The Overlooked Markets Creating Better Trend Opportunities | Open Interest | Ep.21

Summary

Tom Babbedge of Gresham Quant explains why they focus exclusively on alternative commodity markets for trend following, citing structural supply/demand inelasticities that produce superior and more persistent trends. He discusses their market selection process based on fundamental characteristics rather than backtests, the importance of capacity discipline for true diversification, and a novel execution approach that reduces slippage by giving the trading desk a risk budget to wait passively. The conversation also covers client motivations, including low correlation to mainstream CTAs and inflation protection.

• Gresham Quant trades only alternative commodity markets, avoiding financialized assets to maintain low correlation and structural trend drivers.
• Market selection is based on 'alternativeness' metrics like correlation to mainstream commodities, speculative activity, and supply/demand inelasticities, not backtest performance.
• European carbon was added despite a negative trend backtest and became a top performer, illustrating the value of fundamental market analysis.
• Capacity discipline is critical: managing too much AUM forces allocation into liquid markets, destroying diversification.
• Execution edge comes from a passive 'waiting game' where the desk has a risk budget to delay trades, saving spread costs especially in illiquid markets like freight.
• The strategy offers low correlation (20-25%) to the SG CTA Index and provides convexity to inflation/deflation.
• Trend quality (autocorrelation) is higher in alternative commodities than in mainstream markets, making trends easier to capture.
• Clients value the clear narrative of why commodity trends work, helping them stay invested through drawdown periods.