Top Traders Unplugged

SI258: Absolute Momentum in a Chaotic Environment ft. Richard Brennan

Aug 26, 2023

Richard Brennan discusses the uncertainty in the economy, absolute momentum, and how complex systems function. The podcast explores correlation in system design, trading chaotic financial markets, and the calculation of risk in complex systems.

01:26:22

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Episode guests

Richard Brennan

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Quick takeaways

There are different approaches to trend following in financial markets, such as absolute momentum and cross-sectional momentum, which lead to different philosophies and methods for risk management.

Complex systems, like financial markets, exhibit chaotic properties and are characterized by unpredictable behaviors, nonlinearity, and fractal geometry, which can be studied using chaos theory.

In complex systems, seemingly random elements have correlations and are part of the overall structure and dynamics of the system, highlighting the importance of considering noise and correlation in understanding and analyzing these systems.

Deep dives

Different approaches to trend following

There are two main approaches to trend following: absolute momentum and cross-sectional momentum. Absolute momentum focuses on time series and looks for momentum within individual return streams. Cross-sectional momentum, on the other hand, looks at the relationships between return streams and identifies trends that are strong or weak in different asset classes. These different approaches lead to different philosophies and methods for risk management.

Academic literature on trend following: Absolute momentum and cross-sectional momentum

01:24

Conditional Statements and the Impact on Outcomes in Non-Ergodic Systems

01:21

Introduction

2min

Geopolitical Changes and Portfolio Performance

33min

Ergodicity and its Application in Economic Models

25min

The Impact of Strange Attractors on Trajectory Paths

12min

Questioning the Reliability of the SHARP Ratio

9min

The Importance of Knowing the People Behind Investment Firms and Potential Dangers of Investing in Managed Futures ETFs without Manager Knowledge

2min

Reflecting on the Podcast Journey and Announcing a New Co-Host

3min

Richard Brennan is back to discuss the lurking uncertainty in the economy and take a deep dive into absolute momentum. What is it, how is it used and how does it relate to trend following? How does complex systems really function and evolve over time and what role does correlation play in system design? And financial markets is in fact chaotic systems, then how do predictive modellers trade them? Is there an edge from price following techniques in their ability to trade in highly complex and sometimes chaotic environment? Why noise is not as random as it might occur, how risk should be calculated in complex systems and much more.

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Episode TimeStamps:

02:31 - What has happened since last conversation?

08:04 - Industry perfomance update

14:08 - Q1, Correy: If an investor is heavily weighed equities, as most are, are they better off with trend following providers that don't include equities as one of the utilized asset classes?

20:06 - A deep dive into absolute momentum

30:30 - Different implementations, same results

45:47 - The role of correlation

50:56 - Calculating risk in complicated systems

01:14:10 - The weakness of the Sharpe Ratio

01:21:04 - Know your manager well

01:24:19 - Thanks for listening

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2. Daily Trend Barometer and Market Score

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Top Traders Unplugged

SI258: Absolute Momentum in a Chaotic Environment ft. Richard Brennan

Episode guests

Podcast summary created with Snipd AI

Quick takeaways

Deep dives

Different approaches to trend following

Complex systems and chaos theory

Correlation and noise in complex systems

The Limitations of Using Spatial Statistics in Economics

The Importance of Validated Track Records and Holistic Risk Assessment

Academic literature on trend following: Absolute momentum and cross-sectional momentum

Conditional Statements and the Impact on Outcomes in Non-Ergodic Systems

Remember Everything You Learn from Podcasts