Welcome to November 2024’s “What’s Caught Our Eyes This Month!”

This month’s blog is packed with compelling insights from podcasts, articles, and book reviews that explore cutting-edge strategies and timeless principles in finance and trading. Highlights include an in-depth discussion with Jason Buck on the resilience of the Cockroach Portfolio and a Classic Trend Follower’s unique approach to trend-following and outlier hunting. Articles range from the deceptive calm in markets masking hidden risks to the evolutionary dynamics of Adaptive Markets and the game-changing outliers of 2024. We also dive into systematic diversification, explore financial markets through complexity science, and review thought-provoking books like Ergodicity by Luca Dellanna and Adaptive Markets by Andrew W. Lo.

This diverse lineup promises to deepen your understanding of systematic approaches, risk management, and the intersection of behavioral finance and evolutionary biology. Stay tuned for perspectives that challenge conventional wisdom and inspire innovation in navigating the ever-evolving financial landscape.

Stay curious, adaptable, and trade with resilience!

Podcasts

Title: Pushing into Outliers in the Tails of the Distribution
Produced by: Talking with Traders Podcast
Summary: This episode features Richard Brennan, Strategy Ambassador for East Coast Capital Management and co-founder of Aussie Turtles, as he discusses his specialized approach to systematic trend-following and outlier hunting. Richard traces his trading career from its beginnings in 1986 to his pivot toward trend-following in 2014 after experiencing the limitations of earlier strategies.

His methodology targets fat-tailed market events—rare, significant moves that drive portfolio success—while avoiding mean-reverting market noise. By employing small bets, ensemble models, and trailing stops, he captures trends in chaotic markets like Cocoa, Bitcoin, and Orange Juice futures. Richard emphasizes the importance of embracing maximum diversification across uncorrelated markets and relying on algorithmic systems to mitigate human biases and emotional decision-making.

Listeners are offered a unique perspective on managing risk, thriving in nonlinear market environments, and capitalizing on the opportunities presented by extreme market events.

Articles

Title: Beyond the Calm: Understanding Hidden Risks in Market Stability
Produced by: ATS Trading Solutions
Summary: This article delves into the deceptive tranquility of financial markets, emphasizing how prolonged periods of stability can mask accumulating risks. It critiques traditional risk assessment tools like Value at Risk (VaR) and backtesting for their reliance on historical data, which fails to predict future market anomalies. Using the analogy of snow piling up on a mountainside, the piece illustrates how hidden risks can lead to sudden, catastrophic events. The key takeaway is the importance of resilience over prediction in risk management, urging investors to prepare for unforeseen shocks rather than relying solely on historical patterns.

Title: Why Your Brain Isn’t Wired for Financial Markets (and What to Do About It)
Summary: This article explores the evolutionary mismatch between the human brain, optimized for survival in natural environments, and the demands of financial markets, a relatively recent construct. It highlights cognitive biases such as loss aversion, pattern recognition, and short-term thinking, which hinder effective market navigation. To counteract these limitations, the piece advocates for systematic, rules-based trading approaches that remove emotion from decision-making. It underscores the importance of adopting frameworks designed to manage complexity and uncertainty, enabling traders to align with market dynamics rather than fall prey to instinctual pitfalls.

Title: Adaptive Markets: Evolution at the Heart of Finance
Produced by: ATS Trading Solutions
Summary: This article explores the Adaptive Markets Hypothesis (AMH) as a revolutionary framework for understanding financial markets, emphasizing their evolutionary nature. Unlike traditional theories that assume efficient markets, AMH highlights how market participants adapt to changing environments, akin to biological ecosystems. Drawing from Andrew Lo’s work, it illustrates how behavioral biases, technological advancements, and shifting market dynamics influence decision-making and profitability. The piece underscores the importance of flexibility, innovation, and systematic approaches in thriving within this adaptive landscape, offering a refreshing perspective on market behavior and strategy development.

Title: The Game-Changing Outliers of 2024
Produced by: ATS Trading Solutions
Summary: This article spotlights the extraordinary market outliers of 2024 that significantly influenced trend-following strategies. Key performers such as Cocoa, XAUAUD, BTCUSD, OJ, and GBPJPY showcased how rare and powerful price movements can drive substantial returns for systematic traders. By examining the unique market conditions and catalysts behind these trends, the article highlights the value of capturing outliers in a diversified portfolio. It reinforces the importance of robust processes to navigate unpredictable markets and capitalize on opportunities that lie beyond the norm.

Title: Casting a Wider Net: The Power of Maximum Diversification for Outlier Hunters
Produced by: ATS Trading Solutions
Summary: This article underscores the significance of maximum diversification in systematic trading, particularly for capturing outliers that drive portfolio performance. It explains how broad market exposure increases the likelihood of identifying and capitalizing on rare, impactful trends. By incorporating varied asset classes, geographies, and sectors, traders can mitigate risk while maximizing opportunities. The article highlights that diversification is not just about reducing volatility but about creating a robust framework that thrives in unpredictable market conditions. It concludes by advocating for embracing diversification as a cornerstone strategy for long-term success in outlier hunting.

Title: Navigating Uncertainty with ECCM’s Systematic Approach
Produced by: ATS Trading Solutions
Summary: This interview, viewed through the lens of a classic trend follower, highlights ECCM’s disciplined approach to navigating market uncertainty. It delves into their systematic methodology, emphasizing robust processes over predictions to manage risk and capitalize on trends. The discussion explores how ECCM balances portfolio diversification, leverages momentum, and adapts to shifting market conditions while maintaining a long-term perspective. By focusing on consistent application of rules-based strategies, ECCM exemplifies the principles of trend following, showcasing how discipline and process can yield resilience and opportunity in volatile markets.

Title: Miniseries Part 1: The Mechanics of Complexity
Produced by: ATS Trading Solutions
Summary: This article introduces the foundational concepts of complexity science, emphasizing its relevance to understanding financial markets. It explores how systems, such as markets, consist of numerous interconnected agents that adapt and evolve over time, creating unpredictable, emergent behaviors. The post outlines key principles like feedback loops, non-linearity, and self-organization, which underpin complex systems. It sets the stage for deeper exploration into how these principles apply to trend following and systematic trading in future parts of the series. Readers gain insights into why financial markets are best viewed as complex adaptive systems rather than linear, predictable models.

Performance Reports

Title: Trend Following Performance Report — September, 2024
Produced by: Top Traders Unplugged
Summary: September 2024 highlighted the resilience and adaptability of trend-following strategies amidst market crosswinds. While shorter-term trend-followers capitalized on sharp movements in commodities and currencies, longer-term strategies struggled with reversals and volatility spikes. Key drivers included interest rate uncertainty, commodity price divergence, geopolitical risks in energy markets, and equity sector splits. The SG Trend Index posted a +0.98% gain for the month (+2.28% YTD), reflecting mixed but positive performance across major trend-following indexes. The TTU TF Index (+1.12% in September, +3.88% YTD) and the BTOP 50 Index (+1.24% in September, +4.18% YTD) also demonstrated steady performance, showcasing the importance of diversification and long-term focus in trend-following strategies. The report also delves into macro factors, program performance rankings, and innovative portfolio allocation approaches, emphasizing the benefits of systematic and rules-based processes for navigating volatile markets.

Title: Trend Following Performance Report – October 2024
Produced by: Top Traders Unplugged
Summary: October 2024 was a challenging month for trend-following CTAs, as heightened market volatility and abrupt trend reversals impacted performance. The SG Trend Index declined by 4.30%, with YTD performance at -2.12%. The TTU Trend Barometer ended at 39%, signaling a weak trend environment. Sector highlights include:

• Equities: Declined due to inflation concerns and central bank tightening.
• Fixed Income: Rising yields and volatile bond prices posed challenges.
• Currencies: Fluctuations in the U.S. dollar disrupted trends.
• Energy: A bright spot, rallying 4.54% amid stabilizing demand.
• Agricultural Commodities: Mixed results, with Soybean Meal and Live Cattle gaining.

Individual manager performance varied, with some funds experiencing significant losses. The month emphasized the need for disciplined risk management as trend-followers navigated volatile and inconsistent markets.

Books

Title: Ergodicity: Definition, Examples, and Implications (3rd Edition)
Produced by: Luca Dellanna
Summary: This book explores the concept of ergodicity and its practical implications for long-term decision-making across various domains, such as investing, relationships, and personal growth. It highlights how irreversible outcomes can skew long-term performance and the necessity of survival over short-term gains. Through relatable examples like skiing, Russian Roulette, and career decisions, the book demonstrates the critical importance of distinguishing between population and lifetime outcomes. Dellanna introduces strategies to navigate non-ergodic systems, such as reducing exposure to irreversibility, employing the Kelly Criterion, and adopting barbell strategies to balance risk and reward. The book emphasizes practical applications, providing tools to make informed decisions that account for time and uncertainty while minimizing regret and maximizing potential.

Title: Adaptive Markets: Financial Evolution at the Speed of Thought
Produced by: Andrew W. Lo
Summary: This book redefines our understanding of financial markets through the lens of evolutionary biology, introducing the Adaptive Markets Hypothesis (AMH) as an alternative to the Efficient Markets Hypothesis (EMH). Andrew W. Lo explores how human behavior, driven by evolutionary principles like competition, innovation, and adaptation, shapes financial systems more dynamically than the deterministic models proposed by classical economics.

The AMH views financial markets as ecosystems where survival strategies evolve in response to environmental changes. It highlights the interplay of rationality and emotion, showing how psychological factors like fear and greed can cause market inefficiencies. Using examples from neuroscience, biology, and history, Lo demonstrates that financial behaviors emerge from a process of trial and error, adaptation, and learning.

Key takeaways include the necessity of flexible investment strategies, the limitations of traditional risk management models, and the importance of understanding behavioral biases. The book also critiques the rigidity of EMH, proposing that markets adapt and evolve similarly to living organisms, making them unpredictable and requiring constant innovation.

Lo concludes with applications of AMH to contemporary issues, including financial crises, wealth inequality, and future technological developments. By combining insights from multiple disciplines, the book offers a comprehensive framework for understanding and navigating the complexities of modern finance.

 

Well, that’s a wrap for November 2024! We hope you found this month’s roundup as enlightening and exciting as we did. As we dive into December, keep your eyes peeled for more intriguing insights, groundbreaking strategies, and inspiring stories from the world of trend following. Stay curious, stay informed, and most importantly, trade well and prosper. Until next time, happy trading!

The ATS mob