SI317: From Hurricanes to Hedge Strategies: The Hidden Common Factors ft. Richard Brennan

Oct 12, 2024

Richard Brennan, an expert in trend following strategies, discusses the intricate connection between market behavior and complex adaptive systems. He highlights how unpredictable events, like hurricanes, impact investor dynamics and the effectiveness of trend-following strategies. The conversation delves into risk management, diversification techniques, and the significance of outliers in markets. Brennan emphasizes the importance of adapting to constantly changing signals and the intricate balance within financial ecosystems, making a case for informed, long-term investment approaches.

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ANECDOTE

Florida Hurricanes

Richard Brennan and Niels Kaastrup-Larsen discuss the recent hurricanes in Florida.
Brennan expresses concern for those affected, highlighting the increasing intensity of these events.

INSIGHT

Trend Following Challenges

October has been a tough month for trend-following strategies, particularly in fixed income.
Diversification hasn't provided much relief due to hidden correlations.

ADVICE

Trend Following Overlay

Consider using long-only trend following as an overlay to broad market ETFs.
This approach might help limit downside risk, similar to Meb Faber's tactical asset allocation strategy.

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This episode dives deep into the intricacies of trend following strategies and their connection to complex adaptive systems. Richard Brennan and Niels Kaastrup-Larsen explore how these systems respond to market signals and the importance of boundaries in shaping investor behavior. They discuss the challenges faced by trend followers in the current market environment, particularly in October, where many strategies have encountered difficulties. The conversation touches on significant topics such as risk management, diversification, and the role of outliers in financial markets, emphasizing that these seemingly anomalous events are actually a natural part of the market's fabric. With insights drawn from recent literature, including works by John Holland and Jeffrey West, the episode highlights the necessity of adapting to evolving market signals and the dynamic interplay between agents within these complex systems.

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Episode TimeStamps:

00:40 - Our thoughts go to Florida

03:39 - A rough time for trend following

08:39 - Industry performance update

12:14 - Q1, Shahar: Regarding using long only trend following as an overlay to broad market ETFs

23:38 - Applying Warren Buffett's philosophy to trend following

32:33 - Setting limits in your trade following strategy

40:47 - What complex adaptive system can teach us about trend following

01:06:22 - What is up for next week?

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