Turbocharged 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 that long, robust trends—not perfect entries—drive returns. The managers explain how portfolio design, futures-curve selection, volatility targeting, and market diversification shape outcomes, while defending a higher-volatility, old-school trend style that lets winners run and accepts frequent small losses and occasional large givebacks.

Main Topics: How trend following makes money (Priority: 5/5): Trend systems tolerate many small losses so a few large winning trades can offset them and drive performance. The managers stress that not every market trends, and the strategy depends on capturing the outliers. Front-end vs back-end futures curve exposure (Priority: 5/5): Oil and other commodities can be traded at different points on the futures curve, which changes volatility, whipsaw risk, and upside capture. More dated contracts reduce noise but also reduce profit potential. What makes one trend follower different from another (Priority: 4/5): The managers argue that differences in market universe, model type, trading speed, and target volatility create major dispersion across trend-following managers despite similar broad labels. Old-school versus dynamic volatility sizing (Priority: 5/5): They contrast classic stop-and-hold trend following with dynamic volatility targeting. Takahay prefers the older, rougher style because it preserves outlier winners instead of scaling them down. Robust model design and parameter discipline (Priority: 4/5): Rather than optimize for Sharpe, they aim for stable parameters, sensible loss behavior, and positive skew. They prefer broad plateaus in parameter space over overfit point estimates. New trading venues and perpetual futures (Priority: 3/5): They discuss perpetual futures and crypto-native venues like Hyperliquid, noting potential liquidity and efficiency benefits, but also clear institutional limitations and legal/regulatory concerns. Investor base and product positioning (Priority: 4/5): Takahay’s higher-volatility strategy appeals mainly to family offices, high-net-worth investors, and fund-of-funds that can tolerate drawdowns and want a chunky return profile, not to typical institutional allocators.

Key Arguments: Trend following does not require every market to trend; a few large trends can more than offset many small losses. Whipsaws are an accepted cost of doing business in trend following, especially in volatile markets with news-driven gaps. Different futures contract maturities have different beta to the front month, so the curve point traded materially affects performance and risk. Takahay’s model choices are made at design time, not dynamically switched at trade entry, to preserve consistency and robustness. The portfolio universe is a major source of differentiation; market selection matters as much as signal design. Higher-volatility trend following can be capital efficient in futures because leverage is embedded in the instrument. Letting winners run is essential; scaling down a profitable trend as volatility rises can destroy the very convexity trend following seeks. Trend systems should be judged by distributional qualities—loss size, outlier gains, and robustness—rather than by maximizing Sharpe ratio alone. Spread-trading trend models can behave very differently from outright single-market trend models and may go through distinct cycles of underperformance. Fundamental overlays are possible in principle but are difficult to scale robustly across 100 markets and may not improve results enough to justify added complexity. Perpetual futures may reduce roll friction and expand tradable markets, but current liquidity and institutional infrastructure are still uneven.

Data Points: Takahay target volatility: 25% to 30% annualized - The managers describe their fund as higher-volatility than most CTA trend-following products. Typical CTA trend fund volatility: 8% to 12% annualized - Used as the common institutional range that most trend funds target. Portfolio size: ~100 markets - Takahay trades a broad multi-asset universe across commodities, rates, FX, and equities. Example loss per trade: 100 basis points - Used as an illustrative initial-stop risk size for a trade. Example large loss threshold: 200 basis points - Described as a massively large loser for their style if applied to a single trade. Possible portfolio give-back: 3% or more - A winning trend can give back substantial open profit during reversal without necessarily becoming a losing trade. Holding period: More than 2 years - Some of their trend positions can persist for years when a strong trend continues. Bitcoin carry trade funding: About 40% annualized, later falling to 3%–4% - Example of how adoption/liquidity compressed returns in a previously high-yield trade. Cocoa move: From about $2,500 to $13,000 per ton - Used as the archetype of a large trend that should be allowed to run. Current cocoa level: Around $4,000 or below per ton - Illustrates the magnitude of the later reversal and give-back from the peak. Parameter lookback examples: 200-day vs 180-day vs 30-day - Used to explain that small parameter changes matter less than the difference between short-term and long-term systems. Optimization neighborhood: ±10 to 20 days around a moving-average window - They prefer stable plateaus rather than single best-fit points in parameter space.

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." — Max: Framing the core logic behind trend following and why dynamic rebalancing can be counterproductive. "We like putting together systems, models, trading strategies that can stand the test of time and the many curveballs that the markets throw at us." — Moritz Siebert: Explaining Takahay’s emphasis on robustness and resilience over over-optimization. "It deserves to be large. It deserves to be moving the needle. It deserves a larger footprint in our portfolio because that's the outlier trade that's working." — Moritz Hayden: Describing why profitable trends should be allowed to grow rather than being scaled down.

Implications: Trend-following allocators should expect frequent small losses, occasional large wins, and meaningful drawdowns. In practice, portfolio construction, volatility choice, and market universe matter as much as signal logic, and higher-volatility funds may fit only investors who can tolerate that ride.