The Systematic Investor #157 | feat. Jerry Parker

you're about to join jerry parker maritz siebert and niels kostrop larson on their raw and honest journey into the world of systematic investing and learn about the most dependable and consistent yet often overlooked investment strategy welcome to the systematic investor podcast series [Music] welcome and welcome back to this week's edition of the systematic investor series with jerry parker and me nils castro larsen where each week we take the pulse of the global market through the lens of a rules-based investor for those of you who are regular listeners our conversations are intended to learn and grow as rules-based investors and if you're new to the show we hope that today's episode will trigger your curiosity to check out the back catalogue and listen to some of the past episodes that you may have missed like last week's episode with moritz where we discussed the benefits of system diversification a topic that we may return to today to get jerry's view anyways jerry always fantastic to be with you how are you doing this week what's going on doing well niels thank you for having me and it's fun to be here i listen to the podcast with your other guests as soon as they come out i'm often very impatient and then i've started listening to them more than once and watching on youtube so i get the transcript so i'm really paying a lot of attention to what you say on a weekly basis so that's very kind we will with your help of course now at this point i would normally give a shout out to those of you who left the rating in review and show my appreciation our appreciation as it really does help the show but this week i have to share that we also got a pretty bad review from someone called lower low so i think he must be a trend follower since his use of the words lower lows from france and he or she was not happy with moritz and my interview with jack swagger and he did not think we let jack speak enough but you know as ted lazzo would say that's okay we don't need to all agree and in any event thanks for letting us know lower lows and i hope of course that you at least enjoyed the other 400 plus episodes that has been released so far and for those of you who want to help offset this negative rating we would of course appreciate if you would jump into itunes and leave a few rating and reviews in terms of a quick summary of the week due to the various holidays at the beginning of the week it was kind of expected to be a quiet one but instead corporations issued paper at a breathtaking pace for the week there was 52 boroughs who sold in excess of 76 billion dollars in paper surprisingly the large supply barely moved the interest rates as the 10-year treasury note was less than four basis points higher for the week the s p 500 traded lower each successive day this week as forecasts for slowing economic growth dominated the headlines but point to point the index was down approximately one and a half percent which is hardly a correction given all that's going on it's fair to consider the chance of the fed tapering purchases this month as a solid maybe but the upcoming september 21st 22nd fomc meeting may serve as a platform for a formal announcement of their plan with the current plan calling for a full wind down of the quantitative easing regime by the middle of next year now covet 19 continues to weigh on the economic activity and workers continue to be incentivized to stay off the job but the producer price index released on friday is likely to shake the fomc's confidence that inflation really is transitory ppi final demand increased 8.3 percent over the last year's index value on top of the fed's likely discomfort is the calls from influential voices advising president biden not to re-nominate the chairman so it sounds like we could get a busy end to this year in the financial markets but perhaps the biggest news of the week was that the s p 500 did not make a new all-time high and in fact there wasn't a single day in the s p 500 during the week where it was up which is rather rare by historical comparison and has only happened 14 times out of 911 trading weeks since 2004 but as mentioned the move down was pretty small and not really a correction let's talk about what stood out for you jerry since last time we spoke anything sort of performance wise market wise news wise from a big picture point of view oh yeah big picture grains are hanging in there one short soybean meal but everything else i'm pretty long the grains still kind of funny how the dollar turned around and we we have a lot of logs and a lot of shorts and it's like 50 50. so some of the european currencies are weak although they rallied a bit this week and then the emerging market mexico russia brazil south africa stronger so that's interesting to me but i think the big mover this week or especially yesterday it's uh new highs i think in most of the lme the base metals copper aluminum zinc nickel lead 10 is 10 has been the biggest mover and the biggest sell-off but man i think aluminum i was reading some headlines i think aluminum and a loop there's fundamentals out there that uh aluminum is should stay strong and it's kind of major resumption of those up trends and i think started off a long time ago a year ago but uh that sector of my portfolio has done very well i'm really happy with my coffee position i've got london coffee and i've got u.s coffee and london's been stronger i think it made new highs this week so yeah it's been uh oh oh yeah i wanted to mention coco there was we had some tweets going back and forth with our friends friends of the podcast on twitter talking about coco with 20 losses in a row and uh i mentioned that i was long i think london cocoa and short u.s cocoa at the same time so it's just how you know my system can get triggered barely get triggered sometimes that would and i think i'm going to probably end up losing money on both of those trades so that was the punch line you know yeah not only has there been like 20 losses in a row in cocoa but i've figured out a way to even have more since i trade both but you know i'm hopeful for coco it's it's building this base and it's been frustrating a lot of false breakouts and that's when my system kind of says yeah that's let's really take this market seriously but then after 20 you know after 20 losses in a row i will be hesitant to do another one but the system and the computer is not so i'm not sure if that's good or bad but i'm sticking with coco i mean it's a great point it's a great discussion you know i have exactly the same experience with coco it's just one of the most frustrating markets and has been for such a long time and it's it's kind of getting to to this point where you say should i really continue to trade this because it never seems to make money and i think so a lot of people i think will have these uh will look through the portfolio and and have these observations with some markets and of course as you say well you know we just keep at it and it's just one market out of 100 or 50 or however however many markets we trade and i think that that's absolutely the right approach but but i fully understand and appreciate the frustration by the way speaking of coffee as you as you rightly noticed european coffee is always stronger than u.s coffee i mean u.s coffee doesn't taste of anything right i like that i like that that's good exactly but interesting stuff going on in the middles i completely agree i mean base metals uh much stronger than than precious metals at the moment i mean on our side it was a down week this week there was some pressure in the in the stock sector in the in particular with with us mentioned the u.s stock market for the first time you know losing money on the week but interestingly enough nikkei did pretty well and topics so the japanese stocks are doing something completely different at the moment but not enough to really offset all the other stock markets grains and soft also struggled on our side even though the other sectors were marginally positive there was just not enough in it to offset that kind of negative breeze we saw in particular inequities volatility wise it's interesting realized volatility continues to really tumble and it did so this week and you now have a five-day equally weighted measure in its ninth percentile and it's standing at 4.1 percent annualized volatility which is almost back to the levels we saw in 2017 which is on record the lowest vol year at that yeah on records oh anyways interesting i would say what was also interesting is that the vix index did not react in the same manner in fact it increased for the week even though realized volatility was lower and it went up by four points to about 20 so not a small increase so a couple of interesting things happening in that area on our side our program lost a little bit of money about 60 basis points i will say that in october i think i'll come out with a little mini series on volatility so stay tuned to that in terms of my own trend falling portfolio and model where i can be more detailed of course it was down 2.2 percent for the or it is down 2.2 for the month it's up 7.08 percent for the year performance so far this month all three groups are down group one about a percent group two about half a percent in group three about three quarters of percent so far in terms of sectors base metals as we talked about in energy is are doing well and the worst sectors so far equities bonds and short term interest rates and as we also talked about single markets for the month so far aluminum doing the best net gas following that and then it's followed by the nikkei and at the bottom we find the dax the swiss market index in australian so definitely an equity theme to that and in terms of the trading the system started the week getting out of some uribo and some live cattle and getting into some long nikkei positions and then on wednesday it got stopped out of a lot of dax positions for the shorter term models and then thursday it took a little bit of profit in swiss market index as well as in a short german boon position and it finished the week buying a little bit of mexican peso some sink and getting out of a little bit of wheat and actually going short palladium yeah palladium was pretty weak this week anyways your beloved risk to stop level jerry is down to 8.13 down from 10.16 percent you know i was thinking about that uh when i was listening to the last week's podcast that that thing can get large the more money you make yeah so it's not a bad sign kind of it's it's really interesting yeah open profits clearly because the stops obviously don't move up in a linear way right so so open profits will definitely cause it to look more risky but you're absolutely right and in a sense it's a little bit like what you're talking about when you talk about your closed equity and your open equity right we need to allow a little bit more risk when when there's strong profits so yeah i agree with that it reminded me of another position i have on which is the natural gas and i trade the us in the uk and like moritz and you were talking about last week the uk has its own fundamentals with russia and europe and whatever going on of course and so uh that the uk has been much stronger and much crazier yeah than the u.s natural gas which uh is an uptrend for the first time to this degree in a long long time but that's interesting as well it reminds me of you know richard we were having a discussion on clubhouse a few weeks ago and he was you know his explanations are so amazingly in-depth and he uses words to say the same thing i've been saying or i've been trying to say that i haven't heard before and it's just like a poet i really enjoy listening to him but once he gave this explanation i was like whoa whoa whoa stop stop what you're saying basically is that we see correlations a lot like natural gas or coffee but they can break down so we shouldn't pay attention to them because we'll miss an outlier if we say uk gas equals u.s gas uk coffee equals u.s coffee he goes yes that's right okay all right so for i need to interpret some of these things for more simple minds like mine sometimes and that's what we're sort of seeing you know how you will miss a big trend in some of these markets if you and this is something that i missed and i know i've been on the show before and said well you know don't worry about it all the energies are the same even though i had also said i made 30 in heating oil one year yeah so it is kind of a real we don't want to be too risky we don't want to ignore correlations in in highly correlated sectors and groups and yet we can see these outliers in these trades and some of the what seemingly are correlated markets look a lot different than uh the their market they're supposed to be correlated with yeah i agree um there seems to be a little bit i mean first of all there are more markets we can trade now i'm sure that um 10 20 years ago there wasn't an a uk net net gas contract i mean i'm speculating here i don't know it for sure but it's not something that's been on my radar until recently and the same with some of the other european markets that are now uh tradable that we would otherwise trade in the us so there seems to be a bit of a decoupling and actually it's great for us because it gives us even more diversification opportunities even within the same same seemingly same markets so i guess we should just embrace it and this is just another reminder that um you know as you said you can have these outliers suddenly occur and and our job is to try and capture them and i also think i think some of this is what we're seeing actually in the returns between again seemingly similar trend followers that's a big return dispersion among managers in the last 12 18 months and i really think it's the ones who have embraced some of these newer contracts on your markets that have really benefited that's what it looks like to me so that's right i mean you know when i first got in the business my takeaways from the turtle program were you know hit those breakouts don't stop and diversify like crazy and it's like you've said a few times since uh coveted outbreak of last year that that's what's been rewarded just close your eyes hit the breakouts and trade as many markets as possible and that strategy is having its day it won't always but it seems to be working pretty well now yeah and there seems to be not that much downside really to to to change kind of the way we allocate risk to include all of these markets we could still have the same quote unquote risk to the sector and just say okay if there's two natural gas i'll trade them a little bit small i don't think that that's a bad thing so um so yeah interesting stuff i wanted before we dive into the question there's a question from sebastian that came in this week but i just want to say you mentioned richard and he and i and actually also morris and i were answering a question from derek and we which was regarding back tests i think things we look at but also kind of processes we use in order to do back tests and i also wanted to um let you weigh in a little bit maybe not spend too much time on it but big picture wise in terms of how how you and your your team does back test in in general you know how far do you go back do you focus uh to put more weight on on more recent days or not recent days sort of give a little bit of a of an insight to how you um perform the back test or the process of for doing a back test and maybe some of your which i know you've said before but some of your the key things you then would take from it yeah i mean i think you should use all the data and uh i'm happy being in the minority on that that's fine and don't overweight recent data i kind of think i understand how richard and dunn might update their slowly slowly make minor adjustments to the parameters i like that idea i think if i understand it correctly it makes perfect sense to me i've tried to explain it back to richard and say you know if i if i understand you correctly i would have no problem doing the same thing uh adding data and slowly seeing if the markets need to be if i need to be longer term or shorter term that sounds good to me but um i just try to look at you know i've said this before like i like to look at charts and see what's going to keep me in the big trends you know what sort of parameter i don't want to be too short-term and get bounced out of the big trends and i don't want to stay too long and give back too much profit and then when i get in my head uh what this looks like what should work to hunt those outliers and stay in those outliers that last a year or two or three and then i do the back test on those parameters and the back test says yes those are good parameters and so that's kind of how i do it i don't want to optimize and i don't want to be fooled by what my eyes are seeing so i want to do the back test but i want to start with what i with the philosophy and i just love this idea that you brought up and that i think i'd heard before a few weeks ago loose pants i'm like yes loose pants and i just think when you look at some of these charts in these markets especially recently the feedback that i get from the research and from my observations is it's very hard for you humans to be too long-term i mean because i swear some of these trends that we have seen they have had massive sell-offs that were very uncomfortable and yet go right back up right back to the highs and then the profit is just gigantic and i just was thinking it's almost impossible i don't know if anyone who can do that i don't know i don't care almost what the research says the back test can tell you if you still have your full modern position going to have one hell of a trade and you're going to be making so much more money this year than anyone else it's just not modern it's bitcoin tesla and in order to what you have in the disappointment of lumber is i was thinking the other day you know lumber is just a bad looking trade for me because i gave back way too much profit quote unquote right but i followed my system but in order since i'm treating all markets the same i had to sacrifice lumber in order to stick with tesla and moderna and you're like oh yeah you see how do i make all three of those trades look great i don't think you can you can make the most amount of money on all three as a group if you have a long-term approach but i think that getting into your back testing and saying to yourself constantly loose pants loose pants have these parameters that a lot of crazy price action can fit under and keep you in it is so important and you can't pay too much attention to drawdown then or maximizing the profit or volatility because that's not loose pants you're being too precise and adapting i'm a i'm an anti-adapter of new price patterns because i want to see price i'm going to be ready for price patterns i've never seen before which it could in the future some of some trade in the future might need even looser pants and look way worse than moderna so it i'm getting excited about research because i think the research is good and i agree with what everybody says about it except we have to be prepared for crazy volatile markets in order to maximize our profitability yeah i know i i love the way you phrase that of course the quote was not mine it really was from perry kaufman i think it's in one of his books but it is a fantastic quote and i do see definitely signs that when we talked about before the return dispersion i do see signs certainly that some of the managers that i know well uh who are doing really well in the last 12 18 months and and congratulations on that i think it is the ones that as you say can absorb the volatility don't worry too much about the drawdown and will you know benefit over time with without a doubt so um yeah completely uh agree with that and embedded in the let profits run take small losses and let profits run i mean it's fine to reject that and that's fine and even as a trend follower you could reject that whole notion that's fine as well or parts of it or to a large degree or that's old school caveman and it's not much evolving going on there that's all fine but you have to admit that in that one little cliche take small losses and let your profits run is it's impossible to for me to understand how that could possibly be the case unless you are planning to treat open profits different from losing trades and so right then and there we're going to take these 25 basis point losses but the volatility in order to let the profits run there's a distinction right there between losing trades not not percentage performance and not daily performance or weekly or monthly no no no it's the trade let that profit in that trade run and that right there to me says i have no care related to volatility if you're going to follow your system and follow the exit in the trailing stop you have to wait for it to get hit and that could be very uncomfortable and painful and so there's two different types of drawdown but drawdown from a peak profit in modern a tesla bitcoin lumber that's different than a small loss yeah very true very true i wanted to actually also pick your brain on on a topic that also derek brought up because i'm sure he would love to hear your view on that as well mort and i gave our thoughts last week and and that's this question about what we would do if we had to start a cta firm today and not 20 or 30 years ago how would we go about it probably the last thing on your mind really but i would still love to see if we can give derrick a few thoughts on that how you might want to what do you think are the challenges today for new managers and how that how you may think they could overcome it because as i mentioned last week i think the barriers to entry in our industry today is higher than they've ever been for various reasons so do you have any thoughts on if you had to start all over what you would do i believe i saw that tweet and i think we talked about it on clubhouse but then i listened to you and moritz and i was like oh yeah you guys are really i really had forgotten about one big issue that moritz brought up which i think is man is paramount and that is positive cash flow that is sort of the most important thing and that's and that's my mentality in 1988 when i started chesapeake and i had tremendous positive cash flow and a few clients and the way he explained you know his uh starting of his cta firm that i was really thinking back to those days and thankful that i had not gotten into trouble in some of those areas but i just can't help but think too that it's it's two different questions one is if you want to be a successful if you want your performance to be good and or if you want to have a successful trading firm with assets under management that's like two different things and i i think i have no clue how to do the latter because it's so hard now when i started people were throwing money at us and some of the deals and some of the funds we were trading were sort of dubious from a client perspective and whoever would take the money and trade it and trade it kind of large and overcome the high fees the early days of managed futures i think that was really fun but in hindsight it was not sustainable and then in the 90s we most of the industry had those one giant client that was just the best client ever and the fees were low but the track record was amazing my track record with those guys was just so phenomenal when you compared the two with my managed futures public funds the big wire houses that didn't look as good because the fees to the clients were so much higher but now how do you do that where is this big investor that's going to step in and give us all you know lots and lots of assets to manage and understand and love manage futures and ctas systematic trend following i don't see that and it's very difficult to see how small smaller traders are going to have the same success that chesapeake had from 1988 onwards for 20 to 30 years so it's i have no idea how to do that but as far as just having a good performance and having a good small fund i would say you know have a fund don't have 100 managed accounts like i had and trade equities trade single stocks with you know make that portion of your portfolio the 15 or 20 or whatever that you're going to allocate to the stock sector you know definitely get out there and trade individual names with lots of diversification hunting for those outliers in those markets and uh try to blend in and not be so cta-ish i think you know for a long time i i don't know if you felt this way or done felt this way but we just sort of felt like we made a mistake by being classifying ourselves as a cta to some degree and not more you know systematic global macro trading equities and being a little bit more mysterious i would hear about you know famous hedge fund guys that were thought of as more of hedge funds and we were just pretty sure that they were all kind of trying following in their own way they just didn't talk about it but i'm not sure exactly how to become a big cta now for myself or for anyone no i i mean you make some some some great points and and i agree with that it's very hard because what we want to do as managers in order to achieve the best long-term performance is not necessarily what what the clients well maybe they want it deep down but they just don't have the ability to uh to stomach it so to speak with the way they are structured what i did notice and that's quite interesting i i do think we could say in general there's been a bit of a drought in terms of flows into the cta space i think it's shifted meaning that i think it started out with kind of high net worth individuals then the institutions came i think it shifted back somewhat towards the high net worth individuals i think the institutions have been taking a bit of a breather but then i did read an article yesterday about inflow seen in one of our peers and where they were highlighting in the in the article that the flows really came from north america institutional investors and i think putting two and two together i think what's going on right now is that very few but very large u.s based pension funds and some of them have been on the on the show like calstrs a number of years ago and i do think they've been in at the forefront where they really do realize that there is just no argument for not having trend following in their portfolio there simply is no no scientific argument for not having it that's never been a white paper written that doesn't confirm the improvements that that we add to a portfolio and those guys continue to add trend following i think to to to their portfolio and so i think that's what what i'm picking up is that that some people who really uh understand and believe the value they are now adding but these guys are obviously not going to invest with the new manager they're picking the top five which is why they they continue to grow in size and and then it doesn't really flow down to to even medium-sized managers today so yeah it's a it's a tough business but i think the best thing you can do is if you love the industry like we do just do it and and hopefully uh you're gonna have luck on your side and uh and get that little breakthrough yeah how do you think at some point in time stocks return to more of a normal performance that we will see a resurgence in ctas and we should dominate with our risk control and with our the number of markets and i think eventually they will i think maybe long after i'm gone they it'll be the most mainstream investment i think that i kind of obviously don't enjoy some of the elements that have been added to trend following by ctas of all targeting the obsession with drawdowns on open trade profits and i kind of like the more classic but more than likely that all the large ctas have dealt with these institutions and come back and said hey this is what they want you know you can make fun of but we're the ones with the billions under management and we're the ones meeting these people's needs and they really don't like uh the drawdowns and the volatility in these open trades so we're trying to run a business here and give these clients what they want and it's not classic trend following so i still don't understand why like especially like a year like this year like where is the classic trend follower in like a mutual fund why aren't they up 20 or 30 percent like some of the uh smaller traders are where it does seem like that we've that has been that vote has been missed a bit that more retail people might be just perfectly fine with more of a classic strategy but i'm not sure if enough of that is out there in the in the public and in the mutual funds or an etf that they could access so it does seem to be maybe the high net worth people there would be perfectly fine with someone who accepts the volatility of some of these open trades but i don't know if maybe the i feel like some of the mutual funds they just they have to sort maybe more of a similar strategy than um you know like a chesapeake classic strategy i know for a fact that at least one but i have a feeling it's it could be more one of the very big so so the mutual fund space as i understand it it's all about being on the right platforms right there's maybe a handful of platforms if you're on those you can kind of grow your aum a lot but certainly from um from what i know a few years back one at least but maybe more of these platforms started to discourage their broker network from investing in those cta mutual funds that had high volatility so that that i know for a fact and so that could be exactly the reason why as you say that what people can buy today is not what's going to give them these outlier returns as we've seen in the last 12 to 18 months but i want to go off script a little bit more jerry if you don't mind because some it just reminded when you said this thing you said you know when i'm when i'm long gone and i wanted to to ask you something so i was listening to a podcast episode this week or a conversation uh maybe i should say with later braga the the founder and ceo of systematica which is of course um hugely experienced person in our space and they they're the ones who run the the blue trend fund which has been very successful over the years and she was asked that you know about what are the things that um keeps her up at night what are the things she's thinking about and it actually was two topics that we never talk about on the podcast actually one she said cyber attacks apparently systematica had been attacked only a few weeks ago or had a cyber attack and then the other thing she thought a lot about was succession planning so given the fact you said when i'm long gone i was curious succession planning is that something that you ever thought about and and also the other thing i was just you know cyber attacks and all of that is that something you think about spend time on oh yeah we spend a fair amount of time on cyber security and we employ outside firms and we have you know people in charge in that area so it's something that we're we get uh good grades on but we have to remain vigilant and um yes certainly that's a big effort too i think from the nfa right i think my compliance people were telling me once we're sec registered as well and sometimes i see regulations and compliance ideas floating around our firm and i'm like what's up with the sec why can't they just like leave us alone a bit more and they'll say no this is the nfa so i think the nfa is is is uh doing a pretty good intense job as it trying to keep this issue in the minds of ctas and make sure they understand how important it is so yeah i agree with her on that it is frightening uh when you read about these attacks and what about succession planning if you don't mind i know it's a little bit off-the-cuff question but um is that something you ever thought about i think you know for me my trading has over the past you know five years become more personal and uh with fewer clients and more of my own money that i'm managing so and i think my succession plan is pretty much how do i continue to encourage people who are listening and um to trade you know more of a classic trend following approach and so i'll be succeeded by lots of small traders who will give me some credit for introducing them to and extolling the virtues of smaller of a classic trend following approach so i don't think that chesapeake will live necessarily beyond me but hopefully the the methods and the ideas that i've been using since 1983 that they will succeed me beyond because i do think it's a shame for everyone to evolve into a hybrid of classic trend following when classic does really well and it's not going to get any better than the last year and a half or two years if this is not enough evidence you know there's nothing i can do or anyone can do but i do think turtle trend following may pass away and i think that's what i'm more interested in we cannot let the one of the greatest experiments and one of the greatest ideas and events of all time from a financial trading point of view our little niche just totally go away like i wonder how the turtles traded you know it's just a lot of disinformation out there and a lot of emphasis on wrong-headed small parts of the turtle experiment and the core of what it was all about and what it meant i think i don't want that to get lost so that's what i'm way more interested in that continuing and the great thing because i completely agree with you and and and i think thanks to all your efforts through the the years it will continue but in a sense that's also why i think it is so important that we are building this body of work every week we have these conversations they are recorded they will live forever when you and i are long gone they will still be there and and it's that legacy hopefully that people will always be able to refer back to keep them grounded and keep them focused on the long-term picture but we're not quite gone yet so let's go back to the questions that we have for this question from from sebastian this week and then we'll dive into some of the topics you brought along jerry which are really really interesting as well [Music] sebastian writes thanks for a great podcast i really enjoy every episode and learn a lot in the last episode i really enjoyed the discussion about starting a trading firm so we've done that already uh very honest words i have a question about currency hedging the most stocks i trade i are based in uh denominated in the us dollar and i'm based in europe i know mort's and nils are based in europe too do you hedge u.s dollar-based futures stocks and if so how so let me jump into that one since um since it is an issue i think that's um i think essentially sebastian if you were a firm for example you could offer your strategy in different currency denominations and you would obviously hedge your currency back to that base currency every day every week however often i think if you're trading your own p l i think you have to at some point bring it back to your base currency you could say that you know if you're trading a lot of u.s stuff you could say okay my my initial margin that i have to post in in the currency of choice and i can and you can say or the currency of of the exchange and you can either decide and say okay it gives me a little bit of currency diversification that i leave that in us dollars but all the profits that i have all the realized profits i bring back and i convert that to europe you need to find something that is easy to manage though you don't want to do this every day if you're just trading your own account so maybe something you review on a monthly basis i wouldn't worry too much about it in the long term but once you do have some very significant open profits i think you do need to convert it back if you don't want the currency risk anything you want to add to that uh jerry yeah i think i believe that um i look at it on a kind of a trade by trade basis you know if i'm trading and market denominated in euro then i might you know just i have a tendency not to calculate and worry about it not being in dollars but uh so if i'm going to try to lose three atrs on a trade maybe on a euro-based trade i'll i'll lose 3.1 atr's or 2.9 so i think i just write it off as it probably is just going to probably come out in the wash not be a winner or a major loser and then of course if you're trading euro yen or euro canada you can't hedge that because then you're back to just trading euro so i think i just sort of ignore it but don't most of the european traders and ctas um keep their track record and their in their fund in dollars i know some yeah you have to convert it yeah you have to convert it back for for track record purposes completely agree and some of them uh have different share classes a euro share class a swiss a us so that's another way to do it as well but um yeah i guess i don't focus on that too much no and then we do i mean at all at our shop we we have uh different currency classes but then you know the our cash manager will always hedge the uh the actual currency exposure so that people don't see that because that's the reason why they bought say a euroshare class that's because they don't want to have you know unnecessary exposure to other currencies so it can be done but of course at the end of the day people should just be aware that if you want to have a you know currency denomination in euro then you're gonna pay negative interest rates so euro share classes at the moment perform generally worse than u.s dollar share classes just because of the interest rate uh differential but that's the way it is i want to jump into um since we're already 45 minutes into our conversation i want to make sure we get to all of the topics that you brought along and maybe one or two that i thought of at the same time and it's based on some of the tweets you sent over to me so i'm sure you can give maybe a little bit more of the context so i'm gonna throw them at you and and we'll see how uh where we go with that the first one you were sent over was um i think from a conversation i had with rob a while back the code was keeping things simple often seems so complicated that a complicated approach is chosen as an easy way out oh yeah i'm always trying to pick up quotes like that and and make it make sure everyone knows that i'm just a simple guy and you know it really doesn't help my reputation i should try to become a more complex person but uh you know that was a quote off of linkedin comment on your interview with rob from harold a trans trend so harold's a really smart guy and transgender yes i've just been such a huge fan of those guys from day one i just for some reason i just thought they were they're just the best and every and harold is really a smart guy and i love reading i sometimes don't understand some of his stuff but uh this of course i did understand and i pinned it as it's my pinned tweet yes it doesn't get any better you know than that from my perspective so um i thought that was interesting because here's a group that could definitely get as complex as they wanted to they have a lot of smart people and i think they stay pretty true to the core trend following and i think that's kind of a nice little quote that you know one of the things that i do is that i think it's very important to um be ready you know as i said earlier be ready for things we haven't seen before and crazy things covet and that crazy market action and i think trying to come up with a lot of complex ideas on what should we do next like an almost an ai point of view to learn from kovid i think or just if you see huge volatility and lots of losing trades in a short period of time reduce your trading size okay so that's my solution right i could become a lot more complex with rules and trying to learn what has worked in the back test the best to prevent massive loss of capital and i'm very hesitant and i'm not in favor of overriding the rules and the systems and yet we have to stay in the game and preserve capital and not be slaves to these rules and systems if it's going to cost us our business and too much of our equity and so that was the ultimate turtle rule is that when you're having periods like this and things are going really crazy uh take off half your trades or a quarter of your trades and and see what happens and survive and maybe it won't work and i don't think it has worked very often for me and sometimes i have got myself in trouble from just purely trading too large but it was a big benefit to me last year when cove it happened just to have that one simple rule in place of maybe a lot of complex rules that says when things get really crazy trade small and then when things settle down go back to trading normal and i think that that's just the best rule ever and i think that that quote kind of reminds me of a way that we could uh become a lot safer without being too complex yeah i want to stay with uh uh since i now know that the quote came from uh from harold at transtra and i wanna stay with transtrend for a little while longer because they do produce some great papers and research and um i think one of them was the subject of a article that you also tweeted out from hedge fund journal and in that there is another quote that goes shorter term systems might sound more responsive but they may not necessarily pick up new trends they can be distracted by noise we think in terms of robustness rather than speed we want to ignore short-term noise and stay in long if the opportunity is there yeah i like that because once again it reaffirms my commitment to longer term and staying in there i think even if we look at the back test and we see okay this is uh the computer wants me to be longer term i'm uncomfortable with that so i think it's difficult to actually follow the rules that or the preference of the back test because once again those drawdowns can be kind of anxiety producing but another thing that produces anxiety for me is just continuing to get in and out of a trade why get back in well we've got to get back in at the highs because we can't miss an outlier that's a trend following rule but man some of these markets you just get in and out your whipsawed all around and that is just a lot of noise and it's very costly and we tend to get small nicks but they add up over time and we tend to focus on the big drawdown which yeah it's painful but sometimes uh avoiding the short-term noise and whipsaws can really make a difference in our performance you take something like sugar it's been kind of an up move but and it has it's probably won't make a great deal of money i mean most the trades don't but if you were too short-term i mean it's just going to chew you up and we talked about cocoa and so for me it's been 20 losers in a row but for my system it's probably been just five over the past you know five years because i just don't get out unless i'm really really compelled my stops don't get hit unless it's you know really a trend reversal in a major way so i think i like that noise thing the noise is getting greater and greater and uh we've had to in order to preserve profitability become longer term we get criticized for that it's reminds some people of just buy and hold but it's more than one thing about hunting outliers you want to stay profitable and not get chewed up when we don't have the outliers and the longer-term systems do a much better job than the shorter term i think everyone should try to be as short as term as possible and maybe one of these days we'll get back to the late 90s when the trends were more calm and smooth but if not i think a longer-term approach is going to continue to do as well or better yeah no definitely again i'm pretty sure it's from the same article where the quote this time is there's no certainty that historical correlation patterns will persist systems need to be flexible enough to cope with things that have never been seen during back tests history isn't a safe guide we see things which have never happened before all the time yeah that's right i mean this is one of my another one of my favorite topics so i need to diversify more in my topics i guess i'm not as well diversified about the things i talk about but uh yeah so i think that is such an important thing for me that once again these loose pants a lot of trends can happen in the future in the past and yet the chart patterns and the fundamentals that are driving them are going to uh could be much different and we need to uh allow these parameters to capture these large trends and hang in there and stay in there with them and then you know once again that rule of cutting back when you face problems in your portfolio and you losing too much money that's just the greatest rule of all time you no matter what you see no matter what's causing it we can all trade smaller for a time in order to stay alive yeah no definitely it is interesting because certainly when you uh hear or listen to other people in our industry talk they do talk about the correlation seems to be more persistent than other things that we use uh potentially in our in our signal generation or risk management whatever it might be but you know again nothing is bulletproof now then i want to move on to something that i had picked up when i i think i read the original paper that transtrent had done something that was very interesting to me and i do think it made a huge difference to performance last year and it's when they start to talk about volatility and so i'm gonna do my best to not butcher this uh these few lines so they write some traditional approaches to forecasting volatility and correlation such as the exponentially weighted moving average which heavily weighed the most recent observations could have markedly downsized positions after march 2020 and resulted in two small positions also in 2021 short-term volatility associated with the phenom phenomenon such as cryptocurrencies and speculative retail investors frequency in certain meme stocks could have resulted in systematic strategies reducing or exiting exposure transtrend was not entirely immune to these typical portfolio management dynamics but anticipated the consequences of such periods of extreme turbulence initially in march 2020 transtrent undiversified risk adding up all positions all position risk assuming 100 correlation did drop as some positions were caught or exited but by may 2020 it had increased to about 50 percent above pre corona virus crisis levels the ability to not only rebuild exposure but also augment distinguished trans trend from some systematic strategies targeting constant forecast volatility that might well have undershot their target volatility in 2020. i think this is a very interesting topic because i fully agree and have certainly seen how volatility or changes in volatility significantly changed exposure in some strategies last year and where of course now that we know what happened if you were able to maintain high exposure or build quickly after the initial shock in march and april you would have had a much better outcome for the year 2020. what i didn't quite understand maybe how old would clarify on linkedin or twitter is this word that their systems anticipated the consequence i'm not sure what that means anticipated the consequence if there is a certain rule you know in there or whether it was something they decided to do or whether it's kind of built in there because it is kind of unusual frankly to see a systematic manager where the markets go through an explosion of volatility to see a systematic manager after decreasing positions as we would normally do increase them so quickly after that because volatility hadn't quite unless you use very short-term volatility measures you could maybe argue that volatility had decreased again so much by may that you could increase your positions but usually we don't use that short term volatility to to position size so i'm intrigued by this part of the uh of the article i don't know whether you picked up on this at all jerry but but it's just interesting to me yeah i read that whatever they put out whatever whenever he says i read it very carefully and you know it may sound odd coming from me but with someone like uh transtran i really my idea is how can jerry and trans friend both be right sometimes i read things and i'm like i could jump to this conclusion and oh it doesn't sound like they're doing things the way that i would do it or the correct way the correct jerry way you know and uh but then sometimes i'm thinking just read it more carefully maybe you know we both can be right and how is that possible so i was trying to figure out that way that i could read it in a different way but i think one of the things that happens with maybe with ctas in general is you're back to sort of the volatility of the portfolio in the correlations so when i set up my portfolio i kind of pay attention to correlations and then i ignore them forever so i set up my position weightings and all the different markets and i'm going to but they're fixed so i think yeah heating oil crude and unleaded they are kind of correlated silver gold and platinum kind of correlated but they could have their own move that could be a big outlier so this is the weighting that i'm going to give the portfolio and i'm just going to say to myself okay over time the correlations are going to go from 0 to 99 but i'm okay with that i'm just going to live through it if it starts to impact my portfolio in a big negative way i'm gonna just cut back the whole portfolio but i'm going to be a slave to taking all the trades for the rest of my life with the same system same entry same exit all the markets the same longs and shorts the same and the same unit size the same weighting of the portfolio so i'm not going to pay attention to correlation so maybe though other ctas say it's not just the atr oh i was very defensive about this atr thing and i'm like no no when the volatility when i put a trade on and some of those trades we were reversing the volatility getting short the commodities and the currencies back in last year so what i'm not going to say oh i'm going to anticipate more volatility or when i we reverse the positions and we started going long after covet was deemed to be over and the expansion was going to occur i'm not going to adjust my atr so i was really defensive about that i don't like that idea at all if the volatility is high then i'm going to have a small position you know and i'm going to but maybe they were intertwining into all of that this correlation thing as well which i don't pay attention to and saying we know we not only look at the atr we look at the correlations and thus we're going to trade small but of course maybe they also say that is a hindrance sometimes jerry's right we we don't want to trade too small and maybe they do have some rules that say hey now we think history or the back test has shown us that we're going to go through a period where the correlations are going to be less than they were and thus we can kind of trade small so i mean we can trade larger so i think maybe some traders put both of those concepts into this the quantity calculation for the next trade which i don't do but yeah you're getting him on and asking him some questions is always a good idea yeah well he's always welcome uh has been on the show a number of times so uh definitely i think i might skip the quantica things because i want to want us to have enough time to do that maybe we do it next time you're on they had also released a good paper maybe just finishing off jerry the concept of system diversification this is something that richard has talked about i've talked about it and now last week moritz talked much more about it because he's now at around 30 percent you could say well it is trend following in in the way he looks at it but it's actually spread trading so trend following spread trading if that makes sense so it's definitely something that's moving into his portfolio as well derek tweeted at some point it also speaks to the cost of not adding other strategies and why we must take the volatility in our equity curve since you're not optimizing for risk adjusted returns no maximum diversification but maximum survivability if trading is an infinite game survival is more important than returns so that's not directly linked to this but a little bit about diversification so system diversification i just wanted to ask you even though you don't do it are you against it is it something you would ever consider how do you think about that you know i love listening to the podcast where you and moretz or you and richard will like i don't know if jerry's not gonna agree with this i don't know jerry doesn't agree with this i think it's really funny and i have to sort of sit back and say okay i gotta get a good answer to these guys i gotta you know act like i know what i'm doing here so you know of course i am in favor of system diversification now my system diversification that i've talked about is not good enough for most people which is trend following with different parameters so that's not good enough it's still trend following and my obsession with trading as many markets as possible it's including single stocks that's not that great either because i think derrick insinuates or says well you're still going to have some correlation because you're trend following everything and i don't disagree with that i do think believe it or not trend following currencies and trend following the meets uh that's still trend following there's probably some correlation there and those trends and the commodities and the currencies they're all moving around together sometimes with similar fundamentals so i agree so there should be a it would be great to have another uh system not different parameters of the same trend following strategy and not even moving averages versus breakouts you know it probably would be better to have something else you know i richard brought up lots likes to talk about convergent and divergent and i was like okay i think i'm pretty sure i know what that means but i asked him one day and i got him on record like wait a second you're saying like convergent is not great because it doesn't have a trailing stop yes i'm like yes i agree see that's where that's what what i won't do so whatever system you have call it what you want to call it divergent convergence i'm not going to trade without a trailing stop i refuse so no it's not safe you know you're not going to add something to my portfolio that's not safe you know there's a limit we raise our children yes these are all good ideas but don't do that one thing over there you may not survive and so that's what i'm saying if my performance especially my back tested performance and richard mentions this as well it's very easy to come up with lots of diversification of strategies in the back test but going forward are you comfortable with the stock market that can have a 50 80 drawdown and we've seen it it can have a drawdown at the same time as the trend following drawdown so marrying the two i'll have a lot of my assets in long only equities i'll have a lot in systematic diversified trend following yeah i mean that's really great in history but no it's not safe i'm not going to do that because you can't have these monster drawdowns so bring me a systematic approach that's counter that's going to add value to and add diversification to the traditional trend following that doesn't make me risk too much money and if you don't have a trailing stop then it's not for me it's not safe i'm not going to do it stop loss is keeping those losses small whatever your strategy is there that's another great idea and so we're in this dilemma what do we do and it doesn't we can't pay attention and we can't take too much comfort from a historical back test knowing that stocks can crash and have a bad decade yeah no i like that and i think that's definitely true that i think all of us are much more comfortable with anything that where the loss and the downside is defined for me when i hear system diversification i think about the way that it's structured inside my own trend following model where there is different kinds of trend following models not just one type of trend following maybe even different time frames of course but really just also different ways of of doing trend following for me that that you know makes sense but hey there we are let me quickly wrap up by the way i will say to to richard though next time he's on i do think you can do convergent strategies with a stop i mean if you want it may not work very well but i think you can because you're just betting on the mean reversion and if it doesn't happen or if it expands you you have your stop but if you want to just be long only of course then that's obviously wouldn't have a stop per se anyways quick uh update performance wise it's not a bad start to september at least as of thursday beta 50 up 70 basis points up eight and a half percent almost this year structure and ct index up 20 basis points up 6.7 this year trend index up 31 basis points up almost 9 this year the short-term traders index though it's down 22 basis points for the month and it's now negative slightly though for the year my trend barometer is still weak 30 is the reading which people of course can follow on the website but it is weak and we have seen some weakness uh at least among some trend followers over the summer so um more reflecting that msci world is down for a change this month down 60 basis points but still up 16 for the year and the world government bondex that index is down 13 basis points so far as always we know that your time is not a renewable uh resource so we certainly appreciate you taking one hour two hours a week to keep up with the podcast the clubhouse and everything so so we appreciate that as we um together walk this journey of figuring out how to best trade and invest in in an uncertain time and sometimes even crazy world so we are very grateful for that feel free to leave a rating and review that would be wonderful next week it's mark who returns mark and i decided a month ago we're going to talk about something completely different to what we normally talk about i think it'll be super interesting i have to read up on it myself but it's a study that he was part of so i think you will enjoy that um it'll be an unusual topic so to speak but of course still within our wheelhouse yeah any final thoughts jerry before you go off and watch the teenage girls play the u.s open final yeah richard tweeted something about the women's finals and uh calling the these girls outliers and uh i think if i think regardless um what of what who wins they're i think they're both going to make like from this one tournament more than they've ever made in their entire life playing tennis so uh you know it's uh we see it all the time things that have never happened before and coming from unlikely places and sources so i'm really happy to live in a a world of outliers and in a in a world with a non-normal distribution and it's uh it's fun this is the most fun business you could possibly be in it just keeps getting better and better i'm so intellectually challenged every day to uh make money and survive you know and it's such a such a fun business to have to be able to look at all the different markets all around the world absolutely i completely agree outliers they pop up all the time and and of course when it's in the financial world it's our job and wish to be there to capture them jerry thanks so much for your time another great conversation thanks to everyone who listened in and we look forward to being back with you next week in the meantime take care of yourself and take care of each other thanks for listening to the systematic investor podcast series if you enjoy this series go on over to itunes and leave an honest rating and review and be sure to listen to all the other episodes from top traders unplugged if you have questions about systematic investing send us an email with the word question in the subject line to info at toptradersunplug.com and we'll try to get it on the show and remember all the discussion that we 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 risks from the investment manager about their products before you make investment decisions thanks for spending some of your valuable time with us and we'll see you on the next episode of the systematic investor [Music] you

Channel: Top Traders Unplugged

Views: 248

Rating: 5 out of 5

Keywords: niels kaastrup larsen, jerry parker, systematic investor, top traders unplugged, investing, hedgefund, trading, trend following, managed futures, risk management, popular traders, investing money, investing for beginners, trading news, investment news, investment advice, trend following updates, news for traders, top investors, investing podcast, short term, markets, backtesting, CTA, cyber attack, funds, currency hedging, covid, pandemic

Id: F9QAO8p4qPc

Length: 66min 21sec (3981 seconds)

Published: Tue Sep 14 2021