I continuously scratch my head thinking about the paucity of allocations towards the Commodity Trading Advisors (CTA’s) that practice the shady art of trading divergence. While they fit into the neat but sometimes spurious classification of ‘active manager’, the skill is thrust towards the management of risk as opposed to the ‘more sexy’ active pursuit of predictive certainty.

You won’t necessarily hear the army of quants in the background of the CTA fortresses feverishly programming their AI or pattern recognition algorithms searching for the mythical  “John Nash” unicorn to end all unicorns and hence they are probably considered by the investment community to simply be punch drunk survivors of that very simple approach called trend following who are just lucky to still be in the game.

After all *the mumbling is heard through the hallways*, “there is no skill in managing risk if you aren’t prepared to be bold and put that money on the line with an optimised ‘full kelly’ predictive punt…….in fact they really don’t deserve performance fees as anyone can manage risk and they certainly don’t deserve a meaningful allocation with no ‘active management skill’ in predictive certainty”.

I then imagine the CTA manager trying to hold their tongue when penning their monthly investor newsletter and then suddenly letting loose in an unconscious spasm “ SILENCE YOU RUSTING NINNY – We are very certain about uncertainty”. 

If only you knew what it takes to be an active manager in this space. Skill is having the enduring patience to ‘stick to the system’ when everything else is screaming at you to bail. To deal with anxious investors day after day after day simply because they lack the foresight when all about is dark, to understand how the persistent arbitrage in this investment space is maintained….as it is simply so god damn hard for us mortal human beings (that like to second guess) to stay the course. Skill is having the nerve to hold on based on a deep understanding of the frailty of human nature itself, as AI is feverishly investing their efforts to crack the super code. Skill is having the nerve to hold your tongue as the ‘CTA replicators ‘ arrive to mimic your ‘easy’ returns with backtests who simply fail to understand what it takes to trade on the right hand side of the charts looking into the abyss of an uncertain future.

You complain about 2/20 fees given your perception of little skill…….hell I say that every penny is worth it.

Well quite clearly the investment community don’t understand what it takes or simply don’t care based on the current pitiful allocations made in this space. The current woefully inadequate average allocations of say 5-10%  is more a token statement of “better have a little punt just in case” than a meaningful allocation to actually make the portfolio sing….

….and you might say……”Hey Meb Faber told us to do it so it must be the right thing to do as he is not one of those loonies”.

Well the reason Meb Faber came to this conclusion is that he is an empiricist who actually looks at his data. He is not a victim or follower of the hunch.

I inhabit the retail trading world applying my own systematic divergent strategies to the game of speculation…..”Urrrrgh…A retail trader” you cry. “You are spawned from that shady exploitative world of  charlatans, conspiracy theorists, no hopers and drifters’ are you?”

Well listen here Pal,,,,,,,the problem is that those very traits infest the professional fund management world as well, but you just need to take those monocles off to see it.

In this ‘professional space’ who supposedly know better, we all rely on empiricism as opposed to gut instinct….don’t we?…wait a minute….do we?

Let’s say you are a student that knows nothing about the profession of speculation……before you attempt to apply your hard earned finite dollar towards your profession, what is the first thing you should do? Yes that’s right….it is due diligence. So why don’t investors do it? Go to the source of long term track records in the fund management space and open that blinkered vision. WHAT IS IT SAYING?

Well to be honest, not much since 2010, but it certainly still breathes and only needs a coordinated behavioural  push or two arising from you ‘clever folk’ to take off into the stratosphere…but go longer. Go 30 to 50 years back in time after all we want to ensure our objective of long term sustainable wealth has a chance of success.

Now have a look at the survivors in this long term space. Now go back to the research papers that span 200 years of market speculation on this amazing anomaly called ‘momentum’. What does that say and what is this anomaly that is spoken of?

“I always thought an anomaly was a defect in the data?”

“I am not so sure now as this thing called momentum certainly appears to stand the test of time. Why is it called an anomaly in modern financial market theory?”

I think that mere statement says it all. Can you smell the rat of academic bias and dogma in that statement alone?

Why are investors prepared to simply ‘follow the herd’ of modern theory that can be demonstrated time and time again to possess woefully deficient models? Why rely on the models when you can simply get off your buts and go directly to the verified audited track records?

I personally think the reason lies in a bias that exists in our purported cleverness as a species. We like to think that complex financial markets can actually be predicted with certainty so we go about the task creating ‘prediction engines with bells and whistles’ without realising that the secret sauce may actually lie in that which is tossed away as holding us back, namely ‘risk management’.

“Isn’t that the stuff those compliance guys do? What do they know about the craft of trading?”

Now this is when you start levitating and reach out to the misinformed investor offering a riddle *Tibetan musical accompaniment to be inserted*

“When you can open your eyes my little grasshopper, then you can see the world for what it is”…*chanting music ends* with quizzical looks following.

  • Yes, we are risk managers as that is where adversity and opportunity can be clearly seen.
  • Yes we really are empiricists that faithfully observe and understand how complex systems operate.
  • Yes we are gurus who recognise the fallibility of the human condition and systemise everything we do.
  • Yes we are the wealth builders who offer stunning long term risk adjusted returns.
  • Yes we are the diversifiers who mercilessly track down any trending opportunity far and wide,
  • Yes we are the capital protectors who go that extra mile protecting your hard earned wealth,
  • Yes we are the adverse outcome specialists that ensure you are always in the game and never knocked completely out of it.

How do I confidently say all this?…..Well all I do is go to the fountain head to put rhetoric to the test…..namely the actual long term performance results.

So how much do I allocate as a 60:40 traditionalist? Well you know what I am going to say……”hell all of it as these guys are diversified like the clappers and include equities and bond of all shapes and sizes in their portfolios already”. But recognising your frailty as a human perhaps as a minimum half of it. Why?

‘Cause mere allocations in traditional investment classes of equities and bonds are based on a fundamentally illusory assumption…..that asset prices will always rise over the long term. We all read history don’t we…..you know. History of civilisation I mean. You’ve got to go back in time to appreciate it. Investment hasn’t just been a 20th century thing though it might take a while to sink that nugget in.

As wealth building for a single investor is typically a 30-40 year generational exercise, just step back a few generations to see if your assumption of ‘always rises’ really holds. Then break that time zone into 30 year segments and step it forward each time looking at your commencing and ending equity. Asset prices always rise……reeeeeeeeaaaaaalllllllllyyyyyyyy?

If you want to do yourself and your next generation a service then anything short of a meaningful allocation in this investment space is mere ill informed tokenism.

Go on….take the plunge. Welcome to trend following where you can sleep easier at night and be certain about uncertainty.

Trend Following Riddle: Look deep into this crystal ball my friends (refer to chart below). You don’t want to predict it…..but don’t lose sight of the opportunities that lie within. How do you catch these opportunities without attempting to predict?

Trade well and prosper

Rich B

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