Best of TTU – Return Dispersion and How to Successfully Adapt

In today’s post, I would like to share with you some really great moments  and unique takeaways from  a conversation I had with Marty Bergin, the president and owner of DUNN Capital Management, where Marty shares his views on Return Dispersion and how those experiences, together with extensive research, has enabled them to produce a more robust trend following process for their clients.  If you would like to hear the full episode then you can just click here

Katy:  I have a question too, one of the biggest challenges we’ve had in the industry has been return dispersion for investors too. It’s that you have one fund up, another fund down, it seems that there’s a lot of difference in terms of how performance has not been very consistent across managers in the space and that creates a lot of confusion for the investors.  
How has your experience been with this? Have you encountered… Do you have some thoughts about how DUNN sees that and how you have fared in this sort of change in the industry, and what do you think drives it? 

"There’s always a sweet spot for your period of time you’re looking back over. "

Marty:  Gee whiz, Katy, you’re the expert in this area. You’re the one that should know these answers (laughter). This is my opinion, which you can tell me whether you agree with my opinion or not. 
Katy:  I want your opinion. 
Marty:  I think it really has to do with time periods that people are looking at. There’s always a sweet spot for your period of time you’re looking back over. I think one thing that has worked well for DUNN is that we don’t put any restrictions on what’s available to the program from a time constraint. It can go as short as a week and as long as four or five years if it chooses that.  
Now, the parameter selection process is automated, it happens weekly, but it doesn’t matter that it happens. It’s not imperative that it happens each week. We can go eighteen months without any real difference in return, so it’s not sensitive to the parameters.  
I think it’s important that you allow the system to evolve between shorter time periods and longer time periods given whatever the investment environment is. That’s the only reason I can see why… Well, that’s one of the many reasons why, I think, we’ve been able to manage this environment well. Between the ARP, between the uncorrelated revenue streams that we have, and the adaptive nature of our system, we have an exit strategy that has been implemented over the last five to seven years. All these things have made us better. 
Katy:  Yeah, I mean it’s been a very… If you think about it, the reason that I’m interested is that you’ve done very well for your investors over the last few years and it has been very challenging. Quantitative easing, very low trends… 
Marty:  It’s been one of the most difficult environments that I have ever seen in what we do. I thought this was going to be easy, and you look at the post-financial crisis and it has just been a hard road for trend following systematic managers. What’s happened is the central banks have created this environment where everything is correlated across all the markets. So, in reality, I ask myself, “Do we have diversity?” 

What is diversity? So, people are investing in their stock portfolios. They go to a mutual fund, “Oh, we’re a diverse mutual fund. We have a hundred and fifty holdings. Nobody has more than two percent of the AUM, all these stock names, pretty diverse, right? I would proposition no. If all those stocks are highly correlated aren’t you truly only invested in one thing? 
That’s the same thing that happens in the managed futures space when all the markets become correlated. It’s a lot harder for our markets to become correlated because it’s the softs, it’s the energies, it’s the metals, it’s the currencies, it’s the interest rates, it’s bonds, it’s equities,