You're about to join Niels Kaastrup-Larsen on a 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 Series.

Welcome and welcome back to this week's edition of the Systematic Investor series with Katy Kaminski and I, Niels Kaastrup-Larsen, where each week we take the pulse of the global markets through the lens of a rule-based investor. Katy, it is wonderful to have you back this week. How are you doing? What's going on where you are?

Hey, Niels. Yeah, I'm doing good. A little snowed in, but otherwise good. You know, it feels like winter, but that's where we are.

I was going to ask you about that. I mean, we hear a lot about this winter storm, but how affected have you guys been?

Well, I'd say, in Boston we're basically just snowed in and there's just like mounds of snow that may be here forever. But I think I've been more following the ice storms originally from Tennessee and millions of people have been out of power and dislocated. So, you know, we're complaining about the snow, but I really think it's been a serious issue for a lot of people dealing with power issues and you know, having no heat. So, it's a pretty extreme January, so far, in many ways.

Yeah. For obvious reasons, work wise, I usually travel to Florida. So, I've never really been caught in a winter storm in the US but of course you have the hurricanes. And it's always puzzled me a little bit why the US, when they know these things happen almost every year, either a winter storm or hurricane, why they don't dig down in the ground, the electrical cables. I've never thought…

You just read my mind because I'm from Tennessee and they all the trees are down because the ice is so heavy on the trees. And I just think like, in Europe, like they always dig them down and then it doesn't matter if a tree falls. I mean, yeah, it might hit your house, which is bad, but it's a really big logistical problem.

Yeah, absolutely. Well, I'm sure people didn't tune in to hear about the weather, but I always ask you and all the other co-hosts what's been on your radar? I know literally weather has been on your radar, but is there anything else you've been sort of finding interesting in the beginning of 2026, if we stay away from politics and stuff like that, as we normally do. But anything else?

I mean, I think, for me it's been just following what's been going on in, you know, the silver markets, for example, gold. I mean, those are not new trends, but like just the extremity of moves and certain things, where you think it's never going to end. It's pretty interesting. So it's an interesting world. 2026 is interesting.

Oh, for sure. Actually, you kind of read my mind about what's been on my radar. Gold has been, but not maybe for the reason that you have. It's because yesterday I saw an article about how Tether is becoming like as big a holder of gold as some of the sovereign wealth funds, but also some of the central banks. So that is really interesting and it kind of begs the question, well, how long can this go on? Because it's kind of a big change to maybe the monetary system. And of course, we know that the US are pushing for new kinds of currency systems or however we define it. So, a lot of money has flooded into these type of products. And if they're then, in the background, buying gold and maybe other precious metals, who knows, then clearly we can understand better maybe why we see these extreme moves. And, by the way, I was just looking at Mark Rzepczynski's blog post, and he did a post about gold and central bank holdings, and it looks like there's been a positive buying of gold every single year since 2011 by central banks. Whilst in 2000 through 2009, they sold net gold every single year. So, that's obviously also a big change.

Yeah, that's interesting. I mean, it just shows you that people are looking for value and they're going back to basics, In some sense, you know?

Yeah, yeah. Speaking of value in a different kind of way, a former chief economist of Chief Strategies, I'm not entirely sure, but Steen Jakobsen, who used to be at Saxo Bank, he sent something out this week that I thought was quite interesting. He sent out a chart where it basically shows that the US dollar is flirting with its 200-month simple moving average, trying to penetrate it to the downside. And I found that very interesting. And he makes some points, in his material, why this is important, which I fully agree with. We don't have to go through this now, but it is true that if that kind of relationship changes and we start seeing structurally kind of a weak dollar world, that has implications. And I was thinking, well, maybe that's also part of the commodity story. I mean, we know that commodities tend to do better in nominal price when the dollar is weak. Not always, but often. I have had Adam Rozencwajg on many times, on the podcast. And he's obviously a commodity expert, and he talked about that usually you see a commodity supercycle really take off when you have some kind of change in the monetary system. So, all of these false starts we've had in the last few years was really because there wasn't a major change in the monetary system. But you could maybe argue that this time is different, in that sense, and therefore there could be some very sustained trends in commodities in general. We've already, as you alluded to, we've already seen them. And even this year, I mean, you mentioned silver. I was just going to look at this on my screen. I mean, Silver is up 68% so far this year, platinum 35% and gold is only up 27% so far. But here comes my question to you. You know, CTAs, we've kind of been known for having commodity exposure as a meaningful part of the diversification that we offer. But in recent years, of course, some of the most popular CTA products have not been the underlying CTAs, it's been the replicators, who tend to have much less exposure to commodities. Now I'm not saying that this means, per se, that they will do worse, but it is a little bit interesting to me because it might remove some of the benefit that CTA's offer if you go into a product that trades much fewer markets and all the action. And I'm not saying that that's where it's going to be, but what if we are moving into a commodity super cycle and most of the action, going forward, will be in commodities? Of course, some of it could spill over to financials like the dollar, like some interest rates, etc., etc. But still, I couldn't help make that kind of connection between where people are investing their money in CTAs right now and kind of the structural differences between, say, a replicator and a very fully diversified CTA. I don't know if there's a question in there, but I'd love to hear your thoughts.

Well, this is a really interesting question and we looked a little bit at this in some of our research recently. Just like the biggest markets and which markets have done the best. And obviously, if you look at the bigger markets and the commodities, you start immediately with gold and perhaps energy. And so, you do get, as you build lower and lower into the pyramid of these typical assets, you will see big differences in return. But you see some of those assets that are not in the typical, you know, sort of smaller portfolio. So silver is a good example of that. So, like a lot of people, if you're just looking at one asset, you'd buy gold in futures. The second would be silver. And silver has outperformed gold, although gold did very well last year. So, you see, depending on your asset set, you can have very different return profiles. And that's a big driver. One of the main drivers of return dispersion in our space is that positive returns come from big trends. And you need to be exposed to these big trends. And it's how much risk allocation you have to them that differentiates relative performance. So, it turns out (and we can talk about this a little bit more later), last year, it was a very narrow band of assets that actually did well in trending. So, if you happen to be in that narrow band, you look very good, versus, right now, what we're seeing is a much more broad range of trends. So, let's say copper. We're talking about copper, we're talking about aluminum, we're talking about silver, gold, platinum, palladium. You're seeing sort of really interesting trends across a wide range of different assets. And you just have to ask the question, does gold represent all of those? And you know, to some degree, yes, but to some degree, no. And so I think that will just create some different return dispersion, which is why, you know, every approach is not sort of giving you the index. It gives you sort of one approach to the CTA space.

Yeah, absolutely. And we will come back to that. I'm sure I'm going to put you on the spot, but it's fine if you don't know the answer. Do you know, and I don't know how you would even define it, but what's the liquidity difference, really, between gold and silver? If you had to say, okay, gold is 100% liquid, how liquid is silver comparably? Do you have a feeling?

I don't have that off the top of my head, but the two of them, you know, gold is obviously much more heavily traded than silver, but silver is also heavily traded. We do also look at the volatility of those contracts, and we have seen that silver volatility has increased, last year for example. But I don't have those numbers off the top of my head. But gold would come up first. It's more traded.

Yeah. So, I'm sure people will… Or maybe people don't know this, but I would hazard to guess that, because people might often say that when a market really moves in a big way, like cocoa did a few years ago, etc., etc., it's very easy to blame the CTA and say, oh, they're the ones pushing the price higher, they're trend followers. But I think I'm pretty correct when I'm saying that most of our friends in this industry probably got long gold a long time ago, and we're not the ones buying gold right now. If anything, we're probably the ones selling into this rally because of expansion of volatility. So just to put that out there.

Exactly. And I think the way you have to think about how CTAs tend to risk manage this approach. So, as the vol of assets go up, using a traditional CTA approach, you would actually reduce your positions. I think you talked a little bit about replication as well. If you're using one asset, you might end up with really large positions, for example. But in a typical diversified CTA program, silver positions would be growing, as vol expands there would be some profit taking in a sense where you kind of reduce positions as a function of vol. So, I think you'll have much more evenly distributed positions across multiple medals in a CTA program right now that's capturing multiple themes of just maybe one. If that makes sense.

Sure, absolutely. And, of course, for those who don't volatility adjust their positions, they're having a incredible, maybe a world breaking month of January, but we'll see that as the numbers come out. Anyways, trend following update, we've already kind of touched on it. It's been a great start to 2026. Now, I meant to look this up and I'm not entirely sure about what I'm saying now. We still have a day and a half left of the month, so anything can happen but, I wouldn't be surprised if the SocGen Trend index is getting very close to getting back at new all-time highs. I wouldn't be surprised if that's the case. And that also means that a number of CTAs might be coming back to new all-time highs as we speak. And that's going to drive some interest, I'm sure. Once again, I, by mistake, sent you a link yesterday to a Wall Street Journal article that I thought was new. It turned out it wasn't. It was last summer. And, of course, it's fun to read that article now because it was not a very pretty picture they were painting of the trend following industry. Among other firms that was mentioned, they mentioned Man group, they're often referenced. It's a great firm of course. And they were talking about how they had, like, called all men on deck, you know, have sent out an email to like 150 of their people. Like, now you have to work really hard, as if that makes any difference to how markets are trending, that you can just put more manpower on the case and then suddenly, whoops, you start making money. I don't think that made a difference, but performance for them and for everyone else certainly picked up in the second half. So, maybe a little bit of negative press is not the worst thing we can get. It's usually a good sign and buying opportunity. But yeah, you mentioned it already. When I look at the data that I have access to, you're absolutely right. Metals are doing the heavy lifting so far this year, but we're also seeing some opportunities in cocoa, I would say. And also something that hasn't moved as much, I feel, for a while, except maybe for the yen. But some of the other currencies are giving some interesting opportunities. And coming back to this dollar theme and what if it does break the 200 month moving average, whatever. I mean could currency, as a sector, come back and really help out, so to speak, and support long term performance once again? Because we know that once we get the bigger sectors like currencies, like equities (which actually have done pretty well and still doing well this month), and fixed income of course, then it does make a difference to our ability to deliver really, really strong returns. There's no doubt about that. So, anything that you've seen on your side so far?

I think January has been very interesting because the profitability of trends has been diversified across multiple sectors. So, it's this sort of multi trends-at-bat kind of situation which is where we do best and where we're the least exposed to reversal. And you definitely saw this on these risk-off days. And let me just explain. So, you know, equities have continued to be a positive trending contributor. Short US dollar and that sort of theme has extended and also worked very well. Certain places like the Aussie dollar have been very good, for example. And then if you look in the commodity sector, everything but energies. I think energies have still been tricky a little bit. They've been up this month, but the direction of those and the overall magnitude over the last year or so has been hard. But precious metals, base metals and a few idiosyncratic Commodities have just been really moving. And so, why this is important is I always find it useful when there's a day where the S&P is down and you see that the trends diversify so you don't just have that equity exposure. And so, I think this diversification of the different trends, both the weak dollar theme combined with pro-growth, pro-metals, is something that says, things are moving and are working very well for any sort of momentum trade this month. And it's not just one theme, it's multiple.

Okay, well let me quickly run through some numbers then, and these numbers… Well, my trend barometer, yesterday, finished at 59, so that's a strong, strong reading and it's in line with the performance. I think the number… Well, I know the numbers I'm going to quote now is as of Tuesday night because it takes a little while for the numbers to be published and we're recording early afternoon on Thursday, so, they're not live yet. Anyways, I think yesterday was a good day for the CTA industry anyways, as far as I can tell. But before I get into the usual numbers, there is one other number I'd like to mention and that is that our good friends over at Societe Generale, they have this wonderful trend indicator which, for the longest time actually, didn't necessarily do fantastically in terms of performance. But the information they put out is very useful for people if they want to understand how managers might be positioned. That's the first thing I would mention. And then I was looking at it today. The trend indicator, I mean, month to date up 19.27% as of probably last night. I mean, that's extraordinary. That could also be a record in its history. I don't know, we'll have to ask Tom when he comes back in a couple of weeks. So, lots of interesting stuff for people to dive into. But anyways, as usual, BTOP50 index up a whopping 5.41% so far. SocGen CTA index up a whopping 5.94%, and the trend index topping that out with 6.13% as of Tuesday, not even including yesterday. And even the Short-Term Traders index up 2.56% which is doing pretty well. And let me also mention the Bridge Alternatives index. I did check it just to give them a little bit of a spotlight. That's a pure trend five managers, for all I know you might be in it, actually, Katy, but 7.26% it's up so far this month. So, all indices, all around, doing well. And as I mentioned last week, we also did well in January of 2025. So, I don't want to jinx it too much. Anyways, MSCI World up 2.882% S&P US Aggregate Bond Index pretty flat, up 19 basis points. And the S&P 500 Total Return, up 2% as of yesterday. Now before we jump into Katy's wonderful topics, I will just mention that only a couple of weeks ago I published the eighth edition of the Ultimate Guide to the Best Investment Books of All Times. And so, we now have and this is thanks to the incredible group of people that works with me on the podcast, we now have more than 600 titles in the book, or in the guide. And it is giving you lots of options to educate and learn from different sources on different topics. Not all finance related, frankly. And you can get it by going to toptradersonplugged.com/ultimate, or if you're on my Sunday update email, you'll get links to it anyway. So, back to you, Katy. You brought along a few different things. The main feature, I think is fair to say, is your own paper, which I'm excited to dive into. But, beforehand, and it's funny, every time I see a story about trend following and managed futures at the moment, it's either you, Andrew, or both of you being quoted. And I think, in this Bloomberg article, you're also both being quoted along with a few other friends from the industry.

And Jerry too, Jerry was there.

And Jerry, our good friend Jerry is there as well, wonderful. So why don't you tell me about the highlights from the article?

Well, I think it was, you know, it's always fun because when Bloomberg or the Wall Street Journal anyone sort of starts profiling trend following, that's usually a sign that things are going really well, or things are going really bad. And you mentioned that. So, they reached out to talk to us a little bit about what was going on. And so, of course, we shared this paper we're going to talk about. And it just was an interesting sort of shift of themes where you can kind of see that last year was very challenging. But we've seen the aftermath of such huge shifts in fundamental relationships that are now sort of coming to fruition and becoming really strong trends. And you know, trend following is kind of off to a roaring start at the beginning of the year. So, I think the article kind of highlights that. And it also featured one of the plots from the paper that we kind of recently published, and just kind of this idea of what was going on and how different this year could be from last year, for example.

Yeah. And do you remember just off the top of your head, kind of what the various people were… Tou know, you're going to be commenting on kind of the same thing that's in your paper for sure, but do you know how the other friends we have, who are a part of the article, what they were kind of focusing on or their angle to what's going on right now, when asked by journalists?

Well, I think the general theme is that there are very strong themes and trends in the markets that are easy to discern. That the aftermath of the massive change from last year is resulting in a great environment for trend. I'd say that, you know, there wasn't anything sort of earth shattering in anyone's comments as usually there wouldn't be. But I think the general theme is, and I felt this way as well, that going into this year we have such an extreme environment. And we still have a situation where the US growth has still been very strong. So, it feels like all systems go until it's not. And I think for us this is great because we're ready to roar upwards and then of course we'll pivot and if we do have sort of a boom/bust type of cycle, which is what it feels like, we can be part of the boom, but we can also participate in the bust in a positive way. So, that's a very positive environment for trends. “Steady as you go” is not good for us and shocks are not good, but booms and busts are great.

Yeah. I have a thought. I'll try and remember it in a few minutes because I do want to dig into and let you talk about the paper you just released. So, why don't you tell us a little bit about what you and your colleague, Yingshan Zhao.

Yingshan, yeah, She's written a bunch of papers with me. We have a couple in the pipeline as well.

Which we will talk about.

We can talk about later. But yeah, so we usually every year we try to do a synopsis piece where we look at things that happen. And it's quite a lot of fun, where we're kind of look at things that we notice through the year, and then document them, and then talk a little bit about some of the dispersion choices or things that cause dispersion in our space every year, and every year is different. So, we kind of highlight what we found interesting in that year. And we kind of started off this piece by, kind of, one of the big things that's been really notable in the previous year was just the difference between sort of pure trend and sort of the aggregate SG trend index. So, for example, trend really struggled in 2025, whereas macro strategies and sort of more fundamental approaches, or perhaps economic trend and things that kind of look through the prices and focused on the fundamentals were a little bit better positioned for a year where there was a lot of headline risk and a lot of shock. What we're seeing already this year is that's not as much the case. So, macro has been lagging trend now that the fundamentals are kind of much more clear. And so, that kind of is one thing you'll see in our space is a sort of debate of, you know, at what point do you see through the price moves and you look at sort of the fundamentals, And that relative difference was large last year and it was persistent across every quarter. They were somewhat similar in Q4, but the difference in terms of how macro and trend reacted to the first part of the year in Liberation Day and how it recovered post Liberation Day was very different. So, we kind of highlighted that, that one point.

Can I interrupt you here and just ask you, on that specific point? Have you ever looked back in time, because economic trend became popular only a few years ago, but have you looked back in time and found similar periods where really these two kind of approaches differ a lot?

So, economic trend and price based trend are highly correlated. They use different inputs to determine what the trend is, but they both are trading a trend in an asset. And the difference is really in that input. And so, when you look at economic trend signals, it's really about measuring things like growth, and is growth accelerating, is inflation changing? And sort of using that to kind of determine where the trend should be based on economic fundamentals. And if you look at those strategies compared with price-based strategies, they're roughly, you know, 40%, 50% correlated because they end up in the same trends. So, if growth is positive, trend following will eventually be in equities. If growth is positive, macroeconomic trend will be buying equities. So, the timing of the two different strategies is slightly different, but they do end up in some of the same trends over time. And so, they're naturally, through complimentary and in extreme years like last year where prices were much more affected by sort of headline risk, sentiment risk change versus macro, they had a harder time to follow. Whereas, at the same time, price trends can better capture some of the themes at different points, and more aggressively than, say, a macro trend which can sometimes be slow or get the macro wrong when things change. So, they naturally complement each other.

I can't help ask you, do you think economic trend benefited last year from no economic data from the US for a while? I mean, I don't know. What do they put into the model if there is no data being released?

This is a very good point, I'd say, for the US numbers perhaps. But you know, a lot of economic trend is really global data across multiple different regions. So, you know, you had a little bit of nans, probably, in some of those data arrays for a little while. But you know, there's also other methods and other data sources that people can use that are not necessarily official. I think those official numbers are important because they kind of are a signal for the market. So, especially for us, we care a lot about CPI, and PCE, and things like that, because they are a focal point for price trends as well. So, they do kind of show, or confirm, or not confirm general themes.

Yeah, interesting. Also interesting timing, by the way, this week where yesterday Powell was out talking about the latest decision from the Fed not to do anything, but certainly deflecting a few questions about, you know, the one who will follow him. It'll be interesting, hopefully we'll learn soon. Okay, so that was a little bit of a detour. I kind of interrupted your flow a little bit, but I think…

No, it was a good question.

Okay. It certainly was an interesting question for me, personally. So, yeah, we talked about the, the kind of the asset class theme and, and the difference between macro and price-based trend following. And then there was a second kind of stream you went down, in your paper, as far as I remember. So, talk, talk to us about that and we can dig deep into some of this where you find the most interesting parts.

So, the other thing that we always like to do is we like to kind of distill down decisions that people make into different decisions and how they performed in a given year. Because these decisions that each individual CTA makes, you know, the speed you trade, the number of markets you trade, the risk allocation, your volatility sizing, position sizing, all of these are sort of idiosyncratic decisions to individual managers, and a lot of this is an art. There's no right answer. But in a given year, you can have very, very different results depending on how the trends evolve and how markets move. And I think that's what's tricky about trend, is you end up with very high correlation across managers, but you don't end up with the same returns. So, because we're doing similar things, you have similar correlation. But when you look at different performance, a choice of which market set or what speed you use can create very different results. In a year where things were definitely very extreme, you'll see perhaps even more variations in those choices. And so, these choices are tricky because in one year the choice might look very smart, and then the next year it could look not so smart. And there's a lot of noise around those.So that's why we like to look at those, just to kind of show how those different decisions affected returns in 2025, but how they may have affected periods in the past as well. So, you know, a lot of us focus on 2022 because that was also a very important diversifying event for CTAs. So, we actually looked at three things, Niels. We looked at speed; how fast you're trading, and sort of your typical, like, data window for how you're taking in price trends. We also looked at market size and concentration. And finally, we looked at volatility adjusting, because in a year like last year where we had such a big turbulence event, so the Liberation Day event, kind of that shock, if you think about a data-based approach, how does that permeate through all the decisions you make? And so, a big shock can definitely adjust different things and create very different returns depending on how you react to that shock. And I think that's something that causes very, very different results. So maybe I can just go through each of these three and we can talk about it because it's kind of interesting.

Absolutely. And I actually just want to say that I really think, when we get to the volatility estimation, that that's something we rarely talk about on the podcast. We always talk about speed and market selection, so we'll start with that. But I think people should pay really close attention when we get to the third one.

Yeah, definitely. Because, I mean, that's something I follow and think a lot about. I mean, that's like nerdy CTA thing. I love to look at like full estimates crossed different… Yeah, we'll get there. So, we first looked at speed. And what was interesting about our estimates for speed for this year, it turns out that shorter windows and longer windows worked the best.So, for example, if you had say a 12 month window, so you were looking at 12 months of data, you kind of were able to navigate some of these big shocks and do well last year, at least flat. And the same thing is the case with the shorter windows. And that may make sense, right, because if you have this Liberation Day event, if you have a shorter window, you get out, you get back in, you keep moving and you don't get rattled as much by sort of this extreme V shaped move that you had perhaps in Liberation Day. So, the worst time horizons are around seven to nine months, or four to nine months. So, right in the sweet spot of many CTAs where you're kind of looking at that medium horizon. So, you can imagine that, you know, shorter-term (which is a very small group of people, not that many people do shorter-term), and long-term (which is more consistent with like replication and sort of slower moving strategies), that looked a lot better last year. And then the year before you saw the opposite, that fast was really hard, and slow again was better. So, you know, it really, really varies a lot given this individual year. But it kind of showed you how you could have had quite a big difference between returns, just given the overall speed that you traded the market markets in 2025.

Maybe I can add one thing, actually. We talk often about speed as being the lookback period that we use. And that's absolutely correct. I remember one of my very, very early interviews on the podcast (this is more than 10 years ago), the manager actually said, well, we only trade once a week. First of all, we trade weekly bars, not daily bars. And of course, we know that our friend Andrew only trades once a week. So, that's another way of… I mean, speed is kind of affected by your trade frequency as well. And I've even heard some people talk about, maybe not publicly, where they say, well, we get the signal today, but we actually wait three days before we change positions based on that signal. We kind of delay. So, speed is an interesting thing, even though I completely agree that the most common way of thinking about it is just the lookback period of the model. But there are a couple of small intricacies as well. Last year, if you only adjusted position once a week and you didn't “panic during Liberation Day”, clearly that is where some differences, or the biggest differences, happened among managers was just in April.

Yeah, but I think you would see very different results in a year like Covid. We definitely saw that as well. Being faster was better there. We wrote some articles about that as well. But you're right, it really depends on what happens and your approach. And it's not just the window size, it's, you know, how you adjust your trading, it's how you smooth your signals. All of those things combine, which gives a much more complex definition of speed. And I think we use common metrics to think about speed. But there's also, if you're using nonlinear approaches or machine learning, your speed, actually, may be time varying. So, I think it's more as a benchmark to understand where the frequency of the market was as opposed to kind of get into the nuance.

Yeah, I remember speaking with, I think it was with Nick Baltas, was it last week or the week before? I can't remember now, where they had also done an analysis talking about speed. And I actually brought, for our conversation today, also some analysis that we've done on speed. And just looking at what was the best, if you had to pick like the best lookback period, anywhere between say 0 and 300 days lookback, what would have been the best for each of the calendar years in the last 25 years? And what is interesting is that, first of all, I think that at least in our findings (I'd love to hear what you think) we do find that most years, probably I'm eyeballing it now, maybe 70% of the years, it's kind of 200 days upwards. Now there can be other factors involved here, but the way we analyzed it, it was that kind of lookback period. But then you can have a period where it's completely different and you have like three or four or five years in a row, and where it's completely different. It doesn't mean that in 2008 you couldn't have made money with 200 days. You made money regardless of what time frame you used, even though the best timeframe, according to our analysis, was actually 56 days in 2008. So, it is interesting and I think, according to Nick's data, that what we have seen in the last few years, like two or three years (and we'll talk about that in a second, I'm sure) where a narrow universe… So, in super liquid markets and kind of choosing a certain time frame, worked really, really well. But when you look at, you know, the 10-year period in 2000, 2009, it would have been completely opposite (something like), from memory.

Yeah, that's what we… And actually, Nick and I were discussing that a little bit and it was very interesting that he had very similar results as me. And you know, it just was confirming like, oh, this is not just a data… he's seeing the same in his data. But you know, it's interesting you say that because we wrote this really cool paper. And I'm really dating myself, but it was called CTA Style Analysis. And we did this really neat decomposition of the CTA space by speeds and by different design decisions. And we did it over the history of the SG Trend index going all the way back. And what we showed was a few key themes. One of them (and I really have to redo this paper, Yingshan and I were talking about it actually, it's on the to do list, but it's such a hard paper so it's a lot of work), but what we found is that early on CTAs were a lot faster than they are today. And so if you think about an allocator who's looking at the CTA index as their actual input for what they're actually trying to get, they're getting a very different CTA in today's world than the return series of the index over time. And this is why we were interested in this analysis because we showed that more risk premia was coming in, different strategies, carry, other sort of approaches, are coming in. So, more diversified approaches from historically and then also that models had slowed down quite a bit. Now, we know why, I mean, slower had been a little bit better. But you know, some of that reactivity is still very, very important for sort of these crisis alpha or dislocation periods. You don't feel it when you haven't had a crisis recently. But definitely we highlighted that the industry had gone slower, had become more diversified. That means that the actual return series, that you're using, isn't necessarily the same managers and same approach that you would see today if we repeated 2008.

I think another thing that may be getting into a little bit too much of the secret sauce. So, I don't want to put you on the spot and that is, because you mentioned it briefly, it's what we do with the data before we generate our signals. I don't think we were that sophisticated 20 years ago as we are now. But I do think it's actually a very important point that we don't really want to talk about, frankly, I think. But it is part of the secret sauce.

Well, I think there's a lot of nuance, I think in the approach. And I think that that's what's fun. I think why I love this space is that when you look at it from the outside and then you actually implement it and deal with the day to day details, there's a lot of nuance of details in different decisions that you make. And I think that's what makes it fun, especially for those of us that like to geek out on it, I guess. But there are a lot of details in how you're trading, how you're thinking about rebalancing, that make it interesting.

Yeah. Okay, so we talked about speed, but there are a couple of other things that you looked into. So, why don't we look at the next area?

So, the next area, and this is something that I think you had mentioned. I shared this with Nick because he had found some interesting. So, we took like the 10 most liquid assets out there, and that's going to be things like gold, and crude, and the yen, T bills. And so, if you take the 10 largest assets and you look at the difference like how trend following on those 10 assets compares to a wider set of assets, you'll see that there's sort of a weird pattern in the very recent period. And this has to do with what those assets are pretty much right as well is that narrow asset was actually positive for 2025, very positive in 2024, and also did well in 2021. Whereas, if you look historically, there's actually a 10 year period where those 10 assets underperformed a diversified basket for 10 years in a row.

Right.

And so, I think that just kind of shows you that, you know, if you have a very concentrated approach, it can be right, and right even consecutively if those assets are the right ones. But they can also be wrong for long periods of time. So, I think it was interesting to us because, just simple things, like, if you had just picked gold, you looked really smart in 2025. And it's not necessarily the case in every year for CTAs, just something to kind of food for thought, something interesting, because we really believe in a diversified approach. We do also do replication, but replication needs to be diversified enough to capture general CTA moves. But there is also value in diversification and you're going to get different return streams from both of them.

Now, for the star of the three, in my opinion, that we rarely talk about. Enlighten us on what something as benign as volatility estimation can do for a CTA or not do for CTA?

Well, so, I was interested in volatility estimation because, if you think about it, volatility is so nerdy. When people ask me about CTAs and how we build our portfolios (and if I give a talk like at the university) I always tell people we don't talk about dollars, we don't talk about notional value, we talk about risk and we allocate risk. And they often look at me, especially if I'm speaking to people from the more classic economics and finance, and are like, what do you mean? We think about every asset as a unit of risk, and then we size our positions as a function of how much risk we think those assets are, and then, you know, obviously that's a function of the signal strength as well. But that volatility estimation is not really an alpha signal, but it's a calibration. It's the way that we think about how much of each thing we should have. And so, when you look at volatility estimation, it really sort of can create very different return patterns for trend depending on how fast or slow you adjust your volatility and depending on what happened in the market. So, let me give you two examples. So, if you take… Let's go back to 2022, okay? In 2022 (we noted this in our notes as well), bond volatility more than doubled. So, volatility went up quite a bit because it was a stressful year for most of us. But bond volatility went from an average of about 4 to an 8. And that's a big, big, big move for fixed income. And so, if you are doing volatility sizing and you do it very slowly, then your volatility estimates will slowly get up to that 8%. And if the big trend was in fixed income, you maintain a bigger exposure to the actual trend and capture more of it. If your volatility estimates are fast, then you sort of naturally constrict your positions faster even though you're kind of risk managing that. And that can go either good or bad. And what you see is, in a year like 2022, having slower volatility estimates was very beneficial because trends were working. So, you kind of capture more of the trend before your vol estimates say, hey, there's too much risk in all these assets. Let's cut our positions. And where you see the opposite is true is if you look at the second part of this year, and parts of this year was very different. We saw in the first half of the year it was better to have slower volatility and then it was better to be faster. So, in some sense it's like faster volatility also allows you to adjust to a change more quickly. And that can create very different returns, both positive or negative, depending on sort of how extreme and how much those particular trends expand. Was that too clear?

Yes, I mean, it makes sense. I obviously want to make sure that everybody listening kind of captures the importance of it. But it basically means, in an easy way to understand, perhaps, is that, for example, if we take either Liberation Day or maybe Covid 2022, if we have very short term volatility estimation, we can reduce our risk very quickly. Which, for example, let's call it, say, Silicon Valley Bank. I mean, that was an event where I think a lot of risk was taken out pretty quickly. But as you rightly say, and also, it can also mean that we can resize if we have kind of a linear approach to that, we can resize our risk pretty quickly. But we don't necessarily always have to have the same speed for resizing that we have for managing or reducing risk. And so, there, as you rightly say, are so many decisions we have to take. And we will not get it perfect for sure. And we're trying to find kind of a happy medium in terms of how we want to do that. But it's something that is perhaps becoming more important, in an odd way, as the world gets more deglobalized and more independent in the way market behavior shows up.

Yeah, this is a good point. I mean, I think why this is interesting is if you look at last year, it would have been painful, on Liberation Day, to be faster with your volatility, but if you adjusted the vol back down quickly again, then you would be able to capture the second half of the year better. So, I think that, you know, it just shows very different paths. You'll have different return paths depending on how you think about vol. And in some years it would be for the better and some years for the worse. But it's sort of part of the art of risk management for CTAs that everything to us is vol sizing. You know, how much risk are we seeing in each individual asset that we trade? And it's something like I actually look at a lot just kind of what are the vols of the different assets, and how are we seeing those change over time? And Silver is like a fun one to look at this year. But you're seeing sort of huge changes in terms of how those assets volatility has changed just because risk has changed.

Yeah, I like to leave the kind of 2025 review with a couple of thoughts and then we'll jump on to another paper that we will pick a few highlights from. But, you know, when I think about 2025, I think most of us, and I've said this, I think last week as well, that most of us would say that was really an unusual year in so many respects. Yet in other respects, when you're a pure trend follower, actually the year wasn't that unusual. It was pretty familiar. Meaning, there were a handful of markets that did all the work, and then there are lots of markets that didn't really do so well, and one or two that were really difficult for sure. Anyways, when I hear you talk and knowing everything you've done, and written about, and so on, and so forth, I can't help thinking about 2025 as a year of maybe kind of a regime change kind of thing. Which straight away leads me to the whole crisis alpha and the original definition of what you discovered. The answer you came up with when a pension fund, if I remember correctly, asked you many, many years ago, why do you think these strategies do well? And I don't remember exactly how you phrased it when I spoke to you about it a few years ago, but you mentioned like three or four things. And those things actually ties in pretty well with this idea about regime change. Feel free, if you remember them, to repeat them. You might have them, like, you can say them in your sleep. I don't remember the exact wording, but they were like three or four things that are really important for why this strategy actually is super beneficial to have in the portfolio when you go through a regime change, as I think we are doing right now.

So, I mean, I think you're hitting at the original paper on crisis alpha that we talked about. And sometimes I definitely get, and you’re included in this, like we sometimes banter about this, you know, this concept of crisis alpha.

No, actually, let me correct you here. Let me just correct you here. Your definition is actually the correct one. What I feel is that, unfortunately, people are misusing it because they call everything a crisis. That's my point, just to put it on the record.

That is correct. So, my original argument was crisis alpha is finding our opportunities during periods of market dislocation and distress. And so, then you have to define what that is. But for me, when you think about being able to capture a challenging environment in the markets, it's about being adaptable, it's about being liquid, and avoiding bias. And so, I think, you know, if you take those three characteristics, you want to look at strategies that may be able to have some of those features. So, trend is a strategy where, you know, intrinsically you shouldn't have a bias. If things are going up or things are going down, it's going to follow that particular theme. And 2022 reminded us of that, where we were able to short bonds, which people have a hard time to understand. And then being liquid is also important. And we forget about that because we haven't had a liquidity issue since 2008. But just wait till we do and then we'll remember. And also, credit is also part of the liquidity issue. And so, you take that and then finally you also take opportunistic, so, adaptable. Trends and opportunities during crisis are very different from crisis to crisis. And a strategy that can capture some of those by just doing different things can be beneficial. I mean, I think a good example I use of that is a 2022 crisis was very different from, say, a Covid crisis, and they had the exact opposite trends. So, Covid was long bonds, short energy. And 2022 was long energy, short bonds. So, you know, if the crisis movements are something outside of what we trade, then it's going to be hard for us to capture something like that. But I think the point is that, you know, having a strategy that's adaptable, that changes over time, and tends to do better when things are disruptive or moving a lot, it means our strategy is very cyclical as well, but just on a different cycle. And so, what you'll see is, and that's why, even though Liberation Day was very challenging for the strategy, to me it was a catalyst of change in fundamentals that people were not sure what those fundamental changes meant. But now we're in a period where we're seeing the ramification of those changes, the deglobalization. We're seeing sort of the macro impact of changes in policy, of divergence across views globally, and sort of potential geopolitical conflict. And I think that creates macro change, and themes, and trends, which we tend to benefit from. So, it's cyclical, but on a different cycle. So, we tend to be mean, reverting as a strategy, as well. We'll have a great year like 2022, and it's been a trickier since then. And then you'll have periods where the strategy works very well. Again, it's been like that for decades.

Yeah, and to that point, let me just remind myself, maybe you, and certainly our audience, that we talk a lot about 2022, one of the greatest periods in the CTA industry, really. However, it all started with Thanksgiving 2021, and managers losing a ton in one single day when they came out with this news about the Omicron variant. And so, it was like the worst, and you could not believe that managers was going to come back and have, after a day like that, the best period for decades, really. And I wonder if Liberation Day, when history books are written about our industry, they will say, well, do you remember that day? That was really bad. But then, wow, what a comeback. I'm hoping, I don't know, but I'm hoping that's how we're going to see it at year's end.

I think it's so funny, Niels, because we have these days that I remember, and they're just like CTA days that you remember, and other people don't share them, and you and I do, but, like, Black Friday, oh, no. Or what was it, Italian bonds in 2019 or something? There's always something. Something that happens that you kind of go, wow, that was insane. Yeah.

But let's jump into the last… Well, let's jump into the paper you brought along. I think I touched on this slightly, but I do want to just, for the benefit of people. They can obviously download it themselves, but it is written by Meketa and maybe there are a couple of highlights. And then I want to make sure, before we finish today, I want to hear about what you're working on, because I know there's a bunch of interesting papers lined up from your side, so. But from the Meketa paper, was there anything you thought, wow, this is actually worth mentioning?

This is a new paper that just came out by Meketa, and I just really think they do a very, very good job of summarizing so many interesting insights from across the industry. They kind of distill down sort of the changes in the industry and sort of what trend following really captures, its role in a portfolio, the dispersion in the space. So, I think, you know, probably one of the interesting ones that comes up, also, is just they talk a little bit about the AUM and sort of how, in a relative sense, AUM for CTAs isn't that much larger. We always get this question, I think even the Bloomberg article, crowding of CTAs. I think the truth is we trade in some of the most liquid assets out there. The idea that we're going to revert the yen trade and have more power than sort of the PM of Japan, I think, is hard. There's definitely a concern to think about crowding but, in general, these are very liquid markets so they do highlight that. How about you? Did you see anything?

Well, I mean, I met with one of the authors last year, at the iConnections conference in Miami, and I'm heading getting back to that conference next month and hopefully I'll run into Ryan again. If I was going to put one little finger on it because, I agree with you, it's a great paper and people should read it. It's actually on the Meketa.com web page and then I think it's under leadership, but that data is a bit out of date. They could because they didn't get published until, I think, December 2025. Some of the charts actually stopped like a year before. It would have been nice with some updated data but of course I'm being very picky now and very self-serving saying, oh, it would have been nice to see completely updated data but there we are. We'll say one thing that you just touched on, but just to visualize it for people, they have this wonderful chart where they show the percentage of the total hedge fund universe that managed futures actually is. And back around after the great financial crisis, where CTAs and crisis alpha (thanks to you) became very popular. A lot of money went into the industry. And by 2012 the industry, the CTA industry, according to this chart, was about 20% of the total hedge fund universe. But now I think we're below 10%.

It looks like you're at 8, something like that.

Yeah, something like that. And this is at the Q2 2025 number. So, it might be a percentage bigger now because of the recovery, but it's just to showcase that we are very small, really, as an industry and we've been pretty constant in terms of official AUM. I know a lot of strategies, like QIS strategies, and maybe individual pension funds, are doing trend following or something similar. So, it doesn't tell you all you need to know about AUM. But as an Industry, as a public industry, we haven't really grown a lot. Now maybe we will, thanks to all the efforts of Andrew and all of that. So, we'll see. So, anyways, let's wrap this up by going into something we rarely do on the podcast, and that is looking into the future. Because, of course, as trend followers, we never look into the future with any confidence. But I think we can be a little bit confident about your research publishing plans in 2026. So, I'm excited to hear about them and what our listeners can expect during the next few months, maybe from you and your colleague.

Well, I think we've been interested in a lot of different topics. You can kind of hear a little bit in the theme. So, we've been looking a little bit at macro strategies, and trend, and the relationship between those. That's something we're interested in and sort of working on publishing some articles on that. Another one that's come up that I think is cool and I can highlight a friend of mine's paper that I think geopolitical risk is very interesting to people right now. And what's so cool is, you know, there's a lot of academic research out there that does different ways of measuring it because geopolitical risk, in a vacuum, is hard to define. But there's all sorts of LLM type, you know, sort of sentiment type indicators that one can build and look at sort of measuring using publicly available news data, that kind of measure, like how much geopolitical risk is perceived in current news data? And so, one thing we have been looking at, as an interesting question (and this actually came from a client asking us this question), is like how does trend perform? How does trend perform based on geopolitical risk or trade war discussion discussions? I'll highlight, there's a really good paper from some authors from UC Irving that actually did something, this is what inspired me, like their paper, it's called Geopolitical Risk and Stock Returns. And they kind of focus on not just geopolitical risk, but they also look at trade wars and kind of trying to understand trade. Because I think we're in a period right now where trade, trade negotiations, trade balance, the dollar effect, is going to have a huge impact on some of the macro themes over the next two years. So, I think that is an area where we're going to continue, and we need to think about. But just stepping back, all of the research I've done on trend, it likes disruption, change, and difficulty. So increased geopolitical risk… So, as a preview to some of the things we found, increased geopolitical risk and higher levels of geopolitical risk is generally positive. So, the answer is probably the same as higher inflation and things like this. But this is kind of where the market is going and the things that people are concerned about. And the academic literature is definitely covering a lot of stuff on geopolitical risk, and the value of diversifying for it, and hedging it, and things like that. So, that's exciting to me - fun stuff. And then, of course, we also have other evergreen topics related to using managed features for retirement and so forth. But, so hopefully next time I come I'll have some of these papers so that I can share them with you.

Yeah, absolutely, absolutely. And it sounds like, unfortunately, that the only light at the end of the tunnel, when you have geopolitical risk, is managed futures. Not many positive things come from that, that's for sure. But if we can be that little light, I guess we'll take it. Anyways, we'll see. We have no idea. Now, most importantly, let me just say to everyone listening that it takes a lot of work for Katy and all the other co-hosts to prepare for these conversations. So, if you wouldn't mind, go to your favorite podcast platform, leave a comment, leave of a rating and review and just a show of appreciation for all the hard work that goes into all of this. And of course, while you're there, make sure you follow the show, as they say, because that's what the algos really like. Now next week I am joined by another author, Rob Carver, who I'm sure will have some fun insights to the current environment as well as some other themes that he will bring along. So, if you have a question for Rob, you can send it to me info@toptradersunplugged.com and I'll do my best to get it answered by Rob. That's it for today from Katy and me. Thanks ever so much for listening. We look forward to being back with you next week. And until next time, as usual, 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@toptradersunplugged.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.