So thanks gents for joining us today. We turned this around quite quickly. I know everybody has been hard at work trying to get a handle on what is going on in the markets in the last few weeks and days. I would like you guys to help us set the stage a little bit on what is going on in the markets. In the last few weeks, we have had European regulation reforms, the surprise German fiscal stimulus, the Atlanta Fed’s negative Q1 gross domestic product (GDP), not to mention the tariff battles between Canada and Mexico and Europe.

Now we have systematic—the reality is that systematic managers that we are, we generally do not talk about these fundamental things very much, but I do want to pick your brain because I know we talk about it a lot internally.

What have been the biggest market moving stories in recent weeks?

[00:01:37]Corey Hoffstein: Hey Rod, I want to point out, you said all that has happened in the last couple weeks. All that happened in the last three days. It is just that every day feels like a week. Look to me, these are all big stories, right?

Tariff pressure leading to a massive negative one—Q1 GDP forecast print is huge for the U.S. economy. These European regulatory reforms are huge for European growth prospects, but to me, the big one that was a surprise, and feels like a bazooka is the German fiscal stimulus. For folks who have not read about it or looked into it, the proposed fiscal stimulus is really focused on infrastructure and defense spending.

In particular, it allows Germany to lift their budget cap for any defense related spending. The amount of fiscal stimulus that it captures is between 10-20 percent of Germany’s GDP. To put that into context, that is about how much the U.S. unleashed as a percent of GDP during COVID, right? When we shut down the economy, we did a fiscal stimulus package of 10-20 percent of our GDP. Germany just went, let us do it.

You saw massive moves in the German bund, right? Rates there jumped 30 basis points, which is, the last time they jumped 30 basis points was again, during COVID, during expectations that the government was gonna have to pay for this somehow.

You saw huge moves in the German DAX, right, the equity market, both up and down, right? Lots of volatility there, right? You saw moves in the Euro versus the dollar. In terms of something that had a true cross market impact, that was a huge one in the scope of it.

For Germany, this is just so massive, relative to their GDP. I feel like we use the word unprecedented every time something happens in the markets, but for not having a COVID-like economic shutdown to just say we are unleashing 10-20 percent fiscal stimulus is huge. People should be aware of and appreciate it.

I also appreciate—just one comment real quick, Adam—it is not in effect yet. The vote is March 24th. In terms of what markets are trying to digest, there is also a probabilistic reaction here. If markets overshoot that this is gonna get implemented, you could see a whipsaw effect in late March.

[00:04:23]Adam Butler: Yeah, actually, just in terms of whipsaws, this has been an environment dominated by whipsaws. I remember coming into February, the tariffs were announced. The currencies of the target economies are decimated, which was in the direction of Carry, it was in the direction of the prevailing trend.

It started out being a phenomenal day, February 1st. By the end of the day, it was announced effectively, that the tariffs were not gonna come into effect, or at least they were gonna be delayed. There were options for target countries actions they could take in order to avoid this outcome. The market completely reversed.

We have seen these kinds of policy reversals over and over in the last few weeks, and it is this strange binary outcome, right? 25 percent tariffs on Canada and Mexico on top of 20 percent across the board tariffs to China.

That is a completely different global world in 6-12 months than not having those tariffs in place, right? Investors are having to price in this double-headed, this binary distribution, where you have got to price in the probability of one or the other. It is not like it can be the average of the two. It is gonna be one or the other, and markets are just vibrating between them.

Just in terms of the size, the magnitude of this change in Europe, legislation was put in place on the formation of the European Monitoring Union to enforce fiscal prudence, largely driven by the Bundesbank, by Germany, which is typically the most austerity or fiscal prudence oriented country and governance structure. But it was applied broadly to the Eurozone, broadly to the EMU.

Those rules are not easily overturned. Some of them require unanimous consent from all EMU participants in order to pass. While Germany has changed their views, obviously 180 degrees over the last few days even yet, we still need to—the Scandinavian countries also need to validate any major changes in rules.

It also takes a two-thirds majority to change the laws around the debt break in Germany that would allow them to engage in this level of fiscal expansion. Keep in mind, this is 10-20 times the level of fiscal expansion that is currently allowed under Germany’s debt break policy. It is not just that the politicians have announced their objectives, or their goals or what have you.

The markets are saying there is a reasonable probability that these rules will get completely repealed or substantially modified in the very near future, which will unleash a completely different economic environment in Europe. That is what is being priced here.

[00:07:34]Rodrigo Gordillo: Yeah, and I think, talk about unprecedented, the last time that the yields moved this quickly in Germany was 1990. It has been a while since we have seen a single day move like this. I just want to go through, because we are gonna be talking about systematic strategies.

Just as a reminder, systematic strategies in the managed futures space invest across all equity markets, or a large swath of equity markets, large swath of bond markets, commodities and currencies. I just want to—I am gonna take some time to go through some of the major ones, so that we can get a feel for what type of the magnitude of moves in the last few days.

Why do not I begin with currencies here? The U.S. dollar is up 8 percent against major markets from September 2024 to January 2025, down 4 percent from mid-January through to March 4. That is the type of whip saw we are seeing, right? The German—sorry, the U.K. currency is up 2.5 percent and the Euro is up 4 percent in the last three days, representing a 99 percentile, in 99.9 percentile three-day move. Again, this is gonna be a common theme as I go through these.

[00:08:52]Adam Butler: Yeah, so just to put that in perspective, a 99.9 percentile move is expected to happen about once every thousand days.

[00:08:59]Rodrigo Gordillo: Yeah. When I move on here to—what did we just do? The currencies, German bonds—we just talked about them, a 3 percent move in the last three days. That is a less than 0.1 percentile outcome. Gilts down 2 percent in the last three days, one percentile outcome. Equities, the German stock market, we look at a 25 percent increase since 2024 in the last two days. It has been incredibly volatile with a negative 3.5 percent on March 4th and a positive five—3.5 percent on March 5th, right?

Again, talking about these whipsaws, S&P 500, Nasdaq, strong trends in 2024, now negative for the year in 2025, and we are definitely seeing some short-term shift in momentum away from U.S. equities and towards European equities. On the energy front, we are looking at very strongly positive 10-20 percent moves across a variety of contracts, from the lows in September 2024 through mid-January.

The Brent crude move in the last three days of negative 5 percent is in the fifth percentile. Most energies are now negative for 2025, with the exception to natural gas, which is up quite a bit. It is up 35 percent.

All right metals, trends in gold and other precious metals are generally strong from 2024 through 2024-5, even to date. Copper—this is the big winner here—is up 15 percent year to date with a—that is like a massive big one day 5 percent move. That is a 99.5 percentile outcome. That is due to the tariffs, right? We are announcing copper, I know people knew that that is another announcement that has come, we focus so much on equity markets, but we are…

[00:10:49]Adam Butler: One can be excused for missing a policy announcement amongst the barrage we have been dealing with, yeah.

[00:10:57]Rodrigo Gordillo: In grains and softs, the big movers were coffee up 15-25 percent, and cocoa, down 30 percent year to date, okay? Those are the markets we are dealing with, and that is the magnitude. Again, focusing on how rare these moves are, single day, three-day moves as we move into assessing what those broad market impacts are to systematic strategies like Carry and Trend.

[00:11:24]Adam Butler: I think it is important too to remind listeners, when you talk about managed futures strategies, many people do not realize that we are allocating to all of these different markets.

The reason why we are talking about how cocoa and copper and the DAX and the Bund and all these different markets have been behaving is because these are, for the most part, constituents of managed futures portfolios, right? While typically investors’ attention is on what is going on in maybe in the S&P or maybe some are watching the U.S. ten-year rate, and maybe the dollar, we are trading 25, 26, 27 currencies in these Return Stacked®, managed futures strategies, and many other managed futures strategies, they are trading in the dozens, right? We really need to take a global multi-asset perspective.

[00:12:06]Rodrigo Gordillo: Yeah, that is a good point. So let us start talking about some of these managed futures strategies. Let us start with Carry, multi-asset Carry to be specific. Not everyone is really as familiar with Carry as with multi-asset Carry models, as they are with Trend. Adam, you literally recently wrote a large white paper for ReSolve on Carry. Can you give us a 30,000-foot review as to how the strategy operates?

[00:12:33]Adam Butler: It is not that large or intimidating. Definitely digestible and approachable and worth reading. Yeah, there is a reason why we parenthetically call Carry, yield, right? Carry is the return you expect to get on an investment if the price does not change.

Obviously, we are used to in this environment getting the vast majority of our returns from changes in prices, right? Stocks go up, indices go up, et cetera. There is another source of returns, and that is yield. In equities, it is the dividend yield. In bonds, it is the coupons that are paid quarterly or bi-annually or annually on bonds. In currencies, you can borrow in a currency with low interest rates to invest in the short-term government bills of a currency or a government with higher interest rates, right? You can borrow at say 1 percent in your domestic currency, and then invest overseas in a country that is yielding 2 percent and earn that 1 percent spread in currencies.

In commodities, there is also a yield, a convenience, real yield, a roll down yield. The idea in commodities being that the futures markets are helping to ensure large investments by commodity producers by giving them a price today for their production, which probably will not come online for many years in the future, but by the futures markets giving them a price today, they are able to lock in a much better financing rate on building out those large projects, to build those into production. Therefore their cost of financing is lower. The economics on these projects are more attractive.

It is this win-win in commodity markets, right? It is really just dividends on equities, coupon payments in bonds, interest rate differentials in currencies, and this insurance and convenience yield in commodities that we are harvesting.

The price does not really need to change though in futures markets. It ends up that the price changes, just in terms of how futures roll up or roll down the curve, coming into the maturity of the contract. The simplest way to think about it is just picking up coupons or picking up dividends.

[00:15:05]Rodrigo Gordillo: Okay, but let us talk a little bit about—that is the concept of Carry, but let us talk about the idea of those Carry measures as signals to try to predict future price movement of these assets.

[00:15:19]Adam Butler: Yeah, so in general, you want to be—

[00:15:21]Rodrigo Gordillo: Flipping coupons in front of a steam roller rather than using it as a predictive measure.

[00:15:30]Adam Butler: Sure. In general, you are gonna expect to get a higher return from an asset with high Carry. You are gonna expect to get a negative return from an asset with negative Carry. What is positive Carry or negative Carry? Typically, Carry is whatever the rate of return is above the cost of financing, right? You need to borrow money in order to purchase an asset. If the rate that you are borrowing at is lower than the rate that you expect to get paid on that asset, you are expecting to earn a positive Carry.

Let us say this is actually not the case in many global equity markets at the moment, but let us say that the expected dividend yield on an equity index is 5 percent, and the current interest rate that you would need to borrow at in order to invest in that equity index, you only have to pay 2 percent. You would expect that—you expect to earn about a 3 percent premium over the duration of holding that instrument, right, if instead, as actually is the case today, the dividend yield is actually lower than the financing rate.

Let us say the dividend yield is 2 percent and it costs four or 5 percent to finance it. Actually, you probably want to be short that asset and long cash, effectively, in order to earn that differential, right? In that way, what we assume or expect and what is validated over decades of empirical evidence, is that markets tend to rise in price to match the expected Carry.

If there is an expected 3 percent difference between the cost of financing and the coupon or dividend yield or what have you that you are expected to get paid, then the price will rise in order to deliver that 3 percent premium, or in the case of being short, the price will fall in order to deliver that premium, and we are measuring that premium, that Carry premium every day. It changes every day depending on changes in interest rate differentials, or the slope of the yield curve, et cetera.

We are adjusting every day to try to get maximum exposure to markets that appear to have the highest expected Carry and the largest short exposure to markets that have the greatest expected negative Carry.

[00:18:05]Corey Hoffstein: Rod, if I can summarize it maybe in one sentence, because I think what is important here, when we talk to people about Carry strategies, they often think about clipping coupons. What is critical about a multi-asset Carry strategy is it is using Carry as a signal to try to forecast the total returns of each market, rather than a strategy that is trying to isolate and extract the Carry on its own right. Just like Trend, use a Trend signal to go long and short markets, and you are trying to forecast the total return. Carry strategies can do something similar.

[00:18:36]Rodrigo Gordillo: Yep. With that understanding, if anybody wants to get something a bit deeper, we have done a ton of other videos and papers on it, and you can go to returnstacked.com and read some of the blog posts in there.

Let us talk about what—how Carry has been affected in this market environment. Broadly speaking, how were multi-asset Carry models positioned entering this week?

[00:19:05]Adam Butler: Keep in mind, just think about the evolution of the economic environment since, say, 2020. We had this large stimulus from COVID, that contributed to a surge in inflation. You can argue about what other factors contributed, but we had a surge in inflation. The Fed raised rates aggressively and therefore short-term yields rose above long-term yields. Now, that the yield curve is inverted, you are actually getting a lower expected return on the 10-year than you are on owning cash.

From a Carry standpoint, that implies that we should be short bonds. Indeed, the Carry strategy was short bonds for much of the 2022-2023 period, and through much of 2024.

As the economy began to cool, the Fed began to, and global central banks began to talk more dovishly about rates, implied rate cuts actually have, rate cuts, the curves have normalized and in many parts of the world are now back to being upward sloping.

Over the last six months or so, our bond exposure and the Carry strategy has tended to be on average more sort of long bonds. Now, what happened? By the way, there were changes in currency markets as different economies experienced changes in or moderation in inflation rates at different rates over time, or at different speeds, let us call it over time. Therefore, the currency markets changed in order to reflect those changes in return expectations and therefore changes in interest rates, short-term interest rates.

Now we come into the most recent episode. The Trump administration announces that America is no longer in a position to continue to fund the Ukraine war, to continue to support NATO to the extent that they have. Europe is going to need to stand on their own two feet, strategic autonomy that motivates this enormous, basically overnight change in both the public’s perception of the necessity of major fiscal spending policies in Europe, and changes to the legislation that would be required in order to actually operationalize those fiscal expansions.

The market goes from perceiving that Europe is kind of locked into this low growth environment because they have got all these regulations that prevent major expansionary policies. Overnight that is flipped on its head. We are getting a massive expansion. Therefore, nominal growth expectations jump effectively overnight in Europe, and global, European bond markets are repriced higher, in terms of rates, in order to reflect these higher nominal growth expectations. That was, as Corey mentioned, a highly irregular shock to both short and long-term rates on European government bonds, to the tune of between 20 and 30 basis points, basically overnight.

As we know, when interest rates go up, bond prices go down. We are long bonds. The Carry strategy, because Carry, the slope of the yield curve has been normalizing, in general, we are expecting positive returns over cash from holding bonds. We get this kind of overnight rate shock. That obviously is highly punitive and that was the major explanatory variable in terms of why we experienced that large negative return yesterday.

It was not just that there were also secondary effects too, as the interest rates changed between Europe and the U.S., that also made the Euro more attractive as a currency for global savers to hold their savings in. There was a flight from U.S. dollars into the Euro. The Euro rose.

We were also net short the Euro because the interest rates in the U.S. have been structurally higher than in most of the rest of the world, over the last 12-18 months. We have been structurally long the U.S. dollar and short foreign currencies. We were positioned—we were short the Euro.

Now the Euro kind of crashes higher, right? That was also at the margin, a bit of a hit. Add in the Trump tariffs, copper jumps, meanwhile, copper is suggesting negative Carry properties, so we were short copper on the wrong side of that. Oil is reflecting supply/demand dynamics where the oil market is in backwardation. We are also offside a major collapse in oil. It was a constellation of large surprises that went against the prevailing tailwind that we normally expect to get on our Carry positions.

[00:24:20]Rodrigo Gordillo: That is very helpful. Thank you, Adam. I think a lot of people in the last three days may be thinking, okay, this is the typical Carry strategy that has a negative tail risk, right? This idea of the young Carry trade going against you at the worst of times, do you think that idea is true here for a multi-asset Carry? What are your thoughts on this concept of picking up pennies in front of the steamroller for Carry, broadly speaking?

[00:24:58]Adam Butler: If you look back historically at recessions and the concept of a typical procyclical strategy—pro cyclical meaning it does well when the economy is in an upcycle and does poorly when—looks like we are falling into recession. Think sort of the reaction function of global equities. You just do not see it.

Because we are trading all of these different markets, we are trading global bonds, global currencies, global commodities and global equity markets, for example, we have been strategically short, on average global equities for many months. Sadly, equities did not fall yesterday, right? That was also a strange situation. Equities are down today.

The Carry strategy is benefiting from that, right? This is not a procyclical type of hit on the Carry strategy, right? If anything, the Carry is getting hit by a major growth shock in the Eurozone, right? If you look back historically, the Carry strategy does not have any pattern. If it happens to be positioned in some bear markets so that it is long equities or short rates, then it can get hit for a time while equities get hit. There are lots of times when it runs in reverse, and Carry ends up being a wonderful diversifier by rising substantially as equities fall in bear markets.

There is just no clear pattern. I understand that many people who have been around markets for 30 or 40 years think of Carry as Currency Carry where you are borrowing in, say, the yen or the dollar to invest in the Mexican peso or the Brazilian real or what have you, to pick up this interest rate differential against emerging market currencies.

That is clearly a pro-cyclical strategy. It is in theory, it is empirically. You see them—they get hit when equity markets get hit, but because we are applying this concept to all these different markets and sectors, theoretically, there is no reason why it should have that profile and empirically we just do not observe it.

[00:27:17]Rodrigo Gordillo: Let us—we have had a shock. We have had a macro shock in the last few days, and we have seen periods where the Carry strategy has been caught offside. Can we talk a little bit about historical context where the strategy is positioned against the policy shock, and then what happened and what happened after? Can we go through some examples there?

[00:27:44]Adam Butler: Yeah, sure. Think about the 1994 bond massacre. Greenspan, he is newly in office. He wants to set a standard as a hard liner. He enforces this very large surprise interest rate raise. That was, until this period, the largest drawdown in the Carry strategy, just this unexpected major adjustment. In that case rates—it was rates again, this time that caused a material decline, took a year or so to recover from those losses.

Equities and metals also contributed to losses in that period. Eventually, because there is nothing changed about the long-term expectation of this premium, it went on to new highs.

There were steel tariffs introduced in March of 2002. The Carry strategy was caught offside. Some commodities in that year struggled for a couple of quarters, but actually ended up 20 percent on the year in 2016-2018.

We also had, you will remember the Fed tried some policy normalization during that period, and then markets had a temper tantrum in 2018. 2018 was a very rocky year. At the beginning, when central banks began this normalization policy and markets were not expecting it, we had another substantial drawdown. There was also a round of tariffs on China, another sort of similar context to the current situation. Carry experienced about a 20 percent drawdown then, right? There was also a post pandemic inflation while the market was digesting what the Fed was going to normalize rates, after raising them. Then it has been a kind of a bit of a sideways to down move, right?

Obviously in all of these prior periods, things normalized and Carry went on to actually, in many cases and on average, to emerge from these troughs with a surge of better than average performance.

[00:30:12]Rodrigo Gordillo: Yeah, that is what we have seen across every one of these as the very strong outsized recovery coming out of these situations. That is important to understand here, but just going back to the last three days, a lot of people are asking, have there been any adjustments made as a system, adjusting in any way. Can we talk a little bit about how often a multi-Carry strategy described in your paper is adjusting, and then how the adjustments have happened in the last three days.

[00:30:45]Adam Butler: We are looking at the changes in the interest rate differentials, and the slope of the cash yield curve, and the term structure of commodity futures, et cetera. We are looking at that every day and we are making adjustments to the portfolio every day.

There has been at the margin, some reduction in energy exposure, equity markets, metal exposures. There has been a marginal reduction in European bonds. There has been an, obviously, an increase in volatility, which at the margin would expect a position to contract, but because the yield curve has steepened in Europe, also the expected Carry has gone up. To some extent, expectation of higher future performance by holding European bonds has offset the increase in volatility. There has not been a very large reduction in European bond exposure.

There has been some at the margin, there has actually been a small increase in exposure to U.S. bonds, but generally the exposures in Carry tend to change a little bit more slowly. Major changes to things like global yield curves, global currency differentials, et cetera, tend to happen over a period of several weeks and months. We expect the strategy to adapt on those timeframes more than via overnight shocks.

If you look back on average, over very short horizons after these types of shocks, that strategy has actually paid off, because you tend to see an overreaction in the very short term to this type of shock, or this type of news. The market then moderates that reaction a little bit. We tend to get back a little bit of what we lost. Once the market stabilizes, the Carry signals have also stabilized. We have got a more, a better reading on the new regime that we are in, in terms of the Carry portfolio, and we are better positioned for what emerges going forward.

[00:32:53]Rodrigo Gordillo: Perfect. That is a very good overview of Carry, what is going on in Carry, and how it is changing. Let us flip over to Trend Following managed futures.

Corey, maybe you can help us out here and get some better understanding of what has been going on. Trend Following strategies generally succeed when they catch these very strong sustained moves, and they tend to struggle in these type of reversals that we have been talking about. Over the last three days, why do not you give us an overview of which markets have contributed the most and why.

[00:33:26]Corey Hoffstein: I think it is always interesting to think about when you have these big reversals, in some cases. In other cases, it has been substantial extensions of the Trend are how much are those surprises really priced in, versus how much was the market predicting? We can talk a little bit about that, but just in terms of what we saw over the last couple days, obviously gains in European equities were strong, though volatile. We have been overexposed to European equities, largely underexposed to U.S. Equities, as U.S. Equities have been flat to negative over the last three months.

We have been seeing a moderation of that position while European equities have been very strong, plus 10-15 percent, depending on which market you look at. We continue to see positive trends there. We have been long metals, gold, silver, copper and continue to see strong trends there. Energy is one that we have been flat-ish, and it depends on particularly where in the energy complex we have been. We had some gains in nat gas that were offset by losses in crude, right, and RBO gasoline. That is sort of a mixed bag over the last couple days.

Bonds, we have been short, and so, while we are down year to date on bonds, because bonds have just been a struggling trade for the last—I do not know, call it 18 months almost, as they just get whipsawed back and forth by different, the market digesting policy decisions and what is happening with inflation and economic impacts of tariffs.

We did get the benefit from bonds and then probably the biggest loss was in currencies. We have been predominantly long the U.S. dollar, as you mentioned at the beginning, Rodrigo. The dollar, as a basket, was up 8 percent last year. It is not a surprise we were long the dollar against a good cross section of other G10 currencies.

We had these very rapid repricing, particularly in the British pound and the Euro that led to a pretty substantial one or two-day loss—not substantial in knocking the whole portfolio off-sides, but substantial in the size of that individual position.

[00:35:26]Rodrigo Gordillo: Since we have seen extreme volatile moves here in the last few days, have we seen any major adjustments in positioning as a result?

[00:35:36]Corey Hoffstein: Yeah, and when we think about, again, we are evaluating trends every single day. When we think about Trend Following, there are two drivers for us. There is the volatility component where we are volatility targeting these positions. As volatility expands, we will naturally reduce the size. Long, will get less long, short will get less short.

If trends change materially, that can change the direction or moderate how much exposure we have. With weakening U.S. equity and increased equity volatility, we have seen some of our equity position to continue to come down. We have actually seen a marginal increase in the metals as gold, silver, and copper continue to perform.

We have seen a marginal decrease in energies. Trends continue to reverse from positive and some of them are showing as negative now. We have increased our short bond exposure. Bond prices have been trending negatively since around September last year, and the trend continues and so we will press the shorts there. We have been reducing long U.S. dollar exposure, now reducing here.

I think when we look at a couple multi-day changes, our bond exposure has jumped up 40 percent, right? It is important to keep in mind volatility of a five-year Treasury is very different than volatility of equities. Currencies have dropped about 20 percentage points. Volatility of the Euro is very different than volatility equity.

On a risk basis, there have not been really substantial changes from these last couple of days. As markets continue to digest the probability of these things going into effect, that is where trends can emerge, right? I think that is a really important point here.

People often ask, why do trends exist? We talk about this one-day change with the German fiscal policy proposal, that has to go to vote, and Adam talked about all the potential risks of this going to vote. The market over the next month will start to price in the probability of realizing that the first move was just recognizing that it could occur, and then as it becomes more or less likely, if it becomes less likely that those moves will likely revert, as it becomes more likely they might continue. Again, that is how those trends can persist as markets price in the probability of these bimodal events.

[00:37:56]Rodrigo Gordillo: Let us talk about just the same thing as Carry, like historically we have seen similar geopolitical movements affect Trend in different ways. What lessons from those kind of past events can we apply to the price movement of managed futures Trend today?

[00:38:11]Corey Hoffstein: Not surprisingly, it is actually a lot of the same events that happened in Carry. We are Trend events as well. It is because a lot of these events that catch their Carry or Trend offside, it is not because Trend or Carry actually historically are similar signals. They are actually quite dissimilar, and that is what makes them such a great complement.

It is because the policy or market shift has been so against the prevailing expectation that you get this sudden reversal in these markets. 1994, again, the interest rate event in ‘94 with a massive unexpected rise in rates, caused Trend to have a negative year. Steel tariffs in 2002, 2015 through 2018, just a struggling period for Trend in general, as it was these ambiguous central bank decisions around the world, as to whether they were or were not going to come off of the zero interest rate policy. Start and stop growth in global economies in the early 2000-tens again, causing struggles for a lot of Trend strategies.

2021-2024, obviously 2022 was a very strong Trend year, but then we had post-2022 again trying to renormalize trends to post pandemic inflation. 2023 in particular, being very tough in bonds.

I think the majority of losses last year were in bonds, but we can highlight the move in the yen as well last year, as being a big driver, a sudden surprise, a big sudden policy surprise that went against the prevailing positioning.

The last thing I will add there is while some of these moves can go against the prevailing positioning, the Trend is your friend until it ends, you can still net make money on Trend Following, even if the end is a violent reversal.

If you look at a lot of Trend Following P&L last year, the yen was a violent reversal in August that caused a lot of pain, but the net P&L for the year on the Y trade was still positive, because the performance was so strong before that. Some of these can be very painful when they occur simultaneously.

Trend actually has not really been that bad over the last couple of days. Especially compared to Carry. Some of these things when they are Trend surprises can be painful, but you have to consider it in the position, in the context of the larger trend in P&L that you have generated over the last six to 12 months.

[00:40:35]Rodrigo Gordillo: Yeah, look, I am just reminded of 2008 when I was a very heavy investor in Trend. We are talking about three days and when Lehman happened, the volatility in Trend was just insane over those three days. It was not necessarily favorable. The thing about all of these is that there is a period of adjustment.

We saw it in 2020 during COVID, right? That first leg, the Trend happened to be positioned in the opposite of the prevailing trends. The first week or so, it had a similar reaction to what was happening in global markets, but then it quickly transitioned the other way, right? The adaptability of this is something to remember.

In any given day, really whether we are gonna be on the right or wrong side of a geopolitical move will depend broadly on whether that geopolitical move is in the prevailing trends or against it. Three days is not much. We have got to talk about it, we have got to put it into context, but let us remember the big picture ultimately.

Let us talk a little bit about just comparing this Trend Following and multi-asset Carry. They are both trading the same contracts. Why do we have those two different signals and how did—how do they tend to relate to each other, especially when they react slightly different to global macro events? Anybody grab that one?

[00:42:08]Adam Butler: They are mechanically similar in so far as we are broadly trading the same universe of markets. We are broadly finding an optimally diversified portfolio of those markets based on the Trend and or Carry signals at the end of every day. They are systematic, right?

The other thing to recognize that Corey has hinted at, is that systematic strategies, at least the ones that Carry and Trend rely on, are relying on changes in prices. For Trend, it is the change in effectively the rolled front month futures contract. For Carry, it is changes in the prices of contracts along the curve, the futures curve or along the … curve, but we are taking signals from the market itself. As market participants are shifting capital away from one market and toward another, Trend and Carry are picking up on that.

Why do we rely on that? We do assume that at the margin, participants making decisions in markets, on average, reflect information, right? We are picking up on the information that the market is transmitting via its price movements, just by virtue of the fact that these movements are basically impossible to decipher narratively, or using some kind of clinical framework, just in your mind, we are forming portfolios based on all these different signals across 27 different markets, right? It is all just reacting to or digesting information that the market is giving us.

When the market is not doing a very good job of adjusting because it is confused or uncertain, or does not know what is likely to happen, these are the periods when the Trend and Carry strategies are most likely to suffer. That is exactly what we are seeing today. We are in a period of extreme policy ambiguity, right? We will not always be in a period of extreme policy ambiguity.

Once that settles out, either the market will get used to the way that, for example, Trump communicates and be able to read the tea leaves and anticipate what his true intentions are, and adjust towards that over the intermediate term, or just, Trump may get what he wants and therefore there will not be the same number of these policy changes happening. At some point there will be—the market will adapt to the new environment. There will be a new equilibrium, and these strategies will continue to go on and do what they have always done, which is just deliver on this nice, non-correlated premium.

[00:45:17]Rodrigo Gordillo: Let us just discuss the difference here between market moves on headlines. Just wrap it up really, what are the strategies—the strategies operate on principles. The question is whether recent returns are a feature or a bug. Is this a feature or a bug? What we are seeing in these two strategies?

[00:45:48]Corey Hoffstein: We have these systematic strategies that we talk about, trying to harvest these premium that we believe exist, right? Trend Following and Carry. We believe that there are, particularly with Carry, I think there is a very strong argument that that is tied to intrinsic risk premia that exists in the market Carry of a trend.

You might argue there is some risk premia there, some behavioral, right, but they can be caught off-side by these sudden market headline movements. That is just the reality of any investment strategy. Certainly it is never fun for something like a Carry strategy to be down 5 percent in a day, or 5 percent over three days and 4.5 percent in one day, but we see that happen in other markets, right, not just alternative strategies.

We have seen that happen in equity markets frequently. We have seen that happen in bond markets. Rarely over the last 20 years, but it has happened, and those sort of things happen when there is a fun—the market is fundamentally repricing something that it did not get right.

A strategy can do the same thing where the strategy can be off-sides because again, in our case, if we are Trend and Carry relying on market derived signals, and those market derived signals are just not capturing or did not anticipate these sudden rapid, in this case, policy changes. The reality is it is a feature, right?

The thing I always say is, if a strategy becomes too easy to hold over the long run, everyone would hold it, and all the premium gets squeezed out. It is not a fun answer. It is a little flippant, frankly. I have said time and time again, no pain, no premium. If we believe there is a risk premium here that is different than equities and bonds it, we should expect it to behave like equities and bonds.

No one really questions equities dropping by 5 percent over a couple days. It has happened. It will happen again in the future. When it happens in an alternative strategies, the sudden question is, is the strategy broken? I think a lot of that just comes from a lack of transparency in these strategies.

Going back to the beginning of this call, we rattled off all these markets that impacted Carry, especially, right? Carry, just fundamentally, this week was on the wrong side of three or four massive policy announcements that came out of nowhere, right? You got the Canada/Mexico tariffs, you got the Copper tariff, you have European deregulation, you have the German fiscal policy announcement, all happening in a two- or three-day period, and Carry was on the wrong side of all of those.

That is unfortunate, but a lot of people do not even realize when they are investing a strategy like this because again, it changes over time. They might be long the DAX, long the dollar, long German bunds. That is where the beneficial diversification comes in, hopefully over the long run, but that can cut in the short run as well. It is, I do not want to say losses are a feature, but losses are a reality.

[00:48:41]Rodrigo Gordillo: So are large positive gains that offset losses in your traditional portfolio, that we do not talk about much because everybody wants to focus on what is going quote/unquote wrong, the wrong is the pain that you are paying for that premium. One of the questions here was, this, the drawdown in Carry has recently been pretty large. One of the biggest challenges for advisors here is to help clients stick to strategies through different market environments. A good way to set expectations here, and I bring this up over and over again, is, you are taking risk. You are taking risk in equities, you are taking risk in bonds, you are taking risk in a Carry strategy or Trend strategy. A good rule of thumb for me has always been, what are my expectations of the best and worst?

Let us focus on the worst year, right? If you have a strategy like the Carry strategy that we discuss as a, on an average volatility of standard deviation of around 10 percent, I think the expectation here needs to be that there will be a negative three standard deviation move in that strategy. It is broadly normally distributed. You need to expect those types of moves to happen every so often. It happened back in 1994 during the bond massacre in 94. It happened in the mid-noughts, and we are seeing a little bit of it again today.

What is a three standard deviation for a 10 percent volatility strategy, assuming a Sharpe ratio of 0.5, that is, a 25 percent drawdown is a three standard deviation, right? It is probably gonna go plus or minus that at some point. That is the risk. That is the kind of the long-term risk that you are gonna take in order to see it, then in every case, it is rebounded pretty aggressively from that bottom.

You know, this is the behavioral side that I think I want to bang the table on. This is where you might want to start thinking about allocating if you have it, right? If you believe that it is normally distributed, you believe that it is going to revert back to its mean, it might not be a bad idea to start seriously thinking about allocating here. This is where you earn your premium, right?

[00:50:55]Adam Butler: If you are gonna earn it, are you gonna stick around and get paid for it, right? I also like to think about with these Trend and Carry strategies, I think it works for others as well. But, I just bring it back to middle school science. It is potential energy and kinetic energy. Kinetic energy is when you are getting—when the bets that you are making are paying off.

In Carry, you are building potential energy as—you are in bonds because they have got high rates versus cash. There is a loss on that position, which means that rates just went up. Now, you just took a loss, but your expected return is higher, right? You have got this sort of negative kinetic energy translating into potential energy.

The potential return on the portfolio is probably considerably higher now because the rate differentials widened, the slope of the yield curve has steepened, et cetera. You just have to wait for this potential energy to translate into kinetic energy, once it is unleashed in the next regime, right? It really is just a waiting game. This is where you pay, and the payoff happens later.

[00:52:13]Rodrigo Gordillo: To wrap things up, any parting words from any of you as to how to think—how to help advisors talk to clients with regard to this type of environment with rapid policy shifts. We talked a little bit about no pay, no premium. Any other thoughts?

[00:52:36]Adam Butler: I have one thing and somebody mentioned it, about how much Trend versus Carry would you recommend in a portfolio? In general, we have about the same expectation for both, at least I do. I am not sure whether everyone would come down in the same exact place, but I think about the same expectation for both, especially over a five or 10-20 year investment horizon. I have about equal expectation. What is great is that off, they are non-correlated, they are reacting to different information at different times.

I always say you should—if you own Trend, you should 100 percent also own Carry. They are tremendously good diversifiers for one another. They are—it is like having two eyes and being able to view things in 3D through binocular vision, you are getting information from the term structure.

You are getting information from price, momentum, and together it is just really fine well-crafted dish and the experience of them together is just so much smoother and more palatable than holding either of them on their own.

[00:53:50]Corey Hoffstein: I have a tremendous amount of sympathy for advisors who particularly have line-item sensitive clients. When any line item goes through a big one-day drawdown, they have got to field calls. You cannot rent conviction, right? If an advisor is not truly understanding what this strategy is, I understand the desire to get out of it. Frankly, I felt the same way yesterday looking at our, the Carry strategy. I have, I, we eat our own cooking. I have a substantial amount of, my portfolio has a Carry overlay.

To Adam’s point, I also have a Trend overlay and I have other overlays that I add. I have a huge amount of overlay on my core stock and bond position. Carry is just a slice and somehow despite loss, substantial losses in Carry yesterday, my PA was positive.

[00:54:41]Rodrigo Gordillo: Yeah.

[00:54:42]Corey Hoffstein: I go back to—even I have to check myself, I can become over line-item focused, but at the portfolio level, diversification worked. It was not fun to have that part of the portfolio down, but there was other stuff that was substantially up that net offset it because I was not so dramatically overweight that one particular trade.

Again, it is one risk premium that we have high confidence in, but it is one of many. It is one that is gonna operate well or not well in different environments, the same way stocks and bonds operate well and not well in other environments, Trend may operate well and not well. For me, trying to market-time or determine when these things do well or not, is totally undermining the potential benefits of diversification.

When you have diversification across a huge swath of different strategies, the hurdle rate for market timing just goes up so much. I just go back to those basic principles of do I have conviction in the strategy long term? Is it appropriately sized in my portfolio? Yesterday was a great test, and for me it was, and what else do I have next to it that I do believe is truly diversifying and did it behave in a diversifying manner? I looked at my PA yesterday and I said, it did exactly what I thought I would do.

[00:56:06]Rodrigo Gordillo: Yeah, again, I think what we have seen is that these strategies are non-correlated to equities, bonds, and themselves in the last three days. We have certain—another acute moment of pain for managed futures was during the SVB fiasco, right? The Silicon Valley drop Trend had a, it was just caught really offside. Carry was not, it was a non-event for Carry. Slightly up, I think, during that period. Again, it can be the opposite. Right now Carry is struggling more than Trend, and that is what it is. It is just added diversity across different areas of your portfolio.

They all tend to have a positive expected return, and we are gonna be in around that over time in different ways, which is exactly what we are looking for.

Okay, so with that, sorry we were not able to get into any fund specific content. We are restricted from speaking to with regard to the funds, due to regulatory restrictions, but I hope that this was useful in providing some context on the macro environment and the kind of managed futures strategies that are out there.

If you do have any questions, you can reach out to us directly, you can go to returnstacked.com and go to the contact section and talk to any one of our reps.

If you want to go directly to us we are on Twitter and pretty active there, or LinkedIn these days. Look us up. Corey is Cho@choffstein. Adam is @GestaltU and I am @RodGordilloP. Any parting thoughts? Adam, I know you needed to go 15 minutes ago. Thank you for sticking around. Thank you everybody for sticking around this long. Really appreciate your time today and looking forward to seeing you in our next live Q&A.

[00:58:07]Adam Butler: Thanks.