#7 – A Scotsman & an Englishman

In this interview, Dylan Grice and Rob Crenian discuss how markets work, how “stupid” investors have been winning of late but will not do so for much longer, how quants think, how real alpha will be more difficult to come by, and how this will likely be found not by being smarter but by doing something different; and they explain how they are seeking to preserve wealth with an unconventional investment strategy at Calderwood Capital.

I met Dylan when he was working on Albert Edwards’ team at SG and I used to enjoy his weekly missive, Popular Delusions, a title he has resuscitated for his new newsletter. I hadn’t met Rob before this episode which we recorded in person in the podcast studio at my office. We really had a fun conversation in which I probably participated too much, and we carried on in the pub afterwards. Spoiler: this episode is longer than usual.

They got together to set up Calderwood Capital which is an unusual hegde fund, deploying unconventional strategies to preserev and grow wealth, as they explain in the podcast. Their principles are that diversification is the most potent tool in capital preservation yet is the least effectively used; but radical diversification requires radically orthogonal (it seems to be their favourite word – statistically independent) return streams. They talk about the evaluation of risk-return as needing to take place after the research, not before.

You get the picture…………..

GETTING INTO INVESTING

Both started at Dresdner Kleinwort with Dylan going on to work with Albert Edwards at SG and Rob moving to quant manager Aspect Capital. They therefore have had very different career experience, which brings diversity to their new venture.

THE ROLE OF THE FAMILY OFFICE

Family offices are attracting some really high quality investors who enjoy the relative lack of constraints. But the job, capital preservation, is much more difficult than it was say 20 years ago, because of the lack of yield.

“You don’t have to be the smartest guy in the room, but you do have to be different.”

VALUE INVESTING

Value investing hasn’t been working; what has worked recently is “craziness, recklessness”. Dylan mentioned when talking about SPACs and similar features of recent markets:

“it’s crazy how dreams were being priced”

QUANTS

I was quite surprised by some of the things I learned about quants. Good quants just connect data, and there is the analogy of continuous improvement with F1 teams, where success often depends on the data. Quant managers too have to accept that they live in an ever-changing world and Renaissance used to talk about the “half-life” of a quant model – the ability to generate alpha decays over time.

STRATEGY

Their strategy is to build a portfolio that doesn’t depend on getting markets. macro or forecasts right. When you get into more esoteric areas of markets, you find a genuine risk premium – for example, the reinsurance industry depends on collecting more premiums than it pays out in the long term – there has to be a profit incentive. By assembling a basket of such strategies and some quants exposure, they hope to be able to survive interest rates at 20% and still make money.

I thought this was a fascinating discussion, full of gems, and it made me reconsider whether gold was a sufficient insurance policy in my portfolio and what else I should be thinking about. You should too – strategies which have been successful over the last 40 years are unlikely to work in the next 20. That’s why I am continuing this macro series with a very special guest next month.