Unpacking the Sell-Off! Awesome Insights from discretionary macro trader Asim Ghaffar (2024)

This week’s episode of The Derivative features an in-depth discussion with discretionary global macro trader Asim Ghaffar, founder and CIO of AG Capital. Ghaffar shares his insights on the recent market volatility, including his views on the potential triggers behind the sell-off and the chances we have for a recession. Was it just a blip on the radar, algos deleveraging? He explains his discretionary macro trading approach, highlighting the importance of risk management, position sizing, and the psychological challenges of the business. Ghaffar also discusses the differences between his strategy and systematic trend following, as well as the unique opportunities smaller managers can pursue compared to large global macro funds. In this chat we also explore Ghaffar’s personal journey into the industry, the challenges of starting a hedge fund, and his long-term outlook on markets, including his perspective on the role of gold in a portfolio.

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From the episode:

Check out our episode with Jack Schwager mentioned in this podcast:

Wisdom from the wizard maker with Jack Schwager

Unpacking the Sell-Off! Awesome Insights from discretionary macro trader Asim Ghaffar

Jeff Malec 00:00

Welcom to the Derivative by 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. Hope you survived the market sell off here early August 2024 as best you could, hard to tell for me if this is real or just an overreaction on leveraging of some trades that had an oversized effect anyway. You know, it would be awesome if we had a global macro guy on the pod to talk through what went down and what it could mean. Voila, we have Asim Ghaffar, founder and CIO of AG Capital, joining us today. Yes, his name is literally pronounced awesome, spelled as I am, and yes, I spent an inordinate amount of time getting into that coincidence. But we also get into some real stuff, talking about if this was just a yen carry trade unwind, just what it takes to be a discretionary macro trader. Was he slinging yen trades at 3am Sunday night, and how discretionary macro differs from trend and quant approaches. Oh, yeah. And if you ever get started the macro tourist talking about the Fed and gold, send it. This episode is brought to you by RCMs, cool and informative infographics. That’s right, who knew we have infographics? We just did a new one last week on what diversification really looks like. But we’ve got one on the futures ecosystem, the Summer Olympics guide to investing, timely and my favorite, of course, the Star Wars fans guide to investing. Check them all out at RCM, alts.com/infographics, with an S R Sam, alts.com/infographics,

Jeff Malec 01:52

All right,

Jeff Malec 01:53

we are here with Asim, which is pronounced Awesome. We’re joking. Did you get teased by a kid or praised as a kid for the awesome name?

Asim Ghaffar 02:05

More just the annoying fact of having to explain what your name is since kindergarten, first grade, my whole life, and

Jeff Malec 02:13

what’s the background of the name, awesome

Asim Ghaffar 02:17

Pakistani name. Parents came in the 60s, early 70s. So typical immigrant story,

Jeff Malec 02:25

spelled as I am, by the way, pronounced us. So lucky to have a discretionary macro guy here when we just went through a little macro noise we’re recording this august 6, had some global market activity, August 1, August 2, then the weekend, and it really blew out yesterday, August 5, before recouping a little bit today. So tell us what you saw, what your thoughts were. Think this is for real. I think this is early innings, just a blip on the radar. What are your thoughts?

Asim Ghaffar 03:01

I think, blip on the radar. From a very short term perspective, it’s all positioning that’s getting unwound. So this is a bunch of levered players, whether hedge funds or other players. Algos going off. If you look at what happened, it really looks like just a positioning unwind across all these markets. And part of the reason I say that is normally, it wouldn’t filter out into what I would call secondary and tertiary type relationships. So an example is, we all know what’s happened with equities, but if you look at currency markets, normally, the euro and the pound are highly correlated against the dollar, so they’re both developed market currencies, the British pound and the and the euro are going to go in the same direction against the US dollar almost always. But what happened in the past couple of days is the Euro ripped higher appreciated against the dollar, while the pound went down. And the reason is speculators were flat or even net short the euro, and they were very long the pound, and so they just were covering those positions to raise cash to meet margin requirements. And if that’s happening across the board, it means that across all these different market and macro relationships, everyone’s just raising cash. So whether it’s pension funds that are borrowing and yen or pod shops that are very levered long Max seven, everyone’s just unwinding trades. Algos are firing off from the quant folks out there, exacerbating things. And there’s your quick panic. And I think it’s over now, so the markets probably will stabilize, and I guess equities would rebound for the next at least week or two. We’ll see.

Jeff Malec 04:36

And all on the news in the press, they’re blaming it on the yen carry trade. Do you think it is mainly the yen carry trade, or that’s just a easy boogie man for the press? The

Asim Ghaffar 04:47

latter. Yeah, the Yen has a carry trade out there. The Yen carry trade has been around for 30 years. I think it was probably bigger at points in the past. Maybe it’s a little larger now, in notional terms today, I actually don’t know. I don’t think there’s any way that the yen carry trade was the fuse that lit this off. This happened.

Jeff Malec 05:04

Yeah, you called it a 30 year meme before pocket Yeah,

Asim Ghaffar 05:08

this is, this is happening across the board. Sure, the yen, the yen people were short, they’re covering the Bank of Japan had a hawkish hike that’s caused the Nikkei to really fall. But a lot of this, I think, is beyond just the entire trade. That’s just one element. It’s a symptom of this, not so much the spark or the cause. This is just de leveraging, degrossing, and algos Gone Wild over the past few days. That’s what it is. And you can look at the VIX. The VIX is telling you that this is absurd, is what I would say. The VIX is at levels that it went to during real problematic crises in the past. For example, 1998 LTCM was a big deal, almost took down the financial system. 911, a few years later. So the VIX is at similar levels, which tells you that, again, this is just algos and possessions that are being squared causing a chain reaction that’s way to proportion to an 8% decline in the s, p5, 100.

Jeff Malec 06:03

So to me, that begs the question, and I know you don’t know the books of every trader out there in the universe, but from your seat, right, begs the question, what was that trigger? Why did it start delivering in the first

Asim Ghaffar 06:14

place? Well, you could argue that in the latter half of July, there was a little bit of a tremor where folks were unwinding some of these long, Max seven short Russell 2000 positions. So you saw the Russell 2000 spike higher as some of the mag seven stocks sold off. So there was already a bit of trigger finger, sort of de risking going on heading into this. And then it seems like the payroll report was the key trigger. So payrolls came out at 114,000 think the expectation was for 175,000 so big miss, but that, in and of itself, should not have set this off. The bigger picture is that markets tend to go quiet and lull you to sleep for many, many months and quarters in a row, and then all of a sudden, some data point comes out, and everybody quickly panics. So discontinuous tech moves. That’s exactly what markets do after a long, sleepy period. And that payroll report was a trigger, and then secondarily, maybe the Bank of Japan’s hawkish hike and a little bit of the end carry trade unwind. But I think it was more people were ready to already had their sort of finger on the trigger coming into payrolls, and that really that did it

Jeff Malec 07:19

right? I love that view of, hey, they’re gonna find some reason, right there maybe, probably wasn’t a reason. It was just, we’re gonna find some reason. Our fingers already on the trigger. That market was getting long in the tooth, all of that. Let’s de risk. Let’s take our profits off the table.

Asim Ghaffar 07:35

Um, it would have been something else. If this print for payrolls had come in a little higher than this event would not have happened, and maybe it would have passed. Would have happened three weeks from now on. Some other data point.

Jeff Malec 07:47

Love it. Um, and as a discretionary What’s that look like for you? Are you up all night tracking these markets? Are you placing trades in the middle of the night? Like, how does it look for you personally, when you’re looking at a some sharp moves like this, we’re

Asim Ghaffar 08:00

very long term. Our we have a basically a two thirds, 1/3 split. We’re a concentrated manager with usually five, six line items in the portfolio. Two thirds are very long term, meaning multi year in nature. So we’re not looking at day to day moves, and even our short term trades tend to be many months in a row. So the short term idea for us might be a five month hold. So we’re not at all influenced by something that’s going to happen over two days. That being said, the first rule of being discretionary manager is risk management, and so when stuff goes haywire, yeah, you do wake up more than once in the middle of the night just to take a look and make sure everything is not going out of whack. Because if we have to, we need to just cut positions. We always have to do that, sometimes for risk purposes, but in this case, watched it, monitored it, and we did nothing to to change positioning. Yeah,

Jeff Malec 08:49

my vision of you is waking up at three in the morning, seeing the yen way overbought and slinging some short yen trades, betting on a mean reversion. That’s the cheap and dirty version of the discretionary trader, I guess.

Asim Ghaffar 09:02

Yeah, that’s the stereotype of the swing trader. So if you’re putting on trades with a three hour hold or a three day hold, that’s the legendary style of of trading that was popularized, I think in the 80s. It doesn’t work anymore. I don’t know anyone that does it. I’m sure somebody out there is trying it or doing it full disclosure, I did try it way before I built dayg capital as a business when I was younger, just tinkering around with my own account, probably 2020, years ago, maybe longer, and I failed at it miserably.

Jeff Malec 09:31

You don’t look that old. We could talk about that later.

Asim Ghaffar 09:33

I’m old. We can talk about my failures later. But I tried swing trading and day trading and a bunch of other styles of short term trading in the in the early 2000s and and just failed that

Jeff Malec 09:44

in miserably, scars to prove it. Oh, yeah. And that experience led you to, hey, I need to be longer term. I need to have these longer term convictions,

Asim Ghaffar 09:54

partly, partly, just that first, I think, 345, years of a trader’s learning. Curve, you need to experiment. I think that’s important. And over time, you figure out what works for you psychologically, your trading style or your investing style has to be married to your psychology. So for me, I would hate a systematic approach. That’s not my style. I like to figure things out and understand what’s happening. And I think the short term trading the market’s changed so much, from humans to now very algorithmic, with moves that are so different on a three hour chart than they were in the mid 90s. The short term stuff requires you to adapt in a way that I think is just too difficult, potentially doable, but the failure rate is too high, and I think it’s very difficult to try to build a 3040, year track record with three hour and three day type of swing trades. I couldn’t do it. It wasn’t something I was capable of. So I gravitated towards more of a longer term fundamentals plus technicals plus sentiment. It’s still considered a classic macro approach. It was prevalent in the 80s and 90s, but at the time, there were more of these sort of short term swing traders, and they’ve basically gone extinct

Jeff Malec 11:07

on the algo side, right? You’ve mentioned algos a few times. Do you think this move these past few days was exacerbated by the algos? Is it right? Are they both? They’re maybe the only ones who can trade in those hour to short term time frames, and then when they decide to get out, it causes that cascade effect.

Asim Ghaffar 11:27

Well, undoubtedly, and that’s why, you know, our style is to stay outside of that algo fault. So whatever move they’re going to drive over X hours or X days or even a few weeks, we want to be outside of that volatility. You want to think bigger picture, longer term, the algos that did whatever they did in the last two days, they’ve been around for a while now, and this quant approach with algos has been around for 20 years. And so it shouldn’t be a huge surprise that you get these sharp, cascading style moves. It’s just it’s happened over and over and over again. So I think that definitely exacerbated the

Jeff Malec 11:59

move. Does your model consider that those these moves are going to happen from time to time, and have some exposure to sort of tail events like that? Oh,

Asim Ghaffar 12:09

for sure. I mean, a huge part of our style, any kind of longer term style, you’re taking advantage of the tails, classic long term trend following, which is systematic, as well as our style, we have very different entries and exits and different portfolio construction. But at the core of it, you’re looking to take advantage of some of these very large moves where vol expands and a market makes a move that nobody expects. If you can have a sense for what some of these outlying parts of the tail look like, and just have enough sort of irons in the fire and viewpoints that are different than the majority. You’ll capture some of those moves, and you need to have some of those if you’re going to hold a move for three months or a year, a huge chunk of the gain is going to come from when the market finally, slowly comes to your point of view. And it’s going to happen in a discontinuous fast and half the time.

Jeff Malec 12:57

And that’s interesting, right? The kind of difference between a guy at a pod shop meeting Make Money Day in, day out, week in, week out, or maybe get fired, versus you just said, I’m waiting for it to come back into my viewpoint. I can’t remember exactly what said, but Right, like I want the trade to come into where I expected, versus that pod shop guy, or even an algo probably is like, if it doesn’t work in the five minutes or five hours or five days, I’m out, and then I’ll try again, try again. Yes, you’re saying skip all that and just wait for it with conviction to get where you want it to

Asim Ghaffar 13:30

1. Yeah, the short term performance pressure is what kills you. I think if you need to make money day in day out, this is a brutal business, unless you’re market making potentially. But the key, I think, to discretionary macro is if you have the 40 most liquid markets across currencies, commodities, rates and equities on your screen, you don’t have to have a view on all of them. You just have to have a high conviction view on three or four longs and maybe two or three shorts. And you can basically ignore a particular market if you need to, for years in a row. So there are markets where we won’t trade them for five, six years in a row, and then we’ll go crazy and trade them a ton in the next six months. And I think that’s the right way to do things, where you don’t have to have a trade on all the time, especially if you have, you know, highly competitive markets like rates and currencies. If you’re always trading currencies and rates. You’re probably making a mistake. You should only put trades on if you have conviction. The technicals are there sentiments on your side. Just you have to wait, wait, wait, wait, and then finally, find a pitch you like.

Jeff Malec 14:31

Can you give a few general examples of what those trades would look like?

Asim Ghaffar 14:35

I’ll give you one that we have on right now. We write a very transparent letter so we don’t, you know, have things I think are proprietary, and we get into a longer conversation, but I don’t think that. I don’t think idea generation, or ideas are a secret sauce. As much as people make them out to be. It’s position sizing, risk management, where you get in, where you get out, all that stuff. That’s the secret sauce to managing money. But. So the feeder cattle market, this is one that a lot of folks probably don’t talk about. So let’s talk about something that gets away from just the s, p and the VIX and whatnot. The cattle market in general, both live cattle and feeder cattle have been in bull markets for the last few years, and the reason is they’re just they’re fewer and fewer animals, whether it’s disease, drought, whatever you want to call it, herd sizes in the US have gotten small, and I think they might be at their smallest level in in 80 or 90 years. And so you have a supply problem that drove this big bull market in both live cattle and feeder cattle. If you go back through time and look at charts and look at previous bull markets in in the cattle complex, at the end of the day, beef is a luxury good, you know, it’s, it’s, it’s something that Americans, we take for granted, that you always have access to every protein source. But when beef gets expensive, people trade down to cheaper cuts. They trade down to pork, chicken, other protein sources. And so demand destruction kicks in, and everybody in the market likes to focus on supply side of the equation with commodities, because you can model things out. You have data. You don’t have data on the demand side. And it’s very qualitative. You have to, you have to sort of assess, where’s the consumer, what’s the breaking point, but that supply demand balance gets to a point where the consumer pulls back, and that’s what catches the market.

Jeff Malec 16:20

So basically, you’re as an example, you’d be saying, hey, people are going to be in the supermarket. They’re going to be sitting there looking down, saying, I’ve got to choose between the beef and the chicken. The chicken is cheaper. My rents higher. Everything’s bad. I’m taking the chicken.

Asim Ghaffar 16:36

Yeah, that happens as an inflection point where it just builds and builds and finally, the market slowly gets the data and realizes that at the margin, it doesn’t have to be a huge change, but just enough to bring that market back into balance and and put an end to the bull market that we’ve been in for a few years. I think that’s exactly what happens. And that type of thing also happens leading into a recession, and that’ll just exacerbate the decline in the kind of complex

Jeff Malec 16:59

and is that an example of most of your trades kind of that seems like a mean reverting example or not necessarily?

Asim Ghaffar 17:06

That is 2/3 Oh, well, sorry, 1/3 of our trades are like that. They’re shorter term. We call short term anything under a year, which might be long term to some people, but a short term trade for us, it’s something between a couple of months up to a year, and those tend to be more mean reversion type ideas. So you need to be able to get in when you’re on the other side of the crowd, and pick a spot, have a feel that the fundamentals are going to go in your favor, that that the core theme that everybody else is looking at is played out. And those will be good mean reversion trades are short term trades that are less than a year in duration,

Jeff Malec 17:41

and then the other two thirds is very long. You said,

Asim Ghaffar 17:45

very long. I think these days you’ll probably talk to a lot of systematic or discretionary macro folks who will say, Well, we trade in a three to nine month horizon. Our long term ideas tend to be more multi year. You know, it might be two years, it might be five, six years, but it’s more of a cyclical or even a secular theme that we look at and say, Okay, we might not get this trade right the first time we try to execute it, but we’ll work away at it and try to get a point where we get in and we want to hold that position for a few years, and we’ll manage the exposure up and down with futures. You have to roll the contract, and you want to look at where you are and dial things up and dial things down at different times, but it’s a multi year approach for some of those longer term themes.

Jeff Malec 18:27

How do you square that with it seems like nobody wants to look out more than two three years, right? Like, if that takes, say you had that only that one market, and it took flat, flat, flat for three years, and then the pop and performance, like, how do you keep investors around for that long to see through that three, five year? And I think that’s why nobody does it anymore, because it’s so hard to convince the investors, hey, this is a long term trade, partly, but if

Asim Ghaffar 18:54

you only have that one market, I think you’re in trouble. The whole key having a portfolio is, if you have six trades in there, you’re going to have some ideas that you’re just off in your timing, and when we’re off, if it’s a long term idea where we think it’s going to be a, let’s say it’s a five year move. You can be two years early, and two years early is wrong in our business, but you try it, you take a small loss, you might try it again six months later, take a small loss, try it again a year later, and get it to work. But the key is, you have those five other trades, and hopefully a couple of the short term trades are working out, and maybe one of the other long term ideas is working. It’s almost never the case that all five or six ideas in the portfolio are working a great month, as if you had half your trades go in your favor and work for you. So we don’t need everything to work. You just need to have enough stuff working to to have a good month, quarter a year,

Jeff Malec 19:44

and then talk through what’s it look like for you personally, and like, the psychology of, okay, that trade, I think it’s a five year idea. I’ve tried once I failed, I tried. Second time, I failed. Third time failed. Like both from a kind of your personal model. How many times will you try before you say this? It working, or basically what would get you off of the longer term theme.

Asim Ghaffar 20:05

Now this is getting into why this business is all mental it’s a psychological struggle. It’s not what people think it is on the outside looking in, but building a 30 year track record, if that’s what you want to do, that’s our goal. We’re 10 years into it. It’s basically 100% of mental game. If you try a trade and you’re wrong, you want to be able to go back in a few times. And so it’s maybe it’s like a baseball analogy where you get three strikes. So we’ll try a trade a few times over the course of a handful of quarters, and if it’s not working, and we realize the fundamentals are no longer lining up, we’ll just walk away and stop trying it. Other ideas are important enough where you can tell eventually this is going to work, and we just were wrong on our first two or three attempts. So maybe you take a fourth attempt and that’s the one that works. But if you only try something once and it doesn’t work, and you don’t have the guts to get back in there, you’re going to fail at this business, because the markets are are very much a chaotic animal. They’re not something you can model out mathematically. With regards to getting perfect timing, you just have to be willing to be wrong all the time until you’re right. And so it’s position sizing, risk management, drawdown management, modeling out your ad points, your entries, your exits, all that stuff ahead of time. That’s 80, 90% of your success, and your idea generation, your brand new idea generation from scratch, that’s 10% of the business,

Jeff Malec 21:31

right? Which seems, from the outside looking in, seems those percentages would be flipped, right? That it’s 90% idea generation and 10% being able to cope with it.

Asim Ghaffar 21:41

If you’re writing a newsletter, or you’re a consultant, or you’re in the business of charging clients a fixed fee per per month or per year, you need to come up with new ideas all the time, and you need to make everything about new ideas. You’re not being graded on an actual live track record of the money, and so you don’t then spend a lot of time on things like risk management and position sizing, your entire report is going to be new ideas and catchy and whatnot. If you’re managing money, you need to flip it around. And I think that’s, I think this is probably one of the least understood ideas in the money management world. Is how different it is on the inside running a hedge fund or a CTA relative to what people think it is by going on Twitter or or just watching TV shows about Wall Street

Jeff Malec 22:33

and talk through that a little bit of the compare, contrast discretionary versus global macro, some of the pros and cons, first, maybe from a personal level, from a psychology level, and then secondarily, we can get into like from the as an investor looks at it and how they can ascertain what’s going on.

Asim Ghaffar 22:51

Well, the pros for me are easy. I love what I do. I think that’s important, especially in a business like this, if you don’t love it, if you don’t want to read research and figure things out, put the puzzle together. All day long, you’re going to struggle. And so as a business, I wouldn’t want to do anything else. So the pros for me, this is just personally, speaking, I went and studied liberal arts type subjects in undergrad in high school. And so for me, a little bit of math and economics married to a lot of history, psychology, philosophy. That’s the the dream job, and that’s exactly what a discretionary macro manager does. They they put together a lot of right brain subjects for the sprinkling of just enough left brain to glue it together. And that’s the day job. So I love it,

Jeff Malec 23:35

the science, science plus art, so to speak, yes, but I think,

Asim Ghaffar 23:39

and then this is another probably point where people would disagree, or this is controversial, it’s probably 80 90% art and 10 20% science, math and econ is the 10 20% and the history, psychology and philosophy is 80 90% of of the game of managing money. Yeah,

Jeff Malec 24:00

you’re talking to a philosophy major. So there we go. Good, yeah, but I you real quick bringing in cons. Like, I think a lot of people would say, is it a puzzle? Is it something that can be solved, or is it an unsolvable puzzle?

Asim Ghaffar 24:14

It’s the latter, which is why it’s a it’s a great puzzle to work on that’s like

Jeff Malec 24:18

chicken and egg, like, if it’s unsolvable, how can you make money trying to solve it?

Asim Ghaffar 24:23

Well, you can still make money on a long term basis with an edge that you carefully sort of execute on. But it’s, let’s put it this way, the markets are an unbounded set. There’s no underlying distribution or math distribution you can use. We use shorthand heuristics like the normal distribution, the Gaussian bell curve. And of course, we know that the tails are fatter, and so people just say, Oh, they’re fat tails. But that’s actually not true. It’s not a bell curve. It’s not it’s not even a log normal distribution. It’s an unknown shape shifting distribution, where you’re doing your best to get a feel for what those tails look like, but you don’t really know. And. And this is just clear from looking at things like we talked about 567, sigma events happening. Those things happen once in a million years in physics. And so, you know, with the short 100 year track of the S, p5, 100, that what we’re talking about is we don’t know how to actually talk about the underlying distribution. It’s better. It’s good to have a math background to understand what the concepts are, but it’s better to get rid of that and just think purely in terms of the math being a risk management Foundation, knowing when to cut your size, manage drawdowns, etc. But it’s an unbounded space, and so that’s why the puzzle is fun, is because it’s not solvable.

Jeff Malec 25:34

Yeah, I think the right, if you outside looking in, oh, discretionary macro guy, he’s trying to, he’s gonna, he or she’s gonna come up with, Hey, I know exactly what’s gonna happen with the British pound, the banks, right? The George Soros example, he had it nailed. The bank’s gonna do this. We’re gonna make a ton of money. And it’s a super high conviction trade. Once they solve the puzzle, they go all in on on that trade, yeah?

Asim Ghaffar 25:59

But like every great macro manager, he was probably only probably only right on half, or even fewer than half of his ideas or trades. And that’s same thing for us. You’re gonna it’s

Jeff Malec 26:09

probably a misnomer. He probably wasn’t risking 80% of his capital on that trade or something. I don’t know what the number on that

Asim Ghaffar 26:15

trade, from what I understand, he was probably risking eight or 9% far more than most people can afford a risk today.

Jeff Malec 26:21

Yeah, right. Which back to your 80s style. That’s when was that? Before the 80s, early 80s, 9091, okay, so even 90 stuff. But talk what you mean a little bit while we delved into it here, 80s style, global macro. I’ll

Asim Ghaffar 26:38

give you the well, give you the quick cons. Yeah, first done, yeah. So the cons in this business are psychological. You could argue that it’s sort of psychological torture over time to deal with constant drawdowns. And it’s the whole game theory notion where a loss, $1 loss, hurts you more than $1 gained, and over time, that adds up, because most of the time you’re in a drawdown, and in the minority of times you’re in a new equity high, just like the S p5 100. Most of the time the S P is in a drawdown, and in a very small minority of cases, it’s making a new equity high. But it’s a it’s an index that’s gone up over 100 plus years, and because it’s an index, it doesn’t have feelings. As a trader and a money manager, I have feelings and the pain of the losses, it takes a toll on you over time, and so you have to navigate that. I’ll give you a little vignette. If you’re a dentist or a landscaper, two totally different professions. But if you put the time in, study hard, build your business, you have a 30 year, maybe 40 year, career ahead of you, if you really run your operations well and scale your business, there are not many dentists that you hear of that just after eight years of doing it, they just closed down because they mentally crack. I mean, somebody might have a breakdown, but in general, it doesn’t happen. You build a landscaping business, you hire people who have trucks, and you can build a very nice business over 30 years. And you don’t just quit in year 14, because something happens where, psychologically, it’s too stressful. This business is different because I like

Jeff Malec 28:07

it rained again, yeah, exactly. Can’t take it, yeah, another cavity, I can’t take it, yeah. This

Asim Ghaffar 28:14

business is different than than almost every other industry out there where, you know, I worked as a consultant before setting up, AG, capitalize it as an investment consultant. So I got to sit on the allocator side for six, seven years. And now you would see this happen over and over and over again. I can’t tell you how many times, eight, nine times I would see the hedge fund. They raised three, 400 million. They built a five to 10 year track record. And then all of a sudden, out of the blue, comes a letter. We’ve decided to close down. We gave it our all. We just have lost confidence in our vision, in the trades we’re putting on, the investment themes, things aren’t clicking. We’re not in sync with the markets, and quite frankly, we’ve decided to just liquidate and return capital. And what happened there is that that manager just lost their confidence. They no longer know how they’re going to make money, and they sort of cracked like an egg. And that’s that’s the risk, and that’s what happens to many people in this business. You know, projecting out a 30 year career or a 3040, year track record is difficult, because those painful periods are there. And whatever your your deepest or longest drawdown was in the past, it’s going to get worse in the future. Your longest drawdown is ahead of you. Your deepest drawdown is ahead of you, and if you’re not mentally prepared for it, you’re going to probably fold psychologically. So that’s that’s the con. It’s a business where, you know, you’re mentally always a little bit not down. There’s some there’s some great days, and you have to maintain your equilibrium, but it takes a toll on you, as I’m trying to get at psychologically,

Jeff Malec 29:43

you’re not selling it so well. For all those young hedge fund managers out there, discretionary managers, it goes

Asim Ghaffar 29:48

back to if you really love it and you don’t care about those sort of downsides to the business. There’s nothing like it. It’s an amazing business. I love it, but I think too many people go. Do it just for the money, and that’s the problem.

Jeff Malec 30:04

And inherent in that whole discussion seems like you’re saying you have to have the discipline Right? Like to be able to not let those psychological pressures overtake the trading and influence the trading.

Asim Ghaffar 30:16

It’s more than discipline. Discipline, to me, is a word that talks about, okay, I’m not going to risk too much on this trade. I’m going to follow all my processes, etc. You can still lose your confidence and decide to fold if you don’t have a different sort of equilibrium. And it’s more it’s just that mental clarity that comes from I have this game plan. I have a blueprint for what I want to do here. I’m looking way out into the future, and I have different scenarios, but I have a strong, sort of bedrock confidence in some of my longer term themes and ideas. And that’s for example, that’s what gives me the confidence to come back when I’m in a bad state, if I’ve had a bad year, or even if we’ve had two bad years in a row, which can happen, and did happen to us recently. It’s that longer term, almost sense of serenity that I have the analysis done well, and I really know why I’m doing this for a living. The discipline is important, but that’s almost a different subject altogether.

Jeff Malec 31:11

The cynical part of me says they shut down not because they got tired of it, but because they couldn’t charge fees anymore and senior fees, so they shut down and restarted under a new umbrella. Some people

Asim Ghaffar 31:23

can do that. It’s much harder to do in real life than you think. Only a handful of very famous people are able to pull off restarting a fund after a drawdown where they can’t charge fees. Most people, most average sort of hedge fund managers that have a few 100 million and they have a tough drawdown, maybe it’s partly influenced by the fact that they can’t get back to the high water mark to charge the incentive fee. But I think a lot of it is just psychologically. They’re beaten up, and they just, they can’t take it, they give up.

Jeff Malec 31:55

So you mentioned the consulting piece and starting this business yourself, like talk a little bit about what that was like, why you decided this route instead of going to work at a pod shop or a prop training firm or

Asim Ghaffar 32:07

Well, I have a I have a non traditional background. I never worked on Wall Street, and so my entire career, just to give a shorthand version of it, I graduated college in the late 90s, 98 and I went down the consulting path. At the time the economy was booming, and you, if you went to a school where you had on campus recruiting, you could go down and you were going into, say, business, quote, unquote, yeah, go down either the Wall Street path, which was an investment bank, or sales and trading at an investment bank, or there was the consulting path of, probably management consulting of some sort. So I went down the consulting path, and I spent the next 13 years in a variety of different consulting firms, one of which was a large, prestigious investment consulting firm where, like I said, I sat in the allocator side of the table, and I had clients that were pension funds, large insurance companies, endowments, foundations, ultra high net with families. So my career was Mr. PowerPoint slides and present, which doesn’t really lend itself to managing money. So there’s a side story where think it was 2000 or 2001 so again, almost 25 years ago, close friend of mine handed me a book. And this won’t be a huge surprise to listeners who are familiar with a lot of the legendary traders from the 80s. But the book was called Market Wizards, written by Jack Schwager, where he interviews a lot of famous traders. And it was just interviews directly with equity and a lot of macro and futures traders. And I read it, and it just lit my brain on fire. I said, this is what I want to do now. This what they’re talking about. Here is, again, a mix of a lot of right brain topics, like history, psychology, philosophy, married to a little bit of math and econ, all these subjects I loved in in high school and college, and I said, I want to do this. And at the time, I was in grad school, and we had the.com bust. So I tried sending resumes out to a variety of hedge funds or even banks, and I got 00, interest, no interviews, no nothing. Consulting firms were interested, because I had done consulting prior to to grad school, and so I took a job in consulting and stayed in that field, but I started to Trade Investment Consulting then investing. Well at the time, I was doing management consulting, but yeah, the keeping is outside of my day job, my nights and weekends were consumed. So this is 2001 to let’s call it 2006 2007 I was spending 4050, hours a week trading on the side. And I tried everything you can try to try, you know, swing trading, day trading, some systematic stuff. I just, I failed at everything, and I finally gravitated towards this more, longer term approach of marrying fundamentals plus technicals plus some sentiment analysis. And it took a while, but in my late 30s, I felt I had the confidence, and I was getting very consistent from a trading perspective over a few years. And I decided, listen, I love this. I want to do this for a living. There’s no way somebody’s going to take a 30. Eight year old consultant. Now that I’ve tried, you know, going over to the buy side repeatedly, and never got any interest, the only way for this to work is if I quit my day job and start from scratch and try to build my own business. So that’s, that’s how I got to where I am, and how ag capital took off back in 2013 2014 I

Jeff Malec 35:17

think there’s an old saying, Never quit your day job, but he will put it in the show notes. We had jack on the pod a few years ago chatting with him, which was cool. And then I have a similar story, except I was reading Star Wars Expanded Universe books, and I wanted to become a X Wing pilot, so it didn’t work out as well for me, tough.

Asim Ghaffar 35:39

It’s a different universe. It’s tough to get over there, right? A different universe.

Jeff Malec 35:43

Um, so when you started, was there any thought of, like, I want to be a systematic I want to be trend like, or you said, always, right? We’ll come back to that 80s thing. I want to bring back 80s style, global macro.

Asim Ghaffar 35:57

In the beginning, I didn’t have strongly formulated ideas, like I said, I let’s go back to say 2001 2002 when I’m experimenting, I tried swing trading over, say, a two, three day time period, or even on a shorter hourly time period. I failed. I had put in $20,000 into I forget which broker was. I think it was either a ref CO or a Lynn waldock account, brokers that no longer exist, that have been gobbled up by other FCMs. But I turned that $20,000 into $3,000 so I lost all my money trying to, oh, you know, it’s one of the best things, I think that can happen to you, is to lose all your money when it’s smaller stakes, and you’re learning. But I tried day trading, swing trading was was totally inconsistent. Couldn’t make money. Realized it wasn’t for me. I then did try a little bit of systematic trading. I tried basically coding. I know a little bit of coding to be dangerous, but not a lot, but I tried coding my own sort of medium term trend system, and realized just a handful of months into trying it, that I hate this. I hate this, following this computerized rules based. I don’t enjoy this. I love reading about the markets and trying to put together the puzzle. So that wasn’t for me. So then you know this for the process of

Jeff Malec 37:08

years, you’re experimenting with your own money or with client money. No

Asim Ghaffar 37:11

with my own money. This is the 10 years, the 10 years in the wilderness prior to setting up the business. Those first five years were the experimenting phase. The following five years, let’s call it trying to make sure I have some dates here so people can get some context. Let’s call it from, say, 2007 to 2013 by then, I had sort of cemented this longer term approach of marrying multi month, multi quarter hold times, using fundamentals to get the direction down, having a high conviction view with fundamentals, and then looking at sentiment, you know, where are other traders? Is everybody on one side of the boat? Sentiment is used as a contrarian indicator. Take the other side ideally, and then basic technical analysis. So those three things combined fundamentals plus technicals plus sentiment, longer term hold times that started to work, and I became consistent and and realize that I have something here. I know what I’m doing. I’ve been doing this now for over a decade, on the side, with my own money and and that’s what then ultimately led me to the decision to put my day job in and build a business.

Jeff Malec 38:16

And where, how was that? Early years, I know from experience trying to start a CTA without a Goldman background and without a, what I call a golden Rolodex, can be difficult, right? So, how were those early years? Was it the constant like, Oh, I love what you’re doing, but I can’t, I only allocate in $5 million chunks, and I can’t be more than 50% of your equity, blah, blah, blah,

Asim Ghaffar 38:38

a lot of that, which is why it did take a long time we, I think we started off with 500k on day one in three separate accounts. And in the early years, what I did is there was a conference called CTA Expo that no longer exists. I think it went under during covid In 2020 Yeah.

Jeff Malec 38:57

We almost took it over. Maybe we will talk offline, if we restart it up. Yeah. The

Asim Ghaffar 39:02

beauty of that conference was it was designed for truly emerging managers. I had come from this investment consulting world where an emerging manager was somebody with 500 million and had, again to your point, either come out of a blue chip hedge fund or spun out of a Goldman trading desk, whereas I’m sitting here with $500,000 on day one. But CTA Expo was fantastic because it was, if you had 500k or a million dollars and a six month track record, great. Come meet people. There were a lot of introducing brokers. But it took time, you know, I went to probably 12 or 13 of those conferences over four years to get the Aum from 500k up to somewhere between five to 10 million so it took, it took four years to get into that five to ten million range. That conference no longer exists. So if you’re a young man or woman listening to this and you want to do something similar, you know, I think there are different mechanisms you’ll have to try today. Twitter is around where Twitter wasn’t as big back then. So if you want to build up a following on. On social media and try to meet people that way. That might be the way to go today, but the way I did it was to go to that CTA Expo conference circuit and just meet a lot of brokers and clients directly make the case and to your point. In the beginning, you have a one year track record, people kind of potentially laugh at you behind your back. Okay, you come back with a two year track record and a little more money, and they still think you’re going to fail. And they’re probably right, by the way, because the failure rate is extremely high. It’s probably 90 95% for for folks in that AUM band. But once you come back from that third year, now you have a four year track, and you’ve got 4 million, 5 million, and you’ve managed through, say, three or four drawdowns, you get taken more seriously, and all of a sudden, people introduce you to clients. Clients want to open up some separate accounts, and things start to roll. But it’s, it’s a process where you have to have that marathon approach. It’s not a sprint, it’s a it’s a very long slow grind. And I was well aware of that. I think you have to be there’s a lot of characters. And that was one of the fun things about those days, is you just had a lot of interesting High Net Worth investors that were willing to take the risk and wanted to get away from just stock market type exposure. But those were, those were kind of fun times.

Jeff Malec 41:12

Yeah. And I’ve been on a panel before with some one of the consulting firms, Mercer Cambridge, or someone, and was like, oh, yeah, we’ve done our research that emerging managers can outperform and all this stuff. And I just stopped her, I can’t remember. And I’m like, Hey, hold on. How many times have you actually recommended a manager under a billion dollars? And she was kind of backtracking, like, well, and I’m like, Yeah, you say emerging managers good, but there’s no way any of those consultants will ever put their neck on the line and actually recommend an emerging manager

Asim Ghaffar 41:45

as a firm. They can’t do it. I work so I know you can look me up on LinkedIn and easy to find. I did work at Cambridge associates for six years. All the consulting firms, I think there’s a there’s an element where they don’t, they do look at emerging managers and they will make some allocations, but there’s tremendous career risk. So many emerging managers don’t make it that you need to wait. And from their perspective, you definitely, you can do a little bit of it, but you have to wait and and wait for someone to actually get past a certain threshold. And so it’s just

Jeff Malec 42:15

that was my annoyance of like, well, don’t sit here in front of this panel and tell these CTAs that you do allocate when you in practice, really don’t. Yeah,

Asim Ghaffar 42:24

they also have, there’s, like I said, there’s a different mentality around emerging these days. The industry has changed so much in 40 years that an emerging manager in the 80s might have had again, 5 million. Today, an emerging manager in the large institutional world is anybody with 500 million to a billion. If you start with a launch that has 600 million, that’s an emerging manager. A mid sized hedge fund might have 5 billion. And large hedge funds, as you know, have 20, 30 billion. So the numbers are are crazy compared to what the industry looked like when it was nascent in the 70s and 80s.

Jeff Malec 43:02

And speak to that for a minute of like, how do you obviously, besides the size, like, what can you do that some of the big $20 billion global macro funds can’t do

Asim Ghaffar 43:11

well. The most important difference, I think they’re offering a different value prop. I think a lot of the 20, $30 billion managers, particularly last decade, when rates were zero, they were trying to give you a 567, percent annual return with six 7% volatility. And the pitch to a pension might be, you’re getting nothing on your bond portfolio. Let us be a fixed income replacement, or maybe that’s the pitch to an endowment, we’ll step in and give you that six 7% return. You can slot us in as an absolute return fund in your fixed income bucket, or in your absolute return bucket, because bonds are not giving you what they gave you in the in the 90s. We’re giving our our approaches. We’re trying, we’re a boutique, so we’re trying to go back and give you actual, I think, equity plus type alpha. So it’s a very different pitch. But the one thing we can do, and the way we, I think, have an advantage, is if you’re managing 20 billion as a macro fund, you have no choice but to have 90% of your exposure in equities, currencies and interest rates. The most liquid commodity market is crude oil, and it’s Bucha. Once you get past crude oil, believe it or not, liquidity just evaporates. It’s gone. So a market that’s super liquid to me. A market like corn, it just doesn’t move the needle. You can’t take ten billion and put on a corn position. If you’re managing a very large macro fund, it’s just not going to happen. Your exposure has to be mainly in FX and rates. What I can do is, if I don’t see any good trades in the bond market or in the currency market, I have no problem having zero exposure to those two asset classes for two years in a row, and have my entire portfolio be long the British pound, short cocoa, long sugar and one other trade. And so we can do things that large managers just won’t and can’t do. And I think you can, you can have this nimble approach. Dollars up until, you know, one or two or $3 billion in AUM, and then the game changes a little bit.

Jeff Malec 45:05

Yeah, just from position limits alone, they can’t meaningfully access markets like corn. Hopefully you weren’t short Coco. But no,

Asim Ghaffar 45:12

we were. We were long Coco, and I wish I had held it for longer than I did.

Jeff Malec 45:17

That was a crazy trade. So speaking of those global macro guys and that kind of risk return profile, now compare yourself with and how investors look at it like versus trend, classic systematic trend, versus, say, tail risk, where I’m going to get this crisis period performance at a pure volatility or tail risk. What are your views on those three kind of buckets. Because if I’m an allocator looking I’m like, Okay, what, where do I put you? Tail

Asim Ghaffar 45:46

risk is almost its own. I would almost put that into a separate category, because my understanding with tail risk, however you structure it, you’re constantly losing a little bit of the ante at the poker table, and then you’ll have a massive payoff in year four. And so your entire profile is structured so that you would never want your entire portfolio to be in a tail risk fund or a substantial part. It’s designed to give you that extreme payoff once a decade or twice a decade, it’s not a core holding, whereas I think trend following can be a core holding within your hedge fund bucket, along with a discretionary manager like us. So I think the key comparison might be between us and say, trend following. You know, at the end of the day, you need to have a trend to make money, right? Even a value investor in equities, if you buy a stock at 10 and it goes to five and you buy more because your price target is 30, and it got cheaper, you still needed to go from five to 30 to make money. You need some kind of a trend. Everybody in markets needs a trend. The key question is, where do you get in, and where do you get out, and how many markets are you invested in at any one time? And then there are ancillary questions around risk management, position sizing, etc. The big difference between us and a trend follower, trend follower, especially a classic trend follower, will have anywhere from 20 to 40, maybe more positions on at any one time. They’re in everything, because they’re constantly getting a signal, you know, they have two moving averages that cross, or they have an end day, a 20 day breakout. The signal triggers and they get in the trade. And so they have some limits, but they’re in, I think, a majority of the markets that they have on their on their screen, they have some kind of position in. So they’re always in every market. Let’s call it as a simple heuristic, and that means that they will they’re almost guaranteed to be in every major trend. Now the downside is they’re constantly getting whipsawed and they’re constantly getting chopped to death. We’re only going to have five, six, maybe seven, line items in our portfolio, and at times, we’ll only have three line items, so we’re going to miss a lot of the big trends out there, but the ones we capture, we’re going to do very well in. And so we’ll overlap with the trend follower in those moves that we’re both in, but we’re going to miss a lot of the other ones. But the key is, on the risk side, we’re also not going to get chopped to death and and constantly have a lot of whipsawing going on. And so we’ll have a lot of these short term trades that we put on, where we take profits, where trend follow, will give it all back. And so that’s a big distinction. And the other distinction is because it’s a qualitative approach. It’s our analysis, whether it’s a five month short term trade or a three year longer term idea, our analysis is driving the conviction and the confidence to be in this position, and not a crossover, yeah, not a moving average. So sometimes we’ll be in a trade way ahead of a trend follower and some and they’ll enter much later. I tend to be we tend to be earlier than a trend follower to the trends where we overlap with them. And we also tend to get out a little sooner. They’ll wait for the moving averages to cross over, so they’ll give back a good chunk of the profits. We tend to get out a little sooner. So that’s those are some of the differences would be great for

Jeff Malec 48:45

you, right? If the trend follower gets in the same direction, that’s going to probably push it in your direction. Well, that’s right, you need to be like, come on,

Asim Ghaffar 48:53

come on board, boys. Once you put a trade on you want everyone else to follow you after,

Jeff Malec 48:58

right, right? Which did do you get in? Right? We don’t really call activist investors discretionary macro, but they sort of are on the stock side, right, like picking this stock, picking that stock, and then their game plans, talking up their book, right? Do you do any of that? Like in your newsletter or whatever you’re telling what positions you’re in? But it’s a

Asim Ghaffar 49:17

terrible idea in our markets. I think the equity world is the Wild West. It’s very different. There’s a lack of liquidity. And you can push things around in our world, you’ll get carried out on a stretcher. You can’t push markets like the corn market. Look, if you’re a large fund, maybe you can for a few days or for a week. But in general, you can’t do it, and it’s a terrible idea, and we’re not big enough to do it anyway. I don’t think it’s a good strategy if you are big enough to do it, but it’s, it’s the wrong approach in macro.

Jeff Malec 49:54

So we’ve had this big move circle all the way back. What’s your well, I’ll ask it in two different ways. Like, what kind of themes? I don’t want to have your specific themes and trades, but what sort of, generally, what sort of themes are you looking at like now that this market action happened through the rest of the year and even into your 235, 10 year horizon, I’ll

Asim Ghaffar 50:16

start with the let’s start with just a 12 month horizon. We have some short term themes and views on in the commodity complex, mainly in the agricultural area. So the cool thing about commodities is there’s always either a long or a short setting up. So you either have a supply demand mismatch in the market looks like it’s going to collapse, or you have a situation where a bull a nascent bull market could happen. You can always find some sort of unique short term trade in commodities. And so in our case, the ag markets, the agricultural markets, have some interesting setups where we have some views and some ideas. We have one position on, and we have a couple others we’re looking at. I put that in the short term bucket because of our let’s call it six line items. We always have two, maybe three, that are in that short term bucket. On a longer term horizon, you could almost call it a medium term trade. But we have then, let’s call it 12 month views on some of the financial markets. I think that we are likely to get this long delayed recession that everyone’s given up on. The peak recession talk was back in the fall of 2022 and today, no one’s really talking about it. And I think the fuse was just it’s like in the cartoons that we all watched as a kid, where you have Wiley Coyote, and you have, you have the bomb and goes off and it doesn’t blow up. And so they all the cartoon characters come back to it, and then it blows up and annihilates them. I think that’s sort of what happened in the last two, three years, where the fiscal stimulus was so large and so many corporates and households had locked in low rates on a long term basis that it just took time for enough new borrowers to need to borrow at these higher rates, and for that fiscal stimulus to work its way through the system, and for the bottom third of society to sort of no longer have a lot of these savings left over. I think now we’re finally getting to that point where those two year three year lags are are kicking in. So my view is we’ll have, I think, a very mild run of the mill recession. What I mean by that is, if you think about the last handful of recessions, I mean, they happen so infrequently that we have to go back for decades. But I was in I think eighth or ninth grade when the 1990 maybe it was 91 that recession happened. That was a pretty severe recession. That was a recession where people had a tough time getting jobs if they got laid off. But it was a very mild stock market outcome where the S P went down 25% you can barely see it on a chart. And then you had the.com bust, which was actually a very mild recession. GDP barely went negative, and it wasn’t, it wasn’t really a terrible recession. But of course, because markets were so overvalued, they came down 50 to 80% so I think we’ll have a mild recession similar to maybe the oh one style of recession. And I think we’ll also have a mild bear market in equities, a good template might be. And this goes way back in time, before I was born. But 1969 1970 bear market put an end to the secular, secular bull market of the 50s and 60s. And I think it was a 30, maybe 32% decline. If you look at a chart of the S, P and again, step back and zoom out over the decades, y