A Detailed Look at All Weather Investing with Eric Crittenden

Episode Summary

Executive Summary: Eric Cranton explains Standpoint’s approach to all-weather investing, managed futures, and trend following as a liquidity-driven way to capture structural risk premia. He argues that bonds and traditional 60/40 portfolios face major stagflation risk, while broad trend following across liquid futures and equities can improve resilience, diversification, and investor behavior over full market cycles.

Main Topics: Defining trend following, managed futures, CTAs, and all-weather portfolios (Priority: 5/5): Cranton distinguishes common industry terms and argues that trend following is best understood as participating in major directional moves while avoiding being on the wrong side of big trends. He frames an all-weather portfolio as a portfolio that works reasonably well across inflationary, deflationary, and growth regimes. Liquidity-based asset selection for the portfolio universe (Priority: 5/5): He says Standpoint selects markets based primarily on liquidity as a proxy for demand for risk transfer and available risk premia. In futures, he uses open interest; in equities, free-float market cap. The resulting universe is the 75 most liquid futures markets and the MSCI World equity universe. Critique of 60/40 portfolios and the bond challenge (Priority: 5/5): Cranton argues that the long bull market in stocks and bonds since the early 1980s has spoiled investors, but that 60/40 portfolios have a blind spot in stagflation and rising-rate environments. He is skeptical of bonds at current yields and says many alternatives fail when stocks fall, leaving investors trapped. Why trend following works and what it harvests (Priority: 5/5): He attributes trend following profits to providing liquidity to commercial hedgers who need to buy falling markets or sell rising ones for risk management. The strategy, in his view, earns returns by taking the other side of those non-profit-seeking flows and offering a valuable service to the market. Portfolio construction, weighting, and risk management (Priority: 4/5): Cranton says he no longer prioritizes theoretical diversification optimization as much as before; instead, he lets liquidity and market trends drive weights, then overlays risk controls. He favors a market-cap/open-interest-like process rather than forcing capital away from trending markets into static diversifiers. Evidence from historical research and stock return concentration (Priority: 4/5): He discusses research showing that a small fraction of stocks drive most long-term equity gains and that market-cap indexing functions like a slow trend-following system without risk management. He also notes that a hidden left-tail of extreme stock losers is absent from simplistic academic distributions. Investor behavior, expectation-setting, and implementation discipline (Priority: 5/5): Cranton emphasizes that the main challenge in all-weather or trend strategies is behavioral: investors must accept long stretches of relative underperformance. He uses transparency, anonymized strategy presentations, and expectation-setting to reduce the chance of capitulation.

Key Arguments: Trend following is less about predicting and more about avoiding being on the wrong side of large, persistent market moves; capital preservation is central to compounding. Managed futures is the broader industry housing CTAs/CPOs that trade futures and forwards; retail access has expanded via ETFs, mutual funds, and managed accounts. Liquidity is the key filter for choosing markets because it signals real risk-transfer demand and the existence of harvestable risk premia. The 60/40 portfolio is vulnerable to stagflation because both stocks and bonds can fall together while real bond returns become negative. Current bonds are unattractive because yields are below inflation and rates have limited room to fall, making real returns likely negative. Most alternatives fail in equity drawdowns or are costly/tax-inefficient, which is why many investors still hold bonds despite poor prospective returns. Trend following works because commercial hedgers create repeated demand to buy weakness and sell strength; trend followers supply that liquidity. The recent pain in long-term trend strategies is partly due to changed market speeds, but not enough to justify abandoning old-school trend following. Diversifying across trend speeds (e.g., 6-, 9-, 12-month breakouts) is preferable to wholesale strategy redesign. A small number of stocks drive most equity market returns, and market-cap weighting is effectively a crude trend-following mechanism with no risk control. Investors should be shown the trade-off honestly: all-weather strategies may lag in strong equity rallies but aim to reduce drawdowns and improve stay-in-the-game behavior.

Data Points: Experience in industry: 24 years - Cranton says he has been in the business for 24 years while defining trend following and managed futures. All-weather equity/futures benchmark mix: 50/50 blend rebalanced annually - He describes Standpoint’s benchmark research as a simple annual rebalanced blend of SG Trend and MSCI World. Futures universe size: 75 most liquid futures markets - He says this is the current cutoff in Standpoint’s tradable futures universe based on liquidity. Equity universe: MSCI World Index - He says the equity side of the opportunity set is essentially market-cap-weighted developed markets. Crypto futures liquidity rank: 79th most liquid futures market - He contrasts Bitcoin/Ethereum futures with carbon credits, saying crypto ranks below many obscure contracts. Carbon emissions credit move: About 5 to 45 (roughly 9x) - He cites carbon emissions credits as a highly liquid market that appreciated substantially over the same period as crypto. 10-year Treasury example expected return: About 1% annually - He uses this as a rhetorical example to show why he thinks bonds are unattractive today. 10-year Treasury downside sensitivity: Could lose 20% to 40% - In his example, rising rates could cause large capital losses in the 10-year Treasury. Treasury yield threshold for >5% return: Negative 5% to 6% yield on the 10-year - He says only extreme further declines in yields would allow an attractive return from the 10-year Treasury in his example. 10-year Treasury historical annualized return: 7% to 8% annually - He cites the 1982-to-present bond bull market as producing unusually strong returns for a supposedly risk-free asset. Corporate and government bonds real return period: Negative real return from 1940 to 1983 - He says U.S. bonds produced negative real returns for 43 years despite positive nominal returns. T-bill long-run average annualized return: 4.7% over 50 years - He notes this to explain the collateral yield component in managed futures programs. Trend-following hedge-fund benchmark: SG Trend Index - Used in Standpoint’s multi-asset blend research as a proxy for large trend-following managers net of fees. Investable products failing in stock drawdowns: About 98% - He claims most investable products are highly correlated with stocks during equity downturns, except fixed income. Risk contribution concentration in stocks: Top 20% of stocks drove over 100% of gains - In his stock-return research, he says the strongest minority of stocks generated more than all market gains. Retail behavior test result: 99 out of 100 chose all-weather - He says anonymized, color-coded presentations led almost all participants to prefer the all-weather profile over stocks.

Pivotal Quotes: "I view trend following as a means of avoiding being on the wrong side of big trends." — Eric Cranton: His personal definition of trend following emphasizes capital preservation over pure return capture. "An all-weather portfolio is basically the SUV of portfolios." — Eric Cranton: He uses the SUV analogy to explain why all-weather portfolios aim to function across many market environments. "I have no interest in owning bonds." — Eric Cranton: He states his current view on bonds while arguing they are likely to deliver negative real returns.

Implications: Listeners should expect fewer “free lunches” from stocks-and-bonds alone and may need broader diversification, liquidity-aware sizing, and explicit behavioral discipline. For the industry, managed futures and all-weather design look increasingly relevant in a higher-rate, higher-inflation world.