Finding Alpha in Unexpected Places: Doug Greenig on Trend Following Beyond Developed Markets

In this in-depth conversation, Jeff Malec (@AttainCap2) picks the brain of veteran quant Doug Greenig of Florin Court Capital about pursuing trends on a truly global scale. Greenig takes listeners on his fascinating career journey, from cutting-edge fixed income modeling at Goldman Sachs to managing risk at MAN AHL’s pioneering CTA firm. He explains how this experience led him to establish Florin Court Capital and develop novel ways of accessing over 500 international markets. Greenig and Malec engage in a lively debate about capturing narrative shifts, the effects of high-speed trading, and how allocators can balance exposure to alternative trends. Listen in on unique insights into operational challenges like structuring swaps to trade illiquid assets. Greenig also discusses how Florin Court scales risk across a massive portfolio while still delivering the crisis protection allocators seek. This revealing episode pulls back the curtain on one firm’s quest to follow profits wherever macro winds may blow. SEND IT!

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From the episode:

History of Managed Futures whitepaper

Guide to Trend Following

 

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

Finding Alpha in Unexpected Places: Doug Greenig on Trend Following Beyond Developed Markets

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, Happy March Madness to those who celebrate. I hope your brackets aren’t too busted up. What is decidedly not busted up was this pod where I was lucky enough to pick the brain of Doug Greenig of Florin Court Capital and hear more how they seek out trend opportunities in more than 500 markets across the globe. 500 What? There’s not that many liquid futures markets are there. But what about OTC swaps, cash and more, we get into all the details with Doug including if there’s a law of diminishing returns and so many markets. If trend followers need CHIEF RISK officers whether Florin is the best at a sample trend following test we’ve ever seen. And how allocators should think about trend in general and alt trend markets specifically send it This episode is brought to you by our really old but still quite good, I think white paper on the history of managed futures. Doug spent some time at AHL before Florin and in our white paper talks about the three founders of that shop and how they went on to become managed futures royalty in a way. Go to RCMalts.com/mfhistory to download it today. Thats RCMalts.com/mfhistory. And now back to the show.

Jeff Malec

1:06

All right, everyone. We’re here with Doug Greenig. Doug, how are you?

 

Doug Greenig

1:09

I’m well, I’m well, how are you doing Jeff?

 

Jeff Malec

1:12

I’m great. Thanks for joining us. You’re on a little bit of leave, I hear…  So, thanks for joining us on your day off.

 

Doug Greenig

1:15

My pleasure

 

Jeff Malec

1:16

Could we even call it a day off or no?

 

Doug Greenig

1:25

I don’t know if we can call it a day off. I had quite a lot of work today. I had a risk meeting, a call with an investor, as well as several conversations with people in the office. So, I’ve actually been quite busy.

Jeff Malec

I hear you, and where do you call home? London, right?

 

Doug Greenig

1:45

I spend about half of the year in the UK and half of the year in Abu Dhabi, chasing good weather as it were. We have offices in both places of similar size, so we sort of have co-headquarters.  And that’s one thing that allows us to trade markets around the world and almost around the clock, having those two different time zones to work out of.

 

Jeff Malec

2:14

I’ve never been to Abu Dhabi.  Worth the visit?

 

Doug Greenig

2:17

Oh, absolutely. It’s probably not what you expect.

 

Jeff Malec

2:23

I’m sure it’s not. In what, in what way?

 

Doug Greenig

2:27

It’s an incredibly modern, advanced society. It has, you know, it has some of the features of Singapore, but its own unique culture and history and trajectory. I would say that the UAE is emerging, along with some of the other Gulf states, as incredibly powerful, interesting economies that are, you know, making big plans and big strides for the post-petrol economy.

 

Jeff Malec

3:03

They see the writing on the wall, right? Hey, we gotta modernize we gotta get away from oil.

 

Doug Greenig

3:09

Oh, yes, they’ve seen that for a long time. And indeed, they’ve done it. These economies are increasingly diverse. And remember, of course, the economy of Dubai was never based on oil. Dubai has always been a diverse economy, with tourism and many other business activities, and sort of being a gateway to Africa.

 

Jeff Malec

3:27

Yeah. Awesome, you could argue is based on oil money, perhaps, but I get your point. So, you have quite the resume let’s dig into your background a little if we could. So, we’ll start at, where do you want to start, Goldman?

 

Doug Greenig

3:44

Oh, you can start earlier than that. All right. So, I began as an economist, but ended up getting a PhD in mathematics from Berkeley.

 

Jeff Malec

3:56

Oh, that sounds easy.

 

Doug Greenig

4:02

Yeah, I remember back in those days, wondering if I was gonna make it through the PhD as I worked on my dissertation, and a lot of it came to be one morning on Polk Street in San Francisco in a cafe after I’d had like five cups of coffee. Suddenly, I thought, right, how to solve this problem I’d been working on for about two years.

 

Jeff Malec

Oh, wow.

 

Doug Greenig

And it was a very famous problem. Well, moderately famous – not very famous – a well-known problem in mathematics called the Markus Yamabe conjecture. I made a great deal of progress that one morning, and I thank determination, a lot of work and caffeine. Caffeine played a definite role in shaking things loose that day. Anyhow, during that time when I was getting my PhD in mathematics, my field was dynamics and differential topology. I was also working part-time, a considerable amount of time, at Barra in Berkeley, California. I had a chance to work with some very notable people – Ron Kahn, you know, Peter Muller, and a lot of very interesting characters on the quant equity side. That set me up for my job at Goldman Sachs when I finished school.

 

Jeff Malec

5:30

What year was this roughly?

 

Doug Greenig

1993.

 

Jeff Malec

Okay, so early days for quant anything, sort of.

 

Doug Greenig

5:38

Yeah, yes, indeed. And so, I came to work with Fischer Black as sort of his assistant at Goldman Sachs. So, I’ve worked with Fischer and later Bob Litterman, some of these folks, and had some very nice years at Goldman Sachs.

 

Jeff Malec

5:57

And I always ask Goldman alums, when they’re on the pod, if they think of it as the vampire squid, that was portrayed in the press back in the day.

 

Doug Greenig

6:11

Of course not. Goldman is a commercial organization. But when I was there, there were tons of absolutely fabulous, talented people, and most of us worked together very well. And it was a very collegial environment, for the most part. So actually, I think it was a great organization. But obviously, the commercial goal of a company is to make money. And so they are good at it, but we felt that we worked together better, in different areas, than our competitors, and that was our edge: superior teamwork. I can’t speak for Goldman today, but Goldman back then was a terrific organization. For sure.

 

Jeff Malec

6:56

One, one lady, I had on said it didn’t matter if you were male, female, black, white, green, purple alien, if you could make money, they had a spot for you.

 

Doug Greenig

7:06

Yes. Or if you could help others do it. Again, the teamwork aspect was very, very big. And I’ve carried that forward in the jobs and roles that I’ve had over the years.

 

Jeff Malec

7:21

Awesome. So parlayed Goldman into where?

 

Doug Greenig

7:24

So, I then went over to RBS, Greenwich Capital, which was an absolutely terrific fixed-income shop. Now, when I was a Goldman, I did fixed-income arbitrage. And over several years, at the Goldman arb desk in New York, we used things like term structure models to trade fixed income in currencies and so forth. It’s very interesting stuff. It sort of grew out of the study of fixed income derivatives. How do you model yield curves? You know, how the yield curve shape evolves and how do you trade the idiosyncratic deviations from the yield curve. So, it was very hardcore quant stuff; we used stochastic calculus, and all sorts of different term structure models. But there was also a discretionary component, because you needed to understand why something might be a deviation or at an unusual point relative to history before you decide. So then I went over to Greenwich Capital Markets, and I became the head of their mortgage arbitrage desk. And then I was promoted, and expanded so it became kind of a fixed income arb desk. And then I also got responsibility for the customer business in mortgages, where I managed agency mortgage trading, and research.

Jeff Malec

9:02

And was that the heyday of packaging all the mortgages right before 08?

 

Doug Greenig

9:07

Well, I was not involved with subprime side credit side; I was involved with traditional agency mortgages. And so it didn’t involve that kind of credit risk. But it did involve a lot of trading of curve volatility, mortgage spread, and I had a wonderful, wonderful team there. Many great people whom I learned from and helped from my side. And so it was a very, very successful experience over, I guess, it was about six years.

 

Jeff Malec

9:41

And in simple terms, what was the goal? To strip away all the volatility and credit risk and interest rate risk and just have a fixed yield?

 

Doug Greenig

9:51

No, no, if you strip away all the exposures in a mortgage derivative, the costs for doing so are prohibitive.

 

Jeff Malec

Ok

 

Doug Greenig

10:03

But what you do is, you strip away the ones that you can hedge cheaply or the ones you really don’t want to have. Then, of course, in the customer business with mortgages, you know, there’s obviously the market making business. You can buy from me at one price, and I’ll buy from you at another, you know, you’re the customer, and I’m the dealer. So, there’s a certain value to that business. But it’s a very, it’s a very interesting business because there’s a kind of, for want of a better word, adverse selection. If somebody comes to you and wants to trade, what is it that they might know that you don’t know?

 

Jeff Malec

10:43

Yeah, you’re trying to sell you that mortgage? What’s the red flag?

 

Doug Greenig

10:47

Yeah, the – you know – what do they know about the market or the product that you don’t? So if one is careless, as a market maker, you can end up on the wrong side because you’re willing to supply liquidity to everyone really.

 

Jeff Malec

11:09

So, was there the concept of like, Citadel these days? Like, I’m not gonna get in front of the smart money, right? I’m just gonna book the dumb money straight. Did you have that concept of like-

 

Doug Greenig

11:20

This was a professionals’ market. This is all institutional, right. There’re all smart; there isn’t much dumb money. You just want to make sure you’re not the dumb money. So it was a wonderful experience. That’s another great firm. I’ve been very lucky because I’ve had a chance to work with amazing people at amazing firms and experience a lot.

 

Jeff Malec

11:44

Amazingly, we haven’t even mentioned trend yet. So, you were doing all this stuff. Was trend even a gleam in your eye or it was out of your mind?

 

Doug Greenig

11:52

Well, yes, because we also …  I also had some quants who were doing some quantitative systematic trading, and so we looked at variables like that. And then when I went to Fortress Investments later, you know, we had a systematic macro program within their macro fund. That was, that was an interesting thing, and trend was one of the things that we did back then. In any case, I should probably wind things more to the present because it was the really formative thing. Because you can tell as I go over my career, I’ve been in the markets an awfully long time.

 

Jeff Malec

Yeah.

 

Doug Greenig

And don’t try to flatter me, okay. I’m like Father Time here. I was in the Cretaceous era with raptors and stuff. But more recently, my big exposure to trend was when I was hired to be the Chief Risk Officer at AHL, which is obviously a very distinguished name in the trend-following and quant space. And that was a – that was a terrific job, and I learned a great deal because obviously, I came in with a lot of experience across quant space, the macro space to fixed income space, and some exposure to trend. But certainly, my knowledge was very much deepened by my experience of working there.

 

Jeff Malec

13:29

Was everyone (A, H, L) out there?

 

Doug Greenig

13:33

Tim Wong was the CEO, and they had left. But their tradition, the way they looked at the world, was part of the DNA there and the models. So, you know, I looked deeply at that, I asked a lot of probing questions, did my own research, and it was a very good experience.

 

Jeff Malec

14:01

Sorry, I was just gonna say for the listeners, AHL is the last names of David Harding. Martin Lueck, and I can’t remember the A. But we’ll put a link to our history of managed futures. We have a paper on that they all; two of them, were in the dorm room in Cambridge and kind of came up with this. So it’s an interesting, interesting story.

 

Doug Greenig

14:26

I tell you that these were very, very bright, creative people, and there was an earlier tradition, of course, of trend following in the US, the turtle traders, and that was very much oriented towards breakout systems. Okay. And they had a particular way of doing things. And then the European CTA sort of all flowered out of the three gentlemen that you mentioned, and with similar methods.  They tend to use a smoother and more continuous form of momentum in most places, and that’s generally better behaved. The drawdown characteristics of what are called oscillators are better in general than what you find with breakout system. Although, you know, most good CTAs use a little of both, depending on the circumstances. A rule of thumb is that smooth momentum, as I call it, based on an array of oscillators, will have a max drawdown or something like 1.7 times the annual vol, but the number can be well over two for breakout systems, where it’s kind of student body left or student body, right. You can get the thing very, very wrong under certain circumstances.

 

Jeff Malec

16:02

Do your UK people understand that analogy? Student body left, student body right?

 

Doug Greenig

16:06

I have no idea if they do. By the way, the UK is a different animal. It’s a little bit of a different culture from the US just watch the Guy Ritchie series The Gentleman on Netflix. You’ll see that it’s different.

 

Jeff Malec

16:27

It strikes me, what it seems like, an easier, right?   It’s weird.  It seems to me the mortgage and the fixed income and the yield curve stuff was way riskier way and more in need of a risk manager than then trend following at AHL. I mean, they were getting into other stuff, right. So it was it, uh, I don’t want to say easier, but it was just different. Right? Like, there shouldn’t be that much risk in a properly run trend program?

 

Doug Greenig

16:51

Ah, but the risk you have is model risk; that you haven’t organized your trend following models and your allocation in an optimal way. CTAs and decently organized trend following programs don’t have very much blow up risk. Right, they can bleed, but they tend not to blow up. Because at the end of the day, it’s a kind of, as you probably know, a long convexity strategy. You’re synthesizing volatility, in effect, buying higher prices, selling lower prices on the idea that there will be a continuation. And, and the trouble when you get into trouble, it’s a different kind of trouble is because it’s chopping back and forth. The so-called frequency of death, some wrong frequency with respect to yours, where you’re getting crossed up. Now, when you go over to the world of fixed income, and so on, the key is trying to manage that tail risk that comes from short volatility positions that you may or may not be aware of.

 

Jeff Malec

Right.

 

Doug Greenig

And so, the typical thing with a fixed income derivatives portfolio is getting all of those risks, all of the greeks, if you will, to use an option terminology, in the open, figuring out what you can live with; figuring out what risks you’re getting paid for, and which ones you’re not getting paid enough for and then managing that dynamic process through time. That’s trickier.

 

Jeff Malec

18:37

Yeah, you mentioned an interesting thing there – like the model risk – but then also, right, if you get chopped around and you change the model at the lows, you might just exacerbate the thing. So there’s also kind of firmwide model risk too, right?

 

Doug Greenig

18:52

Of course. So you know, one of the big lessons is that the trends speed that worked last year, may or may not work this year.

 

Jeff Malec

19:03

Yeah.

 

Doug Greenig

19:06

This is one of the reasons it’s so difficult to make significant improvements in trend-following programs on the classical liquid markets: everyone’s been working on this since time immemorial, and the people working on it are, give or take, as smart as you are.

 

Jeff Malec

Yeah exactly.

 

Doug Greenig

And, and it’s tricky, it’s very tricky to make improvements. The low hanging fruit is finding new diversified, uncorrelated sources of alpha: new markets where the trends are less correlated with the trends in the standard markets. That’s the low hanging fruit in the space, but it requires a heavy operational lift.

 

Jeff Malec

20:01

Yeah. And, and some people have gone the other way, right like, hey, everything’s known out there, we’re not going to find anything new in the trend space, let’s just go with a basic trend model that gives us roughly the beta of the space. Right. So whether that be replication.

 

Doug Greenig

20:18

That’s not a bad thing to do. Some people sometimes ask me, you know, an allocator would say: what would you do in the CTA space? And I can make a case that you’re supposed to have some CTA exposure, it’s one of the tried-and-true methods to hedge your tail risk. But what you know, one very reasonable thing to do is to get low cost developed markets trend, just as you’re saying. There are also some very good developed market trend programs that are worth the fees they charge, you know, for example, Lynx. You know, they’re related to us, another Brummer fund, and they’re good, and they generate a lot of gamma. And you might want a high-speed CTA in the mix.

 

Jeff Malec

21:16

We all know they struggled with the past couple of years, but yeah.

 

Doug Greenig

21:18

Yeah, I know, but they are good things to have. And then I think you want an alternative market CTA, because it complements this other stuff. And over the past seven years, you know, you get a Sharpe ratio in the neighborhood of one instead of a Sharpe ratio in the neighborhood of point three, and you still have the crisis alpha among the other characteristics, depending on where you want it, depending on where the crisis happens.

 

Jeff Malec

21:52

We were gonna save that well.  We’ll dig into it now, since we’ve, opened the door to it. So my problem with kind of, well, let’s talk let’s define alternative markets, alternative trend if we can, right. So we’re talking and you’ve mentioned the developed markets. So my view there’s call it 75 tried and true develop futures markets that most trend followers operate on, maybe you can take that out to 150 or, more. And so with that background, explain how Florin Court does it a little bit differently and says, Hey, there’s a whole other universe out there of these alternative markets.

 

Doug Greenig

22:28

So that’s exactly what we say. And by the way, I think you’re supposed to have a CTA exposure on the 75 to 100 markets. Then the question is, can you get any benefit from trend following electricity around the world? From trend following Turkish interest rates? Malaysian palm oil, onshore Chinese commodities, Bitcoin? You know, Colombian interest rates, California carbon emission, okay, wet freight, from the Middle East to the China gulf.

 

Jeff Malec

23:04

Right. All right, now need to know what wet freight is?

 

Doug Greenig

23:08

Yeah, it’s stuff that shipped in tankers.

 

Jeff Malec

23:12

Okay. On the ocean. Yeah.

 

Doug Greenig

23:16

Yeah, and so, you know, the, the answer is, there is a benefit to that. You can look at the returns over the last seven years that we’ve had in these markets, and you know, there, there are some even longer track records out there. And so, it works well, and is additive. And then the question is, how much do you want? And that’s really up to the allocator, depending on their level of interest in alpha, versus the extent to which they’re trying to hedge their S&P exposure or their US recession risk. We give you a more global orientation. If China has a problem, we’re more likely to do well with a dislocation there, probably, than a standard CTA. Whereas if, you know, if there were to be a major dislocation in the US, the standard CTA might have the edge. But we cast our net globally and we cast it wide: we have nearly 500 markets.

 

Jeff Malec

24:36

So this is interesting to me. Because say, the theoretical allocator you have there. So you touched on the main difference, right.  I want trend. I want this extra alpha that these alternative markets bring. But the more of those I add, the less I move away from the classic trend, crisis period performance, or at least the US crisis period.

 

Doug Greenig

24:58

Yeah, you get other crisis periods. We do very well, when Turkey has the crisis, not that I want Turkey to have a crisis. I love the country.

 

Jeff Malec

They seem to have a lot of them that.

 

Doug Greenig

Yeah, they have about 75% inflation now. And actually the world where we work, that area, in general, is more crisis-prone than United States. The United States is a remarkably stable, well organized economy, you know, with some world class companies that are essentially global monopolies. You know, you think about a company like Microsoft, if you’re looking for trends, and dislocations, you might be well advised to look at Turkey, Colombia, Chile, you know, Indonesia, and all of these other places that, as wonderful as these countries are, are on footing that is less firm.

 

Jeff Malec

25:59

Which is interesting, because a lot of trend managers were complaining right now of the Fed suppressing volatility, and we’re in this 09 to 18 period where everything’s kind of messed up because of the Fed. It sounds like you guys are like, well, then screw the Fed, let’s move over to markets where they don’t have as much influence, if any.

 

Doug Greenig

26:17

Exactly, exactly. And going forward, you know, I had the personal view, that we probably would have a pretty tough hard landing in the US. But the US is turning out once again, to be this incredibly stable place. Take a look at growth over the last couple of years. It’s really hovered around 2%. I think in quarter three, last year it went higher. But it’s been in that two to three zone, remarkably stable despite these predicted calls for recession. And I find that really, really interesting. And, you know, we don’t see the same stability in Europe, we don’t see the same stability in emerging markets, the US has something special going forward. There’s no denying it.

 

Jeff Malec

27:13

So why not? If I’m an allocator, just go full hog into these alternative markets into alternative trends. Right of like, hey, this is where the alpha is, this is where the instability is. This is where everything we just talked about, I want more and more and more of that.

 

Doug Greenig

27:28

Well, I wouldn’t mind allocators reaching that conclusion. But if I were an allocator, I want some CTA stuff as a risk mitigation tool against my equities, my fixed income, my private equities, all these other classes.

 

Jeff Malec

27:50

Yeah 2022.

 

Doug Greenig

27:53

Yeah, I’d want to have that stuff. And then I’d want to have some exposure to China, emerging markets, electricity, idiosyncratic stuff, there’s absolutely nothing wrong with passing your convexity net wider with the flows there. And do you want speed diversification too, so you know, as I as I said, if I were an allocator, I’d have I’d have some alternative markets CTA stuff, I’d have some developed markets CTA and I would have something on the fast side too. Yeah, then you know, you that you can figure out the right balance based on your views about the world.

 

Jeff Malec

28:36

Right. But that’s the trick to me that right balance, because you’re like, hey, this is a lot of allocators, I feel like we’ll come to the conclusion, okay, I’m going to put 5% into this alternative trend stuff, but that doesn’t really move the needle, right. So they’re getting a little bit of Alpha on the edges, which I think happens in main trend followers portfolios to have like, Okay, I want to add these markets. But I’m only going to risk this little bit. And it’s only this little bit of the portfolio. And even when Turkish interest rates run, I made 40 basis points portfolio wise on it. So that I think they come to the conclusion, it’s just not worth it.

 

Doug Greenig

29:09

It depends on how big you are as an allocator, or as a fund. If you’re an allocator, that’s absolutely gigantic, it’s not even clear alternatives will move the needle for you.

 

Jeff Malec

29:20

Yeah, agreed. You can’t do enough.

 

Doug Greenig

29:23

On the other hand, there are plenty of important medium-size institutional, small and medium sized institutional allocators where a $300 million allocation to someone like us, is meaningful, okay. It really just depends. The other thing is the standard market CTAs are not as good at the operational lift. They don’t have nearly as much experience dealing with these markets as we do. We’re going to be better. We’re specialists.  My partners, David Denison and Anthony Vinitsky, they’re specialists in this. That’s our bread and butter. So we do it a little better we think, than somebody who wants to throw in, just like, Phelix electricity contracts into their standard program.

 

Jeff Malec

30:17

Yeah. But in a in a perfect world for an allocator, I want you guys to run it like 80% Vol. Right? And hey, I can throw this into the portfolio to give me this extra diversification and they run this super high vol and I get what I want without having to put too much money over there.

 

Doug Greenig

30:34

But yeah, well, you and I would both like to be in this perfect world. And by the way that would obviously be at the top of the list if I’m allowed to go for perfection. The issue here is there’s more margin involved with the alternative markets business. It is very difficult to run this stuff beyond about a 15 Vol without the margin to equity ratio getting too high. But the returns have been excellent versus standard CTA programs, you know, the various SG indices over the last seven years.

 

Jeff Malec

31:24

So let’s dig into that a little more of this as a practical matter. So sometimes you’re going into the over the counter markets, sometimes you’re doing swaps like how are you accessing these different unique opportunities?

 

Doug Greenig

31:37

Exactly. Some of them are exotic futures on different exchanges. You know, the Baltic Exchange for shipping, the European energy exchange. In other cases, we’re doing total rate of return swaps with people on things that are hard to access directly. We’re doing interest rate swaps, Turkish interest rate swaps, you know, so we do a lot of different things to get the access that we have. Everything is managed to pretty good liquidity conditions, if we had to wind up what we do, we could do so in a week or so, without undue market impact, assuming the world has not ended. So, again, we’re a liquid fund, you know, monthly cycles.

 

Jeff Malec

Yeah.

 

Doug Greenig

You know, and we manage this, we’re not as illiquid as you might think. But it’s operationally difficult. You know, for example, there are several ways to access Chinese commodity markets, which are among the most liquid in the world. But whatever method you use, there’s a lot of operational stuff.

 

Jeff Malec

33:00

Yeah, and that’s the knock, right? If I’m the traditional CTA, like, oh, there’s no liquidity there, I have to do swaps, or I have to do, and then there’s a huge barrier of entry to right like, how did you guys even get started with some of those, you have to be big enough, in order to have the credit backing in order to get the swaps?

 

Doug Greenig

33:15

Well, that’s what that’s where Brummer came in. Okay, by the way, you cannot do this, starting up with a few guys and the Bloomberg and a dog and a Siberian Forest Cat.

 

Jeff Malec

33:29

What’s the dog and the cat do? I want to hear this.

 

Doug Greenig

33:31

It just adds to the scene. I’m helping people visualize this, you know, maybe somebody has they do it in their study in Rye, New York, you know, or maybe they rent a little office in town. Okay, and you got to have a cat and a dog and stuff like that. So no, it’s not like that. To trade, the stuff we do, you have to have a bunch of money. So we began with Brummer and Partners. And we started trading, I think the year was 2016, where we were really launched. And we started with 270 million in capital. They’ve known me for years and years and years, going all the way back to Greenwich Capital, when they were a customer of the firm and I used to go up to Sweden, for Midsummers to give them some talks on macro and fixed income. They’ve known me forever. And so when I left AHL and was starting to look around at things I might do and people whom I might partner with, Brummer very quickly rose to the front, because they’re like, we know you Doug, we’re very, very interested.  What do you have in mind? And I said, Hey, let’s get out a clean sheet of paper and try to design the best CTA that I know how to design with new infrastructure, new everything. And it seemed to me that the real opportunity, since they had Lynx which is a developed markets CPA, a good one, would be to do these operationally difficult markets, because I had some experience with these markets. And, ever since then it’s been, you know, a wonderful success story. I’m very grateful to have the partners and the team that I do. Great group of people.

 

Jeff Malec

35:25

Right, seems like you’d go around be like, I’ve got an idea we’re gonna do trend following and 2016 and everyone would have been like, what we have plenty of that. That’s all you got?

 

Doug Greenig

35:36

Well, you know the thing is, it helps a lot when somebody knows you well and trust you. This is not coming in and doing some cold pitch to someone who doesn’t know you. You know, I, at least with some people, had built up a reputation, and I’m very grateful for Brummer’s support.

 

Jeff Malec

36:04

Why did you leave AHL to go hang your own shingle to go do your own thing?

 

Doug Greenig

36:09

In the end yes, AHL was in the process of shifting, there was new management and a lot of changes taking place. And, you know, it was kind of time for me to do something a little different.

 

Jeff Malec

36:26

So I read somewhere doing some research, you guys are looking at 50 more markets every year is that still the case?

 

Doug Greenig

36:33

Well, we will if we can.  We’re always looking for new stuff. And there are new things, whether you’re talking, you know, about Japanese power markets, Indian commodities, there are a lot of things that we’re looking at. And, you know, as you would suspect, the marginal benefit of adding 50 more markets is smaller now than it was when we had 200.

 

Jeff Malec

Yeah.

 

Doug Greenig

And it’s harder to find stuff that’s independent. So we’re also doing a lot of work refining our models, looking at what we do, seeing how we can trade the markets we already trade better. It was pretty low hanging fruit, as I like to say, to go from about 200 markets to 250 to 300. These markets really are diversifying. But there is some diminishing return at a certain point. And so we continue to look for new markets and find them, but we are also focusing a lot on making sure that we’re right at the cutting edge with the best models that we know how to build and portfolio allocations.

 

Jeff Malec

37:57

So what’s that look like in terms of you guys weighing the risk reward of that law of diminishing returns? Right? So you’re like, Okay, I mean, it seems like you would have hit that a long time ago back at 200, or 250, or 300. So well, even in those early days.

 

Doug Greenig

38:12

Remember, because of our reputation as the alternative market people, people bring them to us. Because they know that we can, we’re nimble, you know, we’re 24 very experienced people, many of whom have gray hair, premature gray hair in some cases.

 

Jeff Malec

Or no hair.

 

Doug Greenig

Or no hair, the reflective scalp, right. And we’re nimble, and we can make a decision to look into things, research things more quickly than large bureaucratic organizations. And so they bring stuff to us. And we look on our own and, you know, we do continue to find new things to do: new markets, new way to combine markets, new ways to do things and improvements and refinements of our models as we go. But, you know, there’s just, it’s harder and harder to find 50 really new things.

 

Jeff Malec

39:22

Yeah. But back in the day, when, when you went from 200 to 250, what was the metric for this is additive to the portfolio? Is it you’re running a portfolio-

 

Doug Greenig

39:34

There’s a conceptual method, like our Turkish interest rate swaps, how correlated are they with other things?

 

Jeff Malec

Okay.

 

Doug Greenig

Then there are, you know, freight markets, how correlated these with other things that we have? Are they sufficiently liquid? Can we get the size we need? How quickly can they be traded? What constraints are there? What’s the volatility like?  What, you know, what has trend performance been? In general, we believe any market that is not artificially suppressed or fixed in some way, can trend, but some markets are better behaved than others. That’s certainly true. And markets where fundamental value is more uncertain, and the future is more uncertain, they’re more prone to that kind of herding and trending behavior than other markets.

 

Jeff Malec

40:28

And do you feel like this has been a test of trend following in general, right? Like, this is the ultimate out of sample test, you’re trading real, live billions of dollars real live money on all these alternative markets with I’m gonna assume classic kind of trend models. Not to belittle them, but right. So it seems to me this is the ultimate test of trend following.

 

Doug Greenig

40:53

Well, that is actually an interesting point you make, because one very good thing to do when you’re building models, is to take the same model and apply it to a different universe.

 

Jeff Malec

Exactly.

 

Doug Greenig

If you’re doing for example, a systematic macro, like relative value, these cross-sectional models, change the cross section, do a global cross section and then do a cross section in Asia, let’s say. Does it still work with the portfolios being very different? So, I don’t think that there’s any real question that trend following works at least okay. I mean, there have been some papers, you know, about a century of trend following.

 

Jeff Malec

Yeah, AQR had one.

 

Doug Greenig

And I’ve seen another one that extended it even further. I haven’t seen one that goes back a millennia. Goes back millennia, but-

 

Jeff Malec

41:56

A lot of assumptions in going back a millennia.

 

Doug Greenig

42:01

Well, indeed. But the fundamental thing that makes trend an evergreen strategy is what moves prices, is narrative. Narratives move prices because this is how people think, they tell a story. We’re telling stories now about AI, and I’m not deprecating those stories and I’m not trying to say you shouldn’t take AI incredibly seriously, or Nvidia isn’t incorrectly priced. I’m merely saying there’s a narrative out there about Nvidia, about AI, about productivity enhancements, about dislocations in the labor market, where you can replace a lot of customer service and outsourced activities with technology. It’s a big narrative out there.

 

Jeff Malec

42:53

You can have two guys, a cat and a dog and AI does the rest.

 

Doug Greenig

42:57

Maybe. But that’s just an example of a narrative. There was a narrative about inflation. There are narratives about the pandemic, and narratives move markets. Now what happens when narratives start to change? Or get definitively subscribed to, so that, kind of, in a sense there’s no one left to join the ranks of the believers. What tends to happen is something new happens, and the narrative changes. And there’s usually a burst of volatility, right around those narrative turns, the narrative corners, if that makes sense. And it is that burst of volatility, which is so critical to trend following. If you don’t affectively take profits from that jump and fall, you lose half of your Sharpe ratio, or approximately half, from trend following. Um, and it’s a kind of brilliant insight into it or summary of it. It’s about, in a way, Minsky moments occurring in many different contexts. You have a narrative, you have a trend. Oh, no, the trend has changed. There’s a burst of volatility. Now maybe, ride the new trend.  And it doesn’t always work that way, but it does enough of the time that trend following does have a pretty decent long term Sharpe ratio in light of its positive skew.

 

Jeff Malec

44:37

I was arguing with someone on Twitter about that, like, I think we publish something of here’s the trend over the last 20 years and was like average 6% right, this was the normal indices average 6% drawdown of 18 and someone’s like this thing sucks why do you want this one? Like if you could get a positive carry of 6% for something that performs and an O8 and 22, right, that’s the Holy Grail, that’s what you’re looking for. Everyone else is paying carry for that insurance.

 

Doug Greenig

45:05

I know I was a little bit dumb because, at certain points, I looked at trend early in my career and I was accustomed to higher Sharpe ratio strategies that had the tail going in the opposite direction.

 

Jeff Malec

Yeah.

 

Doug Greenig

And I was kind of unimpressed by, you know, a Sharpe ratio, .7, .5, .4 and a positive skew. And then over the course of my career, I kept seeing the unthinkable happen. I kept seeing dramatic tail events typically related to leverage, but again and again.  There was a pandemic, then there was over stimulus and a tightening, and you have all this stuff going on, and it’s a very powerful thing to combine volatility synthesis, through trend following, with these other forms of investment, where you’re kind of betting on the continued growth and good health of the world.

 

Jeff Malec

46:15

Yeah. Right. I can give you a 50 Sharpe strategy, right, or buy today and sell when profitable. If you just marked it to market on the on the end of the trade, you’d have a perfect Sharpe but a lot of volatility in there. So a few things back to pop in my head. Do you think the US is right for saying the power of trend power of you guys are these narrative turns, so question one, are you saying you need to capture the early part of that turn, to keep that Sharpe high?

 

Doug Greenig

46:48

No. As a trend follower, it’s very difficult to get to the early part, it’s very hard. What you need to make sure is that you don’t get ruined at the early part of the narrative turn.  Just think about it, you’re doing trend following and you’re probably going to be quite big as the trend develops and in the late stages of the trend. Trend followers will stay with things longer than other people do. Because other people may have anchoring bias. And they may think that a one and a half percent 10 year Treasury is as low as it can go, you know, I shouldn’t use that example, I’ll use the example a 3% 10 year treasury, or 4% is as low as it can go, it can go a lot lower than that, as you’ve certainly seen, in other countries, it’s gotten very low indeed. And so trend followers will stay with things for a long, long time, you know, until it turns. And then the problem is, if it turns when you’re large, okay, you can get very hurt with that initial part of the turn. However, if you’ve detected an increase in volatility and shrunk your position very quickly, around that turn, that gives you the protection, so you don’t lose all of your gains. You’re probably going to lose some of them, but you don’t lose all of them.

 

Jeff Malec

48:19

What do you mean by gains? Your entry point?

 

Doug Greenig

48:22

The profits that you made in this extended trend. And so if you lose some of them, that’s life. But it’s actually easy to lose.  You can just do an experiment where you don’t do this volatility – profit capture method. If you don’t do that scaling, you can show that you will tend to lose quite a lot on things when things turn instead of a more modest amount.

 

Jeff Malec

48:46

So are you guys, and some people would derogatorily call this, volatility targeting? Would you agree/disagree with that, that this is volatility targeting?

 

Doug Greenig

48:57

No. This is volatility scaling in individual markets.  It’s done very rapidly using short term measures of volatility. Volatility targeting is when you try to make sure your portfolio has the same vol all the time regardless of signal strength. That’s a different story. If you don’t have, if you don’t have, much signal strength, we make our positions essentially proportional to signal strength. Okay, you know, the risk we take in a position proportional to signal strength, and so in individual markets, we don’t target vol. In the portfolio as a whole, we have enough different markets and enough different trends that actually we are able to achieve the advertised volatility over six-month periods and three-month periods typically, but in individual markets we can be very small, and we can be reasonably large up to certain limits.

 

Jeff Malec

50:02

And you’re achieving that target vol by just how you’re combining them and what you’re risking per trade, you’re saying?

 

Doug Greenig

50:08

It’s the overall combination, it’s the overall combination.

 

Jeff Malec

50:12

Yeah I think the derogatory part is people saying okay, you’re cutting you’re right trend wants to let profits run. If you’re vol targeting, you might be cutting positions short, not letting them run. So, right.

 

Doug Greenig

50:24

But it’s a misnomer. The trend as traded by good CTA is not about letting profits run. It’s partly about letting profits run and it’s partly about recognizing when volatility has risen. Okay. And when narratives and price action are about to turn.

 

Jeff Malec

50:53

I want to circle back, when we’re talking about these narratives, and what drives trend in general. Do you think the move in the US, right, we have these prop firms, we have high frequency trading, we have co located servers at the CME, do you think all of that infrastructure has allowed US firms to kind of remove the narrative and there’s more computerized trading versus some of these alt markets where it’s less prevalent?

 

Doug Greenig

51:20

I would say that in the developed markets, the unpredictability and choppiness is pretty extreme. And it’s certainly true that in markets like electricity, in markets like, you know, emerging market interest rates, you see, in general, more directional movement relative to the amount of chop that’s there. The way to visualize this is to imagine you’re going, let’s say, from the lower left to the upper right in some markets. You have a price graph. And in some markets, you could imagine going there, and there’s a big directional movement, a big change from beginning to end. And the wiggles are not too extreme. In other, in many developed markets, the amount of up and down, back and forth, and volatility that gets you nowhere, is quite high, you know.  And so the alternative markets tend to be a little better. But I should point out, of course, some developed markets that are very efficient that can sometimes trend magnificently. There are periods when the US Treasuries trend at times, you know; certainly we’ve seen a pretty strong trend in US stocks, especially, you know, The Magnificent Seven. But in general, more operationally difficult markets with fewer speculative players, I think they tend to do a little, they tend to do a little better.

 

Jeff Malec

53:10

And now with these 500 markets, and you said, you’ll scale by signal strength, what does that risk per trade look like? Are you going, everything’s 10 bps? Or is it up to 1% of the portfolio? What’s the range of possibilities there?

 

Doug Greenig

53:24

Oh, in general, in general, it’s pretty small per market, because you have 500 markets.

 

Jeff Malec

53:35

Right, that’s what’d I’d assume. If you had 10% on –

 

Doug Greenig

53:36

But there will be kind of clusters, for example, European electricity. Okay, you have Scandinavian power, you have French, you have German, US, Spanish, okay. You know, you have all these things and you have the inputs, you have Dutch natural gas, you have UK natural gas, you have this stuff, you have European carbon emissions, okay. Then you have US power, which is a different animal altogether. But that European complex, it will tend to move together collectively, that can be a decent sized part of our portfolio. That could be just the positions that you have on at a given moment in European related power markets, it could be a 4% annualized vol position, which is meaningful in a fund which has 10% annualized vol. By the way, you can’t just add the vol up, as you know, because the correlations aren’t perfect. That’s why there’s a multiplier.

 

Jeff Malec

54:44

Yeah, that goes back to your risk days with the interest rate drops until they do become correlated.

 

Doug Greenig

54:50

The thing is the stuff that we have, yeah, is less prone to that. French electricity is not prone to get correlated with Latin American interest rates, you know, which is not that prone to get correlated with base metals in China. The markets that can really correlate and de-correlate quickly are actually some of the big developed market themes like US Treasuries, you know, developed market stocks. They can go to correlated and anti-correlated and go to extremes very fast. Less so, where I play.

 

Jeff Malec

55:36

Why not do this? Right, how many listed equities are there in the world? 50,000? Let’s call it 20,000. Why not delve into trading individual equities? Or do you?

 

Doug Greenig

55:48

We don’t do that. We don’t but this is an idea some CTAs have explored. The first thing about individual equities is you need to limit yourself to a liquid universe. We are at the end of the day trading liquid assets that are operationally difficult. The trick is not trading some crappy future that you’ve never heard of that kind of trades by appointment almost in Chicago.

 

Jeff Malec

56:19

Bonds, muni bond futures back in the day.

 

Doug Greenig

56:24

The Widowmaker, I think they called those. That’s not the idea. The idea is to do the work so you can trade freight, Chinese commodities, and some of these, some of them are more liquid than others, but they’re all within the realm. So you’re not talking about gazillions and gazillions of stocks, it would be a smaller number that would reach the liquidity requirements. However, it’s legitimate to ask why don’t you do those? The first thing is the common factor in equities driving them is very high, factor one, beta is a very big component. Number one. Number two, most people come to CTAs looking for a different set of exposures than equities. They have equity managers coming out the wazoo with every single style on the earth. You mentioned it.  All the way from quant equity long/short, discretionary equity long/short, discretionary long situations, stat arb you know, five to 15 day hold, and high frequency, which you know, which in many cases is sort of merged with market making. You have all this stuff going on in the equity world.  And, you know, we want to compete where we think we have a little bit of an edge. I’m not sure we do in equities. But the cash equities, there are angles people can take, it’s not an idea completely dismissed.

 

Jeff Malec

58:07

Yeah. But you do have stock indices in the portfolio.

 

Doug Greenig

58:13

We have some ETFs that expressed sort of …, you know, like an ETF for Vietnamese market, that sort of stuff, it’s a little more consistent with –

 

Jeff Malec

58:33

Right, you’re not just long Nasdaq futures.

 

Doug Greenig

58:37

Now, by the way, it seems to me in retrospect that just being long Nasdaq futures is not a ridiculous investment strategy, I mean.

 

Jeff Malec

58:48

Or just Nvidia itself.

 

Doug Greenig

58:51

You know, I find it very easy for people to be dismissive of things and say well, you know, it’s not going to be that easy in the future and in equities. I don’t know, it’s the US equity market, and the US economy is different. I remember a friend of mine, who is a public intellectual in China, kind of a well-known guy.

 

Jeff Malec

59:21

That sounds dangerous but go ahead.

 

Doug Greenig

59:24

He’s a good guy, and he was there at Berkeley with me. And he was explaining why he thinks their government is very good and efficient at what they do and in comparison to sort of the messiness of Western democracies. And, you know, he made some good points. But then he said, the thing you have over us in the US is you have the best companies in the world. And he said, nobody can replicate that. They’re innovating so fast and so hard that it is unlike anything else, and that the world is going to become a bipolar world. You’re going to succeed and we’re going to succeed too, but kind of for different reasons. You know, our government is going to drive some of our success, and your private sector will be your crown jewel. And we see that those big tech companies have kind of reached a level of size and excellence and innovation. They’re just shocking.

 

Jeff Malec

1:00:23

Yeah, they’re bigger than many economies. Right? Many of the things you’re trading, Vietnamese whatever.

 

Doug Greenig

1:00:31

Exactly. Exactly. It’s a remarkable world, but it’s also an unstable world that is developing. Europe isn’t doing that well, okay. In terms of the geopolitical situation, the US may be absolutely dominant economically. But our ability to be the unipolar power, determining events everywhere, is smaller than it had been and so it’s going to be a very complex world with a lot of macro trends. And that’s kind of where we come in, and other CTAs, you know, to exploit those.

 

Jeff Malec

1:01:18

I muted myself sorry. I said, I love it. I think, well, we can leave it there unless you’ve got any last points you want to throw at me.

 

Doug Greenig

1:01:28

Well, I want to thank you for this enjoyable interview, and the opportunity to talk about what I do. And so I appreciate it very much.

 

Jeff Malec

1:01:36

Thank you. We never got into the official Florin Court. So give me the quick 10 minutes on how it was founded, where you guys are, you’re in London, Abu Dhabi. Give me a quick five minutes there because we never got into the details on the firm.

 

Doug Greenig

1:01:49

Okay. So, the Florin Court Capital program began in 2017. The firm was really put together over the prior year or so and, you know, we have about 2 billion in assets under management, give or take. And, we have about 24 people.

 

Jeff Malec

1:02:16

Is that quite small to you, 2 billion based on where you’d come from?

 

Doug Greenig

1:02:23

It’s not that small, it’s a little small, but when you have, as I was going to say, about two dozen people, we’re nice size. We have offices in London and Abu Dhabi, the London office is a little larger, but it’s not a lot larger. So we have a real presence in Abu Dhabi, with you know, trading, research, everything there as well. I’ve got two partners, amazing guys. David Denison and Anthony Vinitsky, Brummer was our seeder, as I mentioned, back in the day, and still is.

 

Jeff Malec

1:03:04

They’ve been happy with that one. Where did the name come from?

 

Doug Greenig

1:03:09

Ah, yes, when I came to London, I was very intrigued by the place. And I found a really interesting place not that far from the city of London. It was called Charterhouse Square and it’s one of the most ancient parts of London. It was just outside of the old city walls and there was a very, very old monastery going back I think to the 13th or 14th century, on that square. There is an apartment building that is the residence of Hercule Poirot in Agatha Christie. It had curved windows. Anybody who remembers the television version of that series might remember this building with the curved windows, it’s an art deco building from 1930s called Florin Court.

 

Jeff Malec

1:04:06

I love it. I just watched Murder in Venice, that latest one, on the plane the other day.

 

Doug Greenig

How was it?

 

Jeff Malec

I think the worst of those ones with him but still pretty good.

 

Doug Greenig

1:04:19

I don’t know if they had Florin Court or not in this thing but on the television thing you see Florin Court all the time. It’s amazing because this quiet place is very quiet, a nice place. Off to the side, but not far from the city of London since it’s close to Smithfield. Which is a very lovely place to live and that was the origin of the name of the fund.

 

Jeff Malec

1:04:46

And now I’ve got the title for the pod, the Billion Dollar Manager, named after an apartment building. I think that’s a first. Well thanks so much, Doug, it has been awesome. Best of luck with everything. And I’ll try and come visit you in London or Abu Dhabi. Would be fun since I’ve never been.

 

Doug Greenig

1:05:08

Well, either way, you’re entirely welcome. And if you come to London I’ll show you Charterhouse Square and Florin Court, we’ll get dinner nearby and if you come to Abu Dhabi I’ll show you all the wonderful developments taking place in the UAE.

 

Jeff Malec

1:05:24

Lets do it. I love it. All right, thank you again.

 

Doug Greenig

Thanks.

 

Okay, that’s it for the pod thanks to Doug and Florin Court. Thanks to RCM for sponsoring thanks to Jeff Burger for producing. We’ll be back when we’re back, peace.

1:05:50

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1:06:12

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