The Real Secret behind Trend Following and How it Works | with Martin Lueck

imagine spending an hour with the world's greatest traders imagine learning from their experiences their successes and their failures imagine no more welcome to top traders unplugged the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level before we begin today's conversation remember to keep two things in mind all the discussion will have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risk from the investment manager about their product before you make investment decisions here's your host veteran hedge fund manager niels castro Larson [Music] you're listening to top traders unplucked where I continue my conversation with Marty Lewis co-founder and director research of aspect capital disintermediation is the interbank market you remember that yes so you know as it be you know as it became more democratized and everyone had access to price feeds so well you know the the the bank trading desks had to you know had to make a living and and spent time understanding our models so back to the show Hodge back to you know the early point about being being picked off but um so what that told us was that we just had too much of a market impact we were too visible to the markets so around that period there were there was a same same effects we were capturing meals but in a different way that meant that our entry and exit to the markets was much much smoother and effectively invisible so since then you know huge development and huge focus on execution to make it to really obfuscate what we're doing to dribble our trades into the markets in random pieces at random delays and really you know try and exploit the market volatility rather than forcing our business to get done as quick as Muslim so interesting and so sorry you know that so that that was a sort of starting place to subscribe what at what aspect what the diversified program looks like today in talking about the grand sweep of how the program has evolved you know it has remained predominantly medium-term trend following that is what we are committed to delivering to our clients so you know you go through a challenging period for trend following the temptation is to introduce or other models or to change the weights either to reflect what would have worked or to reflect what you think will work that we don't think that's our place it is for some other firms because they've sold themselves as you know multi strata or whatever it is but our place is to deliver quality medium term trend-following returns to our institutional and and now broader client base that 80% of the portfolio is focused on those trend-following models we trade over 150 markets and multiple contracts in many of them so it's probably around 200 instruments hundred and 80 or 200 instruments and 20% of the risk nails is in a range of we talk about modulating factors or or complimentary models that are designed to if you will take some of the rough edges off of of trend-following or or take advantage of orthogonal or diversifying effects that we believe have a similar level of persistence or traction as the momentum component right so not really mean reversion or counter trend or is it more on the exit side or that it helps you and get out a bit quicker or get in a bit earlier that these models help you good actually I'd sort of think about it slightly differently in there is so although I may have misled you by using a term like modulating there was that what that doesn't mean is that they are all you know focused on what the trend models are doing and right or speeding them up or slowing them down or making them more more sensitive or and now they're they're effectively capturing other factors dry off it may be that some of those factors are related to the trend fault so they may it may for example be relative momentum between instruments in your in your trend-following portion which clearly is a diversifying effect but they will have the effect of of capturing diversifying factors in where either you've got you've got different in from sources whether it's whether it's a carry effect right in in FX or in fixed income or in equities you know you can look at features and different dynamics of the of the term structure you can look at as I say relative momentum pieces you can look at mean reverting or other market dynamics typically faster or strategies but I we don't choose to look at them as you know as sort of is this getting us out of our current position fact I should also stress that we continue to evolve and improve and and hammer away at the trend following piece and and and I'm often asked that in due diligence questionnaires you know you've been doing this for thirty years I would have thought you'd have figured it out by now and and there's always more there's always more that you can do and it's and it's fascinating yes absolutely how how do you weight the portfolio in broad terms between financial markets and commodity markets because that's always sort of being brought up when you when you compare smaller managers to larger managers yeah well not surprisingly you know our starting point is a very agnostic outlook so we absolutely defy or issue the the worldview that says you know you can you can look at what's happened historically and predict what's what's going to happen in the near future obviously with the brought that that is essentially what you know the behavioral aspect of trenzalor is based on but your ability to infer that well because I've had a good run in bonds means that they're going to continue to perform so I'm going to go over weight and bonds that's that's not something we ascribe to so it's very you know we are seeking the most agnostic portfolio construction we can and therefore if I had no you know liquidity or correlation constraints I would trade you know and an even spread of sectors nails so my starting places is broad diversification across we talked about seven sectors internally and then I will modulate or I've use that word too often but I will you know flex that that agnostic diversification with appropriate consideration for the long term structural correlation between markets and also cognizant of the liquidity characteristics of the markets so and and that's something that we review on a regular basis and and and the portfolio allocation structure slightly you know flexes very gently around different liquidity characteristics so we have both you know obviously there are hard limits that the exchange will impose on on you in many markets that you can't be bigger than position X but we also impose our own much more conservative constraints about how much of the average daily volume or the open interest we're prepared to be and how much we're prepared to be in you know in entail events and all of that feeds into a process that regularly and systematically determines what what the allocation will look like do you have a lot of scope for growth when you look at the markets you trade the balance of the portfolio as it is today and the you know constraints that you just mentioned I mean does it still allow you to to grow substantially from from here without having to change that side of things so to speak absolutely you know there is there is considerable capacity in the program and I you know and we're very careful about it and I don't I don't say that willy-nilly jump because as those flexes happen in the program we we look to understand what different features you know how that's changing the the curve relation structure and and the you know any potential impact it has on the market and that you know that gives us a great deal of comfort that there is a large you know there's there's significant capacity but it also nails gives us you know a clear point at which we know we need to be careful so if I not like yeah just keep going until something goes wrong sure it's it's well given these conservative constraints when we hit this particular point then we need to be very careful but so you know number what comes out of that is number one you need to be cognizant of not just your own size but also what's going on in the market so you you know you could stand still and the markets could dry up you need you need to be aware of that number one let me um ask for slightly different question and and that's a little bit about as you say you know you need to be aware of what the market can handle I assume that you trade a foreign exchange and not be honest and not just foreign exchange via futures yeah we trade them both but yeah the predominantly interact issue and given what what happened in 2008 nine we're certainly liquidity in those markets seemed to change dramatically let's put it that way and and and what's going on in in the financial industry as a whole today the concerns that we have perhaps with some of the things happening in the banking sector and what the central banks are doing and and and the fact that it's really opaque in terms of what is inside a bank are you are you concerned about liquidity drying up again should we enter into a new phase of the crisis and and have you have you learned something to deal with that sudden change in liquidity in in a market okay so that I mean there are two parts that one is the sort of ambient liquidity of the markets and our ability to respond to you know changes in those if we see this red expanding or you know or we see a period of unfavorable behavior in our in our execution algos how we respond to that I'll come back to that the second the other I don't know whether you're alluding to this was the you know in in the crisis of 2008 there were you know literally there were bank lines being frozen yes you know so what I mean again I this at least were cognizant before 2008 that you know a prudent managed account holder will have sort of backup relationships if so and certainly we had backup prime brokerage relationship so everything we do you know and again that's sort of I think a truism now for for most of the institutional money management firms is you've got multiple clearing houses you've got multiple prime brokers and if you can persuade your clients to go through the pain of setting up that multiple relationships and you can go through the additional burden of keeping them alive it just means you have that degree of flexibility that if heaven forbid but it did happen you know heaven forbid your lines dry up with prime broker a that you can move those positions and carry on trading at prime broker B so absolutely you know I think we were we were well placed to survive that cleanly in 2008 but you know but we've continued to strengthen that feature of the business that operational robustness and I think that you know the regulators and the and the due diligence some folks that have come in have have seen you know that that was probably a model of how to do it in terms of the market dynamics well you know you sort of highlighted one of the most challenging markets to get true numbers on on what the quiddity dynamics are but there we have so I make two observations the first is the point I wanted to make earlier in addition to to being clear about what our capacity is with a given set of my markets we continue to monitor and include new market chokes by luck you know over the past few years we've introduced a range of non-deliverable forward currencies which expands the universe of opportunity okay it also expands the you know he the put the the the complexity of monitoring their liquidity you know their liquidity profiles but I think that the most important feature in what we do so most of our of our strategy trading you know sort of ninety-six percent of it is is a box-to-box it's an electronic execution but it's monitored 24 hours a day by the by the very experienced trading team and they have you know there are certain circuit breakers or thresholds or Canaries in coal mines if you will that indicate where we see sporadic you know the changes in liquidity profile shall we say and if we see those the portfolio construction will will adapt sure sure I wanted to ask a slightly different question which is something that I'm not interested in tirely sure how to how to best phrase it but but let me try and explain and so on one part I think many people think of trend-following as okay but you you get your signal to buy or to sell and then you follow along for the ride and and and you have some kind of position size algorithm but when I listen to what you're explaining I think what you're actually saying more is that since you have smooth out this process and I'm not looking at it as a black and white concept and it probably the position size is more maybe a reflection of the strength of the signal because the more confirmation you get the bigger you will build your position and so on and so forth and but in my mind I think a lot of the secret to success of trend-following is not so much actually where where we buy and where we sell are we a day late or day early a lot of it is really the risk management and thereby the position sizing itself that that's a big part of the secret sauce to the success or the robustness of trend-following how do you view that III I think you're absolutely right there's lay you know it's what we do is a holistic challenge you can you can you can get overly focused on the you know and an individual trend-following model at an individual time scale but it's the combination of all of the pieces put together and the combination of all of the markets put together and how you risk manage the whole that determines obviously your cat your end performance make two observations the first is that the positions that we hold are yes a function of signal strength and conviction shock but that as you'd expect would be modulated by what you perceive is the risk of the market so for a given signal strength if I see the volatility of a market which is a cypher for risk if usual if you see that say double I will effectively half of my position to maintain the same risk for that given signal strength point one point two is that you know it's not an inexorable line the stronger that the trend the bigger or position I'll put on because as you can imagine Neil's that way lies madness so there's a you know knowing effectively when to back off and perhaps when to be a provider of liquidity to the markets rather than they and a you know consumer of liquidity that's another delicate feature of of what we do yeah so in effect just to make clear to the listeners you're not actually using a stop loss per se because it comes automatically as the strength of the signal changes your position changes along with it that that's exactly right so it's a it's a gradually a modulating signal and the other thing that I really like about what it is we do and obviously we spent time researching super you know intraday models and edited and and and there's there's utility and there isn't some people do them very well one of the things I like to stress for an institutional investor is the intuitive qualities of medium-term trend following in the way what I mean by that Neal's is that you know if you read the Financial Times or The Wall Street Journal or you know your local financial newspaper and you follow roughly what's going on in global markets then you will have a good intuitive sense of the positions that we hold so obviously you know the the detail and the complexity of exactly the position size that we hold which as you've said is a function of signal strength volatility you know where you are in the development of that trend portfolio construction risk management are you up against any exposure constraints all of those pieces holistic challenge very complex but by and large if you stand back up just a short way and look at the urban flow and it the dynamics of how that portfolio is moving from day to day it's very intuitive in a lot you can broadly as an institutional investor understand why a trend-following portfolio makes and loses money when it does which is always actually parceled me because people often criticize you know what we do from saying that it's complex it's difficult to understand and I'm just puzzled about this because it's really not that difficult to to understand that when something goes up you buy because you think it's going higher and if it goes down yourself because you things go lower compared to you know a fixed income arbitrage or whatever they call their strategies and yet people seem to love those strategies more maybe we have time to talk about that more from the philosophical point of view later on I wanted to ask you just a final point maybe about the program itself and that is and and going back to research a little bit here how much research do you actually need to do to overcome or to improve efficient execution so to speak is is that a big part of research when you get to your size too to make sure you you can continue to grow and and and and have efficient execution yes well so as a research team we you know we look at the problem of of continuing to evolve and develop the program we we break it down into the you know the core diverse effects our II the core trend following four components the diversifying modulating strategies the portfolio construction and risk management piece and then execution and by and large there is all we someone working on something in in each of those areas and you know over the sweep of time we will have periods of more concentration in one area than in other so so it's a bit of an ebb and flow so about four years ago we embarked on the on the transition to a wholly box-to-box so you know if you look at the sweep of evolution of execution back in the good old days of where we would trade binary in big Clips show and we and we had to get it down to an open outcry market well our our execution research in those days niels was to go to chicago and meet the biggest and baddest floor brokers and you'd hire them because they got to the front of the pack and then you know so overtime markets have become more electronic and we've that that's that's played into you know the technology led lead firms and then actually making the leap to a predominantly box-to-box world right albeit you know monitored carefully that has been an enormous commitment of research effort and and investment um it requires an ongoing monitoring I I would stress that you know what we don't do hft so it's not we're not going head-to-head with sort of an hft firm for the hour where you're swapping out algos every few minutes or every few hours we have a suite of execution algorithms which are generally fit for purpose we ensure that they are correctly parameterised for the liquidity you know for the character it you know your markets change their characteristics what sort of resting bid-offer spread what are the the typical clip sizes that people are making available those are characteristics of markets that we need to review and re parameterize on a regular basis and obviously monitor if they're changing more rapidly than we'd expect so it's an ongoing monitoring effort I think because we're not slamming the markets with with you know very fast models you know our execution now goes are predominantly looking to make us I'd love to say invisible but certainly obfuscate what we do and to capture if you will a patient's premium we're not in a hurry to get our business done but but it's an ongoing effort yeah absolutely risk management and not that I want because I think we've talked a lot about that already but I had a sort of a general question and that is how do you define risk meaning there are so many different risk measures people talk about Value at Risk March into equity position size you know risk to stop whatever it might be but there is there is there something that you've come across which you feel very comfortable with looking at when you look at risk what what that means to to you and to your portfolio well I'll go slightly at edit tangent so you know I I think that I've banged on earlier about how important we think the risk management challenges yes in in terms of how you put the component pieces together and then ensuring that you don't get transfixed by var measures make note you have other measures of risk I think that's been an important piece of the puzzle for us and and stood us in good stead in this period of extremely low volatility where you run the risk that you know if you're just looking at far you can blow up and up and up and up a position and then if all attila tea returns to the market you can get a very unpleasant surprise so you know yes yes we look at those suite of issues and yes we're obviously very focused on operational risk having had you know the institutional peace is very much as the fundamental DNA of aspects the other the other thing that I think is interesting about you know how we've approached risk is if I if I talk about model risk right for a Mon that's interesting yes and because I think this is this is great and again it's part of the journey that you know this was never written in a textbook anywhere as I say I couldn't spell risk in the in the early days of Ahl and and for a while you know we'd say you know the the consultants would come in and they'd say so who's the director of research and I you know Michael Adam or I would stick up our hands and then they say and who's the director of risk and we'd also stick up our hands and and they'd sort of say well that doesn't work so um the point here is that you know we talked earlier about encouraging a collegiate and a collaborative and an innovative research effort and that's what we've done and I think I think we do it we do it quite well but but it's having the right checks and balances and we try to create an atmosphere that's sort of like an academic peer review group so we have a super risk team you know every one of them is is just as smart and just as experienced as any of the researchers and it's and it's their job to shred that's what they can the best research that comes out of out of a research team so is there's a very formal risk review process both of every component that comes out every new component idea that comes out of research team whether it's an evolution or an improvement to the trend-following piece or a new modulating strategy or an amendment to the execution algos or the portfolio construction methodology each one of those will get looked at in isolation and taken apart by there with you know some out-of-sample data some synthetic data some examination of the hypothesis or the failure cases that you know they absolutely stress their components and then Niels you know we typically aim for three releases a year they look at the holistic release right so you may have a you know I may have a couple of tweaks evolutionary improvements to the trend following I'm they have something new going on in the modulating piece I may have another but they get they get aggregated into a new program release and the risk team will have reviewed every component but then they also review the dynamics of the overall you know how all of the pieces work together and I think that that is a crucially important piece of the problem which again make it under under-recognized yes definitely definitely do you think correlations today is a meaningful thing to look at so to speak or are we just living in a world where markets get more and more correlated suddenly within sectors but maybe even across sectors I absolutely think it's a crucial thing that we look at both for for opportunity set in what we do and also for the risk management challenge I think that it ebbs and flows and we've been through a period of of as you say what has felt like a secular increase in in correlation to that to those sort of you know you question what why am I doing this you know sort of 2012 where the risk-on risk-off has got everything just you know you you began to think it was somebody who had singled you out everything to be taken apart but um so I I think it's it's an important part of what we do I think right now we're seeing correlations begin you know just the the signs that the opportunity set is broadening I so I don't give up on the on the prospect of having a diversification I think absolutely the world is now a a much more diverse set of opportunities than it was you know 18 months or two years ago nails so so now we've talked about the risk management aside and of course part of what we have to accept in enrolling these 4s Jesus is drawdowns and I wanted to spend just a few minutes on that one of the things that investors seem to struggle with if I can put it like that is the emotions that they're all downs you know bring with them you've been around as you mentioned you've seen it before how do we best help investors understand that a drawdown in a strategy like yours is not necessarily the same as some kind of open-ended risk where it's just going to continue to go down and down and down again and because of course we are dealing with issues that are related to how the human mind is is working and and and we have these biases inside us but how do we best and give them comfort in times of drawdown and and helps them take some of the emotional stress out and then I guess I ask this market because we see so often that investors we've just seen it recently I believe again sort of and I think most people will know what I'm talking about what a lot of money have left the CTA strategies actually at the at the worst possible time so yes and and I always you know I love to refer to I don't know whether you're familiar with Peter Lynch who was just sort of a legendary fund manager at fidelity and I once saw a piece of analysis that looked at how much money individual investors had actually made with Peter right and and it was it was a tragedy because you know as his performance would you know leap forward that's when the money sloshed in and then it would have a drawdown and that's when the money sloshed out so if you aggregated those chunks of money that typically bought at the highs and sold at the lows it was nowhere like the performance that the the chap had generated so III don't you know when you've got an upset client you probably don't start the conversation with with that activation is it's one observations and that you know the next observation I make is that you know again provided the client has bought into managed futures for the right reason you know and you know what I'm saying here is that is that if it's just been if it's just popped out the top of you know the only thing that made you money in 2008 and you just say we'll all have some of that yeah without understanding its role as a diversifying constituent you know that will move risk to capture the prevalent opportunities be they rising or falling markets on a well-diversified basis you know if you you know if they have understood that it is in their portfolio to provide diversification from the equities piece and the bond piece and and what other whatever other assets they have in the portfolio then what goes with that that is that you know but if by definition that you've put this thing in your portfolio because it's uncorrelated then you know when you have periods that equities are plummeting and your managed futures is making money well then we're we're okay aren't we neon sport number heroes but if you turn that around and equity markets are booming and managed futures is losing money well you're an idiot but that goes with the turf of I mean obviously I'm not trying to present it as anti-correlated you know with with equities because we know it isn't but but that low level of correlation does mean that it will behave differently from the stuff that is on certainly on the front page of the f or The Wall Street Journal and there is so it there is a level of idiosyncratic risk so first of all you have to make sure that your clients are comfortable with that idiosyncratic risk and they look at it in the context of their portfolio rather than just transfixing on the line-item second thing is everything goes through a drawdown whether it's whether it's managed futures or the equity markets and boy when they hit a drawdown they really do it well they're not originally now they make our drawdown Slocombe look small yeah and any other strategy so to lose confidence in in momentum investing or trend-following is you know you know what smarter folks than I written tomes and got PhDs and even Nobel Prizes on talking about you know that you know one factor nails is going to work all the time but a well-constructed portfolio that exposes you to you know equity risk premium to carry from time to time to to value investing to to yes I mean gosh you know those value investors around the time of the tech bubble you know they were they were getting it in there in the neck but if you saw a you know if you saw a value investor suddenly change their spots and and big begin persuaded that it was you know I've given up on my value investing approach and I'm going to become a momentum trader you probably run for the hills so so all of those are good reasons to support you know sticking with the strategy that you have invested in and the utility that it provides to your portfolio and again in my view that's also a little bit of a reminder to the manager community that investors have bought us because we provide a utility to them you don't want to go surprising them and and and suddenly looking like a carry trade sure no I completely agree Marty I mean I think again as you write to say it's not just about investors necessarily not understanding the concepts in full it's also about how we as managers have tried to explain it over the years and maybe we haven't done a good job in doing that and I personally find that maybe we've spent too much time focusing on explaining how we do things and what we do rather than actually focusing on why we do it and I think that again if you can get people to buy into why you do what you do and and and and you know your beliefs so to speak yeah and it becomes a different and a much more a much much more easier or an easier conversation so to speak so I think that's true and I wanted to ask you just one more question on on sort of the the drawdown side and yet maybe it's a very short answer for you but I don't know but we try to eliminate risk as much as we can we try to manage risk as much as we can but is there anything that's left in the back of your mind when you go to sleep at night and where you say mmm I don't really want to wake up tomorrow and this has happened meaning is there anything where you simply just accept that this kind of risk I can't eliminate so it's anything that kind of keep could keep you up at night so to speak that's one of those questions where the more you think about it the less the less sleep yo get that's a risk risk management I think it's about finding the right balance right on the one hand we are paid to take risk Mia but on the other hand you don't want to take foolish risks that could be avoided so starting at the really extreme end you know the world we live in is a febrile place at the moment and you know we've all lived through various weather there terrorist attacks or hurricanes or tsunamis which can knock out your ability to trade and and that that seems so you know when you put it like that it's well it's only money as compared with the loss of life and significance of these effects but we do need to think about it's something something to be aware of what would you do in the event that a certain exchange is is is incapacitate I guess in a you know in in an electronic world that is somewhat less of an issue than the open outcry floors but still you know ones inability to trade a market just has to be the one one of the the most uncontrollable events that you can can deal with and then you sort of work your way in from there we've talked about having multiple prime brokerage and clearing lines it's making sure that you you know we obviously have a fiduciary responsibility to our clients to make sure that their money is is as safe as we can possibly ensure that it is and then it doesn't get stuck if there's some kind of financial or again geopolitical event at and then I think then really the risk management challenge is just to never being complacent you know a you talked about the psychological challenge there's clearly there are psychological challenges for the investors that it's our job to as you say to to help them understand and to work our way through in a spirit of partnership but they're also psychological challenges as a manager and boy you should just expect always to see something new yeah not true I wanted to ask you also too little bit I guess a little bit about risk but it's a completely different question I want to tap into your and to your mindset if I could put it like that way because and you know you start off many many years ago with twenty five thousand and then later on a hundred thousand and and so as an entrepreneur and your mindset is of course okay let's do it we're going to take certain levels of risk and as you said you over optimize you did all sorts of things but you didn't have any fear that okay if it doesn't work it doesn't work and the consequences if I can put it that way were not so grand at that time and then certainly years later you're super successful I mean you've got billions of dollars in the management you've got a hundred and twenty people to feed every month how does that impact the mindset and the risk willingness so to speak of you does that automatically lead to becoming more risk-averse in a sense it probably does nails I think it's part of part of the journey yeah and and you know also part of I guess growing up because you know the you know early AHL Braco AHL was as you did as used it there was no roadmap for Apple what we were doing and we just you know one day at a time and if it had all blown up well it wasn't a good idea in the first thing of the world would have gone off and done something else yeah so then you find yourself in the in the position where you are managing billions of dollar or some other people you know it's it is important it in a pension fund money it's people savings it's you know it's people's hopes and dreams and and as you say 120 people who under 20 fantastic people and and you know so my view actually maybe I have a I put it down actually to teamwork right so this is you know because I'd sort of alluded to the fact that my business career is not predicated on my genius because there isn't much of that it's on you know on being fortunate enough to work with some really talented people and so yet in many ways I think what I've tried to do is almost to keep as a childlike enthusiasm and energy and outlook so it's somewhere between childlike and scientific there's always new information there are always new opportunities there are always reasons to be cheerful and and and that's that's my mindset but I think the maturation process that's happened to us as a business is that I trust and surround myself with people that really can be there that nail this down way better than I can you know so I I think what I'm saying is that I haven't taken it upon myself to be all things to all men to all investors I I think that it's it's a combination of sort of you need the yin in the yang you need the people that are still entrepreneurial and coming up with wacky ideas and now you need that thorough diligent process driven risk management constant review constant you know could we do this better and and and that's in our DNA but but I'd like to think that we still have some of the you know the youthful enthusiasm that hasn't gone away sure absolutely I mean speaking of youth Marty succession plan is that something that's ever been brought up when you sit down you talk to your partners and say what are we are we doing this in 20 years or are we actually starting to think about like you know done capital like sunrise capital people have been around for also 30 40 years yeah and who have put in place succession planning is that something you already think about well we do but it doesn't you know there isn't a secret file mark succession plan that that you know is like the d-day landing because we've you know I talked earlier about that transition that you go through where you know you may think you know too much and then you have to trust the people around you I think we've we've done that so I am surrounded by a senior management team and in you know indeed great depth in the business of people that are really talented really experienced and so succession planning is really not an issue from you know and a lot of people own a own a stake in the business I think that Anthony and I in particular do this because we enjoy doing it yeah and you know and that was so Ahl was a happy accident we sort of bumbled into it and all you know worked out very well aspect was very much an explicit sitting down and saying you know this is the vision that we're trying to create let's go and do it so you know however many years later 25 years later it's the you know the democratization of the managed futures industry well we're well on that path nails I think that that's been that's been super I very much want to get us through the recovery of the strategy from from the challenging times that it's gone through and reaffirm its place in the if you will investor as model portfolios and and and sing its praises but you know there are plenty of people here that do do can do what I do way better than I do it and so you know it will mean me traveling less eventually but I don't think there's going to be a day where I just hang up my hang up my passport and and don't do this anymore no I've got a couple more questions before I go to the last section which is the sort of the more general and fun stuff but and you talked about the vision so to speak what's the biggest challenge that you see in that future evolutional or right where we are right now what do you think is the biggest challenge that you face challenge an opportunity I think every every business and you know every individual you know growth and evolution is not a linear process is it not absolutely you sort of you know you think you're on a ledge you think you're in an equilibrium condition and then something comes along and the world shifts I think it's it's being able to adapt to those shifts and seeing the opportunities rather than just the threats and I think what's going on is that you know this extended period of challenging performance has rattled many investors and it's also you know it speaks to the continuing evolution of the fund management industry in general and what do I mean by that well you look at you look at go back once upon a time if you wanted to in best in US equities you probably have to find a US you know deep value manager and pay them a you know a handsome fee to manage your money and and the world evolves and you know figure out what hang on I can get most of what this person did for me if I just get a you know an SP tracker and which cost me a few basis points so you do that with the with a lot of your portfolio and then you find some real skill that adds some extra components and you're willing to pay for I think that's what we're seeing we're seeing an evolution in our space and another and another hedge funds or alternative strategies so you know there's there's fee pressure there's pressure to deliver pure factors if you will and you know we can all say oh dear it's not what it used to be fee yields or not what it used to be it's just it's a terrible thing and you know hope this performance returns so we can all crank our fees back up I view it as you know it's it's a natural evolution and you know a Plec opportunity or also concomitant with that is that you know once upon a time if you wanted to everyone should have wanted to get into managed futures and have them in their portfolio goodness me we made it hard as an industry you know the products you needed to sign you sign over your firstborn and your you know the risk disclosure statements and and be prepared to pay just wild fees for this stuff and it's it's becoming much more available so when I talk about democratization when I talk about a place in the model portfolios of pension funds and of you know mom and pops that's that's that's where I want it to be so yes yeah there are challenges fees performance draw downs all of the things that we dwell on but it's also fantastic set of opportunities absolutely do you I mean it's no secret that a small percentage of the hedge funds and managed futures industry manages a very very large portion of the assets I don't know the exact numbers but if I say that 10% of the managers manage 90% of the assets is probably not that far away is there a risk in in depth that so many of the smaller firms struggle and and essentially are being forced out yes yes absolutely there's a risk and I I'm very interested in those traders in those models you know okay I don't want that that talent base to get it away sure but it means it is a you know it is a Darwinian process so I think if I put my crystal ball or you know look into my crystal ball I think what's going to happen is you know performance will return so I think we I don't know when don't take that as a guarantee but house performance returns for what we do and people's appetite for it improves then some of the smaller folks who have just not had a chance recently in a very difficult environment are going to have a chance I think some of these seed seeding funds and some of the fun to funds managers that make a point of investing in the smaller folks are going to have a run and then you will I won't say a change of the guard because I'm not going anywhere and I'm sure David isn't going anywhere but you will see some other other people develop substantial businesses and and I think that's fine again yeah so so this isn't about me trying to Barrett you know raise the barriers to entry or make sure that nobody else can get in here but no no absolutely not and I don't think that that actually the managers themselves seek that I think it's more the investors who tend to focus too much on on in my opinion maybe the size rather than what's in behind but let me let me finish up this section with just a couple of different questions completely I I try to remember to ask my guests what they would like to ask the next guest that I speak to you get kind of a traitor's inside to what would be really interesting to hear but will you I'd like to do something slightly different okay and that is to say what would you like to ask my next guest and what is that guest was David Harding oh well David we usually run through a random set of topics whenever we whenever we meet and speak and he's highly entertaining I think given you know what we see from the outside of of Wynton I would love to to get his perspective on you know does he see the managed futures industry continuing in you know as a self-standing entity or is it is it going to be subsumed into you know some kind of mainstream mega asset management business so is it you know is Wynton heading the set you know is Wynton take you are Bridgewater you know are these the the mega firms of the future the googles and the Facebook's of our industry or is there still space and does he support and would he still think of himself as as a managed futures manager alumnae yeah and final question on this section and that is really I mean you you mentioned before that you obviously are part of many many due diligence meetings phone calls questionnaires and so on and so forth but I wanted to ask what do you think is the question that investors forget to ask or fail to ask when they do their due diligence today what should they be asking you I don't have a sound byte of the one question that they're always missing but I think it's a lot of the areas that we've covered it's making sure that that that that they get that both they appreciate it and that the manager they're speaking with appreciates that it's a holistic endeavor when I speak to fledgling managers or people that were talking to and as you allude to it's a difficult environment out there so we do speak to a lot of folks that have run some money you know if if the person is just banging on about their entry points and exit points and you know the stochastic models and the deaded editor yeah that's that's important but it's by no means the whole story so it's making sure that the the manager can articulate how they many of the questions you've asked me do how do you how do you put the pieces together how do you think about the risk management how do you and how do you think about evolving this what's wrong what what what do you like least about your program at the moment and what are you doing about it because you know I think it's the the ability to evolve the program that is is crucial and that's what separates separates you know the long-standing firms from from the untested sure sure and moving to the last section Marty and I wanted to ask a little bit about what you feel it takes to become a great trader great fund manager but in more in the context as to because I'm sure a lot of our listeners are are listening also with the hope and aspiration to one day be the next aspect but is there any advice that you can give to to new or smaller managers for that matter that they can learn from that you've lessons that you've learned over the years that have kind of helped you you know get through different times or evolve well I think you know my starting places is is just it's obviously a very broad Church and and my particular style is different say from David's is different from a discretionary macro manager or discretionary CTA so I guess sort of first nugget is is be true to yourself because if you are if you are just passionate discretionary trader then hone those skills rather than you know constraining yourself unnecessarily and bye-bye-bye the belief that it has to be systematic I don't know I'm not sure that was a food I don't know or actually conversely the other way around because I look at someone like me and I I am way more of a scientist this nails then I am a trader and and therefore I we have tried to capture in the model you know how we how we would rationally respond to to events to how the portfolio evolves which isn't to mean that you know which isn't to mean that we don't supervise it and watch it all the time but my point here is that if you build the model and say well that's good enough for normal running and when you know when the bar explodes or the correlation explodes in the portfolio I'll have to step in and make a discretionary call on down gearing or cutting out a position or a sector or something like that so if you if somebody says to you I'm 95% of the time systematic and I you know have got the discretionary length no nails you are a hundred percent discretionary so and you and you will be unable to get the confidence about about the you know the the integrity of the models that you developed and them and the usefulness of any back tests that you do the last point I'm sorry you keep banging on that you know when I talk about that risk review process being both at a component level and then also aggregated across the the whole release that's really crucial because what you what we're doing in that exercise is basically going back through time and challenging ourselves to say could we have run that program because if you if you you know you can have odds this is a brilliant fantastic model and I'll just bug them all together and if and if in you know if in 94 or in 2005 or 2009 it would have concentrated the portfolio into a place where you just couldn't have hung on to that sighs position and you would have you know you would have intervened as a manager or your client would have called you up and said what the heck are you doing then then that then you can't you can't launch that program you've got to build in an appropriate constraint or you've got to modify the admixture so that it doesn't doesn't do that under those circumstances does that make sense it makes it makes a lot of sense and I think actually you said some very things something very early on in this answer that I think is is really really crucial because no doubt you know there are so many firms that aspires to be like an aspect or spice be like Wynton because we believe that this is what investors want us to be and therefore we should be like them at the same time nobody is going to buy a firm that essentially are just trying to be a lookalike of something else because then they can just buy the real thing so to speak so we also try to be different and differentiate ourselves and I think what people sometimes forget and that is that the only thing that really differentiates one manager to another that's the manager themselves so be true to yourself I think is such great advice because that's really what it comes down to I would say so - yeah what do I want to finish off with because we could go on for a long time and I really really enjoying this and is there any book that you would recommend people to read if they want to underscore something at the book maybe that has been and maybe I'm not referring to your physics books back at Oxford but maybe just something that has overt over your career made a big impact in you and and something you would recommend people hmm what do I think well I you know hark back to the days of Michael Adams father Cyril handing us a book of technical trading models you know that was very formative I have I've always I've always credited Jack Swagger sure with it but I'm not sure that it was shakers joke but but you know so I would I would refer to that as a good prime and and also more recently I've had the pleasure of meeting anti El Manon and I think that he's just done a super job of sort of surveying the space so you know in the spirit of learn everything you can and and then focus on on where your passion is I'm a big it so I sort of read you know I like that your short history of Britain or or I think there's a one book called Brideshead abbreviated and it's a sort of proceeded versions as are all the great novels because life life is way too short and there isn't time to read everything that I'd love to read so similarly with some of these you know like auntie's book it's it's a you know an absolute classic to give you an overview of many of quantitative investing techniques so if you Martin could go back and meet your younger self is there anything you would tell yourself to do differently based on all your experience that you have now lot snails but you know no big thing because it's it you know you you can't have that you can't have that wisdom until you've got the scars that go with it um I think probably you know recognizing the value of team ship you know a collegiate reliance on one another you know if I could have done that a few years earlier that probably would have been good if I could have recognized the importance of chemistry and you know how important it is that you just are comfortable with with the people that you were working with that would that would be another thing to learn what I've done something completely different I I doubt it oh this is been a heck of journey yeah absolutely fine almost final question Maudie is there a fun fact that you can share that about yourself that people who might even know you and don't know about you oh yeah a very very little fun it could be a talent a hidden talent it could be anything I don't know I have heard many different answers to this question let me put it like that and there is no wrong or right no there you know what my friends would all roll their eyebrows and particularly my kids because so the the little anecdote I'll end on the show that I talked about you know my eager days as a skier and mountain climber so in fact my the romance with my wife began on a climbing expedition up Mount Kenya and so to celebrate that on our 10th wedding anniversary I surprised family and took everyone you know so we had four little kids by joining and took them all down to Kenya for a surprise vacation to end on the plane down there so this is pre pre 9/11 train and Nutter got in the cockpit and took control of the jumbo jet and we basically went free for all fell out of fell out of the sky and it was it was all quite dramatic and very traumatic and we landed and and got on with our lives but it was sort of a singular singular watershed so you know my children always go oh don't do it don't tell the airplane story so I've been tried and tested by British Airways and I understand that as part of the part of the training program now for cabin staff the film of that allow light is is part of their training Wow fantastic now I asked you earlier today about what investors are not asking you to you know about important question so I also need to be you know testing my own effort so I want to ask you if there's anything you feel that I've missed something that you want to add and to ensure that I've done justice to you the HL story the aspect story in thing and and obviously at the same time thanking you for helping democratize things by sharing all of this Niels I think you're doing a doing my part and you're doing yours through these through these podcasts so so thank you I think that I mean I've become convinced over the years that the role of systematic trading is a you know is key is core to a well balanced portfolio and I don't actually think there's magic to it so you know that I could this could just be shooting myself in the foot but I think this is less about the genius of the trader then about the repeatability robustness thoroughness and and extensibility of the approach so I think that at you know where as managed futures like so many other hedge fund or alternative industries has grown out of the flamboyance and the uniqueness and the the flair of individuals I think that the future is you know it takes you've got to have those but it does play more to a you know to a model portfolio view of the world that you you know that you need this and you need other strategies and whether you get them all from one shop that doesn't seem like a sustainable outlook does it but you know whether you get all of the pieces of your portfolio from one shop or whether you get them from numerous different shops which I espouse because I think people should concentrate you know I think that that's the way it's going and and that's what I've tried to do and that's where aspect has positioned itself so less about the cult of personality and more about the cult of of robustness and and reliability and evolutionary improvement definitely now before we finish Marty well what's the best place for people to reach out to learn more about aspect capital we do have a very nice website asthma capital calm I think your email aspect capital client services at aspect Capital fantastic yeah and I'll make sure that of course all of these details are also showing up in the show notes page on top traders on plot comm so that people can definitely connect and learn a lot more so all I have left to say Marty is this has been a pleasure this has been an immense privilege and honor to have you on and I have enjoyed it thoroughly and I I look forward to connecting again and and hearing about the great work that you do at aspect Neels it's been my pleasure and we can wake up that lady at the dinner table now that we're done and and I look forward to to seeing you soon absolutely thank you so much much take care / kiss thanks for listening to top traders unplug if you feel you learnt something of value from today's episode the best way to stay updated is to go on over to iTunes and subscribe to the show so you'll be sure to get all the new episodes as they're released we have some amazing guests lined up for you and to ensure our show continues to grow please leave us an honest rating and review on iTunes it only takes a minute and it's the best way to show us you love the podcast we'll see you next time on top traders unplug [Music] [Music] you you [Music]

Channel: Top Traders Unplugged

Views: 13,603

Rating: 4.7402596 out of 5

Keywords: Martin Lueck, Aspect Capital, trend following secrets, trend following, trading, risk, top traders unplugged, investing, top investors, how to invest, investment strategies, top trading, top traders, money, investing interviews, successful traders, how to be a top trader, best traders, hedgefund, better trading, how to trade, analytics, managed futures, future of investing, investing strategies, investing 2018, investment advice, investment challenges, investing podcast

Id: 9zhnmC49c54

Length: 69min 35sec (4175 seconds)

Published: Sat Jun 17 2017