Systematic Investing

Hi, Clifton. Thanks for being with me today.
Clifton Hill:Thanks for having me, Elana.

EMS:Absolutely.

Clifton, to kick off our podcast today, I'd love to learn more about you and the firm and how you got to where you are today.
CH:Sure.

Well, I've always been interested in macro. I started my career interning at the Federal Reserve Bank of New York, in college. And then I worked there for a few years in the markets group. This gave me a great early perspective on global markets, correlation of assets, and risk in the system. After that I held various positions at Tudor Investment Corporation, a macro hedge fund. And then, I had the privilege of learning, there, macro investing from some of the best portfolio managers and strategists in the world, including Paul Tudor Jones.

Then I moved on to Acadian where I had a great opportunity to come to their systematic macro strategy, where I got to apply my knowledge of various roles I've had over my career, while also adding some new skillsets from a systematic, quantitative, and client perspective. What I enjoyed most about being in Acadian systematic macro is the breadth of forecast positions and markets across the world. And I get to analyze and follow it on a daily basis.

This more systematic imbalance approach is enjoyable on a day-to-day basis, because I can really study and follow 150 positions across the world. Whereas when I was a Discretionary Macro PM, I was taking more concentrated positions. I had to focus more time on managing the risk of those larger, more concentrated positions.
EMS:Clifton, I love hearing your background and how you got to where you are today.

Based on what you're managing at Acadian, I'd love to take a deeper dive into where you see the greatest opportunities.
CH:Sure.

What an interesting time we're in. 2022's been a pretty amazing time period, especially for macro. To your question, there's some fantastic opportunities in the near future. As we now have diverging business and central bank cycles across the world, this is different than the quantitative easing period where the central banks keep rates low and we didn't have much volatility.

So, there'll be a lot of divergencies. And it will create great intermediate term trends in equities, currencies, bonds, commodities, and volatility across assets, across countries. For example, some emerging market countries are ending their hiking cycles, that started as early as Q1, 2021, while many developed market countries, such as Europe, just started hiking rates this summer. Additionally, some countries will go into recession or stagflation because of sticky-I inflation and the central banks hiking to bring down that inflation while other countries will see inflation fall quickly, and their central banks will be able to cut rates and allow their countries growth to re-accelerate. The the ability to go long and short across these countries in asset allows our systematic process to take advantage of these different cycles.
EMS:Clifton, indeed, it is a very interesting time to deploy your investment strategy. On the other hand, I wanted to ask you, what are some challenges you're currently facing, and how you're dealing with them on the investment front?
CH:Well, it's a very interesting question, Elana.

From a multi-asset and systematic-macro investing perspective, we view the greatest challenges today, over the medium term, as potential opportunities, of which there are many, as we discussed. More specifically, the post-pandemic period is unprecedented. And the challenge to markets, investors, forecasters, central bankers, is extremely difficult.

Usually and historically, you can develop a clear roadmap, but not any longer. The forecast and analysis have to be very dynamic to a quickly changing narrative. For example, there have been specific cases in which the Chairman of the Federal Reserve Bank, Jerome Powell, say they were going to hike 50 bps, basis points. And then, they had to change a couple of days before the Fed meeting to go 75 basis points, because of an inflation print. These examples show how dynamic investors have to be. That wasn't expected by markets.

The central banks have an almost impossible job of bringing down inflation, which we call, trying to land on a very small runway. And they're extremely far from their targets. That in itself is difficult, but to do it without causing a recession, or very deep recession, is almost impossible.

So, to go through this process of changing economic data, central bank shifts, asset volatility, will be very difficult. The market's been switching narratives from stagflation, shallow recession, deep recession, soft landing, higher inflation, lower inflation. We could go through multi iterations of this until we ultimately settle on a specific regime.

And then, the question is, what will that specific regime be? Will we go back to 2019, where central banks struggled to get 2% inflation? Or do we settle higher at 3%, 4% inflation, and this central banks just allowed to sit higher than their target? And then, the pathway will be very interesting on how we get to whatever that regime will be.
EMS:Clifton, I wanted to switch gears a little bit, and ask you how your firm is integrating ESG and DEI to issues that are top-of-mind for institutional investors and other types of investors and asset management firms, globally.
CH:Very important topics, Elana.

Let me first touch on D&I, and then I'll cover ESG. The firm has really made DIE a major initiative in the past few years, hiring a dedicated DE&I Director, with strong participation at executive level at Acadian. I sit on Acadian's Diversity Inclusion Forum, and I can say firsthand, it's been encouraging to see the progress and commitment here, as we start to execute on a formalized strategy.

Our D&I strategy aims to foster a lot of diverse leadership, develop a lot of talent, and extend the pipeline development. So, there's a number of ways in which we try to address this. We've established leadership representation goals. We offer pathways to success through valuable paid internship experiences, in which we give candidates of diverse backgrounds and academic disciplines opportunities. A good example is, this year's intern class was 83% diverse by race and ethnicity.
We're working hard to expand networks through organizations like HBCUs, historically Black colleges and universities, as well as supporting women in leadership. We're also actively involved in the community through mentoring and financial commitments to diversity initiatives and dedicated to closing opportunity gaps. An example of those would be Thompson Island, La Vita Scholars, Woman Money Matters.

From an investing perspective, Acadian has been at the forefront of ESG for many years. We were the first quant fund to sign the Principles for Responsible Investment back in 2009. And over the past decade, we've aggressively explored how a systematic approach can give us greater edge. For the core equity process, the goal is to integrate ESG signals holistically to enhance the prediction of our risk adjusted returns and ultimately to improve client investment outcomes. What's really important from a quantitative and empirical perspective is that these companies, when we study it and we find that they meet these certain empirical goals, they're more likely to be positioned for success.
A few examples of those empirical goals being reached. A company that's well positioned to navigate the transition towards low-carbon economy, companies that have strong corporate cultures that consider wider stakeholders, customers, employees, local communities, also those companies that have sound governance structures with a majority of board independence and exhibiting diversity in terms of gender and experience qualifications. By contrast, those companies that are poorly managed are more likely to be subject to regulatory penalties, litigation, and reputational damage.

Acadian's core investment process leverages our quantitative and systematic investing expertise. We do that by incorporating proprietary ESG metrics to draw upon the unstructured data, alternative data sets, and machine-learning techniques. We do not rely on off-the-shelf ESG data vendor scores, and prefer to draw upon our own proprietary forward-looking ESG metrics. We incorporate our ESG factors, and only if they demonstrate efficacy and are valuable to our investment process.
More specific to my world in systematic macro, we believe it's increasingly important to adapt naturally to environmental and other ESG themes. Commodities stand out, because the production and consumption are tightly intertwined with ESG. Also, and more specifically, we've tested and implemented ESG factors that are efficacious in our own models and are continually searching ESG data and factors that will improve performance.
EMS:Clifton, we've covered a lot of ground today. So, I wanted to see if you have any final thoughts to share with us.
CH:Sure, Elana.

Just in terms of final thoughts, a lot of investors have been wondering about emerging markets. Will they lead this global growth, and also how that pertains to a commodity price appreciation. The growth's come from emerging markets led by China. As I mentioned before, EM central banks started hiking early because they did not have the choice or the credibility for markets of calling higher inflation transitory like the Federal Reserve Bank wrongly did early in the process.

So, as global growth potentially dips near recessional levels, EM central banks should be able to cut their rates to stimulate growth. China's very interesting. And it could go in a number of different directions with China. They don't have inflation so they can stimulate, but they really have to look at three ways to achieve this growth. They need to take care of the property sector. It's 25% or so of their overall GDP. So, very important. A lot of the household wealth is from the property sector. The second thing they need to do is, they need to curtail the tighter regulatory environment. It seems like every time Chinese assets find their footing, something happens from the regulatory standpoint. And then, lastly, they need to shift from their Zero-COVID policy, or at least hope that COVID diminishes in terms of its importance. If China cannot rebound, which so far, it has not been able to, then it's going to be tough on EM, emerging markets. But maybe for the reasons we've discussed about through this discussion, that the other EM countries can achieve it.
EMS:Clifton, I wanted to thank you so much for sharing your perspective with our listeners. And thank you for listening to the EisnerAmper podcast series.

Visit eisneramper.com for more information on this and a host of other topics. And join us on our next EisnerAmper podcast, when we get down to business.

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