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In this episode of Money for the Rest of Us, we take a look at a strategy that actually added value in 2022. In some cases 30% plus returns in a time when the stock market fell off, when bonds sold off. It's called Managed Futures. In the second part of the podcast, we take a deep dive into how they work and how you could use them in your portfolio. In the first part of the podcast we take a look at why university endowment returns have been so essentially subpar over the past past 20 to 25 years. I hope you'll stick around. Listen to this episode, episode 551 and also if you find it helpful, please share this episode with your friends and family. Just text it to them and share the word about money for the Rest of Us. Now onto the episode welcome to Money for the Rest of Us. This is a personal finance show on money how it works, how to invest it, and how to live without worrying about it. I'm your host David Stein. Today is episode 551. It's titled we're what Average really Looks like and Can Managed Futures help? This month, February 2026, the 2025 Nacubo Common Fund Study of Endowments was released. This is a compilation of hundreds and hundreds of university endowments in the US as they report their investment performance, their asset allocation, their spending rate, and lots of other data as it relates to managing these investment portfolios that help fund university operations. I always looked forward to that study when I was an institutional investment advisor consultant as I had a number of university clients including Texas A and M University, University of Puget Sound for a while, Texas Tech and and others. And so I looked at this study and this is what stood out to me. Performance. Pretty ho hum if we go back 25 years. So this study ends June 2025. We go back to June 2000 and look at the 25 year annualized return for the average university endowment. I mean some did worse, some of course did better. The average 6.6% annualized for the 20 year period. So from June 2005 through June 2025 7.3% annualized. These are not double digit returns. These are mid to upper single digits. These are university endowments that have very skilled staff. They have sophisticated investment committee members, board members. They have access to the best of the best when it comes to investment strategies, hedge funds, private capital. And yet despite all that, they returned 6 to 7% annualized over the past 20 to 25 years. Do you find that disappointing? I find it math the fact that starting Valuations matter. When we look at how the stock market, US and global stocks were valued in June 2005, that makes a difference in terms of the return over decades. What bond yields were the starting bond yields. That makes a difference. If we look at the price to earnings ratio of US stocks back in June 2000, they were at 28 and a half, about what they are today. Investors were paying $28 for a dollar worth of earnings in June 2005. US stocks were priced at a P E ratio of 18 and a half versus 28 today. So the starting valuations were lower but back in June 2005. Yet if we look at the annualized return of the average university endowment over the past 20 years, only 7.3%. If we consider bond yields in June 2000, U.S. aggregate bond index, its yield to maturity was 7.2%. It's 4.4% today. That means lower expected bond returns as we look out in the decade or so ahead. Back in June 2005, the yield of maturity on US aggregate bond index was 4.5%. So just slightly above today. Here we have starting conditions not that different than 2005 or 2000, depending on what we measure. And then again, if we look at their returns, the average endowment 6 to 7%. Shouldn't that be our expectation as we look to if we're modeling out our portfolio returns, what we might put into a retirement planning calculator for what we think we can earn over the next decade or two? That's certainly what we're assuming. If we look at our model portfolios on money for the rest of us, plus our expected return for a moderate to aggressive portfolio is kind of 6 to 6.4% with a probable range of 3% to 9%. So kind of right in there. Now this is the average return. If we look at expectations, the average target return for a university endowment is 7.3%. So kind of right around in that 6 to 7% range, and they come up with that based on what they expect to spend on average is 4.9%. And a university endowment wants to earn enough so that the endowment is least staying even on an inflation adjusted basis. So if we look at that, they're basically assuming an inflation rate of 2.4percent over whatever timeframe they're modeling that that seems reasonable, but that, that's kind of how they, they come up with that. Then they, they have their target allocation. Now, the average University endowment has 31% in publicly traded equities, 45% in alternative strategies. This would be Private capital such as private equity could include hedge funds. 11% in fixed income, that's average. And 10% in real assets, that would be real estate. It could include energy and then 3% in others. Now that's the average. The larger endowments, those over a billion dollars will have more in private capital. We kind of take more of a, kind of a, an average endowment, let's say between 100 million and $250 million. They're roughly 53% in publicly traded stocks, 20% in bonds, 19% in alternative strategies and in real assets. So total alternative, including real assets, roughly 26% or so. Again now that that's average allocation for that range. And many of us might have similar type allocations, probably less in private capital. But one of those billion dollar plus university endowments is Princeton. And there was a recent article in the Financial Times headlined Princeton University Cuts Expectation for Endowment Returns. Princeton's president said in his annual State of the University letter. This is Christopher Eisgruber, that the endowment was lowering its return expectation from 10.2% to 8%. And even that assumption, he said might be considered aggressive. And as a result the Princeton's seeking to reduce spending by 5 to 7% over the next year. Brit Harris, who's a former chief investment officer at the University of Texas, Texas A and m Investment Management Co. Said there's probably no way to hold a diversified portfolio and reach a double digit return target over a long period of time. Princeton has just come down to what is normal. We just saw what normal looks like over a 25 year time horizon, around a 6.5% annualized return. Princeton has been heavily invested in private equity and they talked about the President, how they had access to unusually attractive investment opportunities because they were one of the first to invest in private equity. But now most universities and many pension plans and individuals have access to private equity. And we've talked about in other episodes how these private funds are limiting distributions because there hasn't been many initial public offerings. And so there's this huge bucket of illiquidity that seems to be getting worse and worse, worse. And the returns are getting lower and lower. Now if we look at Princeton's endowments return, it's been pretty good, but over the last 20 year period it returned 10%. So 3 percentage points better than average. But again, Icegruber says we might be too pessimistic, but it's also possible that we're being too optimistic in lowering the return to 8%. I've experienced some of that disappointment when it comes to private capital. Right before I left my advisory FIRM Back in 2011, I was our chief investment strategist and we were putting together some private capital funds, included global Private Equity Buyout Venture, had some private debt, real assets, including energy and real estate. And I invested, in fact, I've invested in the first six funds that my former advisory firm FEG offered and offered to our institutional clients. And this, this was new for us, had new individuals working on it, they worked diligently. And that was 2011. We made our capital commitment, they drew the capital down over three years and now it's 2026 and the fund essentially is done. They have invested in all those areas and now we can see how it's done. And it was disappointing. The internal rate of return was 4.6%. Global private equity did okay. Not great, 9.3%, private debt, 6.2%. But real assets, that's a toug time. 2011, that was kind of the top of the commodity boom and that only returned 3.6%. Now what's interesting, it paid out 1.3 times the amount of capital that I sent in, so about 30% return on that capital. But over 14 years. The proper way to measure a private capital fund is the eternal rate of return because it factors in the time value of money calculation, a discounted cash flow, and it factors in the timing of when the money was sent in and when it was distributed. But the type of returns that we share on a study like NACUBO, that 6 to 7% annualized return, those are time weighted returns, so they don't factor in the timing of cash flows. And mathematically we can take that 1.3 total value to paid in capital and convert that into an annualized return. It's 2% annualized. One of my friends said that's a long time to have your capital locked up for money market type returns. The second fund and the subsequent funds are doing better, but they're not going to earn double digit internal rate of returns, partly because of the debt component. And real assets have been a challenge. If it was just global private equity, it's likely to do double digit internal rate of returns. But this is kind of a diversified mix of alternative investments like a typical university endowment would have exposure to. These are institutional limited partnerships that we were invested in. It was a fund of funds and the fees are modest. About 80, 85 basis points, I believe is FEG's advisory fee on top of what the underlying managers are charging. But even Fund II right now, if we convert it's 10% internal rate of return. On a time weighted basis, it's only around 6%. And private capital right now, it's struggling a little bit. There's been a lot of news recently on private debt. Many of these private equity firms they, they funded or they bought software companies. And then if you're a private equity firm, you borrow money to help fund the operation, to it, to buy out, to buy out. But ongoing funding, they, they can borrow money and some of that money is borrowed from private debt managers such as Blue Al and others. And they have gated it because when in some of these private debt funds that were geared toward individuals, only a certain percent could ask for their money back. And there's a great deal of concern right now in the software space because of AI. And is that going to make those software companies more difficult to operate? Well, they have trouble servicing their debt because they're high, higher leveraged. If it was some type of buyout, but nobody knows. And so that's impacting private debt funds. Investors are wanting some of their money back. The private debt managers are gating the fund, not allowing it in some cases, and it's spilling over into bank loans, leveraged loans. You're seeing some price pressure on collateralized loan obligations, particularly the equity tranche. And I've seen that in one of my investments, Eagle Point Income company eic, the closed end fund. This has been disappointing for me. The fund's yielding 17% now because it's, it has sold off 30% or so in the last six months. And, and whenever you have an underperform investment, it is disappointing. But you don't want to panic, sell either. You want to understand what's going on, look at the documentation, look at what the management is saying. I know in the case of eic, they got a board meeting later this month, this week actually, and I'll be very focused on will they give insight in terms of do they have exposure to software, to what extent, what are they seeing? Is this more market panic or is there something fundamental going on? And that's what we do anytime we have an underperforming investor. We want to revisit our thesis and see if something has changed. 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Sometimes it could be 30 days out, it could be 90 days out. But this is a contract between a buyer and a seller. The, the buyer is betting that the price of that underlying commodity or currency will appreciate. A seller of a futures contract believes that the underlying commodity currency stocks that they will fall in price. And so these are active bets based on the direction of various underlying assets. So if you go long, buy a crude oil futures contract at $70 a barrel, and it's for the June contract. If oil goes to $80 or $85, you make money on that contract. Now, most future traders, they exit the contract. They're not taking delivery of oil or these other assets. They just reverse it and they either lock in their profit or loss. And what a managed future strategy does is it, it can invest in any type of contract. They'll go long and they'll go short. And it's very much focused on trend following. There's a research paper that I'll link to by aqr, and in that, this was, this is an older paper, 2013, but they found the primary driver, managed futures returns, were momentum and trend. And that that's backed up in, in the data. And they tend to see strong performance during extreme markets. So extreme bear markets or bull markets, that's when managed futures strategies tend to do the best, because that is when there is some momentum in the market, some trend. And you know, one of the things you find out in a bear market, it just doesn't happen in a month. It can happen over a series of months or a year. And that allows the managed future to take advantage of that persistency of the trend and to establish their position and reap rewards. And that's what we saw. Some of the best returns we've seen from managed futures came in 2022, a period with the dollar was strengthening where oil prices were spiking due to Russia's invasion of Ukraine. It was when the Federal Reserve and other central banks were raising policy rates, interest rates were going up, stock prices were falling. There was a lot of activity. And there were futures managers in ETFs that returned over 30% in 2022. Perfect market for managed futures. Conversely, a market where there's not a whole lot of movement, a lot of sideways, there's not a persistent trend. That's a very challenging market for a managed futures strategy. And so when I looked at managed futures back for one of our plus episodes in 2017, I was looking at disappointing performance and the reality is over a longer time period returns have not been great if you maintain consistent exposure to a managed futures strategy I went and looked for mutual funds and ETFs that had the longest track record the longest one I could find was the AQR managed Futures Strategy Fund 1 this is the mutual fund tickers AQmix it launched in January 2010 so we have 16 years of performance AQR is a. They started out as a hedge fund manager they wrote that research paper they're quantitative focus incredibly smart. How'd their managed futures strategy do since 2010? 4.1% annualized now they did 35% in 2022 now the first ETF that came out is the WisdomTree managed futures strategy ticker WTMF is about a 66 basis point expense ratios of fairly cheap but if we look at his long term performance record since 2011 0.8% annualized and 2022 the year that there was the biggest opportunity for managed futures WTMF had a negative 6.5% return completely missed the opportunity and I don't know exactly how they were positioned but they weren't positioned right so that's one of the challenges with managed futures when there are some persistent trends that doesn't necessarily mean the manager is going to get positioned correctly for another long term ETF track record is the first trust managed futures ETF ticker FMF about a percent expense ratio it started in August 2013 its annualized return 1.8% also disappointing in 2022 only returned 5.2% those are the longest and so when we think about managed futures how do you think about it? Well, it's almost like an insurance policy we are hoping that when the stock market is down, when the bond market is down, when a currency is falling precipitously that that is where a managed futures strategy can perform opposite Historically they've had very low correlation managed futures to the stock and bond markets just slightly negative to almost basically zero to slightly negative I was used looking at portfolio visualizer for that so you're hoping for that year that that's when it'll shine but Here we have two ETFs one by WisdomTree, one by First Trust that didn't shine in the year they should have and that's why their longer term performance record isn't so great now there are two newer ETFs better, more competitive that have done better the first is the IMGP DBI Managed Futures Strategy ETF ticker DBMF expense ratio is 85 basis point. They're trying to replicate reverse engineer the strategies of top commodity trading advisors, manage future hedge funds and they're trying to replicate a similar strategy. Now these strategies, you look at them, a lot of them are fixed income. And that's what AQR found is a lot of managed futures is not so much on. On hard commodities, but it tends to be more interest rates and things of that sort. This fund's done decent. Well, no, it's done well since May 2019. 9, 6% annualized. It returned 21 and a half percent annualized in 2022. So, so did Shine. It has a negative correlation to the stock of bond markets. It can be volatile 11% standard deviation compared to 16% for stocks and 6% for bonds. So it's going to be between bonds and stocks in terms of its volatility. Its maximum drawdown, its worst loss was 17% in that timeframe. But that's an interesting competitor. I mean we can get high single digits. Now. We have to keep in mind that that's a shorter timeframe. It wasn't investing during that 2011, the 2018 period where there just wasn't a lot of opportunity on a momentum trend basis that pulled down those other ETFs track record. I don't think we can assume 10% type return really 4 to 6% seems reasonable. With the hope that when there's crises. Sometimes managed futures is called crisis alpha or crises excess return because it happens when other things are falling sharply and that's when they can position short and take advantage of that. Another option is the Kraneshares Mount Lucas Managed Futures ETF KMLM. It started in 2020. It's returned 6.1% annualized, but did 30% in 2022. And so when we think about managed futures, there is a behavioral challenge there. It takes patience. You can have years of slightly negative losses because this is almost like portfolio insurance. You're just waiting for that one year. We had it in 2008, headed in 2022. I'm sure there'll be other years in the future. But that's how you have to look at it is I'm layering on some insurance in my portfolio to hopefully reduce volatility. 2022 bonds had a really tough year. So if you had a managed futures strategy, at least not wisdom trees, but somebody else's that actually had a 20 to 30% return in 2022, that helped soften the blow of declining stocks and bond markets. Now there's one other way to invest and manage futures and it's something called return stacking. Sometimes it's called portable alpha. So instead of taking some of your portfolio and allocating to an ETF that does manage futures and having to sell some of your stock and bond exposure, what some of these return stacking etf' is they'll get you exposure to the stock market through futures and then layer on a managed futures strategy on top of that. Now that does increase the leverage, it increases the potential volatility. But the idea is that by stacking the return you got the return of the stock market plus a managed futures strategy on top of that, that that will lead to better performance. And an example of that is the return stacked US stocks and managed futures strategy ticker is RSST. It started back in looks like 2020 and it hasn't achieved its objective turn for the stock market over that timeframe has been 20.4% annualized, but RSST has done 18.7% annualized. And if you're layering return manage futures over a stock exposure, you want it to outperform the index. And it's not always easy to do these portable alpha strategies, there's a cost to that embedded leverage and it's usually the risk free ra. And so what you need is you need that alpha layer, the layer on top to do better than the risk free rate because it's only the excess return above the risk free rate that gets layered on top the stock returns. And so I used to do this back when I was an advisor. I did some return stacking portable alpha for some of our clients layering on hedge fund exposure on top of stocks. And then we did some where it was some bond return exposure on top of stocks and and inevitably there were some hiccups and they didn't actually add the return. There's some complexity there, but be willing to try it. The Simplify ETF family has come out with a brand new managed futures strategy and a return stacking element on it. But it's additional complexity. Now I admit there is something attractive about managed futures. Low correlation has done well most recently when stocks sold off, when bonds sold off, that's when they shine. Maybe adding it to your portfolio, it can help reduce the volatility. Maybe dbmf, the DBI Managed Futures strategy etf, maybe they're the exception. They are now the largest ETF in the managed futures space. And if you've invested in that, it's done well. Will it continue to do so? I don't know. But I think there are all kinds of ways to invest. We try to introduce different approaches on the podcast, but I think the biggest takeaway from this episode is we need reasonable return expectations. When we see sophisticated universities lowering their return expectations and achieving 6 to 7% annualized return with the best of the best lowering their return expectations to 8%, that tells us that that's kind of what we should model in our own retirement planning and retirement investing. 6 to 7%. Especially when we're in a time where valuations for stocks are high, there's clearly a lot of uncertainty. The upside scenario is AI leads to much faster earnings growth, much faster economic growth. But there's also a lot that could go wrong with AI, and we could be in the lower end of those ranges. That's our discussion on what average really looks like and whether managed futures can help. Thanks for listening. Everything I've shared with you in this episode has been for general education. I've not considered your specific risk situation. I've not provided investment advice. This is simply general education on money investing and the economy. Have a great week. Sam. Sa.