Pod Insights Michael Covel's Trend Following Ep. 1331: Moritz Seibert Interview with Michael Covel on Trend Following Radio About this episode My guest today is Moritz Seibert, Founder & CEO at Takahē Capital, a systematic investment manager targeting absolute returns through resilient trading strategies. He is also the former CEO/CIO at Munich Re Investment Partners, and the co-host at Top Traders Unplugged. He is an experienced quant trader across equities, commodities, bonds, FX, digital assets, and liquid alternatives. The topic is Trend Following. In this episode of Trend Following Radio we discuss: Changes in Trend Following strategies Risk management and volatility Changing appetites of different generations of investors Performance-based v. management-fee-based models Jump in! --- I’m MICHAEL COVEL, the host of TREND FOLLOWING RADIO, and I’m proud to have delivered 10+ million podcast listens since 2012. Investments, economics, psychology, politics, decision-making, human behavior, entrepreneurship and trend following are all passionately explored and debated on my show. To start? I’d like to give you a great piece of advice you can use in your life and trading journey… cut your losses! You will find much more about that philosophy here: https://www.trendfollowing.com/trend/ You can watch a free video here: https://www.trendfollowing.com/video/ Can’t get enough of this episode? You can choose from my thousand plus episodes here: https://www.trendfollowing.com/podcast My social media platforms: Twitter: @covel Facebook: @trendfollowing LinkedIn: @covel Instagram: @mikecovel Hope you enjoy my never-ending podcast conversation!
Transcript 0:00 Speaker 00 My guest today, Moritz Seibert, founder, CEO, Taka Hay Capital. Guess what we're talking? Trend following, ladies and gentlemen, a topic that I enjoy, a topic that Moritz enjoys.
0:16 Speaker 00 Without any further delay, let's jump right into it. I hope you enjoy.
0:35 Speaker 00 In this trend following world, this world that I exist in, this world that you exist in, we all kind of learned who the legends were, the Market Wizards books, many of the people that were in my books, people like John W. Henry, Bill Dunn, that were not in the Market Wizards books. But you know, these guys were all swinging for the fences, making big money when the opportunities came, when the trends appeared in markets they could never predict. But the strategy was predicated on something big. You couldn't predict what's going to happen, didn't know the timing, and some particular trends started to happen, you had to take advantage of it. And I say this with no disrespect, more power to you for all the businesses that have gathered
1:18 Speaker 00 significant assets under the trend following umbrella. But we're at a crossroads, in my opinion. We've got all the legendary foundation, but in this new world, people are shooting for a different style of return. And when you shoot for a different style of return, aren't you not changing the strategy?
1:38 Speaker 01 Not taking any risks in life is the biggest risk that you can take, as silly as that may sound. But when the CTA industry, and I'm too young to go back to the starts of that industry, looking at the data, which doesn't lie, when the CTA industry started with Dunn and Bill Dreis was trading, they were all trading at 25 to 30, 35% volatility. This was kind of the norm. The earlier CTA, Dave Druze, I've mentioned Dunn, I've mentioned Dreis, they were all at that kind of level. To me, that makes sense because you're trading a strategy where you take an appropriate amount of risk, not reckless, not irresponsible.
2:15 Speaker 01 And you do this because you want to make a lot of money. And then something changed. I think we can date this back probably to the year around 2000, around the change of the millennium. When all of a sudden it's like, oh my gracious, 20% volatility, 25% volatility. That is far too high. I can't really work with that. It is far too erratic. It has too much of a risk of a drawdown. Please give me something that is smooth and steady Eddie. Something like eight to 10% volatility. That was because of institutional investors' demands, where you have different decision makers at the lever. It's like an allocator that receives a paycheck. They don't want to make a stupid or silly mistake by giving money to a higher volatility CTA
2:59 Speaker 01 that may have a double-digit down month or go into a 40% drawdown or something like that because it may risk their job. The CTAs quite luckily, or they quite happily responded to that. They lowered their volatilities. In aggregate, we can look at the data. You can look at the subscription CTA index. You can look at the benchmarks, but you can also look at the individual managers. And you can see that they've almost all, not all of them, but 99% of CTAs have come down with their volatility to these type of levels, which meant that they could scale their business into the billions, which is fantastic for them because it just puts more emphasis on the management fee as opposed to the performance fee, which personally I think is absolutely wrong.
3:40 Speaker 01 I think our business should be performance fee based and not management fee based. And so they scaled into the billions and the allocators were happy because they got a low volatility return profile and the CTAs were happy because they had more money under management. But it's kind of like something has to give. And the thing that gives is the raw return. People became sharp ratio focused. They forget about the fact that you can't really have sharp ratio for breakfast. The only thing that buys you breakfast is the money. I just observed that change and it hasn't come back. We don't even have to put this into the CTA box. It applies to almost every asset. Equities used to have 20% volatility. The S and P had 20% volatility and everybody was fine with it in the 1990s. And then all of a sudden this was too much.
4:25 Speaker 01 You can't have S and P with 20% volatility, you need to have it with 10. So please dial everything down and make it smooth. For a strategy that keeps losses small and lets winning trades run, that is already based on the foundation to protect your left tail is, in my personal opinion, the wrong approach, especially we don't need all the money. We have most of our money in T bills and we need some of it to pay margin at the clearinghouse. So a higher volatility trend following setup is also more cash efficient. It's more risk efficient.
4:57 Speaker 00 That early 2000s time period, we're coming off trend following performance in 98, which was really good, 2002, which was really good, of course, 2008, which is in a way where the allocators saying, even though you've been successful, we don't want it.
5:15 Speaker 01 You've been doing something wrong if you made money in October 2008, that type of period, we don't want that.
5:21 Speaker 00 I think it was Ben Stein, maybe other people said it, that if you made money in October 2008, you were doing something wrong. Isn't that a great line? If you and I were to say to the audience, but we can give you verified data across untold numbers of traders who made money in October of 2008, not by predicting anything, every smart young guy out there should say, you know what? Let me prove that to myself. Let me go Richard Feynman. Let me hack this thing out. Let me go work it. Let me run the numbers, right? It's such an interesting space to be in with trend following because I find after all these years for me, I still don't see the curiosity there, which is leading to another issue I'll bring up in a second, but the curiosity as to why this works, which
6:05 Speaker 00 gets back to my question to you, that if you crank down the volatility, which so many allocators are doing, aren't you changing the strategy? You're changing it. If you're saying, we don't want that potential upside, I get that they don't want the downside, but they're also saying they don't want the upside, which changes the whole dynamic of the strategy.
6:24 Speaker 01 I agree, because the strategy, the classic or the core premise of the strategy is built on taking an appropriately sized bet.
6:33 Speaker 01 Getting out of it goes against you, keeping losses small and letting winners run for as long as it takes. And we can't forecast wherever these trades go. Outlier trades, cocoa and coffee and orange juice and all these examples, there's many more in the historical track record. I think this is the right approach. Take these risks, don't be reckless, but allow them to become big and allow these trades also to become concentrated parts of your portfolio. Don't dial them down. If you respond to the trade becoming profitable, because think of cocoa, for example, right? You start the trade at a level of $3,000 per ton, it goes to $12,000 a ton, so it has four Xed. The notional value of one futures contract is now four times as large.
7:18 Speaker 01 If you keep the same number of contracts in your portfolio, obviously that trade has now a much bigger footprint relative to other trades that have not performed as well. So ask yourself the question, is that something that you allow the trades to do or not? In our case, we like that because yes, we accept the fact that cocoa now has this bigger footprint and is moving the portfolio, but we're sitting on a big winning trade. That trade has produced a tremendous amount of open trade equity, unrealized profits. And that is essentially somebody else's money because it's a clearinghouse. We've been booked, we've been credited variation margin from somebody else who has had the opposing position in that same futures market, sitting at a loss.
8:01 Speaker 01 We're very liberal with other people's money when we play the markets, but if it's our own money and it eats into our core equity, then we get out quickly. Think about it, Mike, if you dial down that trade because it's become too big or because it's become too volatile, then the only thing that you do or what you must do is you need to sell futures contracts, you need to reduce that position. That is a profit-taking trade. That is a hidden mean reversion trade. That is the opposite of trend following where you're supposed to let winning trades run on.
8:30 Speaker 00 Do allocators know they're doing this? Do you think conceptually they know they're doing this or do they sit there on high with 10 PhDs behind their name and they just unilaterally say, we can just do this?
8:42 Speaker 01 I don't have the answer to that, but I know it's happening. Like, it's this big thing across the industry where you change dynamically change your portfolio in response to changing volatilities and correlations. And in our case, when we do a sum total across all these trades, like we flag them as like dynamic position sizing trade or some sort of a overlay adjustment trade that is essentially an overlay to an already extremely good, robust trend following system, the sum total of these trades is a negative for us. They don't work. And you pay commission and you pay bid offer and you have slippage and all that type of stuff. Yes, what we do get is a smoother day to day, month to month return stream, more like
9:24 Speaker 01 to a target, not laser pointed, but yes, you can use that technique if you say, I want to produce 10% volatility kind of every month. That's not our aim. We don't care if we have 15% vol in one month and 25% vol in another month, it could happen. But the folks that want to have a constant 15% volatility, the only thing that they can do to get to the level is to dynamically change their position sizes up and down. And that overlay, it essentially is an overlay to an existing robust trend following system that exists since decades, as you know. That, to me, is not a good fit. It's just not a good marriage with trend following.
10:03 Speaker 00 You brought up cocoa, and for people that don't know, cocoa was a fantastic trade in 2024. Absolutely amazing. Go look at the charts, go look at the data. But I think something that's really lurking in this conversation about the allocators, the people that control the pension funds and the dallomons, et cetera, and they say, we want to give an allocation of money to the trend following world. We had this moment in time in 2002. We had this moment in time in 2008 where equity markets puked.
10:35 Speaker 00 Equity markets were not happy at the beginning of COVID, but there was a lot of magic wand waving and whatnot. And wham bam, thank you, man, we're right back to all time highs. The interesting thing for the allocators, and they don't necessarily care because it's all relative to them. I mean, if all their friends are doing bad, when a bad time happens, why do they care? It's all relative comparisons, right? But I think what's interesting for the individual out there is to think ahead and say, well, we had this moment in 2002. Equity markets bottoming out. We had this moment in 2008 with essentially a crash. And now it's 2025.
11:17 Speaker 00 And we've got boomers that are in this very large demographic with lots of money. It goes without saying, all one has to do is peek at the news occasionally to see that the narratives are entirely different. So I just wonder, how could the smart people at the allocators not imagine that we could have the equity market dislocations again? And historically, when we have had these equity market dislocations, there is one particular strategy, the one that you and I are talking about today, that does exceptionally well.
11:48 Speaker 01 You definitely cannot discount these probabilities to zero. You can't discount anything to zero as far as I'm concerned in the markets. Stuff happens. Black Monday, 1987. Yes, it hasn't repeated in that fashion since that day, but we've had a flash crash, I think, in 2010 in the S and P 500. I definitely would not bet against another black Monday at some point in time. I'm not betting against not seeing a 50, 60, 70, 80% drawdown in the S and P 500 at some point in time. It can happen. Maybe we should say it will happen. We just don't know when. So you have to be prepared for that. This is our strategy. This is what that system does for us automatically.
12:29 Speaker 01 We'd be getting out of a long position if we had one because we have give back or we go into the initial stop. And if the trend to the downside is strong enough, then guess what? We'll be opening a short position and we don't overthink it.
12:41 Speaker 00 How will the watered down trend following do in a similar type equity market meltdown as?
12:48 Speaker 00 Seventy-three, seventy-four, or summer of ninety-eight, or two thousand two, or two thousand eight. That's an interesting thought, too. Will you have trend-following performance?
12:59 Speaker 01 We don't exactly know how the market patterns are going to be playing out in the future.
13:04 Speaker 00 Not necessarily market patterns. What I mean is the, quote, "less volatility trend-following," how it might perform during a comparable equity market period.
13:15 Speaker 01 How much bang for the buck do you want? This is an interesting question. Most people, unlike maybe you and I, who are hundred percent trend-following, they view trend-following as a component of their portfolio of stocks and bonds and sixty, forty, and risk parity, and all the other things that they have there. Now, the protective characteristics which trend-following can have, there's not a guarantee that these, it's not a hedge, but there is a tendency for trend-following strategies, as we've just said, to start working really well during times of stress. When everything else in your portfolio is red, trend-following has a tendency to become that beacon of green. Now, how much green do you want when you are going into a fifty percent S and P drawdown?
14:00 Speaker 01 You want quite a bit of green. In essence, you want a higher-octane trend-following version so that you can really have some balancing effect in your portfolio. If you have a CTA system trading at eight percent volatility, steady at default control, during these times, it's not going to make you one hundred percent. A manager such as Mulvaney, or Dunn, or Drice, or Tactical, Dave Truce, or us, Tuckahay, I'm not saying that we will, but at least we're positioned in such a way that we could. And that is important.
14:31 Speaker 00 Let me keep you at a word that you have used many times. I know it's habit. I know it is industry jargon. I'm not sure what percentage of regular investors know the term. CTA, commodity trading advisor, a term of regulatory meaning from the United States government. It is a broad term that can include any strategy. We're trading futures primarily. And I've beat this horse for a very long time. This term can include many different types of strategies. I would say, though, for those listening, To keep in mind, if the word CTA can be synonymous with trend following,
15:14 Speaker 00 however, it cannot be, meaning there are people out there, there are firms out there, funds out there that will call themselves CTAs and their strategy may have absolutely nothing to do with trend following.
15:26 Speaker 01 Very good points. I'm as guilty as probably most people using that term over and over and over again. But yes, you can have CTAs trading mean reversion on the S and P 500, off scalping the WTI crude oil futures contracts, which has nothing to do with systematic, diversified, long-term trend following trading, which is probably the box or probably the name that we should be using, but it's a longer name. CTA just is convenient.
15:49 Speaker 00 Back to the core issue. Let's talk about mindset because here I'm Gen X, you're Gen X. We've got frankly, I guess, a lot of the most successful trend following traders of the last many decades were boomers. But Bitcoin and crypto is interesting because at the same time, you have the allocators saying, we only want XYZ volatility. You have an entirely different appetite for risk, entirely different subset of investors that are saying, no, we want the home runs. We want the big money, which would have been
16:30 Speaker 00 the same kind of mindset that Bill Dunn would have been raising assets. And it would have been those kinds of people, no Bitcoin in the seventies. But I would think those types of appetites would have been the foundation for so many of the legendary trend following traders that we've all come to understand. And it's interesting that we've got these different appetites that are being thrust upon us. I'm not saying anything about the strategy of buying and holding any particular crypto. But then again, a lot of people have seen a lot of money made that way. Why don't you speak to that issue, though, the mindset of these different types of investors and perhaps how that's come to be or come to happen? Because I think before crypto, there was probably that 10-year period in the early
17:15 Speaker 00 thousands where it didn't feel like, especially around the Great Recession, that people wanted.
17:22 Speaker 00 Big returns anymore. Crypto came along and it sure proved that a lot of people want big returns.
17:28 Speaker 01 I'm really surprised by that as well, especially during the past, say, 15 years where in many parts of the world, interest rates were really low, if not negative. So you have this period in Europe and Germany, for example, where interest rates were negative. In Japan, they were negative. At least to me, that would be the period where you would go, hey, I need to make some big returns because nothing else really is available. People didn't go for that. They wanted three, four, five percent and they were happy with that. Now, you have all this hidden inflation, you know, all that type of stuff. But to me personally, I'm here sitting in front of the computer. I'm doing what I love doing, but I do it to make money and it has to be more than 5% a year. Now, the flip side of that is there can be years where it's negative 15 or negative 20.
18:12 Speaker 01 There are years where it's plus 35 or plus 50. But over the longer run, the Kagar of what we want to do needs to be substantially higher than 5%. Otherwise, I should be looking for a different job.
18:25 Speaker 00 To keep it at me, moment talking about assets under management. It is worth bringing up that a significant number of trend following traders, or at least traders that built their foundations on trend following performance and perhaps raise their assets off that are doing, again, the low volatility approach. I wonder how that kind of shakes out over the very long haul. I completely salute anyone that builds a business and says, hey, I've got this fantastic track record. I'd love for you to invest in me. But then the strategy changes. I'm going to be the person that's always going to beat the drum. I'll have a conversation with anybody on this podcast.
19:06 Speaker 00 I will speak with any trader in the trend following space predominantly. But I don't know what to say once the strategy changes. There's got to be a tent pole that we all agree that this is this thing, this amazing thing, this amazing idea, this set of rules, these techniques, these systems that were discovered and they seem to be timeless. And they're predicated off human psychology. They're predicated off supply and demand. I just don't know what to do with the fact, once it all starts to become something else. And I think you kind of hinted at this with me when we were communicating before the conversation, which is, and you've already said it in the conversation, about 99% maybe not going the perspective that you and I would prefer. What happens into the future?
19:51 Speaker 00 Will there be the trend following traders publicly stating what you and I agree with? Or will it just become kind of some marketing stuff out there where no one really knows what the truth is anymore?
20:03 Speaker 01 It's a lot of marketing, 95% systematic, 5% discretionary. It's the desire to cater to the concerns of investors such as can you give me a regime identification filter? Because trend following trading is so hard, as you know, like psychologically difficult, painful at times because you have substantially more losing trades than winning trades. Nobody loves that, right? You need to have that thick skin to work with that system. It's very tempting to put a lot of research effort into finding the aspirin or the ibuprofen pill that takes care of that pain, makes that system better by removing these losing trades and making everything more palatable. So investors want that.
20:46 Speaker 01 They express that desire and I'm not criticizing that managers try to find a solution and respond because they're entrepreneurs, they want to build their business. But like you say, it does change the foundation of the strategy.
21:01 Speaker 00 It also creates opportunity though. I don't think we'd be talking right now if you didn't think it creates opportunity. If you have this fantastic strategy where other people say, let's water it down. It does create opportunity.
21:13 Speaker 01 It's like it's back to the future in a way because the opportunity is to essentially go back to where it started. Because this is now the space that is relatively uncrowded.
21:25 Speaker 01 Think about Nash equilibrium, right? Game theory. We're all facing competition. If everybody is trading the 200-day breakout and everybody's trading the S and P 500, everybody is doing vol control at between 10 and 12% volatility, then that is the very competitive red ocean space. And we have no business competing in that space. And in fact, it wouldn't be very smart to do it. But if there's only three, four, and honestly, Mike, there's not even a handful of these higher volatility, higher octane managers left standing. You and I know who they are. Then maybe that is the much more attractive niche, especially if we can also be intellectually honest and say, you know what? We're not in the business of scaling.
22:08 Speaker 01 We're not in the ego business of scaling into the billions, which, you know, I think many fund managers, hedge fund managers, they have that desire to become a multi-billion dollar fund. We don't have that. In fact, we have language in our legal offering documents that prevents us from going to that level. We have a hard stop at 500 million, but we'll be trading 500 million at a higher level of volatility. And that means that we can also go into the markets, which are relatively smaller. They're not like the S and P 500. It's canola and orange juice and rapeseed and palm oil and power and frayed. These type of markets.
22:46 Speaker 00 These are markets that you have immense fundamental knowledge with, right?
22:51 Speaker 01 Zero. You know, zero fundamental knowledge of Bitcoin and all the other, like there's natural gas and power. These are all high volatility markets themselves. But if we apply a trend following system to them, then we can cope with their natural volatility by keeping losses small and letting the winning trades run. We don't necessarily care if a market is very volatile or not. This is a sweet spot for us. And not many are willing to operate in that field because it means you're giving up on the institution investor. The institution investor is never going to be your friend. He's not going to be knocking on our door, requesting a 25%, 30% volatility trend following strategy. They'd be freaking out.
23:32 Speaker 01 But we do have high net worth individuals, family offices, people that really understand the way we trade, by the way. We have personal conversations with every single one of them. Nobody's allowed in the fund if they don't have a chat with us. We can also kick them out, by the way, if we don't like them. We just want to have this good fit between us and our investors. And we want them to understand in advance what it is that we're doing and that they need to have some patience to experience that way of trading.
24:03 Speaker 00 Help me work through what I'm going to put on the table. Boomers in America essentially got big time control in the 90s. Well, they got a boomer president in America. Boomers have been at so many key power levers in America. You'll have to tell me about Europe. I would assume it's probably comparable. And even today in America, the leaders, so if you think about a presidential leadership in America has been boomer since the 90s. It's a very large population. And some of these great trend following traders that we all look up to were boomers. And a lot of their clients were boomers. So what's interesting is this particular generation does extremely well with these strategies.
24:45 Speaker 00 But as they kind of age and gain more power and more control, they're seemingly squeezing out other generations from experiencing the same opportunities. Why would boomers all want to have high vol trend following trading when they're in their youth? But then as they age, they wouldn't want to think that Gen X, millennial, Gen Z, et cetera, would want the chance to get some of those bigger returns younger in life.
25:12 Speaker 01 The cross section of our investor base is actually, call them relatively young, younger than us. Maybe they've experienced Bitcoin or other things or the big tech stocks, but they kind of like get it like, I don't want to make an investment that will make me 4% per year. That just doesn't move the needle for them. Want something that at least can have the chance of making them big money. And when they look at the trend following managers across the databases and you just do a sorting function, you know, you can go to any of these databases and sort them by KAR, sort them by volatility, whatever your metric is, there really aren't that many left that have higher levels of volatility and therefore also higher returns.
25:57 Speaker 01 In fact, we've done the analysis, the median return or the average annual return and obviously the average realized volatility of all our benchmark indices, the subvention CCA index, the beta 50 index, whatever you want to use there. It's all been down, down, down over the past decades. Volatilities have come down, returns have come down, and we don't want to swim in this pond.
26:19 Speaker 00 They've come down, but we have no idea what's going to happen tomorrow. And so you need that strategy that's predicated on that. As you mentioned, new clients coming into your firm and implying that Gen X, millennial, younger would be interesting to know is for some of these very established trend following firms, many of which I've spoken with their owners and people that have educated me, fantastic early track records, salute their performance, but I wonder, what is their client base these days? Is their client base boomers? Maybe some still what they think is a taste of trend following, but dial down.
27:01 Speaker 00 With the Bitcoin crypto backdrop, I can't imagine Gen X, millennial and Gen Z are saying, yo, I want to run into a trend following at half all.
27:13 Speaker 01 In a way, Michael, it is logical. I'm not sure if they're boomers, but we can be pretty sure that their investors are institutional investors by and large. So you have the alligator mentality there and their minimum ticket is a hundred million or something like that. And if they're a sovereign wealth fund, they want to do even more, right? In a way, it is logical. We know who these firms are. And by the way, again, I'm not criticizing them. I salute them for the businesses that they have built. Amazing businesses, right? And if you and I were in their shoes, odds are, we would have reacted in the same way.
27:49 Speaker 00 100% true. I think anybody and everybody that's sitting in the shoes of a Winton, or an Aspect, or a TransTrend, Campbell, etc.
27:59 Speaker 01 Great, great firms, and a lot of respect for them. And it is absolutely logical, in my opinion, if you have a business that runs on management fees. Once you've scaled into the billions and you've become this big behemoth with the 100 PhDs and the big DDQ and like everything that the institutional investor likes, and you have this nice return stream at between whatever 8% and 12% volatility that is, you know, easy to digest. It's just logical to sit on that asset base and earn that management fee because the management fee on a relative basis is now so much more valuable than the performance fee was at a lower level of AUM.
28:40 Speaker 01 The way I view the hedge fund space is that if you are a hedge fund, your job is to produce, call it alpha, a different return stream. A return stream that is not beta, that is not essentially cost-free. You ought to produce a return stream that is valuable, uncorrelated, different, based on skill. It can be discretionary, it can be systematic in our case, but it needs to be something valuable and different. If you're good at that job, you deserve to be paid an incentive fee or a performance fee which aligns your interests with the interests of the investor. And if you fail at that task, and it's a hell of a job, you deserve to go out of business. But this is intellectually honest, I think,
29:24 Speaker 01 that in our business, you should be compensated based on that performance and based on the value that you provide to your clients' portfolios. And this is why we're charging 0% management fees. Our only compensation is a performance fee. And that needs to be above a hurdle rate, which is essentially TIBL hurdle rate. So that is a fair and true statement when we say that we're only going to be paid a fee if and when we make money for our clients that beats the rate of return on cash.
29:54 Speaker 00 Bill Dunn inspiration there?
29:56 Speaker 01 Yeah, I give credit to them. We came up with that as well, but they follow the same principle and they've been there before us.
30:02 Speaker 00 Build it, it's when you and I were little kids.
30:04 Speaker 01 Yeah, in the sixties, it is the absolute 100% correct approach. Sometimes we get the feedbacks like, oh, we want you to earn a management fee because if you don't earn a management fee with your type of strategy and you go into a period of drawdown and, you know, it can be one, two, three, four, whatever years, then you'll go out of business because you don't have the management fee to support your business. My answer to that is, yeah, I don't know about this. Honestly, if you start in our line of work, you should have a little bit of, say, reserves to build your business for two, three years. Like any business, two things can happen. Moritz gets run over by a bus. It's kind of like the key person risk.
30:47 Speaker 01 Okay, so if that happens, there's another team members I have, hopefully they'll be in a position to continue with the business, but there's a key person risk cost. Hopefully the account will be at a new equity high, you get your money back. We're all trading liquid instruments, so no big deal. If we're failing to make money and we're going out of business because of underperformance or relative underperformance to peers, then we deserve to go out of business because apparently there's people who do a better job and there's better investment opportunities available for your money, so you should redeem your money from our fund. That then is likely the case because we won't be at a new equity high. We will be in a period of drawdown or something like that.
31:28 Speaker 01 And yes, we may run into some sort of financial stress because we depend purely on a performance fee. So again, you get your money back, it's liquid stuff and you'll have it back within one, two, three months. What's the big deal? I fail to understand the argument that sometimes is put forward that managers need to have a management fee because it provides stability for their business, yes, but also for the investor. I don't get the investor thinking there.
31:52 Speaker 00 Let me keep it at your... Point with the key person risk. This is something I never heard 20 years ago. Right? And if you think about it, at the onset of anybody understanding what trend following is, it's typically one person looking in the mirror going, I know what this is. I'm going to do this. I'm going to become a trader for clients, a manager for clients. And so at that moment in time, there's a quote key person risk. But look, if something happened to the key person, okay, it withdraw their money, they move on. But I think what's even more interesting about this singular person notion as we talk about
32:33 Speaker 00 these very large funds that have grown to have, as you state, the billions under management, the hundred PhDs. A single trend following trader very well could have had a PhD. I know several of them. I know many that did not. Right? But they all started as essentially one man shops. The intellectual exercise to develop the system, to develop the discipline, to move forward, did not require the dog and pony show. It did not require all of this stuff. So if we're really, really, really being intellectually honest, we would say that, yeah, okay, we've got this massive firm now.
33:15 Speaker 00 But the reality is the strategy doesn't really require all this other stuff. The other stuff has been built up because we've got a successful, huge global hedge fund and we're going to do our level headed best to find additional alpha. And we want everyone to feel like we're an established bank, so to speak. But the vast majority of this success is based on these simple damn rules that go back to David Ricardo, Richard Doncic, et cetera. I mean, one can complicate this tremendously, but it's not complicated.
33:47 Speaker 01 Dave Truce has a PhD. He's a medical doctor. He didn't have a staff of 10, I think. I know for a fact that. Bill Dreis's CTA, Dreis Research Corporation. I ran his trading desk for a while, so I was involved. It was essentially two, three people. It was Bill and I was doing the trades. Definitely not five. We use computers. We input the data. Ology gets better all the time. Python code, it runs, it's in the cloud. You don't need that many people to run a diversified systematic trend following business. You just don't. There is no need for that. Maybe at some point you want to add one person that really understands regulations and all the legal stuff,
34:32 Speaker 01 because that becomes more and more and more and more. And it's definitely not the thing that I enjoy spending most of my time on. But do you need 10 people? No. For us, for our type of business, no, you don't.
34:46 Speaker 00 And let's be honest too, some of the very, very large trend following firms, and we're talking about massive profits. So in some sense, even with the staffs they've assembled, it's not a huge expense for them necessarily. I mean, they're still massively profitable. See, it's just always going to be fascinating for me, especially knowing from where so many of the biggest names started from. And I always go back to the commonalities, the similarities. You might have, as you mentioned, Dave Druse, Bill Dreis, some examples. There's other folks that have multi billions under management.
35:25 Speaker 00 I salute them all, but I will always do my level headed best to bring it back to what's the core? What are we talking about? We are talking about this strategy called trend following. And yes, investors have a choice. They can say to themselves, I learned about this trend following thing. I'm going to give it a shot myself.
35:43 Speaker 02 Yeah.
35:44 Speaker 00 You know what? I have no desire to do the day to day and I'm going to hire Moritz. Right? It's this kind of simple world. It can get more complicated. Like me, I'm a small budget, so to speak, in terms of what my marketing message is. There's multi billion dollar funds out there, filling the airwaves with other messages.
36:06 Speaker 00 That's all fair, but they're never going to deceive my core honest, not saying anyone's dishonest. Here's the trend following, and this is the most amazing thing that still keeps me excited after all these years.
36:18 Speaker 01 That is exactly our focus, and I think that is our competitive advantage as well. We're not charging management fees. We're in this higher volatility space of our industry. Not many people are there. We're catering to a different type of investor profile, maybe more the Gen X and Millennium people, unless the booters, I don't know, this is what we're building a business on. And I find it incredibly enjoyable as well, especially because it frees me. Like, imagine we had like 20, 30 people or 40 people. You run this matrix organization, you're responsible for them, you have to give them something meaningful to do. Otherwise, they're unhappy. It wouldn't be fair of me to employ anyone and not give them a meaningful work and responsibility. But in our line of business, what do I want them to do all day long?
37:01 Speaker 01 We're not doing AI. We're not doing reverse trading. We're, it's like Occam's razor.
37:08 Speaker 00 They're paying for you to operate a high vol trend following firm. That's what they expect you to do. If they have an understanding of what that is, then they will appreciate everything you just said.
37:22 Speaker 01 Yeah, and the less people we have, the more efficient we run our business, the more cost efficient we run our business, the better it is for the investor. It just means that we don't need to charge as much, you know, we charge zero anyways. Look at the multi-strat shops, pass through fees. The salaries pass through, the Bloomberg terminal is pass through, a flight ticket is pass through. Well, I'm not putting my money there, for sure not.
37:47 Speaker 00 It's just fascinating how things have unfolded.
37:49 Speaker 01 They're definitely not high vol. I have not seen a multi-strat pod shop at kind of like 20% volatility. Gris Rocos has 20% volatility. Pieranderent has much higher volatility. And sometimes they have these big miss years and sometimes they have fantastic years. That to me is a better way of trading.
38:09 Speaker 00 I'll give you a thought too, as long as you can. Be the point person, be the speaker. I learned so Much from listening to these early pioneers, direct, direct, the business development spokesperson out at an event in Chicago or London. It was Bill Dunn or Tom Bosso. Those guys went out and hustled. I get it if there's massive, massive success and it's not necessarily relevant anymore to large asset allocators, but I think for the conversation that you and I are having today, potential clients and investors in you are going to enjoy hearing more from you over time.
38:50 Speaker 01 We have a zero salesperson policy at Tuck, Hey Capital. We don't employ one and we're never going to employ one. We're not flooded with like thousands of investors requests per month anyways. The few that we get in our line of business during any given month, come on, I can have a 30 minute conversation with them and I'll enjoy it. And I want to get to know them anyways and see if they really get what it is that we're doing. And if they understand the risks and the ups and downs and the pains and the pitfalls and all that type of stuff, I think that's good for me. It's good for them because it just gives me a chance to prevent that they're going to be a disappointed investor because that's bad for them. That's bad for us. If they're unhappy, they'll redeem or it just, nobody's being helped with
39:35 Speaker 01 that. So no, we are representing my business partners, the other Moritz, Moritz Haydn, who I think you've met as well. We represent the business. Speak to us. We just tell you how it is.
39:47 Speaker 00 The most important thing as you bring me into your world and how you see opportunities and how you lay out the landscape. I mean, I stay so focused on strategy. I don't necessarily keep my finger to the pulse on the machinations of the industry. But I think the opportunity now, if one tries to be a historian for a second and look at capital flows, look at bond movements, look at equity market movements, look at assorted countries, look at where we've been over the last handful of decades. It just seems like a fantastic place to be. Trend following, that is. High volatility traded as the pioneers traded it.
40:31 Speaker 00 A strategy that I could easily see. Heck, it could happen this year, could happen next year. But I'm just saying is it's easy to imagine. And I've said this in my trend following book. It's easy to imagine updating the book with the next series of meltdowns, where everyone was questioning whether this high volatility trend following was really worth it. And then all of a sudden, equity markets from a buy and hold perspective are down 50% and trend volumes up 100% from a high vol perspective. I think the audience should be thinking about that. Imagine what could happen, even if we can't. Like, try to not just be trough drinking what they only tell you in the major media messaging.
41:15 Speaker 01 Probability are all the things that could have possibly happened and not just the one instance that happened to materialize. We don't have the crystal ball between now and 2030 or 2035 or 2040. People are rumoring a Mar-a-Lago accord. I mean, my stuff will change in our world. Financial markets are going to be up and down and they're going to be volatile and nobody can forecast them. This is exactly why you say if you update your book in, say, 2030, it could be at a point in time where we're doing fantastically well. Could be at a point in time where we're just drifting along sideways.
41:49 Speaker 00 I'll make sure to update it after a big run.
41:51 Speaker 01 After a big run, so there you go. Selection bias, but the beauty of our strategy is, yeah, we can have these periods of drift and or drifting lower because we're taking these small losses over and over and over again. But we're preventing killing ourselves and our portfolios with that way of trading. This is a form of resilience. It's a form of longevity for the strategy. It's universally applicable to all markets that are liquid that we can trade. We don't necessarily care at all if it's Bitcoin or power or gas. They're all non-normal in their return distributions. They're all tailed on both sides of the distribution. That is what's so difficult for most investors to get to because these tail events,
42:36 Speaker 01 they are these outlier moves. They're so crazy sometimes. They're so chaotic and there's nothing that you could possibly forecast.
42:45 Speaker 00 Your strategy is fond of catching those outlier moves when they do happen? I don't want to go there now because it'll just be a much longer conversation. If we were to ask general population, college educated, perhaps professional, what percentage of investors were aware of the idea of trend following? I don't think it's a large number.
43:09 Speaker 01 Yeah, and also you've mentioned the outlier. By definition, once you have such an outlier price move and the chaotic price behavior, there's really nothing that you can do from a statistical perspective. You're missing sample size because there aren't that many of these massive instances that happen. So but then to figure out, oh, I could be dialing down the position size or changing this or overlay this or filter this or regime identify this. If you are in that part of the return distribution where chaos looms, there's nothing that you can do other than just roll with the punches and enjoy the fact that you have kept your losses small. You're now out of the dangerous zone where you had this initial stop. You're somewhere sitting on open trade profits. Let's see what happens.
43:53 Speaker 01 Once you have these trades, very likely going to be winning trades. The question is just how big is the winner going to be? And that cannot be forecasted. So just let it rip. Be open minded about these price excursions. One of the fallacies of human beings is you think everything is going to be around the mean in an orderly fashion, you know, up, down, up, down a few basis points in these markets. But no, be open minded about the fact that you may be waking up tomorrow and the S and P could be down 10%.
44:22 Speaker 00 How do you feel when you have to have a conversation like this? A touch more professorial, a touch more academic, and then you get the wild man me on the call?
44:32 Speaker 01 You're not too wild, you're as wild as most of us are, but maybe the final point with all your books, great books, all the information that has been put out on systematic trend following trading at Taka Hay, we're very open books about the way that we trade, almost down to the point where we're like, this is actually the system that we're using. Now, over all these years, I would have thought that people get their heads around and they really kind of like genie's out of the bottle, everybody knows how these systems work. And to my surprise, that is not the case. Repeatedly, we're being asked, how do you size a position? What is this ATR thing? To our investors, like I said, we're completely open books, but I'm putting less and less
45:16 Speaker 01 of these things sometimes now out in the open because it's maybe this still our secret sauce and I don't want too many people doing it.
45:24 Speaker 00 I'm sure you've felt this as Gen X, I've started to feel in the last couple of years, as you get a little bit older, you start to see your place, there's always another generation coming up that doesn't have the information, has not been exposed to some of the things that you and I have been exposed to. I think it's even harder because when I first got involved in this, it was in-person events or listening to audio cassettes that had been recorded of pioneers and raw data and magazine articles where you could tie what was being said in the article to exact performance. There was no BS and if I saw BS, I would call it out, but I really loved the reporting
46:07 Speaker 00 of that age of the 90s and the early 2000s, post the Great Recession, anybody can make any claim. And I'm still surprised that people don't look to the data, at least learn something, learn a lesson, figure out how things work by looking at the raw data that came before us. But maybe that's another thing also that maybe some generations are not growing up with that scientific method approach, that skeptical approach, the Richard Feynman approach of let's go dig under the hood.
46:37 Speaker 01 And staying in your circle of competence. I've alluded to earlier, we're not using AI or machine learning techniques.
46:45 Speaker 00 If you are a high-ball trade following trader, how would that stuff help you? On the margins perhaps in some way, but it's not going to help you to catch that cocoa trade last year.
46:54 Speaker 01 No, exactly. Like I said, I want to be open minded about these things, but also very cognizant of the fact that that is currently way outside our circle of competence. And we're staying away from these hot air type of things. Oh yeah, we're using AI only because that pleases some investors who want to read about that stuff on our website. And if you don't use AI, you're kind of like old school. I only want to do these things if there is a statistical value add, if they really help us to make money and become better. And if that's not the case, we just stay away from it.
47:26 Speaker 00 I'll leave you with this. Speaking of AI, you probably don't know that I'm actually AI now. This is no longer real. I'm completely 100% AI. I was talking to a video professional the other day and he knows his stuff. And he assured me six to 12 months now, AI Mike will be completely past the tests and no one will know. I'm not sure I believe it, but we'll see.
47:48 Speaker 01 Yeah, that's true. Jared Parker, he probably still says that the AI may very well learn to buy the 200 day breakout. That's when we're done with AI. It'll just do what we're already doing.
47:58 Speaker 00 Hey, Moritz, your firm's got an interesting name, but where can we send people?
48:04 Speaker 01 Takahay dot capital. That is probably the best access point. You can contact us through the website. We're called Takahay because it's a flightless bird. Every couple of years, trend following has declared debt extinct. It's no longer working and the Takahay, South Island Takahay of New Zealand is one of the rare species that got declared extinct twice. And it always came back. It just moved to a higher altitude in the New Zealand mountain range where it could adapt better. It can't even fly, like I said, but it's still around, refuses to go away like trend following.
48:35 Speaker 00 The website, though, just so people are catching the name, T A K A H E dot capital.
48:42 Speaker 01 Correct.
48:42 Speaker 00 We're at school stuff. We'll have to do this again.
48:44 Speaker 01 Yep, we will. Thank you.
48:52 Speaker 03 I see a time when those awake will understand how to make money in up, down, and surprise markets. Whether a new trader or experienced, college student or financial advisor, protecting against a crash or just trying to make a lot of money, trend following offers everyone an answer in uncertain times. To get started immediately, send me an email, [email protected] . I will send you the right trend following steps to take along with my free video. But if you want to buy and hold, trust the government and trust Wall Street, this is absolutely not for you.
Previous Ep. 1330: Trend Following Trading Systems with Michael Covel on Trend Following Radio Next Ep. 1332: The Basics Make You Rich with Michael Covel on Trend Following Radio Page updated November 7, 2026 · transcript and summary are machine-generated
