Alex Greyserman is a member of the ISAM Systematic Trend Investment Committee. He has worked with Larry Hite since 1989, initially as research director at Mint Investment Management Co. (“Mint”), responsible for research and development of trading strategies and overall portfolio risk management. Greyserman co-authored, Trend Following with Managed Futures: The Search for Crisis Alpha.”¹

I don’t care what town you’re born in, what city, what country. If you’re a child, you are curious about your environment. You’re overturning rocks. You’re plucking leaves off of trees and petals off of flowers, looking inside, and you’re doing things that create disorder in the lives of the adults around you.

Neil deGrasse Tyson

Alex:

Are you are still [living] in God knows what country?

Michael:

Oh, I love it! Yes, well let’s just leave it like that. That keeps the audience guessing . . . “God knows what country.” We’ll circle back to that on the end maybe!

Let me jump right to the heart of the matter. When I last talked to you and Larry Hite we were right in the middle of the weekly parade of 26-year-old Financial Times reporters writing about trend following as dead. And then something funny happened along the way to the parade. Even in a zero interest rate environment, in a relatively low volatility environment, all of a sudden you and your peers started to make quite a bit of trend following money.

I know we don’t want this to sound like an infomercial, but it’s ­educational in the sense that many people probably don’t know [the real performance] when they see all these obituaries written about trend following. Well, it just hasn’t worked out that way, has it?

Alex:

I’ve been around long enough to probably have seen four or five of these obituaries written, maybe even more over the years, and we’re still here. We’ve seen this in our 800-year study. This is not some voodoo arbitrage strategy that extracts something from somewhere that’s not understood where it could just easily end. This is a strategy that harvests natural [occurrences] in markets. The only way you can, I guess, permanently kill a trend following strategy is to declare all markets to go sideways forever, or to declare that no market will ever move significantly away from some sort of equilibrium, and that just doesn’t happen for long enough ­periods of time.

I’m looking at the yield of the 10-year note and all prognosticators have said that, “Oh, that can’t go to where it is now,” and here it is, but that’s the nature of trend following.

Michael:

Look at crude oil. There’s been all kinds of fundamental opinions about why oil has to go up or why it’s at the right price and this and that, and then wham-bam thank you ma’am, the price dropped pretty significantly.

The most erroneous stories are those we think we know best—and therefore never scrutinize or question.

Stephen Jay Gould

Alex:

Yes, and nobody knows where it’s going to go, but it’s just the nature of people to figure, “Ok things are not going to move far away from where they are.” Yet the same people will invest most of their money in stocks and hope that they’ll go up a hundred percent. This is why this kind of strategy [trend following] adds value over time.

Michael:

It’s important for people to realize you’re not saying that you know what’s going to happen tomorrow. You’re not saying that stocks are going to continue to go down (or up), but there’s another way to think except being only long stocks. There’s something else out there.

You’ve been in the middle of that something else for a long time. I would love for you to go back in time. You work with one of the most colorful people that I’ve ever met. I would like for you to talk about your first meeting. How old you were, your background in your first meeting with Larry Hite, and how you guys have come to have this great career together.

Alex:

Yes, it was kind of a fork in a road as I look back. You know the joke: if you get a fork in a road, you take it. I came to interview with Larry in 1989. I was a kid out of school. I didn’t know anything about trend following and certainly not managed futures or details, I just needed a job. I was making $28,000 a year and Larry offered me $32,000. I still have the offer sheet.

Michael:

Hold on. You say out of school, were you 22, 26? Grad school, undergrad?

Alex:

21, 22.

Michael:

Okay, young guy.

Alex:

Yes. Didn’t really know who Larry Hite was. This was in Millburn, New Jersey, and he was one of the guys that interviewed me. Now the interesting thing is the Market Wizards book had either just come out or was coming out, I don’t recall whether there was the actual book on the shelf or a draft of the book on the shelf, but somebody gave me in the office the chapter about Larry to read while I was waiting. And I remember just flipping to . . . I’m paraphrasing Jack Schwager’s question, something like, “What’s your edge?” or something like that.

As somewhat of a scientist out of school, I would normally have expected some quite scientific answer, because I heard that Mint did something quantitative, so some sort of rocket science answer for what people did in 1989. But then I read this psychology stuff about how we know what we don’t know and I was like, “You’ve got to be kidding me? What am I doing here?”

Michael:

That was a line from Larry.

Alex:

Yes, Larry said that his edge is that he knows what he doesn’t know.

No one is dumb who is curious. The people who don’t ask questions remain clueless throughout their lives.

Neil deGrasse Tyson

Michael:

And you’re reading this before you go into the interview?

Alex:

Yes, I’m reading this before I’m going into the interview. The interview was, “Okay, whatever, go home,” but then typically you have to follow up and write a letter or e-mail, “It was a great interview. Tell the headhunter that I really want this job.” I couldn’t figure out whether I really wanted to tell him that I wanted this job because actually I was confused.

Larry gave a talk in my class at Columbia recently. I teach a class at Columbia. He gave a talk to a bunch of grad students and he confused the hell out of them too. [Laughter] Because it takes times to sink in . . .

Michael:

He makes those simple statements, but the depth of those simple statements is not to be underestimated.

Alex:

Yes, later on I’ve obviously learned what all that means. It’s the respect for risk and not getting very emotionally attached to any one strategy and those kinds of things, which allow you to survive for decades and decades in the markets. But initially, just like recently in my class, I have 80, 90 graduate PhD students, and here comes the Market Wizard. And they start asking him things they think a Market Wizard should know, like where gold is going next week or which way the market’s going because he’s some sort of a wizard. He of course says he has no idea. He just needs to know what he doesn’t know and if he gets into a trade and if he’s wrong then he has to get out of it. [Larry’s view] is so powerful but yet so simple.

To go back to my story, really it’s the fact that he offered me a couple of thousand dollars more that I ended up taking the job. I really had no idea, no way to appreciate that and no idea how to judge Mint or what Larry did, I just . . . I dove in.

Michael:

How quickly did you know once you were hired and you got into the office and you’re around Larry, how quickly did you know this was going to possibly be your passion for the rest of your career? How quickly did you start to have that feeling?

Absence of evidence is not evidence of absence.

Carl Sagan

Alex:

Probably still took a couple of years. I saw the system was making money, but it took a couple of years to kind of sink in . . . what this is about. I was like most geeks in the beginning and just trying to find the Holy Grail, but it’s your realization that no matter how smart you are . . . I see this with all my students. I joke that I try to bring their IQ down after they take my class rather than go up. Obviously, their IQs are high to begin with but if you have the kind of investment IQ where you think you know everything, you’ll end up failing.

It took a while to establish the right mental equilibrium. This is by the way where it’s hard to hire the right people in this area because you need a combination of two things that almost never go together, which is very, very smart people that are also very, very humble. To survive in this business, you need to have the right balance. If you get too smart and not humble enough, you get too emotionally attached.

There’s lots of people out there in the world who are very humble but maybe not smart enough to do at least the basic arithmetic of the strategies. It took a while [for the strategy] to sink in, but I’ve been in this for 25 years and have learned not to get too ­emotionally attached to people declaring trend following dead. On the other hand you want not to feel like we’re walking on water when we are up 30 percent on the year.

These things come and go but over time it works. But I wanted to make one point about trend following that is confusing to people. They focus too much on the S&P, obviously because it’s 
in everybody’s portfolios, but they think, “Ok, the value of trend following is just to time the short side of the S&P.” I have a lot of allocators who are asking me, “Well, what’s my position in the S&P?” If I say I’m long because trend following is long, then they say, “Oh, but that’s not a diversifying investment. Why do I need trend following?”

Don’t bet your deli to win a pickle.

Larry Hite

If I say I’m short then they say, “Okay, maybe that’s too late,” and they try to overthink this. The value of trend following is not just getting the right side of the S&P trade. It may or may not happen. The truth is the systems are not that great in any one market. The value of trend following is that we can do this over . . . 150 markets or however many markets one can find, and really have a diversified, uncorrelated investment. That’s what this is about. That’s why it’s worked [in our book] for 800 years.

If you look back at my first experience with equity markets . . . gosh, shucks, it was in 1987. Mint made 60 percent in that year. This was before I started at Mint, so this is in the history books. But they didn’t make that from necessarily timing Black Monday. . . . It makes money anyhow. Some corn trades and other things in other markets and the same thing in ’01, ’02. Same thing in 2008. The value of trend following is not a one-market thing, it’s a harvesting of natural human behavior in 150 different markets.

Michael:

I see many papers about trend following in the classical sense like you’re talking about. But in the last bunch of years there’s been a lot of papers about momentum and they specifically focus only on equities. There’s some confusion that comes from some of the academic work where it’s been attempting to attach momentum only to an equity perspective and ignoring what you’re talking about as this great diversification.

Alex:

Yes, so maybe this is slightly nerdy but there is a difference between so-called cross-sectional momentum, which is almost what 
all academic papers [talk about with] equities . . . this would be some kind of relative [strength], one stock to another, and time-series momentum is what trend following is.

We trend follow any given market whether it’s going up and down, really unrelated to other markets. It’s related in terms of the correlation and how much you risk, but not in terms of the signal. We could have no position in all markets except for one. All these equity papers are dealing with this cross-sectional momentum where you compare one stock to another and things like that, and they get into the efficient markets of whether it should exist, doesn’t exist. It’s overcomplicating things. When we have 800 years of data and simple—not simple strategies but simple concepts—you buy high and you sell higher and you sell short when it’s going down and you cover lower, that works. In fact, some of the academic papers out call it time-series momentum. That’s what this is.

By the way, anything in equities is invariably probably going to ­correlate to equities even if you try to make it uncorrelated to 
­equities. What adds value is trend following—whether it’s bonds or commodities or emissions or iron ore, or obviously currencies. Then people ask me, “What about the interventions and the government this and the government that?” Meanwhile look where the bond yields are and how far they’ve gone. Things can go quite far.

The solution often turns out more beautiful than the puzzle.

Richard Dawkins

Michael:

The subtitle of your book has the phrase “Crisis Alpha.” It’s clear to anybody that looks at the data during these ­crisis periods, this time series [trend following], does perform exceptionally well. There’s no guarantee that things will work out that way in the future, but it’s performed that way.

But what’s interesting about the last bunch of months, we really weren’t at a crisis period, but there’s still those trend following performances coming out from a fairly low-volatility, zero interest rates environment. If somebody was to couch trend following as only crisis alpha [also known as a black swan], that would be a mistake?

Alex:

Yes, in fact some people in our space have tried to make some kind of an excuse for some lackluster performance by calling this a tail hedge and saying, “There was no tail.” That’s a 
total mistake. Trend following has two great features that you probably can’t find in almost any other investment. First, it’s totally uncorrelated. If you start with that and look at the history of trend following for 10 years, 20 years, or 800 years, it generates a return stream with zero to slightly negative correlation to all other asset classes.

If we take that as given, when you have 800 years of data, it’s pretty close to a given, it’s totally uncorrelated. It also happens to be quite negatively correlated in many periods when you want a negative correlation which is the crisis periods. Because it tends to make money from whether it’s inflation shocks or downturns in equities or something else going on somewhere. Typically, volatility picks up during those periods and it makes money somewhere, but it’s not only that. You could take out all the crisis alpha periods, all the crisis periods, and it’s still a great investment.

I’d argue it’s a liquid investment because we trade liquid markets and so people will go in their 401(k) plan and have 5,000 versions of the same thing. Small cap, mid cap, mid cap . . . I heard this term recently . . . “smid cap,” small to mid-cap or large cap and international and this and that. And how many versions are there of being long only? Which are all 80 percent to 90 percent correlated, 70 percent correlated at least.

Of course, you get a little diversification from that, so, fair enough, but imagine in that same 401(k) plan or whatever list of instruments, now there was something called X, Y, Z. It wasn’t labeled trend following and somebody remembers, “Oh, I read something bad about trend following.” It’s just another investment, another mutual fund or another fund that somebody can put their money into. You look at it and you say, “Wow, this thing is just different,” and it tends to work when other things don’t.

How much closer do you get to a Holy Grail? Maybe, that’s too strong of a statement, but in terms of the possibilities of what one can invest in, how much better can it be? It’s totally diversifying and there’s a good chance, no guarantee, but there’s a good chance that it’ll perform in the periods when other things don’t. So you go back to optimization 101, any kind of optimization of the portfolio should tell you to have some allocation to that thing. In fact, we’re writing a paper right now on the topic of how costly is it to not have trend following in your portfolio. How much do you give up by actually not having it? Not in any particular year but over time. It’s quite costly because you’re actually avoiding a tremendously diversifying asset class.

If you can laugh at your mistakes, it’s a good thing.

Ozzy Osbourne

What can be asserted without evidence can also be dismissed without evidence.

Christopher Hitchens

Michael:

Let me jump into the idea of benchmarking and specifically those institutional managers out there that are fixating on stocks—the long-only prism. Your firm has to deal with that. It’s a constant education process, and if you look at a situation like CalPERS, they had a very small percentage, relatively speaking, with perhaps managers like ISAM. I don’t know if they had an investment with ISAM or not but I’m just saying in general in trend following.

I wonder if you could maybe relay a story about watching people convert or watching people not convert to this way of thinking?

Alex:

We do this all day long. We have major pension fund investors, so some people get it. It’s interesting that in some parts of the world, maybe it’s Australia, Canada, Middle East . . . and the part of the world that you’re in, Japan, that kind of area, historically have been diversification friendly. It’s almost a mental mindset, maybe, because the Japanese market certainly hasn’t been going up in a straight line, right?

They have a lot of currency movements and [maybe] . . . those 
parts of the world are just friendly to the concept of diversification. Trend following will follow from there, but you first have to have the concept of moving somebody away from 100 percent equities.

The U.S. is somehow emotionally attached to this idea that everything will go up forever. Obviously some institutions have allocations to this. The CalPERS thing, by the way, probably was not a managed futures issue, it was just the size of the hedge funds. They actually had a decent allocation to manage futures. But, with some institutions, it depends on their appetite for embracing diversification and as you used the word “benchmark,” whether some form of diversification is in the benchmark.

What’s the benchmark of the institution? And if the benchmark doesn’t allow for this kind of diversification, then we can talk to them until the cows come home, they probably won’t risk their career by putting it in. Because at the end of the day, 1 percent allocation to trend following is not going to make any difference. It has to be 5, 10, and we have institutions who have investments with us or with some of our peers at that level, but their investment committee has embraced that in terms of their benchmark. And they just in general embrace the concept of diversification.

To some people it’s so obvious: “I can’t believe that we even consi­dered not doing it.” To some people it’s, “Okay, stocks go up ­forever, so why do I need to bother?”

If you personalize losses, you can’t trade.

Bruce Kovner

Michael:

I think that it would take a Japanese-style stock market [crash] perhaps to get some people to say, “We have to change.” There’s going to be some out there that as long as ­equities go up seemingly in a straight line, even though there’s been some 50 percent drawdowns in the last 15 years, they’re going to be hard to convince.

Alex:

Especially in the U.S. Like no matter what it’s just all about, “Equities go straight up, equities go straight up.” I don’t know if it’ll take a Japanese type of downturn, but some sort of a shock in the system. But again, I’m trying to tell people it’s not that you just have to have that shock. Why not have a diversifying, uncorrelated investment in your portfolio that can do well when other things don’t. You don’t have to appeal to somebody’s sense that, “Wow, this is only going to make money if [stocks] go down 100 percent.”

People try to overthink the environmental factors for trend fol­lowing and then they try to time them. Some people got it into their heads that this only works when volatility’s high. Well, you said a minute ago that volatility hasn’t been particularly high recently and we’ve done well. There’s no law that says crude oil can’t go from 100-something down to 85 or something like that, in a fairly smooth line.

You don’t have to have massive volatility. There was a stomach virus [that] affected lean hogs recently that made prices go way up and not particularly with tremendous volatility, it was just a fundamental event. This whole down movement in interest rates over the years hasn’t been particularly highly volatile. Somebody said to me, “Oh, this strategy only works in high-volatility environments so I’ll wait till there’s a high-volatility environment.” Well, things are not that easy. [Laughter] By the time you get to a high-volatility environment or it doesn’t work because you have too much intervention—well, wait a second, intervention has caused the biggest trend of all time in fixed income.

Michael:

They want to trade your trend following strategy . . . No, they want to trade you.

Alex:

Yes, they want to trade me. People years ago used to want to time equity markets, too. Remember that? People would try to time equity markets, get in and out, fun timing, all this. It’s not that simple, it’s not supposed to be that simple. What you’re supposed to do is have a handful of diversifying investments and that’s what’s going to take your portfolio to the promised land. I tell people the worst thing you can do is to try and time a trend follower.

To try to time it when they’re doing well, “I should give them more money” and when they’re doing poorly, “I should take money away.” That is actually the worst kind of investment you can make.

Michael:

You are a professor. You have many, many PhD candidate students at Columbia. Let’s say hypothetically because you’re the top guy now or one of the top guys now, so they come to the office, the new employee comes to the office. Obviously, in this day and age they’re going to know something about ISAM, they’re going to know something about you, they’re going to know something about Larry before they sit down with you. But you have to introduce the science of trend following to that new candidate, that new person that you want to join your team. How do you start?

If you hear a “prominent” economist using the word “equilibrium,” or “normal distribution,” do not argue with him; just ignore him, or try to put a rat down his shirt.²

Nassim Taleb

Alex:

We have all these things like adaptive market hypothesis and behavioral theory and things like that, but at the end of the day what I would tell people is the markets are some sort of a risk transfer mechanism. You cannot assume that just because you’re smart you will suck money out of the markets. If you think of it like a poker game, it could be a zero-sum game. You could be the best player, but then your profits will come down not because your skill goes down, but because the other people at the table will just leave the game.

Is it a game of zero-sum kind of outsmarting people? Or is it a natural phenomenon in the markets, almost kind of like providing insurance? Larry talked about this in our last talk about relating trend following to insurance. I say there are natural occurring things in the markets. Let’s start with something other than trend following, so we’ve got an analogy.

Value investing, right? It’s been scientifically, dare I say, proven or shown with data that value investing works because a lot of investors don’t want to hold those stocks when they go down, and you actually are in an economic rent-type of risk premium if you hold them. There are other examples in the markets where you’re actually providing value to the markets by doing a certain thing. That’s what makes it lasting. Because there’s no way for 800 years you could find some gimmick that makes money where you would only do that if nobody else knew about it. There’s no way you can get away with that for 800 years. Somebody from my class will figure it out and then it’ll be gone.

This happens a lot with some high-frequency traders and those things like that. The science is the natural element that what we’re actually doing, what trend following is actually doing is providing liquidity to hedgers, and it’s creating an equilibrium in the markets, and we have to get paid for that. That’s why this has worked for 800 years. If the price of oil, for example, is going up, right now it’s going down, but if it’s going up, the airline companies will almost certainly need to sell oil to lock in the future price. They’re not in the business of counter-trend trading; they just need to sell it to lock in the future price.

We at that point buy it—it gets just a little technical but it’s conceptually establishing the fact that it’s a natural occurring concept. The markets need players like us, otherwise you will have a whole bunch of hedgers and the markets won’t exist.

Michael:

You are speculators.

Alex:

Yes, we’re speculators and then actually we talk in [our] book, there’s hedgers, speculators, risk transfer, and you need to have this. But it cannot be, when you think about evolutionary things, it cannot be a free lunch. If I made money in every single trend following trade, the hedgers will stop hedging. Sometimes their hedge turns out to be a good idea, sometimes they would have turned out better not to have hedged. Sometimes I will look better if I bought oil or I look better if I somehow ignored that trade. Of course, we take all trend following trades.

It’s supposed to be slightly painful, but in the end if you look at the last 800 years, the data shows that equilibrium risk-adjusted returns are pretty good and they’re slightly painful. That’s why you can have a couple of bad years or you can have drawdowns. If it was too good you would have every hedger hiring a quant from my class and run moving-average systems to time their hedges.

It’s the equilibrium of the markets that establishes this principle and that’s what makes it work over 800 years. Trend following is almost unique in that area. A lot of convergent-type strategies are very limited in their capacity, very limited in what they can do, because if five other people discover it, it could be gone.

It’s a naturally occurring phenomenon in the markets and then it’s just a matter of a handful of different ways of actually capturing it. But it’s there. It almost cannot go away. It can temporarily not work but it just structurally cannot disappear, otherwise you might as well shut down the markets and go back to communism.

Success isn’t permanent and failure isn’t fatal.

Mike Ditka

Michael:

You were born in the former Soviet Union? What country were you born in, Alex?

Alex:

Well, actually I don’t know. I’ve had my passport changed several times. My U.S. passport originally used to say USSR because I came to the U.S. when the USSR still existed. So technically I was born in the former Soviet Union, but then they called me up and they said, “Okay, we need to change your passport because this new country got created called Ukraine and now we have to reprint your passport to say born in Ukraine.”

But now, with what’s going on there, they might call me tomorrow and say, “Okay, we have to reprint your passport, now you were born, I don’t know, Russia or something else.”

Michael:

Here’s where I want to go with bringing it up. It’s not for a flippant reason. What age did you come to America?

Alex:

Twelve.

Michael:

Did you have an advantage coming from where you came? Was there a built-in drive, a motivation that you think gave you an advantage over other peers that you might have seen in America once you got to America?

Alex:

I probably don’t have hours to speak about the immigrant drive, but that’s the immigrant drive that got me going on interviews in an area that I had no clue about. At that point it was sort of survival and making money, not this grand idea, “I’m going to become a finance person.” It’s the bouncing around from washing dishes, which was my first job, to this to pay for schools. Certainly my parents didn’t have money to really pay for anything back then. It’s just the inherent immigrant drive to keep pushing.

I had a job before I went to the interview for Larry, but I just wanted to do better. I don’t know if there was any other advantage other than just keep pushing, keep driving. Don’t assume somebody’s going to hand it to you. Larry, probably you’ve heard story’s from him, he had a disadvantage with not being able to see and those kinds of things. I had a small disadvantage in the beginning, I couldn’t even speak English, so that’s why I had a dishwashing job. Nobody had to tell me what to do. If there’s a pile of dishes, then I had to wash them.

Study hard what interests you the most in the most undisciplined, irreverent and original manner possible.

Richard Feynman

Michael:

Meeting Larry was an opportunistic-type thing because let’s face it, I know from when I first met Larry, he gave me so much of his time and energy and we met so many times. I feel ­Larry’s the type of guy that if he sees somebody trying and really pushing, he is the kind of guy that reaches down and says, “Okay, I’ll give you my time. If you’re really hungry I’ll give you my time.” I feel very fortunate to have met Larry. It’s changed my life to meet people like Larry.

Alex:

I started at Mint not as some kind of a master. I started as a technical guy doing some programming. I was quite a low-level ­person. I could have stayed as a technologist for any number of years, but again it’s that drive to see what else . . . I hung close to Larry, got to know about “know what you don’t know” and what he means. I kept asking him about it and that’s how I moved up.

I grabbed my opportunities. But again, that’s not a Russian thing per se, it’s just the immigrant drive. I’ve got to go get it, otherwise it’s not going to come to me.

Michael:

My great-grandfather came from Lithuania in the early 1900s, and they were in coal mines in Scranton and his kids became doctors and engineers, so it happens quick when they’ve got the drive.

Alex:

Washing dishes obviously wasn’t going to make me money, so I had to cut the loss there. I did work for one year out of school in 
an engineering role. I worked for RCA on high-definition television because I had a degree in electrical engineering. It was not losing me money per se, so it’s not technically a losing trade, but it was not going to take me anywhere. I had to cut my losses there. I just trend followed my way into this. Trend following is a good ­general philosophy of life. It’s not just on markets.

It’s how people live anyway. This is why trend following in the markets works because that’s how people are.

If you put in stops and run your profits and trade randomly you make money; and if you put in targets and no stops, and you trade randomly you lose money. So the old saw about cutting losses and running profits has some truth to it.

David Harding

Michael:

When people look at trend following performance across the many managers out there, and we don’t have to 
name names, people can go look at the performance—it’s all freely available. I can see up and down months where trend following traders had a good month. You might see double the return for one particular trader versus another, but still it’s pretty easy to see that there’s dispersion amongst trend following CTAs, trend following managers. Why don’t you talk about that dispersion?

Alex:

Yes, by analogy to equities it’s actually very simple. Initially this is complicated. This is why a lot of sophisticated investors like the institutions you asked me about have a hard time getting in, because they feel like they might make dumb decisions about the space and end up picking the so-called wrong manager, the wrong trend follower, because they have no understanding of what causes differences in performance, and they get a little emotional [over] what makes one manager better than the other. Well, is it who made more money last year, does that make them better? They don’t know how to step in.

It’s actually not that complicated if you make yourself aware that there’s a couple of factors that drive performance. For example, by analogy to equities in the late ’90s—this is where every Internet stock went up 100 percent every day and every brick-and-mortar stock stayed flat or went down.

You had this so-called dispersion between value and growth. Most investors understand that. That’s why they’ll have both in their portfolio. Sometimes you have dispersion between small cap and large cap. If you make just a few, let’s call them sub-classifications, it’s not just, okay, trend follower one, trend follower two, trend follower three. Okay, those are the trend followers but they have a particular focus. If this was equity manager one, two, three, the first one might have been growth focus, the second one might be value focus, the third might be small cap, fourth might be large cap.

There’s going to be some correlation between them because those guys are in the stock market, but there’s going to be some fair degree of dispersion, and in a year like 1999 it could have been a 
100 percent degree in dispersion. Now investors in long-only say, “Ah, okay, I go to my Morningstar little matrix and then I need a little bit of value, a little bit of growth, so I kind of diversify.” Same thing in the trend following space. You do a little bit of analysis and say, for example—the words are not the same—so it’s not value growth, it’s, for example, we introduce certain factors in the book like the speed of trading.

One of the best ways to make money is not to lose money.

Michael Milken

You could do trend following quite slow . . . either by choice or if you manage lots of money, maybe you have to be a little bit slower because of the size of your assets. Or you can be a little bit faster. And you can get different results and you 
can attribute that to the speed of trading. You can also have a market mix bias. You could trade only the large markets, again either by choice, or because you’re big, or you can be quite a bit more diversified like, for example we are . . . trading a lot of smaller markets.

Sometimes those will cause performance differences. But if you would like to have a portfolio of two or three, a diversified portfolio of trend followers, it’s not that hard. Just look at a couple of these factors and who’s tilted too slow and who’s tilted too fast and these kinds of things. Just by analogy to the whole value growth thing. Just a little bit of effort and then that can explain quite a bit of the dispersion between the managers.

It’s not random because people are sometimes afraid of, “Wait, you have eight guys doing the same thing and you have like this massive difference in performance.” I don’t know, what is it? Some guy has a faster machine or bigger computers? And, they get scared because they’ve picked the wrong one. “What is it?”

It’s not that. They’re doing conceptually the same thing but they have certain portfolio tilts that can cause these differences, and with just a little bit of effort one can understand them.

Michael:

It’s all the rage in conversations, the media, Fed watching—
rate hikes. Interest rates going up. We don’t necessarily know if there’s going to be a higher rate environment? We don’t necessarily know how that’s going to affect trend following?

I can live with doubt and uncertainty and not knowing. I think it is much more interesting to live not knowing than to have answers that might be wrong. If we will only allow that, as we progress, we remain unsure, we will leave opportunities for alternatives. We will not become enthusiastic for the fact, the knowledge, the absolute truth of the day, but remain always uncertain. In order to make progress, one must leave the door to the unknown ajar.

Richard Feynman

Alex:

We’ve looked at it over the 800-year data set, “What happens in a rising interest rate environment?” But let’s ask this question: You think equities might do well in that environment? I’m no prognosticator, but it’s possible they won’t. Will bonds do well in that environment? Well, almost certainly not, because rates go up, then bonds have to go down. I would put trend following as maybe one of the few things that might do well.

Trend followers are agnostic to direction. If yields go up, so the prices go down, we will be short bonds. Now it hasn’t happened for many years that there have been substantial hikes in the markets, but if you look at the data, we have data on interest rates from 1395, Venice issued bonds in 1395 called Venetian Bonds. So we have centuries and centuries of data. Plenty of rising rates environments and I’ll simply say we will make money being short bonds if that happens.

Now people ask technical questions, “If you’re short bonds, you short carry, will that hurt you?” It’s not really going to hurt us. There’s going to be almost certainly inflationary pressure somewhere, so we’d probably make money off commodities. There’ll be some interest we get on cash, as it’s a technicality, but most trend followers put up T-bills as margins, so we’ll make more money on margin. We’ll make more money on something called the roll yield in commodities because we have to roll futures contracts.

When you put all this together it should be pretty good. At least we’re going to have a pretty good chance of making money. A better chance of making money in a rising rate environment than a fixed-income portfolio, let’s put it that way. And meanwhile, look, some macro funds out there—and not naming names—they have been betting on a rising rate environment for how long? And they’ve been losing money on that.

Of course, at some point rates will go up. It has to be a truism, maybe in our next life or something, but at some point they have to go up. But look at Japan, where’s a law that says 10-year rates in the U.S. can’t go down more? I don’t know. Meanwhile we’re making quite a bit of money on the trend that’s in front of us now. When it turns there’ll be a little bit of pain and then we’ll make money the other way.

I’m a big fan of people that operate in the world of publish and iterate versus, you know, think, think, think, think.

Kevin Plank 
Under Armour

This is the peril of timing, because you could sit there frozen like a deer in headlights, ignoring what’s going on now, not making money out of it, betting on a rate hike. When is it going to happen? No one knows how to time those things, so just let a trend following system time it and meanwhile let’s take the money, and put it in our pocket from rates going down. What’s wrong with that?