Financial markets move through alternating states. There are long stretches of calm where volatility remains contained and returns progress in small increments. Then there are rough cycles where volatility expands, correlations collapse, and dislocations dominate price behaviour. Each environment rewards a different type of strategy.
This article explains why Outlier Hunters excel across complete cycles and why their return geometry outperforms approaches that smooth risk dynamically in response to recent volatility. Volatility targeting is one example of this broader category, but the principle applies to any system that reduces exposure when volatility rises and increases exposure when volatility falls. The illustrations that follow use stylised synthetic scenarios. They are not backtests and are not linked to any specific CTA program. Their purpose is to highlight the different ways smooth and convex systems behave when the world shifts.
We explore three environments:
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The Calm World
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The Rough World
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The Full Cycle
Each scenario compares two broad approaches:
• A smooth, higher Sharpe, dynamically sized system with mild positive skew
• A convex, strong positive skew Outlier Hunting system
The contrast reveals why smooth systems shine during calm regimes, why Outlier Hunters dominate in turbulence, and why convexity wins the long game.
Act 1: The Calm World
Smoothness excels when volatility behaves
In a low volatility environment, markets drift. Correlations stay steady. Crises are scarce. This is where volatility-targeting and dynamic position sizing thrive. These systems add exposure when volatility is low and reduce exposure when it rises slightly. Their equity curves appear steady and reassuring.
Chart 1: Calm World – Smooth Model Outperforms
Calm World Metrics
Interpretation
In this calm regime:
- Smooth systems outperform consistently
- Reduced exposure is rewarded
- Mild skew is sufficient to sustain returns
- The Outlier Hunter’s advantage stays latent
- Leverage benefits smooth strategies without altering their structure
Periods of calm often convince investors that smoothness equals robustness. Calm regimes, however, never last indefinitely.
Act 2: The Rough World
Convexity excels when volatility breaks its boundaries
Turbulent regimes disrupt the foundations that smooth systems rely upon. Volatility spikes. Gaps emerge. Correlations converge. Extreme moves appear without warning. These are the environments where convex trend following reveals its full strength.
The rough world example below captures this shift. The numbers are stylised but realistic enough to convey meaningful stress.
Chart 2: Rough World – Convex CTA Outperforms
Rough World Metrics
These values represent stylised stress cases designed to isolate geometric effects. Real smooth systems often adapt or are shut down before compounding such extended losses.
Interpretation
In rough markets:
- Smooth systems reduce exposure at the worst possible moments
- Left tail losses cluster and overpower earlier gains
- Leverage magnifies fragility
- Outlier Hunters remain exposed during crisis-driven moves
- Right tail events dominate long term compounding
The calm world rewards suppression of risk.
The rough world rewards asymmetry.
Act 3: The Full Cycle
The combination of calm and rough reveals the true winner
Financial history is not one regime. It is the totality of alternating states. Quiet periods eventually give way to turbulent ones. Turbulence eventually calms. The long term winner is the approach that survives and adapts through all transitions.
Chart 3: The Full Cycle – Calm + Rough
Full Cycle Metrics
Interpretation
Across the combined regime:
- Smooth systems win the calm decade
- Outlier Hunters win the turbulent decade
- Outlier Hunters win the full cycle
- Positive skew shapes long horizon compounding
- Leverage amplifies convexity more effectively than smoothness
This reflects multi decade CTA reality. The managers who survive are the ones aligned with the geometry of right tail events.
Compounding does not reward smooth lines. It rewards big winners and punishes deep losses. You cannot fix the missing outliers by adding leverage to a smooth system. Leverage lifts the good and the bad equally. It never creates the giant winners that only come from staying fully exposed during the wild parts of a trend. This is why convex trend followers win the long game, not the Sharpe chasers.
In the long run, the game is won because positive convexity amplifies CAGR across multiple cycles. The few large winners shape the path of compounding far more than the many small losses.
The Backtest Trap
Why historical samples often mislead
Backtests can easily mislead investors about what truly works. If a historical sample is dominated by calm, smooth conditions with few significant outliers, it is entirely possible to construct a persuasive narrative in which high Sharpe systems appear superior. The dataset becomes the story. Yet this ignores the fundamental point.
An Outlier Hunter prepares for the events that the historical record has not yet seen. That is the essence of risk management. It is not about fitting to the past. It is about building a portfolio that can survive and adapt to regimes, dislocations, and fat-tailed events that have no precedent in the available history but are inevitable over long horizons.
The Regime Paradox
No one can predict which regime will persist
We cannot know how long any regime will last. Calm cycles may extend for years. Rough cycles may dominate decades. Regime shifts occur without warning and without pattern.
This uncertainty makes one design principle rational.
We cannot choose the regime.
We can only choose the strategy that survives the regime.
The Outlier Hunter is built for this reality:
- It endures calm without being eroded by stagnation
- It thrives in turbulence without being broken by volatility
- It survives long enough to access the rare events that define compounding
- It persists while stability-optimised systems fail during transitions
Survival through uncertainty is the foundation of Outlier Hunting.
Career Risk and Commercial Survival
Smooth systems are easier to sell. Their tidy monthly profiles appeal to allocators who value predictability. Outlier Hunters experience long periods of quiet performance punctuated by sudden step changes. This is uncomfortable for investors and challenging for managers.
The commercial paradox is simple. Survival often requires surviving the clients first. Outlier Hunters need patient capital, locked-in capital, or well-prepared investors who understand that lag periods are expected and necessary.
Without this, even strong convex systems may not survive long enough to express their advantage across cycles.
Historical Evidence: Three Multi-Decade Survivors
Stylised scenarios help, but the strongest evidence comes from managers who have endured multiple market regimes.
All historical statistics for Mulvaney, EMC, and DUNN are sourced from IASG. These examples are included to demonstrate the empirical geometry of long horizon convex trend following programs.
Mulvaney Capital Management
Mulvaney’s record is driven by a handful of dramatic crisis gains. Long flat stretches exist, but the right tail dominates the long run.
Program inception: May 1999
IASG statistics show:
EMC Capital Advisors
IASG statistics show:
DUNN Capital Management
DUNN shows that even moderate skew, when paired with consistent exposure to long trends, generates multi decade persistence.
Program inception: November 1984
IASG statistics show:
Context and Implication
These are not cherry-picked examples. They represent some of the longest surviving systematic trend followers with publicly available performance records. Despite differences in style and market universes, their return geometry is strikingly consistent. Low Sharpe, positive skew, crisis-driven gains, and extended quiet periods appear repeatedly. Convexity is not theoretical. It is the empirical footprint of long horizon survival.
The Pattern Across All Three
- Low Sharpe ratios
- Positive skew, from moderate to extreme
- Gains dominated by crisis-driven outliers
- Long quiet stretches punctuated by explosive years
- Survival across many dissimilar environments
In every case, the geometry is unmistakable, and it matches the stylised Outlier CTA profiles shown earlier. The real world validates the framework. The systems that endure are not those tuned for smoothness. They are the ones designed to remain exposed during large, disruptive, asymmetric events.
Sharpe ratio is not the benchmark for compounding. Sharpe measures the smoothness of a return stream, not its long term wealth creation. CAGR is determined by the size of the gains relative to the depth of the losses, and by how often a system remains exposed to right tail events. A strategy with a low Sharpe but strong positive convexity can outperform a high Sharpe system over decades because compounding is shaped by a small number of large winners rather than the month-to-month aesthetics of the equity curve. Smoothness does not drive wealth creation. Convexity does.
Path Dependence and Entry Timing
The sequence of regimes matters. Calm followed by rough produces one experience. Rough followed by calm produces another.
If turbulence arrives early:
- The Outlier Hunter builds a large equity cushion
- That cushion supports years of quiet performance
- Long term survival becomes easier
If calm arrives early:
- Smooth systems gather assets
- Outlier Hunters endure long stagnation
- The transition to turbulence determines who survives
Path dependence is why governance and investor education matter as much as system design.
Hybrid Approaches in Practice
Many long lived CTAs blend dynamic risk management with strong trend capture. These hybrids reduce left tail exposure while retaining enough position size to benefit from crisis moves. They reflect the practical balance between commercial viability and geometric strength.
Hybrids smooth the journey.
Convexity determines the destination.
The Logic of Survival
Outlier Hunters do not succeed because they predict anything. They succeed because they prepare for worlds that cannot be predicted.
Their systems endure the quiet years, thrive in turbulent years, and remain intact long enough for right tail events to rewrite the equity curve. Over complete cycles, survival becomes compounding. And over long horizons, compounding becomes victory.