Eric Crittenden & Jason Buck Explain Why Best Investors Follow the Trends | #533

Episode Summary

Executive Summary: Eric Trittenden and Jason Buck argue that trend following and broader alternatives are best used as portfolio components, not stand-alone “bets.” They emphasize behavioral barriers, statement risk, and the power of combining lowly correlated assets to improve compounded returns and reduce drawdowns, while challenging prediction-based investing and highlighting non-stationarity as the reason durable diversification matters.

Main Topics: Trend following’s evolution and adoption (Priority: 5/5): The guests discuss how trend following has gained visibility through ETFs, podcasts, and better retail access, but still suffers from short-lived inflows and investor discomfort with its lumpy performance. Portfolio construction over isolated line items (Priority: 5/5): A central theme is that investors should focus on emergent portfolio effects—how assets work together—rather than judging each strategy in isolation. They repeatedly argue that trend becomes more attractive when blended with other assets. Behavioral and statement risk (Priority: 5/5): They stress that the main obstacle to allocating to trend is not the math but human behavior: peer pressure, career risk, and the inability to tolerate periods when trend drags on returns. All-weather / multi-strategy frameworks (Priority: 5/5): Both speakers describe their own portfolio constructions that combine global stocks, bonds, trend, long volatility, tail risk, gold, and sometimes crypto, aiming to solve both return and client-stickiness problems. Prediction vs preparation (Priority: 4/5): They contrast macro forecasting with systematic preparation, arguing that prediction is entertaining but unreliable, while rules-based diversification and risk control are more robust in a non-stationary world. Metrics and manager evaluation (Priority: 4/5): Eric explains his process for ranking funds by alpha, drawdown, real return, CalMAR, and alpha per unit of pain, arguing that these metrics better capture true diversification than Sharpe ratio alone. Non-stationarity and historical humility (Priority: 4/5): The discussion repeatedly returns to the idea that correlations, regimes, and macro relationships change over time, so past performance and long backtests must be interpreted cautiously.

Key Arguments: Trend following should usually be part of a diversified portfolio, not a standalone allocation, because investors dislike its boom-bust profile even when the math is favorable. The strongest case for trend is in portfolio construction: pairing it with equities, bonds, and other assets materially improves Sharpe, drawdowns, and long-run compounding. Behavioral and career constraints explain why the theoretically optimal 20%-60% trend allocations are rarely implemented. A broad, “all-weather” mix of global stocks, bonds, trend, and hedges can solve both investment and client-retention problems. Prediction is less valuable than preparation because markets are non-stationary and forecasters have poor long-term track records. Investors should evaluate managers by alpha relative to pain taken, not just raw returns or standard Sharpe ratios. Trend following aligns with non-stationary markets because it adapts to new regimes without needing to predict them. Over-diversification and blending of uncorrelated strategies can justify higher leverage at the portfolio level than individual strategies would suggest. Public-market investors in the U.S. are often overconfident because they have experienced a long favorable regime; overseas investors may be more receptive because they have lived through instability. Client selection matters: firms should target investors who understand the strategy and are likely to stay through inevitable underperformance. A structured, systematic framework is preferable to ad hoc overrides, especially when managing leveraged or correlation-dependent strategies. Alpha may be less about discovering secrets and more about combining betas thoughtfully and rebalancing over time.

Data Points: Recommended trend allocation: 20% to 60% - Discussed as the range many academic studies imply, though few investors actually use it. Effective risk split in Standpoint-style all-weather portfolio: ~50/50 - Eric says trend and risk assets each contribute roughly half of portfolio variance. Optimal portfolio mix: 52/48 - Eric says his calculations suggested about 52% / 48% for maximizing Sharpe, simplified to 50/50. Standpoint portfolio volatility: About 11 vol - Eric describes his live portfolio volatility as roughly 11%. T-bill yield cited: 550 basis points - Jason notes the current yield on his T-bill tranche as part of the portfolio design. SP 500 annualized performance since Jan. 2020: ~14.9% - Meb cites this as an example of why it is hard to persuade investors to diversify away from strong equity returns. 2023 trend performance: Down 8% - Used as an example of trend’s pain when equities were strong. 2023 SP 500 performance: Up 26% - Illustrates the statement-risk problem for trend-following allocators. 2024 trend performance: Another good year - Mentioned as a period when trend had positive relevance again. Long-term backtest horizon: 54 years - Eric references a long-run optimization period for the 50/50 risk attribution discussion. Mulvaney-style CTA months: Back-to-back 40% months - Used as a striking example of exceptional CTA performance and capacity constraints. Diversification count: ~150 return streams - Jason says a broadly diversified portfolio may effectively provide around 150 return streams. Private equity allocation example: 10 return streams - Referenced via Ray Dalio/Tony Robbins discussion of uncorrelated streams.

Pivotal Quotes: "“Prediction is just the scoreboard. You just look at the predictors: who are they and what do their track records look like historically? Just not that great, in my opinion.”" — Eric Trittenden: He contrasts forecasting with preparation and argues that predictive commentators rarely compound wealth reliably. "“We capitulated, said, you know what? I did this for 20 years trying to get people to buy diversification. And it doesn't matter how many times you prove it, you're not really solving the problem for them that needs to be solved.”" — Eric Trittenden: Explains why Standpoint was built to package diversification in a way clients can tolerate behaviorally. "“The whole point is just do one thing and do it well. And it needs to be something that we're willing to eat our own cooking.”" — Jason Buck: Describes why he prefers building the portfolio he would personally own, rather than tailoring to marketing convention.

Implications: The conversation suggests allocators should prioritize behavioral durability and cross-strategy diversification over simple forecasts or standalone factor bets. Trend, volatility, and multi-asset blends may remain niche, but they are likely to gain share as investors seek better drawdown control and less career-risk-driven portfolio design.