“I think that diversification is king, and timing things is very difficult.” – Karsten Schroeder (Tweet)
In this 2014 year-in-review, Karsten Shroeder looks at the CTA industry and give some advice on how to look at 2014 with a rational and objective eye. He also has insights into how 2015 will be for the CTA industry and how to educate more clients to the advantages of managed futures.
Please welcome our guest Karsten Schroeder.
In This Episode, You’ll Learn:
- How the year evolved for Amplitude and it’s strategies.
- How the CTA industry did in 2014 in Karsten’s opinion.
- What models did well last year.
- How hard it is to shape models and make guesses based on world events that affect the markets.
- What Karsten learned from 2014.
“We are trying to educate our potential clients and explain to them the benefits of CTA strategies.” – Karsten Schroeder (Tweet)
- How they have increased their research team.
- Why his firm welcomes divergence in the markets.
- Why educating clients is very important.
- What diversification can do for clients in their portfolios.
- Why not to use 2014 as a reference point and say that this markets new returns for CTAs.
- What Karsten wishes for 2015.
Resources & Links Mentioned in this Episode:
This episode was sponsored by Swiss Financial Services:
Connect with Amplitude Capital:
Visit the Website: www.ampcap.com
Call Amplitude Capital: +41 41 747 15 00
E-Mail Amplitude Capital: firstname.lastname@example.org
Follow Karsten Schroeder on Linkedin
Karsten: If you would have asked people at the end of 2013 what the most favorite strategies are, nobody would have put CTA in the first position. You can look at these polls. You tend to favor things that have done very well in the recent periods. We all know that there will be some level of mean reversion of recurrence when it comes to these kinds of things because otherwise it would just mean that one strategy is notoriously superior to another one which I don't think it is.
My name is Karsten Schroeder. I'm the CEO of Amplitude Capital, and you are listening to my year-end review on Top Traders Unplugged.
Introduction: Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences their successes and their failures, imagine no more. Welcome to Top Traders Unplugged. The place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence, or investment career to the next level. Here's your host, veteran hedge fund manager, Niels Kaastrup-Larsen.
Niels: Karsten, welcome back for this review of 2014 where we look at the big event from the point of view of your trading strategy. I want to explore both the ups and the downs as well as the big takeaway from what can only be described as a great year for systematic trading strategies in general. But as we know, just because you are systematic, and you're trading it doesn't mean necessarily that your strategy deals with market events in a similar way. I want to just jump into it straight away, Karsten, so tell me about 2014 from your perspective. How did the year evolve for your firm and for your two strategies?
Karsten: Well Niels, first of all 2014 I think was a great turn around year for the CTA industry in general, and so it has been for us. None the less, market environment has been quite different for the various strategies. By that I mainly refer to different time frames and also when you review the industry as a whole you will see that, in particular, the more traditional longer term trend followers have had a fantastic time. It's been a little bit more challenging for the shorter term traders. Having said that, as you may know, both of our funds are short term trading funds and Classic has done very well, and it was nominated for the year Hedge Award. Dynamic found it a little bit more difficult, so I would say the short, short end of the short trading has struggled more. You also can see that when you look at the overall indices in the industry. In particular on those one or two day holding periods we started seeing a couple of whipsaws. It was more difficult to benefit from these massive trends.
In terms of overall revue of the year, one can certainly say that the last couple of months, in particular the fourth quarter has been amazing. There were massive trends in all the major asset classes. We had the Euro/dollar moves, before that we had dollar/yen moves. We've had the massive sell off on the commodities, which also we benefited from. But I believe a lot of the players in the industry made a fair amount of profits on those sell-offs in the commodities. Then last but not least there were good price movements on the equities. Overall obviously equities kept up a pretty healthy price level but with some selloff in-between. We've seen some price declines in October and subsequent recoveries. Those moves were all pretty good, in particular for our Classic program. Then bonds, generally speaking, have been a profitable asset class too.
So when you have this type of scenario with no asset class really losing, that obviously creates a fantastic environment for the CTA industry. I'm very happy not just for us but also for our peers and colleagues that this year really has been a big, big turnaround year. It was, of course, necessary. The last years: '13, '12, '11, it was very challenging and a fair amount of investors it seemed have started to have serious doubts about this sector in general. We always preached you have to be patient. It's a volatile strategy. It will play an important role in your portfolio. So not only does the number stand alone, it's very attractive, but I also believe in comparing it to the other hedge fund strategies in 2014, CTAs have really delivered an outstanding result.
Niels: Absolutely. You mentioned some of the sectors. If you drill down maybe even further, which markets in particular would you say were the biggest contributors for you in the year, both on the positive and the negative side for that matter?
Karsten: First of all I would have to distinguish always between Amplitude Classic and Amplitude Dynamic and generally speaking I would say equity markets have been pretty good for us and the bonds and well. I don't really want to go down to the specifics of the individual markets, but those two asset classes have been pretty good. It’s also a reflection of the weights they have in our portfolio given that we are a short term trader; we have to put more weight on those markets, and they've been very attractive. They have done the biggest contribution.
Niels: Again, without going into the nitty-gritty of things necessarily, but we had a year where we saw some big trends. You mentioned some of them: coffee going up 50%, oil dropping 45%, and a lot of other markets having quite significant moves. But it doesn't always mean that trading models capture them well and of course we also have to distinguish between the longer term strategies and the shorter term strategies. If you look at your portfolio of models, so to speak, was there anything that stood out where you said, actually, I thought we would have done a little bit better in this market or in this type of model?
Karsten: I think you will always have the situation no matter which year, or what period you would review. There is obviously a top performing set of models and a bottom set when you look at performance. So to that extent I think that analysis is important in terms of evaluating the robustness of your trading models. But you know, hindsight is obviously a thing that we, unfortunately, don't have in the investment world. So you can always say, if I would have known this or that, and if I would have disabled my worst performing models, then, yeah, in any situation you would have significantly enhanced your return. So whilst I agree that from the perspective of checking robustness it's important to review these performance numbers, beyond that, I think it would be wrong to say, "Oh right, so we had this set of models not really performing very well, so we may underweight them in the following period." This is not how we do our research, or how we build our program.
Niels: Sure, sure, now the year as a whole certainly... and maybe I don't know enough about just the short term space. But to me at least the year was a little bit sort of a year of two tales. We kicked off the year, generally for CTAs, with three very difficult months. A lot of death sentences were issued over trend following in the media for sure, but then we had a very strong run eight out of the last nine months delivering positive returns. We had some events that people will remember: Ukraine, the Russian debate, we had oil, of course, taking center stage. Just to educate the broader audience here, can you talk a little bit about how systems or strategies as a whole, like yours, react to some of these specific events because this is what people often... I mean if they hear Russia or if they hear oil dropping 50% a lot of investors will say, Ooh, that's scary that's dangerous. But actually, as you and I know, these kind of strategies don't necessarily look at events like that in a negative way.
Karsten: That's right because I guess the challenge, you have with geopolitical events from a discretionary and from a human perspective, is that you will try to evaluate them. And you will try to have a position on how the situation will develop going further. Whilst some people and some analysts or traders or portfolio managers may have a superior capability of calling the shots there, I would say, on average it is very difficult and emotions can really get in your way. The beauty of these events, because they are major macroeconomic or political news is that the price movements subsequent to that are quite substantial. And that is a very fertile ground for systematic trading strategies because the models themselves will not care why there is a particular price movement in the market. They will just detect that there is and will work under the assumption that this price movement will continue for some time. So referring to these particular scenarios or events that you mentioned: the Ukraine crisis has obviously caused in its development some concerns that have filtered through in the equity markets and have thereby created trading opportunities, in particular with the shorter term strategies to also make money on the short side and then on the subsequent recovery. To that extent, I think that is the benefit of the systemic strategy that these events will be handled with as little emotion as possible and in a systematic way.
Niels: That's a great way of explaining it, and it's such a difficult thing for many people to understand because they obviously often have emotional input into their decision-making. Now, also in terms of the year, we ended the year, and we can look back on the good and the bad during such a year. Is there anything... you know it could be challenges, it could be highlights... is there anything in particular you would say that you learned from a year like 2014? Obviously you've been doing this for a long time and so maybe there's not a lot of things that can surprise you that you feel, actually that's a great takeaway. But was there anything that stood out for you in 2014?
Karsten: Well, subjectively speaking, it's been the recovery that we are all very happy about. Otherwise, when we do... in terms when you say what do we take away, what do we learn, so I would say we try to base our research not on one isolated year. I don't think this year there has been any particular event or any particular scenario where we would say, oh we have not thought about this, or it's a situation where we need to prioritize particular topics on the research agenda because of it. To that extent, I would say it was a normal year.
Niels: Sure, sure.
Karsten: But the return environment was great. So it's more the question being what does the investor actually learn from a year like 2014, where maybe some of the other strategies have not really performed that well? I think diversification is king and timing things is very difficult because if you would have asked people at the end of 2013 what the most favorite strategies are, nobody would have put CTAs in first place. You can look at these polls. It's all along the lines of long/short equity and maybe some credit and what have you. These weren't necessarily the best performing strategies this year. I'm not blaming them for this. But it's always this: you tend to favor things that have done very well in the recent periods. We all know that there will be some level of mean reversion of returns when it comes to these kinds of things because otherwise it would just mean that one strategy is notoriously superior to another one, which I don't think it is.
Niels: Sure, in fact, you're absolutely right of course. Morgan Stanley just released a report where the answer to that question was really only 2% of all the people that they asked in 2013 said CTAs would be the best performing strategy, so that's very true. In terms of the firm, as such, Amplitude Capital, did you have any major changes there in terms of research upgrades or any big changes in appetite from clients or anything like that?
We've continued to increase our research team and we have had very positive feedback from our existing client base, which has very constant asset growth. So we've managed to, yet again, increase our asset base also in 2014. We're very close to two billion dollars now. That's been good. I would say it's still challenging out there when it comes to investor's interest. We're trying to educate our potential to clients. We're really trying to explain to them the benefits of CTA strategies. And we're quite actually optimistic for this year that we will be able to, in particular with some of the larger institutional clients, to win them going forward. In terms of team here at Amplitude, we're 25 people now. We'll continue to grow at a very modest pace, so that's all going fine.
Niels: Sounds great. Now I know last time we spoke you talked a little bit about some of the more worldly events and some of other things that Merkel and other politicians kind of had been doing in the world and how that affected the markets and so on and so forth. A couple of weeks ago Mohamed El-Erian was on CNBC, and he said something like this, that if he had to sum up the world in one word it would be divergence. As you and I know, most hedge fund strategies are not particularly suited well for a divergent type of environment. They're more convergent type strategies. When you hear something like this, and if Mohamed El-Erian really is right about this and he obviously has been right in the past in coining some phrases and new normal and what have you. Can you talk to me a little bit about why this is really important for the kinds of strategies that you represent and for the investors to be aware of this change when they look at their asset allocation to alternative investments?
Karsten: I guess it's a question of what your point of view is. Given his background as being with the IMF for quite some time, I can totally sense with that statement. I can say from our perspective it is certainly helpful when the world becomes more divergent. Because if all markets correlate in all the major economic regions to more or less the same thing, we lose correlation benefits within our portfolio. We actually quite welcome the fact that economic developments in Europe, in Asia, and in the US go different ways. I think in particular when we take Europe and America we can observe, actually, first of all very different mechanics when it comes to stimulus like quantitative easing. It has worked extremely, and I would say surprisingly well in the US. It does not really work that well in Europe.
We are way more, in Europe, negatively affected by the instability in the Ukraine and the subsequent trade sanctions on Russia which because we all know that a trade relationship between Russia and Europe is much more intense than it is in the US, and we've seen that reflect in the equity markets. So whenever we had negative news from Russia or from the Ukrainian crisis, that has affected the European markets in a very different way than it has done to the US markets. Now from a trading perspective that is very beneficial. Also, when you have divergent developments in the various economic regions you will have more interesting movements on the currency markets, and those have been a great asset class. Also towards the end of the year with the strengthening of the dollar it's been a great opportunity there. So, from that perspective, yeah, I would share Mr. El-Erian's view, and it's definitely good for us.
Niels: Sure, sure. Now, if we look at things from a manager's point of view we saw big inflows in 2009, after CTA's and systematic strategies had a great year in 2008. But it turned out that a lot of those assets were really chasing performance and left the industry, because investors either didn't quite understand what they bought or just got disappointed, or bored with performance in general. So the question is, I know you've alluded to it, the fact that you see good appetite, and it's an important year, 2015. But how do we avoid 2015 becoming a repeat of what happened in 2010, 2011, where people again rush in, but also ends up rushing out? What can we do different? And I know you guys do quite a lot in the selectivity of your clients, but in a broader scheme perhaps, how do we best avoid a repeat of that sort of ying yang we saw in capital flows into CTA's?
Karsten: At the end of the day, it all comes down to a proper education of your client. I mean, clients who have been investing in the space and have a lot of experience, they will know how to handle the situation, and for them their appetite, or their investment activities have by no means changed I would say. So of course they would welcome a year like 2014 because it has helped them a lot in their portfolio. But I don't think that their general portfolio composition would change as a result of 2014. Now, with regard to clients that, let's say need positive performance in a strategy class in order to justify CTA exposure in that, the thing becomes a little bit more tricky. We try in the conversations to always manage expectations in a way that we say, "Look, environments have changed post-2009." And we try to provide them with performer returns that reflect this. I mean, there's such things that we use for our own research, so not trying to overstate anything there, or like lie to ourselves.
So, it's really down to managing expectations and showing them how the years '10, '11, '12, '13, have been really challenging, and that of course we can have a situation like that in the future as well, and it has shown it. I mean, it was the longest stretch so far of flat or disappointing CTA performance. And yes, it can happen, but, I think what also 2014 and some of the data points in 2014 have shown that the industry yet again has proven that it can provide the diversifying return. And I guess that is really important, and it has to be emphasized that investors see the benefits to their portfolio of having CTA's on board. And if they make a long term decision in terms of having the strategic allocation to systematic strategies in their portfolio, then I don't see the problem using a year like 2014 by bringing this past year investment committee because they might find it easier to sign it off.
Niels: Sure, sure. And I guess in the sense that probably is the key advice if you sit in front of an investor, and that is really for them to understand that the value of true diversification, you know?
Karsten: Yes, and I mean this with any investment. As you know things, that observe a very high sharp ratio in an isolated period of time, would carry some sort of risk that eventually will kick in. It doesn't make it a bad strategy, you just have to understand what that risk is. What do you get compensated for? Are you getting compensated for liquidity risk? Are you collecting carry? Are you collecting some other sort of premium? It's all fine, you just have to be aware that there will be, there can be, and there probably will be a scenario where the risk in that strategy will materialize. And when you have a balanced portfolio, that is not going to be a problem. And I think this is why I believe we also should use 2014, not just to say, "Oh, CTA's have just made money." But to say, "Look, equity markets had a very volatile time, not necessarily a bad time because more or less they stayed at the same level, but certainly a volatile time." And it's provided great opportunities. Or if you take commodities, for example, you know that there are investors who have a notorious long exposure to commodities. Then obviously it's quite nice to have a trading strategy that can also benefit in a sell-up scenario in the commodity asset class.
Niels: Yeah, no absolutely. Karsten, I actually only have one final question. But before I ask that, I just want to give you the opportunity if there's anything that you want to bring up that I have not brought up in terms of looking back at 2014, and maybe looking into 2015 as a whole. Anything you feel you just want to mention, or bring to the attention of the audience?
Karsten: Yes, the one thing I'd like to say is that don't... to the investors, you know, don't use this year as a reference point going forward saying, "Okay this is a new level of return that we're going to expect from CTA's in 2015 and 2016, and so on and so forth." But take it as a data point, a way you can see how it adds to your portfolio. And understand that timing this strategy is just not a good idea, because as you've seen, a lot of clients... let's say a fair amount of investors have reduced exposure in CTA's as we could observe in the overall AUM numbers, and just as the strategy recovered again. So I think this is just the big learning. Do maintain a strategic allocation, of course, everybody can vary it a little bit, but do maintain a long-term strategic allocation. It also helps you to understand the strategy better, it helps you to build a more long-term relationship with your managers to be more comfortable with them and understand their research process. Because that's what you buy at the end of the day. You're not buying yesterday's returns. You have to be comfortable with the manager and their research procedure, and that will take time. It's the unfortunate situation of systematic trading that you have to invest a little bit more time on the strategy due diligence.
Niels: That is great advice, as usual Karsten. I appreciate that. Now my final question and you know I always have these weird questions at the end. But I'm not going to ask for a secret talent this time. But I just want to ask you, if you could make a wish for the New Year, whatever it might be, something you would like to see happening. It could be for you, it could be for your firm, it could be for whatever... is there anything that you would like to see happening in the year to come?
Karsten: That is a very tough question because things, that are sometimes good for our trading strategy, are things that I wouldn't dare to wish for. So I would want to say that I feel that the... and this is actually me coming from East Germany and having experienced the Cold War, I have to say that I believe the world is in a very unstable state. And I would wish that the politicians... on actually both sides of the Atlantic shore, a little bit more reason in terms of managing maybe conflicting interests. But also trying to be more reasonable and understand the point of view of the other side. So, while crisis can sometimes be profitable for us, I still would not want to wish for another Cold War scenario. And if we take 2014, it certainly has been the year that brought the world closer to the old Cold War times than it has ever been before. And I think that's a development none of us would like to see.
Niels: Sure, I appreciate that. Now, unfortunately, our time is up for this short episode. I want to thank you again for being on the podcast, for sharing your insights. I want to congratulate you on another solid year for the firm, and I want to wish you and your firm all the best for the coming year. And I look forward to catching up later on in 2015.
Karsten: Thank you so much, Niels! Thanks a lot for the opportunity, and the same wishes go out to you as well!
Niels: Thank you so much, all the best, take care!
Karsten: Thank you! Bye bye.
Ending: Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you, and to ensure our show continues to grow, please leave us an honest rating and review on iTunes. It only takes a minute, and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.
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Date posted: 13 Jan 2015no comments