Adding Spreads and Options to Trend Following, with Moritz Seibert

We’re back in the trend space this week, diving into the pros and cons of classic trend following, as well as exploring new methods of trend, including building new “markets” with calendar spread data, and trying to reduce the infamous trend open trade givebacks with some option trades. Not to mention some talk on how investors have gone soft in their desire for low vol.


Jeff sits down with Moritz Seibert (@moritzseibert), the CEO of Takahē Capital, to talk about the rise of conditional payouts and payments, the peak of exotic structures in 2007 and 2008, and how to build a robust, diversified portfolio that can weather any storm (hint: trend following). Jeff and Moritz debate the importance of a systematic manager having an opinion on markets, whether a small market like OJ can actually make a difference in a large, diversified portfolio of markets, and why the best trade entries are often times the painful ones. SEND IT!







Check out the complete Transcript from this week’s podcast below:

Adding Spreads and Options to Trend Following, with Moritz Seibert

Jeff Malec  00:07

Welcome to the Derivative by RCM Alternatives, where we dive into what makes alternative investments go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Hello there no AI intros for you today. This is 100% Pure Jeff SNESs written intro because the AI would never use a word like deafness. Anyway, we’re 100% going to be getting deep into the weeds of trend following strategy, design and construction on the pod today. We’ve got Moritz Siebert is one of the quants over at the two quants bog and has recently launched a new firm looking to manage investor capital. He named it after an extinct bird, which is no longer extinct, which was interesting. We’ll get into that. And we also get into his unique twist on classical trend following get into creating new time series for trend models to work on on the Futures Curve spreads. Whether a small market like OJ is all that important to a trend follower and who’s to blame for investors no longer differentiating between losses of principal and losses of open trade profits. Send it This episode is brought to you by RCM and its guide to trend following white paper. The guide to trend is a great complement to this pod with definitions, examples, manager highlights performance and more. Go to our papers to check it out. And now back to the Show All right, everyone, we’re here with more REITs How do I say it Marines Moritz?


Moritz Seibert  01:39

And yeah, Moritz is fine. It’s it’s a European name. But you’re you know the ski resort right? I think yes. Beautiful Switzerland base ski resort. That is where it comes from.


Jeff Malec  01:50

Where is that in relation to you’re in where? Where are you?


Moritz Seibert  01:53

I’m south of Munich, wedged in between Munich and Garmisch Partenkirchen if you know where that is. So that’s relatively close to the Austrian border. That’s where I’m from countryside mountain type of boy. And so yes, Emirates isn’t isn’t exactly around the corner but three hours drive then then I’d be there.


Jeff Malec  02:13

And are you a skier we’ve had epic year this year in America, but I know the European mountains didn’t get much snow at all.


Moritz Seibert  02:21

You are well informed. That is right. It was so disappointing. We love skiing, kids love skiing, I love skiing. You know, my oldest is now snowboarding so we’re all about this but it’s just like you know, whenever we wanted to go this year, there was no snow. We went at the end of February for a week to the Augsburg region you know usually fantastic snow there I mean yes up on the mountain there was enough snow so we could definitely ski but down in the village it kind of like it looked it looked devastating as much as great and nothing and so now we had a weird season not enough snow was very warm winter. You know talk about gas prices and you know, Ukraine and TTF maybe we’ll get into that. I mean, that was kind of like lucky in a way as well. That that we didn’t have too much of a cold winter and now everybody was kind of like waiting for warmer weather and some sunshine here in Europe and it’s just raining on it for days and weeks on end. Like you know, even today, just you know walk the dog and as you get back home and it feels like October.


Jeff Malec  03:25

Yeah, now you’re talking my language. That’s what it’s been like in Chicago, cold, rainy 46 baseball games the kids are starting. Like this is not the weather for baseball. 46 Rain and I see your big peloton or I see the peloton in the background. I


Moritz Seibert  03:41

wouldn’t call myself a big peloton I’m just just lazy and it’s kind of like an everybody sees it on the Zoom calls and goes like yeah, I’ve got to jump on that bike again to to get some of that you know, extra fat off of the valley. Now I enjoy doing it look, I mean this is an easy 30 minute exercise sometimes around lunch and you know, it’s just motivating when you have that big screen and you have others kind of like you know, cycling with you and you just you have this target I want to be in the top 10% Or in the top 5% of that class and so you just go a little bit faster so that’s that’s


Jeff Malec  04:17

not not the best stock as it turned out. But yeah,


Moritz Seibert  04:21

I haven’t good Yeah, yeah, I haven’t don’t follow that stock. I sometimes I pick up a headline it’s kind of like you know, I know it’s one of the stocks that when when mooning two years ago during the during the pandemic and I’m not sure where it trades apparently Yeah, I


Jeff Malec  04:38

think it’s my off the top of my head is maybe down at 90% from its highs or something.


Moritz Seibert  04:43

Oh that’s that’s junky Yeah, that’s that’s a lot


Jeff Malec  04:52

so give us a bit of background I think you people see you all around, you’ve been on quarry Hartstein you do the top traders pod you’ve done On to quant blog give us the background how that all ties together let you take it from there


Moritz Seibert  05:07

Yeah well I’m not sure if there is a anything that ties it together that’s just what I do but yeah I mean background is derivatives trader you know started as a trainee for HSBC on the correlation trading so much. In short, my background really is trading exotics. And for for RBS in the UK, I ended up running equity to run and structuring for RBS then in the States as well. So then were these investment banks essentially running exotic risk in in the structure products arena, if you will. So every time there’s something that needed to be warehoused every time there’s something where there’s an illiquid risk that you can’t move for which you need to find a price on your balance sheet to sit on it, whatever forward skew exposure, exotic correlation exposure is stuff that you couldn’t even get a price for, you don’t even want to try to try to get a price for in the OTC market in the like, into into dealer broker market. That’s the space that I was involved in, like, you know, Rainbow replacement clay case, whatever type of, you know, structures with 20, underlyings, and all these things, which have a tendency to, to make the bank a lot of money in smooth sailing times. And every time there’s a little bit of a hiccup in the markets, then these risks have a tendency of, of showing up with a big price tag and usually in the wrong direction. You just sit on it, and there’s nothing you can do. So you may have read a couple of headlines in the last 10 to 15 years like every time something goes wrong in the markets sock Jen loses a bunch of Yeah, Hong Kong on whatever dividends right? Our Deutsche Bank loses a bunch of money on some exotic currency. Exotic that that they have traded. And so I was I was in that space. That was that was fun that was had to do a lot with low vol and stochastic vol and like grade learning journey in terms of derivative pricing and, and all these type of things. But


Jeff Malec  07:11

let me jump in real quick why why did those right? And to your point here in America were like, Oh, the European banks are added again doing some stupid trade. And the correlations blew out and they lost a bunch of money. Like, why are they in there? They trying to just reach for yield? Are they trying to get extra yield? The bank right off the bat? Well, or is it all the clients are doing something in the bank structures? And then they’re left? They have basically some leftovers?


Moritz Seibert  07:38

Yeah, there’s these products are sold. Right. So not as I mean, by the way, the peak of exoticness probably was around 2007 2008, right around when the financial crisis happened, like, you know, the structure product started as vanilla products in the late 90s. Like, you know, call spreads and, you know, capital guaranteed notes and these type of things, but essentially, vanilla exposures, and then, you know, volatility is increased, rates decreased. And that made the structuring of capital protected, or even partially capital predicted payouts, more complex, less even impossible, right? So you had to come up, you had to find derivatives that had a cheaper price, how did you pay the price of the derivative, you give it more underlyings, you make the you make the payout less likely, right? The less likely the payout, the lower the price. And you do that by putting you know, full control features on it. Having conditional payouts, barriers, all these type of things. And so the peak of that I think, was in 2007, and 2008. And ever since the pros have become more vanilla again, you know, we still see the barriers and these type of things, but there’s a lot of exotics, the super, super exotic exotics. I haven’t seen them in a long time, because the banks have also realized, hey, look, I mean, there’s a lot of stuff that can go wrong, and it actually eats up a lot of risk capital. It’s a pretty expensive business for the bank to run. But back then, I mean, look margins on these products. They were very rich, and the European banks had a network, many of them through which they could sell these products, right. So they would go out to their clients wealth management clients say, Hey, you want to have an exposure to whatever the DAX index and the SMI of Switzerland and the footsie at the same time, we’re going to pay you 10% a year, it’s all callable. If all of these three indices are higher than they are today, in a year’s time, you get 10. Boom, and you’re out. Some of these payers are very appealing. So the client said yes, and the bank said yes. And this is how it started. So it became turned into big business. It has shrunk since


Jeff Malec  09:45

I think it’s moved over to America, because that right then a lot of buffered notes and all these things. Yeah,


Moritz Seibert  09:51

you’re doing it a little bit of a different way exactly through ETFs and etps and buffered nodes and the structure products, kind of like issuing notes OTC private placement type of business has never been as big in the States. So that’s spared you from some of that super exotic risk that was traded here in Europe. And by the way, also in Asia, right. I mean, Asia, Japan, Japan, even earlier than, than the European markets, given the low interest rate environment of Japan, right. So they were all keen on having, you know, Aussie dollar exposure and whatever somehow to call the features on the Nikkei index. And then Hong Kong. I mean, Hong Kong was, yeah, Hong Kong had it all. Yeah. And they have a big, big, you know, Wealth Management Network down there. So lots of clients lots of money. And, yeah, this is, this is the space that I was in. And, but I always had a knack for quantitative trading strategies ever since my college days where I for the first time coded a a vol arbitrage model, which was complete rubbish. To be honest, I know that inside now, but it didn’t know it back then. Because, you know, I was I download the data from the Eurex, well, I actually didn’t just download it, I needed to write to them and tell them that I’m a student. And I’d really like to have the reference data for free for a for an academic research project. And they gave it to me. And it was really bad programming as well, like VBA. Even when I look at that stuff, now, I can’t even get it to run. And essentially, what the data told me is, hey, you have to sell every call, and every put that you can possibly get your hand on right? Minus 25 and 25 Delta, add at a one month point to expiration. And when you do this, you just make a bunch of money. This is what the data showed you. Right? Well, that’s that that’s when really, yeah, yeah, now, surprisingly, right. And then, and then I thought, well, it’s probably a clever idea to solve for the optimal strike that you should sell right? So that you never have a loss in the past. So I just created this magical equity curve, which back then, and I don’t know, 20 years old, I just didn’t know better. I felt that was that that is the way you do it. Right. This is this is this is how it’s done. Now, this is 25 years in the past, yeah, I guess I’ve learned a trick or two. And, you know, you would never touch that system. But this is how I got started. And and then even during my derivatives trading days, I was just amazed, like you play around with Bloomberg terminal, you have all these studies, like you know, what happens if you run a 200 day moving average on the s&p 500? What happens if you run the Golden Cross strategy or not only the s&p 500, but on a bunch of markets. And, you know, amazingly, by the way, these strategies aren’t too bad, I think they get a bad rap. But you know, when you run them by, you know, on a large number of markets that are uncorrelated to one another, I mean, there are definitely worse things that you can do than doing that. But, again, you know, younger or at that age, you think that cannot be it, I must be able to do something that is better than that clearly. Because if you can run on the Bloomberg terminal, can’t be that can’t be that special, everybody can kind of like click, click enter and run the same thing. And so, you know, you start optimizing things, essentially curve fit. And that is, that is why I always say, look, I mean, trading and good behavior in the markets is a learning journey. I don’t think that you know, you’re just born with that you have to touch the stove a couple of times and get burned, hopefully not catastrophically. But learn that is the journey, that is the experience. And then also, you know, learn when and how to check your ego at the door and become very trusting in the systems that you run, even though they may be rough. Right? And but you know, that roughness usually is a sign of resilience and robustness, which creates pain in the short term, but you have to be trusting that you can live through that pain. And if and when you do, you know you’ll you’ll survive. And you know, being that professional loser and receiving that feedback all the time that you know, you have 60% losing trades and only 40% of your trades when and how these 40 Most of them are just scratch trades or they don’t make a lot of money. I mean, this is not this is not convenient. This is not a pleasant trading strategy. But when you step back from it and you look at the overall picture, it is a piece of beauty. It is the most protective system from my portfolio that I could ever find. And over the years, I started to love it. It is absolutely amazing. But you have to do it in the right way. And sometimes you have to endure the pain and not lose your compass not throw the baby out with the bathwater stick to a system sticking to it. That is really that is really where a lot of the edges you know people give up with the system’s good systems sometimes way too early, and then they miss out on the recovery. So I guess you need to have a little bit of a thick skin to do that.


Jeff Malec  15:09

Yeah. Which is bad. Why are we right? And I’m in the same boat of like, why did we pick this trend type career where it’s like, Oh, you got to endure all this pain in order to see the game, versus other groups or other people are building a system like, Oh, this one will make money for a lot of money for three years before it blows up, I’m just gonna make that great money and then get out of there.


Moritz Seibert  15:29

Oftentimes like this, with these systems, you don’t see the risk, right? You like, you know, you can, coming back to the option strategy where you’re selling selling options. The risk doesn’t show up in the volatility, as long as the system works well, right, the volatility is almost zero, it’s very little evolved, but obviously, very high risk. So the risk doesn’t show up in the vol. With trend trading, the risk is there. And it shows up, you know, your long and short term contracts. I mean, it’s in futures and linear instruments, you get the feedback right away. And most of these trades don’t make you money. That is, the other thing is like, you don’t I mean, you know, this, we’re not making stuff up as to why we’re a long way shorter market. I mean, we’re long J, as I’ve mentioned ahead of the call, or I’m long Oh J. And the only reason I’m long orange juice is because at some point in whatever January of last year, it’s actually a very long term position, the price started to go up, I didn’t have any knowledge of a, you know, possible bad harvest in Florida, I didn’t have any fundamental analysis as to the orange juice market and crops and all that type of stuff, the only thing I had is the price, the open the high, the low and the closing average true range. And that was kind of like it. So there we take LJ for a ride, right and, and it’s it’s become that, that amazing trade, but I don’t have a story to tell you other than well, at some point, the price started to move higher. And I got long, there’s there’s no other narrative, right, which is why my trend trading friends, most in our community, I mean, it’s usually not the place where you find a lot of Showboats and grand standards that will tell you these amazing stories about their trend trading, it’s kind of boring, you don’t have the story. The stories are told by other types of traders, like, you know, global macro or whatever, like I forecast this, you know, rates need to come down because inflation is too high, and the Feds gonna pivot. Yeah, maybe that’s right. Thing is probably you and I, we could have a discussion, is the Fed done hiking? Or is the Fed not done hiking? And you can I can, absolutely, for sure, listen to one person this afternoon telling me the Fed has done hiking, because inflation will come down, and we’re definitely going to have recession. And that is what’s going to happen as well. That sounds absolutely logical. Yeah, that’s what’s going to happen. Five minutes later, I have another person come out, say, You know what, the Fed has not done hiking, because inflation is stubbornly high. And this is not transitory. This is a longer term phenomenon. We still have, you know, whatever, supply bottlenecks, and therefore, it’s coming back. So yeah, that makes sense to,


Jeff Malec  18:12

right. So which one do I believe which ones we believe? It’s funny, I’ve actually instructed trend managers before going in front of like giving a presentation or answering some questions with advisors in them, like, I know, you don’t care. I know, you don’t have an opinion on the market. But they’re gonna think you’re dumb. Right? They’re not going to trust you if you don’t have an opinion. So have right now because a lot of us because like, I have no idea, right? Because I’ll ask like, where do you think cotton is going? Like, I have no idea. I don’t care. If it goes up, we’ll be banned. And if it goes down, we’ll be sewn. And I’m like, have just have some opinion, even though it doesn’t matter to your model. And you can separate those, like, I think cotton is going up, triple. I’m not our models don’t do that. They don’t trade like that. But here’s what I think


Moritz Seibert  18:55

you could do they say, look, I mean, copper is going to go massively higher because of the green energy revolution, and everything needs to become electrified, and the demand for copper is going to be massive. Yeah, maybe that is true, I guess, you know, that’s nice story. But does it impact does that story today impact the way I trade copper? No, no, it was not going to impact how I’m going to try it tomorrow. Right? Actually, copper is going down.


Jeff Malec  19:19

But even if you knew that to be true, is kind of the whole point. Right? Like, it’s all about the timing right? If you miss the timing up, you can be out of that dread.


Moritz Seibert  19:27

And and and about the volatility as well Jeff, like, you know, sometimes you have these, these trades, so you’re putting on and they happen to have a very low average true range or low volatility at the time you put them on, you know, oh, Jay, by the way, is a good example. You know, that was actually relatively low ATR type of trade when I put it on so that means you have a relatively large position size compared to some of the other markets all risk balanced. You know, that’s that’s the point of it. But you know, these trades can really become outlier trades because As of the way you’ve sized them at the point of trade inception, and sometimes you get into a trade that has already high volatility, so it’s already a relatively smaller position, and we don’t you don’t feel it as much. So that’s a function of those two. And I guess what you could do as a trend following trade. I like when people ask about your OJ trade. Yeah, tell them about the bad harvest. You know, this is presumably the reason prices went higher is because there’s not enough juice coming around, then there’s essentially a crop failure as far as I understand or just have the worst crop in Florida ever. So yeah, tell them that. So your long OJ okay. But you know, why did I get in in January of 2022? Well, I don’t know. price went up. That’s it.


Jeff Malec  20:43

Yeah. I can tell them I grew up down there in Florida. And a lot of my friends like their families are selling right. All these family groves sold their strip malls now. And so part of it, it’s right, there’s just not as many acres in Florida anymore. Let’s talk real quick about the adding these markets like orange juice, right, a lot of a lot of groups wouldn’t even touch that market. It’s too illiquid, it’s too small. So there’s both a liquidity piece, which is less interesting to me and more of like, how do you think about, Okay, I’m gonna add all these diversifying pieces. But something like Oh, Jay, if I’m going to risk up to 1% per trade, or did the bibs per trade or something? Is it even worth it? Right? Like, even if I get the outlier there? Is that going to offset the losses from seven bond trades that that reversed? Yeah. How do you think about that?


Moritz Seibert  21:38

I think it’s absolutely important to trade these markets. I mean, my size, you know, Pa is definitely small enough right now, to be trading o j, or lumber or any of these other smaller markets without any problem. I think. I think I mentioned I’m about to launch a fund. I mean, let’s see how big that fund becomes. And you know, it’s a question of course of underlying liquidity, how much can you trade? But to your question, specifically, I don’t know how many ATR is OJ is going to make, right I mean, I’m risking a certain amount of my closed equity, my core capital 10, VIP say, right, these 10 dips can turn into 1000s of pips on the top side, because I just let that trade run, I don’t know how much money that trade is going to make. I’m still long, I could be, you know, stopped out today, tomorrow or whatever, next week, probably not today, stop still relatively far away. Or OJ could go north of three bucks, right. And I simply don’t know that. But it’s very important for me to have OJ in the portfolio, because it’s behaving in a very diverse and crowded way, doesn’t have anything to do with crude or corn, or the s&p 500, or any of the other markets. So it’s really its own thing, very uncorrelated. And the way I go about adding these markets together, as I’m essentially looking like going through the list, you know, start if you will with OJ and then find another market that has nothing to do with OJ, which is the 10, you’re gonna run and then find another market that has nothing to do with the two that I’ve already selected, which is corn, and then put in gas and then put in blah, blah, blah, right? So once you get to market number 20, you start to realize that you cannot do that trick anymore, that the 21st market that you’re now going to pick will have some correlation, like a structural correlation to some of the other markets that you’ve already chosen, right? So you’re like, oh, yeah, I’m picking the five year note now, but I have the 10 year note in the portfolio. So these two markets are highly correlated. So what do I do? Will I will I risk the same amount on each of them? Or will I view them as a cluster and say, like, Okay, you guys tend to be correlated, I’m therefore not risking 10 basis points on each of you, and risking 7.5 basis points or needs if you’re right. So rather than putting the total risk to 20, and putting, putting the total risk to 15 to recognize some of the high correlation, persistent high correlation that usually exists, but not all the time. And I say usually, because sometimes they decouple, right? If they were perfectly correlated, then in my example, I would give each of them a risk of five, because then they essentially go long and short at the same time. And it’s the same market, right? They’re not they’re not the same markets, they’re just like related markets. And, and every once in a while you have related markets. Disconnect completely like you know, Henry happened TTF you know, people, it’s natural gas. Natural gas is difficult to store. But you know, Henry are ones in the US the other ones here and Europe. They’re not, you know, immediately arbitrage double, you can arbitrage them, of course, it’s the same molecule, but you know, it’s across the Atlantic Ocean with LNG tankers, and you know, it takes a lot of time to do that. So they’re kind of like so somewhat tied to the hip. But boom, all of a sudden they decouple because you know, we have a war here in Europe, and there’s not a war in the United States. So you know, you want to be, you want to be mindful of the fact that these markets can, at some point, just completely go off. Heating oil and crude oil tend to be correlated until the point when they are not, you know, Kansas, wheat and wheat, Chicago weed are correlated most of the time, and sometimes they’re not. So, you know, you want to give them a little bit of room to do their own thing.


Jeff Malec  25:36

What about Minneapolis? We don’t think it’s traded anymore. We’ll have a rest in peace, Minneapolis, we,


Moritz Seibert  25:43

yeah, we have milling wheat here in Europe, which I tried. There’s black sea wheat, which you can trade. I mean, all of that stuff’s essentially the same at the end of the day. But it’s not the same price behavior ever given day. Right.


Jeff Malec  25:58

But I guess, do you view those kind of what I would call outlier markets as they’re going to lower the risk, they’re going to help cover the carry of the kind of the core positions? Or are they going to provide outlier gains?


Moritz Seibert  26:15

On the ladder? Yeah, yeah, yeah, I’m really hoping for each of these markets. And each of these trades that I’m putting on to, to be a complete massive outlier tray. Because I need them, you know, I need these trades to pay for this expand losing, or even slightly more than six plus losing trades that I have in my portfolio. So I just want to hit the ball out of the park with some of these positions, unfortunately, doesn’t happen as frequently as I would like to. But every once in a while it does. And you have to be lucky. I mean, this is why you must not miss any of these trades as well. This is why having a large spectrum or a large array of markets to trade is actually a good thing. It’s not only about diversification, it’s really about the raw number of markets, the more markets I have, the larger the spectrum or the probability of having one of one outlier among them. Right. And, and this is what I really care about. And you know, really don’t want to miss this outlier trade. If there is Outlier trait, I want to be a part of that. And, and then I want to have a very juicy part of it as well, like, you know, I’m not going to be peeling off some of that, that some of that size, because, you know, all of a sudden, the market has become too big, or I have too much of an open trade equity in that position, or I kind of like you know, need to trim my risk. Now, it’s really, you keep that position size, you really isolate that trade, it’s one trade that you put on, you know, OJ in January of 2022. And it’s still the same position size, nothing has changed. That is the trade that is going to at some point show up in the trade statistics. And unless there is a massive gap event and discontinuity to downside, that is going to be a great trade. So uh, you know, I should really step back from the desk and say this, is this going to be amazing. Like, you know, this is going to be one of the nicest trades. Maybe there’s going to be a lot of give back now, as as as OJ goes lower. But I shouldn’t be too whiny about this. Yeah, let it go. Yeah. I mean, it’s going to be a positive trade, right? I mean, what’s better than that?


Jeff Malec  28:27

And putting your quant hat back on, it’s always funny to me see, some clients come in, and they’ll analyze a trend portfolio. And they’ll be like, why will stick on OJ since we’ve been talking about it? Like, why in the world? Would you have that in the portfolio? Right? If you back tested that market only. And I don’t know what it’s back. This looks like but a lot of these if you back test them, right? They’re losing. They’ve lost over the last 10 years, 20 years, 30 years. Silver famously had, like, I think 17 Straight losing trades before it had a nice one, two years ago. Right. So if you back test these individually, a lot of them don’t look like anything, you would throw them out of the portfolio. But you need them all, in order to create the quilt.


Moritz Seibert  29:10

I think I once had a look at cocoa on its own. And it’s kind of like devastating. I mean, he’s got like, what is it with this market? It’s kind of like a kid children that just never listened to you. I mean, that’s that’s that market just doesn’t do. What trend follows wanted to do. But it needs to be a part of the portfolio because I cannot predict. I mean, maybe cocoa is going to be the best market for trend following traders in the next 10 years. I simply don’t know that. But what’s so important, Jeff is when you put all these markets together, and you treat them all the same, you risk use the same rules, same entry, same exits, right. Initial stop. You’re not treating Coco different than Oj or the 10 year note So then what you do is you create a large sample size for the overall system. And that is now sample size that is statistically meaningful because it’s, is using the same route, it’s using the same underlying rules. So now we can analyze that. And it so happens that cocoa plays a role in this. Cocoa is part of that system. It’s part of the ensemble, if you will, or the market universe, right. And, and that system has produced whatever point six sharp and is incredibly resilient. It’s incredibly robust during times of market stress with cocoa inside it. So keep it in there, I think is the Kwanzaa answer. Because it’s part of that system and you love that system don’t throw cocoa out, only because cocoa in and by itself hasn’t performed very


Jeff Malec  30:48

well. But in even if you took it out, the Sharpe maybe goes to point six, five or something could be right, you couldn’t


Moritz Seibert  30:55

get out. It might be massively, might have a massive diversification benefit, at times, you know, maybe it actually shows up with a positive open trade equity and you know, does perform well, when other parts of your portfolio don’t perform well. And still, that cocoa trade that used to have a positive open trade equity could end up being a loser, because it didn’t make enough money to get away from kind of like, you know, my initial stop, if you will. Yeah, the risk that I was that I gave it. So, no, I, I tried all of these markets. And I don’t think it has to do with the kind of like the, you know, if you want to mathematically calculate the diversification benefit, yeah, you figure out after the 21st, or whatever market, right, the marginal diversification benefit of anything that you had, there’s a portfolio is infinitesimally small. It is really about maximizing your exposure to outliers. That is why, you know, you would go to 100 markets or 200 markets or 300. Markets, yeah, you would trade each of them smaller, right? Because now you’re trading a much bigger portfolio. But given that you just have more stuff in your portfolio, that all of a sudden can have a life of its own means that you have a better chance of at some point hitting the ball out of the park. And that is really, yeah, in a way what I’d like to do.


Jeff Malec  32:21

So we buried the lede there a little bit, as I like to do, we got off track from your background. So you were finishing up the background. And now you’re, as you mentioned, launching a new fund launching a new firm as well.


Moritz Seibert  32:33

Correct? Yeah. Yeah, just well actually just launched it. It’s called Tucker Hey, capital, Tucker, Hayes, a, a flightless bird that lives in New Zealand. I don’t have any connectivity to that bird, other than I picked it up two years ago, on the deck. Looking through Twitter, I was like, this was kind of like, you know, people were saying trend following his dad all the time. It’s like, nothing can be further from the truth. Right. So I just found I just looked up Googled, species that have been declared extinct, but showed up over and over and over again. And you know, one of the


Jeff Malec  33:07

things like the dodo bird, basically, a relative,


Moritz Seibert  33:10

exactly, it’s a bird that cannot fly, it actually looks kind of beautiful, colorful type of bird. And even though it can fly, I mean, this is kind of like a disadvantage for birds to begin with, right? It just doesn’t go away. It’s incredibly resilient. It just copes with everything. And all sorts of environments. And I thought this is just so fitting for what it is that that I do from a quantitative trading space. Like it’s all about resiliency, it’s all about avoiding to curve fit. It’s all about avoiding that over optimization, which at the beginning of our conversation, I told you, you know, I was just as anybody else probably keen to do like finding the next best thing, you know, tweaking the system a little bit, making it a little bit more better, but then you start to lie to yourself, because you’re, all you’re doing is essentially reducing robustness. And that is no longer anything that I’m willing to negotiate on. So things that I do, they need to be hopefully able to stand the test of time, but they need to have a resilient and a robust design, at its core, that means you cannot have a lot of parameters. So I’m not using filters and overlays, and this and that. And the other thing like and, you know, five different rules to get in and 10 different rules to get out. Now, it’s like just a handful, a handful, if that rules that determine the position, the direction, the size, and that’s it across a large number of markets, but also do it in spreads. I think this is where some of that stuff becomes a little bit different. Like I’m looking for trend in spreads. And I’m bootstrapping Futures Curve. So when you think about, you know who j is now a bad example, because Bojay doesn’t have the most liquid curve, but when you think about something like crude, right? Crude has a very liquid Futures Curve.


Jeff Malec  34:58

Meaning we could trade out to the A DS 24 contract is still pretty late.


Moritz Seibert  35:03

You can trade Dec 25. So though mn mn, MN, Z, June and December are the liquid the really the liquid longer at that point on the crude curve, right. But for the next 24 months, you could trade any of the monthly expires. So, I can bootstrap that curve and say like, you know, rather than just pointing my system to the front month contract, which is, you know, what many CTAs do I would say what most CTAs do because that is where most of the betta is that is where most of the action is. That’s where most of the liquidity is right? That is where the bid offer spread is the lease that is where he can get the rollover done in the cheapest and most efficient way. Right, just clicking it away. Okay, fine. That is that to me, is one crude market. You know, the second problem third problem, the fourth contract, the fifth contract, whatever, all of these Yeah, they are very related. Crude oil, crude oil Marquez, right. But they’re so they’re kind of like child markets, if you will. But they have a little bit of a different behavior. They’re positively correlated, like, you know, DEC 24, that you’ve just mentioned, or Dec 23, yes, will probably go up and down with, you know, the June contract, which is still the current liquid contract for the next couple of days, at least, but not as much, the beta is way less, right. So when you think about creating just a simple rollover mechanism that rolls June to June, right, or June to dec, and then DEC to June, so every six months, as opposed to every 12 months, right or roll every quarter, then you pick up some different trending behavior, right? Just and that is a very simple trick to do. Now, that is, that is what I call bootstrapping. Now, where that becomes even more interesting is when you create these spreads. Alright, so the first minus the second and the first minus the third and the first month, the fourth, and then the second minus the third and the second minus the fourth all the way down, like the 19th 20th. You can get to one hundreds, hundreds and hundreds of permutations, just in crude alone.


Jeff Malec  36:59

Yeah. And you’re going both ways. And then a result was minus


Moritz Seibert  37:02

Egypt. Yeah, exactly. And each of these time spreads will have different trending behavior, somewhat similar, but different nevertheless. Right. And I’m really interested in analyzing that curve systematically. This is what my system does. And then being long or short on that curve, whatever has the best trending behavior. So that now puts together a nice portfolio because using again, that crude example, by the way, I don’t have good position right now, because it’s been just chopping around. I got kicked out of it. But let’s just let’s just make an artificial example. Let’s just say that I was still long, crude, right? And I was long the June contract right now, because that is the front contract. So I my Trend system tells me Maria, do you want to be long June? Okay, so I haven’t position long June at the front end of the curve. My spread system could tell me, Hey, Maritza, you want to be short July, and long December. So in the situation like that, all of a sudden, I have three positions, right? I have June, July and December. So how to distribute a position across the curve. That is actually something that I like. So I’m trading different parts of the crude curve. Another possibility is for the position not to become distributed, but for the position to become netted in the sense that, oh, I’m still want to be long, the June front month and the outright trend system. But imagine my spread system tells me Oh, Moritz, you want to be short June, and you want to be long December Oh, so all of a sudden, the June position goes away, that’s netted, right. And I’m only long December. So that’s fine. That’s actually I have less risk in the combination, because I’m now on the long deck. Or it could be a cluster position in the sense that my spread system tells me Oh, you also want to be long June versus short December. So all of a sudden, I have to risk units in June, which is a very high beta, high volatile position of the curve. And I only have one offsetting position further down the curve that has less of a kind of like moving the needle type of behavior. So when stuff like that happens, you know, when these when the combination of my systems puts me into these cluster exposures, then what I do and by the way, that is discretionary. I’m using the background that I explained to you from a derivatives and options trading perspective. And I see if I could modify some of the exposure that I have without changing the characteristic right, I’m following the system. But I’m trying to operationalize or delta replace some of the linear futures delta that I have in my example on the June contract right now to be able to have a nonlinear convex exposure in my in my favor. So I give an example when I actually did that in crude I don’t have it right now. But two years ago when we essentially all trend trade has started to go long crude around 60 bucks or so right? Mmm, fantastic trade, it went to a little bit more than 120 I think on the on the first contract. So what that means is like you have one contract that’s worth 60 grand, and all of a sudden that contract, you’ve rolled it a couple of times is worth 120 grand because it’s now at 120,120 level. As I’ve mentioned, I don’t vol control, I don’t adjust any of that position size, I still have the original size on which was, you know, determined using an ATR at the level of 60. Now that contract has, say twice the ATR. So the footprint of crude oil in my portfolio is much larger. And I’m fine to accept that. Now. What I what I could see in the options market at that point record backwardation, right, and the crude oil market, and still relatively low volatility. This was before the Ukraine war started. And so realize, okay, I’m sitting on this massive gain massive open trade equity, and let’s just for argument’s sake, assume that my exit is at 90. So I have $30 of giveback risk in crude. If I had one, one lat long than I would give, I would lose the $30,000. If I ever go from 120 to 90. What I did do and that is a data replacement trade. I’m replacing some of that linear futures Delta through a nonlinear delta by buying a call option, let’s say a 25. Delta call did that Dec 24, DEC 25. So long dated, they’re not gamma bombs, there’s no big of a theta as you read this as a long exposure. And so let’s say I’m buying four of these call options at 25. Delta, that’s a one Delta in aggregate. Right? So I still have the same position on in terms of yet I’m keeping I’m keeping the pedal to the metal random, I’m not looking to peel anything off. What are the two outcomes? Now the two outcomes is and I don’t predict crude goes to whatever 200 It goes much higher, which didn’t happen. But it could have happened, right? Yeah. hadn’t happened, I would have even had a greater outlier position. Because the delta of these calls, all of a sudden, there’s no longer 25 It starts to become 50 round. If it’s if it’s at 200. Probably the delta is one, right. So now now I have a four Delta position, as opposed to one Delta position. So coming back to hitting the ball out of the park. Whoo, that that would be really nice.


Jeff Malec  42:24

And you would let that run? I wouldn’t readjust the Delta back to Well, that depends on one. Yeah, who knows? But yeah,


Moritz Seibert  42:32

who knows, you need to look at the market in these options is something that I observe, but also on the downside, like, let’s assume we go down to the stop right to 90. As you know, as we’ve as we’ve determined, the futures position would lose 30k per per lot. The options position is also positively convex. The downside, right, so we’re getting down to 90 Yes, that delta that 25 Delta is now no longer 25. Maybe it’s now eight, or something like that, right. But I will mathematically lose less of the option premium, then on the futures right. So also have a better they won’t go to zero, exactly, have a better experience to the downside now. If and when the system tells them to get out of crude, which is what happened, then I follow the system, which means okay, you know, I can’t just sit on these options positions, because I have really no no business being long these options, we don’t want to be long crude, right? So that is why I can only do these trades in markets that have a liquid options book, like you know, I need to be able to see a bid, I need to be able to get out of the position I need, there needs to be open interest, right? There needs to be an onscreen book for me to do that. OJ has options, but only options rarely trade. So I would have loved to replace some of my long Delta on Oh j with you know, oh, J Cole options, but I didn’t even look at like valance Q and all these type of things because the LJ options market is just forget about it just doesn’t work. But what I can do in the, in the case of the of the crude example, I’m selling 90% of the options 90% of the calls that I was long, right? And on the 10% and this is not a fixed rule. But sometimes they go like look, I’m kind of like keeping a toll position I’m keeping the foot in the door I it’s non recourse leverage, I’ve paid for it, I’ve you know, the option, I paid the option premium to be flipping around and whipsawing and I didn’t have to care right in the futures I would have to get in and get out and get in and out. So here you know, I can still sit on some of that deck 24 and Dec 25, very little of it. Most of it is gone. But I still have some of that on the box. So if it’s big if crude comes back at some point, moves higher. I’m already there from the beginning. And I just love the combination of these, you know trend trades spread trades and then putting positive convexity With options on top of it, but only where it makes sense, you know that the the crude, crude costs they were they were just so great to try it because of that record backwardation that Dec 24, DEC 25? You know, the, I didn’t know we were at 100 or so and the forward price for that 70.


Jeff Malec  45:18

I mean, yeah. And then is that, why you wouldn’t just do options from the get go? Right? Like, why not take that whole logic and say, okay, instead of doing futures, I’m just going to trade the options from the initial signal.


Moritz Seibert  45:32

That is not how I do it. I don’t have any experience with that, I wouldn’t, I don’t think I would even be able to test it. Like, you know, the options data is true. If you’ve ever worked with options, data, but it’s


Jeff Malec  45:43

crappy, it’s better.


Moritz Seibert  45:45

To Yes, to use to use the right word for that. Another example, just just to show to show you the other the other side of this as is last, just in March, you know, when we had SVB. And the bond markets, I mean, they had moves that I didn’t like, I was still on the trading desk. You know, we didn’t we didn’t see during the GFC I mean, these magnitude type of whatever, daily moves on the two year on Euro dollar, or on whatever the bobble I mean, all of these markets. They just had, yeah, it was just back I mean, I grabbing, attention grabbing type of moves, right. And it was painful, because we trend follows. And most of us, including myself, we were short, every bond on the planet, I was short, the bubble in short, the bone and short the two year in short, whatever I mean, all of these markets, in the right quantities all fine. But I had on some of them on the bone, for instance. And on the 10 year, I would replace some of that short futures Delta with long put options. So being long 110, put on the 10 year, for instance, right. Sometimes I do a put spread, depending on you know how skew looks and how the thing is priced. That has helped me it may still cost a loss. But I I lost less than some of the other trend following CTAs in March because I didn’t have to take as much of a hit on the bond counter move, or the interest rate counter move. Given that, you know, those puts last way less than the futures position and by the way, implied volatility and bonds shot through the roof. Right. So even though that 110 Put option on the 10 year was kind of like yeah, out of the money. Yeah, it’s it’s far in the money. It almost doubled in value, right. So it, it still had a heartbeat. Now the in these markets, the option liquidity is much more tight to say you’re essentially front month liquidity, right? I mean, nobody. Nobody’s trading Dec 2410. Year, I mean that that’s the swaps market, which we’re not, we’re not in so I don’t have the full curve available to me, as I have for my example with crude oil.


Jeff Malec  48:03

But still it helps. And then the news strategy is using both trend and spreads. So these are the spreads you’re talking about or you also have more of like a carry type spread trade that helps offset the the bleed, if you will, in the trend.


Moritz Seibert  48:18

No, I’m not trading carry. I’m really fully focused on trend. But I’m finding trend in spread markets. Okay. Oh, you know, sometimes people create synthetic markets across asset classes, say, crude versus corn or the s&p in whatever which terms right. So you’re repeating these differences between markets, synthetic markets and, and trade there enough, Jeff, I’ve, I’ve tried, many, many years to get that to work. And I just, I just couldn’t get it to work. Maybe Maybe other people can get it to work. But I didn’t have a great experience with essentially changing the denominator on on any of these markets. Yeah. And


Jeff Malec  49:03

even if it’s like WTI versus Brent or something like that, or the wheat we were talking about?


Moritz Seibert  49:09

Yeah, I just I just couldn’t get that to work. And I’ve tried luck, correlation, cointegration, whatever classic turtle type of trading rules. It has a bunch of complexities like, you know, how would you then roll over? It is it is it kind of like sounds like a cute idea on paper when you think oh, yeah, that’s something that I can easily do. But there’s 10,000 markets. Yeah, it’s actually less easy than you think. Now, when you when you go back to the time spreads and the calendar spreads? Well, you’re in the same zip code in terms of it’s yeah, it’s crude versus crude, right, Brent versus spread, whatever. So the denominator issue goes away. And but yes, they’re, they’re more correlated. And I’m not really keen to get myself into anything that has to do with just with karyotype trading in commodities or earning a liquidity premium by front running some of these index roles. are participating, you know, during certain window, business day five to nine of the month where a lot of that index trading activity happens to provide liquidity to others. That’s, that’s what I want to do, right always wanted to use proven or robust trend and momentum based type of trading rules with an initial stop loss, an entry and an exit, in the same way, essentially, but on spread markets. And I tried that for years, three years, something like that, failed, failed, failed, gave up, took a break, tried something new. At some point, I found something that worked. And where I could kind of like step back from the desk and say, Okay, I can probably trust that system in the same way that I can trust my, you know, directional single market trend, tribe type of trading system, because it doesn’t have a lot of parameters, you know, I’ve taken great care to build it in a resilient and robust way without forcing myself to find esoteric positions on the curve. For spread trade, that’s not what to do.


Jeff Malec  51:02

And so it’s not a right, people hear spread, right? Or at least I do, like, okay, it’s a convergent trade. It’s kind of the opposite. It’s might be negative skew and whatnot, it’s still you’re basically saying it still has all the trend properties, it’s just with this spread, I mean,


Moritz Seibert  51:16

look at whatever, like, you know, lean hogs June versus August, right? I mean, that that spread can go wild, right? Yeah, it can have a very nice trend. So I can trade that trend in that spot market, in the same way as I could trade a trend in whatever wheat


Jeff Malec  51:43

we may be getting too in the weeds here. But that’s what we’re that’s what we do here. So, right. I’ve seen people get carried out on stretchers by sizing based on the historical spread volatility. And then it blows out 510 times the historical volatility, as you said, like, these things move together until there’s a war. You know, Hurricane Katrina was a classic example of all the gas was trapped down there at the refineries. So that front month was up 30%. And the back months were doing nothing. Sure. So long way of saying how do you assess the risk there? Are you? Are you measuring it per each market? Are you measuring the actual volatility of the spread itself?


Moritz Seibert  52:25

No, it is it is the volatility of volatility of the spread. There’s one thing that I haven’t mentioned yet. I mean, in some of these markets, you know, seasonality plays a role. We’ve just mentioned all the crop new crop, right? I mean, think about gas summer winter, right? If you’re, if you’re looking at whatever, August, September, Henry Hub spread, I mean, that is a very low vol spread, you know, that’s the summer spread, it’s kind of like, whatever, two adjacent month, you know, nothing really happens. If you’re looking at at March, April, the Widowmaker. I mean, the volatility of that spread is really something quite different, right? So one of the things that I’m not allowing the system to do is, is to cross these nowadays, because then there is a tendency or a penance, propensity for the system to get into a carry type of behavior, right? When you look at March, April, and that gas, yeah, nine out of 10 times, or eight out of 10 times, you make money by selling that spread, right. But two out of 10 times you lose your shirt, so I don’t, I don’t want to have these positions. So I’m not I’m not allowing to have the season crossing spreads. But then I can size and, and, and kind of like risk that position in the same way as I would with with a standalone market simply because of the fact that I know that I have a stop. So what’s the deal? I’m risking a certain amount of equity. Yeah, that’s Brett might be and sometimes they do they go completely bananas, right? I mean, they have like, oh, whatever, the spread moves a couple of cents, and then it moves a buck. And it does happen. Okay, so it happens I get I get kicked out of the position. Try again.


Jeff Malec  54:07

So I don’t do trade, the actual spread. There’s a market gets made in this spread and some of these as well. Yeah. Are you trading the legs independently?


Moritz Seibert  54:14

No, no, I don’t trade the legs independently i because of a trade of the legs independently. That means that for a very small period of time, I have a directional exposure, I have a full risk, right. I trade one leg and I may not get filled on the other leg, right. So now I tried the spread markets. The spread markets work in all of them are slightly different. Like you know, in some of the markets, you have TAs markets, which is a traded settlement market where you can essentially work a limit order around zero during the day in order to get filled at the settlement price. I usually don’t trade these markets. But they are available for people that for whatever reason want to get done. At the settlement, if my system tells me to get into a spread, lean hawks, whenever I mean lean hawks, it’s not like the s&p were like Globex essentially trades around the Glock. The lean hogs market opens early in the morning Chicago time, but it’s kind of like, you know, it’s dormant during the night. So I see where it opens, I usually work limit orders, and I give myself the day in order for that spread to get filled. And if it doesn’t get filled, I become a little bit more aggressive toward the end of the day, because I want to get into the position. It’s like in the in the same way as with the standalone trades, not getting into the trade is that is the issue, you want to have the trade because the trade is part of the sample size of my system, right? If I if I don’t do the trade, because I’m too greedy on the entry price, or think I can forecast the market, I can get in at a better price than that essentially risks me missing the trade completely, and not putting it into the portfolio and therefore not following the system. So now I want to get I want to get that trade on. But I work limits in the spread markets. And yeah, specific points in time during the day, depending on the market a question.


Jeff Malec  56:22

And then do you use algorithmic execution for that? Where you’re just working it? Yeah. I’m well, we’ll chat about


Moritz Seibert  56:30

maybe maybe at some point. Yeah. No more about? No, it’s just limit orders, man.


Jeff Malec  56:36

And then part of me is thinking okay, in the back to the crude example. At some point, are you just kind of getting an extra interest rate trade as well? Right, if the back months are moving mainly based off? In my Katrina example? Of course not, that’s like something new but, but in normal times, when there’s no out there’s no extenuating circumstances, it’s probably the curve is just moving based off interest rates and the the yield curve.


Moritz Seibert  57:03

Well, interest rates play a component, right? storage costs, level of storage, insurance, all of that, you know, fundamental features, whatever physical traders, hedging Mexico hedging their crude production, all of these things play a role. But I, I wouldn’t disagree with you completely. I guess, you know, all of these factors can, you know, cause spread movement? And, you know, for instance, if if you traded gold spreads, and you’re essentially trading an interest rate? Yeah. So yeah, I recognize that as part of the spread markets, I mean, it’s part of every derivatives markets as part of our futures markets, every futures markets, every futures market has, has has has interest rate drift implied in it, right. That’s the cost of carry. So yeah, sometimes maybe these trades get me into a position because of because of rates move and Okay, so but yet, I don’t judge I don’t really care. Yeah, what it is, it is what it is. I follow the system, whether that’s driven by you know, tank tops or whatever, I’m running out of storage or interest rates changing. I don’t really care I just care that I’ve detected there’s, you know, momentum there’s something interesting going on there’s there’s possibly a trend developing so I’m putting on a little bit of a probing trade and see where it goes.


Jeff Malec  58:24

And then I was reading some of your materials, your Trend signals a little bit different than others, right? It’s not a pure Moving Average crossover pure breakout, explain a little bit how you’re no it’s


Moritz Seibert  58:33

not like and again, I don’t want to re you know, talk negatively about the Moving Average crossover, I think, you know, the Moving Average crossover, as simple as that sounds across many many different markets. It’s actually kind of a nice system. So what I what I learned over the time is quite well my experience is that the tougher it is for me psychologically, the harder it is to get into a trade to really buy the high to really sell the low if I’m forcing myself to do this to get into this kind of like inconvenient position to you know, pick the highest price that actually tends to be the better system as as nuts as that may sound. Anna like sounds backwards for sure. Sounds backwards. Exactly. And you know, that is one of the things like I really want to see like, yeah, I just want to essentially by the I that is that is why that is different to Moving Average crossover. What I do I’m kind of like a little bit more picky.


Jeff Malec  59:39

And can you say how that exactly works?


Moritz Seibert  59:42

Think about a simple example. Right? So you want to see a market having multiple highs, right? I kind of like a sequence, you know, you want today’s price to be higher than the price 20 days ago, you want yesterday’s price to be higher than the price 20 days ago, right. So you want consecutive consecutive highs. So that very much correlates to a breakout like, you know, a breakout over a certain time window. And by the way, also trade breakouts kind of like gets you in at around the same price. But just me kind of like having that, oh, yeah, I want to have that sequence, I really want to see that market move higher for a couple of days. And kind of like show that it’s moving in the direction. And only then do I get in, gets me an even a little bit later on, on average, at a little bit of a higher price if I’m long and a little bit of a lower price if I’m short. So it’s Yeah, forcing myself in a way to put on the inconvenient trade


Jeff Malec  1:00:46

what are the exits look like similar. I mean, I guess you can’t have it be similar. But I guess you could if you’re short and high the in the opposite direction


Moritz Seibert  1:00:54

I’m using, I’m using a trailing exit. So my exit runs a couple of atrs. Behind my entry price, were behind the last price right behind the last close or settlement price. That is a very simple exit, we can have a debate as to whether you know, you should exit on whatever the next 100 Day low or you know, 150 day low or anything, it’s fine. At the end of the day, to me that has not made a world of a difference, right? The important thing is that you have an exit, and that exit moves along as your trade develops, and that you stick to that accent and you follow that accent and you don’t second guess it? So that is that is it. Um, another thing is, is, you know, where’s this accent, like, you know, do you want to have very tight accent do you want to have a very kind of like loose pants type of exit. The letter is usually the better. It’s the more painful, but that is where most of the money is, I think


Jeff Malec  1:01:58

sounds sounds like you’re more of a longer timeframe from everything,


Moritz Seibert  1:02:01

you get there with longer timeframes. And, like, I’m very impatient with losers and like tight on my money with the initial stop, like you, you grab into my wallet on that initial trade, I closed that wallet right away, that’s not yours go away. But when the trade develops, I mean, think about it. This is now money that the market has given to me in the form of variation margin, essentially telling me that I’m right, right. So it’s your money, or it’s somebody else’s money because it’s a zero sum game and the futures markets net of commissions, right. So I’m very free and liberal to go to the casino and play with somebody else’s money. Right? That’s not coming out of my own wallet. I know this sounds, you know, don’t don’t take tape because no part out but you know what I mean? Right? I am really, that open trade equity is something that I can be much more risk seeking with and less tight with, than, than my core capital, my close to equity. And so that favors that loose pants type of approach where I cannot predict these markets, if there is a longer term trend, then I don’t want to be kicked out of that trend prematurely. And I recognize that sometimes, you know, you have these massive periods of give back and just you know markets do nothing they go against you. But you know, you stay in them. And they just Hooray, come back. And they they follow the direction of travel and you’re just so happy at that point in time that you still have the original position size on in the original direction and you didn’t kick kick get kicked out of the trade and, and that’s what I do. And if it’s open to an equity, fine, I’m much more willing to do that.


Jeff Malec  1:03:45

Which this is interesting because, right that’s sounds more like the classic trend follower, Turtle trader type mentality. And then I think over the last 20 years, as more and more investors institutional money has come into the space, they hate that profile, right. So they’re, I think they’ve been the ones that have pushed all these bigger firms to be like, we’re gonna evolve target, we’re going to exit we’re going to overlay whatever filters to make sure we’re not in these positions and their whole goal is to reduce that give back open trade equity and sorry for them happy


Moritz Seibert  1:04:16

for me.


Jeff Malec  1:04:17

But you know what I’m saying like cuz it sounds great here on the podcast, but as an as an investor, if I’m in my account, and I’m like, Cool, I don’t really mind that in my account. But for selling the track record, I don’t think it works. Right because you’d have these large drawdowns you have the larger give backs and it just isn’t appealing to people.


Moritz Seibert  1:04:37

Everybody got kind of like on Oh, it needs everything needs to be 10 Vol right. I mean, yeah, we used to be completely fine with 20% equity vol. That was kind of like normal. Nobody, nobody cared about a 20 20% Vol was fine. And that was what your portfolio was on. And, and I guess over the last 10 years, some whatever might shift risk appetite maybe too many accidents, you know, sovereign bond crisis in Europe, the golf measure, people just don’t want to have 20 Vol anymore. They want to have this Muth feel good, low vol type of profile, without a lot of give back straight lights at the top. Not a lot of losing month now. That’s just doesn’t come natural. Like if you’re trying to produce that, right? What


Jeff Malec  1:05:24

are you risking?


Moritz Seibert  1:05:26

What are you risking? Right? I mean, what is the side effect of that type of behavior, and you have full control overlays. And I mean, don’t get me started on that and feels like I’m beating a dead horse on this. I’ve been talking for hours and hours mins on why that is not a good idea. But I think at the end of the day, and man, by the way, there’s also business management behavior on the you know, on the side of the investment management firm or the CTA is kind of like, oh, yeah, we give this more like, you know, feel good type of profile that’s all controlled and smooth, right? So we can obviously, get more assets, maximize the revenue stream trade a larger capacity, because we’ve reduced the vol have a larger management fee footprint, increase the value of the business and then sell it to BlackRock. Thanks. Yeah, that is all very logical. Now, from a trader perspective, and I’m firmly putting myself into the seat of the trader here. Um, when he asked yourself, why are you doing this? I mean, why are you spending all this time researching and developing trading systems? Why are you sitting, and look, I don’t need to sit in front of the screen all day, because it’s the system that’s running, but I’m spending time with my system, I’m spending time with the markets. That is what I love doing luckily. So it doesn’t feel like work. But you know, it is nevertheless something that I put a lot of energy a lot of time and mental power in. And it’s like, why would I ever trade this at five vault or 10? Vault? I mean, I’ve done this, and I think the only answer is to make money. If you give another answer, then, you know, whatever, I didn’t do that to make money, then I don’t understand where you’re coming from. Because as the financial markets is about making money, right? And so you have to accept a certain amount of vol, and variation in your returns. In order to make that money. I you know, I don’t want to be spending all that time here at the desk. In order to make 3% a year I’d rather buy the bond, or, you know, whatever do real estate and, okay, that’s actually risky as well. But you know what I mean, right? I mean, the stuff that we do trading futures, which in and by themself have leverage, I mean, come on.


Jeff Malec  1:07:32

I think the counter would be right it’s a question of Are you maximizing for most return or best risk adjusted return? And if whether we measure that with vol or whatever, but it seems is


Moritz Seibert  1:07:44

this for the return the risk adjusted is everybody risks adjust in their own way whatever suits don’t run whatever sharp Okay, fine. But you don’t get risk on you don’t get rich on Sharpe, you don’t get wealthy on risk adjusted returns, you get wealthy on returns, right. Yeah.


Jeff Malec  1:08:02



Moritz Seibert  1:08:04

look, I know it is unpleasant. I’ve been there a couple of times with these draw downs right and you go like okay, this is this the point in time where it shows you know, do you trust your system, you know, is that something that you can do you have the stomach to you know, put on the next 1000 traits, given where you are today. If you can do that, and it is difficult that is I think where a lot of the alpha is then it is really about the returns then you can make the money. And to me, this is what trading is about. It is not about you know, the risk adjusted. Think about it. If you have a point five sharp right people sometimes belittle that or you have a point five sharp I mean come on take take the next seat, you know, come on give me give me give me another trader I need it. I need a one sharp or two sharp or three sharp live track record. Okay, fine. Well, if you can find that three sharp trader first of all, I’d ask that trader Why are you trading outside money if you have a three sharp I mean, just be very quiet, very secretive, right? Do whatever it is that you do


Jeff Malec  1:09:12

turn it into 10 billion and


Moritz Seibert  1:09:16

you know, buy that island and become the richest person on the planet. But the fact that you are shopping a three shop around to an external investor, I don’t like it makes a little bit. You know, criticals like, what what is it that you’re actually selling? Okay, so point five shop. That means that 20 Vol to use our example again, your expected return is 10. Not every year because it’s the point five sharp, right? So it’s going to be minus 30 plus 20 minus 10 plus five plus 15 plus 20. In order to get to that, so it’s choppy, right, but you you can make 10% a year at 20 Vol. Do this for 20 years. It’s sort of 25 years or 30 years, you know, compound 1.1 to the power of 30. I mean that that is a big number. And I don’t know what it is off the top of my head, but it’s, it’s a nice number.


Jeff Malec  1:10:05

Yeah, I’d take it even further. I’m happy with zero sharp on a trend follower, if it has the divergent properties and if it performs in a 22 and an oh, wait, right, like if you have flat carry, or even most of the time, you have a little bit of positive carry. But I think a lot of people miss that, that point to have like, hey, well, this thing Mike is going to carry positively and it’s going to pay out when you need it to pay out. It’s bad for people in our business, right of like, hey, then they treat it as the piggy bank. Take that and rebounce it into equities. But sure, go for it.


Moritz Seibert  1:10:38

It has that optionality. Right, which which people kind of like say rather than being long term protection, rather than being constantly long vol. In order to protect the equities portfolio, you have the propensity for trend following traders to have that defensive, not guaranteed but defensive characteristic, add an expected positive payout, right, right and have to pay premium right now. But that forces you to view the entire thing within the context of a portfolio right? So you think, Okay, I have the 6040, or whatever, I have a bunch of stocks the s&p 500. And therefore, if I add a trend following trading system to it, it just becomes this better thing.


Jeff Malec  1:11:18

But yeah, it’s just interesting to me, right from the from your seat from the trader seat building the portfolio, all those thoughts, like you got to endure, you got to be able to put on those next trades versus the investor who has to comes at it from a different angle, like is this system going to keep working? How do I know it’s going to keep working? They just have a little bit different mindset and challenges than you have.


Moritz Seibert  1:11:40

They do. And it’s also different across the, you know, investor spectrum, like, you know, I’m not talking to institutions at that point, and maybe I never will. Who knows? But obviously, there you’re talking about completely different than Amex. It’s about the portfolio. It’s about risk adjusted returns, it’s about volatility, its drawdown, its, you know, all these type of things.


Jeff Malec  1:12:00

Even more, I’ll take it over. It’s about do you check the box? Do you have this cybersecurity policies,


Moritz Seibert  1:12:06

career risk, it’s set up it’s all these type of things, right? So you actually in order to get there, you need to run a massive business you need to have whatever how many staff from payroll and this then the other thing and whatever, when you speak to my friends, family, high net worth investors, you know, people in my network, also with kind of like a trading neck, some of the family offices, they get it, you know, they don’t necessarily have to be narrow minded and go like, Oh, this needs to be whatever. 10 Vol and it needs to be the perfect move in there to my 6040 portfolio. But there are smaller groups, right. I mean, it’s who I talked to, and but I enjoy that


Jeff Malec  1:12:59

any last thoughts? You want to leave the listeners?


Moritz Seibert  1:13:02

No last thoughts. I mean, checkout soccer. Hey, if you want if I can pull that block. It’s just about to launch since Tucker Haydock capital, you can find me all over the web. Very classic trend based trader with with the route of some top or nonlinear derivative instruments on top and spreads. So that’s what I


Jeff Malec  1:13:23

  1. And so my end a little option action thrown in there, which was interesting. I love it. All right. Give me your favorite European ski resort, whoever believe


Moritz Seibert  1:13:36

that is a Rosa which is Rosa. I’ve never heard of AR O S. A that is also in graubunden. It’s actually not too far away from Davos and Sainte Marie. It’s kind of like, in that area. But it’s, it’s just beautiful. It’s, it’s high up. It’s quiet. It’s It’s amazing. That’s that’s where I love going. But I love all these ski resorts. I mean, the in that’s rolling in ski resorts with all these beautiful holidays and a little bit of apres ski and get time and some music. I mean, this is just great, great fun.


Jeff Malec  1:14:10

My buddy here keeps trying to get me to go he’s gone a few years I can’t remember there was there’s some race famous race and I think it’s Austria. It’s like a 16 mile race, like all the way down from the top through the village. It’s more of a fun, it’s not an actual race, but


Moritz Seibert  1:14:27

okay. Yeah. Well, the the world’s most famous ski downhill races is in Kitzbuhel. That’s probably the one Yeah, the last weekend was but that’s not 60 kilometers. That’s okay. It’s very steep. Very, very fast. That’s the last the last weekend the second to last weekend of January each year.


Jeff Malec  1:14:46

Nobody you’re saying that’s the World Cup race. Yeah. Yeah, I’m saying this is a race like I can go do are you like more of a drinking?



Oh, that’s yeah.


Jeff Malec  1:14:57

It’s one of those kind of boondoggles wherever Extreme kilometers they become a long way right? Yeah, there’s there’s like 5000 people out there. Yeah, exactly.


Moritz Seibert  1:15:06

Well let me know when you’re here. I mean, I did ski a little bit in the States as well. We were when we lived there we we went up to Stowe, Vermont a couple of times, but that is that is just different skiing. It’s kind of like similar snow to the Alps. Like a wetter type of snow, but I was really missing the, kind of like these Tyrolean wouldn’t hots and just just the atmosphere. So I think that is, that is half the fun is just yeah, having having a few drinks with friends and just a good time after area by area.


Jeff Malec  1:15:39

All right, awesome. We’ll leave you there. We’ll talk to you soon.


Moritz Seibert  1:15:45

Absolutely. Thanks for having me on, Jeff.


Jeff Malec  1:15:47

Yeah. Thanks so much for being here. All right. Ski Talk and trend talk. That was fun. Thanks to Moritz. Thanks to our sponsor, RCM and their trend white paper and thanks to Jeff Burger, who crank this out on rather short notice. We’ll see you next week. Peace.


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