As investors and traders, we all strive for success in the markets. But what sets the best apart from the rest? According to Kapil Rastogi, the President and co-founder of PlusPlus Capital Management, it’s all about having the right culture. Ranking among the best in the industry in RCM’s semi-annual rankings report for best risk control certainly doesn’t hurt either.  

 

In this episode of The Derivative, Kapil shares his insights on a range of topics, including his personal journey to becoming an investor and trader, how compensation structure and successful backtesting can be at odds, and his unique approach to a behavioral approach to trading. He also delves into the importance of culture versus strategy, why most investors are asking the wrong questions, and how to identify a firm with the right culture. With a focus on the two components of success, strategy, and culture, Kapil highlights the significance of hiring the right people and fostering a positive culture.

 

Kapil and Jeff also discuss the concept of skew and how it affects risk, the importance of minimizing drawdown, and how the recent bond volatility has played out in the markets. Through his experience and expertise, Kapil offers valuable insights into what it takes to succeed in the world of risk control. Tune in to learn more about the conscientious culture behind risk control — SEND IT!

From the episode:

Check out PlusPlus Capital featured in our newly updated Semi-Annual Managed Futures Rankings whitepaper!

Look up Kapil on ⁠LinkedIn⁠ and visit ⁠pluspluscapital.com⁠ for more information on PlusPlus Capital Management

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Check out the complete Transcript from this week’s podcast below:

The Conscientious Culture behind Risk Control with Kapil Rastogi of PlusPlus

 

Jeff Malec  00:07

Welcome to The Derivative by our RCM Alternatives, where we dive into what makes alternative investments go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Hello there, we did it somehow the rankings white paper, I’ve been teasing about it on the pod here for the better part of six months, but we finally completed it is being released alongside this pod. Sort of my baby ranking methodology I came up with years ago, which tries to measure all the different aspects of a track record important to investors. Some investors look for the best return some for the best sharp others for the best more others just for the lowest drawdown, we show Best Buy all those and then combine them into an overall ranking. So it’s kind of fun, it’s kind of interesting to jump over to our cmos.com/rankings to download the rankings. After you do that, go subscribe to the pod if you haven’t already, because we have macro Alpha coming on next week to dish on the banking crisis inverted yield curve, if the Fed is trapped, and all the macro nonsense you could want, it’s going to be fun. Okay, that brings us to today’s episode where we have compiled Hristo gi A plus plus capital, which happens to be in our best buy risk control listing and the white paper we mentioned, which we’re going to be doing over the next couple of weeks here of trying to get as many of those top rank managers on as possible. I wasn’t quite ready for him to say the secret sauce is culture, but that’s where we went. He’s also got some quant stuff in there that helps with that risk control. But it was an interesting chat. Couple also talks through the pitfalls of back testing and overfitting why he chose behavioral based signals over trend, what questions investors should be asking, but don’t send it. All right, everybody, we’ve got Kapitel. And I’m not going to try and pronounce his last name. I’m gonna let him do it for us. How do I say your last name? resto de resto game just like it’s about easy? No. So Capelle is here with us. I think you’re in Princeton, New Jersey. Right? That’s correct. Has everyone all pumped up over the two wins in the attorney?

 

Kapil Rastogi  02:14

Oh, absolutely. That’s huge. Let’s, let’s let’s pray. They can keep it keep it going. Right?

 

Jeff Malec  02:20

Right. I can’t remember who they have next round. But that’s it’s not a huge scene, right, but could keep going. Let’s hope, let’s hope. And later on, I think you’ve got some parallels with sports in your investment style. So we’ll get into that in a bit. But we’ve had Roy Niederhoffer here on the pod dish and some gems and so used to work with Roy and at Niederhoffer. Right. So give us a little bit of a background, how you got into there. When, when and why you left and what you’re doing now. Yeah,

 

Kapil Rastogi  02:51

definitely. So my background. So I graduated from MIT in 2002. And with a degree in math with computer science. I, after that, I started working at Merrill Lynch investment management, out in Princeton. Right. That’s where the world headquarters were back in 2002. Before they merged with BlackRock, I quickly realized that risk management, it was a great place, but I had a real passion for markets. I wasn’t really getting any market exposure. So I started interviewing with different hedge funds, and I got a job at Rice firm, wonderful place to work, that’s for sure. You know, I started kind of at the bottom of the totem pole, being a European execution trader. So right, the very bottom, so my hours, my glorious hours, were 1am to usually leave it around 1pm or 2pm. Eastern Standard Time. So yeah, I mean, you know, and I did it because look, it was, it was a, it was an opportunity, you know, and I knew this is what I wanted, in the long run.

 

Jeff Malec  03:57

And myself, quick sidenote, Mike Harris of now at Qwest and formerly president of Campbell and president of the MFA, started as a European desk guy. So for all you young listeners out there who want to get into the industry, go beg and plead at a hedge fund to say you’ll work the overnight hours.

 

Kapil Rastogi  04:13

Absolutely, absolutely. I look, I think was a wonderful experience. You know, obviously, not great for my social life. But hey, you know, it’s, you know, one thing I talk about a lot is like, you know, if you want something badly enough, you’re gonna have to you have to sacrifice a lot to achieve it. Right? There’s, that’s a universal rule of life. So, yeah.

 

Jeff Malec  04:33

Were you up there in Vermont, or New Hampshire or wherever it is? No, he was in the city at the time. He was in Manhattan. Got it. Okay. Yeah.

 

Kapil Rastogi  04:41

So I did that for about two years. And then I came back from New York shift. And kind of, you know, interesting anecdote is, you know, for the first two years, Jeff, I started trying to develop strategies and like pretty much every strategy I tested failed miserably. because it’s a colossal failure. And the one thing I tell you, I do guest speaking to different universities, including, for instance, in my neck of the woods. And one thing I tell people, you know, a lot of young individuals that want to break into our field is, look for the first two years of almost every strategy I back tested didn’t work. And when I finally did get one that worked with statistical significance, we put into live trading. And it did. And, you know, what happened is that it just lost money, lost money and lost money.

 

Jeff Malec  05:34

Yeah, I was gonna say the back testing is the easy part. The live trading is even the harder part. But you got it. So you were even struggling in the beginning on the on the back testing part?

 

Kapil Rastogi  05:43

Oh, absolutely. I mean, and finally, when I got the back test to work, the live training part, hey, you know, I can’t tell you what it feels like to just kind of watch your restaurant and you just kind of bleed money and live training

 

Jeff Malec  05:55

I’ve been.

 

Kapil Rastogi  05:56

And so, you know, again, it all boils down to perseverance, right? I mean, I got I’ve done. I don’t know how many back tests in my career. Definitely, you know, 10s, if not hundreds of 1000s. But I think, you know, after a few 1000 back tests, I think it slowly starts clicking as to kind of like, you know, what works in the back test, and what will actually work in the live trading, and how to normalize those to look that just comes through just sheer perseverance and willpower, and just saying, hey, look, I’m not going to give up. Because there’s no book to teach you how to do this, that’s for sure. There’s no training, really. You just have to kind of like, you know, grind it out. And I played competitive sports my whole life. So I’m kind of had that mentality. So I just kind of went after and ultimately, yeah, I mean, the first couple of years. It was really tough. You know, definitely probably the most difficult years of my life, to say the least.

 

Jeff Malec  06:56

And while you’re sitting at Niederhoffer doing these were they like, we got to fire this guy. He can’t even make a good back test.

 

Kapil Rastogi  07:03

No, nothing like that. And you didn’t know he wasn’t he wasn’t really like that ever. You know, he gives people he gives people space. I was very young. So it’s nothing like

 

Jeff Malec  07:13

and what sports were you playing?

 

Kapil Rastogi  07:16

In college? I was on the rowing team. College rower in high school. I played a variety sports. I played soccer. I played volleyball, right there on the Charles River.

 

 

 

Jeff Malec  07:23

Yes. At what is the big event? They had the Regatta? How did the Charles head of the Charles never been? That’s it seems like a good time.

 

Kapil Rastogi  07:34

Oh, you gotta check it out. I mean, all right. Yeah. Yeah, rolling is a great sport, it does teach you just grit. Conversely, the only people that do it are a little bit masochistic. But also, you know, really, you just have to push through the pain. And so that analogy worked well in the hedge fund space, because again, it comes back testing. Look, you just have to kind of just, you know, keep trying things over and over and over and over again. And eventually you’ll kind of figure out okay, well, oh, this is what actually works in live trading. Right.

 

Jeff Malec  08:09

So and, yeah, just okay. So then you’re, you’re at Niederhoffer and you decide somewhere along the way to go off on your own?

 

Kapil Rastogi  08:17

Yes. So the way that worked out, Jeff was, you know, in, you know, in around 2006, I met my now partner, Murat and Lord, so he was the head of software development, I was kind of building a whole bunch of quant strategies. And slowly and slowly, more and more of the portfolio was being kind of allocated to the quant strategies developed. And, you know, I still remember from the I started kind of doing more marketing, just because I knew the market models pretty well. So I started kind of getting roped into marketing a little bit. And for the first time, I saw a peer group analysis

 

Jeff Malec  08:56

of So you mean, talking to investors, basically? Yeah.

 

Kapil Rastogi  08:58

Well, I wasn’t really talking to investors too much. But I was doing some analysis behind the scenes, right, like helping the marketing team, look at correlations. How are we different screen examples? Right? That’s a big thing. You know, for the first time ever, I was trying to do some marketing, which I had never done before. Right. I was just really trying to focus on building strategies with the highest risk adjusted return possible. So the first time I looked at our peer group, I had no idea who these people, these firms even were, right, we’re talking about household names that were credible, for example, I remember looking at the risk adjusted returns. And the first thing I said to myself was, you know, what, if we if I went out on my own, I knew I know that I could produce a higher risk adjusted return than what I see. I knew it’d be a long process. I knew it’d be a struggle. But I knew that that was the first thing that popped out to me. Now, the second thing that popped out at me was wow, what we’re doing, which is behavioral biases. It’s different. There was one are two other firms who are doing something kind of similar? A little bit, but not really, you know? And so I said to myself, Okay, well, you know, what if I could go on my own and do things, which I believe to be, you know, the right or optimal way of doing things, and everyone has their own perspective on this right, but how to build a business, I said to myself, look, I firmly believe that we can be the best in the world, you can be the best CTA out there. And I still firmly believe that, you know, obviously, the results are the results.

 

Jeff Malec  10:30

Right? You can’t go You can’t go for it without believing that right. Yeah. And so

 

Kapil Rastogi  10:35

that’s where it really started. So I had a talk with my business partner, we’re kind of a happy hour. And, you know, I saw that he had a similar kind of vision as I did, which is really to be the best at what we do, right? I mean, that’s really what it boils down to. Having that mindset of, okay, well, we want to be number one. And that’s our definition of success. No, everyone defines success differently. Right? For me, on our firm a success means being number one, number one, meaning having the highest risk adjusted return in the space.

 

Jeff Malec  11:12

Getting into this with Marty Bergen, last week of like, is a lot of trend fathers, their track records are so long that all their warts are there for the world to see. So almost by definition, they’re gonna have lower risk adjusted returns than the newer flavors of hedge fund or even in their own strategy. So a little bit of his just time and the window that you’re looking at. But I think you would fail. Even if you had been around longer in those years, you’re saying like, No, I the way we do it would produce a better risk adjusted return.

 

Kapil Rastogi  11:41

Yeah, I mean, look, Jeff, you bring up a valid point, right? I mean, obviously, look, you have to have a sufficient time period to evaluate a track record right. Now, in our case, our track record is five years, right? So if you look at our five year track record, right, with the model, we have called plus plus global Alpha. I’m very proud to say that, you know, what we set out to achieve, which is the strongest risk risk adjusted return in the CTA space, we’ve accomplished. So we have the highest Sortino ratio of all CTAs in the sock Jen CTA, and Saatchi and STTR in indices, right. So what we set out to achieve way back in 2007, that vision that we had, thus far, I’m very proud to say, has come to fruition, right. Um, and it’s been quite a journey. You know, we, my partner, and I, we spent several years building our own back testing platform, right? easily put in over 10,000 hours, just in the back testing platform alone. People always ask me, Well, why do you spend so long, you know, building a back testing platform, you can purchase one off the shelf? You know, what’s so special about your back testing platform? You know, one thing I tell people is like, look, I mean, at the end of the day, you know, we’re running a business, right. And so in a business, you have to have a competitive advantage. Moreover, you have to have a long term sustainable competitive advantage, if you want to be the best at what you do. And so one thing I quickly realized is that in the quant trading space, or systematic space, you can have the most brilliant idea in the entire world. But you know what, Jeff, if you can’t back test that brilliant idea, it is totally useless.

 

Jeff Malec  13:27

All right, would even correct it for a little bit. If you can’t realistically back test it.

 

 

 

Kapil Rastogi  13:31

Exactly. That’s it? Well, that’s what I was gonna say. Yeah, reality the world is if it’s not, if you can’t back test that idea quickly. It is effectively garbage. Right. So, you know, building your own that lock back testing structure from scratch, which allows you to back test ideas very quickly, which other people can test quickly. That’s definitely a massive competitive advantage, which is sustainable. Right? Yeah. And this is where the business cultural comes in, in the sense that, you know, if it takes me several years to back test an idea, which I think is really good, I’m going to do it. But if you’re at, let’s say, a really large, firm, um, you know, where the incentives are just a little bit different, right. I mean, you have you have your urine bonus. Right. I mean, you’re not really, you know, going to pursue an idea, which only produces results after years.

 

Jeff Malec  14:29

Of our US political system, right. Yeah. Right. I mean, no one wants to plant trees. They just want to harvest them right now.

 

Kapil Rastogi  14:38

Right. I mean, and also what’s, what’s the compensation structure, right. I mean, you’re getting paid based on the respective results you generate, to some extent, right, you’re not getting paid just to kind of like to back testing,

 

Jeff Malec  14:50

right. But it the same is true for you, right, as a business, you can’t get paid to sit there and bet test and not produce any results for five years. You’d go out of business, you’d have no clients.

 

Kapil Rastogi  14:59

Oh, absolutely. And that’s the reason why very early on, you know, this is way back from like 2010 to 2012, we spent several years kind of building our back testing structured structure. Knowing that look, this is going to give us a real sustainable,

 

Jeff Malec  15:15

like before you had client assets or in conjunction with your launch, essentially.

 

Kapil Rastogi  15:20

Yeah, before we had real client assets is when we kind of really sat down and kind of just just code it six days a week.

 

Jeff Malec  15:27

And what’s that look like? So in my mind, when I hear that I’m like, Oh, you’re doing higher frequency stuff that needs to be done really quickly. And that loses its edge over time, when kind of, I would argue more traditional managed futures, is kind of like, hey, it’s a core piece of the market that works. trend following works kind of regardless of what you put it on, maybe not on a risk adjusted basis. But on a pure what you’re looking for it works, quote unquote. So I don’t necessarily need to back test it quickly. So explain those two pieces of like, why does it have to happen quickly?

 

Kapil Rastogi  16:02

Why did the back testing happen? How to occur quickly?

 

Jeff Malec  16:06

Yeah. It seems like you’re saying like, because you’ll lose your edge. Right? And once it’s, if you don’t get in there quickly, other people will find it, and you won’t have the edge anymore?

 

Kapil Rastogi  16:15

Um, not so much, really, I mean, the inefficiency that we recognize in our portfolio, they last for quite a while. But the reason why Jeff, they last for quite a while is because they’re difficult to find. Yeah, right. So there has to be a barrier to entry, right? Which is high enough that it’s very difficult for people to get in. So when it comes to a lot of the behavioral inefficiencies which we implement in our portfolio, they’re very difficult to find, first of all, because, you know, behavioral biases in the markets are inefficiencies. You know, there’s people like Daniel Kahneman, who have done great work on it. But the reality is, like, in order to find a behavioral inefficiency, which you could exploit, you have to have been watching the markets for years, years upon years, and like, you know, if you watch it for long enough, you develop good intuition, just like in any other field, right? Have you done 1000 surgeries to your, you know, experience leads to better judgment and better intuition. So in our space, in my case, again, as I said, like, you know, I was a quant, you know, but for the first couple of years, I mean, all the strategies I tested, nothing worked, right. And it’s only after 10s, maybe hundreds of 1000s of back tests that I really kind of get in the rhythm of kind of finding strategies that work in the back test, and most importantly, also make money in live trading. And then furthermore, being able to take a multiplier and say, hey, look, you know, what, if my back test has a risk adjusted return, X, I know that live trading, it’ll produce, you know, point seven 5x. Right, that just takes a considerable amount of time.

 

Jeff Malec  17:57

I guess my question is, you could have, in theory, come up with a very simple trend following model that work right, you write your first backtest, using an 80 day look back and a two standard deviation breakout model would, quote unquote, work in the back test. Right? Right. Especially if you add more markets and look back further. So what drove you to be like, Hey, I don’t want to go down that more simple model, like basic, I want to do these more complex behavioral models. And we might have buried the lede a little bit of like, if we back up and say, What is plus plus doing at the top, you know, top down looking down level with these behavioral biases. So I don’t know if there’s a question in there. But you know, you know what I’m saying, give us the top down view, so we can level set and then let’s dig into why did you choose to go that path instead of the more simple path? Yeah, definitely.

 

Kapil Rastogi  18:41

So look, the name plus plus, right? That really signifies kind of our, everything we do the first plus have the strongest risk adjusted return the space, that’s the first plus. And we came up with that name, Jack before we started trading. Right? So you can see our objective our vision or vision statement, it’s embedded in our name, right? So two pluses, first, plus strongest risk adjusted return in the space, second plus low correlation with everyone else in our space, and obviously, all the major indices. Right. So that’s our value proposition. That’s what we do. That’s our competitive advantage. And that’s the value to an investor. Now to answer your question very succinctly, what if I just did a simple trend following model, we would not honor the first plus, which is being the best at what we do. Right? And that’s kind of, it’s a reflection of kind of who we are as people, right? Trading, to a large extent has to be a reflection of kind of who you are, right? Because you can’t trade some asset with a style you’re not comfortable with. For me. From day one, we were always about kind of being the best. So if you want to be the best, then you have to be different from everyone else just by definition I’m hence the reason why we built our own infrastructure, which took us so long to build. And we continue to add on. And secondly, the behavioral approach, it really is different. That’s for sure. And I’m a firm believer that will continue to be different. Even as more quants enter the space, because, you know, you just you really need just many, many, many years of watching markets before you can really come up with a really good or short term strategy. But he’s based on behavioral biases.

 

Jeff Malec  20:31

And so what bucket would you put yourself in? Are you probably going to say I’m outside of the categorization of the buckets. But if you were forced to short term trader trend, follower, pure absolute return, no correlation, any of those buckets?

 

Kapil Rastogi  20:46

Well, I would say if I had to classify ourselves into one of the three, which I guess you’re forcing me to classify myself, we would put, I would put myself in a short term bucket. Why? Because our average holding length is four and a half days. So clearly, we’re short term.

 

Jeff Malec  21:01

Yeah. But in you do, you do exhibit some correlation to manage futures as a whole and trend following correct?

 

Kapil Rastogi  21:08

We do I mean, our correlation to, for example, the stock xs TTI. Index is a little bit over point two, as to whether you consider that material or

 

Jeff Malec  21:18

not. That’s a whole other part. Right here.

 

Kapil Rastogi  21:22

Our correlation and trend following is zero. correlation with the s&p is slightly negative.

 

Jeff Malec  21:28

And then so can you give us a few examples of these behavioral trends? Without giving away the secret sauce? Yeah,

 

Kapil Rastogi  21:35

sure. Yeah. Can give us some examples? Yeah, we one of the things we definitely look at is we look at, you know, so I’ll give you one really good example I like to use is December 6 2019, right? The buy the dip trade and the s&p qualifies. Okay, by the dip trading in the markets going straight up, and then there’s a big dip. And then whoever bought the dip on that day, over the next four or five weeks, you would have made about a five or 6% return.

 

Jeff Malec  22:08

It became so good. It got called by the fucking Deborah BTSC not just BT BT D.

 

Kapil Rastogi  22:13

Yeah. So you know, December 6 2019. By the dip trading, s&p works fabulously well, and make over 5% in three weeks, right. About a less than a month later, the buy the dip trade again, qualifies, you know, if you put that trade on, again, you would have made about 5% In three weeks, right? Buy the dip trade again, you know, late February, right? 2020 Why buy the dip trade again? Or vice? Okay, let’s take a step back. Right. Your that investor job right, first time that a trade made a lot of money, right. Second by the trade? Not you made a lot of money. Third by their trade. What are you going to do? Right human nature?

 

Jeff Malec  22:55

You know, I’m an outlier. I would I’d start taking it off the table, but I know you’re going. Most people at the craps table. They’re pushing that six, right, like, okay, it just, but more on put more.

 

Kapil Rastogi  23:05

Exactly. You put more on now, imagine Jeff for a second. You’re that person. You know what? You missed the first by the train. You went to watch the market go straight up. And you miss a second by their trade?

 

Jeff Malec  23:18

Right? Definitely Miss both those. Right? And then

 

Kapil Rastogi  23:21

the third by the dip trade? What are you going to do?

 

Jeff Malec  23:24

Yeah, get in?

 

Kapil Rastogi  23:25

Let’s get it and not only would you get injured up, you will get in with some real sighs right? Cuz you’re gonna save yourself. Hey, you know what? I missed the first buy the dip trade. I missed a second bite of trade. Both those trades made a lot of money. There’s no way I’m missing a third by the dip trend. Right. So you’re gonna get in and you’re gonna get in with sighs Okay, so our models, for example, will sell that third dip. Right.

 

23:53

See that? Yeah.

 

 

 

Kapil Rastogi  23:54

So that’s, that’s an example of something that we do. Right. And so you take this phenomenon and codify it was set of rules

 

Jeff Malec  24:01

based on just because it’s the third are based on a whole bunch of other

 

Kapil Rastogi  24:06

bases is the third. Right. Right. I just want you to understand the behavioral thinking behind it. Right. So this is the concept, right? You have to codify a new set of rules that tested across all the markets that we trade. Now, I’m giving you an example in the s&p S. But look, we treat all the markets more or less the same, right? Why do these behavioral biases work one of these behavioral pieces his work is because because markets consist of people and people are predictably irrational. Right? That’s why it works. So we take a behavioral thesis like this, and we back tested across all the markets we trade, right? And then we look at how it does in aggregate across all markets. We say is it statistically significant? The answer is yes. That we test it out a sample is a statistically significant out of sample If the answer to that question is yes, then we just say to ourselves, hey, look, we have some real alpha here, right? So you can also see Jeff, how our approach naturally leads to uncorrelated returns. Because if you think about this strategy, you know, this idea I just mentioned, it’s not going to be correlated with trend following. Yeah. Right. Is it going to be correlated with s&p? No. If anything, I’ll be slightly negatively correlated, right? Because we know when the s&p goes down, well, it goes up.

 

Jeff Malec  25:31

Well, how do you avoid the trap of, hey, every third Thursday, the yen goes down. And is that just coincidental? Or is it right every March 17 of every year because it’s close to St. Patty’s Day something happens, right? Like, do you check it against fundamental anything? Or if it’s held statistical significance? It’s in the portfolio?

 

Kapil Rastogi  25:53

No, so. Okay, so what you’re referring to jump is how do we avoid overfitting? Yeah, great question. Okay. Okay. So the way we tackle that problem, is, we have a thesis and we test that thesis across all markets. Okay. So if you think about it, you know, using the example you use, buy again on March 17, because the St. Patty’s Day, that’s just again, so we would never trade that. Right. Now, if you’re saying that this is, hey, look, let’s buy all the currencies or all 62 markets on March 17, for the same 30 days. Great was back tested. I can already tell you, the results will look terrible. Yeah. All right, great. Now, you see how Jeff, you know, what you what you described is very common, like you have an idea, which just works on one market. Right? Why does it work on that one market? Why doesn’t it work on tap? Why does it work on Ozzy dollar? What’s so special about the yen? And the reality is, Jeff, there’s nothing special about the

 

Jeff Malec  26:56

tradable widgets. The end, so what does that portfolio look like? 20? Markets 50 markets 162 62. So in all the normal kind of managed futures, buckets, grains, energies?

 

Kapil Rastogi  27:09

Yep, the four sectors are fixed income, currencies, commodities, and equities.

 

Jeff Malec  27:14

Got it. And then I just jotted this down, let’s dive into it. Now, if you want, like, right, you keep saying intuition, you know, the 10,000 hours, we’ll all that stuff. Some would argue like, hey, we can shortcut that process with AI. Right? We can run this all through AI, we can get AI to identify these patterns much more quickly, much more. Whatever, like, just they’re going to end they can run many, many more in or iterations than you can do. What are your thoughts? Do you guys use that? Do you have thoughts on whether that’s good, bad, indifferent?

 

Kapil Rastogi  27:48

I mean, that’s a different approach altogether, it’s hard to say good or bad. I mean, look, good or bad is just dictated by the results. Right? I mean, he’ll look if you can generate great risk adjusted returns in live trading all the power to you. I just share with you my opinion. Um, you know, with AI is it’s a good tool, but it doesn’t replace intuition. There’s no way, right. I mean, look, if you give me a million different back tests, I mean, you know, just again, being a math person, right? Take a 1% confidence interval, right? There’s a certain percentage of them that will be significant, just purely due to chance. Yeah. Right.

 

Jeff Malec  28:29

But that’s what I’m saying. Like, why not tap into that and get like, Hey, we’ve got 50 More just due to chance that are now significant that we could put into the portfolio.

 

Kapil Rastogi  28:37

Yeah, I wouldn’t ever do that. But that is not our style. I mean, behind every strategy, there has to be a real clear thesis, which is based on intuition. So what I share with you, Jeff, about the third dip, yeah, there’s clear intuition behind that. That intuition. Look, it makes sense to me, don’t may not make sense to someone else. And that’s okay, too. Right. But that’s where the judgment and experience come in. You know, what happens with like, what you described is like, you’ll have all these different, statistically significant strategies. The thesis makes no sense to me. Right? So the thesis has to make sense to me, as a portfolio manager,

 

Jeff Malec  29:22

exam, don’t even have it. These are their complete blackbox AI and just shooting up signals, right?

 

Kapil Rastogi  29:27

Yeah, I mean, for me, that’s very dangerous.

 

Jeff Malec  29:30

I’ve told some of the guys like create, have the AI also produce a thesis, even if it’s totally unlinked from the actual signal. Like,

 

Kapil Rastogi  29:39

I mean, that’s where human beings come in, right, in terms of like pattern recognition and developing a thesis, right? I mean, if you can develop the thesis and then get the get the computer to basically test the thesis, you know, that’s something a computer is very good at. You’re asking the computer to like come up with a thesis. I don’t think that’s a wise idea at all. I’m Yeah,

 

Jeff Malec  30:00

we’re mainly a joke of like, Hey, you have trouble explaining this to investors have the AI just create an explanation. Right? Like, signals totally random and you can’t explain it. So why not just explain it away with some other totally random thing? That’s a little bit tongue in cheek. So talk about this. So this seems to tie in with like, we’re talking a little bit up screen of like, culture versus strategy, right? So yeah, anyone can create a strategy, you could use AI to create it, you could have experience in the bank and know what works yada, yada. So, talk to us about you mean about like, you have to have the culture. I kind of took it as infrastructure, but whatever what tell us what you mean by culture versus strategy?

 

Kapil Rastogi  30:47

Yeah, definitely. So this is a big part of what we do is, so I can share with you that there’s a management guru called Peter Drucker, and if you’ve heard of him, but he’s a very famous quote, which I like, which is, he says, culture Trump’s strategy in the long run, always. And then he has another quote, which he goes even further and he says, culture eats strategy for breakfast. Right? Very strong words. And he’s referring to just business in general. Okay. And this is something that having played competitive sports my whole life, it immediately resonates with me, like any competitive athlete, like you don’t have to tell them this. Right? The importance of culture. Look, if you look at all the best sports teams in the world, New York Yankees, New Zealand, All Blacks, right? Real Madrid, right? They have certain things in common number one is always culture. Always, always always. Okay, so how does culture how does this apply to our space? Right?

 

Jeff Malec  31:46

And just march madness, perfect. isn’t right, that cohesive team that believes in each other believes in the coach usually wins over the super talented team that is barely has a culture.

 

Kapil Rastogi  31:55

Yeah, I mean, look, you talk about basketball, right? 2004 Dream Team. Right? And if you remember the US Olympic basketball team, full of superstars, how can you lose? Guess what happened? First game that used to Puerto Rico by 19 points. Puerto Rico. Yeah. What stores are on that team? How does that happen? Well, culture, culture culture, right? It makes such a big difference in any business in any team endeavor. Now, so let’s talk about how it applies to all respects. Right, because everyone will agree that culture is important. The California management review, it’s a kind of a lesser known Business Review, which only kind of like geeks like me read it, I believe was 2002. They did a great study where they said, Okay, look what Silicon Valley firms make it in which ones don’t, Silicon Valley, like our space is hyper competitive. Right? So over 10 years, they tracked all these startups. And they said from day one, okay, we’re gonna divide all these firms into five cultures. Okay. Cult, culture. Number one is commitment, culture, commitment, culture. Number two, sorry, is star culture. Culture. Number three is bureaucratic culture. Culture. Number four is engineering culture. And then finally, autocratic culture. So let me quickly give you description, commit, what is commitment culture, American culture means, as a leader, you’re actually looking out for the long term interests of your employees. Okay. And most importantly, all the employees notice. Right? So again, you’re looking out for the long term interests of your employees, and your employees can see this. So in essence, you’re committed to their long term success.

 

Jeff Malec  33:41

Right, and preference to the shareholders or in conjunction with

 

Kapil Rastogi  33:46

in conjunction with guy okay, yeah, okay. Then there’s star culture. What is star culture? Star culture means, look, you produce something for me, and I pay you a lot of money to start culture that’s very prevalent on Wall Street on Silicon Valley. Culture. Number three bureaucratic culture doesn’t exist as much anymore. In my opinion, it’s basically look, we have job descriptions, project descriptions, and strong project management, culture, that engineering culture. Okay, we have an open atmosphere, basically free of any constraints. Have fun, right? Yeah. And then finally, autocratic culture, you come into work and you get paid. Now, interesting thing is Jeff, which culture do you think over the 10 years was the most successful? Like a global Silicon Valley firms startups? Right, they’re classified into one of these five categories from day 110 years later. The results were astounding. Which culture by and far do you think but cheap, best results?

 

Jeff Malec  34:48

Well, I’m gonna go commitment culture.

 

Kapil Rastogi  34:51

Yeah, exactly. No, not only to commitment culture succeed and get this in the hyper competitive world of Silicon Valley startups. Not a single startup failed, that employed commitment culture from day one over the 10 years that a single one of them failed. Which is, in my my mind, just astounding. Yeah, right. Now, what’s the parallel to the hedge fund space? Well, there’s many parallels. Right? So one thing I always talk to people about, as I say, Look, you know, superstar culture doesn’t achieve the greatest results. But you know, what, that’s what’s most common? Right? So look, there’s an inefficiency right away, right, there is, as an investor, you know, it’s all about asking the right questions, what could investing is all about is asking good questions. So if you can ascertain what kind of culture is prevalent at the hedge fund, will automatically, that’s a very valuable nugget of information, because we know that commitment culture produces the best long term results. So how do you know if if a firm has commitment culture, or superstar culture or engineering culture? So here’s some basic guidelines is look in hedge funds that have been in business for a long time. Question number one is, how many successful traders have you produced? How many of your traders have started their own hedge funds successfully on successfully? How many of your employees have gone on to be successful? Well, right. Now, if you think about it, if you’re the hedge fund hasn’t produced anyone that successfully created own hedge funds. Okay, that’s a red flag immediately. Why? Well, there’s only two possibilities, right? Why would a hedge fund over a long period of time not produce anyone that successfully went on to start their own hedge fund? There’s only two explanations, explanation one. There’s not many opportunities for growth within that firm, which results in all the employees at the firm just leaving? Yeah. Right. So in all my years in hedge funds, and I’ve worked at, you know, two multibillion dollar firms. Every single employee, I met my hedge funds, okay. One thing they all have in common, Jeff was all of them had an aspiration, a dream, to eventually start their own hedge fund. There is no employee at a hedge fund that goes into the hedge fund and says, Okay, I want to be an employee my whole life. That does not happen in the hedge fund space.

 

Jeff Malec  37:25

My even in the back office and girls like that, for sure.

 

Kapil Rastogi  37:29

You know, that’s a good point, I’m referring more to the research. Yeah, research training, you will never, I’ve never ever seen a single person who could walk who was in the research or trading group at a hedge fund, that does not have a dream to eventually start their own hedge fund. Right. So if nobody in a hedge fund has ever successfully started their own hedge fund, right, that’s a red flag, in my view. Why? Because there’s only two possibilities. Possibility one is, there’s not many opportunities for growth within that firm, meaning that like the leader is not providing enough opportunities for any opportunities at all, for people within the firm to eventually start their own fund. And if if people within the firm see that, hey, look, there’s zero possibility of me starting my own firm. If I stay here, that everyone’s eventually going to leave, it’s going to lead to high attrition. And business literature all says, this is just common sense, in my view, is that high attrition or a lot of people leaving eventually leads to results. And our firm that means big drawdowns.

 

Jeff Malec  38:38

Yeah, right. But yeah, alright, let’s go ahead. But it to me, it’s like how do you separate the strategy can be solid, right? It’s not necessarily going to lead to bad results.

 

Kapil Rastogi  38:50

That’s a good point. So there’s two components of success, right? There’s a strategy and there’s culture. Okay, when you’re evaluating once they have business, like a hedge fund, there’s two components, right? There’s strategy. And there’s culture, evaluating the strategy and evaluating the pros and cons and the approach or the strategy on that’s something that which you basically just write in a very primitive form. You’re asking me questions about the model building, asking me for an example. And that’s something that look, we’re all trained to do that. There’s training as an Investment Analyst, you know, and how do you evaluate a hedge fund strategy right. Now, culture, that’s much harder to evaluate, like, how do you evaluate the culture within that firm? And in my opinion, I think that’s really part of the secret sauce, right? Is to what hedge funds make it and which ones don’t make it? Right. It’s more than just a strategy. That’s for sure. We all know that. Right? But culture is a very critical long term component of success.

 

Jeff Malec  39:55

Yeah, but I guess I don’t why why is it more important, right. I guess they I would view the strategy could overcome any cultural issues, right that if you have a strong enough strategy, it’s going to produce returns, no matter. Say you have, right? A jerk at the top who just has the best strategy and he he’s winning. You have a bad team, but the strategy keeps producing results. So what’s that? Why of like, how does the culture leak into the strategy? Oh, a bad culture? Yeah,

 

Kapil Rastogi  40:22

yeah, definitely look, a bad culture eventually leads to attrition people leaving. Lots of people start leaving, just like in a year of RCM. Right. Like if you happen to leave for whatever reason? Well, your responsibilities have to be passed on to someone else right. Now for you to pass on your responsibility to someone else. If you’ve been there for a long time, you can’t pass it off in two weeks. It’s impossible. How would you pass it off in two weeks? Right. So a lot of things will be lost. Right now notify new employees. Right. Now imagine you want your firm’s went to a drawdown Jeff. No finding new employees, and you’re in a drawdown. So luck with that.

 

Jeff Malec  41:05

But I guess the strategy is still gonna be right. So it’s about the next step after that, right of like, fine. We couldn’t get the new employees. Now we’re not doing the new research. Now. We’re not doing the new project of the execution, improvement, whatever. Right. So it’s those little pieces that get washed away? Sort of, yeah. Oh, absolutely.

 

Kapil Rastogi  41:21

All the details get lost. And honestly being successful. It’s really all about getting the details. Right. Right. It really has I mean, yeah, I mean, look, first of all,

 

Jeff Malec  41:31

you’re like, that seems like it would lead towards the process culture, right? The What was that one call?

 

Kapil Rastogi  41:37

Bureaucratic? Or? Yeah,

 

Jeff Malec  41:38

it seems like, Okay, we gotta get all the details, right. Let’s make sure we’re bureaucratic culture.

 

Kapil Rastogi  41:43

Well, I mean, look, getting the details, right. I’m talking about the strategy. Now. That’s important anywhere you go. Right. So again, look, if I if I create a model, okay. It has a whole bunch of parameters, there’s nuances to it. The intuition, you know, again, my intuition is gonna be different than your intuition. Maybe Sal, the third, it makes no sense to you at all. That’s fine. But if I leave, that, you know, what, then all of a sudden, you have a strategy now with no strategy owner attached to it. Why is that dangerous? One can argue in the short term, there’s no real danger. It’s still running, as you said. Yeah, right. In the long run, there’s a huge danger, right? Who knows? The parameters are set the way they are? Why the third dip? Why not the six step one at the second? Why the dip all together? Why do you quantify dip the way you did? intervene? So in the long run, it really is a dangerous, that’s for sure. You know, so that’s where really, the culture eventually leaks into the strategy. That’s for sure. Because like, at the end of the day, Jeff, a firm is composed of people. And the models are built by people are built by humans,

 

Jeff Malec  42:54

right? I think that’s what some investors like they think they’re just buying this track record that exists through time, but really, you’re buying the firm their ability to innovate their ability to research, write, and produce new alpha over the years as things change.

 

Kapil Rastogi  43:08

Right. And look, Jeff, just going back to business literature, again, 90% of the alpha is created by 10% of people, always, always, always always, that 10% is not there anymore. As an investor, you want to know that?

 

Jeff Malec  43:23

I thought it was an 8020 rule. It’s a 990 10. Somewhere in

 

Kapil Rastogi  43:28

somewhere between, right I mean, you get the you get the overarching idea. Right? So when we talk about investing the track record, look, I totally agree with that. But hey, you better be sure that track record is repeatable.

 

Jeff Malec  43:40

Right? And, and dynamic to some extent of like, what if, yeah, which,

 

Kapil Rastogi  43:45

I mean, look, if you look at for example, let’s take something like paleontology, why the dinosaurs go extinct? Why? Because they couldn’t adapt. Right? The ability to adapt and adjust is one of the key predictors of long term success in any field. Right. And again, you know, the CEO of Goldman Sachs, Hank Paulson said it himself book, you know, he got a lot of heat for this. But he said, Look, pretty much the vast majority of our alpha or our results are really being generated. And you said, like, 20% of the people. Yeah. He got a lot. That’s always the way it works. It’s just kind of, again, a management Maxim, you’ll see that any company you go to, will see that. So as an investor, Hey, you want to make sure that whoever that 20% is, or 10% is still there.

 

Jeff Malec  44:35

Right. Right. Yeah. And we’ll move on. But yeah, in my mind, there’s still that piece of like, well, it doesn’t, right. And I could, I’ve heard it argument like, we know they’re not there. But it doesn’t matter, because it’s systematized and the processes are all documented and we know how to do right, we’ve got that all documented. So it doesn’t really matter if that person is there or not.

 

Kapil Rastogi  44:54

Fair enough. Yeah. I mean, look, it’s we can debate it all day. I think like what the whole concept of idea generation is Well, in terms of generating ideas, that’s where human, that’s what you need human beings?

 

Jeff Malec  45:05

No, I like it. Because a lot of times you just hear people or other firms say, No, we have a robust research process. And we’re always looking to innovate, but it’s yet rarely talked about is, here’s what we believe in terms of culture and making sure the people we need to be here are succeeding. But it also is interesting, if you have that commitment culture, and you’re saying we want to train them well enough that they can go start their own fun, and they leave, right? Aren’t you in that same spot? Like if you had the bad culture, and they leave, you have the good culture, and you’ve trained them well enough to leave? You kind of end up in the same spot that they left?

 

Kapil Rastogi  45:39

Oh, that’s a good point. Yeah, you do? Yeah. Look, we have commitment culture at our firm, right. And so it’s something that I implemented from day one. And both my partner and I were completely on board with it. But we’ve known each other since 2006. We’re working together through ups and downs. Now, look, I’ll give an analogy, right? If you have a tree or plant in your office, and it keeps growing, growing, growing, eventually hit the ceiling. But then it won’t stop growing, it’s gonna start growing, or they’re gonna start growing laterally across the ceiling. So this is how this is just a law of nature, right? Human beings were designed for growth. So look, people are going to leave whether you like it or not just started throwing funds, if they have talent. Yeah, right. If they don’t have talent, okay, well, they probably won’t leave them and go do something else. But if they do have talent, whether you like it or not, if they’re gonna leave, and you know, that’s very natural, it’s very normal for any living organism to want to grow up. Yeah, right. So brings my second point is, you know, when it comes to kind of culture is, you know, if nobody’s kind of started their own respective hedge fund. Then the other question, you know, as an investor, I would ask is definitely, how are you not generating? Or you’re not kind of producing or you’re not hiring the people? Right? What is your what is your hiring process? You know? And that’s, that’s a very important question to understand, like, Are you hiring lackluster, subpar individuals that are really not capable of performing at the highest level? And again, these are just questions, you know, I mean, again, investing is all about asking the right questions as as good trading.

 

Jeff Malec  47:32

So let’s switch topics from it. So our rankings white paper from RCN that, by the time this launches will either have just come out or will shortly come out. You guys are ranked, we show the top five and all these categories. So you’re in the top five of best risk control, essentially. Right. And I think so talk to us a little bit about how you actually do that because a lot of everyone says they can control that drawdowns, you guys have actually done it over the long term. The flip side, I can argue you’ve done it by keeping vol super low. So just talk through that of how you view risk control how you view your, you know, I think the drawdown is under 5%. Historically, right, which is unheard of in the Managed futures space.

 

Kapil Rastogi  48:18

Absolutely. So our max drawdown in Jeff is 4.4%. You know, it’s important to look at drawdown as a percentage of the volatility you’re going to find out, right. So if you’re running a two vol, and your max drawdown is four plus 4.4%, I don’t think it’s really all that attractive, but for us, in our example of running on, let’s say, a six ball, and, you know, our, let’s say, in our 67, volunteer drawdowns 4.4%, and as a percentage of volatility of our max drawdown is about, it’s about half of our annual goal. You know, that puts us pretty much from a downside deviation perspective, or pretty much, you know, right at the top of the list and CTAs. I guess the second question you had was, how do we do it? Right? Yeah. Yeah, that’s obviously a huge, huge topic. And it kind of boils down to all the work we’ve done over the years, the back testing infrastructure, right, which allows us to test ideas which other people can’t, can do it in a very difficult way. That helps us a lot. Our approach is very different in the sense that we, we break down the market into different regimes, and we have a whole army of strategies, which makes money in each respective regime. So when we think about risk, we obviously think about magnitude of drawdown. Right. But another key piece of the puzzle here, which is not talked about enough in my mind, which is something we really focus on is duration of drawdown. Right. We talked about risk management, there’s two key components, magnitude of drawdown right. So our max drawdown is 4.4%. Right, the set One thing though, is duration of drawdown, which is, in my view equally as important, right? So in our case, look, we we’ve hit new high watermarks every year. Right. And it goes back to our approach again of wanting to be the best at what we do. So how do you how do you produce the highest compounded returns in the long run? Well, it’s pretty simple mathematically. The first thing you do is you minimize drawdown. Right? Right. Like if you if you lose 20%, right, you have to make 25%. Just right. So if you want to produce the greatest content or returns in the long run, step number one is just minimize drawdowns. Right, which is, again, sounds common sense, but it’s something I want people through just mathematically to really, really understand this concept, right is how lethal and how detrimental drawdowns are to your long term return stream. Right. And so, that’s kind of you know, that when I talk about being the best at what we do, minimizing drawdown is really one of the big pieces of that. So we have very strict risk controls across all of our trades. If any of our trades loses 30 basis points, we’re out immediately. We have really, really strict risk stops across all of our strategies in all the markets we trade, whereby if any market loses 100 basis points, the entire markets liquidated and it can’t trade until the next business day, for example. Another

 

Jeff Malec  51:39

You mean like not if the if crude oil is down 1% and get out of all crude oil trades, if all of your signals inside of that market lose 100 basis points.

 

Kapil Rastogi  51:49

Correct. So crudo hypothetically, we lose 100 basis points at anytime throughout the trading day, right. And all these markets almost trade 24 hours a day, then we completely liquidate that market. So our models can’t trade cool at all until next business day.

 

Jeff Malec  52:08

All right. Okay. So it’s absent the signals, no matter if you’re making money in that trade or losing money?

 

Kapil Rastogi  52:12

No, we have to be losing money. So if we’ve lost more than 100 basis points, okay.

 

Jeff Malec  52:16

Well, anytime, across multiple signals,

 

Kapil Rastogi  52:21

right, at a portfolio level. Yeah, we liquidate all of our crude oil signals. And we can’t train till the next business day.

 

Jeff Malec  52:29

How do you think about that, because that can be a trap, right? If you’re like, if you always are locking in that loss. But never, you might not ever get the gains to our size, the losses that you locked in, I can’t remember the name of the firm and since that business, but they had this whole complex system of like, and basically they figured out they were just locking in losses. Right, and it kind of caused this downward sloping equity curve of like, we just continually quickly lock in losses. So how do you avoid that trap?

 

Kapil Rastogi  52:58

Oh, look, you have to back test, it is all I can say. I mean, for us, we’ve back tested everything very rigorously. So in our case, also all of our strategies, about 32 of them, they all have a statistically significant positive skew. So it makes sense for our type of trading to have this type of risk control, because luck. I mean, if if I put a trade on miles per trade on, let’s say right now, right, and let’s suppose the trade goes south, meaning we buy crude oil, and the market immediately starts moving against US crude oil and go straight down. We know that that trade is most likely going to end up as a losing trade. Because generally speaking, our good trades just looking to start working almost immediately. Yeah, we’ve done all that research and done that analysis. So we know the look at we’re losing 100 basis points. Plus all these signals include wel