Systematic Global Macro Investing

It's hard for me to say in what ways systematic traders will benefit, but with movement, it's generally a positive. One thing that I think, very safe to say, is that nationalism is on the rise, and will continue to grow with what's taking place right now. It's really hard to imagine a scenario that avoids a global slowdown right now. When you consider the Fed trying to dig out from under QE like we've never seen, interest rates rising. And then when you think about what we're well aware of with the supply chain problems, coupled with the Fed and what they have to do to try to deal with inflation, stagflation, is certainly on everyone's lips. And I think it's a little bit hard to imagine avoiding it without a very aggressive move from the Fed. So, it's an interesting time to invest and I think it's got maybe bad implications for the economy, maybe good implications for systematic trading.
EMS:Yeah, Neil, clearly there's a lot going on in the world right now, both on the macro level and more particular level. So with that being said, where do you see the greatest opportunities in systematic global macro and why?
NR:We're forced to answer questions like that because people want to know how are you going to make money, but it's obviously extremely difficult to have a crystal ball around where opportunity exists. It's really interesting that fixed income has provided so little opportunity over really the last five years, as we've had a very stable interest rate environment. So it's pretty hard to short fixed income, but if you end up with a flat curve shorting fixed income, it gets pretty easy actually. So, there could be opportunities if the Fed gets aggressive and we invert the curve, that could create a lot of opportunities in fixed income. Commodities have been an absolute gift to the CTA world really, I'll say for the last 16 months. It's not just this year. I mean, really kicking in in October, November of '20 commodities were kind of let loose.

I see continued opportunity there, as you get cross currents and different value propositions across asset classes within the commodity world. So, I think there's going to continue to be a lot of opportunity there. Global equities, I think they remain very volatile and I think there could be benefits from offsetting cycles across countries. Eurobank this morning made the comment that he sees very different cycles as far as tightening and easing, Europe versus the US. Obviously they're being hit much harder by supply chain issues of food and things like that in Europe than we are. So, I think there's going to be some timing differences across economies that allows equities to provide some relative value trading. Currencies, they've had very little opportunity for a long time, a little bit like fixed income. I don't know that changes a lot because fiat currency and this race to the bottom seems to be a dead heat.

But in general, we think that systematic trading will benefit from this environment. And while we are not trading crypto for clients, we have developed crypto trading models. And concern with crypto is that if it can go away, if Bitcoin or whatever can go to zero, can you get caught? Well, I don't see it as a buy and hold, and I also don't see it as just outright trading. It's a lot of problems for a US firm to short crypto other than on the CME with Ethereum and Bitcoin. But I think there's lots of opportunity, but there's lots of uncertainty right now.
EMS:Great. Neil, how about on the other hand, what are some of the greatest challenges in the systematic global macro space you see, looking ahead, and why?
NR:It's always a fools game to try to call a bear market. I will do it anyway and say that I think we're in the midst of a bear market, despite strong 8% rally in the S&P over the last five or six days. Bear markets are difficult. They're a grind. They have very large rallies. It's hard to make money being short. It's just as hard to make money on the rallies. And when you are in a bear market, you're destroying value in general, which takes away trading opportunities generally. So, I think we could end up with some difficult trading and equities, but it's hard call. I mean, it's hard to say that's a bear market. When commodities quit going up, indiscriminately, it's going to be more difficult to nuance the commodity trade, but spread trading could remain strong. One of the biggest concerns I've got is, like I said, with what happened in basically wheat on the board of trade in the US has turned into a financial instrument. Chicago wheat decoupled from Minneapolis wheat, decoupled from Kansas City and decoupled from a European milling wheat.

It became a pure financial instrument, just like nickel became a pure financial instrument and decoupled from the reality of the physical market. Just because the amount of, I'll call it excess speculation and people unable to meet their margin calls. So I think that's a very unstable market environment. Unstable market environments are very dangerous. It puts exchanges at risk. It creates squeezes that cause people to end up in situations where they can't meet margin calls. Eventually that drains liquidity, because what happens is exchange have to raise margins and it does make trading in general, a more difficult untenable risk that's harder to gauge. So, I think that's one of the biggest challenges that we face right now is, how does the volatility... Do we head back to stability or is this a structural problem for a while with Russia? And I think the Russia/Ukraine outcome has a lot to do with how unstable the world becomes, which no one can predict.
EMS:Yeah, Neil, absolutely. That's a great point. With so much uncertainty, sometimes it's hard to make concrete predictions. Moving on to the next topic, Neil. I noticed that you forayed into yield-oriented strategies and I wanted you to share your outlook for this space as well.
NR:It's actually an interesting space because we primarily trade futures, we will typically try to notionalize our risk at about a 10% annualized volatility, which means we sit with extreme levels of cash. And we don't like earning zero on our cash, but we also don't want to take risks that can exacerbate the risk we already have. So, we have created a fund that we just use internally that has about 250 million in it, I guess, a little over that, and we refer to it as the diversified alternative yield fund. And what it is meant to do is, it looks for return sources that are truly orthogonal to equities, to our futures trading, to an economic cycle. So those are very hard things to do. We're in the tax lien business, we're in the life settlement business. Those two return streams are unique and we cannot come up with a reason that either one of those strategies have any way to be tied to a cycle or the equity market.

Now, when you start into credit strategies, private credit lending, whatever, by definition a cycle is going to hurt you almost for certain. So we do have some credit strategies. And then in addition, we have distressed restructurings and trade claim. And then we'll also do some traditional kind of stat arb, multi-strat type exposures. So, that gives us sort of three unique, I'll call it, esoteric returns, traditional return, and then market risks that we think that are truly orthogonal to equity risk. So, we mix those together and that's how we manage our excess cash. And we've had a very good result doing that for the last really, 10 years. We organize as a fund about three years ago. So, that's what we do in the yield space.
EMS:Oh, very exciting, Neil. So this would be a nice segue to the next topic on ESG, which has been top of mind for the alternative investment industry and wanted to see what you're doing as a firm to integrate this.
NR:I think it's more than fair to say, than awareness of the impact that ESG has in the price of instruments definitionally makes you more ESG aware. I don't know if it makes you more ESG-friendly. It's a very difficult space to define what ESG means when you are a shorter term trader. And when I say short-term, I mean trading for 20 to 50 day hold times. We might be long crude. We might be short crude. We might be long crude because something that's good for the environment happens. So, if you cancel a pipeline, that may be bullish for crude oil. It's difficult for me to say if I'm environmentally-friendly or unfriendly by buying crude oil, because you're making it harder to get crude out of the ground or harder to move it around. So I think it's difficult in our space. I'm not going to comment generally about an ESG stop, an Exxon versus gold mine or whatever, and what their footprint is.

I mean, generally speaking, of course, anything that's more sustainable, anything that's more equitable, anything that treats people better or the earth better, I think you'd be a fool not to say that's a good, responsible thing to do. We kind of focus more on this, I'll say, at a firm level. We're constantly trying to do the right thing in the right way for our clients and our employees. And I know that's the right approach for us. And to the extent that someone can give us a more illuminated idea on how our trading makes the world better or for that matter, avoiding things that make the world worse, we would like to do that. It just does not seem particularly applicable to shorter term trading in the futures markets to me.
EMS:Neil, so the next topic I wanted to discuss with you is your thoughts on SEC's push for more transparency and what that would mean for a firm like yours.
NR:I think the SEC has constantly pushed for more transparency, really going back to, I'll say, all the way to 2004. They focused on things like soft dollars. They focused on Regulation FD, full disclosure. Those things should make an investor more informed and it should even the playing field. I worry a bit that as you start to add more and more transparency requirements, that means that instead of having two compliance offers, you have to have seven, that what it is doing is it is making investors maybe harder for an investor determine risk because the disclosures become so extensive. And it also makes it harder for small firms with good honest people that are high integrity to compete with a larger firm with a hoard of lawyers and compliance officers. But I do applaud it. I mean, when you start to define things like, what is the VaR of a triple-leveraged short equity fund or a VIX fund?

I mean, there are risks that the SEC has allowed to enter into portfolios that maybe should have been stopped before they were even approved. When you start into any product that's got, I'll call it, any kind of Greeks, I mean, anything that can have your exposure change dramatically with market movement, short options, long options for that matter, where your betas, your gammas, your Greeks, can vary greatly, I think disclosing that, so a client can understand that better, which they're doing that with their VaR disclosures, the value at risk disclosures. I think those kind of things are valuable, particularly when derivatives become involved in any type of mutual fund or whatever. So, generally I applaud more transparency. I don't applaud more perfunctory bureaucracy, especially if it makes smaller firms less competitive.
EMS:Neil, we covered a lot of ground today. I wanted to see if there are any final thoughts you'd like to share with us.
NR:Just really want to thank you very much. I mean, you and I have done an article together and you've been a pleasure to work with, and thank you for including me in your podcast today.
EMS:Absolutely. 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 for our next EisnerAmper Podcast, when we get down to business.

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