028 - Eric Crittenden - A Portfolio for All Seasons
Oct 8, 2024
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Eric Crittenden, Chief Investment Officer at Standpoint Funds, shares his insights on creating all-weather portfolios designed to withstand market unpredictability. He emphasizes a strategy that blends managed futures, global equities, and treasury bills for robust wealth preservation. Eric warns against the pitfalls of over-stabilizing equity curves, advocating for a simple yet effective approach to portfolio management. His unique perspective highlights the delicate balance between data-driven decision-making and the unforeseen nature of financial markets.
Eric Crittenden advocates for an all-weather portfolio that combines managed futures, global equities, and treasury bills for long-term stability.
Simplicity in trading strategies is crucial, as it helps avoid overfitting and maintains focus on effective risk management and performance.
Understanding the relationship between hedgers and speculators reveals how trend-following strategies contribute to market liquidity and overall financial health.
Deep dives
The Dangers of Smoothing Equity Curves
Efforts to create smoother equity curves often lead to more complications and issues than they resolve. Attempting to eliminate frequent, manageable risks in favor of infrequent, larger risks is a flawed trade-off, as it can result in undesirable outcomes. Traders may find themselves exposed to 'iceberg risks' that can be hard to detect until they materialize, risking significant losses. Instead of focusing solely on smoothing, it's more effective to develop robust trading strategies that can withstand varying market conditions.
Building a Durable Portfolio
The philosophy of building a portfolio centers on wealth preservation and designing an investment product that can weather various market environments. A blend of managed futures trend-following strategies, global equities, and a laddered treasury bill portfolio creates an optimal mix. This combination aims for both durability and realistic expectations in an uncertain financial landscape, as it has historically navigated numerous economic upheavals over the last 50 years. Such a strategy allows for peace of mind knowing that the portfolio can sustain acceptable performance even in tumultuous times.
Understanding Drawdowns and Risk Management
Research on historical data since 1970 is utilized to understand the potential for drawdowns and their impact on strategies. Determining the relationship between a portfolio's real rate of return and the associated drawdown is essential for managing risk. Aimed at achieving a maximum drawdown goal while encouraging effective decision-making, the approach ensures that risk exposure remains within acceptable limits. This method emphasizes the importance of preparing for adverse market conditions without solely relying on historical performance for guidance.
The Symbiotic Relationship between Hedgers and Speculators
There exists a complex relationship between hedgers and speculators, where the losses incurred by hedgers can actually contribute to their overall financial health. While providing liquidity, trend followers historically profit from the risks that hedgers manage, enabling firms to stabilize their operations. This scenario suggests that trend followers do not merely extract wealth from the market but instead contribute to a more robust economic environment. Understanding this dynamic can enhance the perspective on the purpose and impact of trend-following strategies within the broader financial system.
The Importance of Simplicity in Trading Strategies
Simplicity is a critical component in developing effective trading strategies, and focusing on straightforward models can prevent overfitting and unnecessary complexity. Utilizing basic mechanisms such as breakout thresholds for entering positions, combined with sensible stop-loss strategies, establishes a reliable framework for trading. Diversifying across various markets and sectors ensures proper risk spreading while maintaining a focus on core objectives. By keeping the system straightforward, traders can efficiently manage their portfolios without losing sight of their ultimate financial goals.
One of the standout points from Eric’s approach is the focus on constructing a durable, all-weather portfolio. Eric designed his fund with the idea that it should be able to endure the most uncertain future scenarios, a goal he finds essential for long-term wealth preservation. His strategy blends managed futures, global equities, and laddered treasury bills, with a focus on equal risk contribution across futures & equities.
Eric emphasizes simplicity and robustness over complexity, believing that this provides the best opportunity for consistent performance in both good times and bad.
For Eric, effective trading is a blend of art and science—knowing when to trust the data and when to recognize that the future will always hold surprises. It was extremely interesting to hear Eric’s wisdom that “direct attempts to create a smoother equity curve usually cause more harm than good. They create more problems than they solve”, adding that it is akin to asking for “more infrequent iceberg risk” in order to avoid “frequent, survivable, nuisance risk”. The solution being to build something that is robust and durable on a stand-alone basis, then something else, and then something else. Pick the ones that play well together and combine into a portfolio!
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