In this revealing episode, Jeff Malec sits down with Grant Jaffarian (@GJaffarian) from Crabel Capital Management to dissect the current state of trend following. They explore the declining performance over the past 6 months, challenges in maintaining positive convexity, and the critical need for innovation. Grant offers candid insights into how trend following has evolved, why its sharpe ratios have decreased, and why he remains optimistic about its future. From discussing market execution nuances to quantum mechanics, this conversation provides a deep, unfiltered look at one of alternative investing’s most intriguing strategies. Whether you’re an investor, researcher, or market enthusiast, this episode offers a provocative examination of trend following’s past, present, and potential future. SEND IT!
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From the episode:
Check out the complete Transcript from this week’s podcast below:
Is Trend Following Dead? (Again…) A Deep Dive with Crabel’s Grant Jaffarian
Jeff Malec 00:59
Hey, Grant, how are you good I just saw you. Was that yesterday or Wednesday? Wednesday? It all
Grant Jaffarian 01:07
muddles together these days, doesn’t it? I think it was Wednesday. Yeah, Tuesday, Wednesday.
Jeff Malec 01:11
Tuesday, Wednesday. And Austin will throw a quick shout out to Meg Bodie and the talking hedge event. They’re great events, if you like what we talked about on the podcast. It’s basically two days of all sorts of conversations like that. So shout out to Meg and talking hedge
Grant Jaffarian 01:29
Absolutely.
Jeff Malec 01:32
And so you had some, I don’t know if I’d call them hot takes. They were getting hot. They were warm takes on your panel that I flagged you right away. I’m like, All right, we gotta, we gotta we gotta expand on those because you didn’t have enough time up on your panel. So we’ll dig into that. But, uh, before we do, give us a little personal background. Yeah, I I know the story, but tell the listeners how you got into this industry and and where you’re at and all that good
Grant Jaffarian 01:56
stuff. Oh, wow. How I got into it? Well, uh, Boy, I’ve been sort of adjacent and or involved in the men future side for a while. 30 years i My first job was a runner on the Chicago Mercantile Exchange in high school. So, and that was really an extension of my father. My father was a trader on the CBO for Chicago research and trading. That’s an old, old name, probably for some before there was HFT, there were some pretty fantastic option shops. CRT was maybe top of the list for a while there in the 80s. He was a trader for them. So I was familiar with futures from a very early age. After I ran I went to college at Wheaton College outside Chicago, and ultimately, then I just wanted to trade right away, so I joined a small trading shop, actually out of Belgium, called analytic Investment Management. Luke von Hoff was the was the founder there. I think he’s still trading. I haven’t spoken to him in a bit, but anyway, that particular shop was folded into robico At some point, which folded the shop after that. Long story short, I ended up at my father’s firm. He is the founder of efficient Capital Management, which is also Chicago based. I think they’re in Warrenville, the western suburbs of Chicago.
Jeff Malec 03:13
Ultimately, love that nice, big office you see off the highway. Yeah, exactly. They have a sign right off 88 there, if you’re from, right? I drive by it, I’m like, come on. Are these guys doing that? Well, they have this whole building here. Come on. Well,
Grant Jaffarian 03:24
they’re great. They’re fantastic. Yeah, no, it’s, it’s still there, yeah, that’s, that’s their building. They’re, they’re still around doing great, great work on the managed future side, multi manager, allocator, I ultimately, I was the CIO there for a number of years, and then in 2012 I left to form an early manager seed or so. I started doing early stage manager startup, sort of seeding. Worked with a couple groups throughout the space. Ultimately, I think we seeded maybe 10, if my memory serves. I was joined, actually, in that operation by Rick russon, who was formerly at Rotella and Chesapeake, and now is the CEO with us here at cradle Capital Management. So we did alphature together, which was acquired by crabble in 2014 and then I, then I started doing research again, and that’s when it got really fun. We launched our trend find product advanced trend at crabble in 2014 been there ever since, and it’s going to be hard to leave. We just have a lot of fun building product over there. So that’s the quick summary.
Jeff Malec 04:25
I love it. Let’s give a quick shout out to Rick if he’s going to listen. Hey, buddy, haven’t talked to you in like, a year and a half or so, but Let’s reconnect. And you mentioned CRT and all those old Chicago firms. I’m dying to read a book. Nobody’s going to do it. So maybe I have to do it about like O’Connor and CRT all those groups, like, if you just just the tree that came out of that, and all the billion dollar prop firms and hedge funds and managed futures groups is enormous to me, right? And it’s like nobody’s told that story. We touch on it on a few podcasts and whatnot, but just the O’Connor side alone. And I hadn’t even thought about CRT and all those different options groups. A lot of them were equity options that became prop that got back into futures. Some of them were pure futures. So I’m preaching to the choir, but like, that’s a little known story that needs to be told eventually. Well, I think
Grant Jaffarian 05:14
a couple people told it. Obviously that was before my time. I’m far expert on their legacy. I was still sort of, well, I graduated high school in 97 so they were sort of their prime. Was was over at that point, but I think Mark Richie was featured one of the two brothers, right? Joe and Mark Richie found it. He was schrager. Featured him in one of his trading wizards books as well. So there’s a little bit of the story out there, but it’s a good one, and it’s not told enough, that’s
Jeff Malec 05:40
for sure. And they’re, they’re getting old as my I’m like, we need to write all these people that were there. We need to interview them before they’re before they’re gone. So very sorry. No,
Grant Jaffarian 05:51
no, no, you’re not wrong. But anyway, yeah, and touch
Jeff Malec 05:55
a little bit on the emerging manager. So I won’t say the event we are just at, but some events, I’m on these emerging manager panels, and it’s like talking with some institutional allocator they’re never going to actually allocate to emerging as I would consider emerging. So where you separate those two, like emerging, evolving seed, like, how do you view that? And what were you guys doing back then?
Grant Jaffarian 06:22
Ooh, well, in fairness, I’m a little bit removed from that, yeah, obviously being a cradle for some time. But I think one of the reasons Rick and I were so excited to join a group like cradle was because they offered a lot that was becoming increasingly difficult for early stage managers to access. Obviously, they’re always going to be the exceptions, right? You’re going to be, I mean, if you’re world quant spinning out a millennium, that’s a wildly different sort of scenario. Then perhaps starting an early stage, let’s say, managed futures fund, depending on your legacy and your relationships. But the hurdles are serious. Obviously, institutions are going to look for your counterparty relationships. It’s hard to secure those with name brands they like. If you’re small, let’s, let’s maybe even go so far as to say impossible. So you’re, you’re sort of recruiting assets from a different pool to begin with. It’s much more difficult to get going. You’re a bad six month stretch away from not having a chance ever. Then of course, when it gets down to the execution level, do you really have the sophistication? How do you access these markets? The micro structure of markets has changed dramatically, post Oh 809, financial crisis, and it’s just very, very difficult. So there’s a lot we could talk about there, and it’s not, yeah, why it’s more challenging, but yeah,
Jeff Malec 07:36
some of the we’ll save that for later. But my frustration is that, and maybe it’s my naivete of like, people talk about investing and emerging like, you have to have 2 billion, you have to make all these checklists. I’m like, Well, that is that emerging? Like, and you’ll have these investors who think that, these managers who, like, I have 25 million, I’m emerging. Can you look at me? And there’s, there’s just no way an institution is really going to look at them, right? No. So they need to come on a platform, something like that, where they can get can build out
Grant Jaffarian 08:12
better scale. Yeah, that’s definitely an option. And
Jeff Malec 08:15
so you touched. Let’s talk through cradle. I still have a dream that someday one of you or Rick will get Toby to come on the pod, but that’s probably a pipe dream.
Grant Jaffarian 08:25
Well, I mean, we’ll throw it out there. You never know, but, yeah, he’s got, but
Jeff Malec 08:29
tell us, like, the legend of Toby and what he built, and give us the quick rundown on cradle before we get into trend being dead.
Grant Jaffarian 08:36
Yeah, yeah, for sure. And I’m pretty sure you’ve had Michael pomada, our CEO, on the on your pod before,
Jeff Malec 08:40
right? I have not went, No. We were trying to get that done and didn’t get that done. So we’ll get Michael at some point. Yeah, yeah,
Grant Jaffarian 08:47
no, no, for sure, right? Toby. So obviously, you know, I have interacted with Toby a little bit up until joining the firm, and then, obviously, quite a lot since, but so I might have some of the details wrong, but he was a floor trader himself. He spent a little bit of time trading with Victor Niederhoffer, and overlap with a bunch of folks that have done some really successful stuff in our space as well, left to do his own trading. He initially founded crab in Milwaukee, which which I believe in his hometown,
Jeff Malec 09:19
and not a hotbed of hedge fund activity, which was always cool. No, no.
Grant Jaffarian 09:22
But you know what’s interesting, talking to folks that aren’t from the Midwest or Chicago, like you and I, people don’t realize how close Milwaukee is. I mean, it might as well be a group of Chicago that’s insulting to Milwaukee. I don’t mean that literally, but it’s
Jeff Malec 09:34
it’s close enough. Yeah, yeah. I know people who commute from Kenosha, so yeah, it happens absolutely, yeah,
Grant Jaffarian 09:41
for sure. But anyway, his, I think he was quite different from what we were seeing in terms of new hedge funds in the in the early, say, 90s, late 80s, because they were predominantly of the turtle trading generation of sort of long term trend and Toby. Not, he was very much an intraday trader. And really, I think he was a pine and pioneer in short term trading, in thinking about markets in a very quick fashion. How can we take advantage of maybe minutes hours, maybe a day or two at the most, and developing patterns in a systematic fashion to exploit those inefficiencies? He was very much in my in my opinion, at least a pioneer there, and we hopefully remain one in terms of our core products. Our core products even flash forward 40 years. Almost 30 years remain intraday in focus. Our Multi Product as an example, which is our flagship, has about a one day average hold duration. So we certainly do trend. I think we do it in an interesting way. I’m involved in that product, as are all of us on the research side. But our bread and butter from the very beginning, thanks to Toby, was really around short term trading, which we really broke into momentum and reversal trading with short term patterns. And
Jeff Malec 10:55
did that like ramp up to high frequency trading, I could, did it ever get into high frequency and radio wave towers and all that, or it was like up and up to that limit where you had to start spelling spending 10s of millions of dollars to compete? Well,
Grant Jaffarian 11:11
candidly, we do spend $10 million to compete, but it’s not because we’re putting in radio towers and trying to launch balloons or satellites and get a little bit faster running our own cables across the Atlantic. We don’t do any of that. We get fast enough so that we’re not sort of the sucker at the table. So for instance, our latency now on major exchanges is down to low double digit microseconds. But the reality is, I think some of the HFT community is faster than we are there, but we’re fast enough that that they’re not going to scalp us. They’re not going to take advantage of us. That’s advantage of us. That’s extremely important. We’re not doing the hundreds of millions of dollars a year like they are, to shave off one or two microseconds we’re getting in the in the zone that we can do with maybe the 10s of millions number and not be taken advantage of. So that, I think creating a bifurcation between what is HFT and what is directional trend. Directional trading is a nuanced sort of conversation. We are definitely not high frequency traders. I think some of the ways you could maybe create a difference between the two avenues would be maybe in in sort of throughput rates, and also maybe an inventory. For instance, high frequency, high frequency traders are not going to maintain very large inventories. They’re not taking long term directional bets. They’re sort of in and out very quickly. So they might do, I don’t know, 1000 trades over the course of a day, just making up numbers, right? And they might not have more than 10 contracts on on at a given point in time. They’re short 10, they’re long 10, they’re long five, the short five, and they go back and forth, and they create quite a bit of volume, but their actual absolute position at any one point in time is relatively small, so that ratio of inventory to transaction is very low. Whereas we’re directional takers, we’re going to take bets. We’re going to hold it maybe for a couple, at an extreme, couple seconds, but generally, we’re going to hold trades for about a day on average across the entire portfolio, which creates a very different ratio of inventory to trading. It’s a much higher ratio.
Jeff Malec 13:09
Just the fact that you call your positions inventory is interesting to me, right? Like most people are saying positions and my whatever, that’s an interesting fact me, like in the high frequency guys even probably view it more as inventory, like we have this stuff we have to get off the shelf. We don’t care. We don’t care what is on the shelf. We just want it off the show. Yeah, right.
Grant Jaffarian 13:30
They don’t want risk. They don’t want to manage it. Whereas we are in the business of taking risk in a directional way, and I think in a lot of ways, that’s what creates the convexity and the skew that we’re going to talk about and the benefit data perspective to institutional portfolios. So you got to take that risk to benefit the portfolios in the way we’re trying to. I think what you’d find reasonably often with the high frequency trading community is they’re not particularly interested in direction taking even for seconds, minutes or hours, because it just opens up too much risk. They’d rather not so to a
Jeff Malec 14:02
detriment. I think you hear these stories in the option markets, especially where, if it gets out of a certain band, all the Susquehanna, all those guys, kind of pull back right, just say, I’m off. I’m out for today. I’m out for this hour, whatever it is. And that creates these kind of air pockets where things can start to jump around. Yes,
Grant Jaffarian 14:20
yes, we is playing a role in what’s happening on the managed future side and some of the difficulties that it’s facing. Absolutely.
Jeff Malec 14:28
We’ll dig into that. I have one more question on the short term side, the I’ve argued before, and I think you’re about to tell me that I’m wrong, of like, well, if you’re holding days to weeks, like, what does it matter what your latency is, right? Like, how do you talk about that? How do you think about that? Of, like, it always matters. And you’re probably gonna say, even on your Trend holding for weeks, it still will matter.
Grant Jaffarian 14:51
Yeah, I am gonna say that. Well, maybe some simple math, just to try to get a sense of the numbers here. Just ball. Numbers. So let’s, let’s say, as an example, you’re a long term trend far that does about 1000 round turns, so 1000 contracts traded per year in in your trend following product. That’s not a million dollars. Let’s say, Okay, so 1000 round turns per year. I think generally, trend is a little slower than that these days. So these are ballpark numbers. Let’s just make it simple. Yeah. So let’s suppose 1000 round turns per million dollars of invested capital. Well, we know a tick in the s, p as an example, the Y Mini S and P is 12 and a half dollars. So let’s say you, you tell yourself, well, latency doesn’t matter. I’m going to just simply buy at the offer and sell at the bid. I’m going to do market orders. And let’s assume you’re at least fast enough you can, you can take the liquidity that’s offered on on the offer itself when you buy, which is, frankly, an assumption to begin with. But let’s suppose you can do that. Well, let’s say that therefore you’re willing to pay a tick slippage on entry and exit versus your hypothetical fill. Well, one tick is 12 and a half dollars. If you do that on the exit as well. That’s another 12 and a half dollars. That’s $25 per round turn times 1000 round turns. Is $25,000 into a million dollars of trading capital is 2.5% so how much is one tick worth to a trend follower?
Jeff Malec 16:14
Yeah, it’s worth two and a half percent.
Grant Jaffarian 16:17
So now, now let’s suppose you’re a trend follower, and you’re generating, you’re a really good one. You’re generating 8% returns with a 10% ball, you’re giving away two and a half percent of that, and frankly, generally, I would suspect maybe more than that, because slippage is very difficult to get to the bottom of. As an investor, I know when I was sat on that side of the table, it’s really difficult to know everybody’s going to tell you, slippage isn’t a factor, or, in fact, they have positive slippage somehow, or there’s going to be some form of a slippage assumption, so you don’t really know, but let’s suppose that they really are only paying one tick on entry and exit. You’ve cut 8% down to 5% you’re charging what, zero and 20 or two and zero, or one and zero, even, you’ve effectively halved your sharp from a point eight sharp to a point four sharp, well and sharp. Let’s talk about risk adjusted return right, right now. You wouldn’t even have that with the risk free rate,
Jeff Malec 17:11
but had. But latency doesn’t necessarily mean not crossing the spread, right? That that’s where I’ll or push back a little bit of like, even if I have the best latency, I still need, right? I still need to have someone accept my bid or whatnot.
Grant Jaffarian 17:24
Well, okay, so let’s think about latency in a really pragmatic way. So you see liquidity that you want to capture, you press the button to buy it. Latency would suggest it would take a while for that to populate in the field. So and the second you hit it, maybe you want to do more behind it, right? Let’s say 200 you don’t want to flood the market with 100 right? Now you’re going to flood it with 100 right now. You’re going to flood it with 10. That delay to get those initial 10 there. First of all, the offer could change before you get there. So you want to hit that faster. Other people might be interested in buying that at that level, if it, in fact, is a good level. But if you only do 10, and you have 90 left, the market’s going to start to vacate and run away from you. So if you’re slow, it’s going to take you longer to catch up with it. Or let’s suppose you’re willing to be passive, which I think is more often the case. You’re willing to say, Okay, I want to buy 10 at the bid because, you know, the market’s bouncing a lot around, a lot. I want to, I want to place it at 10. And as long as the the bid is relatively thick, I know that that’s a real price, but the ratio of sort of your quantity at that bid relative to the entire volume that’s resting at that bid is relevant. If you’re the only 10 that exists at that bid, you’re really kind of holding up the market at that point. And what you want to do is actually not get filled at that price, because the only reason that bid exists is because of you, because of you, yeah. But can you cancel it if you don’t have speed, absolutely not. You’re not getting out of the way of it, right? So speed matters a lot. It matters if you’re passively trying to get a price. It matters if you’re trying to aggressive price, and it all sort of steamrolls one way or another, particularly these days, because what the high frequency trading community typically does is they’re either passive or aggressive. And they will be passive if they can bounce you off the bid and ask and you’re just taking the liquidity as they provided and paying that tick, or they’ll aggress and just get rid of it. Or aggressive price. That’s the wrong price that that you’re holding up the market with. And then you’re stuck trying to get the tail end of that execution done. So,
Jeff Malec 19:19
and I think I would, we’ll get into trend now next. But I think a lot of most managers know that, and they’re using algorithmic execution, and they’re doing what they can to solve that problem, right? I think maybe you guys say, Well, we do it better in our short term, and we have our own models that do it better, but I would say it’s not an Well, tell me if I’m wrong. Like, is it a it’s a known problem, right? Oh,
Grant Jaffarian 19:42
it’s absolutely no problem, and I think there are plenty in our space to do it extremely well, yeah, whether we’re better worse than them, I have a bias, but not one that I’m going to say publicly, because we don’t really know. But what we know for sure is that our volumes are generally a lot higher than you find in the managed future space. So as an. Example, our flagship trades well in excess of 10,000 round turns per million, which, depending on how quickly your Trend far navigates the market, is somewhere in the vicinity of 10 to 20x the volume of a typical trend follower, right? So when you run a one and a half billion in your flagship, that’s like running, I don’t know, a $30 billion trend far. Plus we have a trend for on top of that, plus we have a middle frequency product we call Gemini. So by nature of the volume we trade, it becomes a really pressing need of ours. And obviously when you’re doing 10,000 round turns or more per million a tick, becomes a lot more expensive than just two and a half percent of your nav. We need to do better than that. And we do do better than that, and that’s demanded a huge investment, not just on on low latency and Co Location, which is expensive in its own right, but also algorithmically, what you do with it when you have it, which is a completely different discussion that we can also save. Yeah, but yeah. And
Jeff Malec 20:56
my last bit on all this would be, what? Why? Why doesn’t this see me? Why don’t they lower the tick size, right? Like that would be to everyone’s benefit, it seems.
Grant Jaffarian 21:04
Well, I mean, you change the tick size, you change the notional value, therefore probably, and when you do that, you just every, everything just shifts proportionally. I don’t know that that has a big impact when we’re I
Jeff Malec 21:15
guess what you’re saying, yeah. Well, not that, not that, but the, yeah, I guess the bid ask is still going to be whatever it is it might be if you made it a penny right, like they figured out in stocks a long time ago. Let’s move to pennies so we’re not right. The really active stuff, you’re only crossing a penny. You’re not crossing a quarter already, yeah. But anyway, we’ll solve that problem another
Grant Jaffarian 21:37
day. You got it. You
Jeff Malec 21:46
so trend, we were joking at the conference that let’s do a pod called is trend following dead, because every time that seems to come up in the past, as soon as people start talking about that, articles are written. It tends to bottom and things get better again. So let’s start with kind of that historical premise, and what you’ve seen in the past with like, Can trend die? Is it dead this time? What happened last time, when people thought it was dead? All that good stuff.
Grant Jaffarian 22:21
Yeah. Well, I there does seem to be a correlation between the discussion of the death of trend. I don’t, I don’t know if it counts when we that implement trend products talk about dead in hopes that we that we somehow create a
Jeff Malec 22:33
double negative, hoping, but, um, but
Grant Jaffarian 22:36
probably can’t hurt. Well, obvious. Obviously here at Crabill, we’re practitioners of trend I’m the portfolio manager of our trend product. All of us, as mentioned, we have over 20 on the portfolio management side. We all work on the trend product. We are firm, firm believers in the value proposition. This has been a tough stretch, though, I think you could certainly say over the past, when we’ve had tough stretches, we’ve had recoveries that have been very useful, even recently in 22 or 2014 or obviously, oh 809, there are plenty of examples we could
Jeff Malec 23:09
point to. I’ll give a quick back, like the sock Gen trend index is, I think at New max drawdown on time. It’s, if it’s not, it’s within 1020 bits of that. So that and a lot of managers, we both know a lot that have been on the potter at New all time, Max drawdowns, like 30 year plus new Max drawdowns. So it has been super painful. Sorry, just given the backdrop, yeah,
Grant Jaffarian 23:34
no, you’re not wrong. I think it’s, it’s important to actually say that out loud. It has been painful. It’s particularly bad right now, and generally speaking, I would guess some decent percentage of all trend fires are at their max drawdown. I don’t, I don’t think we quite are, but that could be because our drives were a little worse in the past than others. Who knows, but? But the reality is, it’s really difficult, and I think in these moments, you can’t really excuse it away or not talk about it. We need to go right at what could be the issue here, or at the very least, why we’re optimistic there’s going to be recovery to cut to the end. We are pretty optimistic there’s going to be recovery, but I don’t think it’s going to happen by just sort of hoping and sitting on your hands. I think the world’s evolved away from that.
Jeff Malec 24:18
Yeah, and that the and we’re guilty of this. Did a few blog posts and even another podcast of like, write this whole they’re not the first responder trend. They tend to show up in the second half of the crisis and oh, 822, and then they pay off on the long term drawdown. I in actually that one blog post where we were talking about that, it tends to have, I kind of caution in a paragraph like, but as this particular thing is setting up, if it’s a rip back to the upside in equities, you’re likely going to lose more before anything happens. So to me, that whole scenario has kind of gone out the window a little bit. And just curious, your thoughts of like, is that. A Pollyanna, and we’re just, oh, every time it did this, it tends to bounce back because we have this extended drawdown. I don’t know if there was a question in there, if I’m just babbling, but what are your thoughts? I
Grant Jaffarian 25:12
mean, there are a couple things that are a little bit more painful about what we’re experiencing right now than in the past, although April ended up being very sort of a different result than we expected. As an example, I think equities ended up being generally almost flat, certainly not down significantly, so from the classic managed futures Charts, where you post the worst months in the history of S, P and how trend did relative to that, don’t we? Don’t. We’re not going to see April. It’s not on that chart. Yeah, it’s not on that chart. And had, at least in our in the way that we run advanced trend, our product, had markets continued to sell off and not bottomed out on April 8, we probably would have had a very, very different result as well. And we can talk about why that is, and what does second response really mean in the context of trend, and Why might it have been different? And we don’t know, and I’m not going to speak to our particular product, I just think, in the case of trend, let’s suppose that equities didn’t bottom out on the eighth and rebound, but in fact, tripled the size of that drawdown. Would trend have ended in a different place in terms of absolute return in April, it certainly would have, yeah, my guess would be, it would have been a lot better than it ended up being. So it could have been another case, example for us of trend saving the day. But that’s not what happened.
Jeff Malec 26:30
Yeah, sorry, you were telling me in Austin, like, Okay, you had two trend followers. One that was long hadn’t reversed short yet on August 7, one that was short. Like, that’s pretty much just a coin flip of that bottom that day, and what happened to those two track records the rest of the month?
Grant Jaffarian 26:47
Yeah, yeah. No. I mean, in the case of faster responding trend, I think a lot of managers may have actually gotten net short equities by the seventh or eighth of April, but if you were not responding as quickly, you probably stuck to that long exposure, and you end up in a similar position, maybe at the end of the month. So that the time schedule of trend and how that’s evolved over the last couple of decades is really relevant to this discussion, and as is things like risk management and how that’s deployed. All of these, these things create a lot of differentiation from one trend manager to another. So to me, that doesn’t mean we can sort of look at trend and say, well, trends not behaving the way that it has historically. I think it has more to do with how strategy, the strategy itself, has evolved, and what it’s targeting, which is a little different.
Jeff Malec 27:37
And then it’s a little unfair to say it was just an equity issue this year, or even right, it was more in bonds and currencies. So we can all point to the equity rebound and say that’s was why they made or lost money. But probably the truth of the matter is, more bonds have been crazy volatile. Rates are going down. Rates going up, back and forth. It’s been seemed to me, just from afar, like trend has had a really hard problem this time, getting on the right side of bonds, when historically, they’ve generally been on the right side of bonds. That’s been like a tailwind for them.
Grant Jaffarian 28:10
It has, I mean, this gets into maybe a dangerous trend conversation around how much of trend is beta? Yeah, the reality is, a lot of trend returns are derived from capturing carry term structure, obviously being in the right direction. In that regard, when it comes to interest rates, or let’s say, the yen as another example, that has been very difficult because, of course, trend fires have been short interest rate futures, which was very rewarding, 2020, through 2024, but when bonds, around, and you don’t have a lot of movement, and they don’t capture the carry anymore, yeah, it sparks some questions.
Jeff Malec 28:50
Yeah. Roy Niederhoffer, I’m sure you read that piece. Roy not Victor, I think they put out that piece of like the next right of the this much of trend over the last 30 years was from being long bonds, short yields. The next 30 years, you’re not gonna have that carry and it’s gonna be basically, I can’t remember his conclusion, but he was like, it’s gonna look nothing like the last 30 right? Even if you just totally reversed the trend and it went straight back up, you’d make half the money, or a quarter of the money. I can’t remember its conclusion, but you agree with that. That’s what you’re saying with there’s you don’t have the caring. I
Grant Jaffarian 29:24
don’t know if it’s a matter of agreeing or disagreeing. It’s just a path dependency question. I mean, look what rates did. Gosh, I think How long did it take us? I should know this off the top of my head, but to go from essentially zero to 4% in tenure, how long did that take us? Lesson? Do you have Jeff off the top of your like, I don’t know. It wasn’t. Yeah, well, how long did it take us to go from 4% to zero? You know, it took years and years and years, right? So the path dependency is a factor here, and so if the move in rates was exactly. Identical. It was reflection of itself. Yeah, I think Roy would be right on that, of course, because you’re really not capturing a lot trend wise. If you’re moving 1050, basis points at most a year, you’re paying for that carry being short interest rate futures the whole time, that’s going to be tough. However, that’s not what happened. It moved far more quickly than that. So the trend dramatically overcame the carry expense. So I think trend is very path dependent, and now that you’re up to this level, let’s not forget some of the amazing benefits of trend, which can’t be ignored. I mean, it’s it’s extremely cash efficient. So you might not have the carry as a function of your futures holdings being short interest rate futures, but you certainly do have it on the cash side, because margins are going to be well less than 20% so you’re able to capture all those benefits of carry really, on the cash side, even if you’re giving it away on the positioning side, on an interest rate. So the benefit is still there in a way.
Jeff Malec 31:01
So let’s talk some of your warm takes that we’re starting to get hot on the panel of. Let’s start with like, the numbers that you’ve seen in the research you guys have done, of like, the decline in sharps over the years.
Grant Jaffarian 31:16
Oh, boy. Well, and again, in fairness, you know, you say some things on panels that I believe to be true, but you’re trying to make it a little bit more interesting for everyone. So I should probably hedge a little bit, but I’ll try not okay. Yeah, I think there’s some things that are undeniable that we just need to acknowledge, because it should be informing the research process and how we think about building these products to best benefit institutional portfolios, which are that’s our goal. We want to produce returns that benefit institutional portfolios. That’s why we do this at the end of the day. That’s, you know, why we wake up in the morning and want to do that. We want to benefit.
Jeff Malec 31:49
So Right? To give them something when stocks and bonds struggle, this is what they’re supposed to be. Is supposed to be helping? Yeah,
Grant Jaffarian 31:57
yeah, yeah. And if it’s not, we want to fix it while not having strategy drift, which is, you know, a nuance, okay, but, but the bottom line here is, once upon a time, and I don’t I, you know, I It depends what markets you use for your analysis, what data you’re relying on, but let’s say something that is probably reasonably easy to defend.
Jeff Malec 32:16
Yeah, we won’t hold you to these. But okay, as a general, as a general,
Grant Jaffarian 32:21
yeah, in the 80s, Turtle trading, the classic trend technique was, was probably relatively easily north of a one sharp. If we look at trend returns from, let’s say the 2000s post the.com collapse a one through Oh 809, I think you can get pretty close to a point eight sharp, you know, probably around there, some down point six, some up to one, 1.1 we have not seen sharps in excess of point eight since then. In fact, I think depending on what benchmark you’re looking at, and you know, what fees you pay, etc, and whether you’re thinking about it from a sharp or risk adjusted return perspective, from a risk adjusted return perspective, we’re probably south of point five since so that it’s almost impossible to deny the overall degradation of risk adjusted return and trend over the last 40 years
Jeff Malec 33:17
generally. And if you plotted that against the growth in assets. Is it right? It’s opposite each other. The
Grant Jaffarian 33:25
last time I really looked at those numbers, it seems to always sort of top out at what’s, what’s I’m trying to remember the numbers that it kind of 300 billion comes to mind where it’s sort of like we have 300 billion in trend or something. Has it really that much over the last five years? I don’t know, no,
Jeff Malec 33:40
and I used to do a bunch of those posts on, like, Barkley hedge was using, what’s his name, Dalio Bridgewater numbers in that trend. Number, like, right? I’m like, I don’t think. And they were 30 billion, so, like, a 10% of it was, was risk parity, not really trend. So yeah, yeah, the numbers are hard to believe to begin with, but yeah, right. And that’s one of the classic tropes of trend falling instead, there’s too much money in trend. So just talk to that for a second. Do you think more like surely, but from the 80s to now, there’s definitely more money in trend. And is that what has pushed that sharp down?
Grant Jaffarian 34:21
I don’t think that’s what’s pushing, pushing sharp down. I don’t think there’s enough assets. I don’t, to your point, you kind of confirmed what I had, what I had a suspicion about, which is, it’s not as though trend assets have grown a whole lot over the last five to 10 years, if at all. Maybe it’s difficult to know just in terms of what some institutions are doing internally, but I don’t know that we’ve seen a lot of growth, and yet the returns are more challenging now than they were pre 0809 so that would almost definitively suggest that that is not the causal factor. There are a couple caveats. However, I don’t think there’s any doubt that, as a single trend follower, managing more assets is more difficult than managing. Less assets. If you change no other variables. Of course, you manage more assets. You theoretically have more revenue. You can invest more in research. You can do more on the execution side, and you can combat that. But if all variables are held steady, and the only thing that changes is you’re managing more in assets, of course, it’s going to be more difficult to implement that, so you can’t really argue that away. You could almost make a counter example or a counter argument, however, that more assets in trend should be more helpful than hurtful in the sense that they can exacerbate the moves that
Jeff Malec 35:31
they’re like. They’re a flywheel effect. They’re pushing it one way, which is what you see every time there’s blame going around in I can’t remember the name of that guy who writes those articles, I’m like, he’s big on CTA positioning, and they’re the ones they’ve gone short equities. It’s pushing equities down. I always kind of take that with a grain of salt, but, um, from seeing what’s actually going on with actual positions. But that would talk to that the more money it is, the more it would feed into itself and push the trends further. Yep, yep. But then that’s like a Race to Zero, because then now I got to get ahead of that guy, and I got to get and I got to get out first before everyone else gets out.
Grant Jaffarian 36:09
Yeah. And again, I think trend is behaving a lot differently than it did 10 years ago, certainly 20 years ago. And so is the 300 billion, or whatever it is, that’s in trend today the same as it was 1015, 20 years ago. I don’t think it is. Certainly the volatility expression is not now. Maybe that’s a function of volatility of underlying markets declining generally over time. But whatever it is, the reality is it’s just a different sort of
Jeff Malec 36:36
expression I would I would argue those that’s the institutional investors don’t want the old 60 vol or 50, right? They don’t want that big number. They want to plug it into their models and have a and people have gotten more sophisticated. They have better risk controls. They have better so they’ve just like modernized, and when you modernize, your vol comes down. That’s it. I agree. So so your other take was, right? I’m talking about all the time that trends positively, convicts, before we get into that. I have one other thing on sharp like it shouldn’t matter necessarily to an institution, even if it’s zero sharp, even if it’s a little bit of a negative sharp, right? If it’s providing that non correlation when you need it, if it’s path dependent on those extended drawdowns, on those long losing periods, and stocks and bonds, I’ll throw in, it shouldn’t matter what the sharp is, because it’s providing that return when you need it, right? It’s path dependent in a good way there, and that’s been the biggest struggle of this period, is it’s not shown up when you need that. So now, if it’s going to drag at the same time, now I’m really ultra concerned about its standalone numbers.
Grant Jaffarian 37:56
Well, I think people are always concerned about the standalone number. And I, of course, I think you’re right. If you have something that has a zero return and negative correlation, it’s still obviously going to benefit your portfolio. But that’s unfortunately, pragmatically, not how it works, certainly not with institutions. And we know this. And I think as you know, we’ve become more sophisticated and understanding what investor needs are. We’ve had to acknowledge that reality. One of those realities is our investors are professionals, just like us. They go home to their families. They’re earning a paycheck. They don’t want to lose that paycheck. They have to go in front of their boards, and they have to defend things, and their boards are going to say, this guy loses money. Why do we have him? We’re paying him this amount of money, him or her this amount of money. Why do we want to retain this investment. So it would be nice to think that we could just simply slap the reality of diversification in front of them, regardless as to the absolute return, and that should be sufficient, but it is not sufficient, and I think that that has caused a lot of trend fires to have to evolve in a lot of these ways. We’ve we’ve discussed, you know, they cannot sustain the drawdowns as easily as they once could, because they’re forcing their investors to defend something that’s that’s quite difficult for them to defend. But don’t you think
Jeff Malec 39:11
that, like lessens the brand, so to speak, over all that like, then you’re going to move to longer term, long equity bias. You’re going to do all these things to kind of smooth the ride, that when the next crisis happens, when the next Oh, eight happens, you’re not probably going to be in the same position. Yeah. Sorry, that has a lot of assumptions in it. Of like, that people can’t pivot and change their models on on some directional change. But that’s always been my fear. Of like, from a from an allocator standpoint, I want you to do what I need you to do, and you’re kind of saying the opposite of, like, I want you to do what I need you to do, but I also want you to have a smooth, consistent, positive return when you’re not doing what we need you to do. So that’s the trick right there. Like, okay, how do I do that? And how do I do both sides of that, which seems to me somewhat impossible. But what are your thoughts? Well, you. Yeah,
Grant Jaffarian 40:00
no, no, I think you’re describing exactly what’s forcing evolution in our space. And it’s meaningful, but it’s being done, I think, in a very thoughtful, deliberate, slow way, so as to not exhibit strategy drift. Right? I think the fatal flaw, fatal flaws, let’s make it plural in quant trading, are starting with, I was going to start with number two, but number one being, you just don’t make money, right? You don’t generate returns. And included in that lump, I’m just gonna say drawdowns, et cetera, et cetera. The second fatal flaw would be strategy drift that allows your investors concerns. Who is this guy invested in this particular sort of strategy, and he or she is not running the same strategy anymore. You want to avoid both those things, but those have been to your point, I think, sort of attacking one another trend by nature of what it was, was positively convex, and I use that in the historical sense, and we can discuss whether it still is or not, and it was a much higher sharp and that we know fairly clearly based on benchmark data. So it was those things, but by nature, being positively convex, you have long, seasonless return seasons even back then. How do you defend that?
Jeff Malec 41:19
So basically, the more you look like buying an option, the more you’re going to have a return that looks like buying a lot of options that turn out useless. Yeah,
Grant Jaffarian 41:27
you can’t allow for that bleed, so that they can’t hang on to you when you finally have that payoff for them, which forces that evolution we’re talking about, and I think what that evolution has generally looked like, particularly in a heavily beta driven environment, which has been the case post financial crisis, 0809 with very minor blips, really, and I don’t even know if they’re blips like COVID and inflationary concerns circa 2020, to present. Generally, it’s been a very beta driven environment for the last 15 years more, and what that has meant is that trend followers that favor long term hold durations have been benefited versus those that are more reactionary. And that’s simply because, if you’re more reactionary to trends, and the key trend is beta driven, you’re reversing out of beta. You’re doing the opposite of beta. You’re paying for it by often having to pay that term structure carry and other factors against beta, or even equity beta, by going short it, and when it constantly reverts back to beta, everybody who was longer term and just sort of wrote it out and never flipped ends up making money, whereas you lost on the way down, and now you lost before you could get back on on the beta ship again. And so there’s been this movement towards longer term trend, away from medium term trend. And of course, that’s compounded by the best performers getting more assets, as we’ve discussed. All else equal, it’s more difficult to trade more assets than less assets, and depending on how quickly you adapt to that, a lot more difficult. And so that puts you in a position where it would be awfully nice if you could spread out your execution risk over, let’s say, multiple days or even weeks, as opposed to right now, I have to do something. And so you see that also pushing duration out, but that’s been such a steady, slow evolution that you can do it in a way that is, I think, reasonably correctly arguing that it’s not strategy drift, it’s just maximizing the sharp and then when you layer that with tighter var controls and risk management controls, which, of course, has to exist, particularly for institutional portfolios in, you know, the modern era, let’s say those things compound on each other.
Jeff Malec 43:40
And what are your quick thoughts on that? Of like there was, I’ll dig up the tweet, we’ll put it in the show notes of some tweak, saying it was like European trend, which is far controlled all that, versus old school us trend, like Jerry Parker. Now the Mulvaney is kind of the example of old school us trend, which is ironic, but right of like, they’re shooting for the sky, they’re going to have these big, volatile numbers. European trend was more concerned with var control and like, we’re going to make sure the volatility is controlled. Like, you think you can do both? Do you think you can have the volatility controlled but still have the convexity to the upside?
Grant Jaffarian 44:19
I to some extent that’s like saying there’s no such trade off between return and risk. I Yeah, you there’s always a trade off. But the flip side of it is, if you’re going to invest in managed futures, I think you really have to decide you believe in something called trader skill as well. So I think there’s room, despite the risk return trade off, which has to exist and always exists. If you want to be more long term, that’s fine. Your risk is you’re not going to be able to reverse onto risk off moves as quickly, for instance. But there are ways in which you can, you can be more thoughtful, but, but this is kind of what I said on the panel. I think the reality is trend has steadily evolved to be more palatable. Evolve to investors, and it has steadily evolved to create a slightly higher sharp and that has meant a steady evolution away from positive skew and positive convexity. And there needs to be an awareness that that is how the evolution of trend has manifested. So if you want to still be old school us, trend, Turtle trend, like some of the guys you mentioned, who are fantastic legacy folks in our space, unfortunately, I would say, if you want to talk about those folks and some of the absolutely incredible shops that exist in Europe that also do trend, I probably shouldn’t name any names, but great, great respect for all of them. One of those has won and one is lost. You know, in the Europeans have won if we’re, if we’re going to create this sort of,
Jeff Malec 45:44
you know, just well in terms of assets, or, I guess, yeah, if you put yeah in terms of track record side
Grant Jaffarian 45:49
by side, in terms of, I think, the competency of their research, that sounds insulting, of some amazing legacy talent. I just mean to say, if you look at the numbers and who’s generating the returns and and the income. You know, I think one group is has won,
Jeff Malec 46:04
although both sides are in these Max drawdowns now, which makes it such a weird, weird period. Yeah,
Grant Jaffarian 46:10
yeah. Anyway, I’m meandering too much, but I think that the bottom line here is, I believe you can be more creative and more thoughtful, but it demands an awareness of this evolutionary cycle and deciding what you want to try to provide the investor and really think about it in an very active, research oriented fashion. So to put it simplistically, wouldn’t it be great if you could have trend that still has that positive convexity in a really meaningful way that still has a positive skew, because it’s targeted, but is cognizant of the needs of our investors, who are people, professionals, just like you and I, who need to defend their investment to their board. Can you balance those two things? There’s there’s trade offs there doesn’t mean you’re always going to win, but, but I would say, from a research perspective, we definitely believe, as a shop led by Michael pomatter, our CEO, that we just have to get better. We have to get better on the research side, and it takes an active research process. So I’m not going to go and say, Oh, you can absolutely do both, and you can do it better than anybody else. It’s not easy. But I do think it starts with the mentality to believe that maybe you can. It’s just going to take a lot of work to
Jeff Malec 47:30
get there. You’re adding these pieces, and a lot of people have done this with portable alpha of like, I can’t sell this to the board. I can’t have this line item risk. Let’s slap 50% trend, 50% stocks beta. Now I’ve gotten rid of the line item risk, but now I’ve added all this negative convexity in the stocks, right? So that’s the far one side. Example of that. Let’s just throw pure beta in there to make it more palpable. And I guess on the far other side would be I’m doing research on timing or volatility filters are like, what does that look like without giving away the secret sauce of like, what can you do besides adding pure negative convexity to the positive convexity to make it neutral?
Grant Jaffarian 48:09
Yeah, by the way, those, those, I think, are really sound ways to implement trend, particularly from a retail perspective, combining classic equity exposures in the form of maybe some sort of S P, sort of latent expression with with trend. I think those are great. But yeah, I’m talking about something a little
Jeff Malec 48:26
bit despite this quarter. Hang in it, for all those you invested in it,
Grant Jaffarian 48:30
hang it. Yeah. Unfortunately again, April, you know, equities weren’t down that much. It’s, yeah, it’s not the way you want these things to start. Of course, the worst draw downs are always going
Jeff Malec 48:39
down right when all these assets flooded into those programs. Yeah,
Grant Jaffarian 48:42
exactly. Okay. I think there are a couple of things to say on what, what can you do? And again, I think it has to start with just a general curiosity and willingness to test common assumptions. And I think one of the ways, one of the reasons, I was sort of deliberately, I don’t know, challenging on on the panel for fun, was I’m not so convinced in the positive convexity of trend flying anymore, nor am I. I’m certainly not particularly convinced, convinced of the positive skew. I think it starts with an awareness that maybe, maybe that assumption needs to be challenged as a function of looking at the data. I believe, when you look at the data, yeah.
Jeff Malec 49:20
Just for my friend George, as I say, can you explain what you mean by positive skew and positive convexity? Really?
Grant Jaffarian 49:27
Yeah, yeah. And I’m, I’m not a physicist, so I tend to explain things in the simplest fashion. I’m more of a pragmatist. Positive convexity in the simplest form suggests that as things start to go your way, you add to the position it’s going my way. I’m going to do more of that, and more of that, and more of that, and more of that. You know, it’s, I don’t know, a simple example, like, if you, if you’re, if you’re Mars, and you come up with the Snickers bar, and it’s, it’s beating the classic chocolate bar. We just need more Snickers in shelves, right? Let’s do more of it, more of it, more of it. You’re creating more positive convexity around the margins and the value of one particular approach. Much. So in trend, that would look something like, wow, equities are falling. Let’s go short. And they’re still falling. Let’s go more short and more short and more short. So you create that gamma, that optionality to your expression. That would be sort of in a very, in a
Jeff Malec 50:13
classic though, that just the option becomes more valuable, not like buying more options. But I get what you’re saying on the trend. It has trouble doing that without adding more positions.
Grant Jaffarian 50:21
I mean, the way that historically, I think trend did it classically, is by having positions sort of cascade in the same direction. So you made in
Jeff Malec 50:32
different markets, but basically the same trade. Yeah, you’re trading, you’re trading
Grant Jaffarian 50:36
10 equity indices, and they’re all long, but then one of them is short, and then two, and then three and then two, and then three and four, and ultimately all 10 of them go short, and that creates this cascading positively convex orientation around equities selling off, because you are adding in the form of positions rolling over from long to short. And that is, in fact, positively convex. But, you know, as an example, in a shout out to mark Moran, I was talking to him, you know, new new Hyde Park, capital there. The other day after this event, he said, you know, var plays a role in this too. I think he’s absolutely right in the sense that what happens now, however very often, in trend, is we all have and we should var restrictions and var caps across the portfolios. You need that that’s important in no way, shape or form. Am I saying you should be a reckless cowboy with var. It needs to be controlled. But what that does is when, when? Obviously, var is a function of two vectors, right? We’re talking correlation and volatility. So if you have increase in volatility, and now you have increase in correlation, in a risk off event and positions are toppling over, what’s happening to your var, your var is exploding right into your var cap, which forces a reduction in size,
Jeff Malec 51:40
which to the people who hate that concept and trend like that just eats at their soul. It’s like, No, this is the time when it’s most profitable when, like, the voting machine is all signals go. All 10 of these are a go, right? That’s what drives them crazy. Like, how can you be reducing right into that best possible time? Yep, that’s right, that’s right. But your answer would be, I’m putting words in your mouth. Well, test it. And long term, it reduces the volatility, and it keeps returns roughly the same, and you’re better off over the long term. Well maybe,
Grant Jaffarian 52:12
yeah, I mean, I think we need to think about the implication in a more you know, unfortunately, it’s a lot more nuanced, of course, and I know you weren’t saying it so specifically. But actually, you know what this reminds me of? I’m going to take a side channel just because I haven’t same in a while. But Salem Abraham back when. Love the guy. Hopefully he listens to your podcast. I wouldn’t
Jeff Malec 52:30
be surprised he’s been on the pod. We’ll put him in on the pod. He was so good. He’s the best because basically, there’s none of this crap we’re talking about. He’s just telling stories about like, jumping over a bank in Texas. And, yeah,
Grant Jaffarian 52:41
that’s it. So back in my efficient days, I did due diligence with him in Canadian Texas, and he was telling me a story about how one of his investors was complaining about his being long live cattle Canadian Texas. Of course, he’s surrounded by cattle ranches everywhere. And he, in fact, took us on a tour of a couple of them, which I we don’t need to discuss. But in any case, he said, you know, my investors were complaining about live cattle. And he said, you know, they were doing an on site visit. He said, Okay, well, let’s go down to the steak house downtown and ask my butcher what he thinks about live cattle price. So, like, how could you keep buying this stuff? It’s at all time highs. This is ridiculous. No way is cattle worth this much? It couldn’t possibly go
Jeff Malec 53:19
higher. They know everything about cat, yeah, right. I just, I kept the
Grant Jaffarian 53:23
position, fact, I added to it, right? So they go down, they ask the butcher, you know, hey, what about live cattle? And he’s like, I don’t get it. I’m surrounded by ranchers. I’m trying as hard as I can to get my hands on beef, and I can’t. And it’s like, I don’t know where it is. It’s like, I’m tempted to, like, start knocking on doors. I just can’t get the stuff. Point being, of course, that some of the best trends are those that are running away from you. And it might not make sense fundamentally, and that’s the whole point of trend now for 50 years, and why it’s been so effective at least for 40 so does var move you away from that core mentality? And I think we know that it does. And in no way am I suggesting that that is, that is a bad thing. In fact, we have very strict bar caps on our own positions, which we monitor very tightly, in fact, on an intraday basis. So you’ve got to have it. Can you have your cake and eat it too well? There are going to be trade offs there, like I said before, but, but there has to be an awareness of what that is, what you’re controlling for. Would
Jeff Malec 54:22
it be fair to say it’s like a I’m giving up, and these are random numbers. I’m giving up an 80% year for not having a 50% drawdown, something of that nature. Like I’m right. I’m capping the I’m trying to cap the risk, but I think I’m capping the return less.
Grant Jaffarian 54:40
Yeah. I mean that would be the idea. But when you start looking at the data, and I think there are two things that are combining, but when you start looking at the data, so I don’t think it’s just var capping the data. Basically, success suggests that the positive convexity we love in managed futures is not what it once was. In fact, maybe it’s gone entirely. And. Certainly the positive skew, which we used to love, is not as positively skewed, definitely, on daily returns as it once was, in fact, last time, and it’s, I think it’s more difficult to get the stock trend index daily data. Now I’m not sure why, but anyway, I don’t know what they did with that. Yeah, but, but, you know, we, we still try to track it, yeah, um, it’s negatively skewed. Last time I checked since, and
Jeff Malec 55:21
we I interrupted your two definitions before so quickly on positive versus negative skew, we kind of come back that
Grant Jaffarian 55:28
would I mean, if you create a normal standard deviation, a positive skew, would suggest that when you look at that normal distribution, you look over to the right, that you have a lot more large, nice looking blips over to the right, and you have very few over to the left because your big winners are a lot bigger than your average losers. Negative skew means you might look great day after day after day, selling puts in s and p as an example. Yeah. God forbid that something happens and you blast out that position, because you’re going to have that big bar over to the left that looks pretty ghastly.
Jeff Malec 56:00
And that’s the classic definition of trend. They cut losses, let winners run lots of small losses, and you have these big outlier, Lumpy positive returns causing the positive skew. Correct, but you’re saying you’re now seeing it is not there in the data.
Grant Jaffarian 56:17
It’s not there in the data recently and again. What’s happening one year, three years, what are we saying? Well, I mean, the last time I ran it and again, please don’t hold me to any of these numbers, because it’s all going to depend on what benchmark you’re looking at. I’m sure some managers don’t look quite the same. Some are going to be positively skewed. Some negatively. But overall, I’m suggesting that phenomenon looks like it’s pointing more negative than positive. Overall. The reason is principally, I think, two things, one, long term trend versus medium term trend, and secondarily, what’s happening in terms of our capping? Because instead of things being allowed to run, what’s happening is a couple things. One, if you’re extremely long term, that simply means you’re more entrenched in the trend, and it takes longer, let’s say, in a risk off move, for you to switch your position over to short equities as a class, classic example, because you’re so embedded in this multi month, even maybe multi year. Look back, it takes more that retracement, we believe, and I think the data still supports that. Risk off events tend to be coupled with higher volatility than risk on slow maturing sort of asset appreciation moves. Therefore the high volatility, which should produce outsize returns for trend is entirely missed in the early stages, because you’re just too long term. And so what you’re trading for long term trend versus medium term trend is you’re trading a higher sharp with long term trend, which is quite clear, because you’re more often with the beta, and we’ve been in a beta driven world, but you’re trading that convexity potentially, and you’re trading that skew, maybe because you’re less reactionary.
Jeff Malec 57:56
But isn’t that a pro, like a lot of investors or me, would say, Well, I think that’s a problem. Like, I want that positive convexity. I need trend to do X, Y, Z, which comes back to, well, they say that, but then they really want it to have a higher sharp on their line item on it when they’re going before the board. But like in a pure in a vacuum, they would say, No, I want as much positive convexity to protect the rest of the portfolio. So like that, to me, is the big problem, like, how do we square those two things?
Grant Jaffarian 58:24
It’s it’s a very difficult thing to square as you become bigger and your investors become entrenched. I think one of the things that happened for us here at crabable is we sort of looked at this question in 2012 that sort of error, and we said, Okay, if we were to redo trend all over again. What are some of the things we’d want to see in this product? Well, we’d want it to we’d want to see a product somehow that was able to maintain that positive convexity, that positive skew. We’d love to have a product that was sort of balanced in a modestly different way. In other words, we’d love to marry our ability, on a short term basis, to think about risk management and controlling the downside with a desire to maintain that positive, convex sort of personality, a trend that we think is extremely important. I think it’s more difficult to do potentially, if you’re sort of entrenched and modestly or even more significantly successful in trend, because you open up, it’s just a different sort of mentality and trend. So we basically said, Well, how do you do that? And for us, it came down to being more dynamic in time frame expression. That’s sort of one of the key principles that we started looking at a lot more aggressively,
Jeff Malec 59:37
like based on the loose air quotes for the listeners, the trend environment like I would need to go shorter term, longer term, or dip longer to more longer.
Grant Jaffarian 59:47
That’s right, right? Essentially saying, you know, there are moments in time where probably you should definitely be a very long term trend far, and there are moments in time where maybe you need to be more reactionary, and the thought process around, well, when are those two times different? Different. You could say that that’s kind of trader skill to some extent, and that’s not easy trader skill, but that’s what we’re after. After I’m we’re an alpha based shop, so that’s what we’re trying to target. And we had a lot of legacy research that tried to do that exact thing, and so we were able to leverage some of that. But then it also is, is a willingness to say, Okay, how do you both control for downside risk, while understanding that moments of high var expression are not necessarily bad. So we took a different approach to var risk management as well. We basically said, well, we want to do two things, and we’re not convinced they’re mutually exclusive. Now we’re going to we ran a lot of tests. Obviously, we continue to do that. But for instance, we said, well, maybe we should have a wider var range. Maybe we should allow var to go a little bit higher, certainly not to the moon, but modestly higher. We will tell all our investors exactly what those levels are. They’ll know. They’ll monitor. We’ll do it on an intraday basis, but then we’ll also deploy intraday stop management when markets move against us. Can we do both? Because obviously our legacy is short term trading. We have a lot of work done on how you should think about risk management on an intraday basis. That would take a you know, that’s a different conversation. Yeah. So we basically said, well, let’s marry because we’re short term traders. We had the benefit of marrying those two things together, and that’s what we tried to do. Now, it’s not always going to be optimal. Sometimes let’s thank Silicon Valley Bank. It’s kind of a bummer because, well, no, it’s very good overall. But obviously Silicon Valley Bank was had rates shift dramatically early in the month, and they completely reverted by the end of the month. For us, that was reasonably painful, because we were very reactionary to that move. In fact, we were ready to go. It’s sort of like, okay, let’s go. Let’s, let’s, you know, maybe we’re back long rates that didn’t happen, and so we got chopped a little more than others. So it’s not a permanent winning strategy, but it’s our desire to sort of combine the old with the new and acknowledge that what we have today is not going to be good enough next year either. So how does that? How does that? Thought that was the legacy thought process that got us started in 2014 a lot has happened since then to enhance some of those central tenets that I’m describing, but the goal was, again, an awareness that, hey, I’m not sure trend is going to deliver the convexity people are looking for. Let’s make sure we do and then continuing to deploy additional research to try to get better at it. You
Jeff Malec 1:02:26
What are your thoughts on the seems the move. A couple managers have said their solution to this is go into esoteric Turkish Lira swaps and basically I’ll trade trend on non Exchange Traded stuff which still exhibits right more trendiness. Maybe it’s the product itself is longer term. So maybe you don’t have to move your models longer term. You can get into a less reactive product. So are you guys moving in that direction? Have you researched that? So,
Grant Jaffarian 1:02:59
yeah, yeah, extensively. And by the way, some of these products are phenomenal, and they’ve done extremely well, maybe 2025 aside, to some extent, they’ve been great. And I think if you’re a responsible sort of asset manager, you’re always asking the question, what are other people doing that we should be doing too, particularly if they’re doing better than us. And you know, they’re, they’re some of those trend following products have done better than us. So why is it just purely a function of the markets? And I think, and often it is now here with advanced trend, we’re a little bit different because, again, we’re our short term legacy allowed us to trade just about every market we could. We’re co located all over the world, so our execution latency, as discussed, is puts in a position where we can trade some of these smaller, esoteric Exchange Traded products, maybe with a little
Jeff Malec 1:03:49
Yeah, even that’s a seems to be like, well, you’re talking like Japanese rubber or something like that, or that’s a little more popular, but something like that,
Grant Jaffarian 1:03:57
sure, Indonesian Palm Oil mentioned the Turkish Lira as an example, Brazilian futures, some of the smaller interest rate products trading in Taiwan, etc. So it puts us in a position where you can do that, and we have done that. So as an example, advanced trend already trades 270 markets to begin with, depending on how you splice it. It could be that anywhere from 100 to 200 of those are generally found in some of these esoteric trend Find Products anyway. I you know, in fairness, they’re not going to disclose the market list, nor should they. I don’t know the overlap, and we’re not doing any OTC derivatives outside of FX. So there’s doing some of those that are unique. I i have not been so ingrained in OTC derivatives to be able to answer the question as to whether or not you know the nuances of the benefits of doing that, except to say that some of our best performing markets are some of our smaller markets, we tend to get higher, sharp expression out of markets that are relatively new to our portfolio of markets, and we don’t shy away from an advanced trend. We think that’s a. You know, that’s one of the benefits we can offer because of what we do throughout the entire firm. We can add these new markets a lot more quickly. And we do so, we basically say, well, let’s trend. Should marry all of it in as much as their exchange traded, at least on our part. That’s
Jeff Malec 1:05:14
there’s a few, right? If you believe in the concept of trend, you should do it on as many markets as as possible, right? Yep, yep, um, but that brings up the question I’d like. So you’re in Malaysian palm oil, all these smaller markets, how can you have the proper sizing for it to really make a difference to like? So you said 240 say 100 are these esoteric markets? All do 80 of those need to have profits in a year for it to actually add to the bottom line, like, what is? What does that look
Grant Jaffarian 1:05:44
like? It again, it’s all about throughput monitoring. So it’s, it’s a mark by market question that’s had has to be answered in a systematic fashion on a day by day basis. So essentially, let’s say you’re trading a small derivative market and your throughput rates go beyond our thresholds, and I, I won’t discuss hard numbers on what that exactly then, yeah, you’re right. You would, you would throttle that back. You don’t want to be more than a certain throughput or volume expression in a given market. And of course, we patrol those really carefully. We want to be hidden. We don’t want people to know what we’re doing, and we certainly don’t want outsized risk, and we never allow for that. So so that definitely is is real for us. However, we do get really decent attribution from, let’s say, the not 100 largest markets we trade. And we do try to target equal exposure to all of our markets, if we can get it. So what happens is, you could sort of take two approaches. Well, there are a lot of approaches you can take, obviously to portfolio construction, but just to overly simplify, our view is sort of the bigger markets. We can trade a lot of different ways. You can trade crude oil a lot of different ways, a lot of different expirations, a lot of different derivatives that are related to it. You can only trade some of the smaller commodity markets, maybe once in in sort of a single market, so you end up with far less exposure risk, even if you trade, let’s say front month, month crude with the same size as you do it. It’s just trade. You’re trading a lot more expirations on the crude side, as an example. So we do try to get decent exposure. And it’s it’s been rewarding, I will say that has been frustrating over the last year or two. I’d say some of these smaller markets have been a lot more challenging than they once were, and maybe that’s because they’re crowded. We sort of monitor the micro structure really closely. We’re not seeing strong evidence of that in terms of our slippage numbers or anything. In fact, our slippage is at all time lows right now, which is exciting for us organizationally, but maybe, maybe that’s part of what’s happening.
Jeff Malec 1:07:38
Flip side of that question, Do you think I’ll see some of these, right? Here’s a list of 40 managed futures, or trend follower and, like, one, right? Everyone average down 10. And there’s this one up five. So, right? As you’re saying, like, Okay, what’s that person doing? But a lot of the times my put my negative hat on, I’m like, Oh, they’re they’re doing something that’s not trend, right? They’re obviously doing something different. And it’s seems to me, usually it’s probably not a good different. So I don’t know how you think about that. Don’t throw anyone under the bus, but like, at some point there’s adding which you talked about before you have to stay true to that you’re aiming for that positive convexity. Do you think some groups are just saying, screw it. We’re managed futures. We’re not trend and we’re just going to do whatever it takes to post a positive number.
Grant Jaffarian 1:08:27
I don’t know, but honestly, Jeff, I would say probably not. I don’t think that’s necessarily where the dispersion comes from. I think for the most part, trend followers remain very much trend followers. I could be wrong in that. And again, I know cradle really well, I know guys almost not at all anymore, except for their numbers. And I’m not dismissing the point the dispersion is significant. I would guess that the dispersion is more related to two things, and those two things are timeframe selection and asset allocation mix. Yeah, I think that that is probably what you’re seeing more than anything else. There are years where, if 50% of your risk is interest rates and you’re trading zero commodities, you could have a 10% better year than somebody who has 25% risk to each of those two sectors. So yeah,
Jeff Malec 1:09:13
but that’s kind of to my point. If you’re like, someone’s at the top of the list, and they trade seven markets, and one of them was Coco, like, great. You did better. But should assets as an allocator, I’m going to warn people like, they sort of just got lucky. They were in the one, right, whatever 1/7 is that 14% whatever that is, of the portfolio was in the one best trending market. So great. They look great. But is that going to, you know, is that going to repeat itself? So that’s kind of more to my point of like, it all it always makes me raise a red flag or a yellow flag. Of like, okay, let’s dig in and see why they outperformed. And is it repeatable? And to me, it’s almost by definition not going to be repeatable, because whatever they captured there was, was something special.
Grant Jaffarian 1:09:56
Yeah. Yeah. Very much, potentially. Um. To take a case example, let’s say of crude this year in 2025 so crude finally broke out of a really tight range last year. Over the last six months, it was consolidating, and it finally rallied through the end of the year. Last year, we all got long. We all the trend, find community got long.
Jeff Malec 1:10:18
And my little it was little bat to now, and the knees got taken out. Yeah,
Grant Jaffarian 1:10:23
yeah, but I forget the exact date, one or two weeks into January, the wheels fell off. The Bat got taken out, and we’ve been selling off essentially ever since then. Well, the question then is, when did trend fires go short? Because that by itself, is anywhere from a one to 4% nav swing from one trend fire to another just in that single market, market. Yeah. So if you’re a very reactionary medium term trend, far that was fantastic for you. Probably by February, you’re getting positive attribution. If you weren’t, you might have been struggling hanging on to that long exposure all the way through early April or later. Well, think about how big of a bifurcation of returns that one market could have made, depending on your reaction, schedule and trend? So I don’t know, from my perspective, there’s enough data. I think trend typically is trend, but I keep saying I think you need to be more creative with trend. So let me try to answer that real quick, because I think I would not be an advocate for adding fundamental models to trend or just saying, I know I’m going to take all this short term stuff I have and I’m going to thrust it into the trend following portfolio, because that’s going to be this great diversified I’m sort of against that sort of just throw it in the bucket mentality. I think you need to be more thoughtful what you’re doing. But some of
Jeff Malec 1:11:34
you mean, like, I’m adding swing trading and mean reversion and all this stuff, put it into my trend model and, yeah, like, where my Trend portfolio to smooth out the journey? Yeah, yeah,
Grant Jaffarian 1:11:44
exactly like you were talking about on mutual fund side. I you know, it’s a great idea to have 100% exposure to s, p plus 50% exposure to trend, and we can do it because of the cash efficiency. That’s great, but that is a very deliberate allocation decision. Yeah, you don’t know you’re doing 100 100 100 now even, but, yeah, or 100 100 that you don’t need. You don’t need credible to make that decision. You can make that decision on your own. You have the tools. You can give us 50% and 100% equities. So to me, I’m sort of paralleling that to like, let’s add this other thing that’s alpha into this thing, because then it becomes less predictable, I think, for investors, and maybe even less predictable for you. Because it’s not as though risk parity and trend aren’t going to suffer at the same time. As an example, they could in ways that they didn’t before, just like stock bond, stocks and bonds might not be negatively correlated, just like they always happen and suddenly you have last couple years or
Jeff Malec 1:12:34
stocks, bonds trend, which is exactly so
Grant Jaffarian 1:12:37
I am generally sort of, well maybe it’s safer to say I’m kind of agnostic towards that approach. I’m much more interested in saying, Well, what can we change right now that we think when we can add value to this thing? So it means constant evolution on things like execution. I think it takes constant evolution on deploying new tools to get better at what we do already. So obviously, we don’t have time today, but the world of llms is meaningful, and it’s creating more than ripples. I think, if you’re not using some form of large language modeling now, every day, all day, for all sorts of tasks, you certainly will in the next couple of weeks, and you’re probably behind at this point. It’s a huge focus for us here at Crable. Those should be informing how you cannot get away from trend by adding different components, but rather Express trend in the way that you want it to be manifested better, and that looks like more positive skew and less significant drawdown. And that’s kind of a sucky thing to say right now. When we’re in the midst of one of the more difficult drawdown cycles, you’re not going to be able to avoid it, though. I mean, trend is trend, and we’re not trying to not be trend. We’re just trying to get better at it. And there’s a lot you can do to do that. Can do to do
Jeff Malec 1:13:44
that. Yeah, we keep circling back to it. Unless everyone shifts to that right, unless they’ve all shifted to negative skew, then trend isn’t trend. So I can almost wrap it up by like, is trend dead? Well, yes, the people who’ve moved to massive negative skew and and aren’t convex anymore, maybe that is dead, because you need to stay more on this side, more on the key. Well,
Grant Jaffarian 1:14:05
you’re saying that. Not me, Jeff. I think cars in the space are fantastic, and they are I’m probably shortchanging them across the board in all sorts of ways, because that’s not what I mean to say. I just mean to say, from our perspective, we know I get it, yeah, yeah, exactly.
Jeff Malec 1:14:23
I want to say, like we were just in Austin, so it’s like, Keep Austin weird. Like, keep trend weird. Don’t neuter it to the point where it’s just like, long, short, equity, eking out 4% returns a year. We’ll finish with some fun. Ask you, what rabbit hole Have you been on a YouTube crusade or magazines or record listing like, what kind of weird rabbit hole you’ve been down lately? Weird rabbit hole?
Grant Jaffarian 1:14:59
Yeah, I. Uh, I’ve become strangely fascinated with quantum mechanics, which is okay, which for someone who hardly remembers scientific terms to begin with, or explain to you exactly what an atom is. That’s probably a weird path, but I just find the full the whole thing wildly fascinating. I think the world of of quantum physics is rapidly changing with an awareness that things aren’t what we always thought they were. The laws of thermodynamics maybe are slightly complicated, maybe entirely refuted by things like quantum mechanics and zero point energy, and we’re finally acknowledging things like, well, gravity is a wave. What does that mean? We’ve acknowledged that for several decades now, but, but what is that? You know exactly when we talk about bosons, how do they work together, and how do you monitor them, and are they real? And is a vacuum really a vacuum, or what’s really going on? And what does this mean
Jeff Malec 1:15:50
is this, does this touch on string theory? Is that part of quantum mechanics?
Grant Jaffarian 1:15:53
No, no, no. Well, again, you’re talking to somebody who has no right to talk about any of this.
Jeff Malec 1:15:58
What I’m asking, is even more of that? Yes, string
Grant Jaffarian 1:16:03
theory, to the best of my recollection, is one way to define things that we can’t understand. So the basic premise here is, is the world is composed. And I think this is largely agreed on by by the world of science, that you have fermions and you have bosons. Fermions being matter, atoms, protons, neutrons and then electrons, circling around them that can dive down into the quarks. They have mass. They they. You can see them. You can touch them. You can do things to them. They can’t occupy more than one thing at one time. Space. Time is confined to them. You can’t stack them, as an example. But then we have all these things that we just don’t know what’s going on with them and and so we’ve come up with weird ways to describe them. And so this is the world of bosons. It’s the world of maybe zero point energy, or what some people call the ether. We don’t know, but we do know that you create a vacuum, and you get rid of all the fermions that exist in that vacuum, and there’s still energy there. How is that possible. There’s no matter. There’s no mass. And isn’t that from law of thermodynamics, there doesn’t there have to be some form of mass for some form of energy. But in fact, we know quantify, we can quantify that. That’s not the case. But the complexity that that opens up now you start talking about things like wormholes and time travel, and of course, I’m going to sound like a nut, but, but these things are becoming increasingly acknowledged as real, and we’re trying to understand them. So we start slapping names on things. Well, gravity is explained by gravitons. Well, what are gravitons? Well, we don’t know. It’s just what we’re calling this thing that we observe from this thing called zero point energy, that we don’t really know what it is. So anyway, it’s wildly fascinating, and it makes you think that maybe Marvel characters aren’t so wild, so weird, as he thought, yeah. And
Jeff Malec 1:17:45
then does that go into quantum computing? Like, if we write a vertical, if people can create a quantum computer, then all encryption goes away, and all that’s scary to me. Like, what does that look like for our space and everything? Like, yeah, that would just to me, that takes AI and, like, 1000 degrees into the future, once you get the quantum computing.
Grant Jaffarian 1:18:07
Yeah. I mean, again, I’m far from an expert on these things, but entanglement is basically the principle that things can be attached to each other when they’re not, yeah, fermion sense attached to each other. And, in fact, there is no they can be two things at the same time, yeah. Or they can be two things. You can do things like Boson coupling, and you can stack these things on top of each other in the same time space and create more energy there. So entanglement would suggest, like, you know, Google had their big breakthrough, that they think they proved the metaverse because they could do a computation that should take all of the power that exists in the universe times 10 or something, and they did it in a matter of hours. And how is that possible? Well, maybe there are metaverses That
Jeff Malec 1:18:47
did it and then passed it through, yeah, well, or it’s doing it across all the universes. And, right? Yeah. Instead of taking 1000 years in this universe, I did it and one year across 1000 universes,
Grant Jaffarian 1:18:59
yeah, instead of taking 1000 years, if you had all the power in the entire universe, and then still, it would take you 1000 years, it took them a matter of hours. How is that possible? So it was you have universe stacking on top of each other. But
Jeff Malec 1:19:15
my contention would be that you didn’t define the problem correctly, that it wasn’t 1000 pounds. Well,
Grant Jaffarian 1:19:20
I’m not a scientist, but you can see why it’s a rabbit hole, because it’s like, I don’t understand any of this. But what
Jeff Malec 1:19:25
you got any books or podcasts or things where you dive into all that,
Grant Jaffarian 1:19:29
um, I mean, what’s that guy’s name? Cal Poly. I think he’s shown up in a couple podcasts, like, I think he was on Joe Rogan and a couple others. And he what, there was a guest on Joe Rogan for inside, I listened to both sides of the ledger. I’m not particularly political, but, and he had, he had an energy device, I think, a microchip, that had actually, theoretically zero point energy, where it created its own energy without any, without any outside force. You know, you should only be able to produce energy if you put likewise. Energy into it some Yeah. You know, fission and fusion are two ways in which you can, can do this, obviously, and yet it was, you didn’t have to charge it. It wasn’t solar. Wasn’t anything like that. It was a chip that permanently refreshed itself from an energy perspective by pulling from the zero point energy field fusion.
Jeff Malec 1:20:15
I just watched the saint that when Val Kilmer died. Yeah, remember that movie? Oh, Elizabeth shoes like creating gold fusion. Oh, she was believable. Yeah, she was believable as a cold fusion PhD professor, not, yeah, you’re
Grant Jaffarian 1:20:32
talking to an MBA. So I really shouldn’t even have this conversation. But
Jeff Malec 1:20:36
no, that’s why we asked. Like, it’s interesting. Like, okay, and you mentioned Marvel. You got a favorite Marvel movie before we let
Grant Jaffarian 1:20:44
you go? Oh gosh, I don’t know. I’m kind of I think, like the rest of us, I’ve seen more than my fair share. I don’t think I’ve watched a Marvel movie in four or five years now, because they’re the same. Oh, I will say, supposedly, this last one was good. I didn’t see it. I didn’t see it either, but I will say one of the TV shows with, uh, who’s Thor’s brother. That’s, what’s that guy’s name?
Jeff Malec 1:21:04
Yeah, whatever the other helms worth. Liam, no, no,
Grant Jaffarian 1:21:08
not, not, not actual,
Jeff Malec 1:21:09
oh, Loki. Loki
Grant Jaffarian 1:21:12
Loki. So there was Loki Sean Disney, yeah, that
Jeff Malec 1:21:14
was good. That was awesome. That was really good. And Owen Wilson, yeah, yeah, that was great. They did great. So agree, all right, and I’ll make you ask you to we went dark there. So give us hope for trend following in a in a closing, a closing Epilog here.
Grant Jaffarian 1:21:32
There’s a reason why trend following works. It captures beta, it captures carry and it has the potential to capture that convexity. None of that has gone away. It might be muted, but there’s nothing else like it, and it will absolutely revert. I think we’re dealing with an unparalleled season of time, of uncertainty in the markets. We all feel it. Every business in America and the world is feeling it, but it’s going to break one way or another. And manage futures has a pretty darn good chance of capturing it. We have. We had a complete trend reset in April. That tends to be a pretty good demarcation of an interesting period to come. And I know we here at cribble are really optimistic about it. We’re actually very excited and passionate about trends, so we think it’s a good space to be in. All
Jeff Malec 1:22:17
right, we’re going to lead with that. We’ll put that to the top, thanks. It’s been fun, and hope to see you soon at the next event, sure you will thanks Jeff, All right, thanks Grant, bye.
This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.
