SI421: Taking CTAs Mainstream ft. Andrew Beer

0:01The entire equity markets have become one crazy venture capital play. And you have something that's working this year. But why? Okay, because it's doing things that you can't do on your own. And so we have to step up out of the weeds and basically make the argument that, you know, that having some tactical is good, but you know, it's also dangerous to hand the keys of that car to humans. Welcome to top traders Unplugged in market success doesn't come from predicting what happens next. It comes from being prepared for what you can't predict. In each episode, we go deep with some of the world's most thoughtful minds in investing, economics and beyond to understand how they think, how they prepare and how they decide and the experiences that shaped how they see the world. No noise, no shortcuts, just real conversations to help you think better and invest with confidence.

1:04Welcome and welcome back to this week's edition of the Systematic Investor series with Andrew Beer and myself, Niels Kaastru-Larsen, where each week we take the pulse of the global market through the lens of a rules-based investor. Andrew, it's great to have you back this week. How are you doing? Have you been? I'm wonderful and thank you so much for having me back. It's great to be here. Absolutely. I've seen pictures from your travels, so I know you've been a busy man. Speaking of busy, we will be busy today for what I am pretty sure will be hopefully a very useful conversation for not just for investors, but I think hopefully also for some of our colleagues in the industry. So we have quite a lot of ground to cover. But before we do that, and also I myself have been a little bit out of the loop traveling for a couple of weeks, so I'm kind of very interested in, in, in what came across your desk, what's, what's caught your eye in the last few weeks since I will say I have not, I've not followed the, you know, the, the industry and the markets and the news as, as closely as I normally do. So anything exciting while I've been away?

2:22Well, I think I'm going to, I've been thinking a lot about AI and because I'm, I'm, I, I don't use a lot of AI in my day to day existence. I spend an enormous amount of time talking to people and trying to understand what they're doing. But I have been talking to a lot of younger people recently, people in their 20s or 30s about what this means for you with AI and you feel a tremendous Amount of uncertainty about job futures. I mean, how on earth can you predict what job you're going to have in 10 years? And what it reminded me of was actually the 1990s.

2:59That shows you how old I am. So something very, very pivotal happened in America in the 1990s, which was if you want to get a job in the early 1990s. So I was graduating from Business School 94. There still was this idea of, I'm going to find the right company, and I'm going to march up the ranks of that company over time, and unless something's really wrong, I'm going to stick with it. And that was kind of the path to, you know, if you kind of scaled the corporate ladder, you kind of make money, et cetera, et cetera.

3:28And the stability of that was highly valued in my entrepreneurial classes at Harvard Business School. They actively discouraged students from starting their own businesses. And they said, you know, the failure rate is 8 out of 10. One guy, sort of one professor arrogantly would laugh if anybody would talk about starting their own businesses. There are a few people who did it, like Bill Ackman and David Berkowitz, had done it a few years before me starting a hedge fund. But it was, by and large, it was, you need 10 years of experience, you know, kind of build a safety net before you even think about doing it. And in the next half of the decade, what happened was the dot com crisis got so crazy and so frothy that there was a point at which, you know, that. That people could sell a business plan for $10 million, and the wealth creation was not, hey, I'm going to take a risk on this job. And I might do a little bit better economically than the old job that I had. It was, my God, I could make $10 million in six months. I could make, you know, I could make a billion dollars. And it changed the risk tolerance of a lot of people.

4:32They left their jobs, and it wasn't the catastrophe that people thought if you tried for two years to do a startup and it failed, and you went back to your own employees, they're like, oh, it's really interesting. What did you learn? That was really gutsy of you. So there was kind of a sea change in how people thought about starting businesses and being entrepreneurs. That, I think was extraordinarily healthy for the American economy. And it was easier to do it here than I think it was internationally, which is. That's sort of when you see this great inflection point with U.S. economic growth. And what I think is going to happen with AI is, you know, the business that used to require a million dollars of working capital, $500,000 of working capital. You need four people, you know, somebody in accounting, somebody doing this, somebody doing that, is now one person and Claude. And so it is dramatically in a scale, it's almost, it's unimaginably lowered the barriers to entry to starting. And so I was actually with a friend last weekend who has basically a business that helps people to kind of organize their houses and kind of go through 20

5:37years of stuff. And it's very systematic the way she approaches it. But the most interesting to me was how she runs the business, which is, it's her, it's the people who add value on a day to day basis. And there's no cfo, there's no accounting department, there's no bill paying. And this is not somebody who is like a computer science engineer by training, like my partner Matthias. This is somebody who just talks to Claude and says, how do I do this? And so I think there's going to be enormous amount of disruption. But I think what you'll see is an entrepreneurial expression of entrepreneurial hunger, which I think is again, I'm a fervent capitalist and I think this is the kind of stuff that's the lifeblood of the evolution of the economy. So that's the optimistic side of AI. If it doesn't kill us and people don't build bioweapons.

6:29No, I mean, you're absolutely right. Of course it's going to have massive changes. And we do see that. I mean, to me when I hear that, it's kind of another way of capitalism to some extent squeezing out efficiencies. Right. I mean now as you say, instead of four people, we can do it with one person. But I'm wondering sometimes, when I listen to that is, does there come a time where we have squeezed out every single ounce of efficiency and it's all priced in and there's only one way from there and that's not up, so to speak.

7:06I don't know, it just feels like that. But maybe something else comes along and makes it even more efficient. I mean, I think the nature of innovation is we can't see it coming. You know, that's the end. And I think this is truly, I mean, it's truly bizarre that we have people spending hundreds of billions of dollars to provide services almost for free. Yeah, I mean it's, it's, it's. Look on our business, you know, we've got seven people. But we function as 25 people basically just based upon the efficiency of relatively what we accept. This is the fourth asset management business that I've started. You know, the first one had 35 people, the second one was had 20, the third one had 25 or something. Those are all in the 2000s. Now you've got seven people running a business. So anyway, yes, it's going to flow through all sorts of things and hopefully people use those efficiencies then to offer services or products that again, as we'll talk about today, grows the pie.

8:07No, absolutely. So I did have a little bit of time to think about something that I thought was interesting. And you know, I've been talking a lot with Richard about complex adaptive systems every time he's on. And for me, five, 10 years ago, I didn't really think about trend following in that sense. And this is sort of a relatively new way of thinking about it, I think, at least in the open narrative. And essentially just the thing about that, we really don't know how things evolve and the impact of things and so on and so forth. And. And of course we look at it from a financial lens and how markets behave and so on and so forth.

8:49But then I was turning on the television while I was traveling and I see this story about an 87 year old lady living in Spain who gets kicked out of her apartment. Now usually I would think that happens all the time at some, you know, people just get kicked out, et cetera, et cetera. But what we know now is that for some whatever reason this particular story has just snowballed. People started protesting, et cetera, et cetera. And now they have called for a general election in Spain. And it all dates back to one 87 year old lady who'd been living in the same apartment for 70 years getting kicked out. And then suddenly you have that reaction. And I thought, wow, I mean that's a very good example away from the financial markets that things really are unpredictable.

9:44That's the butterfly wings and hurricanes. Yeah, anyways. Yeah, there we go. Anyways, what is also a little bit unpredictable but probably in line with expectation is the fact that the trend barometer finished at 52 yesterday, which is still pretty strong, even though the last few days of September was somewhat soft. So I. E. The industry gave back a little bit of money towards the end of the month. The numbers that I have for you, Andrew, is as of Tuesday, I think this week, since we're recording on Thursday, the Beta 50 is up 0.4% for the month already and up 15.27% so far this year. SoC Gen CTA Index up 19 basis points for the month of October, up 15.88 for the year. Stockton trend is flat for the month and up pretty much the same 15.78 for the year. And the Short Term Traders Index down half a percent but still up 5.78% so far this year. In the traditional world MSCI world is up 1.15% as of last night up 13.38% for the year. The MSCI World ETH so EX US and Canada is down 1.22% but up 9.5% for the year. One World Government Bond not doing so well this month. Not doing so well this year. Down 36 basis points and

11:08down 3.15 for the year. And the S&P 500 total return up about 2% so far in October and up just shy 15% so far this year. Now today some of these numbers will be relevant because we will talk about some of these traditional markets. But before we jump into that so far this month my observations are that it's very much sort of a little bit of specific market actions that are moving. Not maybe we're only a few days into to October of course, but of course you may have a different lens. It's you know, I guess fixed income is still a driving force for most CTAs at the moment to some extent. Maybe energies and one or two currencies.

11:52But is that kind of how you are experiencing it as well? Well yeah, first of all the fact that the stocks and CTANICS it was up 15.7 through the end of September. Hooray, that's a great year. It's Also, it's up 20% or so over the past 12 months. I think this has been one of the best 12 month periods of the space that I've ever seen in that, you know the knock on the space is you make money in 2022, you give it back in, you know, the first part of 2023. Like it's, you know, it's, it's always like it's a lot of people at this reduction. We'll talk about this like the two step four, two steps back. This here has been very, very interesting and, and part of the function of that is is, is when the portfolios get concentrated in a single macro theme in 2023. 2022, 23 is basically the two year treasury that kind of drove everything. And what you've seen this year is, is actually you've had two competing narratives in the market. You've had this FOMO around AI and equities. So equities have gone up, as you mentioned, with the MSCI world, but on the other end of the spectrum, you've had the spike in crude oil and now recently

13:03rising rates. And so when we look across the four asset classes, we've generally seen the best years like 2022 are when three of the four asset classes are working well. And so again, just looking at it through September, you made a lot of money in oil because you got into, you're basically buying oil in the 60s in January, you through until a couple of months ago, basically you were making money in equities, particularly like emerging markets, which had that kind of very much of an AI theme to it.

13:34And then recently it's been treasuries and rates. And so the fact that there was this money that was made then you went through a period where those kind of positions were offsetting each other for several months and then the industry was flattish and you're making money again. That's a wonderful. Sure return pattern to look at as an allocator. Now, I know we, what we want to do with the, with you in the lead, it's always good to have a professor on the, on, on the, on the podcast. So, so, so you're going to be giving us a, a masterclass in terms of how we ought to think about positioning the space and so on and so forth. But the reason why we want to talk about that, and maybe we spend a little bit of time on that because I'd love to hear your, your narrative on this as well. And, and that actually goes back to a, a recent report that came across my desk, which was from our friends up in the Nordics. Hedge Nordic to be precise. Cameron and his team had published a piece recently where lots of people were weighing in on the 6040. And, and one of the things he wrote, and I'm just going to read

14:56it out here, he writes in his introduction, he says perhaps that is why my old laminated model portfolio really looks its age. Not because stocks and bonds have suddenly stopped being useful, nor because every portfolio now requires an exotic collection of alternatives. It looks dated because it started with the answer. Here is the pie. Here's how we slice it. The more interesting portfolios today start with the question, what returns do we need? Which risks can we afford? What does our diversification actually, or where does our diversification actually come from? How much liquidity do you do? We Generally require what happens when the assumptions behind our allocation stops working. Only then should we decide how to split the pie.

15:46Cool. So who, who was that quote from? That's from Cameron. That was great. That's a great quote. Very good. So, so before we dive into to that to, to, to, to your, to your masterclass, so to speak, you have a good way of explaining the challenges with this 6040 framework. I know a lot of people have written about in the last few years and is it dead? And this, that and the other. But it's always good to hear a different take on this and so why don't, why don't we start with that?

16:20Sure. Well, so, so I think let's take a step even farther back to like what are you doing with asset allocation? Right. I mean, you know, asset allocation and building asset allocation models is not easy. So basically you think about it, you say I'm going to define these 25 or 30 or 40 different asset classes. And what you're really doing is you're making projections as to how each one of those asset classes are going to do over the next 10 years.

16:48Those are capital markets assumptions. But not even that, which is hard enough. And it's all self referential. So it starts with cash. What do I think equity is going to do over cash? Okay, the S and P is going to do this. And I mean it is, we talk about like, I mean it is art, you know, which has a scientific coating around it because you are, you are basically making 40 market calls. Even more than that, you're making calls about the correlation relationship between the different markets. Okay, nobody gets this right. Let's just start with that.

17:21Right? I mean it is absolutely impossible to make those predictions over the next 10 years. But you need a framework. So you need to start from somewhere. What I think is interesting, having looked at this, the asset allocation business a lot since the early 2000s, it has an enormous amount of what's called recency bias. And so how do you decide what the S and P is going to do over the next 10 years? Most people will look at the past 20 or 30 or 40, 50 years to decide. And what they're looking for in that data is some universal truth about the asset class. So the equity risk premium, how much should you earn over there was crew rate over time. And so again having since the period of time when I've looked at it, the assumptions are always wrong. And so you go through these periodic what I would call existential crises where okay, the assumptions were wrong, we did it Anyway, we don't want to go back and basically say, sorry, we made a massive mistake, all of our assumptions were wrong. So you get this kind of evolution. So I'll give you one example. In the late 1990s, the, there was some

18:30academics who did the first futures based return series of, of, of commodity contracts, including roles, et cetera, like that, right. And, and, and the, and the outcome of their paper was commodities give you equity like returns over decades with a negative correlation to equities. Right. The next day I'm thinking about how to start a commodity business, okay? Because I knew once people would see this, everybody building an asset allocation model would think about, okay, now I need commodities again. And that was true until you got to kind of the mid-2000s and the correlation flipped positive. And then we talked about 60, 40 portfolios. It was based upon a very, very, in historical terms of short period of time when stocks and bonds had negative correlation and bonds never went down. So I think what you're seeing right now is an existential crisis in the asset allocation world that people went, the pendulum swung too far to the easy answer, which was 60, 40 between stocks and bonds. And everybody got benchmarked to it and worked again and again and again.

19:32And now people are saying, I mean look, if you just look at bonds, right, you walked into, so end of 2021, equities have been up by 28%, bonds were flat for the year, bonds are earning zero, basically. And everybody's been talking about inflation for the past year. What do you do? You sell your equities and buy more bonds. It is among the worst mistakes an allocator could make at the very peak of the bond bubble. You add to your position. And so what you see across the space is basically people saying, how do I, I don't want to throw out the whole construction because I need a framework to work with. And the moment I throw out the construct and start with something completely new, guess what? That's not going to work either. So how do I make it incremental margin?

20:28And actually I'll talk about that in the context of the broad manager space and where I think the pitch around the space. And again, my starting point is we've got to grow to the pie. We've got to convince, we got to get the message through that this is a terrific diversifier. But how to frame what we're talking about in this space in the context of the real world experience of these allocators over the past 25 years, trying to figure out how to build Better portfolios.

20:57So let me just ask you a question before we get to that in terms of growing the pie. So my experience over the last few decades have been often that when, when people have tried, say, to invest in managed futures, I'm just using it as an example. It's not the focus of it and they get the timing wrong, they get a bit gun shy and they tend not to come back to the space. So I'm using this a little bit as a metaphor for saying what does this transition look like from the 60:40? Meaning? Because as you rightly say, there are people who are incredibly late to the table in terms of getting out of the 6040 or changing. Most of the change should happen to the 40, probably. But admitting that they were wrong is one thing. And so this transition can take a long time.

21:56And maybe it's almost like we have to have a new generation of CIOs before we can really get this transition going. At least that's been my experience often with, with trend following is that you kind of had to wait for a new team to come in and say, oh yeah, we're not, we're not bound by these mistakes or whatever, we don't even call them mistakes, but this is just, we need to move forward. So I don't know if what my question really is, but my, my, my, my, my concern is that even with all this evidence about the 6040 and now that you talk about the bonds, I mean, I'm sure you remember that probably around five years ago, at the peak of low interest rates, some countries issued like 50 and 100 year bonds. I can't imagine what they look like.

22:42Today, but they were $18 trillion of negative yielding bonds. Exactly. And people were adding bonds from rebalancing. I mean, from an investment perspective, it's insane. But, but that's the but. And look, asset allocation models have been a wonderful net positive, which we'll talk about overall, right? Human beings are terrible market timers. Like they came out of a world where in the 1960s everyone, or 1970s and 1980s, people thought you could look at a chart and basically decide whether the S and P was going to go up or down. So there's been, there's decades of. You're hurting yourself by doing this. Okay, yeah. More Morningstar used to always, you know, basically say, yes, the S and P has gone up. But, but these poor retail investors are doing everything at the wrong time. They're buying at the top and selling at the bottom. And so, and, and people are over Concentrated. So you, you know, they got personally blown up in the, in the dot com crisis in the gfc. So, so the ethos of asset allocation models is built on two principles. The first is diversification is good. We know it's a, it's the one true free lunch in France.

23:47In finance it's, I think it was Paul Samuelson, the Nobel laureate who said that. So we know if your goal is to grow your assets over time and not have catastrophic drawdowns, diversification is good. The second is the ethos is don't do anything fast, don't be rash, don't be tactical. And that was the basis of trying to look far off into the horizon and say, which is a little bit crazy in a way, but it's because it's almost saying, well, I really can't predict what's going to happen over the next three months, but I'm very confident what's going to happen over the next 10 years. But what it did with investors, and this is true of the wealth management space in the US is it said, look, first of all, focus on the whole portfolio, not the line items. And the evidence, for instance in equities is yeah, don't get out of the bottom.

24:36It does come back. Asset classes go through these cycles. So those two things have been enormously positive across the investment world. But it does have limitations. And what happened with 60Forty was that it was a bit of a historical accident in the 2000s and I'll talk about that when I have data. And it was a bit of a historical accident. It was fueled by the 20 year bond bubble because bonds were the statistically perfect diversifier to your stock portfolios for 20 years. I used to call them the super meta diversifiers. Nothing could compete with them.

25:19On top of that, you have all sorts of behavioral issues of the end clients. So I don't know if I told you the story, but somebody was asking me about because I've been critical of bonds over the past 10 years and they keep talking about statistics. And they said, so you own no bonds, right? I said no, of course I own bonds. And they said, well why would you own bonds? He said because I love the coupon like anybody else. It's the regularity of it. It drops into your account. And no, I don't sit there and say is this the right real return that I'm getting, et cetera, et cetera. There is something very human in your own money handing you money every month that you can go spend. So all of these complexities go into the process of building the models, how people end up investing in them, why they end up investing in them and how they're pitched. I think, just think what you're seeing right now is the breakdown in the relationship between stocks and bonds is really challenging. The simple, easy construct of I want 60% S&P, 540% US corporate bonds and I'm done that. And so across the industry, people are either saying, okay, maybe I need

26:25a different 40 because I still love my 60, or maybe I should pull some of the, or pull some of the 40 and put in alternatives. And plenty of investors have been doing this for 10 or 20 years anyway. So there's massive heterogeneity across there. But the underlying problem is the same which they've been dealing with for decades, which is how do I maximize returns and reduce my risk? Yeah, no, no, absolutely. Well, why don't we try and then get into the masterclass about how we could end up growing the pie at this critical time? Probably. I mean, it feels important, so it's a good time to talk about it.

27:02Right? So 26 minutes into our talk, I'm going to lay out basically I'm going to put on my allocator hat and basically say looking at the space from the outside, when you are sitting in an asset allocators of the portfolio construction seat, what do people see? And then once I think we have clarity on facts and methodology, then we can talk about how the narrative can help to ultimately grow the pie and make this a more important allocation because it punches above its weight in terms of the amounts people have in their portfolio. So from a definitional purpose, the first thing I'm going to say is when I'm talking about the space, I'm talking about the SOC Gen CTA index. For anybody who's unfamiliar with it, it's an index that New Edge, which was bought by Soc Gen created back in January 2000 and they said we're going to look at, we are going to pick the 20 largest, what we view as funds in the managed future space or strategies in the future space. And we're going to do a great surface to the allocator by giving you daily data, the average daily returns of the of of those managers and every January will change that. So you now have

28:10close to 27 years of daily data of the average net of feed returns of the big players. So if you looked at it today, you would see Winton, NHL Transfriend Links, Campbell, you know, kind of go down aspect, Alpha Simplex, Go down the list and, and so that's like the s and P500. So if you say to a typical allocator, you know, how is the manager space up through September? Most of them will say the stock gen CT index was up 15.7. If they have to do that.

28:40The reason that ends up being very, very important is because you're trying to reduce the idiosyncratic risk of a given manager and try to look at the space overall because that's more predictable thinking about how it should do over the next 10 years. And it gives you the window into how it performed in all sorts of different market environments. And so when I look at the space, so when you look at that as your starting point, there are six key statistical characteristics of the space. And by the way, I will put up the slides and all this stuff. If you're connected, not connected me on LinkedIn, please connect in. And I'm going to do it in a more organized way. By the way, this is a way in which AI has made my life much better. It's much easier to do this stuff than it used to be. But the first big statistical characteristics is what Katie Kaminsky coined crisis alpha. And so if you look at the three major crises, so when we define crisis, we mean an equity bear market, I mean commodities, if they go down, doesn't affect the whole portfolio. The driver of growth in everybody's portfolio is equities. So how do we protect against those terrible

29:47periods? There have been three major crises over the past 27 years. Sustained, prolonged crises. You had the dot com crisis, you had the gfc and then you had this kind of wonderful Pollyannish period. And then you had kind of a minor crisis in 2022 when equities went down 20%. So these three crises give you a window into how and why asset allocation models have changed. So start with the dot com crisis. We have a chart that looks at five major equity markets. Okay, so S and p went down 40%. Nasdaq went down 80%. Let me go by stats. Nasdaq actually went down 80%. Non US equity markets were down about 45%. But what we do then is we compare that to what a typical allocator might have had in their portfolio. So you've got a bunch of different bond categories, Bloomberg gold lag, US ag, corporate bonds, and say high yield.

30:47And what you find during the dot com crisis is they all went up okay, a lot because you went into the crisis with high interest rates. And the Fed's response was to drop Interest rates to the floor. So the US AG was up 30% in that period of time. And guess what? The other things you might have seen in a portfolio at the time, REITs, right? The 1990s were amazing for real estate because you come out of this year, this terrible recession in the early 1990s. The worst real estate investor in the 1990s made a fortune. So, and then, so put them into REITs and then we can make it available to broader range of investors. REITs were up 49% with a drop in interest rates. Gold and, and the broader GSCI index were both up and, and, and the Stockton ct index up 26%. This is roughly 2000, 2001. So think about that, right? Your stocks get crushed, your nasdaq, but you're saved. Everything else went up in your portfolio, but most importantly, your bonds went up a lot.

31:51Boom. Okay? That data point, that period becomes a key part of how portfolios are constructed for the rest of the decade. So now you hit the gfc, okay, The GFC happens. It's only five or six years later. You've barely recovered from the last one. The GFC hits and equities are down 40 to 50% across the board. But interest rates are already lower. So bonds don't go up, but they don't go down. So if bonds was your big diversifier, you can say, well, it preserved capital, protected capital, high Yield went down 22% because it's got a big equity piece to it. Okay, what were your two favorite diversifiers at this point? REITs because they were heroes in the last crisis. And commodities, which not only went up, but nobody owned them during the dot com crisis. But now you've had, this is the brics, this is years of everybody being bullish on commodities. The commodity super cycle REITs of commodities go down 50% each.

32:50Wow. Okay, guess what goes up again. The song CTA index goes up 11%. Okay, so when you say you talk about waves of interest, so then you get waves of interest in it. Now nothing happens for 14 years. The markets never really go through a terrible crisis next 14 years. But when it happens, it's totally different from the other crises. In that equities, it's like a flesh wound for the equity markets. They go down 20% but the whole bond area also goes down 15, 20% and REITs go down 25%. And gold, which people have been buying in the early 2010s, basically waiting for inflation to come back, actually doesn't go up. So the playbook you developed for the dot com crisis doesn't work at all in the GFC, which then doesn't really work in 2022. And guess what goes up again now? It's oil drives up the GSCI 20 something percent and CTA's go up again. So the argument on crisis alpha is the strongest argument for the space because. And the argument that I would make is it's not accidental, it's, you know, managed futures funds make money when there are big price moves away from consensus. Basically you have to have an opportunity to buy something

34:13in a. So that's why like for CTAs my term is contrarian tactical alpha. You have to be willing to buy something and then hold it when it goes, when it doubles or short it and have it go down. So it's a strategy that structurally should do well in a crisis. So I say basically say this is from a crisis alpha perspective, it's three stars, it's the trifecta of all three by the way. Can I just add one thing and that is that during that quiet period, but where we had experienced one brief but memorable event, which was I think in 2018, the volatility of all mageddon February of 18 where of course volume funds did really well and where in 2020 during COVID some volume funds also did really well, a lot of people were expecting 2022 volume would also do really well, but actually it was not the case because it was a different kind of volatility.

35:11Hence this is why you diversify, right? Yeah. Like it's. No, nobody has a crystal ball and anybody who thinks they do shouldn't be in the invested business. But, but again it's. But, but again if your focus is on a crisis, right, and you're worried about the equity markets going down 40% over the next year, I would put my money on managed futures making money during that period. Other things, there will be other things that will make money, things will be crushed that you don't expect but, but structurally it's something you want to have in a crisis.

35:41Tactical is good when you go down 80% and now remember, I mean you go down 80% peak to draw to trough drawdown in commodities, holding that with a white knuckle grip is hard. Right. With every asset you're basically saying I'm going to own it for the next 10 years underneath the hood in the managed future space. The tactical nature of it allows them. And I'll come back to the stats on that because it's very important in terms of controlling drawdowns okay. Okay, cool.

36:07All right, good. Statistic number two is low correlation to stocks and bonds. Okay. So you can look, line up those same asset classes and obviously S and P has a correlation of 1 to itself. Equity markets from NASDAQ to emerging markets are going to be between 75 and 85% over time. So if somebody says I'm getting out of large cap stocks and I'm investing in dividend growth stocks, you're getting a tiny, tiny little bit of diversification maybe from a fundamental perspective, but not much statistically. You look at those four bond categories, so global AG, U.S. aG, U.S. corporate bonds and high yield. They have correlations to all have positive correlation to equities. The 2000s and 2010s was an anomaly and people only looked at that period because they didn't want to look at. The uncomfortable truth was that that was unusual but it helped the narrative. And so people, folks, people cherry picked that period of time. Look at correlation. But you take the US investment grade market, which is where most people have most of their money, it has a positive correlation of 0.36. REITs have a

37:11correlation of 0.65 over that period of time. The GSCI used to have a negative correlation, then it went positive over that 27 year period of time. It's 0.3. Gold is great gold zero basically over that period of time. And CTA's as a space have slightly negative correlation. So why is this important? I mean it used to say people can't eat correlations. But what it means is when you are doing the math of building a model, the lower the correlation you have to all traditional assets, the stronger the argument for inclusion of the portfolio. So that's why if you even and we'll get into the return profile, it's very, very powerful for anybody with a statistical bone in their body who is trying to build an efficient frontier and improve returns the portfolios.

38:01So that's, that's also a fantastic characteristic. Now the knock on it will be yes, it's Sunday's positive Sunday it's negative. But if you're an asset allocator Looking at 10 year horizons, it shouldn't matter to you. Yeah. The third characteristic is, is, is alpha generation. And, and people with propellers spinning on their head get into arguments with me about this. I wrote a paper called like lies, damn lies in alpha. Alpha can be used and misused. There's a private credit fund that claims to have ratio of, of.

38:33Of. Of 8 or 10 because it doesn't mark anything to market. I mean so so you can. But, but in general, the way that I think about alpha when you're comparing it to The S&P 500 is how much of my, my returns are sneakily coming from equity exposure. Because that's going to affect me in a crisis. We, it's going to affect me, you know, in terms of how I think about the value of the dollars that are being generated. So alpha generation for the CTA space for the past 27 years, about 330 basis points. That's at the very high end of hedge fund strategies. Part of the reason the alpha generation is high is because the correlation is so low.

39:14So any dollars that are generated are valuable. That's why I say it's got diversification bang for the buck. Now if you look at bonds and things, Even including that 20 year unbelievable period, if you can get 50 to 150 basis points of alpha generation in your portfolio from bonds, then again that's a win basically. So positive alpha, again, great. I will tell you that gold is the only thing it has much higher Alpha. It's got 9% Alpha, but a lot of those because it's gone crazy over the past couple of years. So alpha generation is positive, but again you can't eat alpha. But it goes into the models. It's important. The fourth statistic, which is also very good is the control drawdowns of the space. And so people look at this space and they say it's a quantitative long short, derivative based black box. It's going to blow up right when you look at the drawdowns across and you compare it. So the max drawdown on a monthly basis of the soccer and Satanics over 27 years is 16%. The max drawdown of the Bloomberg US AG is 17%. Now, okay, the max drawdown of the Bloomberg global ag is 24%. The max drawdown on the S&P 500 is

40:3251%. The max drawdown of the NASDAQ is 81%. The max drawdown of US REITs of the US REITs market is 69%. Gold, everyone's favorite diversifier these days is 42% and commodities is 87.2%. So 16% max drawdown is heroic over 27 years. Why? Because the space is not built to hold losing positions with a white knuckle grip. They may be long commodities, but if commodities are going down 87% over a period of time, trust me, they're not going to be long commodities. So the tactical nature of it is also a capital preservation tool. There are Two knocks on this argument that we have to address openly with people. The first is this. 16% is the average of those 20 funds. And the 20 funds have changed over time. The average max drawdown of any one of those funds, the individual funds, is closer to 25% and the range is wide. So if you look at the current constituents of The Soc Gen CT Index over just the past 10 years, by the way, I'm just sorry, that's a stat from the past 10 years, not 27. Not many funds go back 27 years and it ranges from like 13% to high 30s. You go back, you pick constituents who've been kicked out of the index. It gets into the high 40s.

42:05So you only get the control drawdowns in general if you diversify. So that means you have to own a couple of different funds in the space. That's a complicating factor. Institutions have been understand that they've been using that playbook for a long time. It gets a little more complicated in the wealth management space. The second knock on it is that you get a lot of 5 to 10% drawn outs. So what made bonds magical is that the Bloomberg DAG from 2000 to 2020, the max drawdown was under 4%. It never went down. Now that was a function of central bank policies and bubbles and other stuff like that, but it created the perception that bonds were this unassailable ironclad asset class that could never do wrong. And so when you're looking at something over here that has a little bit more alpha, a little bit better correlation statistics, but then every, you know, has, gets. Gets knocked around a lot more than bonds. It was, it was a, it was a bad comparison. And then when you go over to equities, you know, again, equities that have bigger drawdowns, but they'd always come roaring back in a way

43:15that this space could never keep up. So, and then third, and related to that, the third issue is the narrative argument, right? Remember I told you that people have been trained don't sell at the bottom. There is a narrative around that. And the narrative is, look at these periods in the past when it came roaring back. But even on a more granular level, the argument will be, this guy's a great stock picker. He's been picking great stocks. You don't want to sell Nvidia now because it's down 20%. You don't want to sell this stock because it's a great underlying company.

43:54The market is being irrational. It's going to come back. The fascinating thing for me watching about the defensive bonds since and everyone said after 2022, okay, we took our pain but bonds are going to be amazing going forward. It's like the reflexive defensive bonds was. But the argument was don't worry, you're still going to get your money back. The very criticism they made about private equity and other investors about non marking their portfolio. The problem with space is that if you are doing the rational thing, which is cutting your losses and getting out, then the recovery argument is very theoretical. Okay, look, don't worry. In the past after periods like this they found opportunities to come back and make money over time. That's less tangible than don't sell cheap stocks at the bottom, don't get out bought, but you're going to get your money back in maturity. So it's a very, very good statistic but it breaks down a little bit when you get into it, which is why we don't highlight it as much.

44:53As. The fourth statistic is the positive Sharpe ratio of the space you mentioned Volume strategies and other things. So there are things that have protected you during crises but they're insurance. You pay, pay, pay, pay and hope you make a lot of money back. Those are really hard for people and a lot of them have. But you know a lot of sort of model guides I've said they say look, the low correlation, the crisis alpha is so valuable if you gave me that product with a zero Sharpe ratio, I'd still buy it. Fortunately this space has a positive Sharpe ratio. Sharpe ratio is 0.34 over the past roughly 27 years. So how does that compare?

45:33When an allocator looks at that equities have a Sharpe ratio of around 0.4 over time you make 600 basis points or something. Over cash you've got a 15 Vol, you can kind of do the math. You kind of get into that sort of a range. Bonds, you make a lot less money over cash over time but you have much more stability, less lower volatility. You'll also have a sharp ratio around 0.4 REITs 0.46. Gold is 0.6 but that's because of the recent bump commodities lower 0.15 to 0.2. So 0.34 is a perfectly respectable Sharpe ratio for traditional assets. When you move out of traditional assets and you go to particularly things that are illiquid, they pretend they don't have volatility. Volatility is a key input into Sharpe ratio. The Sharpe ratios always look higher or you look around and you Find a firm like Millennium that has somehow managed to deliver a Sharpe ratio well above 2 for 30 something years. So if you come to this saying it must be a Sharpe ratio generation machine and you see 0.34, you're like, oh, that's kind of disappointing.

46:52So I think a framing issue is that the industry was hamstrung by being in the hedge fund bucket. You're then being compared to hedge fund Sharpe ratios. And by the way, the hedge fund Sharpe ratio question is a mess because there's enormous amount of selection bias. So people tend to spend a lot of time talking about the funds that happen to have done well and have high Sharpe ratios. And why? Because they love it, right? That's the game. They're picking the stars. So my argument is that for this asset class to really go become mainstream, it needs to be in vehicles like ETFs and mutual funds that then should be compared because of the liquidity and accessibility comparison characteristics to the rest of the liquid portfolio. And by the way, the difference between the stats that I'm studying and the Soc gen CTA index, which was a central part of our thesis, is that 0.34 is after all the trading costs incurred in the strategy and the management and generally the funds. In the stock gen CT index, I think Tom said the average fee management fee was 1.4% and the average incentive fee was

48:05like 14%. So it's a 0.3234 Sharpe ratio. After a lot of stuff. Your S and P Sharpe ratio is for free, your bond Sharpe ratio is for free and you can't invest in it. So that's sort of another consideration. And so to put that 0.34 Sharpe ratio in context, it's about cash plus 275 over time. And asset allocation models generally start from this is our long term assumption about the return on cash. You can imagine how many people got that right 10 years ago. Everybody got it wrong and then everything is built on it basically. So start with cash, then you got to decide which cash. So this is what I mean about asset allocation is there are so many assumptions that go into it. At the end of the day it's somebody's call on it. So the stockchain CT index is done. Nev of all those fees and expenses is done.

48:58But cash was 275 over time and which is respectable. And the volume has been less than 10, which is how you get to the 0.34. And here's the last statistical characteristic is the lumpiness of the returns. True okay, so 2008, you're up 13% in this space. You don't make money for five years in the Soc Gen CTA index. You make 16% in 2024. 2014, excuse me, you don't make money for five or six years. Basically, basically five years, you start making money again in 21, you have a great, you're up six in 21, you make 20% in 2022, then you earn less than cash for three years, and now you're having a great year again. So the problem with the modest Sharpe ratio and the lumpiness of returns is that if your investment Horizon is truly 10 years, then it's fine because you don't care about these, you don't care when it comes. Or maybe you care more. It comes in the periods that you want it to come in. Maybe it's even more valuable because of that. But when you get into the real world, there's somebody who's going to a quarterly investment meeting for 20 quarters in a row who has to defend this strategy that doesn't have a great recovery narrative

50:23around it. And so, so I, so, so that's the issue that, so these are the, this is all the good and all the things that people struggle with. Now again, I started by saying this is the SOC gen CTA index data. Sure. Right. So, and by the way, when you get into, into the wealth management world is even more problematic, right? Because now you're sitting across the table from somebody who's not thinking about mean variance optimizers, but from somebody who's like, why is my money sitting in that when Nvidia keeps going up? But there's another element beyond that is even if you love the space as an allocator, then you have to figure out how to invest in the space.

51:08And so one of the stats that I mentioned was the average drawdowns of the space are much higher than the index itself. So one of the great challenges is when you look at all the funds out there, you have two very, very frustrating characteristics for an allocator. The first is that there's a very, very wide dispersion every year. So this year, I mean, there are some funds that are down this year, there are some funds that are 30 or 40 this year. And the second problem is there's no persistence of returns.

51:44So the cold, rational view of it is that the great periods of outperformance by one manager and the great periods of underperformance are due more to modeling quirks, modeling luck basically, than they are to look if somebody is massively overweight, some sector of the market that's not doing well, or their models are picking up different things, it's not their fault. Generally, it's not like they've done a bad job of putting together models. It just, there's, there's. Everybody has different configurations and different, different bets that they've made in their models. And sometimes you're hitting flipping heads three or four times and you're the best performer. Sometimes you're flipping tails three or four times and you're among the worst performers. So that makes it very, very challenging for allocators, because if you think making no money for four or five years is bad, now imagine that one of your two picks has had a 30% drawdown in that period of time. And so now you've got to go through, you got to re. Underwrite it. Well, how do you do that? Right. How do you decide that this

52:45person, what if you get out and then there's a huge rebound in recovery? What if you switch to somebody else who then does badly? Because the standard playbook is I'm going to look at all the funds in the space that are big enough for me to invest in and I'm going to focus on the five that have done well recently. But if that isn't a path to doing better over time, then it gets very, very frustrating for fund allocators. So when we looked at the space over 10 years ago, it was basically, again, we saw the Sharpe ratio as challenge number one and the manager selection problem and the diversification problem as challenge number two. And then, as you know, we kind of came up with our own way of addressing that,.

53:35With all that evidence. I mean, so what you describe is absolutely true and it has been true for a very, very long time. Clearly, the inception of the CTA indices, the CTA index, the trend index, kind of gets people to focus on that period. But actually, for those of us who've been around much longer than that, it's always been true. All the things you'd say, it's always been true, but yet we still need to grow the pie. Yes. And so what do you think will make people kind of give in to the facts? Do you know what I mean? We told this story for a long time. It's the same arguments. Maybe it's just the bonds, maybe it's just the bonds that will force people to say, yeah, I mean, we can't keep holding on, we need something else. Okay. And by the way, you started out by talking about AI and I Have a feeling you might know where I'm going with this. I mean, because if you ask AI, how should I construct my portfolio, it's not going to have a lot of bonds in it, I imagine.

54:47So first of all, I'm very, very optimistic about growing the pie. Anyway, I was pregnantly pausing to see if you. All right. Okay, good. I was wondering. Okay, let's one like a dramatic, like pausing for dramatic effect. So. So what? Take a step back with all you take those six characteristics. Okay. It's among the most valuable diversifiers you could put in a portfolio. Correct. If you're starting. If your thesis statement is I want to raise the efficient frontier, improve risk adjusted returns. And the amazing thing about bonds right now is bonds have no value today. Like, it's, it's, you know, you look at kind of a reasonable period of bonds. It just doesn't help you. You should just forget about bonds and just own stocks if that's your, you have the same risk. So the, the, the, the first thing is the language around the space to me has to more closely align with not just how the space actually makes money, but also why the allocators will be able to pitch this as a compelling cog in a larger portfolio.

55:57Agree. And my personal view is that, look, obviously it resonates with plenty of people. Okay, you are, you have a master's degree in engineering and you are working at a consulting firm or whatever. Like no one has to convince you that about, you know, diversification characteristics. Sure. But I think the, I think the way what total portfolio and everybody is basically looking at is I say get rid of the buckets and figure out what actually adds value and why. And a lot of the narrative around the space is very wonky and academic. Humans have behavioral biases where they are slow to, they're irrational and they sell things at the wrong time or, you know, the markets are slow to incorporate new information and it just, it's not exciting, honestly.

56:57Like, it's, it's. Yes, it, okay, it plays with a certain audience. But isn't it more exciting to say how many things, how many people in your portfolio were buying crude oil at 60 before the war broke out? How many people. How many, how many of your genius macro investors and portfolio strategists that you have across your portfolio decided that when gold broke 2100, it was the time to buy and wrote it to 5500 or while you were worrying about which bonds to buy to limit your inflation risk In December of 2021, how many people in your portfolio were shorting treasuries to take advantage of it. So I think the narrative, I think the, I think we have to talk in the language of the allocator which is your greatest strength is strategic asset allocation. It forces you to diversify when people hate to diversify. Everybody just wants only that thing that went up yesterday force you to diversify forces you not to make bad short term human decisions. What you've done though is you've thrown out the tactical baby with the bathwater. Tactical is good. And so I was at a conference, really interesting conference a week or two ago with a bunch of

58:17really, really sophisticated allocators in the wealth management space. And what was fascinating to me about it, if you think that what is their job, right? Their job is to look at the world, have a view on these kinds of asset allocation decisions and then convey it to clients in a way that's compelling. And to me what I found was that fascinating was the amount of airtime that goes into trades or opportunities or positioning that is totally immaterial to the overall results of the portfolio but it shows you how compelling it is. So we have discussions about AI funding sources and the daisy chain things. And I sort of pithily said yeah we used to call that Enron. Like it's not to whether Japan structurally is interesting as an equity play.

59:07Like these are not really actionable investment theses but the narrative value is investing and having people manage money for us it's not just about I joke nobody's going to give you a hug after 20 years for raising their Sharpe ratio by.05. It's the human experience of day to day of having these portfolios and having this money and hoping it's working on your behalf and being able to connect it to things that are happening in the real world. So we've got to do that. And so my argument is basically you got it 90% right with strategic asset allocation. 90%.

59:48We can help you with the other 10% this year. Okay, we're look today is a great example. It feels a little bit like we've got the mother of all bond market tantrums building it may reverse tomorrow. Really does not look like it's getting better structurally around oil and commodities. AI as I mentioned is going to be the entire equity markets have become one crazy venture capital play and you have something that's working this year. But why? Because it's doing things that you can't do on your own. So we have to step up out of the weeds and basically make the Argument that, you know, that having some tactical is good but you know, it's also dangerous to hand the keys of that car to humans because 15 years ago there used to be all these tactical strategies in the U.S. you know, because they were, you go into the, into the GFC and people had these signals and they would say, you know, I've got this signal, I'm going to get out of the S&P 500 if you know, it turns dark red and I'm going to get back in if it turns dark green. And so you'd have 20 guys go into the GFC. Five of them got it right. Guess

1:01:00what? They've got $10 billion businesses. Five years later, the other 15 are gone. They all blew up. It worked a couple of times and then they got destroyed on it. So tactical has become a bad word. But everything else in your portfolio, but we can help with, we can make your portfolio. So that was actually the metaphor of this funny sloth mascot that we have in the US is asset allocation portfolios. They're wonderful, but they're very slow. And so you bring in something like manitouches, it can increase your ability to be more adaptive in the markets. And guys, don't you think the markets are moving a little bit faster than they used to move? Don't we think the world is changing a little bit more?

1:01:43So we need that as kind of a broad pitch. The next layer is the language is too technical. I mean CTAs who calls a hedge fund an RIA, like a registered investment advisor. You know, it's a commodity trading advisor now by the way, I've completely co opted that expression. I call it contrarian tactical alpha because I actually like, I like the term cta. It kind of rolls off the tongue but it's too technical. Trend following is terrible connotations.

1:02:13It sounds like you're the last person to a party. I joke that it's like you show up at a party at 1am and hope that it goes until 5, when people are already walking out. Smart people are already going home. The rational people are going home already. But it's not what happened. You buy gold at 2100, the signal goes on at 2100. You ride at 2-5500. You're super early contrarian and right. So we need the language around the space. And managed futures is equally bad. What does it mean? People don't even know what futures contracts are. So. So I think the language needs to of the space needs to align. And the examples that I've Used in the past are like leveraged buyouts. Was not becoming an institutional, institutional asset class. It sounds scary and barbarians at the gate like private equity. Okay, I'll do that and then you can endow museums basically, you know, asset based lending. Hard money loans became private credit. Junk bonds became high yield. Cigar butts became value stocks. We collectively need to all sit in a room. I'll take out a hotel conference room. Everyone flies in, we all sit down, we say we are going

1:03:24to use this terminology for everybody. I like contrarian tactical alpha because it's very hard when you say that. It's very hard for people to say, oh I don't want that in my portfolio. And then you explain what it is and then you have examples that support it. So shifting the narrative is extremely important. And then the third layer beneath it is we've got to dial back the technical nature of the presentations that individual managers give individual managers because as I mentioned, there's no, there's so much variability. And about performance over time. What happens from allocators that I've spoken to is of the 20 funds out there, seven are doing well recently. You're going to hear a lot from those seven. They're going to come in and they're going to tell you that the modeling nuances that they have is what's driving their outperformance, that they made changes that were better than those 13 guys who are not doing as well. And they go so into the weeds as to what our model does. And the implication of it is when you say our model is better, the implication is there's something wrong with their model. And what I get

1:04:41though is allocators have no idea how to evaluate that because there is no way to evaluate it to say, oh, I definitely want something that has who's introducing short term models or ball controls or stop losses or is going into alternative markets or all these different things. There's no way X empty as an allocator, if you're honest with yourself, to really have a strong view on which one of those is going to work. This is what the allocators ask us, right? They ask us how are you different? I mean they will even ask are you using a 20 day moving average? And even though I'm thinking in my head, you don't need to know, it's completely irrelevant, they still ask. And you know, in the old days, the reason why I can I just say the reason why I started the podcast, right, all those years ago was because I was so tired of getting the same Questions from, they were all from an Aima due diligence questionnaire. Like tick boxing. It's the same questions we got every time. So in my naive, a little bit younger me, I thought, well, maybe from the inside I can actually ask my friends better questions. That's

1:05:52why, that's why I started. So I agree with you. But I will also say it is not easy when you're sitting across someone who has a long title, who is very clever and who's getting paid for writing reports about the minute details of each manager. Now if you go to the individual investor market, if you go to high net worth, maybe family offices, I agree the conversations are different. I do think it's difficult for us to basically turn around to a consultant or institutional allocate and say I'm not going to tell you because you don't need to know.

1:06:30No, no, no, no. Going into the weeds is a necessary evil. Okay, but this is exactly my point, right? The people who, people say $300 billion in hedge funds in this space, right? And, and one of the things I've said when I go to these like Hedge Nordic and other roundtables is, is, is where a man hl and aspect, whatever where these guys have a huge competitive advantage, right? Is they. Relative to the kind of stuff we do, right. Which they most mostly institutional investors that they're talking to with Z to be lowbrow. Right. We're, we're, we're, you know, it's an ETF for God's sakes. But, but what those allocators. But there's somebody there and this is an industry structure issue. There's somebody there who has a bucket and they're going to fill the bucket and their job is to. Their job, whether it's a valuable use of anybody's time or something like that. Their job is to do the manager valuation and they like it. Their technical sophistication is also part of their social identification as being a smart, sophisticated allocator. And even though I would argue like you, it doesn't matter long term whether you're not going to find

1:07:43any special answer there. What I try to do though, and so, so, but my goal is we're not going to grow with those people, right? They're already there. Okay? So the allocator, who's the CIO who says I. Okay, my guys are telling me this space is really interesting. Or the allocator who's looks at stocks, bonds and alts and this other stuff. I had an incredible conversation with a guy who's a really, really smart allocator at a huge raa. And he said, the more people I talk to in this space, the more confused I get.

1:08:15Yeah, I believe. Because everyone is telling me. Because reality. He doesn't care whether somebody is trading 150 versus 120 contracts and what those 30 contract differences are. His job is based upon the outcome. And talking to clients and having people say, in three years, God, thank you so much. I'm really glad you put this into my portfolio. And. And so in order to grow the pie, we have to recognize that, I don't know, I'm going to come up with some silly metaphor, but the palate of the average investor needs a different presentation of what it is. And what I see is that. So if you are going to talk about the technical side of it, what I would do is I would say yes. And I do the same thing, too. I say I will do a deep dive on what we do and why we do it, et cetera, et cetera.

1:09:12I'm telling you, if we stop there, we've got to then come out of the weeds and talk about it. Because you have to explain to Twitter, your investing committee, you have to explain it to advisors who need to explain it. There's a long chain of people that we have to actually collectively convince that this is a good thing for them. And if we start, the problem with the obsessive focus on the technical side of it is that it scares away most other people. It sounds scary, it sounds weird and arcane. And so most of the people who invest with us are not doing a comparison between us. And thinking about, should I go into somebody's LP structure, or should I go to some amazing firm like Man Ahl and have them put together some integrated portfolio that has a bit of this, a bit of that, kind of like pulling different arrows across their business to create one great quiver. For me, you're talking about people who just want to be able to say in a sentence or two why this is a good idea. And the thing that happens is that all of this focus on manager selection and these nuances that it ends up. Everyone else who's in that chain has now been.

1:10:40Because, look, when people invest in an alternative product, they're not doing it with a gun to their head. They're doing it because in their job, they like it. Right? There's something about adding that to their portfolio that is going to shine back on them in some fashion. Look what we found. This is our way of helping our clients. If we help these clients More clients will come to us and say, I like what you guys are doing. If I do a good job of it, it's going to. I'm going to advance within this firm. There's a very, very human element to it. But the problem, what happens is when you focus too much on, I found the best manager in the space. This is the AQR story which frankly screwed up the US managed futures space because you look at resumes in 2000.

1:11:29So for AQR did a great service for the US wealth management world when they launched AQMax in 2010, you had an A team in the managed teacher space offering a mutual fund with, I think it was 121 basis points of expense ratio at that time. No incentive fees, as good as their flagship products. Right. It was, as you and I have talked about, like, a lot of the products back then were kind of done by mutual fund firms that were, you know, kind of like paying people through Cayman subs and all sorts of stuff like that. So the. So it was a great product. But the problem is that people did this analysis and they said, well, okay, so now I've seen the space worked incredibly well in 2008.

1:12:10It worked again in 2014. Who do I give money to? AQR. I want to make a 5% allocation in this space. I don't need Cliff Asnitz, who's smarter than him, Just give him all the money. The mutual fund goes to $14 billion, $14.3 billion at the peak in a few years. Zero to $14 billion in like five years. That's four or five years, let's say. And then it underperforms. It's the second worst performer. It goes down 20% over the next five years. What do you do as an allocator? It's very, very hard to go back and say, God, I blew it. I should have split the money between AQR and XYZ firm that did well. And so instead what happens is it goes down and you hope it recovers. It goes down and you hope it recovers.

1:12:58And then at the end of the day, you're basically like, you throw out the baby with the bathwater. And then it recovers the whole space. And then it recovers. There's something broken about the whole space. It wasn't me. I didn't end up with it with. I didn't end up taking idiosyncratic manager risk that I didn't understand because I didn't look at the history of hedge funds in the space. It's something Overall with the space. And so the reason I'm optimistic though about it is that by the time we started kind of talking to a lot of people in the late 2010s and then early 2020s, a lot of allocators, the cool position for them was to dump on the space because so many people had had these experiences. But part of the problem was if you elevate AQR as your. We've now got LeBron on the team and look how well they did in 2014. And you highlight them and you keep highlighting them and then you put them in your portfolio as a 5% allocation. It's much harder to explain why it's now gone badly. You've raised expectations for this space and when it doesn't come through, it creates additional tension. So the

1:14:02cool view back then was like, you know, I, I invested in managed futures back in the 2000s and made a lot of money. But you know, I could see the writing on the wall and I got, I got out of the 2010s before the long winter and so, or in 2023 when people gave back gains or something, it was like, ah, I knew it was like a one thing and you know, everyone rushes in at the wrong time because, because this idea of lumpiness, of alpha and not very high, you know, like positive but not spectacular, short future time tempts people to time the space which then they further get wrong. Right? So you over concentrate a single manager, then you try to time the space, which doesn't work. So to me the narrative has to be in the language of the asset allocator, whether you have convinced them that you plus XYZ other fund are the right balance from a diversification perspective. So what I would do if I was a single manager is I would go in with me, I would basically, and I used to pitch this actually in the ETF space, I would say, look, if you want two funds in this category because you want to have double the chance of having a great

1:15:08story to tell in a given year, then this is the fund that I would recommend you pair us with. So I would go in almost like as a team and say, hey, we think the two of us are great in combination. But then the whole narrative should be about, in their language, about, look, this is how all you have to do is convince people that your portfolio is a little bit better today than it was and that we're going to be part of your portfolio for the next 10 years, because that's the horizon upon which you should measure us we're getting.

1:15:39There, we're getting there. We get. Well we did a good stint today. Hour and 15 minutes by now. So thank you so much for a master class. I'm sure we will come back to this again and again and again. But absolutely and and hopefully there will be, you know, further change, further appetite and further understanding of the value of of this space which you're also a big part of promoting and explaining. So thank you for doing that. Now we started out talking about Crisis Alpha, so I'm pleased to say that next week it's the Queen of Crisis Alpha that we're joining me. And thank you for switching Andrew because Katie is traveling this week. So if you have any questions for Katie, maybe some follow up questions that Andrew touched on, then do send them to infobtraders Unplugged and I will do my very best to bring them up next week. So from Andrew and me, thanks ever so much for listening. We look forward to being back with you next week. And in the meantime, as usual, take care of yourself and take care of each other.

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