Whipsaws, Drawdowns, and Disbelief | Eric Crittenden on the Best Diversifier No One Buys

Episode Summary

Executive Summary: The episode centers on Eric Crittenden’s case for trend following/global macro as a disciplined, risk-transfer-based strategy built for uncertain regimes. He explains why drawdowns and whipsaws are expected, why client education is critical, why blending systematic macro with passive global equities improves portfolio construction, and why market-cap-weighted large caps and a simple, transparent futures framework often outperform more complicated alternatives after real-world frictions.

Main Topics: Trend Following Under Pressure (Priority: 5/5): Crittenden discusses the recent difficult environment for trend following, framing it as an expected part of a long-term process where sharp drawdowns and poor short-term performance periodically occur. Client Education, Drawdowns, and Expectations (Priority: 5/5): A major thread is how managers should communicate risk, explain historical drawdowns, and retain clients who understand the strategy versus those who bought it for the wrong reasons. Blended Portfolio Design: Macro + Equities + T-Bills (Priority: 5/5): He defends Standpoint’s structure of systematic global macro paired with passive global equities and a Treasury bill sleeve as a durable, lower-friction way to compound capital. Capital Formation vs Risk Transfer (Priority: 5/5): Crittenden explains the distinction between equity/bond markets that raise capital and futures markets that transfer risk, arguing that trend followers provide liquidity and earn a premium for taking the other side of hedgers. Why Large-Cap Market-Weighted Equities Won (Priority: 4/5): He says extensive research showed that market-cap-weighted large caps are highly competitive after fees, taxes, and turnover, making them the practical choice for the equity sleeve. Correlation, Regimes, and Position Sizing (Priority: 4/5): The conversation covers why he stopped trying to optimize correlations and instead sizes positions assuming everything can become highly correlated and adverse at once. Structure, Liquidity, and Instrument Choice (Priority: 4/5): He compares mutual funds vs ETFs, discusses futures roll logic, open-interest weighting, and why certain markets or structures create operational and liquidity trade-offs.

Key Arguments: Trend following is inherently lumpy and uncomfortable: success comes from small losses and occasional large wins, not consistency every month. Client retention depends on expectation-setting; many investors leave because they did not understand the strategy and were using it for the wrong reasons. Blending systematic macro with passive global equities is superior to pure managed futures alone because it improves investor behavior, portfolio construction, and operational simplicity. Risk-transfer markets exist because hedgers need to move risk off their books; trend followers earn returns by providing that service when supply/demand for hedging is imbalanced. The historical case for long-only bonds is weaker than many assume once fees, taxes, inflation, and trading frictions are included. Large-cap market-cap-weighted equities are surprisingly efficient and tax-friendly versus small-cap or more complex factor tilts once real-world costs are included. Correlations are regime-dependent and unstable; sizing risk by assuming 100% correlation in adverse scenarios is more robust than trying to forecast correlation regimes. Open-interest weighting and simple stop-loss logic produce a durable, scalable process better suited to managing billions than highly concentrated niche-market bets. ETF wrappers can introduce market-maker spreads, timing issues, and hedging complications that mutual funds avoid for a futures-heavy strategy. Bitcoin futures are acknowledged as a legitimate risk-transfer market, but the position is small and not yet influential enough to matter materially in the portfolio.

Data Points: Trend following trade win rate: 30% to 40% - Crittenden says trend followers are generally only successful on about 30% to 40% of trades, with the rest being losers. Period of recent difficulty: 18 months to 2 years - He characterizes the latest stretch as the most challenging environment of his career over roughly the last 18 months to two years. Expected drawdown: 20%+ - He says a 20% drawdown is certainly plausible and likely not the worst he will see in a career. Historical research window: 1970 to present (roughly 54-55 years) - He repeatedly references data going back to 1970 as the basis for expectation-setting and simulations. Typical asset retention: Two-thirds permanent / one-third transitory - He estimates that if a firm does a good job, about two-thirds of AUM is durable while one-third can disappear at any time. Macro diversification success rate: 75% to 85% - He says systematic macro/trend delivers diversification benefits in the desired way about 75% to 85% of the time. Trend-following trade performance mix: Big winners, small losers - Used to explain how a 30%-40% win rate can still produce strong returns. Risk budget: 7% to 10% - He describes the macro program as generally running a risk budget in this range, allocated across positions. Position count: 30 to 50 trades - He says the portfolio may hold roughly 30, 42, or 50 positions depending on conditions. Stop-loss heuristic: About one-third of the signal range - He says the durable stop-loss zone tends to be around one-third of the breakout range. Long-only bond return after frictions: Less than 1% annualized - He says a historical ~7% annualized bond return falls to under 1% after fees, taxes, inflation, and trading costs. Bond analysis period: 1970s to 2019/2020 - He references a long-run bond study from the 1970s through around 2019-2020. Managed futures allocation sweet spot: $2 billion to $5 billion - He says the strategy is easiest to run in a several-billion-dollar range, while very small AUM is harder. Minimum practical size for macro: A couple hundred million dollars - He suggests running the program below that is not ideal because too many markets must be skipped. Bitcoin futures market rank: About 74th largest futures market - He says Bitcoin futures remain too small to materially move the portfolio needle. Correlation analysis time spent: 2.5 years - He says he spent about two and a half years chasing correlation analysis before abandoning that complexity. Market duration for some regimes: 6 months to 2 years - He says correlations can remain in a regime for anywhere from weeks to two years before changing. Nickel market dislocation: 200% to 300% in a couple of weeks - He and Jason reference the nickel squeeze as an example of a market that broke normal functioning. Front-month liquidity in perishable commodities: About 50% of volume/open interest - He notes that roughly half the liquidity may sit in the front month for certain commodities, with the remainder in deferred contracts.

Pivotal Quotes: "The rules that we all learned over the last, you know, from 1980 to 2018, they're not helpful." — Eric Crittenden: He uses this to argue that older market assumptions no longer reliably describe the current regime. "Let your winners run, cap your losses, have realistic expectations, and have money management discipline." — Eric Crittenden: This is his core description of the trend-following discipline that he believes still works. "The truth is rarely at one end or the other, but it's rarely in the middle either." — Eric Crittenden: He says this when explaining why portfolio decisions should avoid simplistic extremes, especially around rebalancing and risk management.

Implications: The episode argues for disciplined, transparent, rules-based investing in an uncertain regime. For allocators, the lesson is to expect whipsaws, understand the real role of futures as risk transfer, and favor structures and blends that improve behavior, scalability, and after-cost results.