31

we can. I advocate for Abby's

1:02:33

when people ask me if you in the US

1:02:35

mutual fund space,

1:02:37

there, there are a handful of funds that I

1:02:39

recommend to people

1:02:40

if you want to invest in a mutual fund. But

1:02:42

you're just talking about single manager risk, Andrew,

1:02:45

and you're saying wisdom trees a terrible product single

1:02:47

manager risk, you have single manager

1:02:49

risk.

1:02:50

You're replicating you're replicating a benchmark

1:02:53

through this these tools or you know, managers

1:02:55

in this case, you're got this big lag.

1:02:58

If that's not single manager risk, I don't know what

1:03:00

is.

1:03:01

What we are trying to we believe

1:03:03

that if you look at the average

1:03:05

positions of 20 guys, you're going

1:03:08

to look a lot more like Abby over

1:03:10

time than you are like,

1:03:13

so you know, the average drawdown of the

1:03:15

members of the SOC-Gen CTA index is in the 20s, right?

1:03:18

The index is 14. Okay, we

1:03:21

are hoping to be a lot closer to 14 over

1:03:23

time. And so and

1:03:25

so, you know, it's it's

1:03:29

but again, remember, we're also doing it in an

1:03:31

ETF with with

1:03:33

with a fee structure that somebody

1:03:36

who's running a model portfolio can can

1:03:39

can digest and

1:03:42

and feel like there's not a situation

1:03:44

where, you know, I mean, one of the things about the 2000 that

1:03:48

long winter is that yes,

1:03:50

the assets in the industry came down. But

1:03:52

if every third year you have a really good year,

1:03:54

and then you give it back over the next two years, the way the fee

1:03:57

structure works is people make a lot of money in the one

1:03:59

year.

1:03:59

and then you don't get it back. It's

1:04:02

not like private equity where you get to the end and

1:04:04

you see how much money you've actually made in hard dollars

1:04:06

and distributed.

1:04:07

You can have big years

1:04:09

with big payouts followed by periods

1:04:12

of poor force and nobody gives their money back. This

1:04:15

is a problem across the overall hedge fund industry. That's

1:04:17

one of the issues we were trying to address. It's the path dependency

1:04:20

of it. I applaud that and having launched one

1:04:22

of the first ETFs in this space, I get it. I

1:04:25

think there's an appropriate place for it.

1:04:27

Why do you think your ETFs failed in

1:04:30

the US? Well, it

1:04:31

wasn't just the US. We launched them in Canada

1:04:33

when we first launched the MetEts Futures ETF

1:04:36

in Canada. It was just timing. We

1:04:38

launched them at a really challenging

1:04:40

time. It was really hard to tell the CTA

1:04:43

story. Part

1:04:46

of our business model at Ospis was,

1:04:48

again, different than the other CTAs

1:04:50

in that we were retail and institutional,

1:04:53

US and Canada, different

1:04:55

delivery mechanisms to really

1:04:58

open up this to different investors.

1:05:01

The retail space specifically in Canada

1:05:03

was definitely not looking

1:05:06

for CTA products.

1:05:08

It was definitely a misstep. We

1:05:10

learned a lot about that space. Our

1:05:13

product has been live in the US.

1:05:16

The Comm ETF with direction and

1:05:18

the predecessor Fortiac Mutual

1:05:20

Fund has been live in the US since 2012, just

1:05:23

to be clear. It's five-star rated.

1:05:25

That's 11 years. That's

1:05:28

a long commodity tracking ETF, right? That

1:05:31

is a managed futures ETF. That is long

1:05:33

flat, the same engine we use in our

1:05:35

managed futures index. It's just long flat,

1:05:38

a basket of commodity only. Same term

1:05:40

structure, same volatility based position sizing,

1:05:42

it's managed futures at the end of the day.

1:05:45

The point is, even in that, the

1:05:47

commodity side, in fact, even

1:05:49

harder was the commodity side versus

1:05:51

CTA. It was very out of favor. You couldn't tell

1:05:54

a commodity story, let

1:05:56

alone a CTA story. I'm a commodity

1:05:58

tilted CTA

1:05:59

a commodity background. And so

1:06:02

definitely with that tilt, it was very, very hard

1:06:04

for us to tell our story. By

1:06:06

the way, do you know I started Pinnacle?

1:06:09

It was the first commodity funded funds. I launched

1:06:11

it back in the early 2000s.

1:06:13

It's now kind of the global leader in

1:06:15

allocating to fundamentally driven commodity managers.

1:06:19

I've known the commodity space

1:06:21

for a very long time as well.

1:06:23

You talk about us as though

1:06:25

we are

1:06:27

amateurs who cut corners to get

1:06:29

to where we do,

1:06:30

to where we are. It's not who we are.

1:06:32

I think you're taking it personal

1:06:35

when I'm pointing out with

1:06:37

every strategy, as you've pointed out with ours, Andrew,

1:06:40

you've pointed out the pitfalls or the

1:06:42

negatives or whatever the negative points are.

1:06:44

And every strategy has pluses and minuses. I'm

1:06:46

a commodity tilted CTA who put out

1:06:49

a single strategy managed

1:06:51

futures index and commodity index back over 13

1:06:54

years ago. And there's pluses and minuses. There's time

1:06:56

when it underperforms and it outperforms. I

1:06:58

recognize those pluses and minuses.

1:07:00

I don't take them personally. It's not going

1:07:02

to break my heart if somebody says, you know what, here's

1:07:04

the problem with that single strategy is it

1:07:06

doesn't have strategy diversification. You're

1:07:09

too focused in commodities. You

1:07:11

don't have equities. There's a million criticisms

1:07:13

of those things. The reality is we've

1:07:16

got a long track record. We're growing

1:07:18

our business. I see the pluses and minuses. I'm not

1:07:20

taking those things personal. And you shouldn't

1:07:22

take these things personal. What I'm pointing

1:07:25

out is what I see as some of the red

1:07:27

flags in the replication space,

1:07:29

specifically

1:07:30

as to CTA. It's not,

1:07:33

again, you've got a tailwind and I think

1:07:35

you're going to do great. As long as those managers

1:07:37

and those benchmarks do great, you're going to do

1:07:40

great. But I think you have to be careful

1:07:42

with your words when you start talking

1:07:44

about alpha, when you start talking about infinite

1:07:47

capacity, when

1:07:49

the risk management debate comes up, because

1:07:52

those are the bones of what

1:07:55

being a CTA is. And

1:07:58

I think those things just need to be pointed.

1:07:59

it out. This isn't an attack

1:08:02

on you. You put the

1:08:04

negatives of mine and I'm just saying, hey, by

1:08:06

the way, this is a debate. Sure.

1:08:08

Well, look, to close the

1:08:10

circle, I think the way you talk about Alpha to me seems…

1:08:13

You've said naive. You've said naive in old

1:08:15

fashioned. Yeah. Look,

1:08:18

I think there's been a huge evolution of how people

1:08:20

think about and talk about these things. Cliff

1:08:22

Asness has been a leader in it. I

1:08:25

personally think that where people

1:08:28

went with the alternative risk premium products

1:08:30

didn't… I

1:08:31

think they were oversold for what they

1:08:33

were. But I think when people

1:08:35

use this term Alpha,

1:08:37

I think you have to think about what are you comparing

1:08:39

it to?

1:08:41

So if you're saying

1:08:44

our definition of Alpha is that when you have

1:08:46

certain market dislocations, you're going to go up,

1:08:49

what's the cost of that and the rest of the time? You

1:08:52

can go out, you can go short the VIX or

1:08:54

you can do whatever. I mean, you

1:08:57

can do a lot or buy the VIX or

1:08:59

you can short various things to get

1:09:01

crisis Alpha. It's always a trade off

1:09:03

on this stuff. And

1:09:05

look, I think there's another issue on the retail

1:09:07

side as it relates to adoption, which

1:09:10

Nielsen and I have talked about. Let me

1:09:12

just address that for one second. This

1:09:15

is a very elusive thing. What

1:09:17

is Alpha? As you can say, I'm naive

1:09:19

about it or old fashioned or whatever. I'm not that

1:09:21

old, but I get your point. But

1:09:24

that's not the issue I have with it. Let's try

1:09:26

to define perfectly what Alpha is and that we

1:09:28

perform perfectly at this time. My issue

1:09:31

is very simple. Your statement

1:09:33

publicly is fee reduction is the purest form of

1:09:35

Alpha. And we think that's

1:09:37

a misrepresentation. It's

1:09:41

a reference to the fact that if you're doing

1:09:45

an institutional share class versus an A share class,

1:09:49

the cheaper share class will generate more. If that

1:09:51

wasn't clear to you, then I think it's clear to most

1:09:53

people that I talk about that it's really an effort

1:09:56

to try to basically

1:09:58

say it's trying to try to.

1:09:59

Lower fees are good for investors. I 100% agree.

1:10:03

Lower fees are very good for investors. And

1:10:05

you know what? And you know what? They're actually reasonably

1:10:07

good for, like, look, there's a sweet spot, I believe.

1:10:10

It's not just that they're good for investors. If you

1:10:12

want a business with longevity, I think having

1:10:15

appropriately priced products for

1:10:17

the performance is absolutely

1:10:20

imperative. So we agree on that. It's

1:10:22

your statement.

1:10:23

Because this is just a debate. It's

1:10:26

two guys talking. Again, it's like Jerry and I

1:10:28

saying, hey, you know what? Volatility

1:10:31

adjusts my positions when vols blow out in

1:10:33

crude oil. And he's saying, don't do that.

1:10:36

And I'm like, well, we agree to disagree,

1:10:38

right? So we're disagreeing on what

1:10:40

alpha is. You're saying it's fee reduction. I'm saying

1:10:42

it's not. No, no, look, I'm saying

1:10:44

alpha is a complicated process. But look,

1:10:46

mathematically, you've got to decide what you're comparing yourself

1:10:48

to.

1:10:49

And that's the question. Your

1:10:52

Twitter handle says, in hedge funds, fee reduction

1:10:54

is the purest form of alpha. I

1:10:56

didn't know who you were, but that's where my starting

1:10:58

point was.

1:11:02

Now, guys, let me interject

1:11:04

a little bit here. This has been good. I'm

1:11:06

sure the audience will be

1:11:09

surprised with this episode, but I think

1:11:11

they're going to love it. Now, I will

1:11:13

just say,

1:11:14

just as a little, there's a couple of things that

1:11:16

I've just written down. And

1:11:19

I don't want to get into a big debate about it. I

1:11:21

just want to point out that when we say that

1:11:24

lower fees are good for

1:11:27

investors, I don't think necessarily that's the true statement.

1:11:29

I know plenty of funds that have high fees

1:11:31

that have much better returns than a lot of

1:11:34

the low fees products. So you can't

1:11:36

make that statement either, in my view, saying, lower

1:11:38

fees are better for investors.

1:11:40

Not always. So I just want to make that

1:11:42

clear. They have to all equate, right?

1:11:44

I don't know if it's the right word, but they have to justify

1:11:46

each other. The clause in the beginning

1:11:48

is, all other things be equal. No, no, I wasn't

1:11:50

actually referring to your statement or anything.

1:11:53

I was just that little point that was mentioned

1:11:55

at the end

1:11:56

by both of you tend to agree that lower fees are

1:11:58

better for the investor. I'm just sure.

1:11:59

I'm just saying, I don't agree with that. In

1:12:02

isolation, I agree. Sometimes. Yeah,

1:12:05

exactly. Give money to millennium. Pay them 10 points

1:12:07

if

1:12:08

you can. They're worth every penny.

1:12:12

Things like that. Even some of the CTAs that I know pretty

1:12:14

well. Anyways, that's

1:12:17

one thing. The other thing I just want to say, because I think

1:12:19

that's just something for me to be absolutely

1:12:21

sure about, something I picked up from you,

1:12:24

Andrew, and that is when you said,

1:12:26

well, we are very closely

1:12:28

correlated to the index.

1:12:32

Again, from my point of view, I think

1:12:34

correlation doesn't necessarily mean that

1:12:36

you're going to replicate the performance

1:12:39

because you could be correlated,

1:12:41

but it doesn't mean you're generating the same performance

1:12:44

because amplitude of returns is

1:12:47

also important

1:12:48

when you do correlation analysis,

1:12:51

right? Because people often say to me, oh, I

1:12:53

only need one trend follower because they're so correlated.

1:12:55

And I'm thinking that's not true because they

1:12:58

can have very different performance.

1:13:00

Oh, completely. Correlations

1:13:03

a terrible statistic, but we search for a better

1:13:05

one to have. We are highly correlated this

1:13:08

year. We're underperforming. We

1:13:09

are highly correlated in the years leading up to it, and we

1:13:11

outperform by a lot.

1:13:12

So that's the challenge of replication

1:13:14

is if you're outperforming, are you

1:13:16

doing your job?

1:13:19

People are happy, but are you doing your job? I just

1:13:21

want to get people to understand that.

1:13:24

The other thing is I actually, I mentioned earlier,

1:13:26

we don't have time for both of them. I just, I

1:13:28

actually did mention that there was a question that came

1:13:30

in from, from one of our listeners.

1:13:33

And I think it's somewhat relevant. I don't know if it's

1:13:35

more a statement than it is something we need

1:13:38

to debate now, but, but Oliver

1:13:40

writes in and I want to give credit to, to him

1:13:42

for, for taking time to write in. He says, why

1:13:45

should it be more attractive for investors to

1:13:47

invest in an index replication

1:13:49

strategy instead of picking the trend

1:13:52

fund that suits their specific portfolio

1:13:54

goals and specific convictions

1:13:56

best. I guess it's more difficult for

1:13:59

investors to tell whether the SG-Trend or

1:14:01

SG-CTA index will move going forward,

1:14:04

e.g. recent sharp tilt of

1:14:06

the index, then to tell where a

1:14:08

specific fund with specific characteristics

1:14:11

will go. Example, if I

1:14:13

invest in say Don Capital, I know

1:14:15

approximately what their fund

1:14:18

and methodology stands for. I don't

1:14:20

know that as well for a mixed basket

1:14:22

index.

1:14:23

The index might move away from

1:14:26

what I'm personally expecting from trend.

1:14:29

However, it might reduce regret, fear

1:14:31

of missing out though when looking

1:14:34

at other funds, short-term performance.

1:14:37

So, there is a behavioral benefit

1:14:40

for some.

1:14:41

I think that's an interesting, I mean

1:14:44

I think also that is a relevant

1:14:46

point that because we talk about it as

1:14:48

it's either or, I think it actually depends

1:14:51

on what you want from

1:14:54

an allocation to this space. Absolutely.

1:14:59

My whole point is anybody who's trying to do, look,

1:15:01

we tried to build this as an index-like solution, index

1:15:04

being defined as the overall space, which we meant

1:15:06

by the SG-CTA index or an equivalent index.

1:15:08

That guy should invest with you. It

1:15:13

is really good for him. He wants to know

1:15:15

how you think and what you're doing. He has very

1:15:17

well-defined

1:15:19

views in terms of where you fit in your

1:15:21

portfolio and how you're supposed to put it. Or he

1:15:23

should invest with Tim

1:15:25

because Tim is basically articulating that

1:15:27

we think we are going to have this

1:15:29

particular return profile over a period of time

1:15:31

that is going to generate

1:15:32

XYZ at specific periods of time.

1:15:35

That's a guy who is neck

1:15:37

deep in this space and

1:15:40

what he wants and has the technical expertise to

1:15:42

do that. If that guy

1:15:44

says, my goal

1:15:46

is in 10 years as part of my asset

1:15:48

allocation to have something that is

1:15:50

moving along with the index for good or bad,

1:15:53

but if that's my goal, he should talk

1:15:55

to us.

1:16:01

Now,

1:16:02

I'm going to wrap, I'm going to kind of wind

1:16:04

this down, but it does leave us with,

1:16:07

I think, potential for more debates,

1:16:09

because I sense you're becoming best

1:16:11

friends through an hour of conversation,

1:16:14

even though you, it may not have sounded like

1:16:16

this in the last hour, so I think that's where we're

1:16:18

heading. But anyways, there

1:16:21

is a new entrance coming into this space

1:16:23

who will be listening right now and that is, of course,

1:16:26

Jerry and, and

1:16:29

exactly, even, you know, so even though I think

1:16:32

Tim has some stories about how he

1:16:34

thought that what Tim was doing back then was completely

1:16:37

nonsense, he seems to be joining

1:16:39

the ranks now. But more importantly, he's doing

1:16:42

it, as far as I understand, with

1:16:44

his full product. And that is a difference

1:16:47

because often CTAs have

1:16:49

in that ETF space

1:16:51

carved out something which, let's be

1:16:53

frank, is not their best product. So

1:16:57

I can't imagine why, why

1:16:59

you want to do that for a flat fee

1:17:02

of less than 1% and you have to share half of

1:17:04

that. I can't imagine why you would do that. And

1:17:06

frankly, I mean, you've been very frank with each other. I can be

1:17:08

very frank with you and say,

1:17:10

I still don't really understand why you guys are giving

1:17:13

what you're doing away because

1:17:16

in my view,

1:17:17

you're only competing on price. But

1:17:19

that's for another debate.

1:17:21

I'm setting it up as a little teaser. Round

1:17:26

two. You set it up well. I mean,

1:17:28

you know, this is part of the debate.

1:17:30

And I love the way you describe that, Niles, in terms

1:17:33

of, yeah, there was a high criticism

1:17:35

of, you know, why are you doing this and why are you charging

1:17:37

this? And why are you carving this out of your

1:17:39

flagship product, you know, your subpar

1:17:41

product, so to speak, or a single strategy?

1:17:44

I don't think it's subpar. I think it's

1:17:46

a single strategy that makes up a multi-strat.

1:17:49

But you know, you're bang on. I'm curious of

1:17:51

those

1:17:51

same things with, you know, with

1:17:53

Jerry. So I think we might be forward

1:17:55

next time. And by the way, you know, I'd leave it with this,

1:17:58

Andrew, you know, from my side.

1:17:59

I think what you've done is super

1:18:02

innovative. There's a great tailwind.

1:18:06

This is not that I think

1:18:08

the things should go away. That is not what

1:18:10

I'm trying to get across here. I think

1:18:12

there's room and I think there should be choice for

1:18:15

investors and I think that's fantastic, especially

1:18:17

in this place. The most underserved space

1:18:19

in the retail world, in my opinion, that's

1:18:22

why I made the business decisions I made. Definitely

1:18:25

had some missteps as a business. We were too

1:18:27

early, even just launching

1:18:29

in Canada

1:18:29

versus the US was probably a big mistake.

1:18:32

It is what it is, but here we are. And

1:18:35

all I'm trying to point out is certain

1:18:37

things that I think we have to be

1:18:39

careful in terms of how we describe

1:18:42

things. And no more clearly

1:18:44

has that been reminded to me most

1:18:46

recently when I converted our longstanding

1:18:49

funds to public funds in Canada, publicly

1:18:53

available, different regulations

1:18:55

in terms of how you describe things. And

1:18:58

what I'm saying is that we've just got

1:19:00

to be careful in terms of what we promise and

1:19:03

how we describe those things. And that's all

1:19:05

I'm kind of pointing out. You're

1:19:07

obviously a smart group of guys, replication is

1:19:09

a cool thing. I just, I

1:19:11

chose a different path in the CTA space.

1:19:14

Look, I appreciate

1:19:17

you saying that. And look, as I would say, there

1:19:19

are a million different ways to go at this space. And

1:19:22

look,

1:19:22

I think Corey's a great example. I mean,

1:19:25

hopefully Corey will listen to this. Corey is incredibly

1:19:27

smart. He learned what we did

1:19:29

and he built a product that he believes is better.

1:19:32

It uses part of what we do. It uses

1:19:34

part of what you do, Tim, basically

1:19:36

in terms of constructing a rules-based approach.

1:19:39

And then he added a fixed

1:19:41

income and a leveraged component to it

1:19:43

to try to serve a different part of the market. And

1:19:47

so back to Jerry coming into this space,

1:19:50

I hope man comes into this space. I

1:19:52

hope Alpha Simplex comes into

1:19:54

this space. They just bought by a company. There

1:19:56

should be a lot of really good ETF

1:19:59

products out there

1:19:59

haven't been.

1:20:00

And I think what happened with our success

1:20:03

last year

1:20:04

is I think before last year, because

1:20:06

of, Tim, your experience and the experience

1:20:08

of other people in the space, and the fact that WIS

1:20:10

injury had been around for a long time, first of all, it's been

1:20:12

around for a long time, they had gotten traction, is people

1:20:15

assumed you couldn't do it.

1:20:17

You couldn't offer

1:20:19

a credible

1:20:21

asset allocation tool, a credible trend

1:20:24

falling product or credit in an ETF. And

1:20:26

we've tried to break that mold.

1:20:28

It's not easy. We are

1:20:30

dealing, we are 700 million out of a $7 trillion

1:20:34

industry. We are one basis

1:20:36

point out of the US ETF

1:20:38

world. And so, you know, Niels,

1:20:41

back to your thing is our

1:20:43

argument is that

1:20:45

it shouldn't be one basis point. I

1:20:46

don't know if it's 10 basis points, like

1:20:49

in the mutual funds space, or 20 basis points in

1:20:51

five years, or 50 basis points,

1:20:53

there is plenty of room

1:20:55

for everybody to have really meaningful

1:20:57

assets. And our view

1:21:00

is that if we can solve an asset allocation

1:21:02

problem,

1:21:03

it gets us in front of guys who decide

1:21:06

to just use us,

1:21:07

not picking us versus

1:21:10

other things, but they fill a bucket. And

1:21:12

if we can do that well for them, then, you

1:21:15

know, have lower fees, but it'll be on

1:21:17

larger AUMs over a long period of time.

1:21:20

And it'll work or not, you know, three years, maybe,

1:21:23

you know, I'll be I'll be sending you guys resumes for jobs

1:21:25

or something. And you know, there'll be a,

1:21:27

you know, a big, a big,

1:21:29

a resounding laughter from Calgary about

1:21:32

about not at all, again, you

1:21:35

truly shouldn't take it that way. This is

1:21:37

a debate about how to go about something

1:21:39

in a space that obviously is, is, you

1:21:42

know, where I've made my career and how I make my living.

1:21:44

I put food on my table. So I'm

1:21:47

saying sensitive about it. But you know, don't take

1:21:50

it personal.

1:21:50

There's so many ways to slice

1:21:52

the pie. Look, I've been the bearer

1:21:55

of so many a criticism in my career

1:21:57

and even in what we've done at Ospis. I mean, we're a commodity.

1:21:59

of detilted CTA going

1:22:02

down the ETF path. I remember when I first

1:22:04

launched a natural gas ETF. If

1:22:06

you're such a good CTA, why are you launching this beta

1:22:08

ETF? Well, I want to learn about ETFs and indexing.

1:22:11

So I've taken lots of criticism and,

1:22:14

you know, there's room for it. And so

1:22:16

be it. If you want if you want to enjoy

1:22:18

if you want to enjoy widespread hatred, launch

1:22:20

a replication business. I

1:22:25

spent a decade, a

1:22:27

decade and a half, almost 12 years getting

1:22:29

the door

1:22:29

slammed in my face again and again. It's

1:22:32

too simple. It can't work. It's

1:22:34

not alpha. And and for

1:22:36

whatever reason, I am, you know, I'm

1:22:38

still standing, but barely. So.

1:22:40

Okay. Let's let's leave it on

1:22:43

that note. This this really was fantastic.

1:22:45

I thoroughly enjoyed it. I think everyone listening

1:22:47

to this enjoyed it because at the end of

1:22:49

the day, I mean, as I sometimes

1:22:52

say in my intro, I mean, this is the

1:22:54

place where we come to voice our

1:22:56

differences on the one thing that

1:22:58

we all love. And so I think we've

1:23:01

we've lived up to that statement

1:23:03

today and we will do this

1:23:06

again. I have no doubt. And maybe there will

1:23:08

be three, four, five of us. Next

1:23:10

time you'll have Jerry and then you both can

1:23:12

gang up on me. There will be plenty of

1:23:14

ways to to to keep

1:23:16

this going. Now, let me just say

1:23:19

that if you enjoy this type

1:23:21

of episode, why don't you just let me know and maybe

1:23:24

we can do more of these. But in any event,

1:23:26

make sure you rate and review the podcast

1:23:29

so that more people can find debates like

1:23:31

this. I mean, these are some of the smartest people you're going

1:23:33

to come across in this industry. So

1:23:36

why not share that with more people? Next

1:23:38

week, I'm going to be joined by another

1:23:40

very

1:23:40

clever person from this industry, namely

1:23:43

Nick Balthus from Goldman Sachs. So

1:23:45

make sure you send in your questions for that episode.

1:23:47

Info at toptradersonplot.com. That is

1:23:50

where you should send them. From

1:23:52

Andrew, Tim and me. Thanks ever so

1:23:54

much for listening. We look forward to being back with you next

1:23:56

week. And in the meantime, as usual, take

1:23:59

care of yourself.

1:23:59

and take care of each other.

1:24:29

You can even infer anything about future performance.

1:24:32

Also understand that there's a significant risk of

1:24:34

financial loss with all investment strategies.

1:24:37

And you need to request and understand the specific

1:24:39

risks from the investment manager about their

1:24:41

products before you make investment decisions.

1:24:44

Thanks for spending some of your valuable time with us and

1:24:46

we'll see you on the next episode of The Systematic

1:24:48

Investor.