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Excess Returns
He Built the Fund He'd Hold 30 Years | Eric Crittenden on What Investors Pick When Labels Come Off
01:06:54
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A
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- [01:00]
C
The best opportunities present themselves when you are psychologically and socially under pressure. That's a reoccurring theme over my career, for sure. There are regime shifts that just 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 kind of new environments, you run the risk of just getting left out or getting whipsawed from your choice of which system to bet on. Not very many people want to be on the other side of that trade, right? So if 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 premia that we're going to collect. For some people, myself included, it's hard to just sit on your hands and do nothing. But that's simply the right answer 85% of the time in this business,
- [01:57]
A
you're watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use for better questions lead to better decisions. I'm Matt Zigler, 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 piece?
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B
I don't know what to do with your intros every time.
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A
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.
- [02:27]
C
Thanks a lot for having me on. Appreciate it.
- [02:30]
A
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
- [02:53]
C
going on a year ago, 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 I can. Yeah, 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, you know, currency trades. It was a very, very difficult period of time. It's something that we expect to see once every eight years, maybe 10 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 10% in 30 seconds. Bonds having, you know, five, six standard deviation moves against you inside of an hour. It was a very difficult period of time. Yeah, I mean, it takes a lot to get emotion out of me. And even I started to get a little bit. I, I started to feel it, you know, down towards the. So the, the drawdown began in mid February. That's, that's kind of when everything peaked. And for us, it bottomed in early April. So it wasn't a long drawdown, but it was a fast one. 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. You know, my birthday's in early April. Things I've noticed historically 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 30 year career. So, um, that's, that's what happened. And, you know, what can you do other than just manage your risk and accept your, accept your beatings when they come, they're going to Come from time to time you're going to 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?
- [05:22]
A
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. That's what this is. This is like a test of the strategy when this starts to all go wrong.
- [05:40]
C
Yeah, it was pretty much a full risk on, you know, positioning. We were long European stocks, Japanese stocks, US Stocks, Canadian stocks, and we had some, I would say moderately sized short positions in bonds. We were, we were long the US dollar, we were long gold. Um, it was kind of a, you know, happy days growth oriented portfolio. Exactly what you didn't want on when, when it hit the fan. Um, so yeah, it was a fairly typical pro growth, reasonable inflation type of portfolio that was on kind of like a 1980s style portfolio related to that.
- [06:19]
B
Eric, don't you think like that's part of like every trading strategy has its pros and cons. And one of the cons of like trend following is like 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 going get whipsawed. Because you're really trying to capture like the belly of a move. And so that always happens. But then part of it. Does it give you that 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 going to get some drawdowns. But then what that regime shift is doing is opening up a new regime, hence regime shift. And then 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.
- [06:59]
C
Yeah, I think that's fair. The regime, 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, you know, before dawn when no one really wants to allocate to your strategy. That's the push pull dynamic in this, is that the best opportunities present themselves when you are psychologically and socially under pressure. That's A reoccurring theme over my career for sure.
- [07:32]
A
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.
- [07:45]
C
Yeah, the speed is different depending upon market environment. You know, April 2025 was one of the fastest I've ever seen. You know, 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 going to work. And then get that thesis through an investment committee and get everyone signed off on it. You know, systematic trend following or, you know, 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, 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.
- [08:43]
B
But when you're. Sorry, sorry Matt, let me just jump in real quick. When you're, you're going through that drawdown and you've been in this game for decades, so like you, you know how to stick to your systems. Like you said, that's, that's the discipline is sticking to the system and everything. But you know, everybody has, I guess, dark nights as a soul, like you said around your birthday, like 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 like saying maybe we should have some faster signals?
- [09:08]
C
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, you know, 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. So you just have a diversification works also in systems. So that's a good point, Jason, is that you really do need to diversify across time frames if you want to do reasonably well through most plausible market environments.
- [10:32]
B
Like you said, like Feds, you know, sometimes short term works better, sometimes it doesn't. If I think about the flip side of that is just, you know, this last March where we're going through the straits of hor moves and flopping back and forth on a daily basis, like your long term signals might have not even gotten involved in that, you know, so you're doing really well on that side. But like, that's what I'm saying. I think that it's like you said, diversification of signals is important. But I, I do see even within different firms is like maybe the, the desire to switch to short, medium, long term based on recency bias. And that's more than temptation rather than sticking to your signals. So I'm just wondering how you deal with that mentally or just you're just so disciplined that, you know, we can't even imagine what it's like to be a Vulcan like Eric.
- [11:11]
C
We just decide to not do that. Yeah, I see people fall victim to that where they're like, well, the short term is going to work better now based upon the environment we're going into. So we're going to overemphasize that. Right. Some people are using fundamental filters, GDP filters, you know, interest rate environment filters, and having good success with those things. But you know, over the long term, if you're, if your research goes back to 1970 like mine does, you can see that there are regime shifts that just 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 kind 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. So I give them equal representation and just stick to the process. You know, 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. So 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,
- [12:34]
A
in the systematic process, looking back. So this isn't just a last year question, stuff that'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?
- [12:53]
C
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 have been, would not have been implementable. You know, a lot of the higher frequency stuff just simply wouldn't have been implementable because you were trading almost using the post office back and then, you know, it was a phone call but you know, 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 I actually would have been implementable back then. So yes, we are continuously doing research, but we're purposefully not changing very much. I don't want, 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. Right. So 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, 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. You know, 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 want to Tinker too much.
- [14:46]
B
I think what Matt's like hinting at as well is like, I think he's actually hinting at the hardest piece to this, like, systematic trading, right, Is like, how much do you evolve and iterate versus tinker? And what, what's the right time to do it when it's not the right time to do it? Like, as you've evolved throughout your career and iterated to this point is like you launched Standpoint in 2020. Like, you're saying you have the tools that you have then, you know, you're going through this drawdown, you're getting redemptions. You know, all of that external pressure is so much that I think that's the time when you want to tinker the most. So, like, 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 like you're saying it's an art, so maybe kind of open that up for us if you can a little bit. Like, I think that's one of the hardest questions for anybody to answer.
- [15:29]
C
Yeah, well, especially guys like me that like to design systems and build them. You know, do you just build it once and then just sit on your butt and ran it, Run it for the rest of the. 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. So the way I look at it is, you know, everything's a trade off and everything has unintended consequences. And, you know, it's kind of like a matrix in my mind. If you, if you want to do something, you know, what's the upside, what's the downside? What are the potential unattended consequences and the unintended benefits as well. So I tinker a lot just on the research side. I look at things, especially after drawdowns, like, you know, what could have been done differently? And you'll get an answer. You'll get plenty of answers. You know, I could have done this differently. I could have used, you know, some form of profit targets. I could have used, you know, covariance or copulas or whatever to kind of squeeze out the risk and see where they were starting to converge and whatnot. And it always looked great, you know, right then. But then you gotta go back in time and apply it continuously through time. And you're like, wow, okay, they worked great in, you know, two times in 50 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, you know, these solutions or quote, unquote, improvements that you're seeing. So doesn't stop me from, you know, I'm curious and I like these kinds of puzzles, but I'm very, very skeptical about introducing them into the. With other people's money if they don't solve more problems than they create.
- [17:02]
A
I think the rigor there is really important, and it is.
- [17:05]
C
And there's, you know, a humility too. Right. It gets it. For some people, myself included, it's hard to just sit on your hands and do nothing. But that's simply the right answer. 85% of the time in this business. You know, if you have a good thing, don't mess it up.
- [17:18]
B
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 like, no, we should be doing this, right? Like, that's the, the spin out. But hopefully, you know, you have good team members and everybody that keeps you in check and good kind of people on your board to maybe have. Be a sounding board so you can maybe sit on your hands better than maybe you want to, you know, touch that keyboard.
- [17:38]
C
It also helps to not be particularly emotional. So I fit that thankfully, exactly.
- [17:46]
B
I was. I don't think I've ever asked you this because I could just guess what your answer would be. But, like, like, you're saying that drawdown last year was one of, you know, we both studied this. The space and these trading strategies and styles is like, that was one of the worst drawdowns for decades for most, for a lot of trend following managers. And so we always have heard this every decade, every few years, trend following's dead. You know, Trump's trade, you know, it's a faster acceleration. You know, it's never gonna work again. It's been. It's 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 you just know it's gonna eventually come back?
- [18:24]
C
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? Yeah. Cause I've spent a lot of time studying why trend following, even works in the first place. Like why should you be able to do this and extract money from these markets? I mean, you're trad against the smartest people in the world, the hedgers and the commercials and whatnot. So. But I mean 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? You know, are you diversified enough and are you, your, your leverage isn't, isn't 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. So the, the naysayers that said, you know, trend following is not going to 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, a legitimate way to extract a very valuable and very large risk premium from the features markets. And I fully expect it to work long term, as long as you don't over leverage and you diversify properly.
- [19:43]
A
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, oh, 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?
- [20:05]
C
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 you know, when it went crazy a few years ago when I looked at the underlying structure of the market and saw that, you know, there's a couple of Russian oligarchs own all the nickel in the world and the LME is not giving me straight answers about, you know, counterparty risk and some other stuff and it's a tiny market anyways, so we kicked that out. Another change I've made is some of the short term fixed income instruments
- [20:56]
A
use,
- [20:56]
C
you know, in order to get a reasonable position size on, you know, with your risk budget. The, 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 to, you know, you've got this huge fixed income, you know, opportunity set and putting you know, euro yen and your ribor and you know, the shats in there gives you just more of essentially the same, almost the same exposure with a much higher leverage level. So if you look at our leverage levels you see a pretty low number, pretty humble number and you look at some of the other futures trading firms and you see just eye popping numbers. If you look under the hood, it's the short term fixed income products that they 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 year 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.
- [21:56]
B
But like I want to clarify though, when you take Nick a lot 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.
- [22:20]
C
Yeah, and that's a terrible mistake in my opinion to kick out a market because it hasn't been profitable. You know, 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, for a couple decades. Same thing with silver like you mentioned. So yes, I'm not going to, not going to be doing that kicking. You need to be there consistently providing liquidity to hedgers and buying, you know, strong markets and shorting we weak markets. And if it's a legitimate futures market it needs to be in the portfolio.
- [22:53]
B
So that means, but related to that you brought up the fixed income markets and the amount of leverage, understandably you have to take to be involved in there for Any sort of meaningful gain on a risk adjusted basis. But you know, the last five years people have had a really hard time in trend following with fixed income markets and maybe they want to throw them out, maybe they want to keep them. You know, I'm hearing a lot of grumblings about it, like how do you think about the fixed income markets over the last few years besides the leverage part? Like, how do you think about them on a trend basis?
- [23:18]
C
Well, you know, 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 that, you know, especially the argument against shorting bond futures. You know, a lot of people were writing, smart people were writing articles saying it's impossible to make money for being short bond futures because of the way that the coupon payments work. And that's a whole nother thing. But I did the math on that and said, no, I'm not buying it. It's reduced somewhat, but I'm not buying it. So no, we keep it symmetrical. We're agnostic to direction when we're trading futures. And I think that 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, 10, 20 years. What?
- [24:14]
B
Yeah, there's all that literature was coming out about CTAs. The bulk of their profits have been made in a, a falling interest rate environment. And when interest rates rise, they won't be able to make any money. So that was one of the, one of the primary arguments of why it was broken and wasn't going to work anymore. But obviously it has been working again.
- [24:28]
C
So yeah, all they needed to do was go look at the 70s. You know, the CTAs that were around were rising interest rate. I couldn't believe it. I was reading it. I'm like, no, I expect to make healthy, you know, like it's, it's, I'm praying for rising interest rates not for the economy but for a trend following portfolio. Especially if you're a collateral yield, right? You're just climbing the ladder, making money on your T bills and being short bonds. And so. But we got what we got, you know, and they got proven wrong. So.
- [24:53]
B
Well, in that way the term structure matters. So like how do you think about that too?
- [24:56]
C
Like 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 shake. It's, you know, work itself out over time.
- [25:07]
A
I want to. I know this is foundational, but I want to spend an extra second on it. The providing liquidity to hedgers, that 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.
- [25:27]
C
Yeah. Okay, so it's been a couple years since I had this conversation, so we'll see how good I do. There's a couple different points I'm from that I want to make. And it can be difficult to tie them together. So let me take my best shot here. I'm out of practice on this. So I'm from Kansas, big agricultural area, Hog farming, wheat farming, alfalfa, stuff like that. Coke industries. Koch is there. So I know a lot of people or did 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 it was. We were essentially trying to create a computational finance type program before computational finance existed or financial engineering. And so a lot of the people that joined my club worked on hedging desks, you know, for farming syndicates, you know, 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, you know, they generally lost money on their. On their trading. And it seemed like the more they lost, the more that they got compensated. Like, what is going on here? I was an investments guy, right? And then I realized after a while of just, you know, 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, right? So they're not trying to make money. They're trying to. It's a form of insurance to them, right? And I thought, well, how much of a difference can that possibly make? And then I, when I. 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, you know, so they may lose 2, 3% a year on the hedging side, which can be leveraged up to 6, 9 12% 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's just these hidden things in the background that you have to drill through to see, you know, what, why these motivations exist. So now in the, the example I use in the, 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 3. What's it trading at today? I don't look at the prices, I just look at the risk typically. But just pretend that was 10 years ago and that implies a profit margin to you of say, I don't know, 10% profit margin. 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 going to take you time to ramp up, right? You know, you got to hire people and get more insurance and equipment and you know, 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. So, but you're going short copper futures. Are you bearish on copper? Oh, you're bullish because you're, you're opening up previously closed mines and hiring people. Right, but, so you're trying to protect your profit margin. Now some people don't do this and they're like, well, I'm just going to gamble. I'm, I'm betting that copper's going to go up, so I'm going to not hedge. And some people get away with that. But for how long? Right? Because you know, it's, imagine it's hard enough to trade copper profitably, but if you're doing it with a six month lag, spending $20 million to hire people and, 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, right? No one else says wake wakes up and says, you know, oh, copper prices are 20% higher than they were a year ago. I want to buy, right? So but all of the people that produce copper are seeing the same thing. 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. Who's on the other side of that trade? Not very many people want to be on the other side of that trade. Right. So if, 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 premia that we're going to collect. I say that that's the trend following risk premium, right? So that's copper. Now you asked about other asset classes because some people would say like well where's the premium in going short the S&P 500? That makes no sense. So I'm going to change my definition of hedger to hedge like behavior. So hedging like behavior motivations are cousins throughout all the different asset classes. And I can't prove this, you know, but I think that's why it persists is 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 behavior, hedge like pressure that flows to the trend follower. If we're, if we're, if we're a minority group in the market space and we're willing to provide liquidity by buying rising markets and selling shorting markets over time, that if that risk premium exists, it's going to flow to us over time. Now I think it's humble, I think it's 200 to maybe 350 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 8 to 12% annualized return with commensurate volatility and drawdowns that are in the 15 to 20 range, I think that's doable.
- [31:52]
B
Matt, I'm so glad you brought this up because this is one of my favorite things that Eric talks about because like historically if you look at trend following and everything, everybody says it's behavioral, people just see something going up and everybody jumps on, they pile on and it exceeds its capacity. Right. It's just like a behavioral effect and like it never like sat well with me until you know, talking to Eric about like this risk transfer services. Because that makes much more sense of like why there would be a premium there and so forgive me if I brought this up on the last one, but like, I always think about, you know, people talk about alpha and beta, but then Scholz introduced omega, which he called the risk transfer service premium because, like, that's the way they could pour it onto their efficient market hypothesis where it still made sense of where that premium exists.
- [32:29]
C
Yeah.
- [32:30]
B
And the idea is if you're providing a risk transfer service, right, you should get paid for it. So the analogy is to like, you know, when you're an options buyer or seller or an insurance buyer or seller. Right. There's 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. And it's more about a time arbitrage to me than anything else. But I always think about it as like, you know, if you're, if you're inventorying options like deep out of the money puts, waiting for a market crash. And everybody always asks me, are, are puts overpriced or underpriced? I'm like, I don't even know how to answer that question. Yes, you could do theos and all this stuff and, and tinker around the edges of relative value amongst the, the different deltas you want. But historically, right, options are, 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. 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 about arbitrage through time seems similarly like if your house burns down or you get in a car accident, do you have the cash on hand to then 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 or PNL through time. And so 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 going to 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 is if you're performing those risk transfer service, I always think about everything through adverse selection as well. Right. And like you said, these commercial producers and hedgers are unbelievably their, their amount of knowledge base and statistical data and everything they have is so, so much superior to your. So like you said, they have much more informational advantage over you because they're the ones actually, you know, pulling the raw commodities out of the ground or refining those commodities and then they're 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 that 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 going to 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? We did. You know, if your windows are bare, indoor temperatures can go up 20 degrees. Turn the temperature down with blinds.com and get up to 50% off custom window treatments like solar roller shades and more. During the Memorial Day Mega sale. Whether you want to DIY it or have a pro handle everything, we've got you free samples, real design experts and zero pressure. Just help when you need it. Shop up to 50% off site wide and huge savings on door busters. Right now during the Memorial Day mega sale@blinds.com rules and restrictions apply.
- [35:38]
C
Help the market clear, right? The market's got to clear, which means you have to find some balance between buying pressure and selling pressure. Right? And if copper is going to go, you know, is going to double in value over a three year window, you need liquidity on both sides of it, right? So our job is to provide liquidity in a way that's behaviorally and socially difficult for other people. You know, buying rising markets and shorting falling markets and you can download the data for every futures contract that's ever existed and just run it through a simulation and you can see the skew, you can see the Tails. Now, they're not consistent. They're not there all the time. They're not there at a time frame that gets people excited. You can't just take, say corn and say every year I'm going to make 6% in corn. Right. It's like, no, it's 10 years of dead money and then you make 150% return in corn. And then another market it could be, you lose money consistently, you know, 3, 4% a year for 7, 8, 10, 12 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 on to a supply demand mismatch and hold on to it, you know, it's rare that you're going to go, you know, five years without some supply demand mismatch in one of the sectors that you're following. Right. It does happen. You know, there was the, you know, there's been periods of times where they're muted or there's not very many supply demand mismatches that provide, you know, the fuel for a big trend. But these markets exist for a reason. And you know, we help clear the market by unraveling those, by providing liquidity to ultimately resolve those supply demand mismatches when they do happen.
- [37:32]
B
That's. I think you're thinking through it in real time or helping me think through it. That's what I was kind of saying is like, if the supply demand is, 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 like quote unquote, the spread or the profit margin widens. You know, 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 it's balanced, because people are forecasting a future regime that looks like today.
- [37:58]
C
Yeah.
- [37:59]
B
As soon as that, that shifts globally, like, then we got a problem. And in a way, like, I guess everybody should thank this US Government regime, right? Because it's shifting the political landscape globally so quickly that that's, that it opens up new regimes and creates supply demand imbalances. But also the way I was thinking about it too is like, it's very similar. Another analogy, because I know, Matt, you were asking for other industries. So I remember like a year ago I was talking to and reading about like maybe dry Bulk carriers and how the, the Swiss physical commodity houses will also, you know, have the shipping containers going, you know, and in different cargo ships and bulk dry bulk ships going worldwide is like 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 to like Eric said that one time every five years where you know, a straits of Hormuz gets closed or something happens and now they're going to make 20x the profits. So it's, it's another way of optionality or risk transfer services. Like if we have these cargoes going all over the world, most of the time nothing's happening. We're just, we're flat, we're break even and then once every five years we just make a fortune and it's this like punctuated equilibrium.
- [39:05]
C
And sometimes that's just how markets clear. Right. It's not up to us if that, that's just the dynamic. We have to figure out a way to profit from that. It does. The markets don't care that we want to make 8% a year like clockwork every year. They do not care. Their job is to match, you know, willing buyers and sellers and clear the market. That's it. They don't care what that means to us. Right. So it's our job to if we want to participate, participate with reality. It's kind of like being a little boat on a big ocean. If it decides to storm, it's. It's not up to you.
- [39:33]
A
Right.
- [39:34]
C
You just have to figure out a way to survive the storm and keep going west or whatever direction you're trying to go.
- [39:39]
A
I feel there's mixed Hemingway metaphors inside
- [39:41]
C
of that one that I'm going to
- [39:42]
A
let slide for sake of this conversation. So pairing so now not just trend in isolation, pairing with portfolio. How do you think about this with that awareness? I think this is really important too because for any like 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 going to 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?
- [40:23]
C
Well, my approach is just top down empirical. That's what I like to do. That's where I like to start Right. So I'm going to take, that's what I did, you know, and when I started standpoint, I'm like, all right, you know, I'm not afraid to be long stocks for the long term. I've seen the data. You know, bonds have a negative real return long term if you factor in, you know, fees, taxes and inflation even during bond bull markets, those, not those numbers aren't great. Most of the alt products out there underperform inflation. You know, 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 know, you should. I, I, I view stocks almost as cash at this point. You have to own them for the next hundred years or fifty years or whatever if you want to keep up with the debasement of your currency over time. That's what the empirical data says. Now probably we'll go into a 90% decline tomorrow because I said that. But whatever the empirical data, it's past
- [41:25]
A
your birthday, I think.
- [41:26]
C
Yeah, yeah. Well, so then the question becomes, all right, well, how much do I want in stocks? For me, I put 50% in stocks. Just leave it, start off with 50% in stocks and allow it to fluctuate up to like almost 70% and down to almost 30%, 2/3, 1/3 essentially. Now I've got a lot of cash left over. What do I do? Well, there's 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. You know, they were great. Gold sometimes is just wonderful, it's a wonderful diversifier and other times it's just a massive drag. And then all the other asset classes, you know, they either kind of 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, you know, at the base rate statistics and I look from the top down, you know, 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 and just show them, here are the monthly or annual returns for these asset class A, B, C, D and E. They will put most of their money in trend and then they'll put the second a tranche of money in diversified bonds. And then I mean stocks are literally in last place usually is what people choose. Basically it's the opposite of what they do in real life. So but 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, you know, anywhere from 30 to 60% in Trent 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 trends. Now are other people going to put half their money into trend? No, they're not. No, they're not. So they, you might talk them into 10% and if they're only going to do 10% in trend, they really should be buying the most volatile trend program out there like a Mulvaney type or like, you know, something like that. But they won't do it. So I found that from a behavioral and social perspective, there's no way around that if you convince someone to put 10% of their portfolio in trend, they're going to watch that thing like a hawk every quarter, every month and every time it's down, when the market's up, you're going to 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 and 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.
- [45:15]
B
Well, and, and everybody's coming to your conclusion. You've had a lot of people copycats and everybody trying to maybe overlay a little bit of a little stocks in their portfolio. What they're trying to be part of it, but If I think about it almost in the reverse sense, like you said, if we look at, through a Nassim Taleb sense of like anti fragility, right. Trend following is one of the best strategies in the world for anti fragility. When market regime shifts and everything. Like this is the kind of strategy you want. Like you said, when people look at the data anonymized, that's what they actually want. But as a standalone, it's like you said, it's always been a hard sell. Right. And I want to come back into why it's a hard sell. And like if it die, if, if trends dead, why do people not hold it? I want to come back to that in a minute. But like, so like you're saying if, if this is what you truly wanted, you'd have trend as a standalone. But then as we know, it's so hard to sell trends as a standalone. So historically, especially a lot of the European trend followers have added let's call it carry to their portfolios, like where trend following is very convex. So that's why you want it, because the convexity of trends, well, they're like, well what do I do when convexity is not really pervasive in the markets? Well, I want to add a bit of carry there. And so inside their funds they'll create some sort of carry, you know, where it's term structure carry, but it's usually over across the same commodities. So it's really idiosyncratically similar to a lot of the strategies they're trading. So could 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 is that, 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?
- [46:42]
C
Well, they're cousins in a sense. You know, the motivation is somewhat similar. The motivation could be different. You know, for me I just wanted a growth portfolio that gave me what I felt was an intelligent, you know, 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 a noble cause as well. For me, I realized my co workers actually talked me into this. This is the summer of 2019 and they said just build what you would put all your money into and what you would stick with for 30 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 going to find out. So we launched it, right? And it was, it was actually, it was, what would I be willing to put my mother's money into? You know, she's going to henpeck me to death if. If it doesn't have a, you know, if it doesn't grow and have a reasonable path traveled along the way. And it's just pretty close to what I would pick too. So that's what we did. Now, trend followers adding carry in, you know, they're trying to solve a behavioral problem, I think by smoothing out the returns. That's a noble cause too. And I guess those motivations are related in a sense. But for me it was like I want the highest compounded return after fees, taxes and inflation over the next 30 years per unit of risk taken. How do I achieve that? And this is what I came up with is that 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 relative in year 30 with a path traveled that reflects a reasonable amount of risk taken each step of the way, if that makes any sense.
- [48:48]
B
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 there are 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.
- [49:16]
C
Yeah, that's a really good point. I was cognizant of that when I was building it. A lot of trend followers that want to stay, you know, they don't want to diversify, you know, they want to stick with trend following, but they need to make it more palatable for people to hold on to will are incentivized to come up with like profit, profit targets and other volatility smoothing techniques that are really interesting but they build fragility into the program and they, like you said, they take away from the fat tails, they take away from the convexity when people need it the most. It's kind of, it's, it's, it's bizarre in the 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, of, you know, what you have to give up in order to get what they need long term. It's kind of like someone who, you know, lives in Florida and they pay every 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 and you know, it's like the convexity component. So I very specifically did not do that. I built a trend program using, you know, short term, medium term and long term trend following on futures with none of the volatility smoothing tactics. You know, no profit targets. You know, we're not trying to, just didn't do any of those things. I wanted to keep it pure. Now we do have, you know, a risk budget that has to be enforced, but everyone has to have that. You know, you can't just let their open risk go up to 80%. Ours is at 10, you know, a 10% risk budget which is below where it could be, you know, but you know, it needs to fit into a 40x structure and it needs to not keep people up at night. And I'm not trying to make 20% returns a year, I'm trying to make something like 12. So yes, but by parent, when you bring the equities in to the total portfolio because they're negatively correlated with trend, when trend struggles, they tend to be negatively correlated. You know, everything gets better. Your risk adjusted return gets better, your volume gets smaller, your drawdowns. 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. I mean, it should just be, you know, modern portfolio theory 101. But that's very counterintuitive to people. I'd like to know, Jason, what you think about that.
- [51:37]
B
Well, I don't. That's what you're saying. I think people think about things structurally as just individual strategies. And then when you think about portfolio construction, it's a total hump 180.
- [51:46]
C
Right.
- [51:46]
B
You're saying like if how can I pair these things and not work? Well, it goes back to what I want to touch on when Matt was like, you know, how do you keep people invested in this? And part of it is these struggles you do have in trend following, right? It's how you keep people invest or why isn't everybody doing it is part of it is like, so if you take a, a strategy that historically, like say trend following has a MAR ratio of roughly 0.3. Is that fair, Eric? I mean if it's varies around there, but let's say 0.3 and, and say it's similar with, with stocks or even worse, right? Like 0.2. Right. So you would not like. And by the way, my ratio is your KEGR divided by your max drawdown over time. And so 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 or for creating a portfolio yet we use all those Sharpe ratios and everything else for individual strategies. 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, like if you in average pod shop manager only has like a sharp or MAR ratio of like 0.7 to 0.8. But when they combine them especially uncorrelated strategies across 100 or 200 strategies that 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 wanted to be correlated with your stocks until they sell off, then you want it to be negatively correlated, so you actually want it to move around. But unfortunately, I think because we have a math bias and we have this physics bias instead of a biology bias like we want to be able to. And Matt, you know this all too well. You have to show clients portfolios. You want to use this very structured, rigorous, rational, analytical way of looking at things. But if correlations fluctuate, that throws out your entire backtest. And 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. And so you have to think about the core, core signals and diverse fires and the core reason why asset classes may move in different directions at different times given the macro regime.
- [53:59]
A
And you can have a whole mess of assets and a whole mess of strategies in some of these, in somebody's life. Eric, I'm curious. Selling the strategy and I don't mean that this isn't like a marketing tips question. What a person should like knowing what, knowing what Jason just said, what a person should responsibly be aware of when they're making the buy slash allocation decision to trend. Like 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. What do you need to know and understand today?
- [54:39]
C
Well, they need to be aware of the challenge of having a non correlated component to their portfolio. You know, they're gonna, they're gonna have to face their own investor biases cause they're gonna feel it, right? So, and most people, like, you know, I can't tell you how many people I run into where, you know, they find out what I do for a living. I'm at some sort of an event and they, they wanna show me their statement, right? And they've got, you know, 20 or 40 investments on there. And they always want to focus on the things at the bottom and say like, you know, 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 want to get rid of that one? They're like, well it's, it's because it's down, you know, it's not working. These other ones are working. This one's not working. They view it as a report card, right? There's A's, B's, C's and there's F's at the bottom. So they constantly want to sell anything that is getting an F for the quarter or for the month or the year or whatever. So they're, they're fighting the diversification. So if you, if you bring in trend into your portfolio being uncorrelated and at times negatively correlated with what you're already doing in the portfolios, essential to adding value to the portfolio. Which means that it's going to be getting an F when your risk assets are getting an A and vice versa at times, right? So when people don't understand this and they just look at it like a report card and they're gonna, they wanna Fire anything that's, that's getting a bad grade for the quarter. They're gonna, they're essentially saying I don't want a diversified portfolio, I just don't want it. So until they face that 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. So now to be clear, I gave up on that lifestyle, guys like that, that uphill battle and you're just getting kicked in the face every single day of your life, right? There's, I've seen plenty of trend oriented managed features programs to 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 big moves, right, and bring them into a portfolio to, to create a multi strategy approach. I want the benefits of trend and without the fees, I'm not paying anyone else 2 and 20 and merging it with equities and a laddered, you know, 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 life. It cost me a lot to give up on that lifestyle and to start this new lifestyle. So that's my answer is you probably can't do it.
- [57:46]
B
Matt, I'll use a different analogy. And like, like you're saying inherent in your question is a little bit of like what, you know, how do you convince people to have these things in their portfolio? And I'm not sure we can convince anyone in anything, right. Like, and, and I, you know, I have a background as in comparative religions as you know and so I always think that these things are faith based, right? Like the trend followers are very faith based. Like anytime you have a mar ratio of 0.3 it's faith based. Isn't this why people, not everybody does it similarly with our, our value vesting 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 so, and then similarly like as you know, in the RIA space, it's like this 60, 40 faith, right? This 70, 30 faith, right? You know, target date funds. And everybody is like. And nobody wants to look different. Like, 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 going to happen. And so we always think that, oh, 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 is, like, we're forming these new churches where 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 want. That are running or sprinting away from their church because they can't take it anymore, right? They want something new, but that's going to be like one out of every thousand people. So it's like, it's very hard to find those people because otherwise you can't convince anybody off the street that why they should add these things and why they should hold on to 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 show all the math, it still doesn't work, right? You people have to convince themselves before you can convince them. So you're not really convincing anyone of anything.
- [59:31]
C
Just stop the unforced errors. That's my philosophy, right? Like, well, we, we talk to thousands of. I've talked to thousands of financial advisors over the last 28 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, a reasonable downside and reasonable taxes and can kind of keep up during the good times, but doesn't blow me up during the bad times. That's what they all want, you know, their ideal alt, right? So trend is not that. Trend is a way to get them to have their portfolio deliver something like that, right? So think of it like this. I did a study recently similar to what I just mentioned, you know, because, yeah, my coworker Matt asked me to do this. He said, find me all the funds that have outperformed a 6040 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 46% of the funds outperformed a 6040 portfolio.
- [60:42]
A
Right.
- [60:42]
C
And then he said, after that, of those funds, that's. 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 3% 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 like, 20 funds left over. You know, out of. I think it started with 10,000. 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 10, about half of those were buffered funds. Right. Which, by definition, or, you know, stocks have been great, you know, and then they've got a beta below 0.5. Right. So really, there was only like 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 of them. So, yeah, it's just. It's a strategy to target what people. What it is people actually want and need from the marketplace. That also happens to be, you know, consistent with what I think is a good way to compound wealth over the long term.
- [62:13]
B
But my. Like, I was thinking what Eric said, unforced errors. I was like, yeah, but hitting winners is so cool. And that's what makes the highlight real. Right? Like, that's what's. Like, I can show you the scoreboard, right? Like, that's the cool stuff. And not, like, reducing errors through time, but, like, Matt, I want to flip it back on you because Eric, I. I mean, I love what he just did there. And he showed me that when they're working on that data and everything, and obviously, I'm a big believer in that data. And, like, it's amazing. And, like, you get to what is real returns after tax returns, you start getting in all those things. It's 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 like a portfolio similar to what Eric's doing. But then you put that in front of a wealth advisor, right. They're simply not going to do it because the wealth advisor next door is offering 60, 40 portfolios and you're trying to build a business. So what do you. So I'm gonna throw it back on you. Like what is. How do you. Like just because you. Maybe the only thing, and maybe Eric knows this too is like you try to find a wealth advisor that wants to be different from the, the nine guys around him and within his geographic vicinity. Like how do you do this? Like how do you truly care about the client's investment portfolio? Where in fairness to the advisors, right, you don't want to look different. You want to build a business. You need to have, you need to feed your family. And so you may be focused on more estate planning side. And the portfolio then is just aggregate to the 6040. But maybe if you really cared about the portfolio side, you'd know what compounds wealth over time.
- [63:42]
A
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 deeds. I think the only answer to that is you look for. I always go back to the Looney Tunes thing where the dogs look like the owners. Yeah, I try to remind people of this constantly. Like 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 we want to find the right clients. And you're trying to get to them through the advisor or the allocator. We'll figure out where it actually makes sense to them. And 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 got to 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 is 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 I'm like, I'm at the next phase of life. Holy crap. What, what new help do I Need.
- [65:06]
C
And that's kind of well said different
- [65:08]
A
way to think about it. But. But that's all it is.
- [65:10]
B
That's all I think when you're saying dogs look like the owners remind me of our buddy Mabs. Like paper on most RIAs are like four times levered to the stock market because of like all the way.
- [65:19]
A
All the GDP thing and.
- [65:21]
B
Yeah. Yeah. Like how they're all. Yeah. So they're, they're the ones that should more be believing in like this trend side or whatever the he 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 makes, it does make me think and I think Eric's firm probably does this well and you guys would probably agree is like is the real only way to do this is to try to take maybe 10% of a stock bond or stock portfolio and put 10% with a, with a firm like standpoint and then wait five to 10 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?
- [65:55]
C
Kinda.
- [65:56]
A
You gotta find ways like that.
- [65:57]
C
Right. You know we, we've kind of a little taste. Yeah. We've graduated to finding advisors that just want to quote unquote what they think is a good fund. They describe to us what they want and we show em 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, you know, junior high and we're going to find out if the marketplace says, you know Eric, your thesis was right. People want one of these kind of quote unquote good fund. We'll see. I'm hopeful.
- [66:36]
B
I'm curious, is this part of your, your genius background? Year seven, graduating junior high. It threw me off there for a minute.
- [66:42]
C
Well, the phone.
- [66:42]
B
I mean seven years of school or like a seven year old you'd be just graduating elementary school, right. Or you just skipped so many grades, you are graduating junior high at seven years old.
- [66:51]
C
The funds in its seventh year. So.
- [66:53]
B
Right.
- [66:53]
C
And that's kind of like getting into high school and the life cycle of a, of a mutual fund.
- [66:58]
B
Gotcha.
- [66:59]
A
So the real life Doogie Howser of trend following. Eric, if people want to bug you on the Internet. More information about Standpoint. Where should we send them?
- [67:07]
C
Yeah, standpoint funds.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. And we don't sell your data or spam you. So it's just the monthly updates and they're organized nicely.
- [67:29]
A
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?
- [67:43]
B
Yeah, just go bug Matt Ziegler at Cultish Creative. That's where you'll find me. We're mutinyfund.com always happy to talk about any of this stuff.
- [67:52]
A
All right, that's the way it goes. You're watching Excess Returns. Like Comment, subscribe all the things below. And we are out.
- [67:57]
B
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- [68:03]
C
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- [68:07]
B
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- [68:09]
C
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- [68:10]
B
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- [68:12]
C
you can contact us at excessreturnspod@gmail.com.
- [68:16]
B
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- [68:18]
C
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- [68:22]
B
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