Eric Crittenden - "It's Not Fear and Greed that Drives the Investment World; It's Envy" | #14

Episode Summary

Executive Summary: This episode explores trend following, managed futures, and stock trend strategies through Eric Crittenden’s path from science and medicine into systematic investing. The core message: durable returns come from exploiting uncrowded risk premiums, avoiding big losses, and accepting long periods of underperformance. The discussion emphasizes survivorship bias, inversion, diversification, fee drag in fund-of-funds, and the importance of discipline over excitement.

Main Topics: Trend following and managed futures basics (Priority: 5/5): Meb frames trend following as buying assets in uptrends and exiting or shorting downtrends, while managed futures apply that approach across many global markets with long/short flexibility and broad diversification. Eric Crittenden’s background and path to investing (Priority: 4/5): Crittenden explains how a medical/science background, surfing, meteorology, and systems thinking led him to finance, computational methods, and eventually trend-following research. Risk premiums, hedging, and diversification (Priority: 5/5): The conversation focuses on the 'risk transfer premium' sourced by CTAs and why proper diversification is psychologically difficult even when it is intellectually appealing. Performance, pain, and underperformance tolerance (Priority: 5/5): They argue that elite managers and systematic strategies often underperform benchmarks for long stretches, and investors fail because they cannot tolerate the pain of relative underperformance. Survivorship bias, backtest pitfalls, and inversion (Priority: 5/5): Crittenden details how delisting, corporate actions, dividends, and restatements can distort research, and how inverting assumptions revealed the true edge in trend-following systems. Equity trend following and stock selection (Priority: 4/5): Longboard applies long-term trend following to individual stocks, buys breakouts to new highs, shorts broad index futures, and relies heavily on stop-losses and volatility weighting. Research, scaling, and organizational thinking (Priority: 3/5): The episode closes with discussion of scaling research culture, training employees to think critically, and continuing to improve infrastructure rather than constantly launching new products.

Key Arguments: Trend following is a simple, long-established method: own assets that are rising and avoid or short those that are falling. Managed futures work because they access uncorrelated, relatively uncrowded risk transfer premia across many markets. People say they want diversification, but in practice they resist it because it causes uncomfortable periods of underperformance. Elite strategies often win precisely because they underperform the benchmark frequently enough that most investors abandon them too soon. Survivorship bias can make bad strategies look good in backtests if delisted losers and other missing data are excluded. Avoiding large losses matters more than picking a few winners; defense drives compounding. Most mutual fund 'managed futures' products are fund-of-funds with heavy fee layers that can severely erode returns. Stock trend following can work if implemented with proper handling of corporate actions, survivorship bias, stops, and volatility-based sizing. Market-cap indexes may indirectly reflect a trend-following effect because they allocate more capital to rising winners and less to losers. Inversion—asking what would break the strategy or what data is missing—produces better research and decision-making.

Data Points: Trend following history: 100+ years - Meb describes trend following as an investment approach that has existed for more than a century. Markets tracked by Longboard: 145 global futures markets - Crittenden says the firm is looking at 145 different global futures markets. Distinct risk premiums: 5 to 8 - He estimates only five to eight distinct global risk premiums after correlation/PCA analysis. Maximum institutional managed futures allocation seen: ~30% - Crittenden says the highest allocation he has observed was around 30%, though rare. Typical managed futures allocation: 2% to 5% - He notes most investors allocate only a small slice to managed futures or global macro. Managed futures mutual funds that are fund-of-funds: 44 or 45 out of about 50 - He says most managed futures mutual funds outsource to other CTAs rather than run direct programs. Total fees on fund-of-funds: 5% to 10% - He estimates all-in fee drag from layered structures can reach this range. Highest fee drag observed: 14% - Crittenden says he has seen total fees as high as 14% depending on market conditions. Private stock trend-following product launch: 2005 - Longboard launched its stock trend-following product in private placement form in 2005. Mutual fund version of stock trend strategy launch: ~15 months prior - He says the mutual fund format launched about 15 months before the interview. Research backtest example: 40% annualized return with 20% volatility - Crittenden’s college trend-system backtest looked excellent before real-world survivorship issues emerged. Survivorship bias explanation: 99.7% of performance difference - He says missing bankruptcies and buyouts explained almost all of the gap between backtest and live results. Russell stock lifetime return concentration: 8% outperformed the S&P by 500%+; 7% lagged by 500%+ - Cited from Longboard research on the distribution of stock outcomes. Worst-performing stock cohort: 11,513 stocks, about 80%, total return of 0% - The research shows most stocks collectively contributed no net gain. Best-performing stock cohort: ~3,000 stocks, about 20%, accounted for 100% of gains - A minority of stocks drove all long-run market returns. Underperformance tolerance among institutions: 99% said 1 or 2 years - Meb references a Financial Times study showing institutions tolerate very little manager underperformance.

Pivotal Quotes: "In theory, people are receptive to the idea of bringing in uncorrelated risk premiums... In practice, it is very interesting. The psychological trauma... that people experience when they diversify properly is one of the most fascinating observations I've ever made." — Eric Crittenden: On why investors say they want diversification but struggle to hold it in real portfolios. "The best performing managers over the long term must have been doing something that other people could not do." — Eric Crittenden: On elite managers and why long-term alpha often requires behavior most investors cannot sustain. "Avoiding the big losers has more of an impact on your compounded return than catching the big winners." — Eric Crittenden: On the importance of defense, drawdown control, and compounding.

Implications: Listeners should expect robust strategies to feel uncomfortable at times, especially when they lag benchmarks. The episode argues for disciplined, low-bias, low-fee implementations that prioritize drawdown control, survivorship-free data, and patience over excitement.