Turbo Charged Trend Following: Why Capturing the Market’s Biggest Trends Means Embracing High Volatility | Moritz Seibert & Moritz Heiden | Takahe Capital

Episode Summary

Executive Summary: The conversation explores Takahay Capital’s trend-following approach, emphasizing why long-term trend strategies work best when they let winners run, size positions carefully, and avoid overfitting. The managers explain how market selection, model design, curve positioning, and volatility targets shape returns, why they prefer robust simple rules over discretionary overlays, and how newer markets like perpetual futures may evolve.

Main Topics: How trend following makes money (Priority: 5/5): Trend systems expect many small losing trades and a few large winners that more than offset the losses. The managers stress that the strategy’s edge comes from accepting whipsaws while capturing outlier moves in markets like gold, oil, cocoa, and equities. Curve positioning and whipsaw risk (Priority: 5/5): The discussion explains why front-month futures can be more profitable but also more volatile and prone to being kicked out by event-driven spikes, while deeper-dated contracts are calmer but offer less upside. Curve choice is built into model design rather than decided discretionarily at trade time. What differentiates trend-following managers (Priority: 5/5): Trend-following funds can look similar conceptually but differ greatly in market universe, trading speed, exit logic, and volatility target. Takahay trades about 100 markets, uses multiple model variants, and runs at higher volatility than the institutional norm. Robust design vs over-optimization (Priority: 5/5): The managers argue for simple, stable, and robust parameter choices rather than maximizing Sharpe ratio or fine-tuning each market. They prefer broad plateaus of acceptable performance, consistent risk sizing, and system rules that can survive regime changes. Dynamic sizing, winners, and drawdowns (Priority: 4/5): They reject dynamic re-sizing that cuts winners as volatility rises, arguing it can turn trend following into a hidden mean-reversion approach. Position sizing is important at entry, but once a trend is underway they prefer to let the market determine how large the winner becomes. Liquidity and the future of perpetual futures (Priority: 4/5): The discussion covers decentralized perpetual futures on platforms like Hyperliquid and Kalshi, noting that some markets lack depth/spreads are too wide for large institutional use, while liquid equity perps look more promising. They see the product structure as efficient but still outside their regulated fund structure. Investor base and portfolio role (Priority: 4/5): Takahay’s higher-volatility trend fund is aimed at high-net-worth and family office allocators who accept drawdowns in exchange for chunky absolute-return potential. The strategy is not designed primarily as a smooth institutional diversifier, though it still offers diversification benefits.

Key Arguments: Trend following works because a small number of large, persistent winners can offset numerous small losses. A smooth trend and a volatile event-driven trend are handled differently by futures curve location; farther-dated contracts reduce whipsaw but also reduce upside. Model differences arise from the market universe, model type, trading speed, and volatility target—not just from the basic idea of trend following. Takahay deliberately uses multiple oil variants and spread/trend models to increase diversification across related time series. Higher-volatility trend following is capital efficient in futures, but it is less suitable for large institutional allocators seeking smooth returns. The firm favors robustness over optimization; it looks for stable parameter plateaus, not the single best Sharpe outcome. Dynamic volatility targeting can dampen winners and effectively add to losers, which conflicts with classic trend-following logic. Fundamental overlays may help some large managers, but scaling that across 100 markets is costly and complex; price alone is sufficient for their process. Perpetual futures could attract liquidity over time, but current spreads, funding, and market depth limit usefulness for large portfolios.

Data Points: Takahay trading universe: 100 markets - The managers say they trade a unique portfolio of around 100 markets across commodities, rates, FX, and equities. Typical trend fund volatility: 8%–12% annualized - Described as the norm for most CTA/trend-following funds aimed at institutional investors. Takahay target volatility range: 25%–30% annualized - They describe their fund as higher-volatility and capital efficient. Holding period for some winners: more than 2 years - Used to explain why entry timing matters less than position sizing in long-term trend following. Example initial risk: 100 basis points - Illustrative example of the expected loss on a position if the initial stop is hit. Example large loss threshold: 200 basis points - Described as a massively large loser for their type of portfolio. Example portfolio drawdown from give-back: 3% - Mentioned as a plausible portfolio-level loss on a give-back trade. Cocoa peak-to-current move: $13,000 to around $4,000 per ton - Used as an example of a major outlier trend and the pain of giving back open profits. Cocoa illustrative path: $2,500 to $3,500 to $13,000 - Used to show why discretionary profit-taking can miss the full trend. Bitcoin carry yield example: 40% annualized, later ~3%–4% - Used to show how crowded crypto basis trades compressed as CME liquidity improved. Example bad year for spread systems: This year underperformed - They note spread-trend systems have been erratic and whipsaw-prone this year after strong prior years. Historical flat period for trend: 2014–2018 - Cited as an example of multi-year flat performance across the trend-following sector.

Pivotal Quotes: "It's kind of like adding to losers and taking away from winners, which is the exact opposite of a trend-following strategy that is keeping losses small and letting winners run." — Takahay Capital manager: Explains why the firm resists dynamic sizing that cuts successful trends as volatility rises. "We look for robust and resilient systems that can stand the test of time and the many curveballs that the markets throw at us." — Takahay Capital manager: Summarizes the firm’s design philosophy: simplicity, robustness, and avoidance of over-optimization. "Trend in and by itself, a single market trend following has had a very good start to the year." — Takahay Capital manager: Describes the year’s performance as driven by major trends in precious metals, equities, petroleum, and select commodities.

Implications: Trend followers should expect uneven results, prioritize position sizing and robustness, and avoid overfitting. Higher-volatility, broad-market trend programs may suit HNW/family-office capital better than large institutions. Perpetual futures may grow, but liquidity and regulation remain key constraints.