E10. Live Q&A - Managed Futures Trend & Carry Flash Update

Speaker 1 0:02

Hello, and welcome to the Get Stacked investment podcast, where we delve into the exciting new world of return stacking. Join us as we break down complex financial concepts into accessible insights, speak with leading experts in the space, and analyze real world applications for return stacking. GetStacked is here to help you break out of the traditional portfolio construction mold and get you to start thinking differently about the path to successful investment.

Speaker 2 0:29

Corey Hofstien is the cofounder and chief investment officer of Newfound Research, and Rodrigo Gordillo is the president and portfolio manager of Resolve Asset Management Global. Due to industry regulation, we will not discuss any funds managed or sub advised by these firms on the podcast. All opinions expressed by podcast participants are solely their own opinion and do not reflect the opinion of neither Newfound Research or Resolve Asset Management Global. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of these firms may maintain positions and securities discussed in in this podcast.

For more information, visit returnstack.com.

Rodrigo Gordillo 1:20

Alright. It looks like we are live, ladies and gentlemen. Thank you, everybody, and, welcome to our live q and a. And today, we're planning on discussing what is going on broad broadly speaking in the macro markets today and the impact specifically to the managed future strategies of trend and carry. And, yeah, I mean, if you guys haven't heard of us already, my name is Rodrigo Gordillo, president and portfolio manager at Resolve Asset Management Global.

And today, I'm joined with Corey Hofstein, chief investment officer of Newfound Research, along with Adam Butler, CIO of Resolve Global. And everybody here today are cofounders of the return stacked ETFs and return stacked portfolio solutions ventures. So thanks, gents, for joining us today. And we turned this around quite quickly. I know everybody's been hard at work trying to get a handle on what's going on in the markets in the last few weeks and days.

And, I'd like you guys to help us set the stage, a little bit on what's going on in the markets. I mean, in the last few weeks, we've had European regulation reforms, a surprise German fiscal stimulus, the Atlanta Fed's negative q one GDP now print, not to mention the tariff battles, you know, between Canada and Mexico and Europe. Now we have systematic now it's it's the the reality is that systematic managers that we are, we generally don't talk about these fundamental things very much, but I do wanna kinda pick your brain because I know we talk about it a lot internally. What have been the biggest market moving stories in the re in the recent weeks?

Corey Hoffstein 2:57

Ron, I wanna I wanna point out you said all that's happened in the last couple weeks. All that happened in the last three days. Yeah. So I think I think it's just that every day feels like a week. Look.

/: 2001

For folks who who haven't read about it or or looked into it, the proposed fiscal stimulus is really focused on infrastructure and defense spending. And in particular, it allows Germany to lift their budget cap for any defense related spending. And so the amount of fiscal stimulus that it captures is between 10 or 20% of Germany's GDP. Right? So to put that into context, that's about how much The US unleashed as a percent of GDP during COVID.

Right? When we shut down the economy, we did a fiscal stimulus package of 10 to 20% of our GDP. Germany just went, let's do it. Right? And so you saw massive moves in the German bund.

Right? Rates there jumped 30 bips, which is the the last time they jumped 30 dips was again during COVID, during ex you know, expectations that, the government was gonna have to pay for this somehow. You saw huge moves in, the German, DAX, right, the equity market, both up and down. Right? Lots of volatility there.

Right? And you saw moves in in the euro versus the dollar. And so I think in terms of, like, something that had a true cross market impact, that was just a a huge one. And the scope of it for Germany is just so massive relative to their GDP. It it it feels when it again, you I feel like we use the word unprecedented every time something happens in the markets.

But but for not having, a COVID like economic shutdown to just say we're unleashing 10 to 20% fiscal stimulus is is huge. Now

Rodrigo Gordillo 5:21

I just

Speaker 1 5:21

I just wanna make sure

Adam Butler 5:22

you're appreciated.

Corey Hoffstein 5:24

Just just wanna appreciate it. Comment, It's it's not in effect yet. The I think the vote is March 24. So in terms of what markets are trying to digest, there's also a probabilistic reaction here. And, you know, if markets overshoot that this is gonna get implemented, you could see a whipsaw effect in in late March.

Adam Butler 5:43

Yeah. I actually just in terms of whipsaws, I mean, this has been an environment dominated by whipsaws. I remember coming into, February, the tariffs are announced. The currencies of the target economies are decimated, which was in the direction of carry. It was in the direction of the prevailing trend.

Started out being a phenomenal day, February 1. And by the end of the day, it was, you know, announced effectively that that the tariffs were not gonna come into effect or at least they were gonna be delayed. There were options for target countries, actions they could take in order to avoid this outcome. So markets completely reversed, and we've seen these kinds of policy reversals over and over over the last few weeks. And it is this strange binary outcome.

Right? 25% tariffs or on Canada and Mexico on top of 20% across the board tariffs to China, that is a completely different global world in six to twelve months than not having those tariffs in place. Right? So investors are having to sort of price in this this, double headed, this binary distribution where, you know, you've gotta price in the probability of one or the other, and it's not like it can be the average of the two. It's gonna be one or the other, and markets are just vibrating between them.

Right? Just in terms of the the, the size, the magnitude of this, change in Europe, you know, legislation was put in place on the formation of the European monitoring union to enforce fiscal prudence, largely driven by the Bundesbank by Germany, which which is typically the most, austerity or fiscal prudence oriented country and and and governance, structure. But it was applied broadly to the Eurozone, broadly to the EMU, and, those rules are not easily overturned. Some of them require unanimous consent from all EMU per participants in order to to pass. So, you know, while Germany has changed their views, obviously, you know, a 80 degrees over the last few days even, we still need to we the Scandinavian countries also need to validate any major changes in rules.

It also takes a two thirds majority to change the the laws around the debt break in Germany that would allow them to engage the in this level of fiscal expansion. And keep in mind, this is 10 to 20 times the level of fiscal expansion that is currently allowed under Germany's debt break policy. So it's not just that, you know, the politicians have announced their objectives or their goals or what have you. It is there's there's you know, the markets are saying there's a reasonable probability that that these rules will get completely repealed or substantially modified in the very near future, which will unleash a completely different economic environment in Europe, and that's what's being priced here.

Rodrigo Gordillo 8:54

e this quickly in Germany was: 1990

or markets from September to,: 2024

That the German sorry. The The UK, currency is up 2.5%, and the euro is up 4% in the last three days, representing a ninety ninth percentile and 99.9 percentile three game. Right? Again, this is gonna be a a common theme as I go through these.

Adam Butler: 10:12

Yeah. So just just put that in perspective. Right? A ninety nine point ninth percentile move is expected to happen about once every thousand days.

Rodrigo Gordillo: 10:19

Yeah. And so when I move on here to what do we just do? The currencies, German bonds, we just talked about them, a 3% move in the last three days. That is a less than 0.1 percentile outcome. Gilts down 2% in the last three days, a one percentile outcome.

/: 2024

energies are not negative for: 2025

als are generally strong from: 2024

Right? And that's, that's due to the tariffs, right, that that we're announcing copper. I know people knew that that's that's another announcement that has come. You know, we focus so much on equity markets, but, you know, we are One

Adam Butler: 12:09

can be excused for missing, a property announcement amongst the, barrage we've been yeah.

Rodrigo Gordillo: 12:17

And then in grains and sauce, the big movers were coffee, up 15 to 25%, and cocoa, down 30% year to date. Okay? So though that's those are the markets we're dealing with, and that's the magnitude and, again, focusing on how rare these moves are, single day, three day moves, as we move, into assessing what those broad market impacts are to systematic strategies like carry and trend.

Adam Butler: 12:44

I think it's important for you to remind people, like listeners, when you talk about managed future strategies, many people don't realize that we're allocating to all of these different markets. Like, the reason why we're talking about how cocoa and copper and the DAX and the bund and, all these different markets have been behaving is because these are, for the most part, constituents of managed futures portfolios. Right? So while typically investors' attention is on what's going on in maybe in the S and P or maybe some are watching The US Ten Year rate, and maybe the dollar. You know?

So, really need to take a global multi asset perspective.

Rodrigo Gordillo: 13:27

Yeah. That's a good point. So let's start talking about some of these managed future strategies. Let's start with carry, multi asset carry to be specific. Not everyone is really as familiar with carry as with multi asset carry models as they are with trend.

So, Adam, you literally, recently wrote a large white paper for Resolve on carry. Can you give us a 30,000 foot review as to how the strategy operates?

Adam Butler: 13:53

It's not that large or intimidating. Definitely digestible and approachable and worth reading. Yeah. I mean, there is a reason why we, parenthetically call carry yield. Right?

Carry is the return you expect to get on an investment if the price doesn't change. I mean, you know, obviously, we're used to in this environment, getting the vast majority of our, our returns from changes in prices. Right? Stocks go up, indices go up, etcetera. But there is another source of returns, and that is yield.

On in equities, it's the dividend yield. In bonds, it's the coupons that are paid, quarterly or biannually or annually on, on bonds. In currencies, you can borrow in a currency with low interest rates to invest in the short term, government bills of a of a currency or a government with higher interest rates. Right? So you borrow, let's say, 1%, in your in a domestic currency and then invest overseas in a country that's yielding 2% and earn that 1% spread in currencies.

And then in commodities, there's also a yield, a convenience real yield, a roll down yield. The idea in commodities being that, the futures markets are helping to ensure large investments by commodity producers by giving them a price today for their production, which probably won't come online for many years in the future. But by the future markets giving them a price today, they're able to lock in a much better financing rate on building out those large projects to to build those, into production. And, therefore, their cost of financing is lower. The economics on these projects are more attractive, and so it's this win win in commodity markets.

Right? So it's really just dividends on equities, coupon payments in bonds, interest rate differentials in currencies, and this insurance and convenience yield in commodities that we are harvesting. Again, the, the price doesn't really need to change, though, in, in futures markets. It ends up that the price changes just in terms of how futures roll up or roll down the curve coming into the maturity of the contract. But the simplest way to think about it is just, you know, picking up coupons or or picking up dividends.

Okay. So but let's talk

Rodrigo Gordillo: 16:28

a little bit about so that's the concept of carry. But let's talk about the idea of those carry measures as signals to try to predict future price movement of these assets.

Adam Butler: 16:39

Yeah. So in general, you wanna

Rodrigo Gordillo: 16:41

be coupons in front of a steam roller rather than using it as, as a predictive measure.

Adam Butler: 16:50

Sure. Yeah. The idea is that in general, you're you're gonna expect to get a higher return from an asset with high carry. You're gonna expect to get a negative return from an asset with negative carry. What is positive carry or negative carry?

Well, typically, carry is whatever the the rate of return is above the cost of financing. Right? So you need to borrow money in order to purchase, an asset. So if the rate that you are borrowing at is lower than the rate that you expect to get paid on on that asset, you're expecting to earn a positive carry. So let's say this is actually not the case in in many global equity markets at the moment, but let's say that the the expected dividend yield on an equity index is 5%.

And the current interest rate that you would would need to borrow at in order to invest in that equity index, you only have to pay 2%. Well, you would expect that, expect to earn about a 3% premium over that the duration of holding that instrument. Right? If instead, as actually is the case today, the dividend yield is is actually lower than the financing rate. So let's say the dividend yield is 2%.

It costs four or 5% to finance it. Well, actually, you probably wanna be short that, asset and long cash effectively in order to earn the that differential. Right? And so in that way, what we sort of, assume or expect that what's validated over decades of empirical evidence is that markets tend to rise in price to match the expected carry. Right?

So if there's an expected 3% difference between the cost of financing and the coupon or dividend yield or what have you that you're expected to get paid, then the price will sort of rise in order to deliver that 3% premium. Or in this in the case of being short, the price will fall in order to deliver that that premium. And we're measuring that premium, that carry premium every day, and it changes every day depending on changes in interest rate differentials or the slope of the yield curve, etcetera. And we're adjusting every day to try to get maximum exposure to markets that appear to have the highest expected carry and the largest short exposure to markets that have the greatest expected negative carry.

Rodrigo Gordillo: 19:25

And so Rod, if if

Corey Hoffstein: 19:26

I can summarize it maybe in, like, one sentence. Yeah. Right? Because I think what's important here, when we talk to people about carry strategies, they often think about clipping coupons. What's critical about a multi asset carry strategy is it's using carry as a signal to try to forecast the total returns of each market rather than a strategy that's trying to isolate and extract the carry on its own.

Right? So just why, like, trend, use a trend signal to go long and short markets, and you're trying to forecast the total return. Carry strategies are can do something similar.

Rodrigo Gordillo: 19:56

Yep. So let's then with that understanding, if anybody wants to get something a bit deeper, we've done a ton of other, videos and, papers on it, and and you can go return to Stack.com and read some of the, blog posts in there. But, let's talk about what how carry has been affected in this market environment. So broadly speaking, how were multi asset carry models positioning positioned entering this week?

Adam Butler: 20:25

Yeah. So keep in mind. Right? Just think about the evolution of the economic environment since, say, 2020. Right?

So we had this large stimulus from COVID that contributed to a surge in inflation. Can argue about what other factors contributed, but surge in inflation. We had the Fed raise rates aggressively, and therefore, short term yields rose above long term yields. Now the the yield curve is inverted so that when the yield curve is inverted, you're actually getting a lower expected, return on the 10 than you are on owning cash. And so that implies from a carry standpoint that we should be short bonds.

s short bonds for much of the: 2022

So over the last six months or so, our our bond exposure and the carry strategy has tended to be, on average, more sort of long bonds. Now what happened and by the way, as a result too, there were changes in currency markets as different economies, experienced changes in or moderation in inflation rates at different, rates over time or at different, speeds, let's call it, over time. And, therefore, the currency markets, changed in in order to reflect those changes in return expectations and therefore changes in interest rates, short term interest rates. Right? So now we come into the most recent episode.

The Trump administration announces that America is no longer in a position to continue to fund the Ukraine war, to continue to support NATO to the extent that they have. Europe is gonna need to stand on their own two feet, so called strategic autonomy. That motivates this enormous, basically overnight change in both the public's perception of the necessity of, major fiscal spending, policies in in, Europe and changes to the legislation that would be required in order to, actually operationalize those fiscal expansions. So the market goes from perceiving that Europe is kinda locked into this low growth environment because they've got all these regulations that prevent major expansionary policies. Overnight, that's flipped on its head.

We're getting a massive expansion. Therefore, nominal growth expectations jump effectively overnight in Europe, and, European bond markets are repriced higher in terms of rates, in order to reflect these higher nominal growth expectations. So that was, as Corey mentioned, a highly irregular shock to both short and long term rates on on European government bonds to the tune of between twenty and thirty basis points, basically, overnight. And as we know, when interest rates go up, bond prices go down. So we're long bonds in the carry strategy because carry the the slope of the yield curve has been normalizing.

In general, we're expecting positive returns over cash from holding bonds. We get this kind of overnight rate shock. That obviously is highly punitive, and that was the major explanatory variable in terms of why we experienced that large, negative return yesterday. Wasn't just that. There were also sort of secondary effects too.

As the interest rates change between Europe and The US, there also was then that made the euro more attractive as a currency for, you know, global savers to hold their savings in. So there was a flight from US dollars into the euro, so the euro rose. We were also net short the euro because the interest rates in in The US have been structurally higher than in most of the rest of the world over the last, you know, twelve to eighteen months. So we've been structurally long the US dollar and short, foreign currencies. So we were positioned we were we were, short the euro.

Now the euro kinda crashes higher. Right? So that was also at the margin a bit of a hit. Add in the Trump tariffs, copper jumps. Meanwhile, copper, is suggesting negative carry properties, so we were short copper on the wrong side of that.

And oil is reflecting supply demand dynamics where the, oil market is in backwardation. So we're also offside a major collapse in oil. So it was just a kind of a a cons a a a constellation of large surprises that went against the prevailing tailwind that we normally expect to get on our carry positions.

Rodrigo Gordillo: 25:40

So that's, that's very helpful. Thank you, Adam. I think a lot of people in the last three days may be thinking, okay. This is the typical carry strategy that has a, a negative tail risk. Right?

This idea of the young carry trade going against you at the worst of times. Do you think that idea is true here for multi asset carry? What are your thoughts on on this concept of of the, picking up pennies in front of the steamroller for for carry, broadly speaking?

Adam Butler: 26:17

Well, I mean, if you look back historically at, recessions and, the concept of kind of a typical procyclical strategy, procyclical meaning it does well when the economy is in an upcycle and and does poorly when when looks like we're falling into recession. So think sort of the reaction function of global equities. You just don't see it. So because we're trading all of these different markets, we're trading global bonds, global currencies, global commodities, and global equity markets. You know, for example, we've been sort of strategically short, on average global equities for many months.

Right? So, you know, if if sadly, equities kinda didn't fall yesterday. Right? So we that was also a strange situation. Equities are down today.

The carrier strategy is is benefiting from that. Right? But, you know, this is not a, a procyclical type of hit on the carry strategy. Right? If anything, it's it's we're the carry is getting hit by a major growth shock in the Eurozone.

Right? And if you look back historically, the the carry strategy doesn't have any pattern. You know? If it happens to be positioned in some bear markets so that it's kinda long equities or short rates that it can get hit for a time while equities get hit. But there are lots of times when it runs in reverse and carry ends up being a wonderful diversifier by rising substantially as equities fall in bear markets.

So there's just no clear part pattern. You know? I I understand that, many people who've been around markets for thirty or forty years kind of think of carry as currency carry where you're borrowing in, say, the yen or the dollar to invest in the Mexican peso or the Brazilian real or what have you to pick up this interest rate differential against, emerging market currencies. That is clearly a procyclical strategy. It is in theory.

It is empirical. You see them you know, they get hit when equity markets get hit. But because we're applying this concept to all these different markets and sectors, theoretically, there's no reason why it should have that profile, and empirically, we just don't observe it.

Rodrigo Gordillo: 28:37

Right. And and but let's I think look. We've had a shock. We've had a macro shock in the last few days, and we'd have seen periods where the carry strategy has been caught upside. Can we talk a little bit about historical context where where the strategy is positioned against the policy shock and then what happened and what happened after?

Give us can we go through some some examples there?

Adam Butler: 29:04

Yeah. Sure. I mean, think about the nineteen ninety four bond massacre. So Greenspan, he's he's newly in office. He wants to, set a standard as a a hardliner.

So he he enforces this very large, surprise interest rate raise. And, you know, that that was actually the the until this period, the largest drawdown in the carry strategy. Just this unexpected major adjustment to, in that case, rates. Those rates again this time that caused a a material decline, took kind of a a a year or so to recover from those losses. Equities and metals also contributed to losses in that period.

% on the year. In: 2016

So when at the beginning, when when, central banks began this normalization policy and markets weren't expecting it. We had another, substantial drawdown. That was also a round of tariffs on China, so another sort of similar context to the the current situation. So Carrie Carrie experienced about a 20% drawdown then. Right?

And there was also kind of a post pandemic inflation while the market was digesting what the, how the Fed was going to normalize rates after raising them, then it's it's been a kind of a bit of a sideways to down move. Right? Obviously, in all of these prior periods, things normalized and carry one on to actually, in many cases and kind of on average to emerge from these troughs with a surge of better than average performance.

Rodrigo Gordillo: 31:32

Yeah. That's what we've seen across every one of these as the, very strong outsized recovery, coming out of these situations. So that is important to understand here. But, just going back to the last three days, a lot of people are asking, have there been any adjustments, made? Is the system adjusting in any way?

Can we talk a little bit about how often as the multi asset carry strategy described in your paper is, is adjusting and then how the adjustments have happened in the last three days.

Adam Butler: 32:05

So we're looking at the the changes in the interest rate differentials and the slope of the cash yield curve and the term structure of commodity futures, etcetera. We're looking at that every day, and we're making adjustments to the portfolio every day. And so, yeah, there has been at the margin, some reduction in energy exposure, equity markets, metal exposures. There's been a marginal reduction in European bonds. What's happened is, there's been an, obviously, an increase in ex in volatility, which at the margin would expect a position to contract.

But because the yield curve has has steepened in Europe, also the expected carry has gone up. And so to some extent, the expectation of of higher future performance by holding European bonds has offset the increase in volatility, so there hasn't been a a very large reduction in European bond exposure. There hasn't some at the margin. Right? There's actually been a small increase in exposure to US bonds.

But, generally, the exposures in carry tend to, to change a little bit more slowly. You know, major changes to things like, global yield curves, global currency, differentials, etcetera tend to happen over a period of sort of several weeks and months. And so we expect the strategy to adapt on those time frames more than via overnight shocks. And if you look back on average over very short horizons after these types of shocks, that actually that strategy has actually paid off because you you tend to see an overreaction in the very short term to this type of shock or this type of news. The market then moderates that reaction a little bit, so we tend to get back a little bit of what we lost.

And then once the market stabilizes, the the, carry signals have also stabilized. We've got a a more, a better reading on the new regime that we're in in terms of the carry portfolio, and we're better positioned for what emerges going

Corey Hoffstein: 34:13

forward. Perfect.

Rodrigo Gordillo: 34:13

Okay. So that's that's a very good overview of, you know, carry, what's going on in carry, and and how it's changing. Let's flip over to trend, following managed futures, Corey. Maybe you can help us out here, get some, better understanding of what's been going on. You know, trend following strategies generally succeed when they catch these very strong sustained moves, and they tend to struggle in these type of reversals that we've been talking about.

So over the last three days, why don't you give us an overview of which markets have contributed the most and why?

Corey Hoffstein: 34:45

Yeah. And I think it's always interesting to think about when you have these big reversals in some cases. In other cases, it's been substantial extensions of the trend. Are how much are those surprises really priced in versus how much was the market predicting? We we can talk a little bit about that.

But just in terms of, you know, what we saw over the last couple of days, obviously, gains in European equities were strong, though volatile. And we've been overexposed to European equities, largely underexposed to US equities as US equities have been flat to negative over the last three months. We've been seeing a moderation of that position while European equities have been very strong plus 10 to 15 depending on which market you look at. So we continue to see positive trends there. We've been long metals, gold, silver, copper, and continue to see strong trends there.

Energy is one that we've been flattish, and it depends on particularly where in the energy complex. We've been you know, we had some gains in net gas that were offset by losses in in crude, right, and and RBO gasoline. So, that's sort of a mixed bag over the last couple of days. Bonds, we've been short. And so, while we're down year to date on bonds, because bonds have been a I mean, bonds have just been a struggling trade for the last, I don't know, call it eighteen months almost as they just get whipsawed back and forth by different market digesting policy decisions and what's happening with inflation and and economic impacts of tariffs.

But we did we did get the benefit from bonds, and then probably the biggest loss was in currencies. Right? We have been predominantly long the US dollar. As you mentioned at the beginning, Rodrigo, the dollar as a basket was up 8% last year. It's not a surprise we were along the dollar against a good cross section of other g 10 currencies.

And then we had these very rapid repricings, particularly in the British pound and the euro that led to a a pretty substantial, you know, one or two day loss. Not not substantial in knocking the whole portfolio off sides, but substantial in the in the size of that individual position.

Rodrigo Gordillo: 36:46

And so since these we've seen extreme volatile moves here in the last few days. Have we seen any major adjustments in positioning as a result?

Corey Hoffstein: 36:56

Yeah. And when we think about again, we're we're evaluating trends every single day. When we think about trend following, there's there's two drivers for us. There's the volatility component where we are volatility targeting these positions. So as volatility expands, we'll naturally reduce the size.

Long will get less long. Short will get less short. And if trends change materially, right, that can change the direction or moderate how much exposure we have. So, again, with weakening US equity and increased equity volatility, we've seen some of our equity position that continue to come down. We've actually seen a marginal increase in the metals as gold, silver, and copper continue to perform.

We've seen a marginal decrease in energies. Trends continue to reverse from positive, and and some of them are showing as negative now. We have increased our short bond exposure. Bond prices have been trending negatively since around September, and and the trend continues. And so we'll we'll press the shorts there.

And, we've been reducing long US dollar exposure. Now reducing here, right, I I think when we look at a couple multi day changes, you know, our bond exposure has jumped up 40%. Right? But it's it's important to keep in mind vol of a five year treasury is very different than vol of equities. Currencies have dropped, you know, about 20 percentage points, but, again, vol of the euro is very different than vol of of equities.

So on a on a risk basis, there haven't been really substantial changes from these last couple of days, but as markets continue to digest the probability of these things going into effect, that's where trends can emerge. Right? I think that's a really important point here is people often ask why do trends exist. We talked about this one day change with the German fiscal policy proposal that has to go to vote, and Adam talked about all the potential risks of this going to vote. The market over the next month will start to price in the probability of realizing that.

The first move was just recognizing that it could occur, and then as it becomes more or less likely, if it becomes less likely that those moves will likely revert. As it becomes more likely, they might continue. And, again, that's how those trends can persist as markets price in the probability of of these bimodal events.

Rodrigo Gordillo: 39:16

Right. So let's talk of just the same thing as as Carrie. Like, historically, we've seen similar geopolitical movements affect trend in different ways. What lessons from those kind of past events can we apply to the price movement of managed futures trend today?

Corey Hoffstein: 39:31

Yeah. Not surprisingly. It's actually a lot of the same events that happened in carry were trend events as well. Right? And it's because a lot of these events that catch their carrier trend offside, it's not because trying to carry actually historically are similar signals.

these markets. So, you know,: 1994

f, trend strategies. And then: 2021

You can still net make money on trend following even if the end is a violent reversal. And if you look at a lot of trend following p and l last year, the yen was a violent reversal in August that caused a lot of pain, but the net p and l for the year on the yen trade was still positive because the performance was so strong before that. And so some of these can be very painful when they occur simultaneously. Trend actually hasn't really been that bad over the last couple of days No. Especially compared to carry.

But, again, some of these things when they are trend surprises can be painful, but you have to consider it in a position, you know, in in the context of the larger trend in p and l that you've generated over the last six to twelve months.

Rodrigo Gordillo: 41:55

Yeah. And and, look, I I'm just reminded of o eight when I was a very heavy investor in trend. You know, we talk about three days. And when Lehman happened, the volatility in trend was just insane over those three days, and, it wasn't necessarily favorable. But, again, this is the thing about all of these is that there's a there's a period of adjustment, and, we saw it in 2020 during COVID.

Right? That that first leg, it just the trend happened to be positioned in the opposite of the prevailing trends. And so the first week or so, it had a similar reaction to what was happening in global markets, but then it quickly transitioned the other way. Right? So the the adaptability of this is something to remember.

But in any given day, you know, really, whether we're gonna be on the right or wrong side of a geopolitical move will depend broadly on whether that geopolitical move is in the in the prevailing, trends or against it. So, it it three days is not much. We did gotta talk about it. We gotta put it into context, but but it let's remember the big picture ultimately. So let's talk a little bit about just kinda comparing this trend following multi asset carry.

You know, they're both trading the same contracts. What, why do we have those two different signals, and and how did how did they tend to relate to each other, especially, when they react slightly different to, global macro events? Anybody grab that one?

Adam Butler: 43:27

I mean, they're mechanically, they're similar insofar as, you know, we're we're we're broadly trading the same universe of markets. We're we're broadly finding an optimally diversified portfolio of those markets based on the trend and or carry signals at at the end of every day. And, you know, they're they're systematic. Right? And the other thing to recognize that that Corey has hinted at, is that systematic strategies, at least the ones that carry and and try and rely on, are relying on changes in prices.

You know, for for trend, it's the change in, effectively, the rolled front month, futures contract. For carry, it's changes in the prices of of contracts along the, along the curve, the futures curve, or along the spot curve. But we're taking signals from the market itself. So, you know, as as market participants are are shifting capital away from one market and toward another, trend and carrier are picking up on that. Why do we rely on that?

Well, it's because we do assume that at the margin, participants making decisions in markets, on average, reflect information. Right? So we're picking up on the information that the market is transmitting via its price movements. And just by virtue of the fact that these movements are basically impossible to decipher narratively or using using some kind of, clinical framework just in your mind, you know, we're forming portfolios based on all these different signals across 27 different markets. Right?

But it's all just reacting to or digesting information that the market is giving us. So when the market is not doing a very good job of adjusting because it is confused or uncertain or doesn't know what is likely to happen, these are the periods when our when the trend and carry strategies are most likely to suffer, and that's exactly what we're seeing today. We're in a period of extreme policy ambiguity. Right? We won't always be in a period of extreme policy ambiguity.

Once that sort of settles out, either the market will get used to the way that, for example, Trump communicates and be able to, you know, read the tea leaves and and anticipate what his true intentions are and adjust towards that sort of over the intermediate term or just, you know, Trump may get what he wants, and therefore, there won't be the same number of these policy changes, happening. But at some point, there will be the market will adapt to the new environment. There will be a new equilibrium, and these strategies will continue to go on and do what they've always done, which is just deliver on this nice uncorrelated premium.

Rodrigo Gordillo: 46:38

So the let's let's just kinda discuss, you know, the difference here between market moves on headlines, just kinda wrap it up really. You know? What are the strategy the strategies operate on principles, and, the question is whether recent returns are a feature or a bug. And so which is it? Like, is this a feature or a bug what we're seeing in these in these, two strategies?

Corey Hoffstein: 47:08

Alright. So we have these systematic strategies that we talk about trying to harvest these premia that we believe exist. Right? Trend following in carry, and we believe that there are particularly with carry, I think there's a very strong argument that there's that's tied to intrinsic risk premia that exists in the market. Carry of a trend, you might argue there's some risk premia there, some behavioral.

Right? But they can be caught offside by these sudden market headline movements. And I and I think that's just the reality of any investment strategy. Certainly, it's never fun for something like a carry strategy to be down 5% in a day or, you know, five percent over three days and four and a half percent in one day. But we see that happen in other markets.

Right? Not just alternative strategies. We see we've seen that happen in equity markets frequently. We've seen that happen in bond markets rarely over the last twenty years, but it has happened. Right?

And those sort of things happen when there is a fun the market is fundamentally repricing something that it it didn't get right. And a strategy can do the same thing where the strategy can be offsides, because, again, in our case, if we're trending and carry relying on market derived signals, and those market derived signals are just not capturing or didn't anticipate the sudden rapid, in this case, policy changes. So the reality is it it's a feature. Right? The thing I always say is if a strategy becomes too easy to hold over the long run, everyone would hold it, and all the premium gets squeezed out.

It's not a fun answer. It's a little flippant, frankly. But, you know, I've said time and time again, no pain, no premium. If we believe there's a risk premium here that's that's different than equities and bonds, it we should expect it to behave like equities and bonds. And no one really questions equities dropping by 5% over a couple days.

It's happened. It'll happen again in the future. But when it happens in an alternative strategy, it's the sudden question as well as the strategy broken. And I think a lot of that just comes from a lack of transparency in these strategies. Going back to the beginning of this call, we rattled off all these markets that impacted carry especially.

Right? Just carry just fundamentally this week was on the wrong side of three or four massive policy announcements that came out of nowhere. Right? You got the Canada Mexico tariffs. You got the copper tariff.

You have European deregulation. You have the German fiscal policy announcement, all happening in a two or three day period. And Kerry was on the wrong side of all of those. And that on that's unfortunate, but a lot of people don't even realize when they're investing a strategy like this because, again, it changes over time. They might be long the decks, long the dollar, you know, long German bonds.

That's where the beneficial diversification comes in hopefully over the long run, but that can that can cut in the short run as well. And so it is I don't wanna say losses are a feature, but losses are a reality.

Rodrigo Gordillo: 50:01

And so are, you know, large positive gains that offset losses in your traditional portfolio that, you know, we don't talk about much because everybody wants to focus on what what's what's going quote, unquote wrong. The wrong is the pain that you're paying for that premium. One of the questions here was, you know, this the the drawdown in Cary has recently recently been pretty large. And, you know, one of the biggest challenges for advisors here is to help clients stick to strategies through different market environments. And a a good way to set expectations here, and I I bring this up over and over again, is, look.

You're taking risk. You are taking risk in equities. You're taking risk in bonds. You're taking risk in the carry strategy or trend strategy. A good rule of thumb for me has always been, what are what are my expectations of the best and worst?

Let's focus on the worst year. Right? So if you have a strategy, like the carry strategy that we discussed as a a on an average volatility of a or a standard deviation of around 10%. Well, I think the expectation here used to be that there will be a negative three standard deviation move in that strategy. It is broadly normally distributed, and you need to expect those types of moves to happen every so often.

It happened back in: 1994

It's probably gonna go plus or minus that at some point. That's the risk. That is the kind of the long term risk that you're gonna take in order to see it then. In every case, it's rebounded pretty aggressively from that bottom. And, you know, this is the behavioral side that I think, you know, you I wanna bang the table on.

This is where you might wanna start thinking about allocating if you have it. Right? If if you believe that it's normally distributed, you believe that it's it's going to revert back to its mean, it might not be a bad idea to start seriously thinking about allocating here.

Adam Butler: 52:13

This is where you earn your premium. Right? So if you're gonna earn it, are you gonna stick around and get paid for it? Right? I I also like to think about, with these training carrier strategies.

I think it it works for others as well, but the the I just bring it back to middle school science. It's potential energy and kinetic energy. Kinetic energy is when you're getting when when the bets that you're you're making are paying off. Right? But in Cary, we're building potential potential energy as, okay.

You're you're in bonds because they've got high rates versus cash. Well, there's a loss on that position, which means that rates just went up. So now you're, yeah, you just took a loss, but your expected return is higher. Right? And so you've you've got this sort of negative kinetic energy translating into potential energy.

And so the potential return on the portfolio is probably considerably higher now because, you know, the the rate differentials have had, widened, The the slope of the yield curve has steepened, etcetera. And so you just have to wait for this pen potential energy to translate into kinetic energy once it's unleashed in, you know, the next regime. Right? It really is just a waiting game. This is where you pay, and the payoff happens later.

Rodrigo Gordillo: 53:33

Yeah. I mean, look, just to kinda wrap things up, any parting words from any of you as to, you know, how to think how to kind of help advisers talk to clients with regard to this type of environment with rapid policy shifts? We talked a little bit about no pay, no premium. Any any other thoughts, Jun?

Adam Butler: 53:56

I have one thing, and somebody mentioned it about, you know, how much trend versus carry would you recommend in in a portfolio. Right? And, I mean, in general, we have about the same expectation for both. At least I do. You know?

I'm not sure whether everyone will come down in the same exact place, but that is about the same expectation for both, especially over, you know, a five or ten or twenty year investment horizon. I have about equal expectation. So and what's great is that off you know, they're uncorrelated. They're reacting to different, information at different times. And so, you know, I always say you should if you own trend, you should 100% also own carry.

They are there's tremendously good diversifiers for one another. They're it's like having two eyes and being able to to to view things in three d through binocular vision. You're you're getting information from the term structure. You're getting information from price momentum. And together, it's just a a really fine, well crafted dish.

And the experience of them together is just so much smoother and more palatable than holding either of them on their own.

Corey Hoffstein: 55:10

Yeah. I mean, I I have a tremendous amount of sympathy for advisors who particularly have line item sensitive clients when any line item goes through a big one day drawdown. You know? They've gotta field calls. Right?

And that's you can't rent conviction. Right? So if an advisor isn't truly understanding what this strategy is, I I understand the desire to get out of it. And, frankly, I felt the same way yesterday looking looking at our you know, the carry strategy. I have I you know, we eat our own cooking.

I have a substantial amount of my portfolio as a carry overlay. But to Adam's point, I also have a trend overlay. And I have other overlays that I add. I have a huge amount of overlay on my core stock and bond position. Carry is just a slice.

And somehow, despite loss substantial losses in curiosity, my PA was positive. Yeah. Right? And so I go back to even I have to check myself. Like, I can become over a line item focused, but at the portfolio level, like, diversification worked.

You know? It wasn't fun to have that part of the portfolio down, but there was other stuff that was substantially up that net offset it because I wasn't so dramatically overweight that one particular trade. And so, again, it is one risk premia that we have high confidence in, but it's one of many. Right? And it's one that is gonna operate well or not well in different environments the same way stocks and bonds operate well and not well in other environments.

Trend may operate well and not well. And and for me, trying to market time or or determine when these things do well or not, is totally, undermining the potential benefits of diversification. And when you add diversification across a huge swath of different strategies, the hurdle rate for market time just goes up so much. And so for me, I just go back to those basic principles of, do I have conviction in the strategy long term? Is it appropriately sized in my portfolio?

Yesterday was a great test, and for me, it was. You know? And what else do I have next to it that I do believe is truly diversifying and and did it behave in a diversifying manner? And so I looked at my PA yesterday and said, did exactly what I thought it would do.

Rodrigo Gordillo: 57:26

Yeah. And and, again, I think what we've seen is that these strategies are noncorrelated to equities, bonds, and themselves in the last three days. And we've certain like, look. And another acute moment of pain for managed futures was during the SVB fiasco. Right?

The the, Silicon Valley drop. Trend had a it was just caught really offside. Carey was not. It was a nonevent for Carey, slightly up, I think, during that period. Right?

So, again, it's it it can be the opposite. Right now, Carey's struggling more than Trenton, and that's what we've what it is. It's it's just it's added diversity across different areas of your portfolio. And they all tend to have a positive expected return, and we're gonna beander around that over time in different ways, which is exactly what we're looking for. Okay.

So with that, sorry we weren't able to get into any fund specific content here. We are, restricted from speaking to any, with regard to the funds due to regulatory restrictions, but I I hope that this was useful in providing some context on the macro environment and the kind of managed future strategies that are out there. If you do have any questions, you can reach out to us directly. You can go to returnstacked.com and go to the contact section and talk to any one of our reps. If you wanna go directly to us, we are on Twitter and pretty active there or LinkedIn these days.

So look us up. Corey is at at Chafstein. Adam is at Gestalt u, and I am at Rod Gordio p. Alright. Any any parting thoughts?

Adam, I know you needed to go fifteen minutes ago. Thank you for sticking around. Thank you everybody for sticking around this long. Really appreciate your, time today, and, looking forward to seeing you in our next live q and a. Thanks, all.

: 59:30

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