Full Transcript: Eric Crittenden on Trend Following and Portfolio Design
Regime Shifts, Risk Premiums, and the Optimal Portfolio
Matt: You’re watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use, where better questions lead to better decisions. I’m Matt Zeigler, AKA the Fred Wesley of Excess Returns. Why? Because I’ve got the JBs with me today. Jason Buck from Mutiny Funds. Are you ready to pass the peas?
Jason: I don’t even know what to do with your intros every time.
Matt: It’s all right if nobody gets that. We’re doing this to the death. That’s all I know. Because we have Eric Crittenden here. He’s back. Eric, thank you so much for coming back on Excess Returns.
Eric: Thanks a lot for having me on. Appreciate it.
Matt: I’m here to troll. Jason, you’re here to do that with me by answering questions about stuff that... I mean, let’s be honest. Last time you were on, trend following was not putting up its finest numbers, if I recall correctly. And it seems things have changed just a smidge between then and now. So maybe first and foremost, what was going on a year ago?
Eric: It’s a very different environment today. So back then, the tariff wars, the trade wars resulted in some abrupt trend reversals. And I think everyone in the industry that I follow got whipsawed pretty mercilessly. We all had significant drawdowns. We lost a ton of money being short bonds, long stocks, currency trades. It was a very, very difficult period of time. It’s something that we expect to see once every eight years, maybe ten years.
It’s hard to predict. If you think back to what it was like, we were one tweet away from the S&P moving ten percent in thirty seconds. Bonds having five, six standard deviation moves against you inside of an hour. It was a very difficult period of time. It takes a lot to get emotion out of me, and even I started to feel it, you know, down towards the... So the drawdown began in mid-February. That’s when everything peaked. And for us, it bottomed in early April. So it wasn’t a long drawdown, but it was a fast one, you know, and, and it was the result of multiple whipsaws across really deep liquid markets that we had big positions in.
So it was not fun, and I’ll admit that even I started to feel it a little bit in early April. My birthday’s in early April, and I’ve noticed historically things tend to cluster around my birthday. So it wasn’t a pleasant experience, but we stuck to our plan, just like we told our clients we would. We managed the risk as best we could. Our drawdown was significant, but it wasn’t outside of the range of what we communicated to people. Survivable, it’s just not fun. And then it was over. It was over in early April, and of course, we didn’t know it at the time, but it’s been a much more favorable environment since then.
Actually one of the best environments I’ve seen in my almost thirty-year career. So, that’s, that’s what happened. And, you know, what can you do other than just manage your risk and accept your beatings when they come? They’re gonna come from time to time. You’re gonna have drawdowns. Question is: do you manage the risk well during them, and do you do what’s necessary to come out of them when they’re done?
Matt: Can you talk for a minute about the positioning at the beginning of it? So not to pick at scabs or poke at traumas here. But I’m just curious about the actual positioning as it was and then testing. This is like a test of the strategy when this starts to all go wrong.
Eric: Yeah. It was pretty much a full risk-on positioning. We were long European stocks, Japanese stocks, US stocks, Canadian stocks, and we had some moderately sized short positions in bonds. We were long the US dollar. We were long gold. It was kind of a happy days, growth-oriented portfolio. Exactly what you didn’t want on when it hit the fan. So yeah, it was a fairly typical pro-growth, reasonable inflation type of portfolio that was on. Kinda like a 1980s style portfolio.
Jason: Well, related to that, Eric, don’t you think that’s part of every trading strategy has its pros and cons, and one of the cons of trend following is you get long in the tooth on the trend, right? And if you have a quick reversal, especially if you have medium to longer-term trend signals, that’s where you’re gonna get whipsawed because you’re really trying to capture the belly of a move, and so that always happens.
But then part of it, does it give you the confidence to hold on? It’s like, this is what happens when you have some sort of regime shift. That’s when you’re gonna get some drawdowns. But then what that regime shift is doing is opening up a new regime, hence regime shift, and that’s typically where trend tends to do exceedingly well compared to maybe other strategies. So it’s just knowing the pros and cons of what your strategy helps you sleep at night.
Eric: Yeah. I think that’s fair. The new regime that’s born after a drawdown — that’s usually the most fertile soil for finding new trends that are not trusted. They’re not exhausted, and there’s a risk premium embedded in them, and that typically comes, you know, at the darkest moment, you know, before dawn, when no one really wants to allocate to your strategy. That’s the push-pull dynamic in this: the best opportunities present themselves when you are psychologically and socially under pressure. That’s a reoccurring theme over my career, for sure.
Matt: Talk a little bit about what that process was like when you were going through it then. How quickly are you seeing new trends emerge that aren’t being trusted, especially when you’re coming off the heels of the regime shift?
Eric: Yeah. The speed is different depending upon market environment. April 2025 was one of the fastest I’ve ever seen, on par with the COVID bottom, with new themes emerging. And that’s where a systematic process really, really helps a lot because it just forces you to get on the right side of these new trends before you can come up with a thesis as to why they’re gonna work, and then get that thesis through an investment committee and get everyone signed off on it.
Systematic trend following, a systematic process, just basically forces you into winners and forces you out of losers through discipline with no hesitation. So that’s how I like to live, and that’s what we do. And I think that in a really fast environment where you have to make decisions under pressure that are not politically or socially popular, a systematic approach helps a lot.
Jason: Well, so when you’re — sorry, let me just jump in real quick. When you’re going through that drawdown, and you’ve been in this game for decades, you know how to stick to your systems. That’s the discipline — sticking to the system. But everybody has, I guess, dark nights of the soul, like you said, around your birthday when it’s in deep drawdown. And I wouldn’t say it’s necessarily sticking to your systems. Does it make you start to question the time duration of your systems and say, “Maybe we should have some faster signals”?
Eric: Yeah, absolutely. It’s important, and that’s a lesson I learned a little later in life. My bias is towards long-term trend following. I have a few biases that I have to manage, and I manage those systematically. One is a small-cap bias, another is a complexity bias, and the other one, probably the strongest one, is a long-term bias. And the reason for that is the long-term approaches tend to work a lot better over the long term. They just have higher risk-adjusted returns, higher compounded returns. They’re just better compounding machines, and I don’t like trading a lot. I don’t like taxes, and I don’t like turnover.
But there are market environments, there are sequences where the short-term systems are essential to doing well. After COVID, that was true for a period of time, and then also this time around. So if you diversify across short-term approaches, medium-term approaches, and long-term approaches, you’re giving up a little bit of the upside from just sticking with the more profitable long-term approaches, but you create a much smoother experience that people can stick with and that you can size more appropriately. Diversification works also in systems. So that’s a good point, Jason — you really do need to diversify across time frames if you want — to do reasonably well through most plausible market environments.
Jason: Like you said, sometimes short term works better, sometimes it doesn’t. If I think about the flip side of that, it’s just this last March where we’re going through the Straits of Hormuz, and it’s flopping back and forth on a daily basis. Your long-term signals might have not even gotten involved in that. So you’re doing really well on that side. But that’s what I’m saying. I think that it’s, like you said, diversification of signals is important, but I do see even within different firms the desire to switch to short, medium, long term based on recency bias, and that’s more of a temptation rather than sticking to your signals. So I’m just wondering how you deal with that mentally, or you’re just so disciplined that we can’t even imagine what it’s like to be a Vulcan like Eric.
Eric: We just decide to not do that. I see people fall victim to that, where they’re like, “Well, the short term’s gonna work better now based upon the environment we’re going into, so we’re gonna overemphasize that.”
Some people are using fundamental filters, GDP filters, interest rate environment filters, and having good success with those things. But over the long term, if your research goes back to 1970 like mine does, you can see that there are regime shifts that were very counterintuitive. And they happen fast, and there’s really big moves in the first couple innings of those. So if you’re using too many filters that haven’t seen these kinds of new environments, you run the risk of just getting left out or getting whipsawed from your choice of which system to bet on.
So I trust all three of my systems — the short term, the medium term, and the long term. I give them equal representation and just stick to the process. I don’t want any more model risk than I have to take, and I don’t want human discretion getting in there messing things up because we’re fallible human beings. We feel the pressure. I’m very thankful that I’ve stuck with the systematic process for as long as I have, and I will always stick with it going forward because it just simply works better in my experience. So I’m, I’m very thankful that I’ve stuck with the systematic process for as long as I have. So.
Matt: In the systematic process, looking back — and this isn’t just a last year question — what’s broken and you’ve jettisoned or let go from the process. These didn’t come down to you handed on stone-carved tablets, I don’t think. A lot of work goes in. They’ve been updated along the lines, right?
Eric: Well, in a sense, yes. But I will say that the systems that we are running, it’s really important to me that they be stable across decades, meaning implementable. So if I’m looking at research from the 1970s but I’m applying technology from 2026, if I go back in time to 1970, it would not have been implementable. A lot of the higher frequency stuff just simply wouldn’t have been implementable because you were trading almost using the post office back then. It was a phone call, but it was hours before you got filled, maybe the next day kind of thing. So it’s important to me that if I’m going to use data from a stagflationary era, that I use systems that actually would’ve been implementable back then.
Yes, we’re continuously doing research, but we’re purposefully not changing very much. I don’t want to — if we find efficiencies, we’ll implement them, but it’s an art. It’s more of an art than a science to not get in there and tinker with a good thing. In my experience, the most successful people that I’ve met that have done it for a long time, if you drill down and look at what they do, it’s actually blunt and simple and durable, and not very sexy. You know, they use diversification across different blunt tools They use diversification across different blunt tools that when combined together create a nice experience. The people that are smarter than me and more educated and have more elaborate, complicated systems — I haven’t seen as much success from there. I’m dazzled by what they do, but when I look at where the real money is and the real profit margins and the real risk premiums being collected, and I decompose those, I see simple, blunt tools. So I don’t wanna tinker too much.
Jason: I think what Matt’s hinting at is, I think he’s actually hinting at the hardest piece to systematic trading, right? How much do you evolve and iterate versus tinker, and what’s the right time to do it and when’s not the right time to do it? As you’ve evolved throughout your career and iterated to this point — you launched Standpoint in 2020 — like you’re saying, you have the tools that you have then. You’re going through this drawdown, you’re getting redemptions. All of that external pressure is so much that I think that’s the time when you wanna tinker the most. So what hurdles do you put in place to make sure you don’t tinker? But like you said, maybe technology’s evolved, maybe certain things have evolved. Maybe you do need to tinker, and it’s an art. So maybe open that up for us a little bit. I think that’s one of the hardest questions for anybody to answer.
Eric: Yeah. Well, especially guys like me that like to design systems and build them — do you just build it once and then just sit on your butt and run it for the rest of... No, I tinker a lot on the research side. But I’m very aware of how dangerous it is to bring new concepts into something that’s working well. The way I look at it is, everything’s a trade-off and everything has unintended consequences. It’s kind of like a matrix in my mind. If you want to do something, what’s the upside? What’s the downside? What are the potential unintended consequences and the unintended benefits as well?
I tinker a lot just on the research side. I look at things, especially after drawdowns, like, what could’ve been done differently? And you’ll get an answer. You’ll get plenty of answers. I could’ve done this differently. I could’ve used some form of profit targets. I could have used covariance or copulas or whatever to kind of squeeze out the risk and see where they were starting to converge, and it’ll always look great right then. But then you’ve got to go back in time and apply it continuously through time, and you’re like, “Wow, okay. It worked great in two times in fifty years, but the rest of the time it was a huge drain on your profitability, or it actually increased risk.” So you need to be intellectually honest about these solutions, or quote-unquote “improvements,” that you’re seeing. It doesn’t stop me from looking — I’m curious, and I like these kinds of puzzles — but I’m very, very skeptical about introducing them with other people’s money if they don’t solve more problems than they create.
Matt: I think the rigor there is really important in this.
Eric: It is, and there’s a humility, too, right? For some people, myself included, it’s hard to just sit on your hands and do nothing, but that’s simply the right answer eighty-five percent of the time in this business. If you have a good thing, don’t mess it up.
Jason: But it’s hard when you’re in a heightened emotional state. Your thinking’s not clear, but you don’t know your thinking’s not clear, so you’re tricking yourself into, “No, we should be doing this,” right? That’s the spin-out. But hopefully you have good team members and everybody that keeps you in check and good people on your board to be a sounding board, so you can maybe sit on your hands better than maybe you want to, you know, touch that keyboard.
Eric: It also helps to not be particularly emotional, so I fit that. Thankfully.
Jason: Exactly. I don’t think I’ve ever asked you this because I could just guess what your answer would be, but like you’re saying, that drawdown last year was one of the worst drawdowns for decades for a lot of trend following managers. And so we’ve always heard this every decade, every few years, “Trend following’s dead,” “Trump’s trade,” “It’s a faster acceleration,” “It’s never gonna work again. It’s been too big of players in the space.” I’m trying to think of all the reasons and excuses people give that it won’t work. Do you ever even pay attention to any of that, or do you just know it’s gonna eventually come back?
Eric: Do I pay attention to it? This time around I did not. I have in the past, where I’ve listened to this and I’m like, “Well, could they be right?” You know? And I’ve spent a lot of time studying why trend following even works in the first place. Like, why should you be able to, to do this and extract money from these markets? I mean, you’re trading against the smartest people in the world, the hedgers and the commercials and whatnot. But I, I have a theory as to why trend following works. It provides liquidity to hedgers in their moment of need, and from an accounting perspective and from a supply-demand and, you know, the physics of real life, I mean, that just, in my mind, has to be true. So trend following should work. The question is can you survive the path traveled? Are you diversified enough, and is your leverage not too high? You’ll be able to survive the wiggles, because a small wiggle can be a big wiggle if you’re using too much leverage, you know.
So the naysayers that said, you know, trend following is not gonna work this time around, it’s the same crew of people over and over and over again. I understand their perspective. I used to be on that side. I was an arbitrage guy coming out of college. I just dug in and looked at the math myself and said, “No, trend following is actually a legitimate way to extract a very valuable and very large risk premium from the futures markets, and I fully expect it to work long term as long as you don’t over-leverage and you diversify properly.”
Matt: Not to emphasize or go too closely into when you’ve changed something, but is there any story about something when you actually tinkered, you did the research, and you were like, “I didn’t see this before because this crisis made me ask this question”? Is there any example of where it actually passed through the filters and arrived at an actual update?
Eric: At Standpoint, no, not in terms of changing the system. We haven’t changed the system at all. Having three different trend approaches — short term, medium term, and long term — goes a long way towards inoculating you from having to do stuff like that. What I have done is there’s certain markets that I’ve removed from the portfolio, nickel being one.
We made a lot of money in nickel, but when it went crazy a few years ago, when I looked at the underlying structure of the market and saw that there are a couple of Russian oligarchs who own all the nickel in the world, and the LME is not giving me straight answers about counterparty risk and some other stuff, and it’s a tiny market anyway, so we kicked that out.
Another change I’ve made is some of the short-term fixed income instruments. In order to get a reasonable position size on with your risk budget, the amount of leverage that you have to use in those low-volatility markets is just eye-popping, and it scares the regulators, it scares the board, and they add almost no value. You’ve got this huge fixed income opportunity set, and putting euro yen and EURIBOR and the Schatz in there gives you just more of essentially the same exposure, with much higher leverage levels. If you look at our leverage levels, you see a pretty low number, a pretty humble number, and you look at some of the other futures trading firms and you see these eye-popping numbers. If you look under the hood, it’s the short-term fixed income products that were causing more problems than they were solving for us, so I kicked them out of the portfolio. So those are the only two changes that I can recall during the Standpoint years so far. Thankfully, I haven’t had to tinker with the systems. They’ve done what I hoped they would do. They did what we designed them to do.
Jason: But I want to clarify. When you take nickel out of it, it’s because of a structural fundamental reason, because of the structure of the market, where some managers took out, let’s say, cocoa or silver because in three decades they hadn’t trended. And so they were like, “Why should I have these in there?” And then all of a sudden, that’s where all your returns come from in the last few years. So I just want to clarify — you’re not throwing it out because it hasn’t trended in the last few decades. You’re throwing it out because there was a structural reason to throw it out.
Eric: Yeah, and that’s a terrible mistake, in my opinion, to kick out a market because it hasn’t been profitable. I think cocoa has been our most profitable market since we went live, and a lot of people don’t trade cocoa because it was such a pain in the ass for a couple decades. Same thing with silver, like you mentioned. We’re not gonna be doing that, kicking out markets. You need to be there consistently providing liquidity to hedgers and buying strong markets and shorting weak markets. And if it’s a legitimate futures market, it needs to be in the portfolio.
Jason: Well, but related to that, you brought up the fixed income markets and the amount of leverage you have to take to be involved in there for any sort of meaningful gain on a risk-adjusted basis. In the last five years, people have had a really hard time in trend following with fixed income markets, and maybe they wanna throw them out, maybe they wanna keep them. I’m hearing a lot of grumblings about it. How do you think about the fixed income markets over the last few years, besides the leverage part? How do you think about them on a trend basis?
Eric: Well, they served us very well in 2022. Being short bonds is what saved us and allowed us to have a positive year. And I heard the same argument prior to that — especially the argument against shorting bond futures. A lot of smart people were writing articles saying it’s impossible to make money from being short bond futures because of the way that the coupon payments work, and that’s a whole other thing. But I did the math on that and said, “Mm, no, I’m not buying it.” It’s reduced somewhat, but I’m not buying it. So we keep it symmetrical. We’re agnostic to direction when we’re trading futures, and I think you need to have fixed income, you need to have metals, you need to have grains, you need to have currencies. You should have representation from all of them, and don’t discriminate just because they haven’t trended well over the last five, ten, twenty years, whatever.
Jason: Yeah. There was all that literature coming out about CTAs — that the bulk of their profits had been made in a falling interest rate environment, and that when interest rates rise, they won’t be able to make any money. So that was one of the primary arguments of why it was broken and wasn’t gonna work anymore, but obviously it has been working again.
Eric: Yeah, all they needed to do was go look at the ‘70s, the CTAs that were around with rising interest rates. I couldn’t believe it. I was reading. I’m like, “No, I expect to make healthy...” You know, like, it’s — I’m praying for rising interest rates, not for the economy, but for a trend following portfolio, especially for collateral yield, right? You’re just climbing the ladder, making money on your T-bills and being short bonds. But we got what we got, and they got proven wrong, so.
Jason: Well, in that way, the term structure matters. So how do you think about that too?
Eric: Term structure matters a lot. But if you’re factoring that into your time series that you’re taking your trend signals from, it should work itself out over time.
Matt: I wanna — I know this is foundational, but I wanna spend an extra second on it. The providing liquidity to hedgers concept, and can we do it across some of the spaces? Because there’s different hedging activities in different markets, same construct. Explain how you mean it. Explain how that works maybe in a couple of different domains.
Eric: Yeah, okay. So it’s been a couple years since I had this conversation, so we’ll see how good I do. There are a couple of different points I wanna make. It can be difficult to tie them together, so let me take my best shot here. I’m out of practice on this. I’m from Kansas, a big agricultural area — hog farming, wheat farming, alfalfa, stuff like that. Koch Industries is there. So I knew a lot of people, when I was growing up, in the hedging space. And I went to Wichita State University, and I started a club there called Students of Finance — kind of a bland name for, but we were essentially trying to create a computational finance type program before computational finance existed, or financial engineering.
A lot of the people that joined my club worked on hedging desks for farming syndicates, trying to manage risk. And I remember one time we were discussing their compensation plans, and it was so confusing to me because they weren’t compensated on profits. A lot of them generally lost money on their trading. And it seemed like the more they lost, the more they got compensated. I’m like, “What is going on here?” I was an investments guy.
And then I realized after a while of just fighting with them about this and digging for answers — because they were perplexed as to why I was confused — their job is to create negative correlation with the core risks on the balance sheet of whatever corporation they were working for. And I thought, “Well, oh, okay, they’re hedgers. So they’re not trying to make money. It’s a form of insurance to them.” And I thought, “Well, how much of a difference can that possibly make?”
And then when I realized that by hedging properly and reducing the bankruptcy risk, it lowered their weighted average cost of capital for the whole firm — so when they’re issuing bonds or raising money or whatever — they may lose two, three percent a year on the hedging side, which can be leveraged up to six, nine, twelve percent from someone that’s trading opposite them. But they’re lowering their cost of capital across the whole spectrum of the business so much that they’re making a lot more money. So there are just these hidden things in the background that you have to drill through to see why these motivations exist.
So now the example I use in the futures world — I think my favorite is the copper mining example. So let’s say you’re running a copper mine, and copper is trading at three, what’s it trading at today? I, I don’t look at the prices, I just look at the risk typically. But just pretend that it was ten years ago. And that implies a profit margin to you of, say, ten percent. If the price of copper goes way up, then you’re motivated and incentivized to produce more copper as fast as possible. But it’s gonna take you time to ramp up, right? You’ve gotta hire people and get more insurance and equipment and open up mines that have previously been shuttered. Maybe that takes you three, six, nine months to do all that work, and it costs you money, right?
In the meantime, copper prices could go right back down to where they were, and then you just spent all this money chasing a profit margin that didn’t really exist, right? But if you pre-sell by going short futures, you can lock in that profit margin, right? And then with that certainty, you can go out and expand production. But you’re going short copper futures. Are you bearish on copper? No, you’re bullish because you’re, you’re opening up previously closed mines and hiring people, right? You’re trying to protect your profit margin. Now, some people don’t do this, and they’re like, “Well, I’m just gonna gamble. I’m betting that copper is gonna go up, so I’m going to not hedge.”
And some people get away with that, but for how long? Because imagine it’s hard enough to trade copper profitably, but if you’re doing it with a six-month lag, spending twenty million dollars to hire people and get more equipment and whatnot. So who’s on the other side of that trade? Who wants to buy copper just because it’s going up? It’s the trend follower. No one else wakes up and says, “Oh, copper prices are twenty percent higher than they were a year ago. I wanna buy.” But all of the people that produce copper are seeing the same thing. The price is going up. That implies a higher profit margin. They all want to expand production, and most of them need to sell copper futures or forwards to lock in their profit margins, right? Who’s on the other side of that trade? Not very many people wanna be on the other side of that trade. And we don’t have a vested interest, so to get us to come in and provide that liquidity to you, there has to be some sort of implied risk premium that we’re gonna collect. I say that that’s the trend following risk premium. That’s copper.
Now, you asked about other asset classes because some people would say, “Well, where’s the premium in going short the S&P 500? That makes no sense.” So I’m gonna change my definition of hedger to hedge-like behavior. Hedging-like behavior motivations are cousins throughout all the different asset classes. And I can’t prove this, but I think that’s why it persists — because you can’t actually prove it’s true. But I believe that there are social and political and societal pressures to not chase things that are up, or to liquidate things that are down, and that creates hedge-like pressure that flows to the trend follower.
If we’re a minority group in the market space and we’re willing to provide liquidity by buying rising markets and shorting falling markets over time, and that risk premium exists, it’s gonna flow to us over time. Now, I think it’s humble. I think it’s two hundred to maybe three hundred and fifty basis points. But then what trend followers do is leverage that up and diversify across all different asset classes, and you can turn that into an eight to twelve percent annualized return with commensurate volatility and drawdowns that are in the fifteen to twenty range. I think that’s doable.
Jason: Matt, I’m so glad you brought this up because this is one of my favorite things that Eric talks about. Because historically, if you look at trend following, everybody says it’s behavioral — people just see something going up, and everybody jumps on, and they pile on, and it exceeds its capacity. It’s just a behavioral effect. And it never sat well with me until talking to Eric about this risk transfer services concept, because that makes much more sense of why there would be a premium there.
And so forgive me if I brought this up on the last one, but I always think about how people talk about alpha and beta, but then Scholes introduced omega — which he called the risk transfer service premium, because that’s the way they could port onto their efficient market hypothesis where it still made sense of where that premium exists.
Yeah. And the idea is if you’re providing a risk transfer service, right, you should get paid for it. So the analogy is to when you’re an options buyer or a seller or an insurance buyer or seller, right — there are risk transfer services. And risk transfer services, like Eric’s alluding to, is also a time arbitrage, right? You’re just trying to smooth out P&Ls through time, and that’s why people want this risk transfer service, and they’re willing to pay you a premium for it, because Eric’s saying they have this tertiary effect of lowering their cost of capital but also smoothing out their time horizons. It’s more about a time arbitrage to me than anything else.
But I always think about it as, like, if you’re inventorying options, like deep out-of-the-money puts, waiting for a market crash, everybody always asks me, “Are puts overpriced or underpriced?” I’m like, “I don’t even know how to answer that question.” Yes, you could do theories and tinker around the edges of relative value amongst the different deltas you want, but historically, if you’re buying options, especially deep out-of-the-money put options, they’re overpriced because nothing happens, right? You’re burning through all that premium until something does happen, and then they’re incredibly valuable. Mm-hmm. So they’re always overpriced or underpriced. They’re never perfectly priced.
So I don’t even understand that argument, and that’s the kind of term arbitrage through time. Similarly, if your house burns down or you get in a car accident, do you have the cash on hand to rebuild or make up for that car accident? Likely not, and this is why we use insurance or risk transfer services — to make sure we can flatten out our balance sheet, our P&L through time.
And so it’s, it’s an interesting way of thinking about it, especially when you’re thinking about commodity trend following. And I was thinking about this, Eric, the other day. I haven’t fully formed this thought, so I know you’re gonna make fun of me and probably rip me right away for it and point out the obvious flaw in this thinking.
So I was thinking about it as, if you’re performing those risk transfer services, I always think about everything through adverse selection as well, right? And like you said, these commercial producers and hedgers are unbelievably... and hedgers — Their amount of knowledge base and statistical data and everything they have is so much superior to you. So like you said, they have much more informational advantage over you because they’re the ones actually pulling the raw commodities out of the ground or refining those commodities and then hedging in the space. So they have much more information and data. So I would argue in most of the time when markets are fairly quiet or mean reverting, they have better data and knowledge than you do, so you have adverse selection.
So those are maybe your whipsaws or where you’re losing a little bit of money. It’s when prices start to run away from them, when they have to really start to reach for those hedges, and they desperately need those risk transfer services — that’s when it opens up your profitability window, and that’s when you’re gonna make the most money, is when they’re really reaching. And now that adverse selection has come down and flipped to the other side because now they structurally have to reach for that, for that insurance. Does that make sense?
Eric: We help the market clear, right? The market’s gotta clear, which means you have to find some balance between buying pressure and selling pressure. And if copper is gonna double in value over a three-year window, you need liquidity on both sides of it. So our job is to provide liquidity in a way that’s behaviorally and socially difficult for other people — buying rising markets and shorting falling markets. And you can download the data for every futures contract that’s ever existed, just run it through a simulation, and you can see the skew, you can see the tails.
Now, they’re not there all the time. They’re not there at a timeframe that gets people excited. You can’t just take corn and say, “Every year I’m gonna make 6% in corn.” It’s like, no, it’s ten years of dead money and then you make a 150% return in corn. And then another market it could be you lose money consistently, three, four percent a year for seven, eight, ten, twelve years, whatever, and then you make a 50% return — like cocoa and whatnot.
But the supply-demand imbalances do happen, and if you can latch onto a supply-demand mismatch and hold onto it, it’s rare that you’re gonna go five years without some supply-demand mismatch in one of the sectors that you’re following. It does happen. There have been periods of time where they’re muted or there’s not very many supply-demand mismatches that provide the fuel for a big trend. But these markets exist for a reason, and we help clear the market by providing liquidity to ultimately resolve those supply-demand mismatches when they do happen.
Jason: That’s what I was kinda saying — if the supply-demand is matched, like it is most of the time, it’s hard for you to make money on the risk transfer service because you have adverse selection. As soon as that balance gets out of whack, that’s where it’s possible to make money, and that’s where the spread or the profit margin widens. You need those imbalances, and like you said, those just happen from time to time. And a lot of times they happen after those regime shifts because people are forecasting a future regime that looks like today.
Eric: Yes.
Jason: As soon as that shifts globally, then we’ve got a problem. And in a way, I guess everybody should thank this US government regime, right? Because it’s shifting the political landscape globally so quickly that that opens up new regimes and creates supply-demand imbalances. But also, the way I was thinking about it — it’s very similar to another analogy, because I know, Matt, you asked it for other industries. I remember about a year ago I was talking to and reading about dry bulk carriers and how the Swiss physical commodity houses will also have the shipping containers going and different cargo ships and dry bulk ships going worldwide.
Nowadays that market has gotten so competitive and compressed that most of their shipping is at a break even, or they might lose a little bit of money having their carriers out across the ocean. And they are just waiting till, like Eric said, that one time every five years where a Strait of Hormuz gets closed or something happens, and now they’re gonna make twenty times the profits. It-it’s another way of optionality or risk transfer services. If we have these cargoes going all over the world, most of the time nothing’s happening. We’re flat, we’re break even. And then once every five years, we just make a fortune. It’s this punctuated equilibrium.
Eric: Yeah, and sometimes that’s just how markets clear, right? It’s not up to us. That’s just the dynamic. We have to figure out a way to profit from that. The markets don’t care that we wanna make eight percent a year like clockwork every year. They do not care. Their job is to match willing buyers and sellers and clear the market. That’s it. They don’t care what that means to us. So it’s our job, if we wanna participate, to participate with reality. It’s kinda like being a little boat on a big ocean. If it decides to storm, it’s not up to you. You just have to figure out a way to survive the storm and keep going west or whatever direction you’re trying to go.
Matt: I feel there’s mixed Hemingway metaphors inside of that that I’m gonna let slide for sake of this conversation. So pairing — not just trend in isolation, pairing with portfolio. How do you think about this with that awareness? And I think this is really important too, because for any fundamental ground-up person, understanding trend through this context is really, okay, I see why this is a diversifier. This is a completely different approach to how firms are gonna solve their cost of capital problems and get this on the table. So where does it fit into somebody who is making just a passive allocation to stocks, bonds, whatever else? Pick on the 60/40 if you want or not, but how do we think about where this fits into a broader portfolio?
Eric: Well, my approach is just top-down empirical. That’s what I like to do. That’s, that’s where I like to start, right? So I’m gonna take... That’s what I did, and when I started Standpoint, I’m like, all right, I’m not afraid to be long stocks for the long term. I’ve seen the data. Bonds have a negative real return long term if you factor in fees, taxes, and inflation. Even during bond bull markets, those numbers aren’t great. Most of the alt products out there underperform inflation. You just look at the whole landscape of all investment opportunities — stocks stand way up ahead of everyone in terms of real returns after fees, taxes, and inflation.
So I’m not afraid to own stocks. In fact, I think you should. I, I view stocks almost as cash at this point. You just have to own them for the next hundred years or fifty years or whatever if you wanna keep up with the debasement of your currency over time. That’s what the empirical data says. Now, I’ll probably — we’ll go into a ninety percent decline tomorrow because I said that, but whatever, the empirical data. It’s past your birthday, I think. Yeah, yeah. Well. So then the question becomes, how much do I want in stocks? For me, I put fifty percent in stocks. Just put fifty percent in stocks, and I’ll allow it to fluctuate up to almost seventy percent and down to almost thirty percent. Two-thirds, one-third, essentially.
Now, I’ve got a lot of cash left over. What do I do? There are all kinds of things I can do. I can do bonds, I can do commodities, I could do munis, I could do gold, I could do convertibles, arbitrage, all these different things. So I’ve looked at everything that is scalable and implementable, and trend following managed futures just stands apart as mathematically the best diversifier to that long-only stock portfolio.
Bonds have been good for periods of time, and they’ve been tragically bad — like in the 1970s, they were tragically bad. From ‘82 to 2020 they were great. Gold sometimes is just wonderful, a wonderful diversifier, and other times it’s just a massive drag. And then all the other asset classes either kinda have a beta to bonds, or more likely they have a beta to stocks, meaning they might be uncorrelated when stocks are going up, but they tend to be highly correlated with stocks when stocks are going down.
So objectively, if I just look at the base rate statistics from the top down, a diversified trend pairs up nicely with stocks. The question is, how much to use? Now, this is where everything goes off the rails, because if I anonymize the asset classes and have people pick and choose — just show them, “Here are the monthly or annual returns for these asset classes A, B, C, D, and E” — they will put most of their money in trend. And then they’ll put the second tranche of money in diversified bonds. And stocks are literally in last place usually — basically the opposite of what they do in real life. So that’s just using their heuristics of looking at the data.
If you put it into an objective optimizer, it comes back and says that anywhere from thirty to sixty percent in trend is what creates the highest kind of omega ratio, Sharpe ratio, Sortino, Calmar, whatever. Whatever your risk-adjusted metric is, it basically says approximately equal risk contribution from trend and stocks is what creates the most durable path traveled. And my timeframe is 1970 to current, right? So that’s what I do. Equal risk contribution from long-only global equities and trend.
Now, are other people gonna put half their money into trend? No, they’re not. No, they’re not. You might talk them into ten percent. And if they’re only gonna do ten percent in trend, they really should be buying the most volatile trend program out there, like a Mulvaney type or something like that, but they won’t do it. I’ve found that from a behavioral and social perspective, there’s no way around that. If you convince someone to put ten percent of their portfolio in trend, they’re gonna watch that thing like a hawk every quarter, every month, and every time it’s down when the market’s up, you’re gonna hear from them.
So I decided to sidestep all of that and just build what I think is the optimal portfolio, get the right amount of trend in there, the right amount of stocks, keep the fees reasonable, squeeze out the taxes the best I can, cut the trading down to just what’s necessary, and offer it as a standalone. That, that’s the only way to survive in the trend space as far as I’m concerned. That, that’s the conclusion I came to, so that’s what I did.
Jason: Well, and everybody’s coming to your conclusion. You’ve had a lot of copycats, and everybody’s trying to maybe overlay a little bit of stocks in their portfolio with their trend. But if I think about it almost in the reverse sense, like you said, if we look through a Nassim Taleb sense of anti-fragility, right? Trend following is one of the best strategies in the world for anti-fragility. When market regime shifts and everything — this is the kind of strategy you want. Like you said, when people look at the data anonymized, that’s what they actually want. Mm-hmm. But as a standalone, it’s always been a hard sell, right? And I wanna come back to why it’s a hard sell and if trend’s dead, why do people not hold it? I wanna come back to that in a minute.
But like you’re saying, if this is what you truly wanted, you’d have trend as a standalone. But as we know, it’s so hard to sell trend as a standalone. So historically, especially a lot of the European trend followers, have added carry to their portfolios. Where trend following is very convex — and that’s why you want it, because of the convexity of trend — they’re like, “Well, what do I do when convexity’s not really, you know, pervasive in the markets? Well, I wanna add a bit of carry there.” And so inside their funds, they’ll create a, a, some sort of carry, whether it’s term structure carry, but it’s usually of or across the same commodity, so it’s really idiosyncratically similar to a lot of the strategies they’re trading.
So do you think almost tangentially that adding global stocks to the convexity of trend, that’s your carry, is through the global stocks program and that nice uncorrelation you get? Or am I stretching it too far thinking of stocks as carry versus what some of the trend following managers do with adding carry to their portfolio?
Eric: Well, they’re cousins in a sense. The motivation is somewhat similar. The motivation could be different. For me, I just wanted a growth portfolio that gave me what I felt was an intelligent path traveled risk mitigation tool. Now it turns out that I’m doing the same thing that other people are doing, but they’re doing it for different reasons, right?
They’re trying to smooth out their trend component simply to make it more marketable. And that’s okay. That’s, that’s a noble cause as well.
For me, my coworkers actually talked me into this. It was the summer of 2019, and they said, “Just build what you would put all your money into and what you would stick with for thirty years.” And I said, “Well, can it be that simple? All right.” So I did it, and I’m like, “Here it is. What do you think? Is it marketable? Will people buy it?” And they’re like, “Well, we’re gonna find out.” So we launched it, right? And it was what would I be willing to put my mother’s money into. She’s gonna henpeck me to death if it doesn’t grow and have a reasonable path traveled along the way, and it’s pretty close to what I would pick, too.
So trend followers adding carry — they’re trying to solve a behavioral problem by smoothing out the returns. That’s a noble cause, too. But for me, it was: I want the highest compounded return after fees, taxes, and inflation over the next thirty years per unit of risk taken, right? How do I achieve that? And this is what I came up with: this amount of trend built this way, paired with these international equities, at this fee level, with these types of taxes and this level of turnover, gives me the best chance of having the highest terminal wealth in year thirty, with a path traveled that reflects a reasonable amount of risk taken each step of the way. If that makes any sense.
Jason: Yeah. Part of that nuance, though, is when you’re pairing those two together, you’re making very different choices, let’s say, on your trend following program than other people that are trying to solve behavioral issues. Because you need trend to be very convex when you need it most. You need it to pair well or be uncorrelated or hopefully negatively correlated with equities when you need it most. So maybe talk about some of those trade-offs where people try to maybe smooth their equity curve on the trend side so people hold it behaviorally, but then you’re not getting some of the components you really need when you’re having a problem on your equity side.
Eric: Yeah, that’s a really good point. I was cognizant of that when I was building it. A lot of trend followers that wanna stay with trend following, but need to make it more palatable for people to hold onto, are incentivized to come up with profit targets and other volatility smoothing techniques that are really interesting. But they build fragility into the program, and like you said, they take away from the fat tails. They take away from the convexity when people need it the most.
It’s bizarre in a sense that if you do what’s right for people long term, they’ll punish you in the short term because they don’t like the symptoms of what you have to give up in order to get what they need long term. It’s kinda like someone who lives in Florida and pays hurricane insurance every single year, and there’s never a hurricane that ever comes anywhere near them. So they stop paying, and then the hurricane comes. That’s the convexity component. So I very specifically did not do that.
I built a trend program using short-term, medium-term, and long-term trend following of futures with none of the volatility smoothing tactics, no profit targets. I wanted to keep it pure. Now we do have a risk budget that has to be enforced, but everyone has to have that. You can’t just let open risk go up to eighty percent. Ours is at ten percent, which is below where it could be, but it needs to fit into a 40 Act structure and it needs to not keep people up at night. And I’m not trying to make twenty percent returns a year. I’m trying to make something like twelve.
So by pairing — when you bring the equities in to the total portfolio, because they’re negatively correlated with trend when trend struggles, everything gets better. Your risk-adjusted return gets better, your vol gets smaller, your drawdowns get smaller. That’s very counterintuitive, right? You take a mean nasty thing like the S&P 500 that has huge drawdowns, and you push it into a trend program, and your drawdowns get smaller and your variance gets smaller and your returns get higher. It should just be modern portfolio theory 101, but that’s very counterintuitive to people. What do you think about that, Jason?
Jason: I don’t — that’s what you’re saying. I think people think about things structurally as individual strategies. And then when you think about portfolio construction — it’s a total hump 180, right? You’re saying like if, why, how can I pair these things and they not work well?
It goes back to what I wanted to touch on when Matt was like, you know, how do you keep people invested in this? Part of it is these struggles you do have in trend following — how you keep people invested is part of why everybody isn’t doing it. So if you take a strategy that historically, like trend following has a MAR ratio of roughly 0.3 — is that fair, Eric? Yeah, I mean, if it varies around there. Let’s say 0.3. And say it’s similar with stocks or even worse, right? Like say 0.2, right? And by the way, MAR ratio is your CAGR divided by your max drawdown over time. Individually, those aren’t great strategies. But when you pair them together, as long as they’re uncorrelated or conditionally negatively correlated like you just said, you create a much better portfolio, and that should be just modern portfolio theory. But nobody thinks about all of the mathematics around modern portfolio theory for creating a portfolio, yet we use all those Sharpe ratios and everything else for individual strategies. Yeah. So it doesn’t make any sense, but that’s the way people do it.
The other way, if you think about the analogy, would be pod shops. An average pod shop manager only has like a Sharpe or MAR ratio of 0.7 to 0.8, but when they combine them — especially uncorrelated strategies across one hundred or two hundred strategies at like a Millennium — they can get to those two, two-and-a-half to three Sharpe ratios. So it’s really about the — you have to work on your correlation matrix. But then the hardest thing about correlations is they’re not static either, right? They’re conditional.
So the ideal thing, honestly, with the uncorrelated nature you get with trend following, is most of the time you actually want it to be correlated with your stocks until they sell up, then you want it to be negatively correlated. So you actually want it to move around. But unfortunately, because we have a math bias and a physics bias instead of a biology bias — like we want to be able to — and, and Matt, you know this all too well. You have to show clients portfolios. You wanna use this very structured, rigorous, rational, analytical way of looking at things. But if correlations fluctuate, that throws out your entire back test.
Eric: Mm-hmm.
Jason: So it’s, it’s more of an art than a science, and I think that’s really why people have a hard time with it. You have to think about the core signals and diversifiers and the core reason why asset classes may move in different directions at different times given the macro regime.
Matt: And you can have a whole mess of assets and a whole mess of strategies in somebody’s life. Eric, I’m curious, selling the strategy — and I don’t mean this as a marketing tips question — what a person should responsibly be aware of when they’re making the buy/allocation decision to trend? What should they understand going in? And especially I’m asking this in part because we just had this run-up that we started this episode with. What do you need to know and understand today?
Eric: Well, they need to be aware of the challenge of having a non-correlated component to their portfolio. They’re gonna, they’re gonna have to face their own investor biases, because they’re gonna feel it, right? So... Most people — I can’t tell you how many people I’ve run into where they find out what I do for a living. I’m at some sort of event and they wanna show me their statement, right? And they’ve got twenty or forty investments on there, and they always want to focus on the things at the bottom and say like, “I need to get rid of this one and get rid of this one.” And I’m looking and I’m like, “Well, why do you wanna get rid of that one?” They’re like, “Well, it’s, it, because it’s down and it’s not working. These other ones are working, this one’s not working.” They view it as a report card, right? There are A’s, B’s, C’s, and there are F’s at the bottom. So they constantly wanna sell anything that is getting an F for the quarter or for the month or the year or whatever.
They’re fighting the diversification. So if you bring in trend into your portfolio, being uncorrelated and at times negatively correlated with what you’re already doing in the portfolio is essential to adding value to the portfolio, which means that it’s gonna be getting an F when your risk assets are getting an A, and vice versa at times. So when people don’t understand this and they just look at it like a report card, and they wanna fire anything that’s getting a bad grade for the quarter, they’re essentially saying, “I don’t want a diversified portfolio. I just don’t want it,” right? So until they face that and, and, and can see the value in having something that’s, that’s moving differently, then you’re not doing them any favors by having them in trend, right?
So now, to be clear, I gave up on that lifestyle, guys. Like, that, that’s an uphill battle, and you’re just getting kicked in the face every single day of your life, right? I’ve seen plenty of trend-oriented managed futures programs that have a positive annualized return over a long period of time, but their investors have negative investor-weighted returns because they buy high, sell low, buy high, sell low, wash, rinse, repeat over and over and over. That’s not for me. I’m not doing that.
So what I did is take the elements of trend, which are really important — the convexity, and the, the big moves, right — and bring them into a portfolio, to create a multi-strategy approach. I want the benefits of trend, and without the fees — I’m not paying anyone else two-and-twenty — and merging it with equities in a laddered fixed income portfolio in a multi-strat sense to create that compounding vehicle I was talking about earlier, where I’m trying to get the maximum compounded return after fees, taxes, inflation per unit of risk taken along the way.
So I’m not the greatest person in the world to ask, “How do you get people to keep trend in their portfolio?” Because I gave up on that lifestyle — it cost me a lot to give up on that lifestyle and to start this new lifestyle. So that’s my answer — you probably can’t do it.
Jason: Matt, I’ll use a different analogy. Inherent in your question is a little bit of, how do you convince people to have these things in their portfolio? And I’m not sure we can convince anyone of anything, right? I have a background in comparative religions, as you know. And so I always think these things are faith-based, right? The trend followers are very faith-based. Any time you have a MAR ratio of 0.3, it’s faith-based. Isn’t this why not everybody does it? Similarly with our value investing friends, it’s faith-based, right? And if you just hold on through the tough times, you will, you will be rewarded, and showered in heaven when trend following returns. And then similarly, in the RIA space, it’s like this 60/40 faith, right? This 70/30 faith, right? Target date funds. And nobody wants to look different. Nobody wants to be ostracized from their church, right? Nobody wants to be tarred and feathered and held up at the pulpit, right? It’s just not gonna happen.
And so we always think that with reason and rationality we can just convince them. It doesn’t work like that. This is entirely emotional. And so like Eric’s saying, it’s like we’re forming these new churches, or maybe we’re combining all these religions in a unique way, and therefore we’re standing up at the pulpit and we have this whole new way of doing things. And so we’re just yelling out into the wind, trying to find people that are running or sprinting away from their church because they can’t take it anymore, right? They want something new. But that’s gonna be like one out of every thousand people. So it’s very hard to find those people, because otherwise you can’t convince anybody off the street why they should add these things and why they should hold onto these things. They have to find the faith in themselves that they want that different thing before you can convince them.
It’s a very difficult situation. And we try to think about reason and rationality, but they don’t really have any sort of truncation there. Even though we could show all the math, it still doesn’t work, right? People have to convince themselves before you can convince them, so you’re not really convincing anyone of anything.
Eric: Just stop the unforced errors. That’s my philosophy. Right. Right. Right? I’ve talked to thousands of financial advisors over the last twenty-eight years, and they basically say the same thing. They’re like: “Look, I want something. I want a good fund. I want, I want a good program that’s got reasonable returns or reasonable downside, and reasonable taxes, and can kinda keep up during the good times, but doesn’t blow me up during the bad times.” That’s what they all want — their ideal alt, right? Trend is not that. Trend is a way to get them to have their portfolio deliver something like that, right?
Think about it like this. I did a study recently — my coworker Matt asked me to do this. He said, “Find me all the funds that have outperformed a 60/40 portfolio since we went live,” which was six and a half years ago. So I ran a query in Morningstar using all ETFs, all mutual funds, everything. And I think, what was it? Yeah, about forty-six percent of the funds outperformed a 60/40 portfolio, right? And then he said after that, of those funds — that’s a little bit less than half — of those funds, how many of them had less downside risk than a 60/40 portfolio? Less drawdown. And the number was less than three percent of total funds — both outperformed 60/40 and had lower downside. So just a couple hundred funds, right?
And then he had one more criteria. He said, of those couple hundred funds that both outperformed and had less downside, how many of them were able to do that with low beta to the stock market? So less than beta 0.5, and I think it was about twenty funds left over. Out of, I think it started with ten thousand.
Of those, about half were gold funds. So you can eliminate those because you can just get gold beta easily, right? And of the remaining — which I think were about ten — about half of those were buffered funds, right? Which by definition, you know, if stocks have been great, and then they’ve got a beta below 0.5, right? So really, there were only about six or seven funds that were actual strategies that have delivered what people say they want, right? And how many blended trend programs are on that list? A lot of the remaining group. So yeah, it’s a strategy to target what it is people actually want and need from the marketplace. That also happens to be consistent with what I think is a good way to compound wealth over the long term.
Jason: But Matt, I was thinking when Eric said “unforced errors,” I was like, yeah, but hitting winners is so cool, and that’s what makes the highlight reel, right? Like, that’s what — I can show you the scoreboard, right? Like, that’s the cool stuff, and not, like, yeah, reducing errors through time. But, like, Matt, I wanna flip it back on you because Eric — I, I mean, I love what he just did there, and he showed me them when they were working on that data and everything, and obviously I’m a big believer in that data, and it’s amazing.
And when you get to what is real returns, after-tax returns, you start getting in all those things — like, what portfolio will actually compound my wealth the most efficiently and effectively with low variance through different macro regimes, and I end up with the highest terminal log wealth because of compounding through time and sequencing risk and all of these things, right? You come down to a portfolio similar to what Eric’s doing. But then you put that in front of a wealth advisor, right? They’re simply not gonna do it because the wealth advisor next door is offering 60/40 portfolios, and you’re trying to build a business.
So I’m gonna throw it back on you. Like, maybe the only thing — and maybe Eric knows this too — is you try to find a wealth advisor that wants to be different from the nine guys around him and within his geographic vicinity. Like, how do you truly care about the client’s investment portfolio where, in fairness to the advisors, right — you don’t wanna look different? You wanna build a business. You need to feed your family, and so you may be focused more on the estate planning side, and the portfolio then just aggregates to the 60/40. But maybe if you really cared about the portfolio side, you’d know what compounds wealth over time.
Matt: This is another silver bullet. Golden calf. Make your statue, give it to your world leader of choice. Make sure it’s made out of gold, ideally funded by some ill-begotten gains. I think the only answer to that is — I always go back to the Looney Tunes thing where the dogs look like the owners. And I try to remind people of this constantly. There is a great human truth in our wonderful industry of advising and allocating, which is that the dogs will look like the owners. And if you wanna find the right clients, and you’re trying to get to them through the advisor or the allocator, figure out where it actually makes sense to them.
Not just the lip service makes sense, not just “I have the academic pedigree that this makes sense to me on the numbers on the paper,” but actually show me that their behavior and the client behavior matches. You’ve gotta see that all the way through. And inside of that, inside of that, you need advisors who also think — and I think this is the great opportunity in the advisory space — you find people who are willing to basically say, “Most people can’t think long term.” The way they think long term is by coping with short term and putting horse blinders up, and then life just overwhelmingly sweeps them along until they wake up one day and they’re like, “I’m at the next phase of life. Holy crap. What new help do I need?” That’s kind of well said. And that’s a very different way to think about it.
Yeah. But, but that’s all it is. That’s all it is.
Jason: When you’re saying dogs look like the owners, it reminds me of our buddy Meb’s paper on how most RIAs are like four times levered to the stock market because of — what is it? The vol lever GDP thing. Like, they’re the ones that should more be believing in this trend side or whatever to hedge some of their unbelievable Forex leverage risk to the S&P 500 given their client base, their business, their own portfolios, et cetera.
But it does make me think — and I think Eric’s firm probably does this well, and you guys would probably agree — is the real only way to do this to try to take maybe ten percent of a stock-bond portfolio and put ten percent with a firm like Standpoint, and then wait five to ten years and come back to the client and say, “Hey, look what this thing did compared to the rest of the portfolio”? Is that the only way to do it?
Eric: Kind of. We’ve gotta find ways like that, yeah. Just get a little taste. We’ve graduated to finding advisors that just want what they think is a good fund. They describe to us what they want, and we show them what we’ve got, and they’re like, “Well, that’s pretty close.” Stick it in there, and they’ll get a feel for what the taxes are, and the fees, and the path traveled, and the annualized return, and the drawdowns and whatnot. And we’re in year seven, so we’re kind of like graduating junior high. And we’re gonna find out if the marketplace says, “Eric, your thesis was right. People want one of these ‘good funds.’” We’ll see.
Jason: I’m hopeful. I’m curious — is this part of your genius background? Year seven graduating junior high? It threw me off there for a minute. Seven years of school? A seven-year-old graduating junior high — you just skipped so many grades. You’re graduating junior high at seven years old.
Eric: The fund’s in its seventh year.
Jason: Right.
Eric: And that’s kind of like getting into high school in the life cycle of a mutual fund.
Matt: The real-life Doogie Howser of trend following. Eric, if people wanna bug you on the internet, more information about Standpoint, where should we send them?
Eric: Yeah, standpointfunds.com. We have a lot of content. Our content page — people tell us they really like it — and they can watch all the podcasts and see all of our research. And also, if you just scroll down and put your email address in there, you’ll get our monthly updates. We don’t sell your data or spam you, so it’s just the monthly updates, and they’re organized nicely.
Matt: If nothing else, make sure you go to the Standpoint website. Get on the list for that stuff. If you haven’t learned more about trend just from this conversation, that’s why we love talking to Eric. Jason, same question to you. Any people, any place we should send people to bug you on the internet?
Jason: Yeah, just go bug Matt Zeigler at Cultish Creative. That’s where you’ll find me. And mutinyfund.com. Always happy to talk about any of this stuff.
Matt: All right. That’s the way it goes. You’re watching Excess Returns. Like, comment, subscribe, all the things below, and we are out.