Kathryn Kaminski - Don’t Fire Your Diversifier | #604

Episode Summary

Executive Summary: Katie Kaminski explains that managed futures’ recent slump was driven by market “turbulence” after major macro shocks, not by a broken strategy. She argues these drawdowns are cyclical, hard to time, and often followed by strong recoveries, especially when equity markets get choppy. The conversation frames trend following as a strategic diversifier, a rebalancing opportunity, and an increasingly accessible ETF-based tool for portfolios.

Main Topics: Managed futures drawdowns and turbulence (Priority: 5/5): Kaminski attributes the strategy’s rough patch to shock-driven, directionless markets after Liberation Day and other macro disruptions, which create whipsaws and reduce trend persistence. Historical drawdown analysis (Priority: 5/5): She discusses her paper on managed futures drawdowns, noting the recent period was the second-worst in the index’s history and comparing it to prior cycles. Equity-market context and recovery patterns (Priority: 4/5): The discussion finds that managed futures drawdowns often happen during strong equity environments, while recoveries tend to be faster when equities themselves are under stress. Rebalancing and investor behavior (Priority: 5/5): Kaminski emphasizes rebalancing into weakness and taking profits after strong runs, arguing that patience and discipline matter more than attempting to time tops and bottoms. Trend following as portfolio diversifier (Priority: 5/5): She presents managed futures as a premier diversifier with slightly negative long-run correlation to equities and an effective way to access macro exposures like commodities, FX, and rates. ETF growth and product innovation (Priority: 4/5): The conversation highlights the rapid expansion of managed futures ETFs and related packaging innovations, which are making the strategy easier to access in liquid, collateral-efficient wrappers. Replication, AI, and future research (Priority: 3/5): Kaminski outlines research on informed replication of CTA-like returns and notes that AI is currently more of a tool than a replacement, though it may enhance analysis and coding workflows.

Key Arguments: Managed futures drawdowns are typically caused by sharp regime shifts and turbulent, choppy markets rather than a permanent failure of the strategy. The recent drawdown was the second worst in the index’s history, but historical precedent suggests recovery can be meaningful and sometimes swift. Managed futures drawdowns often occur when equities are doing relatively well; recoveries often happen faster when equity markets experience weakness. Investors should focus on strategic allocation and rebalancing rather than trying to predict drawdowns or time entries/exits. The strategy’s value lies in diversification and exposure to macro trends across asset classes, not in making a directional forecast. Combining equities with managed futures can improve portfolio behavior and make the exposure easier for investors to hold. Managed futures ETFs are a natural vehicle because the strategy is liquid, collateral-efficient, and well-suited to active ETF structures. Replication can provide beta-like CTA exposure, but the best results come from a hybrid approach that combines replication with risk management and industry priors.

Data Points: Recent drawdown rank: Second worst in the index’s history - Kaminski describes the recent managed futures drawdown as the second deepest since the relevant index began. Worst historical drawdown period: Trade War 1.0 (2019 to 2021) - She says the longest and deepest drawdown prior to the current one occurred during the 2019–2021 trade-war period. Managed futures correlation to equities: Slightly negative over 25 years - She cites a roughly negative long-run correlation between trend following and equities as evidence of diversification. Timing of drawdown recovery: Often faster when equity markets are in drawdown - She notes managed futures tends to recover most quickly during equity stress periods. Publication year reference: 2021 - The host references her prior appearance on episode 310 in May 2021. Dollar/yen level: 150-something - Used as an example of a major FX trend still in motion at the time of recording. Gold example: Could go to 10,000, 20,000, or back to 2,000 - Used to illustrate the uncertainty and possible extension of trends. S&P-style valuation example: P/E could go from 40 to 60 or 80 - Illustrates that expensive valuations can become even more extreme.

Pivotal Quotes: "my glass is refillable" — Katie Kaminski: A response to the idea that managed futures conversations have felt bleak; she reframes adversity as temporary and cyclical. "turbulence days" — Katie Kaminski: Her term for coordinated sell-offs, high volume, and reversals that are hostile to trend following. "the premier diversifier to a traditional portfolio" — Meb Faber: His summary of why managed futures matter in a balanced portfolio, especially given their different return drivers.

Implications: For investors, managed futures should be treated as a cyclical diversifier, not a market-timing trade. For the industry, ETF growth and replication research may broaden access, while patient rebalancing can improve outcomes through inevitable drawdowns.