David Triplo: The Greatest Inflation & Bear Market Hedge Nobody’s Heard of

In this episode, Rodrigo Gordillo sits down with David Triplo, Senior Associate, Diversifying Alternatives Research at Mercer,  to discuss his journey from poker to prop trading and finally to systematic global macro trading. They delve into the intricacies of the trading industry, the impact of market changes, and the future of the CTA space.

Topics Discussed

  • David Triplo’s transition from poker to prop trading and his early experiences in the industry
  • The challenges and opportunities of trading on the future side and the specifics of cash basis trading
  • The decision to move from options trading to futures trading and the factors influencing this choice
  • The impact of market changes on trading strategies and the necessity of adaptation
  • David Triplo’s time at Transmarket Group and the lessons learned from the boom and bust cycle
  • The shift to the world of CTAs and the differences between prop trades and CTA roles
  • The evolution of Systematic Global Macro trading and the increasing use of non-price based information in trading strategies
  • The role of volatility oriented strategies in hedge fund space and the potential for high convexity in a short time period
  • The benefits of a diversified approach in Systematic Global Macro for the average allocator
  • The current state of the alternative investment sleeve and the dominance of private equity and hedge funds

This episode is a deep dive into the world of trading from the perspective of someone who has experienced it all – from poker, to prop trading, to Systematic Global Macro. David Triplo’s insights provide valuable lessons for anyone interested in the trading industry, the evolution of trading strategies, and the future of the CTA space.

This is “ReSolve Riffs” – live on YouTube every Friday afternoon to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management.

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Summary

Trading in the financial market comes with its challenges, especially in an era characterized by changing dynamics and evolving strategies. In the early days, as an assistant prop trader, David observed that liquidity was ample in cash basis trading. However, this changed as we entered the era of Quantitative Easing, making trading more challenging due to decreased liquidity. Despite these challenges, the ability to adapt is crucial in the financial sector. This adaptability is what led David to transition from prop trading to working with a Commodity Trading Advisor (CTA) firm. In a CTA, the focus shifted to money management and working collaboratively to navigate the market. During his time with the CTA, assets under management fluctuated, indicating the cyclical nature of the industry. After eight years, he felt the need for a more stable role within the broader industry, prompting a move to Mercer. Here, his focus turned to global macro and CTA strategies, with Trend-oriented strategies and Multi-strat strategies being of particular interest. The Systematic Global Macro strategy has evolved over time, incorporating other sleeves like fundamental information and quantitative equity models to create a balanced portfolio, aiming for higher convexity and lower fees. The switch to two main categories: Trend-oriented strategies and Multi-strategies, allowed for focus on specific return profiles, with the former offering higher convexity and the latter providing absolute return opportunities. In the current macro environment, Systematic Global Macro strategies prove beneficial due to their adaptability to market conditions. Despite the perceived complexity, these strategies have shown consistent positive outcomes, making them robust and attractive for average allocators. The allocation to Systematic Global Macro in the alternative sleeve is not a new approach but one that aligns well with the current economic climate, offering diversification and a balanced approach to investing. As the financial market continues to evolve, it is important to stay inquisitive and adaptable. Understanding the intricacies of strategies like Systematic Global Macro and Volatility-oriented strategies is crucial to navigate the changing landscape. The allocation to Systematic Global Macro in the alternative sleeve could be the key to stable returns in this fluctuating market. David reminds us that the focus should not just be on convexity in a downward market, but on the absolute return and the specific return profile of a strategy. Adaptability and a balanced portfolio seem to be the recipe for success in this era of changing financial dynamics.

Topic Summaries

1. Early experiences in prop trading and transition to a role in a CTA firm

In the early days of prop trading, the David had to work night shifts and run a large book. He mentions that the night shift was tough and that liquidity dried up after Quantitative Easing. He traded cash basis, focusing on two, five, ten, thirty-year horizons. He started as an assistant, following the instructions of his boss, but eventually got promoted and had more autonomy in his trading. He then transitioned to a role in a CTA firm, where he managed other people’s money and collaborated with the CIO. After eight years, he decided to move on and joined Mercer, where he focuses on global macro and CTA strategies.

2. The importance of focusing on cash basis, utilizing auto spreaders, adapting to changing market conditions, and incorporating fundamental information in trading strategies.

In the conversation, David discusses his experience in trading cash basis and using auto spreaders. He primarily focused on trading two, five, ten, and thirty-year cash basis. He also mentioned that sometimes he would trade cash spreads in combination with futures. He explains that the night shift was tough because the markets were slow and there was not much happening. He mentions that bid-ask spreads were typically four ticks wide on a cash basis in the 10 and 30-year, but after Quantitative Easing, the liquidity decreased significantly. Despite the challenges, David adapted to the changing market conditions and continued to perform well. He mentions that his boss went into hybrid mode and their shifts became longer. However, they were promoted quickly and given the opportunity to run their own book. He also touches on the evolving nature of CTAs, where fundamental information is becoming a more prominent feature in addition to price-based strategies. He mentions the use of various sources of fundamental information, from typical reports to more esoteric ones. Overall, David’s experience highlights the importance of focusing on cash basis and utilizing auto spreaders in trading, as well as the ability to adapt to changing market conditions and incorporate fundamental information in trading strategies.

3. Transition from prop trading to CTAs

Transitioning from prop trading to working with a CTA was a significant shift for David. He mentioned that he didn’t have a choice in terms of job offers and ended up choosing the CTA with the highest earning potential. The transition was not without its challenges, as he discussed the shift in liquidity and the difficulties faced during this period. He started his career as an assistant to a senior trader, learning the ropes and following their instructions. Initially, they focused on market making and cash basis trading, which felt relatively easy. However, after Quantitative Easing, liquidity dried up, making trading more challenging. David also mentioned his interest in spread trading commodities, which led him to consider joining a CTA. He eventually made the transition and spent eight years working with a CTA, experiencing the ups and downs of the industry. He witnessed the cyclicality of the CTA space, with assets under management fluctuating between 150 million and half a billion. Towards the end of his time with the CTA, he felt the need to move on for various reasons. He wanted a more stable role that would allow him to be involved in the industry and see more of it than what he currently experienced.

4. Collaborative environment and managing other people’s money

Managing other people’s money in a collaborative environment is a significant shift for David, who previously engaged in prop trading and arbitrage opportunities. He joined a CTA firm after being impressed by a senior trader’s success in spread trading commodities. The transition to the CTA role meant a more collaborative work environment. After eight years at the firm, experiencing the ups and downs of the CTA space, David felt the need to move on. He sought a stable role that would allow him to stay involved in the industry. In terms of diversification, aside from global macro and CTAs, Volatility-oriented strategies are commonly allocated to within the hedge fund space. These strategies provide high convexity in a short time period to deal with market fluctuations.

5. Transition to Mercer and focus on Systematic Global Macro

In the discussion, David discusses this transition to Mercer and his focus on Systematic Global Macro. He mentions that initially, this coverage was primarily on Trend strategies, but it later shifted to two categories: Trend-oriented strategies and Multi-strat strategies. The switch was made to focus on the specific return profile, with Trend strategies offering higher convexity and lower fees compared to Multi-strat strategies. David also highlights the importance of understanding the different sleeves within Systematic Global Macro, particularly on the Quant/Equity side where Value/Carry models are prevalent. He emphasizes the need to analyze and dig deeper into the various alpha sources and models used by managers. He acknowledges that systematic macro programs can be seen as a ‘magic black box’ by some clients, but his role at Mercer is to uncover and understand the underlying strategies and sources of alpha. Overall, the conversation provides insights into the transition to Mercer and the focus on Systematic Global Macro, highlighting the shift in strategy categories and the importance of understanding the different sleeves and alpha sources within this space.

6. Evolution of Trend strategies and other sleeves in Systematic Global Macro

The evolution of Trend strategies in the Systematic Global Macro space has been driven by the cyclicality of these strategies. While Trend strategies have performed well in some periods, there have been times when they have not. As a result, other sleeves have been introduced to provide diversification and enhance the return profile of Systematic Global Macro strategies. These other sleeves include fundamental information and quantitative equity models. These models analyze Value and Carry factors in different ways, offering a variety of approaches for managers to consider. The goal is to create a balanced portfolio that combines Trend strategies with other sleeves to achieve higher convexity and lower fees. By blending Trend strategies with diversifying strategies, even those with high correlation, managers can still add Value to the Trend component and maintain the desired level of convexity. The evolution of Trend strategies and the introduction of other sleeves have allowed Systematic Global Macro managers to adapt to changing market conditions and optimize their performance.

7. Expectations for convexity and diversification in Systematic Global Macro

In the world of Systematic Global Macro investing, there are two main categories: Trend-oriented strategies and Multi-strategies. Trend-oriented strategies allocate 50 percent or more to Trend strategies, while Multi-strategies allocate less than 50 percent to Trend. The switch from three categories to two was made to focus on the specific return profile of each category. Trend-oriented strategies offer higher convexity and lower fees, while Multi-strategies provide a full range of absolute return opportunities but typically have less convexity. Within the Systematic Global Macro space, there are various sleeves or styles that contribute to the overall profit and loss (P&L). While Trend and Carry are important components, there are also other factors at play. These factors include Value/Carry models and different ways of analyzing data. However, not all Systematic Global Macro managers are expected to provide convexity in a downward market. Some funds may not have positive convexity and are viewed solely as an absolute return profile. It is important for investors to be aware of the specific profile and potential issues associated with each fund. For example, in a market with strong inflation, the calendar roll may result in losses. Despite the lack of convexity in some funds, Systematic Global Macro investing still offers benefits such as diversification and positive Sharpe ratios. It is a robust approach that can provide consistent returns for the average allocator.

8. Benefits of Systematic Global Macro in the current macro environment

In the current macro environment, Systematic Global Macro strategies offer several benefits. One of the key factors driving the appeal of these strategies is the inflationary thrust and the potential for bear markets in equities and bonds. David and Rodrigo discuss how equities and bonds can correlate and go down together, challenging the traditional belief that rates would always be capped at 2%. This change in perspective since early 2020 has created a need for alternative approaches. Systematic Global Macro Strategies, with their ability to adapt to different market conditions, provide a solution. These strategies have shown a positive Sharpe ratio and positive Carry in most years, making them robust and attractive for average allocators. Additionally, they offer a diversified approach, which helps mitigate risk and provides a rebalancing premium. While holding a diversified commodity basket can be emotionally challenging due to the negative Carry 80% of the time, Systematic Global Macro Strategies have demonstrated consistent positive outcomes. The evidence presented in the conversation emphasizes that Systematic Global Macro is not a new and novel strategy, but a proven approach that aligns well with the current macro environment.

9. Challenges and perceptions of Systematic Global Macro

Systematic Global Macro programs are often perceived as a ‘magic black box’ by many people, who are either unaware or uncomfortable with the intricacies of these programs. However, the David emphasizes the importance of delving deeper into these programs to uncover the alpha sources. As part of this role at Mercer, he aims to understand the underlying models and strategies employed by portfolio managers, as well as the edge they possess across various markets. He notes that while there is growing interest in systematic strategies from European investors, the focus on such strategies in the United States is relatively limited. Moving on to the non-liquid alternative sleeve, the dominance of volatility-oriented strategies is highlighted in the context of pension plans and other investment vehicles.

10. Allocation to Systematic Global Macro in the alternative sleeve

The allocation to Systematic Global Macro in the alternative sleeve is a strategy that has been around for some time and has a positive expectancy. It is not a new and novel approach, but it is one that is gaining increasing interest. The breakdown of the traditional 60/40 portfolio has led investors to seek out alternative strategies, and Systematic Global Macro is one that is proving to be robust in the current market environment. This strategy combines trend-based approaches with other sleeves, such as Quant/Equity models, to provide a diversified and balanced approach to investing. While not all Systematic Global Macro managers provide convexity in a downward market, this is not a requirement for investors. The focus is on absolute return and the specific return profile of the strategy. In addition to Systematic Global Macro, Volatility-oriented strategies are also being considered as diversifiers in the alternative sleeve. Overall, the allocation to Systematic Global Macro in the alternative sleeve is seen as a way to navigate the current macro environment and provide stable returns in a changing market landscape.

David Triplo, CAIA
Senior Associate, Diversifying Alternatives Research

David Triplo joined Mercer in 2019 as a Senior Investment Research Specialist. David is responsible for investment due diligence, client management and strategic research for Mercer’s global institutional investor base. He serves as a lead researcher for systematic macro and relative value funds. 

Prior to joining Mercer, David worked at Emil van Essen, LLC where he directed operations, research and trading along with launching a fund internally. Beforehand, he worked at 2 proprietary trading firms. 

He graduated from Indiana University’s Kelley School of Business (2008) with a Finance major. He earned the Chartered Alternative Investment Analyst (CAIA) designation.

TRANSCRIPT

[00:00:00]Rodrigo Gordillo: Everybody, welcome. Welcome once again to the ReSolve Gestalt University podcast. Today we have a very special guest, David Triplo, from Mercer. I met David a couple of weeks ago at an event in Chicago where you were kind enough to lead at panel of CTAs talking about all aspects of CTAs, whether it’s Global Macro, Diversified Trend, Regular Trend, and we’re going to get into all of that.

Backgrounder

But ,we begin, just a quick background on Dave’s current role. He’s a Senior Investment Research Specialist at Mercer. What that means is that he does complete investment due diligence on hedge funds, with a focus on quantitative managers. And he also assists in business development as a leading subject matter expert. He’s written a very interesting paper that we’re going to touch upon today. And with that, welcome Dave. How are you doing today?

Sorry to interrupt, but I did want to take a quick second to remind listeners that while we do absolutely love providing our audience with world class guests and weekly investment insights, we wanted to remind you that we actually do our best work outside of this podcast. And we try to do this by providing cutting edge, globally diversified, and systematic investment strategies that are designed to be broadly non-correlated to traditional equity and bond portfolios.

So we actually manage private and public funds, as well as bespoke separately managed accounts for investors that seek the potential to smooth out portfolio returns in the long run. So if you do want to see that theory that we’ve been talking about put into practice, please do go ahead and check us out at www.investresolve.com. Now back to the podcast.

[00:01:32]David Triplo: Good. Thanks again Rod, for inviting me to be on the podcast. And it was great meeting you a few weeks ago at the, at RCM’s event. And happy to attend that and happy to be here today, especially on a beautiful day in Chicago.

[00:01:45]Rodrigo Gordillo: Beautiful day in Chicago, my God.

[00:01:47]David Triplo: I know October 1st and we’re in the eighties.

[00:01:49]Rodrigo Gordillo: That’s pretty good.

[00:01:50]David Triplo: No sense right now. Yeah,

[00:01:52]Rodrigo Gordillo: Yeah, I’m originally from Toronto, so I know how it is to treasure those days of the beginning of fall. But when we were in Chicago,  was it was your first time chairing a panel like that?

[00:02:02]David Triplo: That was my first time speaking at all in any industry career events for, or at least as someone in investments on this side. So I did do some stuff in my previous life, but yeah, in terms of from the investment side, yeah, that was my first time.

[00:02:19]Rodrigo Gordillo: And we were able to catch up after the event and really get to know each other a bit more. We have obviously similar interests, given the area of focus that you are in. And really our goal, I think a common goal at the time we realized was to prophesize the value of a diversified solution like futures, systematic macro, and all that.

We did really hit it off, but I’m really interested to start with how you got into the business or how you got interested in anything that has to do with P&L and making money. Why don’t we go from the beginning. What did you study and what did you do in your early 20s?

[00:02:59]David Triplo: Yeah, early twenties, I could even take investing really to my teens. It was, my mom was always wanting to be more frugal and more focused on investments, capital markets, despite her just being a teacher, and just taught me the ropes of just the power of compounding, young age, read quite a few books on that, just buying whole principles, Warren Buffett, among all the others, most people on here probably are aware of.

And that’s what like, opened up the door. I’ve always been very entrepreneurial, where I tried to find interesting paths and at a young age, it was poker. Poker was my first start and foray into learning about different types of expected value and types of outcome that can go well.

In high school, it was just a lot of cash games and finding friends that were interested in it, which were a loss. Chris Moneymaker pretty much just won the World Series of Poker back then, between my sophomore and junior year. And let’s say my junior and senior year was a lot of games, and I’m a very competitive person with sports and anything I do. So of course, I have to read every book on the subject. Try to…

[00:04:01]Rodrigo Gordillo: What was the first book you read? Because we have a similar beginning. It was Moneymaker at the …

[00:04:06]David Triplo: First one. Yeah.

[00:04:08]Rodrigo Gordillo: I think I came back from a long trip to South America, and somebody invited me to a party, to a tournament. I’d never played poker in my life. I think my mom taught me some poker, like Five Card Stud back in the day, but I got in there and I won.

It was like 50 people, three floors, and in a house in downtown Toronto, all buddies, and I won and I thought Man, I got this licked. This is so easy. It’s, and I made a lot of money that day. That led me down the path of poker, the experience of poker, and read a bunch of books. But what was the, do you remember the first couple of books you read?

[00:04:47]David Triplo: I think the first one was like Phil Hellmuth’s book. I can’t remember the specific name of it, but that was definitely just him and the character like, oh, maybe he’s a great player. Maybe he’s not, but just with his personality. I think that was one. There was one that Daniel Negreanu also had. And then The Theory of Poker with David Sklansky, that’s going to the roots of it, but you can’t jump into that book first.

That’s just too intense for your first book, to say the least. But then the more mathematical side of it, so definitely focus there. And I was mostly a cash game player, but a little bit on the tournament side of things, while I played like online with friends. The real money was online.

Back in that day, it was all PartyPoker until they were forced to shut down because of the Unlawful Internet Gambling Act, which wasn’t anything wrong, we were doing. It was just for how the banks handled it and then moved over to PokerStars after that and played on there pretty much, until that was forced close on April 15th, 2011.

[00:05:48]Rodrigo Gordillo: Yeah, I had a similar experience with all that in Canada. It was a similar outcome. I played a lot of night games as well in Toronto, which was an interesting scene, all cash games. I found tournament play was a little bit more volatile than cash game. You can count on your edge showing up more consistently if you played enough tables and long enough, cash games. Did you have a similar outcome? Like why did you choose cash over tournament?

[00:06:16]David Triplo: For that exact reason, I’m not someone that likes variance. I like consistent cashflow and I played nine tables at a time and grinded from very small stakes poker, with a hundred bucks, and turned that into good amount of money over the years and just never looked back playing like three, six, five, 10, no limits, six max, on those stakes eventually. And stayed consistent with that.

So basically the end, but then it was an interesting time of like how to do it once PartyPoker was gone, and like how long could this type of edge exist, and in terms of poker with less people playing, on more efficiency in the market. One of my buddies even owned Lego Poker.

And I was debating back and forth if I was going to be a part of that, like how much of my own information edge do I want to put on content on that site, versus the amount of money you would pay me for it. I always went back and forth on it and I was like, nah, I’m not willing to do it. But it was just so much information you could learn, probably starting from card runners, and I would say that started in 2000, maybe 2007 or so.

I think that’s one of the first big years where you can tell the improvement of players. It was drastically different, and you can start to see your hourly rate to decline slightly if you weren’t really keeping up on your game, because everything in the end was all about the math and when you’re playing online like that, and there was two main software programs called a PokerTracker and Holdem Manager.

[00:07:44]Rodrigo Gordillo: That’s right.

[00:07:45]David Triplo: You would do serious analysis and to start doing like SQL data sources on players with thousands of hands, and start to find small tendencies and how you extract alpha.

[00:07:56]Rodrigo Gordillo: You would find the players that had high alpha and avoid them like the plague, right? And you had a history of those guys, although they would change their names once in a while too. to hide the fish from going to their table. So it was a very powerful tool.

[00:08:10]David Triplo: Yes, that was absolute requirement.

[00:08:13]Rodrigo Gordillo: Yeah, you couldn’t, at that stage, you couldn’t play poker successfully if you didn’t, if you weren’t analyzing what you were doing, improving your game, reacting to the reactions. As poker evolved, your game had to evolve. And it did become, you just, you saw live how a clear arbitrage opportunity in the beginning of this space, it was so easy to make money in the beginning. But after reading a couple of books, I think I did win that tournament, then I lost aggressively for the following four months until I picked up the books and started learning how to actually play poker. But you did see it was significantly easier. It was almost free money in the beginning, whereas at the end, you were grinding it out. And yeah, it, you needed to find something new. I certainly did. So why, was it just the difficulty in getting games that got you out of poker or was it something else?

[00:09:05]David Triplo: For me it was I was also going to Indiana University Kelly School of Business, finance major, I knew that was the end route for me And this was just during that time where it was like finding a balance between trying to study and still maintain like over a 3.5 so I can get into the investment banks, and then playing poker 15 to 20 hours a week and still having somewhat of a social life and running a tennis club.

So there was a lot of different things. I was very busy in college, no,t maybe didn’t have as much of a traditional experience. But it was good. No, I enjoyed that and that set me forward I think, in terms of trying to move forward and in the end, so I graduated in December, 2008, which was pretty much the worst time you could imagine, trying to get into sales and trading is, that was my goal at a big bank.

And I had a lot of friends that just were having, obviously, offers rescinded from every bank, everything else. I, and it’s where do I go from here? And what do I do? And I decided to go into prop trading. So there’s a lot of large firms in Chicago that are very reputable. So it’s not like I put up money or something at any of these firms.

And that’s pretty much where I started. So my resume was pretty much solely poker and an internship I had at, it was a combination CTA and also a brokerage house at the particular time. But I only focused on the CTA side, at Daniel van Assen, actually.

And that’s what opened my interest in that side and I ended up just landing more so on futures trading, instead of options trading at TransMarket Group.

[00:10:41]Rodrigo Gordillo: And why did you choose that over options? Was there…

[00:10:44]David Triplo: I really didn’t have a choice in terms of all the offers I had. They were all from futures trading firms. So I thought that was interesting. Because there was like three that I had, and two smaller firms. And then TransMarket Group was very Kahneman and well known and pretty much had the highest earning potential, at least from what I understood.

Going into it where you pretty much work under a senior trader and then at night shift, which of course no one wants to do, but you have to start. That’s how you start the industry. That’s the only way to do it. And run a book early on. I was running a very large book a week into my job. It’s crazy to think about, but again, it’s night shift and there’s, and now people around me to help get you going there.

[00:11:27]Rodrigo Gordillo: So what were you trading on the futures side, because of course in prop trading, there’s a lot of specialties that just focus on a single market. Were you focused on diversified markets at the time or just one at a time?

[00:11:39]David Triplo: Also, it was actually, it was more than futures. It was cash basis. So I was trading two, two, five, 10 and 30 year cash basis, was the primary focus at the time. Sometimes you would trade just cash spreads and so it’d be a combination of futures plus the cash. But at that time, it was all using auto spreaders.

So 2009, not as much was automated and there were still forms of inefficiency that would happen in that space, especially before QE Round One, which happened a few, two or three months into my job, which definitely changed things drastically, even from when I started and then how that even shifted

[00:12:15]Rodrigo Gordillo: So how long was that? It was months?

[00:12:18]David Triplo: Months. Yeah.

[00:12:19]Rodrigo Gordillo: So you guys were making money and much like poker, it got harder and harder, based on one change in the market. That’s the life of a prop trader, right?  And at that point, it’s not like you’re coming up with your own ideas. You’re probably still learning from the guys at the top and trying to repeat what they’ve done to make money. Is that fair to say?

[00:12:37]David Triplo: Yeah. The first few months definitely was just like, you are someone’s assistant. It was like, they pretty much told me, this is my portfolio I have for the day and these are the types of ways I would like you to have edge. And then it would be like market making and the cash basis, which was pretty easy to do, I would say, or at least felt like that way to me, prior to QE.

But then afterwards the liquidity dried up massively. It was like night shift was tough then, because it was not that much happening and it was very slow markets compared to what was happening before. Bid/ask spread would typically be about four ticks wide on a cash basis in the 10 and 30 year.

And then post QE was maybe half that and maybe an eighth of the liquidity. It was crazy how much that shifted in a week and how many people blew out, even from that day, that traded that space.

[00:13:24]Rodrigo Gordillo: So what happened from there? Like, how did you guys adapt?

[00:13:28]David Triplo: I sat literally across from Ray Kahneman and he saw like how I was viewing things and said, you know what, you can go ahead and just run your own book, which was probably six or eight months into my job at that point. And they also had a new hiring class of 15 people. When I started beforehand, it was normally two to four people.

So they needed someone to train these new people and start these new desks. And I was definitely the youngest by far to see how that would go. And that transition went well. So I had a kind of assistant working day shift after six months instead of 18. So that was great and my book did pretty well with it.

And I used a combination of my experience from what I’ve learned from Ray plus my boss and a little bit, even from, what I learned from Emil was how to develop actual strategies.

So I became a little bit more quantitative with my approach when I started writing my own book, and it was looking at a mix of more fundamentals plus technical information. They didn’t use nearly as much fundamental in terms of how they’re reviewing Carry repo and other factors with how you would market make, hold it overnight and understand like, what dollar value of profits or potential losses you would have if you’re short a long cash basis and how you would view that.

And then also I got more involved with trading fly as a different sort and paying more attention to the kinks in the curve, in the entire curve versus just looking at it as a cash basis. So, I’d be looking at like maybe three, five, seven year cash, and how some abnormality seemed to persist for a day or two, because of how the auction cycle is going and other things of that factor. So it was between…

[00:15:06]Rodrigo Gordillo: So let me double click on that a little bit. How do you go from, so you were taught a certain type of trade. systematize a lot of it, from what I understand. How do you go from an idea generation to starting to systematize something like that? What made you think about the repo market and looking at overnights and fundamentals in a way that your bosses hadn’t?

[00:15:27]David Triplo: I think it was just always trying to learn to improve because for me, it was just not always, you can’t say by constant with the strategy, you have to know the difference that’s happening now. When I’m saying systematizing in this case, like I’m not a programmer, I’m not a Python guy by any means.

Where for me, the systemization of it was just analyzing more factors and being more specific and diligent with how I’m executing upon that, versus some other people with the risk management framework were a little bit more loose than what they should have been. So just trying to really hone that down and a lot of different ways where I’m, despite being a poker player and everything else, I’m pretty risk averse in general.

My swings were definitely a lot less than some people, but my Sharpe was definitely higher than a lot. I was fine with not being the biggest earner in the group by far because I, my, my heart can only take so much of swings.

[00:16:24]Rodrigo Gordillo: One of my closest colleagues was a prop trader, continues to be a prop trader. And what he always talked about was like, the ideas, they’re all over the place. Everybody has a lot of great ideas and there’s a lot of overlap. And what, the difference between a successful prop trader and an unsuccessful one ends up being, and how much dollars in your pocket can you actually put in from that same idea and all of that, had to do with process and risk management and making sure that the way that you play the game was as tight and robust as you possibly can, rather than just, that’s a great idea, everybody can do it. That was the big difference there. The attention to detail, it seems like, it seems it’s something that you were honing in on. All right, so you how long did you do this for?

[00:17:08]David Triplo: So I was a TransMarket Group pretty much through the say, boom and bust of it, so to speak. So during the time I was there, there was a lot of people that were getting hurt through some Eurodollar fly positions and some other things.

I would say a large majority of the people at TransMarket Group at the time were trading Eurodollars and not cash basis, so we were definitely more in the minority. Some were doing okay and others not as much. I was still doing pretty well, but the firm itself was not. So that’s when…

[00:17:37]Rodrigo Gordillo: What years were these?

[00:17:39]David Triplo: This would have been in 2011. So I was there for, or no, 10? Yeah, I think it was fall of 2010. Where it just wasn’t going well for the firm and Aardvark Trading actually ended up buying us out. And I ironically switched to another firm that was a different subsidiary of TransMarket Group for the next 10 months or so, doing the exact same thing. And I started to realize over time that both firms were just… terribly isolating. And it was like I was doing okay. And toward the end, it was still like, where do I see my path in the future if I can’t really learn from really anyone else? I never really got that impression at M&M Trading.

And that’s when it’s and at that same time, Emil van Essen was killing it. So this would put us in like end of 2011. We’re middle of ‘11 and I had a variety of discussions with Emil since I had the internship with him and he spot out at three years of 30 percent plus returns. And it was like, and then he was focusing on spread trading commodities, but he didn’t trade rates. So that was how, we kept talking about it a couple of times. You know what, come on board. So that’s what led me to the world of CTAs.

[00:18:52]Rodrigo Gordillo: So you go from doing these very kind of clear prop trades and arbitrage opportunities to a world of CTA, which is, it can mean many things and we’ll get to that. I think you’ve addressed some of that in your paper, but what did it mean in that new role for you? What was the big shift and the big difference?

[00:19:12]David Triplo: At least in terms of the understanding of the job, going into it would just be the fact, to be a way more collaborative environment where I’m able to learn more than just what my trade is. So I’d be able to learn like, how is he making money at 30 percent annualized returns for a three year stretch, spread trading commodities.

And it’s, it seems like it would fit the bucket of what I’m doing since I was like basis trading, cash basis trading. So it was like, that was, seemed like a natural shift in terms of helping him out, and for each other, at least that’s what I took the initial job as.

[00:19:50]Rodrigo Gordillo: And so how’d that go? How’d that evolve?

[00:19:53]David Triplo: I ended up helping streamline a lot of things there, unintentionally. So I was working on back office, middle office, streamline the front office, trying to work with this third party program to streamline some of this with these, more than one firm that we worked with at the time, and just make things a lot more efficient, which we did.

So that was like a key goal. And then the head of compliance and our CFO helped me understand what needed to be done there. And I was more of the meticulous detail oriented person, where it’s I have no clue from compliance side. I was a prop trader beforehand and then trying to put that together, what would make sense of how I envision Emil going in the future, and what type of things would I want as an investor, or also as just being an employee of the firm to help expand that. And yeah that definitely happened.

[00:20:44]Rodrigo Gordillo: So you were already managing other people’s money at that point. That wasn’t all prop money.

[00:20:49]David Triplo: At Emil, yes. So he had 150 million under management. He was the sole CIO and final decision maker on everything. But I would still definitely have a little bit of say, but he’s known to be a stubborn person and likes his ideas, but it was definitely a collaborative environment in terms of coming up with research, designing the research, and then the implementation of it. So I was, became the trader that would handle the majority of the orders between me and, Emil liked to travel for a lot of clients at that time. So then I would be the hands-on guy that would handle the day to day of that.

[00:21:24]Rodrigo Gordillo: So you got to not only see how the sausage was made, but actually build the sausage maker.

[00:21:29]David Triplo: Yeah.

[00:21:29]Rodrigo Gordillo: I’m sure that set you up for your future role. So you, how long were you there for and then what was your next leap forward?

[00:21:37]David Triplo: Yeah. So I was at Emil for eight years, so saw all the ups and downs of going from 150 million under management to half a billion and back down to 150 million. So saw the whole gambit of just the cyclicality of the CTA space, which is major, especially in the 2010s, which I try addressing the paper I will talk about later.

And it was just a tough time for a lot of CTAs for a variety of reasons. And toward the end, it’s just I felt the need to move on for a variety of different reasons. And it was like where do I want to go now? And it’s, I prop traded, I did the poker thing. And then it’s I was trying to see, it’s like, how can I go to something, a little bit more of a stable role where I can still be involved in the space and see more of it than what I currently see?

So that was a big thing for me is like, how can I utilize this? And I worked with a few different people from the investment due diligence side while all these people were onboarding. And that sounded always interesting to me from early on. So that’s where I studied for the CAIA, did that at some point, maybe four or five years into working for Emil. And he always joked, I would end up going on that side.

[00:22:47]Rodrigo Gordillo: Here you are.

[00:22:48]David Triplo: It didn’t happen, but yeah.

[00:22:49]Rodrigo Gordillo: I thought, the reason I left poker is because when I just never felt completely detached from the game, right? When you go on

vacation, you’re not making money, right? You were, you had, it was, you were a per hour worker. If you weren’t working, you weren’t making money. And you should, that’s okay. You’re making enough money in the meantime. You should be able to allow yourself to do that. But I always felt that pull of, I can’t take time off. I just have to continue to show up to work. And I think I would imagine you from poker to prop trading, that’s the same pull where you’re always on, you’re always feeling that. And there’s an allure, certainly for my wife at the time, she’s, do you want to do this in a way where you can actually take a vacation, take some time off and still make some money? And the idea of managing other people’s money in a systematic way, using my poker skills to do that, was a relief, right? You’re, you show it to work. You work hard, you’re getting paid on the back end, it’s much more stable, you’re at risk of …. I imagine that played a role in the decision at this point.

[00:23:53]David Triplo: Absolutely. Yeah, because it was very different because it’s just like you said, everything, if you’re not at the poker table or studying the game, then it just, there’s, you’re not making money and I’m someone where I want to have something complete, but you never actually feel like you’re completely done with anything because you could just always play more and you could always focus on so much more edge in the markets.

And as a, even in the later end, I ran my own fund at Emil as well. Yeah. And it’s, I need to sleep and it’s hard. So sometimes, major market events, I remember the day Trump won the election. It’s, I don’t think I slept for a long time. So it’s like, how do you function and go about this? And it’s you know what? I don’t feel comfortable with this type of environment. And it’s I, yeah, I wanted more the feeling of being able to finish a job. And then also the stability of it definitely was both of those points.

[00:24:47]Rodrigo Gordillo: Okay, so this is when you hit Mercer. And in your role here you bring all this, this is pretty solid background for somebody at Mercer. I imagine there aren’t many of you in there, but your role is very focused on the global macro in CTA space, is that right?

[00:25:04]David Triplo: Yes. I would say when I first came on board, it was probably like 80 to 90 percent of my coverage at the time, which is anything that’s, we refer to it, the year that I came on board in 2019 as Managed Futures and then switched over to calling it Systematic Macro which included three tiers at the time, which is Pure Trend, Diversified Trend and Multi-strat. And then later on, I would say there’s a little bit less of Systematic Macro just to, sadly, lack of demand in the space and more into the, we refer to it as like the other category, which we built out a Relative Value sub-universe as well, which includes, or go ahead…

[00:25:44]Rodrigo Gordillo: Yeah. Okay. So this is, so you basically, because it’s true, I think one of the biggest issues in the space is that it literally has 10 names, right? It’s a CTA, Managed Futures, is Diversified Trend, Global Macro, Systematic Global Macro. So your three categories as far as I understand, Pure Trend allocation, Diversifying Trend and Multi-strategy. Can you get a little deeper into what each one of those categories mean to you guys at Mercer?

[00:26:12]David Triplo: So we actually ended up switching that recently, I’d say about nine, maybe six to nine months ago, because of a couple of reasons. So now it’s just two categories instead of three, where we’re Trend Oriented Strategies, which are 50 percent or more allocated to Trend Strategies. And then the other one is still Multi-strat, which is less than 50 percent Trend.

The reason for this switch was because we’re trying to focus on the specific return profile, which is just either higher convexity and more than likely lower Sharpe, but also lower fees, versus Multi-strat, which is full gambit of absolute return and typically less convexity. So those are the two categories.

And we blended, or we combined the two of Pure Trend and Diversified Trend, because there’s been so much evolution in this space ,where it’s hard to tell exactly what is Pure Trend and Diversified Trend. Because before we had the marker being at 90 percent or more being a Pure Trend into which was 90 percent or more Trend in Pure Trend.

And there’s a lot of them where it’s, is this defined as Trend? If it’s using fundamental information, is that still defined as Trend? And we were, we have a rating system and that rating system would change potentially if you’re looking at one category versus the other. So by combining the two, I feel, or we feel it makes it more simplified for consultants, for researchers.

And it also future proofs the ongoing R&D that all of these firms are going through in terms of how they’re expanding and analyzing trends or other strategies as well.

[00:27:53]Rodrigo Gordillo: Now, was this based on their own articulation of what they did internally, or were you able to extrapolate this directly from the data?

[00:28:02]David Triplo: Oh, you could definitely tell from the data, yeah. So it was noticeable that the returns, the return profile and the convexity level is very similar for he Pure Trend and Diversified Trend in the later years. So we’re looking at 2019 to 2022-ish, and we didn’t see too much of a difference between those two universes.

So we could tell that from a quantitative aspect and then also just from what they were saying their R&D was. There was a few firms that specifically we’re saying that this is still trying to be Trend, but we’re just looking at it in a different way. And that’s where it was getting a little murky.

[00:28:41]Rodrigo Gordillo: And those that were trying to be Trend, but still in a different way, were those systems of fundamental based Trend systems, were, did they still offer the same type of convexity? Were they still thinking that was going to happen? Or did it create that diversity that kind of dampens that, in fact, CTA?

[00:29:00]David Triplo: Some were able to do it pretty efficiently where it was very similar. Others are somewhat efficiently, but sometimes their goal wasn’t to only be somewhat, have maybe like a 0.5 correlation from one to the other. Because there’s, again, if it’s nearly a correlation of one, then you’re not really adding value at that point.

So even though you are having diversifying strategies, even if it’s that highly correlated, what’s the point of adding it? So it’s by going with strategies that would have 0.5, 0.7 correlation, it’s still adding value to their Trend component and still able to have that same level of convexity.

[00:29:36]Rodrigo Gordillo: Okay, so let’s get into, because I think there was, when I got into the business, I used Managed Futures even before I was running my own shop. I used other managers in the Managed Futures space back in the mid 2000s, and they were all Trend. There’s been, obviously, a big evolution in the last couple decades. What has been the evolution, and why do you think that happened?

[00:30:00]David Triplo: I think the evolution happened because of the cyclicality of the space on some level. There are some periods of time where Trend has done very well and other times where it has not. So that’s definitely one reason why firms felt the need to expand into other categories. And even when I worked for Emil, that was a larger differentiator at the time, was spread trading commodities was not as common. And he was known as a diversifier within the managed futures space. So that was like, how it was looked at during that time, which is still even shifted now to an even way more complex version of where we see systematic.

[00:30:37]Rodrigo Gordillo: So it was a survival mechanism. For a lot of following …

[00:30:40]David Triplo: Yeah. Yeah.

[00:30:41]Rodrigo Gordillo: Yeah, I think we saw that with Winton, right? I remember there was a big, there was big hoopla about the fact that he threw his hands up in the air and said, I’m done with Trend. We’re going to add some Carry. And the big concern there was that if you just add Carry, you’re going to, you’re not going to provide the complexity that you promised us, right? I didn’t, were you paying attention to that narrative at the time? At all? I don’t know. It wasn’t, you weren’t part of it. I would imagine that people at Mercer would have been…

[00:31:07]David Triplo: Yeah they were a part of it, but yeah, I’ve heard some of the stories and how you want to view that and how…

[00:31:11]Rodrigo Gordillo: I think he did it like literally months before the 2020 crisis. I haven’t followed closely what their P&L was during that that event, but can’t imagine it would have been as good as just Pure Trend, right? Obviously. Yeah. But Managed Futures, sorry, Systematic Global Macro isn’t just Trend plus Carry.

[00:31:30]David Triplo: Oh, correct.

[00:31:31]Rodrigo Gordillo: What are the other sleeves that you see? Are you able to disaggregate different styles? What makes the other 50 percent of the P&L for a Systematic Global Macro manager?

[00:31:44]David Triplo: Yeah. I would say there’s a lot more on the Quant/Equity side. So you have your Value/Carry models, but it’s also like how they’re trying to analyze that, so there’s so many different ways and how all of our managers that are investable by Mercer or deemed investable by Mercer. can view it.

And some of it’s not even just about the idea generation side, but the portfolio construction of how you’re putting it all together, but specifically on the idea generation of models. Outside of that, we are seeing more on short-term. Short-term has definitely been a larger focus for quite a few managers that we cover.

We’re finding different sources of edge through the microstructure. It’s probably been more prominent in the past, I’d say five years. And I feel like even if you look at all the firms that we cover, the average holding period is slightly declined across the board to cater to this, while still being able to provide the same type of risk profile they’re looking at beforehand, but just new sources of edge that can be done in that space, whether that’s done on a technical basis, which I feel like you don’t see as much of that now, but there’s way more of a focus on the fundamental side, because there’s just so many data sources.

And that’s, I would say, becoming a more prominent feature across CTAs, where in the past, everything was price based, if you go back probably 10, 20 years for sure, definitely 20 years. And more recently, the number of sources of fundamental information, whether that’s in commodities, just grains reports and any other type of typical report, to the more esoteric ones where you will have even, your type of, could range from trying to see like a parking lot, like a map of a parking lot for all the targets and how they can even be used for one thing or another, kind of on that side.

[00:33:36]Rodrigo Gordillo: Okay it’s interesting because… I would imagine Mercer will want to understand, categorize, and provide a sort of repeatable character of the strategies that they offer their investors. And so when we think about Trend, I think historically one can intuit, I think the reason that it was a popular approach was because it was something that has recently gone up. It’s likely to continue to go up for a short period of time. Something that’s gone down, continues to go out and down for a short period of time. If those trends are sustained, then we make money, right? So bonds down, equities down, prolonged, you can count on Trend being there.

At least that’s the intuition. In the paper, you do mention that Systematic Global Macro has similar characteristics, right? It has the ability, it seems to historically have been there during periods of acute equity market stress. How do you think about the expectation of similar characteristics going forward, outside of Trend? And why do we think that they’re still like, Systematic Macro is still a good hedge against poor periods in the markets?

[00:34:42]David Triplo: I think we’ve seen like definitely a regime shift in general of where before, and all of the 2010s. Just quantitative easing. It was a big factor of like how returns were, the lack of returns in CTAs, which has been, which is vastly different now with the monetary policy we have, plus the like de-globalization, different monetary policies across the board globally. and there, which leads to a more prominent set of returns on a go-forward basis across all asset classes. Because beforehand, if you look at 2010s, most returns would just be stemming from Trend following, from Trend followers being, just from rates and then long equities, if they did not have a cap on their equity exposure.

But now it’s very different where you’re able to see the whole gambit between … and FX. We’ve seen positive returns for a variety of funds. Commodities have been, have quite a few strong trends. Given the issues in Ukraine plus supply/demand imbalances in general and just geopolitical tensions overall, you can definitely tell in energies and … markets. Just that there’s quite a bit of more opportunities now than what there was in the past with the macro environment.

[00:35:58]Rodrigo Gordillo: Yeah. And I think a lot of that has to do with the fact that there were no clear dispersions. If you measure dispersion in the early two thousand, it was wide, right? Like they were, the markets really took a lot of control back then in the 2000 to 2003 period, of the tech crisis. We saw it in Brazil, like the kind of the BRICS emergence in the 2003 to 2007 period.

There was a lot of dispersion between global equity markets, especially emerging markets and everything else. Commodities were all over the place. It was a nice playground to be in on the long/short futures space. And then what happened after 2010, basically, is the only game in town was the NASDAQ, really.

The S&P did well, but because of the NASDAQ. And people often conflate when you say, I thought you were a Trend follower. Yes, that’s a single market that did well. If you look at global equities here in that decade they actually didn’t have, as they were, those trends were interrupted often, and it was a muted return structure for global equities.

It was really tough period, flat sideways markets for commodities and dispersion was really quite low during the last decade. All of that, of course, has changed since Ukraine, right? Since Quantitative Easing, after 2020 and then everything that’s come with that, with inflation, right? When the genie has come out of the bottle and the Fed can’t put it back in, you’re going to see opportunity sets for this type of investment.

But I do want to double click one more time. And if you don’t know the answer to this, that’s cool. There’s 50 percent of these systematic global macro managers that are Trend based. And the other 50 percent that is other, do you expect that other to provide convexity in a downward market? Is there an expectation of that?

[00:37:40]David Triplo: No, we don’t have an expectation of that actually. We’re fine with having some funds that don’t have positive convexity within this space and just view it totally as an absolute return profile. That is fine with us. And we will definitely note that in our reports saying that, hey, this is the type of profile you’ll have.

You might have issues for X, Y, and Z reasons. So it’s not a necessity to be, to have that type of profile. The things that we’re looking for in particular is just really sources of alpha. If we believe that a particular fund has more sources of alpha than another, then it can be A rated and investable by our clients and our delegated team. So it can definitely range…

[00:38:23]Rodrigo Gordillo: And so the non-trend side is also style premia style funds.

[00:38:28]David Triplo: Yes.

[00:38:29]Rodrigo Gordillo: So that’s clearly, not necessarily has a character of having high convexity.

[00:38:33]David Triplo: Yeah.

The Paper

[00:38:34]Rodrigo Gordillo: Last time, as we saw in 2020. So in September, 2022, you publish a paper with your co-author remind me of his name again,

[00:38:44]David Triplo: John Jackson.

[00:38:45]Rodrigo Gordillo: John Jackson. The paper’s called Systematic Macro, Hedge Funds Trending into the New Regime. And you started by just discussing a little bit of the macro environment that we were in 2022 and why this is a particularly good time to be focusing on this space. What is the backdrop on the macro side that led you to want to inform your colleagues of this opportunity.

Sorry to interrupt, but I did want to take a quick second to remind our listeners that, you know, the team works really hard on these podcasts. We spent a lot of hours trying to get the right guests and we do a lot of prep work to make sure that we’re asking the right questions. So if you do have a second, just do hit that Subscribe button, hit that Like button, and Share with friends if you find what we’re doing useful.

Thanks again. Now back to the podcast.

 

[00:39:34]David Triplo: I think, yeah, there was just such a big difference between how we view the market during quantitative easing versus post that. And then also the inflationary environment. And we, in general, just believe that macro picture is more likely to have trends across the board that are more long lasting, just given the different monetary policy we expect to see. Yeah.

[00:40:00]Rodrigo Gordillo: And so that sets allocators up to be in a lot of pain if you’re not willing to do something different. I think one of the things that a lot of practitioners have realized, that maybe hadn’t studied history before, is that indeed equities and bonds can correlate. And they can go down together. But of course, I think there was a belief that the idea of rates going to 5 percent was completely just, it was just unacceptable, right? We weren’t going to be able to deal with the debt burden and so on. So we were always going to have a cap at 2%. Clearly that has changed since early 2020. And now we’re seeing this inflationary thrust come upon us and some bear markets and equities and bonds going down together. Now, when you think about diversifiers and in the Mercer space, aside from Global Macro, and CTAs and Managed Futures, all the names, do you, what other asset classes are being allocated to, to deal with this environment? And what’s the proportion between those traditional asset classes and the CTA space that you’ve seen?

[00:41:05]David Triplo: So yeah, within the hedge fund space, outside of Systematic Macro it’s more typically Volatility oriented strategies that can provide like, levels of high convexity in a short time period to deal with the crisis, such as like COVID, that happens out of the blue. Yeah. So it’s definitely more tail protection, which is more options based with a couple of funds that we recommend, and that’s like our main focus for dealing with short term, very sharp dislocations in comparison to more long sustained trends where it would be more beneficial to have a program like managed futures that will do well during times when a 60/40 portfolio might not be performing well.

Which would like, hedge out the difference between the two, between the tail protection, is tail protection. Typically you’ll be losing X percentage on a monthly basis. And if you don’t have that, but at the same time, if you have managed features with the slow sustained trends that can at least recover that and potentially make more. So we lump both of those two together to be part of, I guess we would refer to them as our risk mitigation solutions within our hedge fund portfolio, as a whole.

[00:42:17]Rodrigo Gordillo: And so that’s on the hedge fund side. Do you find a lot of Mercer consultants and clients allocating to commodities and gold just to mitigate some of this inflation that we’re seeing?

[00:42:29]David Triplo: We see a lot more actually on the multi-asset side. So that was more of a focus, but we did actually have some requests for gold as well. Like, I was a little shocked on that one, but I would say 80 to 90 percent was leaning more toward the multi-asset over gold, and nothing for the other.

[00:42:46]Rodrigo Gordillo: And when you see the interest in gold and the options for traditional portfolios to diversify, what do you think, what do you think is a more powerful tool here between, for inflation protection and bear market protection? Is it gold and commodities over Systematic Macro? Like how would you, if you had CARP launch, how would you start leaning traditional 60/40 portfolios towards a safer allocation?

[00:43:12]David Triplo: I think it’s overall long-term, you’re going to get a lot more out of Systematic Macro than you will out of the others. Just by looking at either commodities or gold, you have a lot of issues, but just investing directly with commodities, in terms of being in contango markets versus backwardation, and how you’re actually accumulating returns, which if you look at like BCOM or some of the other indices over time, even in an environment where there is strong inflation, you’re losing, you might be losing too much money from just the roll in general, the calendar roll.

[00:43:46]Rodrigo Gordillo: Yeah. It’s it is a, so when I looked at the data, it has a positive, a diversified commodity basket has a positive expectancy mainly due to the rebalancing premium, but it does come in bunches, right? You get, 20 percent of the time you get all the benefits and then the other 80 percent of the time you have a negative Carry.

So, it’s a tough thing to hold emotionally. Whereas, from your paper, you show the benefits of kind of a diversified approach, positive Sharpe ratio, positive Carry most years. It seems to be a robust approach for these types of markets. And so you make a good case for Systematic Global Macro for the average allocator. And I always, I’ve been using this quote for 15 years because you presented evidence, that is abundantly clear. It is not a new and novel strategy. Like I think a lot of the tail protection strategies that have come up and come about, it is an old approach, right? It’s been around since the 80s. And the quote, I don’t even know who to give the quote to. I think it’s Churchill, but it’s probably not. And it’s that men occasionally stumble over the truth, but most of them pick themselves up in a hurry as if nothing ever happened. So you write this paper, you present the evidence. How many people picked up that piece of truth and ran with it? You get a lot of a lot of pickup?

[00:45:06]David Triplo: Now, sadly, we actually did not. It was one of those things where I expected more client interest just to see in the environment, and it’s not even just the environment, but just the returns. So that wasn’t even intentional that, 2021 and ‘22 were banner years for Systematic Macro.

It was more so the thought of we just believe that this time makes sense. And it’s not just trying to cherry pick more recent returns. The fact that we had both the returns and the continued environment we’re in. I really would have expected we saw more client interest but it was pretty…

[00:45:40]Rodrigo Gordillo: So why do you think that is? As you have these conversations what has come out in your understanding of why they don’t do it?

[00:45:46]David Triplo: I think there’s some of it where there’s the lack of understanding of the full of outside of the Trend following. So Trend following there can be, most people understand that space. It’s been around for over 40 years. But if you, when you go into the full balance of what these other Systematic Macro programs are, people are just not really aware or just not comfortable with it.

I’ve heard clients say it’s the magic black box and it’s no, there’s so much more you can dig under the hood and to try to get there. And some people just aren’t willing to do it, but that’s what my job at Mercer is, to dig under that hood and understand where those alpha sources are and to talk with the PMs to understand each and every model and what they do and how they operate and how their edge exists across the board.

[00:46:33]Rodrigo Gordillo: I think it probably was, September 2022, we’d seen a bit of a peak in that space already in May. I think a lot of it might’ve had to do with the fact that it’s been in a bit of a drawdown, SVB didn’t help, right? That was a big. We’re starting to see it pick up. Certainly, our strategies are positive for the year. We are starting to see things break down in the 60/40 once again. Are you starting to see a bit more chatter as things get better for that space, or not yet? Maybe it’s early.

[00:47:03]David Triplo: A little bit, but I feel like it’s not from US investors. It’s actually all from European investors for whatever reason. Why, I’ve never really understood why in Europe, there tends to be a larger focus on systematic strategies versus the States, but it’s just I feel like, always 10 years. But that’s, definitely we’re seeing more from that side than our US side.

[00:47:26]Rodrigo Gordillo: From the US side. If you examine the liquid alternative or not the liquid alternative, just the regular alternative sleeve, what is that dominated by these days?

[00:47:35]David Triplo: Oh, overall it’s still, Oh, from wait, liquid or …

[00:47:39]Rodrigo Gordillo: No, not non-liquid. Just when you’re dealing with pension plans, whatever space they give to alternatives, what is in there?

[00:47:47]David Triplo: Private equity, private credit, were some of the biggest searches, and actually infrastructure this past quarter as well, was one of our big three in terms of the amount of searches we saw were, those were the big three.

[00:47:58]Rodrigo Gordillo: I’ve always thought that one of the major reasons why larger organizations don’t even look at this space is because it is capacity constrained, right? Each manager has a limit. They have their own limits in terms of trying to achieve positive alpha, their CFTC limits. Do you think a lot of it has to do with the fact that they simply can’t allocate in size?

[00:48:20]David Triplo: I think they can now, there’s enough where you can move the needle for an overall portfolio. I’d say most of the managers we cover have, as long as you’re not looking at the all-Trend space, you have a capacity of three to 10 billion. 50, 100 million allocation for some of these pension funds and endowments still is a meaningful amount in terms of what their risk mitigation solutions portion of their portfolio, where it makes sense.

And it’s all liquid markets. Futures markets are very liquid across the board, and more firms are even expanding upon the number of markets to find other sources of liquidity and value as well in the past few years.

[00:48:58]Rodrigo Gordillo: Yeah, for those that can, not everyone, certainly certain sovereign wealth funds might not be able to, right? But…

[00:49:03]David Triplo: Yeah, on some level,

[00:49:04]Rodrigo Gordillo: If you’re small enough, everybody’s trying to follow the kind of endowment, the Yale Endowment Foundation’s model, right? And it’s a very large allocation or allocator that, that may not have that, that may not have the mandate flexibility and the portfolio agility to do all the things that smaller pension plans can. And when you do examine it, just like you wrote in your paper, when you examine the space and you look at your options, I always like to equate it to the vast majority of assets out there are dealing with a two piston motor, that for the last 40 years has had two pistons move in opposite direction from each other. And in fact, one of the pistons is super thick and the other one’s really thin. The bond piston is really thin. So it’s really the equity piston that’s moving that car forward, a little clunky. You can look at Ray Dalio, and what he’s done to equate those weights and make it a smoother ride.

But ultimately in the last couple of years, both of those pistons have gone down together. And when you look in the landscape as to what you can do to have a third piston to make that ride smoother, it’s just there. It’s not even, I, of course I’m biased, but I got here by just observing the empirical data. It’s just so simple to add that third component, a diversified component of CTAs and little macro, to have that third piston to smooth out the ride. And it’s just baffling to me that those that have the mandate flexibility and portfolio agility can’t seem to see through that. So hopefully your paper and these types of conversations will allow people to see the light, take the red pill, maybe I think. We need a couple of more of these cycles for people to really wake up. But, what are you doing right now to get the word out more in your role? You wrote the paper. What are you doing on the day to prophesize?

[00:50:54]David Triplo: For my specific role, it’s still just trying to find the best managers, so it’s not as much of trying to market the space as much, but just given my background in the space, I try to make sure people are aware of their options. So while my role isn’t much on the marketing side, just by being on here and then also moderating the panel, where some of the stuff, trying just to bring more, not necessarily interest, bring more knowledge to the space of what, how Systematic Macro can add value to a 60/40 portfolio and then also add value just in terms of a diversified hedge fund portfolio, is in terms of how we view it internally across, while including all the other strategy types you would expect to see, and even within hedge fund strategies, that Systematic Macro tends to not be correlated to anything within that bucket more, more often than not.

Extract out the HFRI macro, but for other categories, it’s still very minimal correlation. So just trying to, between the paper and then some events like this, it’s just trying to make sure that our OCIO team is aware, which they are, if they’re, they’ve been in this industry a long time, but then also trying to put more word out there to our consultants as well, across for all hedge fund strategies.

[00:52:11]Rodrigo Gordillo: And the last thing I want to cover is the unique characteristic that the Managed Futures space has with regards to capital efficiency, right? We’ve called it Return Stacking in this channel in the past. If you want to learn more about that, you can go to Returnstacked.com. We’ve written a ton on it, but there is, I think there’s been, if you look at the last decade, there’s been an aversion to a flat decade for a lot of Trend managers, right? But Managed Futures allow, because of their capital efficiency, allow us to really stack that diversifier on top of a traditional allocation. So if a pension plan wants to keep their 60/40 and they have tracking error bias that they don’t want to move away from, there is the possibility of hiring a bunch of CTA managers for them to stack the strategies on top. When you’re dealing with European investors, is there interest in that separately managed account, in that capital efficiency, or are they giving you a full allocation or are they making room in their portfolio for it?

[00:53:12]David Triplo: I mean, we’ve definitely seen both, but, which is a little odd to me. I would think most would want to have the SMA from the capital efficiency standpoint and just the type of returns you can get on your cash right now, with where rates are at. So it’s an environment I would expect to see more on SMAs going forward, but in the past, I would say it’s not too much of a difference from one to the other. But there’s a mix of delegated assets as well. So how that works and is structured at Mercer makes that less possible. It depends on the type of relationship they have with Mercer and if you’re in delegated portfolios, versus other ones that are just individually managed by our OCIO team, which is separate.

[00:53:55]Rodrigo Gordillo: Okay. So can you just double click on that? What’s a delegated portfolio?

[00:53:59]David Triplo: Mercer has a range of portfolios that we view as our Ideal Portfolio of sorts, that are done with specific volatility targets in mind. So it’s, we have one where it’s trying to have equity-like returns with about half the volatility of it. Other ones that are more risk reducing portfolios with certain different return and volatility targets. And then outside of that, then it’s just whatever an individual client is looking for. And then we help manage those portfolios.

[00:54:30]Rodrigo Gordillo: Okay. I see. All right. So I guess what I want to leave it on is, there’s a lot of CTA managers here probably going to be listening to this podcast and that also want to get known and be followed by consultants and be in their favors. What is it that, what type of advice would you give a kind of emerging or mid sized managed futures manager or macro manager in dealing with Mercer and getting their attention? How do you guys handle that?

[00:54:58]David Triplo: Yeah, the small guys, it’s tough. Systematic macro and trying to get in the space is hard from an infrastructure setup plus cost structure data. It’s very data intensive that we would expect to see a well rounded portfolio. So from a startup you would need a lot of money or put a lot of money into it to get off the ground and running.

I would say for the mid-sized ones, is just attempting to be more institutional and then also trying to just focus on R&D. Are you being unique with your alpha sources? For us at this point, we’re not really looking as much in the Trend, just the more typical Trend following funds. They’ve been around for forever.

We cover quite a few. It’s trying to be something different that you don’t see in the space. So how you’re looking at like fundamental information, how you’re looking at broad depth of the universe in a unique way, is something that will set yourself apart versus trying to be something more common.

[00:55:54]Rodrigo Gordillo: Perfect. That’s great advice Dave. And if you want to read more on what Dave has done, you can look up Systematic Macro, Hedge Funds Trending into the New Regime. Is that broadly available online? We’ll put a link to it in the description, but if you search …

[00:56:11]David Triplo: That’s up, yeah, at least in Mercer Insight, which should be open to anyone, I believe. I’ll probably need to double check that, but I think anyone, I don’t, I think, it doesn’t have to be an institutional asset manager to access that, but I would have to double check.

[00:56:26]Rodrigo Gordillo: Okay. If there’s a link, I’ll put it, I’ll put it in the description. And, yeah, it was a great paper, accessible, hopefully, gives enough of a background on these strategies to showcase the non-correlation and the benefits to traditional portfolios and we can start moving the needle forward. All right, Dave, thank you so much for coming on for as long as you did. We look forward to hopefully future papers. I know they, that that is a bit more difficult than Mercer. You can’t put out content every week, but hopefully you’ll continue to put out some thoughtful research in the future. And hopefully we can have you back on in a few months with, as this whole Global Macro thing begins to explode.

[00:57:08]David Triplo: Yeah. I hope so. Yeah. We’re hoping to see more activity in the space and just proponent. We’ll hopefully have more data points in the future here to just reiterate that and hopefully, yeah, everything continues along the same path. So we’ll have to see though. There’s lots of moving parts in the world right now.

[00:57:25]Rodrigo Gordillo: Is there, do you have a public profile that can anybody find you on Twitter or on LinkedIn or if anybody wants to reach out to you directly?

[00:57:32]David Triplo: Yeah, so I just have my LinkedIn, which is, should just be my name, David Triplo.

[00:57:35]Rodrigo Gordillo: Okay. Dave Triplo, Mercer, look it up, reach out to Dave. And once again, Dave, thanks so much for coming today.

[00:57:42]David Triplo: For sure. Thank you so much.

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*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.