021 - Dave Aspell of Mt Lucas - An Institutional Perspective on the Simplicity of Trend Following

[Music] welcome to the algorithmic advantage we're here to expand the tool kid of the Quant trading community and introduce investors to the many advantages of systematic trading our goal is to educate and Inspire as we embark on a captivating journey into the vast knowledge and experience of leading portfolio managers and other experts in the field we hope you enjoy the show and If you do please subscribe leave us a review or even buy us a coffee bya the link on the algori rmic advantage.com we really appreciate it Dave Asel from Mount Lucas Capital welcome to

the show good to have you here thank you very much pleasure to be here lovely to see you Dave let's jump straight into it um actually we uh were recommended to speak to you by our mutual friend lonus um who we've had on the show who runs a great database uh Where did you where did you meet uh lonus L I met him we overlapped at Man Group uh in uh in New York in I think the late yeah 2008 through 2010 I think he was a he was at man at the same time that

I was interesting times they were well yeah give us a bit of a background Dave how did you uh get into trading specifically like what's your journey been in um in trading and and funds management and then perhaps give us a bit of a history of Mount Lucas Because there's quite an extensive track record for the firm so what are the origin stories there yeah uh I'll do my one in three seconds because mine's not super interesting uh I I started at Man Group in 2004 they ran AHL obviously and at the time they had

some funder funds uh businesses as as well and they were uh trying to invest in other managers as well for diversification to run a bigger product uh J M Linus he was covering ctas and manage Futures folk uh there uh So that was I was there in London from 200 I think four through 2008 um and then I got a chance to move to New York uh and I moved literally three days after Leman Brothers failed which was not not great timing and so I was in New York for six months and they said uh

at the time you can stay in New York uh well you can we need you to go to Chicago my man had another business so I moved from New York to Chicago uh wonderful Town just fantastic place so I was in Chicago for a further two years and then man was invested with Mount Lucas at the time uh and so I spoke to Tim rudo a lot who's the uh the co-cio uh and he was a CEO at the time the founder of Mount Lucas uh and I was speaking to him a lot and I

got the chance to come and do risk management for him at at Mount Lucas uh which is in rural Pennsylvania or semi- rural Pennsylvania about half hour north of Philadelphia H I jumped at it you know he's he's a fantastic guy they've been around a really long time the origin story for them uh is real interesting that they came out of well the founder of Mount Lucas was was the founder of Commodities Corp uh back in I think 19 I think 1969 that was Frank vanerson uh he was at Nabisco with uh helmet wyar in

the late 60s uh and they after trading successfully for Nabisco they span out to start Commodities core which was Around I think they started Commodities core in 1969 that was around till the mid90s uh Tim rodo the uh he joined as he never fails to remind me has been trading soybeans longer than I've been alive uh he joined them in 1979 and worked for uh Frank and then in the mid 80s they they span out uh I think in 19 I did have some notes here but in the mid 80s uh I think 1986 they

span out of commodi core with an uh you know in an amicable split Because they wanted to run uh money for the Eastman Kodak pension planner Rusty Olsen who was like a Pioneer in that space uh he started uh I think running the East kak pension plan in the early 70s and ran it for some 30 years and in the mid 80s he was looking for divers I ifying assets to their traditional uh their traditional asset allocation mix and came across Commodities core wanted to invest in these new fangled CTA managed Futures commodity guys uh

but Commodities core was you know that the e k plan required uh you know was an Arisa plan uh you needed to be registered Commodities core wasn't registered so they decided to spin out and uh run money institutionally uh so in the mid 80s Frank and Tim span out of Commodities C started Mount Lucas Commodities cor was in an old farmhouse in Princeton New Jersey and it's on the corner of Mount Lucas Road and Poor Farm Road you're spinning out and if you're Gonna start if you're gonna start a money management business don't call it

poor farm the other's the other right they use the other one so yeah M Lucas was in the middle of Princeton for a long time and then in 2009 I think uh moved just over the river uh Tim had a farm uh in pen and so they moved over the river into New Town Pennsylvania which is where we are now we've been here for I think 15 or 16 years uh and that their origin Story from that point was they Russy also invested with them uh and I think in 1986 and when 19 the crash

of 1987 came along obviously the equity Market uh plummeted and Tim and Frank uh did did really well they were trading an active you know manage Futures strategy uh did really well and then Rusty Olson comes along for the you know the manager meeting at in the first quarter of 1988 and says huh you guys did you guys did fantastically well and Asked two questions uh which are sort of the the Genesis of how we how we view things now which is uh what's the wind behind the sales in managed Futures like why do you

make money and what's the Benchmark for it that at the time well he said you know I know how to Benchmark an equity guy you know there's there equity is it's an easy thing to do I can Benchmark a bond guy what I don't really know how to do is Benchmark uh some long short commodity guys and at the time for Them uh they were an absolute return trade trading shop and you for them it was easy you either made money or you didn't but what he wanted was a benchmark and so they said you

know Tim goes to the dictionary uh goes to be tries to find out what the word Benchmark means this is a long time ago and says I'm not sure in particular uh what a benchmark should be uh but we think should be able to what we're doing it needs to be a long short Benchmark And these are the things we trade we think we should be able to uh to outperform a one-ear uh moving average on the long side and and the short side uh that sounds like a benchmark they did outperform it and then

over time he says you know what that sounds like a pretty good this is this benchmarks an interesting return stream by itself uh is it investable and they like sure why not it's an easy thing to do so they that that was the they built in 1988 the What's the MLM index it's largely the same it's it's it's added to markets over time it's changed a little but broadly it's the same uh it's the same the same type of model it's the DNA of it is is the same we've been running that ever since just

quickly on that the MLM index effectively a moving average Trend following model long and short y that's exactly right y yeah 22 Futures markets uh long and short onee moving average uh if you're above the moving Average you're long if you're below the M you short rebalance that that's it it's it's uh what I think now is called Pure Trend following it's what we've always uh done and we think it's a beta like uh like other beas are and it should be accessed in a similar way so they run that we still run that now

as we run it at different levels of volatility some people have got different quirks some people got quirks around equities or not some people like You know have different cash management things some people like run it at higher all at lower all you know these are all pretty easy things for us to do so we do and then in the mid90s uh Tim and Frank had done real well and then for their own personal Capital they they teamed up with an equity guy uh Roger Alkali who'd uh been around who was uh like did m&a

and merab in uh in the 80s and they they teamed up with him as the equity guy and Paul D Roa who ran prop bonds for City for a while and was at the FED I think I think in the 60s and 70s had a primary dealer they said well we're commodity quants you're an equity guy you're a bond guy that sounds like a macro hedge fund how about we uh just pull our money and you know we'll keep running the MLM index and we'll run we'll run a macro hedge fund so that's been running

as well uh since 96 so it's a 27 26 27 year track record uh and the DNA is largely the Same in that strategy which is that we think that manage features are a fabulous way to diversify equities so we put equities with manag Futures together add on some discre keep that as a core portfolio uh add on some discretionary trading as well where generally we're what I'd call Old School macr Traders uh which you know are sort of a bit of a Dying Breed but when when the DNA of the firm from uh the

comes out of the 70s and commodity Traders where they saw Soybeans go from you know up by 500% and the the oil price double overnight they've got a a right skew a risk preference that so the old school macro is you know very directional in nature uh have a view of the world uh and then compare it to market prices risk a certain amount of AUM on an option like strategy or an option like structure sorry and you know sit and weight a few large themes uh accept the volatility don't don't optimize uh Be robust

don't sell V uh be liquid uh don't you jumped onto this you jumped onto this um material allocation across those three areas equities bonds manage Futures well before a lot of the research papers were coming out in the last few years saying about the breakdown in the bond and equ relationship and the need to have a material allocation to manage Futures you're saying is that your firm right From the outset decades ago um were were placed heavily in this sort of material allocation across these different AIC groupings oh that that's exactly right the the the

macro hedge fund the whole point of it was to say you know if I got hit by a bus tomorrow how would you want your wife to invest for the next 30 Years and they said well we want to own the equity risk premium because you know but you know we want to benefit in the wonderful thing that is capitalism and The growth of the economy and the best way to do that is to buy the equity risk premium uh and then but you know you go through periods where equities aren't great and you need

something that diversifies it you know fixed income is way to diversify but you know as you as as you've just seen you know sometimes ones go down who knew uh they thought a better way to diversify was long short was the MLM index was long short uh manage Futures Trading across across Asset class so they put those together and the MLM index piece uh is fixed income currencies and commodities and and that's it that that's the Genesis of the business and you're right you know to us it just seems like a much better diversifier uh

than or or at least it's it's an essential piece of a diversified portfolio uh you know Futures allow you to to lever things somewhat so it's we think it's just it's a great it's a great core Macro portfolio and then within the equity side you know we thought rather than buying uh just the S&P 500 you know what do we know we'll have a read of the academic literature see how we can if we can out if we think you can outperform equities so we do a few different things there by buy some value buy

some growth by low Val uh put them together and run that alongside the MLM index what its route we think that manag Futures is uh is an element to a portfolio and that That part runs through everything that we do and I think it's kind of important because I feel like a lot of people in the manage Futures space now you know they view it as or they they build things as if they're a standalone uh investment which is a fine thing to do I mean I like Trend following way more than the next guy

and you know I'm not knocking it's a great thing to do but we've always viewed it as a portfolio element and if you view it as a Portfolio element then some of the decisions that you make along the way we think alter and what we try and do is essentially we try we're skew maximizers again this is the whole Commodities core thing the very accepting of right tail uh risk and so what we try and do is just pick make the decision at every decision point to maximize skew at the expense of sharp ratio because

in a portfolio context when you rebalance things with we think that makes most Sense so you're the positive skew guys when it comes to that's what we that's kind of how we try and do it I mean uh yeah there's a few ways I mean if am I right just carrying on talking is this I just wanted to say something quickly here Dave what what's interesting to me is that um you know with this um the traditional 6040 portfolio that the all of the institutions and wealth managers eyes have been on that that that combination

For the last few decades now they're finding that the correlations have broken down um they're now both positively correlated in the last couple of years and now they're saying ah but then there's a material allocation to manage Futures that gives you all of this Bonanza but the thing is what a lot of people don't realize is that when you do the research it isn't a new phenomenon this has been a historical phenomenon that has existed I've done Over 25 30 years it's been a persistent relationship where it's outper form the 60/40 portfolio when you had

this material combination of of manag futures or Trend into uh that portfolio so um it's just very interesting to me and I can totally understand why so you're you're viewing this world as a as a portfolio world you you do like Trend you do like macro you like equities bonds whatever what's your saying is that we can we can sort of bring this All together all weather portfolio effectively by merging these three concepts together is that effectively what you're saying here yeah that's pretty much it yeah and then so we run for institutions generally what

we run for managed Futures is generally uh some people they've already got stocks and private credit uh and private equity and uh those things and they a lot of people don't necessarily want our equities they Just want the portfolio element of skew maximizing managed Futures and so that's what we do for a lot of people and if some people want stocks as well sure we can we can do stocks but yeah we view it as generally our clients have it's one of reason why in the MLM index we don't trade equities generally because most of

the clients that use us they're generally looking for diversification and particularly diversification when they really need it it's not just this You know stocks are up 1% this month you know what does this do over boring times is it uncorrelated in our mind what generally what they want is they want diversification and uncorrelated something that's uncorrelated and particularly is really helpful when you really need it so just one of the ways uh we do that is you know by not trading equities ourselves our kind of view is that generally in a in a raging Equity

bull Market uh they don't really need me buying more stocks and when things start to fall you don't really need me being long of equities for the first chunk of that down move it's not really that helpful and to get maximum diversification maximum skew uh we do things that are you know we we we generally do more Commodities than other people for a similar reason that Commodities are generally the most inelastic of things so they move more uh So so you're not doing things like options sort of embedding options in there for tile risk uh

short V you're looking at the combination of the Commodities with the equities long with the bonds long and and how they all work together so for the MLM index yeah how we do it in that uh main way is uh we trade currencies fixed income on Commodities Long Shore we get approximately the same amount of risk allocation uh from from each of those Which means we trade a bit less Commodities a bit more bonds and FX somewhere in the middle because Commodities are way more volatile and generally relative to other people uh we do a

few things differently the first one uh we're generally at the slower end of things uh over time we think that has at least our research I think it's generally pretty well accepted that generally slower Trend following has been better At least the way we do it that's how we see it uh so we do that we're slower we think in times when you really need it slower is better uh we don't volatility Target the positions which is again another live good to hear it's a ski maximizer thing like at every juncture you know which is

the answer like I don't I'm not really anti- Vol targeting if you're building a if you're building a standalone I'm only going to do a lowrisk sort of version of trend Following you know B targeting is kind of fine like I'm all right with it you know I can do the invest B scaling rolling sand deviation sure it's not it's not I can't do it it's more that in a portfolio context it doesn't make a lot of sense to do it I think that so what we're trying to do is at every Point say given

that this is a portfolio element and given that I want to maximize uh the either the sharp Ratio or the draw down or some something of a Broader portfolio what do I do in this port this portfolio element to maximize that uh that skew so we don't volatility Target the positions we just let them run uh we generally don't trade masses and masses of markets again I know there's the outli hunting view I quite like it but our view is that generally in a real crisis uh me allocating some money to the Swedish Bond future

means I've somewhat take a money away from the US Bond future and In a real crisis you kind want the big dogs uh again I know there's other opinions on it which are sort of fine but that's how we do it it's also some historical reasons for it uh so yeah we also don't do I think the sort of the cardinal sin of these strategies are is that over times when ctas don't do very well you know they went through a period where they you know struggled some win it's really tempting for people to uh

to start Putting in uncorrelated strategies to Trend followers which often end up doing you know they take away from the pure Trend approach and when you really need it they often don't work there's a lot of examples where you know things like commodity spreads uh are uncorrelated to Trend and they kind of do well or they did do went through a period of doing real well when Trend wasn't doing well but then when you really needed Trends do well in you Know through the Ukraine uh and the Ukraine war you know if you're trading commodity

spread and you're you know short the front long the back because it's makes money over time in a slow drip drip drip way which can help Trend get through its periods you know you can get in real difficulty doing that and what I don't want to do is uh dilute Trend or do something that is going to hurt you when you most need it so we're sort of we're pure Trend people in that World and again because we think it's a it's a portfolio element uh we rebalance we think people should and we encourage people

to rebalance like Grady so we have quite spiky performance where we make a lot and sometimes then uh give some of it back because we don't B Target uh but we encourage people and we do ourselves in the macro funds if you rebalance like crazy then having high skew elements you're supposed to have elements of a portfolio that run around About equal volatility and then pump up the Vol on each of them pump up the skew and rebalance like crazy so that that's kind of our approach so no V targeting uh no equity rebalance a

lot more Commodities you know uh Commodities and I you guys know this but generally you know we looked at should we trade the French brond I argued with Tim about this for years and years you know is as soon as a French Bond contract came out like should you trade the French Bond I Don't know know U much as it he surprised him because I'm English like why on Earth I trade a French Bond like well you can short uh maybe that's okay but you know is there a lot of extra diversification benefit in trading

the French Bond or should could I get all of that just by trading an extra unit of guilts and an extra unit of Burns and an extra unit of treasuries like there's not a lot of point but you know Commodities Are they're just more they're way more different than each other right you know Commodities themselves is much lower level of correlation so we think uh you're better off trading more Commodities Commodities are much more inelastic uh and generally the volatility of them moves in direct relation to their inelastic if that's a word in inelasticity that

you know natural gases at the end of things where it's Basically it's an un storable market so uh it's incredibly volatile and gold is a much more storable market so it's way less volatile grains operate somewhere in the middle because you've got a you got a cycle that's a crop Harvest year we trade a lot of grains as well so I talk a lot a lot of my examples are grains based and oil is sort of somewhere somewhere in the middle because it's somewhat elastic but less so now uh but that's it really that's That's

what we're doing we're trying to do we don't sell V we don't do any the other strategy that a lot of people well not a lot of people people but some people wanted to get into in the CTA world was some some selling volatility and they just don't do it you know there's it's a it's a cliche but there's old Traders and bold Traders but there ain't old bold Traders and at some point selling volatility whacks you okay so Dave just to clarify you do obviously Have a Commodities and Futures Trading fund but you do

also have a macro fund that includes the equities bonds and the Futures in that fund I'm just curious what are the allocations what's the percentage split and when it comes to your Commodities trading how many markets are you trading there and and how do you choose those markets so two questions yeah okay so okay so in the macro fund what we're trying to do we run a we try and size Them in equal risk uh and we're aiming at at least uh we want half of the risk of the macro fund to be discretionary trading

and half to be a a core portfolio that's always on uh the reason for that is sometimes on the discretionary side you just don't have any good ideas and you know you think markets are generally pretty well priced and you don't really want to have a lot of pressure to trade something because you haven't got any Risk on because because you need some some risk on so what we want is a core portfolio that's always on and we want that to run about half the risk so generally we want the macro fund is a bit

of a uh I said it's old school macro we run the macro fund at between 16 and 20 Vol Which is higher than a lot now and we want given we want half the RIS risk to be from the discretionary side half from Quant we want the Quant to be around about 10 to 12% volatility and to Do that the way the way we think this through is that if you think stocks are a 16v asset uh and you want around about 8 to 10 Vol from that you need to run somewhere between 40 and

60 70% we Trend follow it a little we move around a little we have a core portfolio that's always on but roughly we run stocks about uh between 40 and 60 70% and then we want an equal amount of risk contribution from uh from managed Fatures so we run a 15v trend follower at around about the same level of risk so that you get because and they're uncorrelated you're running 50% of risk in stocks a 10 uh which gives you about 10 ball about 50% of the risk in uh the CTA we do some other

things in there as well trade some new curve and uh some other bits and pieces but when you put those three those two together you get a Core portfolio that's around about 10 to 12 Vol and Dave just quickly uh so the The um the macro all long and the CGA both long and short uh yeah the yeah so the macro side where we trade stocks is is generally long only yeah like uh it's just hard to yeah it's a good question actually so generally we want to be uh you know it's just unamerican I'm

not short in stocks just don't do it um it's just I just I just think it's I don't quite mean that I mean it's just hard that's why I was reticent to say it I Got I got the French J in there um I just think it's hard it's it's it's a different it's a different skill set uh you're fighting you fight it's just hard you're swimming up uh up River shorting stocks you know I think generally stocks go up over time you know it's we want to participate in the wonder that is capitalism you

know whether you're funding you know uh businesses what Equity markets exist to do there's no natural short in stocks Basically you know uh what Equity markets exist to do is to fund you know to fund progress the same way and we also St some credit on that side if you think in in our heads it's a similar type of thing that uh what you know what what these markets are generally do the equity Market exists to do is to uh move capital from Savers to entrepreneurs or businesses so they can expand and it's Equity markets

that they exist to do that's what an Investment Bank does that's why you know every Investment Bank they've got an m&a division that raises money and they've got an ficc division that trades things uh and sheds risk and we think that that that one of those is a long only Market uh you know and that extends across some credits as well that you know if you're a country in South America that's got you know that grows a lot of soybeans I told you I use a lot of grain analogies uh that grows a lot of

soybeans and you Need to get them out of the country so you can grow you know you need you need what is basically Equity Capital comes in an em debt form it's the same type of thing you're looking for money to fund progress and just shorting that kind of risk is just it's just difficult uh it's difficult and I think the other thing is be only generally when I see people shorting stocks there's some people that can do it well and hats off to them but generally uh Alpha shorts uh one of a Better phrase

seem hard I generally see more people doing an ETFs or indices and what what they're trying to do I think is what they want is a core long book with low of all they want Equity like returns with bond-like volatility so they've got a core long book that they then sell stuff against and we think what they're trying to do is reduce volatility and that that's what the CTA does we think I'd rather have the managed Futures portfolio reduce the Volatility because I think shorting stocks has got a negative expected return and managed Futures as

a positive expected return and they they fulfill some of the same roles in the manag Futures piece diversifies it so that that's how we view it we run we think again if you what what the Futures markets exist for is transferring risk right I mean that's why they're here you know again it's it's not a great analogy but if you've got uh if you've got a if You if you're running a grain elevator if you're a farmer in the midwest you know you're growing corn uh what you don't want you're not in the business of

speculating on corn prices you don't want to do that Futures markets exist so you can have some certainty in what you're doing and it's exactly the same way on the other side if you're a uh you know if you're buying a lot of corn if you're in a business that requires it you also face price uncertainty uh and Neither of you want that neither of you in are in the business of doing that like you're Starbucks right St Starbucks where do you think coffee is on the list of Starbucks expenses like it's not very high

but it's literally it's impossible to be Starbucks without coffee right I mean Starbucks pays money on rent on people on insurance I remember readon they spend more on cups than they do on coffee believe it or not and it's impossible to be it's Impossible to be Starbucks without without coffee so are they that they're perfectly okay and very willing to pay away a premium to hedge their coffee risk they don't want they're not in the business of speculating on coffee prices and coffee Growers are not in the business of speculating on coffee prices so what

what you need is a two-sided Market one of them gets hurt hurt prices go up and needs someone to take the other side the other one gets hurt it Goes down like Risk transfer markets like that are long short markets and in our mind that's just fundamentally different so we trade currencies fixed income Commodities long short but stocks they're not really no one's really no one really gets hurt when stocks go to the Moon you know there's not a two-sided Market in them particularly in the same way that sounds very much like the rationale of

Eric critton about the Commodities Market the whole basis of Trend following is based on the the hedging principles between producers and speculators I I know I know where I got that so Dave the the second part of the question then being the the the number of markets in the future side and how you choose those are they generally just like the most liquid us exchanges that you're trading there it's not a super broad Universe uh so we trade uh we trade the major ones we trade uh I forget which way around This is we trade

six currencies six major currencies uh we trade Futures only so we don't trade FX forwards again it's a it's it's kind of a historical thing it is what it is uh we trade year five bonds we trade the 10e point on the curve uh so we trade uh yeah US Canada guilts jgbs and burns we trade uh ma major FX and we trade 11 commodity markets yeah that's it so 20 22 in total uh and you know there is an index so it's an index product right so there's An index it's a little bit of

a different than kind of a traditional CTA that makes choices in uh in this way like there there's an index committee that sits and decides these things and meets and does make changes somewhat you know what we don't want to do is Tinker with things uh but could we trade some more yeah sure can do but you know there not there's not an I don't feel there's an enormous benefit to it uh you know and when you Really need it uh you know in 2022 for example when you really needed Trend you know our way

did fine uh think there is a certain amount of beta in it now in the macro fund we do trade some other things we trade uh we trade a lot of grains a lot of grain options uh we trade yeah oil natural gas we trade a lot a much broader set of things with the macro fund but the CTA piece we think it's a portfolio element you just plug it in it for us It's uh I almost think of it it's like a level one and a level two discussion that for the majority of people

they just need to do manage Futures they just need to get in there like doesn't particular L matter whether you choose I don't know any any of the different ctas out there at first like the first decision is just doing manage Futures and then within that you know then after that if you're building a portfolio of them you know some of these quirks kind Of do kick in and do matter but broadly we view it as a portfolio element and we want something that is pure and robust and where I know what it's going to

do and it's not going to do something stupid so one one reason we don't B Target again it's a fine thing to do but uh given if you end up having what call like a constant Target exposure then you know I know how long or short bonds I'm going to be in that piece of the portfolio whereas if you're volatility Targeting you kind of don't you know depending on how you do it but you know if I'm pairing it in a portfolio with a bond portfolio for example then I know that if I'm long bonds

or long something over here I know how to size the managed feutures and it doesn't quite take it all of it out or it might not and there might be some basis between the bonds you've got but basically if you're if you're 100% long Bonds on one side then I kind of want to know if it's a portfolio element how long or short I'm going to be because if bonds are going straight down I kind of want to know that I'm gonna be 100% sure of them now what I don't want is that if bonds

go down in price terms by a two standard deviations I don't suddenly want my Trend following model to cut its position by third and I mean it's a fine thing to do V targeting if it's a standalone product and I think if you're Building a standalone TTA that then V targeting is an okay thing to do and people uh decide to optimize on Sharp ratio that's a it's it's fine it's just not quite how we view it we view it that if it's a portfolio element then it's hard to optimize on SHP when you're focusing

on positive skew that's right yeah right right and what we're trying to do is focus on the client sharp right you know if it's a portfolio element world then I kind of think the higher Skew allows clients to uh to monetize that diversification whereas if you're if you're Vol targeting uh and have a lower skew then the manager is kind of monetizing that uh that benefit and what we would rather do is provide something that gives the end users portfolio because in a micr fund that's us we want to give that the highest sort of

the best expected rate return because you know stocks are negative negative stocks and credit are negatively skewed assets Right everyone everyone knows this you know they tick tick tick up and then boom it's that you know the taled thing about the life cycle of a turkey see it great quack you know managed features are a positively skewed asset class so what we're trying to do is maximize the positive skill and manage future side so that when you put them together you get a portfolio that's normally distributed you know we're trying to cancel out the negative

distribut negative uh skewed Nature of stocks and credits uh so that your overall portfolio looks nicer uh I think of it this way in 2008 you know cta's made a lot of money short oil we made a lot of money sh oil but what you don't want is to be limit sh oil from I know if you're a slow Trend follower maybe that was August what it sort of oil Peak to 145 in July I think roughly you know doesn't really matter which model you use most Trend followers are short by the time Leman goes

which is Mid-september uh and if you're fully short you know stop stocks don't Vol Target right there's nobody Vol targeting the S&P and so when Leman goes and stocks Fall by you know 10% in three days what you don't want in our sense if you're diversifying asset is being short oil you know oil is plummeting that's great what you don't want is oil to go down by to Norm to be in a normal world going down by 2% have an 8% down day and then suddenly your very large short That's helping you diversify stocks so

you're like oh that's kind of vol targeting sorry I'm going to take that off off and suddenly have only got 20% of the position just seems it seems like people what you've got then is people are trying to sell or trying to offer a put but they're delivering a put spread because you're constantly you're taking away that vult you know what does a put you know it's not a great analogy but it's sort of okay right ctas kind of Give you a straddle like payout uh because you start off at zero position you know uh

if it moves one way you start to you start to sell into a short but that that's and that's what options do but if you V Target you've got a strangle you know you've got what you're given if just to use a short side instead of giving someone a put you give them a put spread because when it when the Delta really starts going up you mean reverting right at the wrong time That that's how we view it and if you and if you aggressively rebalance then great what you're supposed to do is think I

just made a fortune in an oil short I can take some of that off if I want if you SE is and buy stock like that's what our clients kind of want to do they want to be able to monetize that skew so their overall portfolio is better and so again it's a ski maximizing thing every every juncture if you if you're trying to maximize skew Generally we think you don't V Target uh you have uh more Commodities you generally a bit slower uh that's it that's the that's kind of how we do Dave um

we're obviously interested in the systematic side of things so what percentage of firstly if I can just check with the uh Futures Trading and and then also with the equities what percentage of each of those is discretionary so in the MLM index none Of it's discretionary right it's all that that's all Quant on the equity side that's all Quant again it's a Quant model uh that pick stocks holds them for a period of time gives them time to work yeah and then in the macro fund uh that the put those together we trade discretionarily and

that's around about it depends it's sort of generally that's a much spikier risk profile sometimes you some generally the way we structure positions Is you want to put you want to risk 1% in you know you've got a view of the world that's different you think that uh and you think there's a drought coming and soybeans are about to go from 12 bucks to 18 bucks beans in the teens uh you know what you're supposed to do then you say you think okay I'm going to risk I know it's April it's getting hot you think

I'm going to risk 1% na on the 15 $15 call or something you know what you want is then to have a really spiky risk Profile because you want tomorrow beans to be limit up and limit up five days in a row you're position to expand Delta and then become massive so it then looks like it runs a lot of risk now you've just made a lot of money and you which is good and then you can manage that by no rolling up strikes doing something there's some amount of position management but generally on that

side of the portfolio we have a real spiky risk risk profile sometimes it's kind of low Sometimes it's kind of high at the minute at least in that fund it's at the higher end we've got quite a lot of bond positions on uh running through all of it though we we just don't sell all it's just just and so on the equity side just to put that out of the way because I want to focus on the Futures but on the equity side um what do the strategies look like there is that a a similar

Trend following strategy to what you're doing on the future side or is it quite Different so on the so we have an always on portfolio because I'm American now it's got to be long stock and you know so we're the minimum will length of stock will ever be we're always at least 40% long stock uh and the reason for that is generally the first 25% off the bottom usually happens before you know what time it is right it just it just happens so fast you just need something on and you just don't want to generally

people don't want to Buy stocks uh they they miss it so we always have a piece so we break that portfolio up into some chunks we trade uh us value uh for our sins uh us growth uh a low Val momentum thing the generally what we think outperforms so we think that and again we actually skew maximize in that portion too uh because you think if you've got an element of a portfolio which to us it is you're supposed to kind of pump the v on it so in the in our value piece we don't

buy Very many stocks and we equal weight them and we just let them run and we don't sector constrain them and if that means that all oil refiners are stupid cheap coming out of the pandemic then you know what I own an enormous amount of oil refiners and I'm okay with that and why if that was a standalone portfolio it'd be too volatile but it's not it's an element Dave when we talk about um okay so skew maximizers let's let's talk About in this equities piece your skew maximizes there and you're rebalancing frequency frequently so

what you're effectively doing is um it's a rotational strategy am I right there in that you are continually looking for the best asset strength um in reties yeah sort of right so if if you're in a if you're in 2008 or so and you know stocks uh you know you're at the end of the quarter and stocks have fallen by 25% that and you've just made a lot of money in manage Futures what we want to do is rebalance between those too and Reby stock so what we think manag Futures part of what they're there

for is to smooth the ride but one way they smooth the ride you know a lot of people do these models right where they you know whenever you run that model you know you can throw it through an Optimizer where you get monthly CTA returns monthly stock returns uh you Know it smooth the roads and the reason it does that it implicit I mean explicitly what you're doing is you're rebalancing to to set weights each time right I mean so that that's all we're doing it's it's a similar thing thing there so we just if

C if the CTA portfolio makes a lot of money we resize we we reduce it some take the gains and then buy stock and premium Dave so so understand if if for instance we've Got a um an allocation into um two assets one has done really well when it comes to the rebalance you're taking from the one that's done really well and allocating to another um so isn't that mean reverting into Trend yeah kind of is yeah in in that the portfolio level rebal yes rebalancing does kind of do that right and that's okay okay

yeah that's it but if you're going to run all these little pieces it makes sense to us to run them In re I mean reasonably extreme sort of ways like I don't think generally I think generally you'd get fired pretty fast if you ran just a growth portfolio the way we do it which is you know 20 stocks no sector constraints uh we don't resize the things down so if one of the stocks triples you know sometimes you got big positions yeah uh and we we think that's okay you know would you do that in

a standalone Equity Fund just by yourself well no because it would have tracking error and people don't like that now to me that's a feature other people think it's a bug but if you're gonna do uh pieces inside a portfolio you're supposed to do them in reasonably Extreme Ways so with the equity stuff we do is quite concentrated it it allows quite concentrated positions in stocks in sectors uh and just and just live with it so tell us the uh the ticker of the ETF Dave and what's the uh the AUM in the in the

ETF uh yeah so the ticker is it runs under with a sub advisor it runs under uh under crane shares so it's kmlm uh really disappointed didn't get the CTA ticket but never mind uh but yeah we've got kmlm as ticket and I think there's around about $350 million in it currently uh it's just over three it's I think it's four is years coming up to four year track Record and then generally we we run yeah we run on the institutional side you know we run ctas for all sorts of you know for all sorts

of folk generally in separately separate accounts yeah okay I can see I can see how you've evolved into this position Dave with your relationship with lonus you probably know art Holly as well so I sure do fantastic this is sort of you know the specialists in allocation the specialists in portfolio allocation have Come together with this approach you're talking about now which is really sort of like a it it's a portfolio management approach as opposed to a trading approach to um to investing and that's it's kind of where it came from and I think that

there's almost a coaching tree here right I came from man and obviously I'm British so I based in London you know I kind of feel like the you know the AHL group then span out and uh set off some other you know other Very large managers and generally they're in the Vol targeting Camp I kind of think whereas there's a us uh kind of coaching tree which is sort of not all the same way but you know there's a lot of people came out of Commodities core right I mean I think PA J Jones Bruce

carard you know all came out of Commodities of course you know Tim rero M Lucas you know they came out of that and it's kind of like there's a couple of competing Coaching trees uh around pure Trend or or V targeting and yeah we're family in the skew maximizing Camp well uh definitely worth going back and listening to the show we did with art Holly it's a I yeah I did and lus great yeah I used to work with him in New York fantastic guy nice um Rich do you have any uh deeper dive questions

into the the strategy itself the only thing I can think of I I Can I can visualize how all of these elements are clicking together to be a very powerful sort of almost all weather portfolio but I'm just wondering is there any Achilles he in it Dave like what about the short sharp retracements um how does it handle that uh via rebalancing yeah that is yeah that's exactly right right if you Vol Target you know generally you get uh something of a smoother ride at the expense of uh large generally large Gains we need them

uh so rebalancing deals with a chunk of it but otherwise you know we're okay with it uh we think you know you can see it in the US 10 year right now uh you know the amount of times you would have been stopped out if if you were faster Trend following would have been stopped out and then Resh shorted the US 10 year you know a number of times over the last couple years same in dollar and sometimes you know you've just got to accept you know you just got To throw your hands up and

you just accept the uncertainty of it yeah and it's just you just got to be okay with that at some point we think that you're better off being roughly right uh and robust rather than precisely wrong you know we're not we're not tinkerers we're not we don't optimize anything you know we trade a one-ear moving average but if someone said hey I I really think it should be 10 months is that a thing to do sure as you say you're not optimizing For Sharp you're you're focusing on this positive skew and with that there is

inherent volatility to a degree within that that principle but it gives this massive lifting power to compound of wealth over the long term so that's that's exactly it yeah we think it's a risk premium I think that that's the sort think trend is it's we think there is a uh a risk premium that that does exist and is there and we just pick it up and that's this uh you know when the CTA is generally make money it's generally when something is you know really moving like there's been a surprise somewhere there's been an boom

Equity Market or or bust Equity Market that's where ctas are doing really well in both occasions long end that's right that's right like when does the risk premium if you're to go back to the Starbucks example you know when does ctas make a lot of money in coffee when it moves a lot and when the hedges that Are in that market either the long side or the short side are prepared to pay away that that's the point of it we're accepting that investor risk premium and then if you're in that world you think you know

it's a little I think of it a little like Equity meor rsion uh we don't trade that at all but you know it's sort an interesting area that poke around and you know there's many many ways you can do etim reversion and does it really matter which one you do like I Mean kind of day-to-day but generally what you want is a robust model that captures the thing that you think exists and we think there is a investor risk premium to be captured in managed Futures and we capture it this way and what I don't

want to do is screw that up by selling I know selling Equity VA inside it because because it sort of Smooths out statistically it Smooths out the return stream and helps you when Trend following sort of struggles for a Little bit we like well it's okay I could have done this thing over here uh you know we're not in the sort of the shiny toy yeah it's it's not the window dressing tactics yeah yeah yeah you just have to accept it you just got to you know put on your big boy pants and accept speaking

of um the big boy loose pants um speaking of uh tinkering Dave how then has the research progressed over the years what um what has changed and evolved in the thinking What developments have taken place things that are happening now that weren't happening maybe 5 10 years ago are there things that have changed that are notable uh yes some things so yeah that's a great question what we really really what I'm particularly paranoid about is putting in things that aren't robust uh and getting too far away from home so you know we added in the

mid 2000s uh you know there was a newer set of you know we added Global Bond Futures uh there's been a couple of times we've uh changed you know the some contracts have gone away some contracts have moved you know went from the tenure to the ultra 10 year stuff like that but generally these are pretty small changes it's not the same it's the same model because it's a risk premium and if you think it's a risk premium you know I don't really want to Tinker you I Could do a lot of research into different

ways to get Trend you could trade breakout you could trade on their moving average crossovers you could trade exponentially weighted things you could trade there's all sorts of ways and they're all they're all fine I'm not knocking any of them uh but they all capture generally the same thing like everybody I mean maybe as of put have done this yesterday before the bank of Japan or that Japan you smashed the in But generally yesterday doesn't matter which trend following breakout model you use to get into Doan every single person is in Doan because there is

a large move and it's it's a risk premium you know we're picking that up so the research we do is sort of balance I mean we do we've done recent things around the way the way we execute uh we've done research uh around you know the rolling of contracts but what what I don't want to do is do Lots of research into a shiny toy that really hurts when I don't want it to really hurt you know you don't you don't want to research into something that overfits avoid avoiding overfitting avoid the lure of sharp

and I think that's all about robustness isn't it it'sin robust yeah that's right and the research we do generally I would put that into a different model and then have that in the macr rather than pollute uh the trend because generally Our clients do not want us polluting Trend following the what the Cardinal Sim I think for me uh where people should fire us from the the trend following side is if suddenly you know there there are large Trends everywhere stocks are getting whacked things are really moving I say yeah sorry I've got a strange

trade in Kansas wheat and didn't work and that cost that cost you Trend following games I think that that's the cardinal sin like what you Need is something uh robust and yeah don't stupid things these these are things so now research for the macro side uh yeah we do we do chunks of it I mean generally I spend my time disc on the discretionary side uh hunting for uh large moves where I think that the markets are priced for one state of the world where I think that a different state of the World plays out

and there's are lots of those right now so we've got Recently chunky positions that's it we're trying to just find find structures that are highly levered with uh low levels of or with generally defined levels of risk that's it with it nice well it's been um it's doing well and it has been doing well for a long period of time so congratulations on that Dave um we've been chatting for nearly an hour so we will uh start to wrap it up um how do the uh the the listeners get in touch With Mount Lucas learn

more read the mount Lucas blogs or um otherwise follow along on socials give us a few of the connection points yeah uh yeah we have a website uh www.nc.com there's a Blog on it which is written by generally my fair hand which is uh got some good good pieces on it all around SK mainly around skew uh there's a couple of pieces on there about H the question we get asked a lot is uh I get I I get what you're saying How much Trend should I do uh it's a it's good question uh generally

the answer is more than people want to do so it's kind of different one to answer to answer but we ran a whole heap of optimizations on there where we absolutely torture some Clint Eastwood Dirty Harry analogies and try to introduce a concept of dirty portfolios where you take a whole heap of traditional portfolios and then make a dirty version by I know take take like The uh you know I can't remember what they're called now but there's like the Margaritaville portfolio right there like a third a third a third something make a dirty Margaritaville

uh again it's terrible eny yeah we'll have to um put a few links up on the make make them dirty by putting a material allocation of trend into it I like that's literally what it is I'll send you the links they're quite good yeah we've got blog uh and yeah on social I've just started A Twitter uh or an X and I think uh yeah I think that's Dave I think it's just my name Dave ASO I haven't used it yet but I'll I'll ping one of you two on it we'll put it in the

notes all right wonderful Rich did you have anything to wrap up with any other burning questions it's been great chatting Dave and hopefully we'll get you on um down the track as well um maybe for specific topics you know when we talk about volatility targeting or Wanting a day where we we come out thumping the issue so uh it'd be great to get you on board with his specialist expertise there so yeah wonderful having you Dave yeah thanks yeah I love talking macro markets and yeah I'd love to come back thank you very much for

having me pleasure we should remind you that the conversations on this show are informal and for entertainment purposes only certainly any general advice you may hear is obviously not specific to your Needs goals or objectives so nothing discussed on the show should be considered as investment advice if you want that you'll need to actually do your own research and speak with your financial advisor remember trading can be extremely risky and past performance is not necessarily indicative of future returns if you enjoyed the show Please Subscribe or leave us a review and if you have any

questions or feedback we'd love to hear from you bye for now [Music]