In the chaotic world we’ve endured since 2020, it turns out all you needed was an outlier loving strategy to get you through the storm. We’re talking managed futures and trend following in particular, which tend to thrive in periods of turmoil. But how can you effectively prepare for a wide range of market environments while still producing returns that allow for the investor to stick with the investment. Eric Crittenden, Founder and Chief Investment Officer of Standpoint(@StandpointFunds), sits down with Jeff to discuss the ever-changing trends and providing the right formula for surviving the chaos.
In this episode, Eric and Jeff take a closer look into what has changed since they last chatted on the pod in 2020; needing a healthy investor/advisor/asset manager triangle, the sweet sound of directional volatility, Trend as an inflation hedge, being short bonds(good or bad), the thankless job of a trend follower, if trend following’s long grain positions were war profiteering, and so much more! Plus, get Eric’s hot take on the LME; did they do the right thing? Find out here — SEND IT!
Check out the complete Transcript from this week’s podcast below:
Trends, Inflation Protection, & Getting Investors to the Finish Line with Eric Crittenden of Standpoint
Jeff Malec 00:07
Welcome to the Derivative by our 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. I blew it last week. Sorry, it was Star Trek day and I went and wished you a happy ampersand day. So I’m not sure what I was doing. But happy one week belated Star Trek day. And yes, I am the red bird who likes both Star Wars and Star Trek. Okay, it’s not like being a fan of the bears and the Packers groats. Speaking of fans, we’re a big fan of Kris Abdelmessih, and his party at the Moontower writings. So we’ve got Chris coming on next week with his former colleague, Tina Lindstrom, and a guy called Steiner who taught them both how to trade so that should be fun. Under this episode, where we’re back in my wheelhouse talking trend following with one of the best in the biz, we’ve got the founder and CIO of standpoint funds, Mr. Eric Crittenden. We dive into a bunch of interesting topics like the trade off between an investment programs optimal profile and the profile that investor can actually stick with. Why trend is better viewed as an inflation protection instead of an inflation hedge? And whether the LME actually did the right thing. Big picture wise in the nickel debacle. Send it. This episode is brought to you by RCMs managed futures group and their guide to trend following white paper. Eric on the pod today is featured in that dock along with how trend works, why it works when it works and all sorts of good stuff. Go to our sandbox.com/education/white papers, download the paper today. And now back to the show. All right, Eric, welcome back. You were with us way back in July of 2020. The world’s sure changed since then. Right.
Eric Crittenden 01:50
And it’s been nonstop chaos for years now. So thanks for having me.
Jeff Malec 01:54
Yeah, that’s generally good for people in our line of work, right. But yeah,
Eric Crittenden 02:00
I have that conversation a lot with people. We’ve built something that we hope will thrive in periods of chaos, because we expect them from time to time and so far, that’s been the case. I don’t wish chaos on the world, but we definitely want to be prepared for it. So and we’ve benefited from quite a bit of the chaos so far in our short life.
Jeff Malec 02:21
I know it makes me always it got me thinking like trend followings 10x, more popular than back in July of 2020, you’re probably 10 times more popular people inbound marketing requests and stuff like that. But trend following hasn’t changed, you haven’t changed. Right? So it’s like a commentary on investor behavior that they’re chasing the new shiny thing. But that is also not new.
Eric Crittenden 02:46
I was gonna ask you about that. Have you noticed an uptick in interest in trend following and alternative investments? From your perspective?
Jeff Malec 02:55
Definitely. Yeah. But it’s weird. It’s different than a no, wait, I feel like you were coming from zero to one. And people are like, Oh, trend filings, this new thing, even though it wasn’t new, but okay, I’m into it. I want to get access to it. Now, I feel like people like okay, trend following, but hold on, am I gonna get burned? Like I got burned last time? And what about the draw downs? And so they come with a bit of baggage with their interest. Versus before they were showing up with, with fresh eyes and, and dreams, and now they’re coming in with a little damaged, damaged outlet? Well, that’s
Eric Crittenden 03:31
that’s to be expected, based upon their experience from 2012 to about three years ago, was a very challenging environment. But are the incentives different this time meaning, like the interest in alternatives and trend based approaches? Back in 2012? Are they different than are the motivations different this time around?
Jeff Malec 03:53
I don’t think so. What’s your thoughts on that? I mean, I think they still want to think they’re diversified. But yeah, maybe the nuance there is back then they thought this is gonna go up when market goes down. And now maybe they’re saying a this might go up. If commodities go up, this might go up if rates go up. So yeah, it’s probably a little bit more nuanced in terms of this can do I think they can do a few more things than just making money when stocks go down.
Eric Crittenden 04:18
Yeah, I can’t figure it out. Part of the challenge for me is I was mainly in the hedge fund world prior to 2012. And those investors were looking for alternative investments for a different reason than financial advisors and, you know, everyday investors, retail investors and whatnot. So I’m trying to figure out, have their motivations or incentives changed. Some of the evidence I see suggest that they have that they’re actually looking for long term hold. And effective diversification. They’re not necessarily looking for what we call crisis alpha, you know, something that definitely goes up when the stock market goes down. That seems to have changed, but I’m not sure if I’m just talking to people now. I have more realistic expectations versus back then I’m not sure about that.
Jeff Malec 05:06
Good question I wanted you to launch into. Yeah, the investors are same as always, they’re stupid. They’re chasing returns, right? And they’ve seen trend following go up. Okay, I’m picking up the phone, I want to get me some trend following. And then in two years time, they’re gonna see trend following goes down. And they’re picking up the phone and saying, Get me out of this.
Eric Crittenden 05:25
Now, I’m seeing a lot less of that this time around. I think
Jeff Malec 05:29
real hasn’t gone down yet.
Eric Crittenden 05:32
Fair, fair point. But I am seeing a lot less of the symptoms of that then I’ve seen in decades past, and I’m hopeful that people can see the benefit of just casting your net wider, and giving yourself access to all the different kinds of commodities. You know, whether it’s grains, energies, metals, things that are inflation sensitive, not just on the upside, but on the downside, too, because deflation is actually still a credible threat going forward. So I’m hopeful. That’s the evidence I’m seeing right now. So that’s why I asked you that question.
Jeff Malec 06:05
Yeah, no, I like it, you can run the whole pot, you can, you can interview me if you’d like. The the end what pardon me, though, is I want to get into like trend following is the same thing. So are we bound to just be in this always in a cycle. And sometimes that’ll work every one out of every two years, sometimes one out of every three, sometimes one out of every 10. And the power of it really is in those ones that it’s not working? It’s on average a positive carry? Or is it best for an investor just think, Okay, this is going to hit one out of x times, and I just got to survive through the the other periods where it’s not working.
Eric Crittenden 06:43
I think you can think of it both ways. The trend following the results from trend following really aren’t that different from any other asset class, they move different. But after the fact, you know, just like any other asset class, you know, the returns from trend following can go out of favor and stay out of favor for 358 years. So I’m not sure why it’s so much more difficult for people to hold on to trend following type returns, when they go out of favor, I think it’s because they’re uncorrelated with stocks and bonds, which is, which is weird, because that’s the reason you want it in the portfolio. But it’s also the reason that people feel like they have to give up on it when it’s out of favor. So and as you know it standpoint, that’s why we do what we do by pulling pulling everything into one portfolio to kind of give people the ability to stick with it long term, rather than just giving them pure trend following approach, which feels like a boom bust cycle to them where they have to get the timing right, we’re trying to remove the cyclicality from the experience. And so far, that’s worked really well for us and our investors. And they can see why we did what we did.
Jeff Malec 07:53
dig into that a little more. So you’ve been on top of that for a long time, a lot of other groups have jumped into that space more recently, was listening. Cory Haas team was talking about the other day of like, hey, it’s not enough to just create the best product. But you also have to be able to get your investors from year one to year 10. In order to see the benefits of that best product. So get into the category. So like, what’s this kind of best product versus product investors are likely to stick with? And is there a trade off there? Of right What if the best product is X percent return x percent drawdown but the one investors are gonna stick with is why and why and it’s less? How do you do that catalyst of like, okay, I understand this isn’t the best thing for you, but it’s the best thing you’re going to stick with and thus, it’s the best thing for you. Yeah, you’re
Eric Crittenden 08:42
talking about wants versus needs. So every decision in life is a trade off. You may not know I may not understand it, you may not be analyzing it correctly, but every decision in life is a trade off. So if we just look at it from a purely mathematical perspective, people would benefit from adding quite a bit of trend following exposure into their portfolio and my experience, my research, conclusively has convinced me that trend following returns are the best diversifier out there and better than bonds you know, better than gold. Better than MLPs tips, you name it, if you’re looking at you know, five decades of data. However, in real life, when you get people to allocate a meaningful portion of their portfolio to pure trend following call it CTAs call it macro, you know, call it a commodity trading advisors, whatever you want to call, it’s all basically the same thing. They struggle they struggle because an effective diversifier necessarily needs to be uncorrelated with the rest of the assets in your portfolio and because they benchmark it to say the US stock market and the US bond market, there will come a time where trend following underperforms the rest of the assets in your portfolio. And if you’re in a financial advisor and you’ve got 400 clients if that underperforming that’s resulted in 300 phone calls every, you know, every time it happens, the risk reward for you as a business is not, it’s not suitable. So what I’ve found is that if you combine trend following with risk assets into a more all weather format, advisors in there, clients complain less, and they’re able to hold on to it. So my philosophy is that if you can’t get people to hold on to something, and actually experience the benefit, you’re not helping anyone. So some people look at that and say, well, it’s diluted. And I say, well, we dilute the, you know, the fluoride and the chlorine that we put into the water for a reason, you know,
Jeff Malec 10:42
a separate tap with just pure chlorine and you mix it yourself in the sink.
Eric Crittenden 10:46
And you can do that. But you’re gonna get bad results.
Jeff Malec 10:50
Yeah. But that part that you said to me is the crazy part, right of like, you think at this point, the advisors, not to pick on them, but be like, Yeah, I’m willing to do the 300 phone calls, because I know this is good for them long term. So that’s the little bit that I’m curious if there’s that human behavioral issue of like, we can’t take the medicine as is we have to like, concoct this thing where we have to wrap it up in some cheese or pour some sugar with the medicine to get it down our throat, when it should be playing as conceived like no, just just take the medicine? Well, I don’t want to get too philosophical on you. But yeah,
Eric Crittenden 11:27
that’s No, I like I like it. I like it. I’ve studied cognitive psychology and behavioral finance for several decades now. And what I’ve learned is that even people that have gone through all of the training, and they understand right from wrong, if they’re separated from that discussion, and those books for, you know, six weeks, they revert right back to the same hardwired emotional behaviors, you can play the Monty Hall three door switching game with people and explain the math to them, and then come back a year later, and they’ll revert right back to not switching doors, which is the optimal thing to do. So and I’ve read countless experiments where you can just tweak something a certain way. And it goes from being 30% effective to 80% effective, but mathematically, it’s the exact same thing. So it’s, it’s our decision whether we want to fight that uphill battle, which is a losing battle. And we want to fight the way the human brain is hardwired. Or if we want to be business people and say, look, we’ve got what people need. If we can deliver it in a format they want. Everyone wins.
Jeff Malec 12:33
Yeah, yeah. And I’m kind of setting up a false equivalency here of like, Oh, you have to choose between getting something that sucks a little bit. But you can stick with it for 10 years, are getting the full, full fuel for all 10 years. Right. But in your case, you’re saying no, I don’t You don’t have to give anything up. Really. I’m just giving it to you in a better a better package that you can digest that you can swallow.
Eric Crittenden 12:58
Yeah, the analogy we used to use early on was the gummy vitamin analogy. And that’s like, you know, remember back in the 80s parents trying to get their kids to take their vitamin the morning and those nasty big horse pill size, chalky vitamins, and it was a war with your kids every morning. And then some genius figured out a way to put the vitamins into a gummy bear.
Jeff Malec 13:19
Yeah. And now you got to make it look like a Flintstone that was right. Oh, okay. It’s like a Flintstone. It’s still chalky and like a milk burn. But yeah.
Eric Crittenden 13:29
But put it in a tasty gummy bear that sugar free. And all of a sudden, you got to hide those vitamins from the kids in the morning? Because I’ll get them all. So who’s the genius? Said the molecular biologist that created the perfect mix of vitamins? Or is it the guy that stuffed them into a gummy bear and revolutionized the entire industry?
Jeff Malec 13:48
Right? Probably the gummy bear guy. But I guess so that would be the follow up question. Is there a trade off? Are you able to do everything you would want to do in terms of the trend or alternatives? Bucket in this product? Or yes, there were no limitations? Would you have way more bells and whistles? Or markets or whatever? Yeah.
Eric Crittenden 14:10
See, that’s that was the thing I struggled with early on. When I sat down to build the program for standpoint is, you know, I was worried about that trade off that decision, you know, I don’t want I didn’t want to be one of those people that has to sell my soul and dilute something down to a point where it’s not meaningful, but all of a sudden, now I can make money with it. So what I found through my research is that the the optimal combination of trend and risk assets was about equal risk contribution. And after a year and a half of analyzing the data, every conceivable way that I could come up with I zeroed in on a portfolio that combined you know, global equities with a global trend. And then I looked at my personal portfolio and said that’s almost identical, huh? And then I thought, Well, why do I have my personal portfolio that way. And it’s the same reason that other investors want it there is I want a compounding machine that’s as consistent and anti cyclical as possible. And using all the available data from all the different asset classes, going back to 1970, the optimal combination, from my perspective, was equal risk contribution from global trend and global equities. And it’s also was as tax efficient as I could make it as scalable as I could make it. So it just kind of fell in my lap that, well, that is the optimal Sharpe ratio portfolio. It’s the optimal Sortino ratio portfolio. And it happens to be something that I think investors can actually hold on to so the financial advisors aren’t going to hate me, they’re not going to be calling me 10 times a year demanding an explanation. So I kind of got the best of both worlds. And when you know, what in life, if something like that falls in your lap, you take it and run with it. And that’s what I did.
Jeff Malec 15:55
Right? In my brain goes to like, Okay, if it weren’t, and we’re playing hypothetical games here, but Right, if it were, I can get 80% of the way there of the optimal, but you’ll stick with it. 10 years, still worth it, right? That’s where like, there’s some calculus in there, where it’s like, even if I can only get some percentage of the optimal. If it allows me to stick with it for the 10 years to see the long term effect, then it’s, then it’s better than not doing it because it’s not optimal.
Eric Crittenden 16:22
Yeah, so that’s the second order risk reward cost benefit analysis. And that is, it’s a triangle, right? So there’s us, there’s the adviser, and then there’s the end investor, and the triangle has to be healthy. So you have to satisfy all three. And that’s not the easiest thing to do. But I think I found a formula that is able to satisfy it for a decent chunk of the population and the opportunity set. So, yes, but to answer your question, specifically, if you’ve exhausted all avenues, and the best you can do is 80% of the benefit, but now people will do it, if you multiply through. Yes, that’s that’s worth doing. Sometimes, you know, a number meaningfully lower than 80 is still worth doing.
Jeff Malec 17:04
Yeah, yeah. And then that triangle is an interesting thing. Because I feel like in the 80s, right, the triangle was focused on the adviser. So it was make a product pay the guy at Morgan Stanley 4%, right, like, John Henry made his name and trend following. But they were paying, I think it was five to 8% loan to get into his fund. So every time he written for the Red Sox, thank those Morgan Stanley brokers that were funneling money to him. So it used to be focused just on the advisor, basically, where it’s going to build a product that they will sell, and why are they going to sell it because they make money. And then I feel like the it switch a little bit more to the investor of okay, we’re gonna do it, or excuse me to the advisor of like, Hey, I’m building the best product. I don’t care basically how you access it, but I’m just building the best mathematical sort of product. And then in the last 10 years, it feels like it’s shifted more to the investor of like, this behavioral thing of like, okay, it’s not good enough to be the best product, it’s not good enough for the adviser to want to sell it. But it has to fit all sides of that triangle, as you
Eric Crittenden 18:10
say. Yeah. And I would say that back in the 80s, you know, they had a tailwind of really, you know, performance was easy. It was easy to make money from from trends in the 80s, for the most part. So you can’t just pay people eight, if your funds returning three, because the investors getting negative net 5%. So that doesn’t work. So you need there’s a different triangle over there. It’s performance incentives, you no and no, you can’t do that anymore. I mean, we don’t pay the advisors, anything the advisors pay us. So they have to charge their clients. So the transparency increased, so costs became an issue. Performance is always an issue. So I would say that, you know, it was it wasn’t a triangle back then it was more just like a hri. Two Dots, you know, is the hedge fund manager getting paid? And is the advisor getting paid. And that only works if the performance is high enough to offset all the leakage along the way of people getting paid. When that disappears, the whole thing collapses. I think now we’ve zeroed in on what the true triangle is because the transparencies there, so there needs to be value at each node on the triangle
Jeff Malec 19:17
Venn diagram with triangles instead of circles, the end so speaking of the 80s Are we back where we back shortly in a 80s type directional volatility environment? It certainly felt
Eric Crittenden 19:28
like that. I was gonna ask you how you felt about bonds yielding three and inflation being nine, giving you a negative six real return for bond investors. I haven’t seen that since World War Two. It kind of almost saw it in the 70s. But really, you gotta go back to World War Two to see something that out of sync. What do you think that means? And is that ushering in an era of macro trends?
Jeff Malec 19:55
Ooh, I love it. I think it means you’re going to have a lot more dispersion between the central banks between currencies between all this stuff that has to react to those realities, right? Like, okay, if I’m only getting, I’m getting 9% Real over here, maybe I’m gonna go play around with Australian yields or Argentinian yields or something where I can perhaps get or vice versa get some actual by crude oil or by metals by actual physical commodities, where I’m getting a real yield. So yeah, I think it’ll drive different incentives is basically what we’re saying, right? Great, different investor behavior?
Eric Crittenden 20:35
I think so. I mean, it’s very rare to find, I mean, if you go back to 1925, and you just look, if you compound inflation through time, and you compound risk free, say, three months T bills through time, you’ll see that most of the time those T bills, get you back what you’re losing from inflation, just kind of to be expected, right? It’s very rare for inflation to spike to nine, and then, you know, the risk free rate not to adjust and reciprocate. So a lot of people look at that and say, well, that’s debt monetization, you know, that’s the government, essentially printing money, but holding the interest rates, their own borrowing rate and an artificially low number in order to relieve the balance sheet. And that makes sense algebraically. But it creates a bunch of perverse incentives, and creates pressure and what you were just talking about earlier, people going elsewhere to find yield, arbitraging differentials. Going into other foreign currencies like, now you’re seeing the volatility come into the currency space into the metal space into the energy space. And that’s to be expected how it all plays out? We don’t know. But definitely, it makes sense that we’re starting to see big trends.
Jeff Malec 21:44
And what, and to me, it’s not just the and we could do the math on this, maybe we’ll do a blog post on it. I don’t believe the like, take your metric, average, true ranges are much bigger than they were in Oh, wait, say, or 2014. When energy was going? I think the volatility itself is in line with historical standards. But it’s the fact that it’s bonds going down energy going up. Right, there’s different moves at the same time, we’ve been so used to for so long, it’s one big trade, one big correlated trade. And now we have back to, you know, 15 to 20 different trades, where trend can do well on any one of those trades.
Eric Crittenden 22:23
Yeah, I would say that’s correct. So the spreads, the differentials are starting to trend. The other thing is, I think I agree with you that the statistical volatility is not meaningfully higher than it’s been in the past, however, the directional volatility is, has been quite a bit higher. And that’s why you see CTAs and managed futures funds making money is that the autocorrelation, and the tendency to trend has definitely woken up from its slumber. So that depends on what volatility you’re talking about. Statistically? Yeah, I would say those ATR is aren’t meaningfully higher than they were, you know, times in the past.
Jeff Malec 22:58
And what do you use to measure that directional volatility, I always kind of use it as a, a word without a definition without a meaning of like, what we need in the CTA space is directional volatility.
Eric Crittenden 23:10
But yeah, we just be tendency to trend autocorrelation stuff like that. I don’t even bother measuring it. Because it’s, you only see it in hindsight, you know, it doesn’t really, because the the tendency to trend itself doesn’t really trend. That doesn’t mean anything. So let’s not go down that rabbit hole. But I mean, it means something. But if it takes a week to unpack all that,
Jeff Malec 23:34
well, that was gonna be my next question. So if we’re, if you’re in one of these environments, where there is directional volatility, does directional volatility beget more directional bouts? Right, so or is that in a more mathematical way? Is there proof in your research of persistence of returns, once trend starts moving? Or is it big reversion to the mean? And we’re gonna see a big pullback.
Eric Crittenden 23:57
It’s a little about, you know, it’s, it’s a little of both. And there’s just not enough historical data for me to come to any conclusions. You know, the best we can do is prepare for directional volatility by having the discipline to take those trades, and to be on the right side of big trends and to not be on the wrong side of big trends and know, have faith that they will happen at some point. That’s why markets exist, you know, if they if they never happened, then there’s really no point to these hedging markets. So I can’t give you
Jeff Malec 24:30
a Yeah, and if they never reverted no one would ever revert. He would just write no one right. So you’re just buying keep going up? Yeah, the
Eric Crittenden 24:39
data says that the tendency to trend versus the tendency to revert is pretty close to random. That doesn’t mean that that’s not an argument against trend following it just means that there are no additional rules that I could throw into the into the pot to say, Hey, I’m only going to trend follow when trend following is working and then walk in, sidestep it when it’s not So that’s very seductive idea. I don’t think it works in practice, though.
Jeff Malec 25:05
Yeah, right. I was getting into it on. I can’t remember where part I think when someone’s saying, Well, if you identify this trend followers is smart money, institutional money when they get into a trend and you could get into that trend. And I was kind of saying, Well, hold on, like they might only be successful 35% of the time, right, they’ll get into lots of trends, but their strength is in identifying which trend is which their strength is getting into all of them and, and grabbing the one that ends up working and not losing the whole book on the ones that don’t want. Yeah, that’s
Eric Crittenden 25:37
an astute observation that falls flat in a lot of conversations. But it’s, there’s an old quote, I think it’s from Charlie Munger, more important than the will to win is the will to prepare. And being prepared to buy every breakout in short sell every breakdown, regardless of whether the last two or three or four worked is absolutely essential in this business. Just like being short energy during COVID. You know, we took all those trades. Was it fun? No. Was it popular? Absolutely not. Did a lot of our peers skip those trades? Yes, they did. Because they were politically and socially uncomfortable to put on. No one wanted to shoot short crude oil at $65 a barrel, they thought it was too low. That turned out to be the trade of the decade. And that’s a reoccurring theme, you can go all the way back into the 70s. And look at newspaper headlines and get a feel for what the sentiment was and realize that those big trades that make your career are the hardest ones psychologically and socially to put on in real time when you have to put them on. So being prepared and never breaking discipline is a prerequisite, in my opinion for success in this business.
Jeff Malec 26:49
And that’s, I don’t even know of any trend followers who can’t figure that out of like, right, hey, you gotta be able to manage your losses, like that’s just baked into the DNA of a trend follower, right? Of like, I’m only what’s your risk per trade on a per cent basis? Probably less than 50. pips? Yeah, I’d
Eric Crittenden 27:06
say it’s about 50 basis points, which is half a half a 1%. Typically, we don’t look at it that way. Because our portfolio, I mean, we could be in 30 markets, or we could be in at at any given time, so that numbers gonna move around. But you know, on average, that’s about 50 basis points.
Jeff Malec 27:22
Right? So the general concept is, hey, I’m only going to lose, when I lose, I’m only losing one half of 1% of my whole book. And when I when I could win four or five 610,
Eric Crittenden 27:33
or eight or 10, in the case of the energy trade, which was just a massive trade, and then also the bond trade this year, you know, I, I’ll admit, I’m a human being like everyone else. I didn’t want to short bonds. But as a trend follower, I have to, and that, you know, being short bonds over the last 18 months is been, you know, 810 months or so, it’s been the real big winning trade, but it wasn’t politically and socially comfortable. Absolutely not.
Jeff Malec 28:02
And do you shout that from the rooftops because a lot of trend is saying, Hey, we got inflation. We’re here. But the reality is, it’s been mainly right the commodities helped in the beginning of the year, but the whole maybe since March, it’s been mainly the bond trade, right?
Eric Crittenden 28:17
Yeah. Being long the dollar and short bonds.
Jeff Malec 28:26
How do you feel about trends as an inflation hedge?
Eric Crittenden 28:28
I hesitate to aggressively talk about you know, inflation hedges and crisis alpha, what I can say is that historically, a discipline trend based approach has been able to latch on to inflation and benefit for most of the inflationary periods and also latch on to deflation and benefit. But I can also create a market scenario that’s inflationary, where trend following doesn’t work, you know, one that has really deep retracements and then soars to new highs and then deep retracements and whatnot. So trend following isn’t guaranteed to make a fortune during highly inflationary periods of time. But the research suggests that it’s a great diversifier and generally can be counted on to participate in inflation when it’s going up.
Jeff Malec 29:20
Yeah, it’s a nuanced thing. But it’s, I think, important for investors to hear like, yes, this I can’t think of a better inflation hedge. But similarly, I’m not going to tell you it’s an inflation hedge. There’s tons of basis risk for lack of a better word, right?
Eric Crittenden 29:35
Yeah. And anytime you’re talking about a hedge, you’re talking about something that loses money. Yeah, you know, hedge hedgers lose money on their hedge because a hedge is basically insurance. So you don’t get paid to insure yourself against loss. So having diversification casting your net wide to participate in trends that are unrelated to stocks and bonds, both up and down, you know, long and short is a great way to increase the diversity case in your portfolio, and that looks and feels like a hedge. But that’s really just the diversification benefit. If you want a hedge that’s guaranteed to work, then you need to use options or dedicated positions. And you’re probably going to lose money on the hedge. That’s just the way the algebra of the markets work.
Jeff Malec 30:16
Right? You’re you’d go to a bank say, hey, I want to buy this inflation, swap at x, right? And it’s a, an outlay of money. And if inflation prints that you get paid back, Why dig into that for a second, when you’re saying with, you could map out a market that loses money during inflation like US crude oil, I guess everyone would be familiar with it would something like crew goes up to 100, then down to 60, then up to 180, then down to 120. So kind of big retracements. Like that. You’re saying, Yeah, it’d
Eric Crittenden 30:45
be like an expanding megaphone where, you know, it just becomes more directionally volatile. And you’re not diversified in your systems meeting. Like if you’re just using medium term trend following. It’s possible for the market to move in a way where it hits a new high, you go along and immediately collapses, you stop out and then it immediately goes up, hits a new high, you go long again, then it immediately collapses. So and you just get whipsawed 3456 times in a row. It’s actually happened to me in the Euro, I think had eight losing trades in a row back in the 2012 to like 2018, something like that. It’s pretty painful. But like you mentioned before, if you limit your risk to say 50 basis points per trade even after all that disaster, the total losses you’re nursing are pretty manageable. But you can you can solve this issue somewhat. by diversifying your approach you can have short term trend following medium term and long term, it’s really hard to whipsaw all three at the same time. Like now you really have to create a special permutation or market environment that that smokes all three of those approaches at the same time, but it is possible
Jeff Malec 31:53
for sure possible and felt like March of 2020 was a little bit of that right of like the quick down the quick up. But the long term is in this news didn’t even react probably long term long term trend look backs, right? might not have even reacted to some of the sharp down moves.
Eric Crittenden 32:10
No, I’d say ours. We definitely we made a lot of money being short energy and long, certain currencies and long bonds. But we got absolutely smoked in equities, and a bunch of other risk assets. So I we didn’t actually make money during COVID, we just held strong and didn’t get annihilated like most traditional portfolios. And that’s because on the trend side, it was pretty effective. That being short energy and long bonds. On the risk asset side, you know, we got taken down just like everyone else, but when you net those two together, you get what I talked about earlier, that kind of anti cyclical, smooth ride.
Jeff Malec 32:49
Have you been seeing Cliff Asness get in a way a war on Twitter over his volatility laundering? tagline?
Eric Crittenden 32:57
Now I avoid Twitter. As much as is humanly possible. I don’t use any social media that then LinkedIn and I just post one thing a month. That’s it. And I just stay away from the comments. So I my co workers probably know all about it. But I don’t have an interest in the artificial wars that people are creating with one another.
Jeff Malec 33:17
He’s getting into it because he’s called private equity, volatility laundering, right? They basically hide the hide, like I like that. Yeah, that’s, that’s clever. Yeah. And then another guy came on and said, Well, this private credit fund hasn’t had any volatility. And he said, yes, you’re proving my point. And he’s like, No, the prices haven’t moved. He’s like, again, proving my point. But a little bit of what you’re doing is I don’t want to call it laundering but right. It’s, it’s dampening that volatility by putting these two things together.
Eric Crittenden 33:45
Yeah, but that’s real. That’s not just hiding. Yeah, yeah, that’s yeah, you’ve actually got uncorrelated assets. So you’re, you can’t hide it in the mutual fund, they the accountants print a daily nav, and that the accountants don’t listen to me, they look at the settlement values, and they calculate the nav, and they broadcast it to the world. So that’s real. What cliffs talking about is those assets in the fund are incredibly volatile and incredibly illiquid. But they just don’t print enough for you at a daily frequency. So you don’t know how volatile so I had this conversation with my dad a long time ago, when he was trying to convince me that real estate, you know, is the greatest investment ever and ever goes down. And I said, Well, if you had a real time feed, and you got a daily nav on your Silicon Valley house, you’d lose your mind. But you don’t like you get it, you basically get an appraisal once every five years or when you refinance or whatever. And it’s like, hey, it’s gone up another 22%. You know, and then you factor in the cost to carry and the property taxes and you do all the math and look at it. It’s not that great of investment, even when you were in the best performing zip code in America for 30 years.
Jeff Malec 34:51
But are we kind of too clever by half to say like, oh, you’re not marking to market and they’re like, Yeah, that’s the point. Right? So I can see both sides of it. I intellectually I get it. I’m like, No, there’s volatility there, you’re just not seeing it. But on the flip side, I can also see like it similarly to how we’re putting these two assets together over here, we’re just investing in things that don’t print the volatility in order to not get the volatility.
Eric Crittenden 35:15
Yeah, so symptoms symptoms are similar, right? But what’s actually happening under the hood, or it’s not similar at all.
Jeff Malec 35:21
But if it lets you get to that 10 year endpoint, like we talked about, does it really matter?
Eric Crittenden 35:27
Probably not. He reminds me of that old study about the best performing 401 K’s in the world are the ones that were forgotten about?
Jeff Malec 35:35
or the or the people that died and they just kept rolling.
Eric Crittenden 35:38
Yeah, or either they forgot about it, or the people died, those 401k has had like, 300 basis points of alpha over all the other 401 K’s. And it’s because people didn’t see the assets. So they weren’t in there screwing it up.
Jeff Malec 35:50
Yeah. Which is so yeah, I’m torn on that debate of like, intellectually, I get it. Philosophically. I’m like, maybe they’re, they’re the smarter ones. Of like, no, the whole point is not to print the volatility so that you can stick with it.
Eric Crittenden 36:03
Well, those guys are the smartest in the world. I mean, they still got the carried interest, right. So they’re, basically they’re winning on every possible front.
Jeff Malec 36:11
True, true. So let’s talk we’ll put it in the show notes. But you guys did a video a few weeks ago or month ago, I can’t remember what it was, but um, was kind of a cool look that I hadn’t seen anyone do before you kind of sped up the equity curve. And then on overlaying it on the stocks equity curve at the same time, right, which we can all say like, look at the Sharpe ratio versus 6040. Look at the return. Look at the drawdowns and it kind of a lot of times falls on deaf ears. But I feel like that presentation really let you walk through what it would have been like to be in this product for two and a half years. So not sure if there was a question there. But how did you guys come up with that? What do you think it presented? Well,
Eric Crittenden 36:54
I wasn’t a part of that. I didn’t even know I just saw it on login and seen it. Who did this? And then I talked to my co workers. And they said, Yeah, we’ve been working on that. We told you, I was just too busy running the fund. But yeah, my co worker will put that together. And yeah, I when I watched it first I thought, Oh, don’t don’t brag, but he basically was showing that, you know, you walk forward, and you can just see it. And you can associate the experience that those declines because people were living it. And then they’re looking at an all weather style multi asset financing. Hmm. Well, that’s different. And then they see the risk assets soar, and the multi Asset All Weather fund just kind of gently that doesn’t soar. You know. And so it helps you intuitively wrap your head around that counter cyclical approach. So you can see the good times and the bad times and say, and then make a decision whether Yeah, I could. Our our philosophy is we want to bore you to success, not bore you to death, but bore you to success. And I think that that illustration did a good job of giving people the ability to kind of walk through it, you know, like you said, it’s a speeded up, sped up equity curve.
Jeff Malec 38:02
So it made me if it had been down, and you’re not, it would have been the same concept, the same proof of concept right up like, here, this both went down, ours is down a lot, or even flat or down a lot less, but it would be the same concept of you’ve shortened the short and the drawdown, you’ve reduced the absolute loss. So I don’t know I thought was great. And really helped people understand what it would have been like to have been through that fun. Back to trend, you mentioned the bonds. I think we talked about this on our last pod. Have you seen yet? Any problems with being short the bonds in terms of cost of carry? In terms of right, I don’t think are if we trend down for 30 years, just like we trended up for 30 years, the performance might be half of what it was because of that. Roll you roll costs.
Eric Crittenden 39:02
Yeah, so that’s been it’s been a very, very interesting couple of years. You remember that bond video I did in the summer of 2020. I did the Monte Carlo simulation and basically said that it’s possible to make money in bonds, but it’s just extremely unlikely going forward. And all the hate mail I got back from that video. But then to walk forward and see. And I’ll say for the record, I wasn’t predicting that interest rates would soar that bonds would go down, I was just simply pointing up the map. It’s just such an uphill battle with the yields where they’re at any inflation comes along. And you know, your real return is going to be negative. And then we got what we got. And the arguments back then were that CTAs will struggle in a rising interest rate environment because they made all their money from being long bonds over the last 3040 years because interest rates went down and that was one argument. The other one was, well, they can’t make any money being short. Even if they do go short. Because of the cost of carry, you know they’re on the wrong side of the curve. coupon yield. So now fast forward to today, you know, any CTAs that have had a good track record of the last three years if you if you decompose their returns, you’ll see that a big healthy chunk came from being short bonds. So people are scratching their heads and saying, Wow, and the CTA is have done phenomenally well over the last couple of years. And it’s primarily been from being short bonds. So all the people that were writing those papers saying CTAs can’t make money in a declining bond environment, or yields are going up, they’ve all gone silent. But their core thesis was actually correct, that you can’t make as much being short, because you could make being long because you’re on the wrong side of those coupon payments. So I think what they missed, though, is that when interest rates rise, bonds can go down a lot and fast. And that’s what we’ve seen. Yeah. So it’s it’s not bonds are not symmetrical the same way, stocks are not symmetrical, meaning that on the way down, the descriptive statistics can look quite a bit different, it can be a lot faster, more volatile, and you can make higher returns in a shorter period of time. But you can’t keep it up forever. And that’s where we’re at now. And yes, I prefer short bonds, much less so than we were say, you know, three or four months ago. But now I see everyone piling in on the inflation bandwagon. And everyone’s confident that inflation is going higher, and that the Fed is going to raise and I’m looking at it gone. I’m glad I’m not as short bonds as it was before because as soon as you get A a crowd all on one side, yeah, really confident. Sometimes they’re right. But more often than not, you know, you’re very close to the to the end of that trend.
Jeff Malec 41:37
market likes to inflict the max pain to the max number of people, certain types of people
Eric Crittenden 41:43
overconfident emotional people, the market really likes to lower them in and then rip their heads off.
Jeff Malec 41:52
And so but do you think there’s more opportunity? Whether rates go up or down with rates off the zero bound a bit? Is there more opportunity, Trent, right, just by definition, there should be more up and down availability and trades on the bonds and rates,
Eric Crittenden 42:07
there’s more potential. Yeah. But also, you are gonna see that if things stagnate and bonds just basically become, you know, kind of dead money for five years, and with rates, you know, range bound where they’re at. So I don’t make predictions like that I just look at risk reward. Right now we’re, you know, modestly short bonds, because that’s where the trend is, but not heavily short, like we were before. And whatever happens happens, you know, I mean, I won’t be shocked at all, if we get a bout of deflation, and we end up being long bonds, you know, in a few months, that that won’t shock me at all. You can go back and look, historically, after World War Two, and in the 1970s. It’s not just a one way street for 10 years, you know, there are trend reversals, and sometimes they go the other way. So there’s a lot of inflationary pressures out there. But there’s also policy responses that could lead to a one year deflationary run,
Jeff Malec 43:01
that could happen. And then I always loved that about trend, you’ll get these brilliant macro guys on CNBC, on Twitter, wherever talking about the curve. And here’s how we’re positioning for flattening or steepening, and all this stuff. And it sounds great. You’re like, yeah, that’s what the trend portfolio has been long, two years and short 30 years for two months. So like, built into trend following I don’t know, accidentally or on purpose is this concept of you can be trading the curve without actually trading the curve, right? You’re just each market signals its trade independently, right. And then as it happens, you all of a sudden get into a curve trade, because you might be long, the short end and, and short, the back end, or vice versa.
Eric Crittenden 43:45
Yeah, I remember back a year and a half ago, where we started getting into an inflationary posture. And it’s because of what you said certain trades entered the portfolio, certain markets had an increase in open interest. So position sizing went higher. Other markets were kind of like the short end of the curve was trading very different from the medium and the long end of the curve. So you end up having a bet on that was all systematic, and you just let the market basically tell you where to go. And then if you step back and look at the big picture and say, Oh, we’ve got a steep in Iran. You know, that’s interesting, but the trend following portfolio actually implemented that thematic
Jeff Malec 44:24
trade. Yeah, just cool. And then the same thing, I mean, seeing the same thing in energy prices. You don’t doesn’t necessarily work that way, because you’re not trading each market, right. But you can have nat gas versus crude or different parts of the energy curve, or the energy complex.
Eric Crittenden 44:43
Yeah, to a lesser degree, you’ll see it. I mean, that gas is its own beast, that thing, doesn’t care what Croods do, and it doesn’t care what anything’s doing in the world. I was talking with someone the other day because we’re long natural gas and that was a very profitable market, you know, in the last quarter Like I said, if if bitcoin and Ethereum and I don’t know, some other crazy market had a baby, you know, it would be really I mean, that’s that’s, that’s the market that can keep you up at night it can do anything it wants, it is really just an epic ly volatile and unpredictable. Market. The Widowmaker, right? Yeah, like, like the yen used to be back in the, in the 90s.
Jeff Malec 45:29
But curiously, both of those not as much back in when there was no volatility in like 1718. Both of those seem to be flights to quality when I would write when they were both so low. That I feel like people when risk was off, they would park some money in that gas and yen. I think we did a blog post about that at the time of like this super volatile thing has become less so. But now it’s snapped back into its natural, natural order. Quick thing you mentioned there in terms of the open interest, if you could dig into that a little Have you seen so tell us what you do with open interest helps you select which markets are trading? Well, we
Eric Crittenden 46:08
start by selecting about the 80 most liquid markets in the world. And we do that by looking at their open interest, multiplied by the contract multiplier, you know the size of the contract, and then dividing by the FX rate to get it back into US dollar terms and then rank and sort them. And I just did that analysis a couple of days ago, I like to do it a couple times a year. One, the s&p 500 is the number one than Brent crude. And I don’t know if EuroStoxx 50s in their stock indexes are pretty liquid. A lot of the energies are at the top and then you come down you get into the golds of the world and the corn and the nat gas and stuff like that. So that’s one thing we do with open interest is treat it like it’s the float of a stock in order to get a feel for you know, what’s out there, what’s tradable. How many contracts are actually out there floating around able to be traded.
Jeff Malec 47:02
So not a market cap of a stock but the float,
Eric Crittenden 47:06
essentially, yeah. But if you multiply the float by the price, you get the market cap. Yeah, right. So that so it’s we’re doing that, and then normalizing it into US dollars. Beyond that. That’s how we select our potential universe. And we’ve been talking with you guys about looking at some of these other Asian commodity markets that have become more liquid recently, and adding them into the portfolio, which is a normal thing that you need to do every couple of years is add stuff and delete things out of the portfolio. Beyond that, though, when we go to size, a position, we want our our program to be able to scale. In other words, let’s say we’re fortunate enough to get a couple billion dollars in AUM and three years. Yeah, I don’t want to have to tell my investors that, you know, this is a different program than what they invested into, you know, back in 2020. And that’s a conversation that always comes up is as you’ve gotten bigger and successful. How different is this from what you were doing? Because I can’t trust your track record, if it’s not representative of what you’re doing.
Jeff Malec 48:07
That’d be something like, oh, corn just quadrupled. Why didn’t Weren’t you in it like, Oh, we’re too big. Now we can’t access corn in a meaningful way.
Eric Crittenden 48:14
Exactly. So the way we built this program, we call it the max capacity program. It believes it has $12 billion in it, the model believes it has 12 billion, and it trades accordingly. And it creates a model portfolio. And then we simply ratio that down to whatever asset base we actually have. So back when we had $10 million, you’re trading it like it’s a $12 billion program, we’re just doing it with $10 million. So everything’s D leveraged down to the same volatility for $10 million. Now that we’re at 475 million, we ratio down to that number. But what it means is that I can go up to 12 billion, but the program’s the same. Yeah, it doesn’t mean that we won’t be impacting those markets, if I’m sending you guys orders to do 20,000. Soybeans, it’s going to affect the market. But the model is consistent. It’d be just like if somebody created the s&p 500, you know, 50 years ago, but they only had 10 million bucks, you can invest just market cap weighted, and then when you have 20 billion invest the same way. So it goes a long way towards removing the need to change your program and kick out the illiquid markets as you get bigger.
Jeff Malec 49:24
So I have some experience in that that those bigger guys tend to not be able to access these unique markets that make trend find what it is. So the whole goal of that is to be able to keep the corns and the kind of niche markets that are in there.
Eric Crittenden 49:39
No, I’d actually argue the other way. And I would say that when you look at the big blue chip trend followers over in London and some in the US that those guys have been managing 20 billion for a few years and 40 billion in some cases. They can’t treat palladium the same way they treat gold. Yeah, they can’t treat You know Dutch gas the same way they treat Brent crude. So we want to be successful and manage a lot of money. So we’re not going to make that mistake either by treating the small markets as if we could access them the same way we do the large markets. So our program has always been designed from day one to mimic that of a large manager. So what that means, though, and where I disagree with you a little bit, is that I don’t care about palladium and Japanese platinum and tiny canola, although we do trade canola, but just not not a lot. I don’t think they matter as much as a lot of people think they do, you know, creating all these synthetic spreads and whatnot, what we’re doing is just simple, old school plain vanilla trend following on the 80 most liquid markets in the world on a liquidity weighted basis. And that’s what all of our research going back to 1970 did to. And what it told us and was very convincing to me is that you don’t need obscure small markets in order to have a good program.
Jeff Malec 51:07
So in theory, that lessens the diversification benefit. Yes. And in theory,
Eric Crittenden 51:12
it lessens the diversification benefit. But when I measured it, because I built the one with the bells and whistles to that treated all markets the same did a beta neutral, full risk parity. overweighted markets that had the least correlation with others, I did it every way I could conceivably think of and when you go the full distance to maximize diversification, your risk adjusted returns are a tiny bit higher, tiny bit higher, but your capacity is 94%. Lower. Right? And if you just strip away all that complexity, and you just use the raw simple stuff on the most liquid markets, your capacities enormous, you don’t have to change your program. And but here’s the most important part, Jeff, which one of those do you think blended better in with global equities, the max diversification trend program? Or the raw power trend program?
Jeff Malec 52:04
I would think the max diversification but I know the answer would be the other one. Yeah, it was. It was the
Eric Crittenden 52:11
other one. It blends in better. And I’m not sure if that’s causal or just spurious, but it actually blended it better. With global market, I would guess
Jeff Malec 52:21
it because of because it’s going to keep you in stocks, and currencies and rates and things that are more tied to equities. Right? I would think
Eric Crittenden 52:31
that’s one theory. Because that is what happens, right? It forces you into energy and bonds and more liquid grains and whatnot. There’s also the transaction cost issue. So when you build your transaction cost estimation rules, if you factor in that, you’re just going to pay a lot more slippage in canola than you are in corn, you know, which is reality? Yeah, yeah, it hurts.
Jeff Malec 52:55
And that comes full circle back to our right that you’ve built over here, which max power max power can get to the tenure, finish line. Whereas Max diversification, maybe it’s great, but now you’ve hit capacity constraints, it’s a different type of finish line. But if you can’t get to the capacity finish line, why why start at that point? To begin with? You’re saying,
Eric Crittenden 53:17
I think that’s fair, you know, the small, boutique approach, you know, generally capped out at like six 700 million bucks. Yeah, you know, you could kind of get to a billion. But beyond that, you had all kinds of problems, the max capacity approach, you know, we run it, like it’s got 12 billion in it. And I think that’s a reasonably conservative number can’t go meaningfully higher than 20. You’d have to start building your own spreads and bringing in the Chinese markets and some of the other stuff, then you could do it, but we want to manage a lot of money, we want to be actually be a core holding people’s portfolios. I think, I think when people get comfortable with a multi asset, all weather approach, they’re gonna look at it and say, Why isn’t that 20 25% of my portfolio? It really does solve a lot of problems. For me, it isn’t. I think that’s what’s going to happen. And we want to be able to actually meet that demand. And if I’m running some boutique program that’s capped out at 700 million, why am I bothering these people with an opportunity that doesn’t exist, you know, to investor an
Jeff Malec 54:21
IRA with 7 billion, like, it’s not worth his time to get into you if he could fill up your whole capacity? Right? He or she? So talk a little bit about that. In terms of the what are you seeing from advisors that are investing in the Fund? Is it still five 10% is being treated like an all or like a core old
Eric Crittenden 54:42
equity replacement or some that transition, I believe is beginning in the beginning or early on. Obviously, we’re a young company, you know, three years old now. And we didn’t have a lot of AUM in the beginning. So people treated it like a pure alt, you know, two or 3% allocation. Those have grown Over time, you know, most people have added to their positions. Now the conversations we’re having are quite a bit different. And when people are talking about, you know, how much greater than 10? Should it be? I’m not saying everyone’s doing it yet. But that’s where the conversation has gone. And we haven’t aggressively pushed that. But that that is where it’s, it’s kind of navigated to.
Jeff Malec 55:21
And compliance. How? Because, right, my natural answer is that is 100%. This is a good blend, you get the equity, you get to diversify, like some number, a large number, and compliance will be like, Well, you can’t say, you can’t recommend they put that much into it like, well,
Eric Crittenden 55:35
and we don’t, and we don’t I tell them that the only person that puts 100% of their money in the fund is me, because I built it to basically be my personal long term investment. Or at least it matched what I was already doing. So I just got rid of what I was doing and put everything into the fund. So I think people are looking at it, you know, 10 to 15%, as the idea of a core holding with a few people looking at 20, going north at 20 usually causes more problems than it solves from a compliance perspective. So I don’t see too many people doing that some do. But I tell them, like the you gotta handle that compliance stuff on your own.
Jeff Malec 56:10
But to me, if it’s like, okay, I was doing 6040 with whatever some, the banks mutual fund or an ETF or whatever that was mimicking 6040, I can get the 60% stock profile from this, I can get the 40% bond profile, which maybe we can dig into that, whether that’s the actual profile, but essentially, I can get the same risk reward profile from this. So why would I limit it to just 20%
Eric Crittenden 56:36
compliance reasons? You answered your own question. I
Jeff Malec 56:40
know but that comes back to like, okay, we’re just artificially limiting this because we know it’s, that’s that’s just stupid. That’s like, you want the medicine you want to take the medicine, but we’re not going to let you take it because you can’t take too much medicine. That’s like putting the pill limit on the bottles. Maybe maybe that’s a good thing. Well, I
Eric Crittenden 56:58
can we mentioned earlier that a gummy bears, you gotta hide them from the kids, right? gummy vitamins. So well, they look at other funds, like you mentioned early in this podcast, there’s other people entering the space. And then some of them are high quality. So they’ve got an opportunity to not just, you know, use standpoint, but there’s other firms out there that have, quote, unquote, seen the light and said, you know, this actually makes sense and would solve problems for everyone in the triangle, the adviser, the end client, not ourselves,
Jeff Malec 57:25
which I guess you’re fine with, like, cool, I’ll do 20% of five of us and everyone’s happy. Foreign equities was my last piece. So a little different than most you’re doing, not just s&p, not just us. But what is it 5050 split us and foreign remind me of the split
Eric Crittenden 57:49
6040 split. So we’re 60. So of our dedicated long equity exposure, which we get through ETFs, we really want to be tax efficient on the equity side. So we use the ETFs to get that exposure, and we do not trade them. I mean, it’s very rare that we have to liquidate some of the ETFs. Now we have to buy more all the time when there’s inflows but as far as liquidating them, it’s just very rare that you know, when there are liquidations are usually very small. So it’s 60%. US total stock market exposure, which is going to be market cap weighted, so it’s mostly just large cap, some mid cap. And then 40% is global developed. So you could break that 40% down to about half of it is developed Europe and the other half has developed Asia. Okay. And it’s all going to be not GDP weighted, but similar to that it’s market cap weighted.
Jeff Malec 58:51
And that sounds like it wasn’t mathematically based but fundamentally based, that’d be fair to say I want to split 6040 US foreign, or was it?
Eric Crittenden 59:02
No, it was more capacity based meaning I don’t have any edge when it comes to is Chile going to outperform Argentina? Or is Italy going to outperform Ireland, I honestly just don’t believe that those edges exist anymore. And if they do, they’re outside of my area of interest. The idea here was to capture the global equity market risk premia in the most tax efficient and fee efficient manner possible, and pull that into our macro program so that we have a more all weather multi asset approach that people can stick with. So that’s what we do. So you could think of it as it’s similar to the MSCI World Index or the every footsie has got their own version. Everyone’s got their version of it, and it’s just it’s the maximum capacity global equity
Jeff Malec 59:52
approach, but I guess why global versus just us? Well,
Eric Crittenden 59:56
the Futures Program is global. So why But I restrict the equity portion to just us. That’s what I struggled with the other thing I looked at his historically, if you look at the returns of global markets versus the US on a rolling basis, there are many times where the foreign markets significantly outperform the US. I know the US has outperformed over the whole period of time. But that’s not always the case. And we don’t know what the future is going to bring. I mean, trust me, I wish I had put all the money in the US because they’ve dramatically outperformed the foreign equities, since we’ve been live returns would be a lot higher. But the outcome doesn’t tell you a lot about the quality of the decision. The process was we want the maximum capacity portfolio, the macro program is global in nature. So therefore, the equity program should be global in nature, and there are periods of time where you’re really going to appreciate having those international stocks in there because the US can can be dead money for a decade or more.
Jeff Malec 1:00:56
Right, which was that was that was the answer I was talking about. Right. I’m MEB Faber, everyone’s pounding the table of like, what? Why is everyone ignoring foreign has had these huge periods of outperformance? Yes, it hasn’t performed lately, but I feel like many if you took 10 People who created the same program, I feel like eight of them probably would have said no, we’re doing us only
Eric Crittenden 1:01:15
and they would have benefited. They would have benefited from that US stocks have definitely done a lot better. But was it the right decision? I don’t think so.
Jeff Malec 1:01:24
Yeah. I jotted down here when we were talking. When you mentioned gold, were we were you involved in silver at all and or when I mentioned Cliff Asness as well. Where you guys in silver and get caught up in the LME canceling those trades or anything?
Eric Crittenden 1:01:38
Are you talking about nickel? Nickel? Sorry? Yeah. The others? Yes, yes. Yes. We were definitely caught up in that we had a sizable nickels a small market. Yeah. But it was millions of dollars in p&l moving around. Yeah, right. So we really were definitely long nickel when it went crazy. and held it, you know, while they suspended trading for a week. And then we liquidated it. When they resumed trading after a couple of days and haven’t revisited that market since then. The LME is different than other futures exchanges, preaching to the choir here, you know all about it, right. And then the nickel market, in particular, kind of like some of the other smaller metals like tin and zinc, they’ve got their own reality under the hood, where, you know, big producers may not have the right type of metal to deliver against short positions if they’re in China or somewhere else. And then, so it just that was a giant mess, was very profitable for us as trend followers more often than not tend to be on the right side of these disasters. But we don’t enjoy it, because that nickel market became quite fragile. And a lot of trust was lost. Between traders, and LME, based upon the way they handled that I personally, kind of agree. I agree with how they handled it. I don’t agree with how, how prepared they were for it. But once you get into that disaster, it’s better to do what they did. I don’t agree with Cliff that you know, they should have stuck it to the guy and given him the profit because those prices weren’t real. It was just pure supply and demand for the for the derivative had nothing to do with the underlying market. And that would have caused more damage to the market long term. If you if he bankrupted producers, now they need to fix that and bring trust back into the market my opinion until then I don’t trade we don’t trade nickel anymore.
Jeff Malec 1:03:44
So I didn’t expect you to say that. So you think they should. Right? I’m on cliff side of saying, hey, that guy’s got to pony up, he’s got to pay. If the LME goes bust, I you know, I can see both sides of the aisle me went bust and they gotta grab all those members and grab 235 billion from each member to make everyone whole. And if that didn’t go, well, then you have a potentially a crisis that expands over into CME world and other exchanges, right. So maybe it was best for the entire ecosystem.
Eric Crittenden 1:04:16
That’s what I’m arguing for, like, I don’t dispute you and Cliff’s moral position. You’re right on that. I’m looking more of the long term, like the cost benefit, like you really just need to own up say, Look, we screwed up, he screwed up. We’re not going to allow this, here’s how we’re going to fix it. But we’re also not going to give you these fake profits that aren’t a function of your it’s not because Cliff’s a genius or anyone else whose long it was a genius. It was a structural flaw in the market that led to you know, three 400% moves. And then illegally speaking a cliff has I mean, everyone who was long has an argument Legally speaking, I’m just saying in the best interest of having this market be around going forward to trade. You shouldn’t be going down that route. So it’s a moral versus practical argument.
Jeff Malec 1:05:03
And the flash crash they canceled, right? People were buying IBM at one penny and stop, right? There were some bad prints. What was that? 2010? Or? Yeah, may have 10. So they were bad prints down there, and they read canceled all those trades. So there’s a little bit of precedence. But yeah, it just seemed wrong of our whole lives of like, no. If I trade at a price on an exchange, that’s a valid price, right, that’s just ingrained in everyone’s head that ever traded a futures market. So it was just odd to be like, wait, what do you mean, you can cancel those trades?
Eric Crittenden 1:05:35
Yeah, and I think trans Tran has some strong opinions about this, too. And they don’t really fully understand their argument. They’re always complaining about the Canadian, I think it’s the Montreal exchange and the way pricing works there. And they
Jeff Malec 1:05:48
trade something like 800, futures markets.
Eric Crittenden 1:05:52
So a lot, a lot of those are synthetic, they’re they’re creating spreads,
Jeff Malec 1:05:55
or a lot of those were listed by the marketing department perhaps. Yeah.
Eric Crittenden 1:05:59
Could be I mean, those guys guys definitely know what they’re doing. So I’m not criticizing them. They’ve been around forever and doing well. I personally don’t see that trade 500 different futures markets, I don’t even see more than 80 that have the liquidity to trade. So you read their synthetically creating them, or you’re doing some stuff on clear port, you know, off exchange stuff that is interesting, but just not necessary, in my opinion.
Jeff Malec 1:06:23
And just to wrap up the nickel thing, my thing was telling people like, yeah, you’re gonna, there’s gonna be a class action suit, and you’re gonna get back a nickel. You had 2 million in paper profits, and you’re gonna settle for a nickel.
Eric Crittenden 1:06:37
Well, here’s the thing, though. So I’ll play devil’s advocate take the opposite side of my, my argument about practical. What if the trades were the other way around? Would they be letting us off the hook?
Or would they be sending us a bill? Yeah,
Eric Crittenden 1:06:51
yeah. So I’d like to know that one. You know, I’ve tried if trend followers, were the ones nursing those enormous losses, and making the case that this isn’t right, or fair, whatever. Would they be bailing us out? I’m not sure about that.
Jeff Malec 1:07:04
I don’t think so. Maybe, maybe clip maybe some of the big ones. But which I put that on Twitter a while ago. Have you ever gotten a thank you note for when oil goes down? Or commodity prices go down? Gold is right. Everyone blames the trend followers when all this stuff goes up. Like the trend following the hedge funds are pushing prices up. But I never get a thank you note. I get blamed, but I never get to thank you know when it goes down?
Eric Crittenden 1:07:31
Well, there’s two things I’ll say about that one. Yeah, they don’t. You’re not on their radar when prices are going down. Yeah, right. The second one is when I get this argument that you guys are bad and evil, because you’re putting up food prices, corn and wheat and that poor people struggle because you push up food prices. I’ve never understood why people feel that way. Because it just tells me they don’t understand the mechanics of the market. So when I buy a corn futures contract, it’s a futures contract. It’s not corn itself, I’m not trading spot cash, corn, I’m not pushing up the price of corn. I’m pushing up the future price. And I’m trading against a hedger. And I’m giving them the liquidity that they need to expand production to push those prices down. Without that price certainty, then they would stand back and let prices go higher before they would be willing, because their margins need to go higher to build in a buffer and they’ll say, All right, now I’ll plant more. But if I step up and buy it now, the futures contract, not the corn the contract for nine months out, they say, Oh, well, if someone’s willing to pay this price, I’ll go ahead and lock it in hire these guys. And we’ll go out and we’ll we’ll produce more, which has the effect of pushing the price down when it becomes the cash market nine months from now. So when I explain that to people, and usually I use it and a graphic to show how it works, they’re like, Oh, I always thought you were pushing up the prices, but you’re basically transacting almost like an insurance contract with with the hedger, and then they’re gonna go produce more because you pushed up the price of the contract. Okay, you’re not evil. And I’m like, I wish I don’t understand why that’s so hard for people
Jeff Malec 1:09:11
to even I could argue they’re trying to sell that hedge aggressively, which is pushing prices down, and then you come in and provide a floor. So I don’t I don’t even agree with pushing prices. Yeah, kind of semantics. But I was arguing the other day, we should have called them deliverables instead of futures, because futures right people like oh, you’re predicting what’s happening in the future like, no, if I buy these corn futures today, really what I’m buying is the I’m agreeing to have corn delivered to me in the future. Right. It’s nothing about what the price is going to be in the future. It’s the price I’m willing to pay today for delivery in the future. So yeah, it’s nothing to do with the price in the future is the price today.
Eric Crittenden 1:09:53
I’ve had that debate with academics for decades now. It and it gets heated. You know, it’s just it’s so weird to me. But I look at that price as being exactly what you just described is whatever week, it’s the price that clears the market today for future delivery of corn at some date in the future. So that’s what brings buyers and sellers together today, you know, that’s it’s a price at which sellers are willing to transact, but also buyers. And then there’s three things that I think get factored into that price. And one is expectations, that’s a small one. The other one is the carrying costs, the financing charges, meaning if you do this, you don’t have to hold the weight in a storage facility and pay them you know, just basically the components of term structure, those things get factored in, that’s what keeps the market coherent and stable through time so that you have a place to go get rid of risk or collect risk. I mean, the reason these markets exist is for, you know, risk transfer. That’s why they were designed, they weren’t designed for traders, they were designed for the market participants to actually have a place to go manage their risk. Now you need traders to give you the liquidity to do so. And the markets work very well at doing that. And I don’t know why more people don’t talk about that.
Jeff Malec 1:11:09
We started right here. So hopefully they do. What we were right when I was oh seven, right when Congress was having hearings, and everyone’s pushing the price of commodities, and inflation, and then it quickly all unraveled. And that that all went away. But yeah, we got a little bit of that a few investors, during the first stages of the Ukraine war, were like, I don’t want to get into trend following. If it’s, you know, prop war, profiteering it’s getting, you know, they’re making money off we prices, those are only up because of the war energies up because of the war. So there was a few investors who kind of had moral issues with it. And I was, yeah, it’s a tough conversation. I don’t know how to precisely answer it to say like, well, you’re, you didn’t want the war to happen. You’re not profiteering off the war happening? You’re right, you know, I
Eric Crittenden 1:11:58
say you’re like a fly on the bowl, or bears. But just whenever it wherever it goes, you’re gonna follow you’re not making it go one way or the other. So I’ve won that argument with with every one I’ve ever had it with in the past, and if they were willing to see the argument through and I would just simply ask them, Do you want wheat prices to go lower in the future? And they say yes. And I say, Well, how do you get them to go lower? And they say, Well, you got to, you know, cut the prices? And I’m like, how did the prices go down? I was like, well, the supply needs to go up. And I’m like, Alright, so you need the farmers to plant more, right? How do you get the supply to go up? It doesn’t come from Mars? And they say, yeah, they need to plant more. And I said, alright, well, if I buy wheat futures, those farmers are on the other side of the trade. Why do you think they’re doing the trade, it’s so they can go plant more? Yeah, without the trade, then planting more scary for them. And it’s
Jeff Malec 1:12:47
risky. I’m giving them money today, to deliver me going in the future wheat in the future.
Eric Crittenden 1:12:52
And I’m giving them price certainty right now, which gives them the ability to lock in their margins, and then go spend the money to expand production. And then they’re like, Oh, I didn’t realize that. So you’re not pushing up the prime pushing the price of the futures contract right now. But that’s not what your people and you are paying for wheat. And it’s not what you’re going to be paying for wheat, you know, nine months from now.
Jeff Malec 1:13:13
And then you and I don’t need to have that argument in electricity pricing, because I don’t quite understand how the power markets work and all that. Right, and traders that do all that stuff. And the traders are making billions of dollars when Texas prices shot up 400x.
Eric Crittenden 1:13:33
So those are those are one and two day forward markets. And that’s a completely different ecosystem. So I, you know, but I studied them for a long time. And I know people that have back in the Midwest when I lived in Kansas, you know, and then that’s some people that would trade them over I think it’s Nord Pool over in Northern Europe. It’s just a completely different ecosystem. And it’s, it’s like pay to play meaning it’s, it’s there’s no exchange, right? It’s just all these kind of oligarchy type institutions that get around and they have a kind of a, what do you call that a regulatory capture relationship with the regulators. And then they basically trade these power forwards between each other to try to offset demand from the utilities and whatnot. But it’s all like quasi heavily regulated utilities, and then these kind of almost parasitic entities that are parasitic in a negative way, but really just, they just make money from doing one thing. And if you’re not in that group, with the economies of scale to do that one thing you can’t make money so when I look at it, I say that’s nothing I would ever want to participate
Jeff Malec 1:14:41
- I’ve always wanted to just own in like one of these tail hedge funds just own calls on the power, but probably the carry is insanely expensive. But you think you could own way, way out of the money call? It seems like at one every three years these these spikes happen. And you could capture that right Couldn’t trend follow it, it jumps too quickly.
Eric Crittenden 1:15:02
Yeah, it was somebody who asked me recently if I trade a European or UK natural gas. I told him no, we don’t. It’s not one of the more liquid markets in the world. And they were under the impression that it’s just an incredible market for trend following and I went and pulled up a total return stream over the whole curve. Like that, Mark, it’s been a nightmare. You know, it’s up 700%. But then it’s actually negative three months later, and then it’s up 800%. And then negative. I mean, it trades like Bitcoin did back in 2011. That’s, that’s but that’s not indicative of a true hedging market. There’s something else going
Jeff Malec 1:15:35
on there. Yeah, and I was a tweet a while ago, there’s a bunch of the pricing isn’t what’s actually happening. Yeah, there’s some trading mechanism that post those prices. The but as you mentioned it Bitcoin in the portfolio ever going in there as if one of those ad markets,
Eric Crittenden 1:15:51
it almost made the cut, but still, it’s not.
Jeff Malec 1:15:55
It’s not up there yet. Got it? And how about carbon
Eric Crittenden 1:15:59
carbons in their carbon emission credits? You know, we just had a position a while back in that market, he made a new, I think a multi year high and then immediately collapsed. So that was not a not a profitable trade for us. But it’s all it’s been one of the biggest winners for us over the past three years.
Jeff Malec 1:16:17
I think you should do a YouTube channel, like because that always happens. Right? Oh, here we go into carbon all time highs, this is going to be a loser. I’d probably be the only one who watch it. But that would be fun.
Eric Crittenden 1:16:28
Well, I thought I thought it was gonna be a loser the first time we put a trade on, which was in 2020, and ended up being our biggest winning position over a two year window.
Jeff Malec 1:16:37
Yeah, yeah. 20. That whole period was unbelievable. But that happens to me all the time. Like why in the world, we’d be going short bonds right here, like these are gonna bounce back these are. But that’s probably why we’re both systematic, instead of discretionary traders.
Eric Crittenden 1:16:53
Yeah. Just having a conversation. Somebody suggested to me like you would have been a good discretionary trader, you were right on bonds. You were right on this that and I said, No, I, I, I wasn’t right. I wasn’t I didn’t even make that prediction. I never would have had the courage to put that trade on on a discretionary basis. I don’t want to live that way. Like being able to sleep at night. I am not here to entertain myself or create excitement. The systematic discipline prepared approach was a perfect pairing with my personality and everyone else that standpoint. And I think it works better.
Jeff Malec 1:17:24
Yeah. Well, and as well, and that gets you to that 10 year thing, right? Who knows? How you would that’s a whole nother conversation, but to be able to exist over a 10 year period. Having to put on each trade through your own mental process. That’d be exhausting. Gonna ask you your hardest take but I think you already gave it that, that the LME did the right thing.
Eric Crittenden 1:17:53
I they did the right thing by putting themselves into the wrong position. Yeah. So they put themselves in the wrong position. And then they did the right thing. That’s, that’s very unpopular, but necessary to keep the ecosystem alive. So what what do they call that when you bad incentives, and you have to keep doing the wrong thing to keep it from blowing up or whatever. So yeah, I’m not happy with them. And mine. A lot of people aren’t. And I’ve even I’ve even kicked around the idea of just not trading LME markets anymore. Based upon that in in the end said, well, they add enough value to keep them but I’m watching them like a hawk. I don’t want to see any more crap, like we saw with nickel. But given that it did happen. I’d like for think about this. If they had marked a market, I mean, our profits would have been a lot higher. Right? A lot. And I but I didn’t feel entitled to those profits. I don’t think my shareholders were entitled to those profits. Even though legally speaking, someone could make a case that you were but at the end, they had they did what they did there, the exchange, the regulator’s evidently signed off on it, and it is what it is, and we did make money in that market. But it could have been a lot more. And I remember looking at it thinking, I kind of hope they don’t do this, because it’s going to destroy that marketplace, in my opinion. And it’s more important to just take our modest profits and keep the market alive. I’m talking about more about the LME not nickel, I don’t care about nickel one way or the other. But the LME as a whole I’d like like for them to get their stuff together and do a good job going forward. And that’s more important than making an extra million bucks on one particular trade.
Jeff Malec 1:19:37
Yeah, and the smell test for me was when you pulled up the your screen that day and saw the nickel trade was up, right? Yesterday had been a 42,000 per contract, or 4000 per contract, and now it’s up 420,000 per contract. Right? Did you think in your brain, this must be a bad price? Right? That’s the first thing that went into my brain of like, oh, there’s a bad tick in here.
Eric Crittenden 1:19:59
Well, I knew something was up with the market because there were rumblings that something was up. And then I thought, well, either they’re gonna have to bust all these trades, or you’re gonna have a year of litigation and absolute chaos. And you’re gonna
Jeff Malec 1:20:14
have litigation either way or both, right, they both trades and years of litigation. Right.
Eric Crittenden 1:20:19
But I don’t Who do you think is going to win the litigation?
Jeff Malec 1:20:23
Probably them. I think it’ll settle for some right, like, some small amount. But yeah, I think in their bylaws, and and all the fine print, they can do whatever they want, basically.
Eric Crittenden 1:20:33
Yeah. Well, you know, they actually do have a case when you cause a certain amount of volatility. If it gets to a certain level, it’ll break a margin margining process. Yeah, right. And they have a margining process. And it’s not the greatest exchange in the world. They don’t do the best job out there. But there’s still it’s the effect has been affected. They’ve been around for hundreds of years. But the marketing process got broke, because the volatility was so high. And when that happens, you got to figure out what to do. And they could have split the middle, but they chose the side of the hedge or over the speculator and in their shoes, or would have done the same thing they did. That’s all I can say.
Jeff Malec 1:21:12
All right, tell everyone where to find you standpoint. funds.com.
Eric Crittenden 1:21:16
Yeah, if you want to learn more about standpoint, the best way to do that is go to our website, right there on the front page, scroll down to the bottom and just sign up for our monthly updates. We don’t spam you with junk. It’s just the what we did you know what happened, how we compare to the others in any other good stuff that we think would be worthwhile. So just put in your email address, hit enter and you’ll be good to go and standpoint funds.com
Jeff Malec 1:21:38
Can you do I keep wanting to try to get people to do this. I wanted AI bot to write a fake narrative over this systematic trance just right, for comedy sake, just be like, Well, we really liked the that India was flooding and so we bought corn futures or write some, some fake narrative would be fun.
Eric Crittenden 1:21:58
Okay. I’ll get Sean My, my, my quant guy here to start working on that right now, because that would be pretty entertaining.
Jeff Malec 1:22:07
Click here for the facts and then click here for the onion version of of what happened?
Eric Crittenden 1:22:12
Oh, that’s a good idea. Yeah. No, I think we’ll just stick with what we’re doing, though.
Jeff Malec 1:22:17
All right. Well, thanks, Eric. This has been fun. We’ll talk to you soon. We’ll visit you next time. We’re up there in Phoenix.
Eric Crittenden 1:22:25
Awesome. Yeah. Thanks for having me on. Appreciate it. All
Jeff Malec 1:22:27
right. Let’s talk soon.