SI418: Why Markets Are More Alive Than We Think ft. Richard Brennan

SPEAKER_1 (0:01)

Welcome to Top Traders Unplugged. In markets, success doesn't come from predicting what happens next. It comes from being prepared for what you can't predict.

In each episode, we go deep with some of the world's most thoughtful minds in investing, economics, and beyond to understand how they think, how they prepare, and how they decide, and the experiences that shaped how they see the world. No noise, no shortcuts, just real conversations to help you think better and invest with confidence.

Niels Kaastrup-Larsen (0:36)

Welcome or welcome back to this week's edition of the systematic investor series with Richard Brennan and I, Niels Kaastrup-Larsen. Each week we take the pulse of the global market through the lens of a rules-based investor. Rich, it is so great to be back with you this week. How are you doing? What's going on down under, so to speak?

Richard Brennan (0:52)

Well, it's all good down here, Niels. It's great to be back on the podcast, but the weather is trying to make up its mind at the moment. It's still sort of hanging on to winter a bit, but we clearly are sort of in a transition into a new season on the way. So, yeah, we'll just see how that one plays out. But all good down here in the southern state of Australia.

Niels Kaastrup-Larsen (1:17)

Yeah, well, speaking with you over the years, Rich, I've learned that winter in where you are, it still means like 20 degrees and very nice weather, so I'm sure it's all good.

Richard Brennan (1:27)

Yes, we do winter a bit down here.

Niels Kaastrup-Larsen (1:30)

Yeah, but you know, we have actually a really interesting kind of, I wouldn't even, is it, it's a topic, but it's much more than that, that we're gonna go through today. But before we do that, I'm always curious to hear what's been on your radar, which I think might be surprising to some people listening to us.

Richard Brennan (1:53)

Yes, Niels. So my mind is currently focused on the publication of a new book. That's your and my book, Niels, The Trend Following Manifesto, as it's nearing completion.

Niels Kaastrup-Larsen (2:06)

There we are, world premiere.

Richard Brennan (2:08)

World premiere. But if you remember, Niels, it's been three long years in the making. So what's on my radar today is what you and I discovered over those three years we wrote that book. So if you remember when we began this project together in 2023, the received wisdom from many allocators and investors was that the edge of trend following had weakened post-GFC, and this was shortly after the decade-long winter for trend following that ended in 2020, which was a hot topic for the investment community at the time. But many were saying that the industry had become crowded and the opportunity had been arbitraged away. But if you remember Niels, you and I, we definitely weren't convinced by this explanation as we were both accustomed to disappointing performance periods over long periods of time.

But we didn't want to simply answer one opinion with another opinion, so we wanted to examine what had actually happened. And if you remember, that was what actually inspired our writing of this book in the first place.

Niels Kaastrup-Larsen (3:26)

I do remember, but I can't believe it's really been three years in the making, and also keeping it to ourselves more or less over that period of time. And yeah, no, I do remember, we both lived through kind of that quote unquote difficult period for the strategy that we love so much, and so I understand the concern from some people.

Now, how would you describe what we found, just kind of briefly, when we started looking at the evidence?

Richard Brennan (4:00)

Well, from that research we undertook, we concluded that the edge had not disappeared but rather it had moved.

So, if you remember, Niels, we examined a swathe of futures markets across asset classes using about four decades of data, and found that the underlying tendency to trend was actually stronger in the most recent decade than in any of the three decades before that. It was actually strengthening while much of the industry was worrying about its disappearance. And we found that while the edge had not diluted, the edge had migrated from the short look back to the longer term look back. So, since 2020, the strongest results have concentrated around the medium to long-term 200-day horizon, where the risk-adjusted performance over the shorter term, such as the 20-day horizon, that had fallen to roughly one quarter of its earlier level. So, our conclusion from our book was that those managers who felt that deterioration were actually trading faster horizons. And their experience was real. But what they were seeing was the decay in one part of the landscape.