OI23: Why Capital Efficiency Is the Next Edge in Investing ft. Charlie McGarraugh
Charlie McGarraugh, CEO of Altis Partners (sub-advisor on two Simplify ETFs), argues the next edge in systematic investing isn't better return prediction but better capital efficiency and sizing — how much leverage and drawdown tolerance a strategy can prudently carry. He also argues markets have shifted from a QE-era volatility-suppression regime to a policy-driven volatility-inducement regime, meaning investors should be more adaptive/reactive than they were in the 2010s. No price levels or trade recommendations; the episode is a strategy and product-design conversation, including detail on Altis's Enhanced Macro Program (~150 markets) and a newly launched Chinese onshore commodities ETF with Simplify built on trend plus relative-value signals.
Core argument. McGarraugh's central claim is that in systematic/CTA investing, sizing and capital efficiency matter more on the margin than return prediction itself. "The sizing is just such an important piece of the puzzle," he says, and the industry has under-invested in thinking about it relative to alpha research. His second argument is regime-dependent: markets have moved from a decade (roughly 2010–2019) where governments suppressed volatility via QE — an environment "inimical to the returns of the trend factor" — into a period where governments are actively inducing volatility through tariffs, trade policy and geopolitical conflict. That shift means the optimal amount of "reactiveness to new information" in a portfolio should rise from where it sat during the QE era.
The mechanism. He frames all investment strategies on a spectrum of reactiveness: fully passive (no reaction to new information — dollar-cost-averaging, ~60% of market flows by his estimate) at one end, and over-trading/overfit strategies that bleed out on transaction costs at the other. The right level of reactivity is tied to the cost of changing one's mind, and that cost/benefit calculus has shifted because "the amount of fundamental volatility in the world is just picking up." Futures markets, he argues, are the most efficient venue for this adaptiveness because they combine cheap transaction costs with capital efficiency — access to leverage close to institutional funding costs, something retail margin accounts can't replicate. On sizing specifically, he invokes the Kelly criterion: full Kelly is too aggressive because bet odds in markets are never precisely known (unlike defined-odds gambling), so practitioners size some fraction below Kelly, and choosing that fraction is an exercise in humility about estimation error. His key empirical point: the incremental compounded return from being able to tolerate a modestly larger drawdown is disproportionately large — the difference between an investor who can stomach a 10-point vs. a 20-point drawdown is
way bigger
On the record
| Claim | Speaker | Expression | Horizon | Hedge | At | Status |
|---|---|---|---|---|---|---|
| McGarraugh argues the incremental compounded return from being able to tolerate a modestly larger drawdown is disproportionately large: an investor who can stomach roughly a 20-point drawdown versus one who can only handle a 10-point drawdown gains far more than proportionally more compounded return, depending on time horizon. He frames this sizing/capital-efficiency question as a more important, under-explored lever in systematic investing than further improving return prediction. | Charlie McGarraugh | — | — | base-case | 00:00:00 | OPEN |
| McGarraugh argues markets have shifted from a 2010s QE-era regime in which governments suppressed volatility (a drag on trend-following returns) to a current regime in which governments actively induce volatility through wars, tariffs and trade policy. He argues this shift means investors should now run more adaptive/reactive strategies than during the QE era, with futures markets the most efficient venue for that adaptiveness given their capital efficiency. | Charlie McGarraugh | — | — | base-case | 00:19:17 | OPEN |