Managed Futures- Why Now! Positioning, Energy, De-Dollarization, and Portfolio Blind Spots
Overview
In this episode, Rodrigo Gordillo, Mike Philbrick, and Adam Butler from ReSolve Asset Management Global explore the timely relevance of managed futures, examining why the current macroeconomic environment may be particularly favorable for these strategies. They discuss recent drawdowns, the uncorrelated nature of trend and carry strategies, and the importance of diversification.
Key Topics
Return Stacking, Carry Strategies, Capital Efficiency, Managed Futures, Portable Alpha
Introduction
In this episode, Rodrigo Gordillo, Mike Philbrick, and Adam Butler from ReSolve Asset Management Global explore the timely relevance of managed futures, examining why the current macroeconomic environment may be particularly favorable for these strategies. They discuss recent drawdowns, the uncorrelated nature of trend and carry strategies, and the importance of diversification. The conversation also covers the benefits of strategic overlaying in portfolios, the impact of policy shocks, and the potential for managed futures to add value in various market conditions, including inflationary periods.
Topics Discussed
- The recent underperformance and simultaneous drawdown of trend and carry managed futures strategies
- The behavioral challenges of owning strategies with long periods of flat returns and infrequent new highs
- The fundamental case for managed futures carry as a persistent risk premium, despite recent performance
- The current macroeconomic environment favoring managed futures due to concentrated U.S. portfolios and a potential inflationary shift
- The physical resource demands of the AI boom and global re-industrialization as a driver for commodity trends
- The role of managed futures in capturing global diversification through international equities, bonds, and currencies
- Using Return Stacking to mitigate the tracking error and behavioral pain of holding diversifying strategies
Summary
Despite a recent and behaviorally challenging period of simultaneous drawdowns for both trend and carry strategies, the fundamental case for managed futures appears stronger than ever. The current investment landscape is characterized by extreme concentration in U.S. large-cap technology stocks, leaving traditional portfolios highly vulnerable to a potential shift towards a more inflationary economic regime. Several powerful macroeconomic tailwinds are now emerging that directly favor the asset classes and global markets traded by managed futures. The massive physical build-out required to power the AI revolution is set to create sustained demand for commodities like energy, copper, and other industrial metals. This trend is amplified by global re-industrialization, increased fiscal spending in Europe, and a broadening of market leadership into international and small-cap equities. Managed futures are uniquely positioned to capitalize on these secular shifts by providing dynamic, diversified exposure to commodities, global currencies, international bonds, and non-U.S. equity markets. These strategies offer a direct hedge against the blind spots inherent in today’s concentrated portfolios. To overcome the historical difficulty of holding these diversifiers, investors can use a capital-efficient approach like Return Stacking to overlay these strategies onto their core equity holdings. This method mitigates painful tracking error, making it more palatable to maintain a crucial source of non-correlated returns precisely when they may be needed most.
Topic Summaries
1. The recent underperformance and simultaneous drawdown of trend and carry managed futures strategies.
Managed futures strategies, encompassing both trend following and carry, have recently experienced a challenging period marked by a simultaneous drawdown in both approaches. This situation is particularly unusual because trend and carry derive their investment edges from completely different market dimensions—price momentum versus the futures term structure, respectively. Historically, this has resulted in their return streams being almost completely uncorrelated, making them effective diversifiers for one another. Despite their different underlying positions and day-to-day movements, both strategies have unfortunately experienced a similar downward drift in recent months.
This period of underperformance can be attributed to a tumultuous and choppy market environment characterized by significant policy disruptions. For carry strategies, a drawdown can occur in two distinct ways: it can be a simple “wrong way bet” where market dynamics invalidate the trade’s premise, or it can represent a build-up of “potential energy,” where a position loses value even as its underlying carry signal strengthens, theoretically increasing its future expected return. The recent environment has seen a mix of these scenarios, contributing to the negative performance. Similarly, trend following has struggled in the absence of clear, sustained, multi-asset trends. This difficult performance tests investor patience, as these strategies characteristically spend the vast majority of their time below their high-water marks, with gains often arriving in powerful, concentrated bursts. Despite the recent pain, the fundamental economic rationales for both trend and carry—such as providing liquidity, transferring risk from hedgers, and capitalizing on behavioral biases—remain firmly intact.
2. The behavioral challenges of owning strategies with long periods of flat returns and infrequent new highs.
Strategies like managed futures present significant behavioral challenges for investors due to their unique return profile, which is characterized by long periods of flat or choppy performance. This creates a constant feeling that the strategy is broken or no longer works, making it psychologically difficult to hold. The data shows that these strategies hit new high watermarks very infrequently, only about 12% of the time on a daily basis and a third of the time on a monthly basis. This pattern is described as the difference between “statistical time” and “behavioral time”; while the long-term chart looks great and shows diversification benefits, the lived experience is a painful grind through extended drawdowns. The performance tends to come in large, sudden spurts, often crystallizing when traditional assets are struggling, which is precisely their intended benefit. However, investors often forget the value of this diversification during the long lulls, such as forgetting the major payoff from 2022 during the more recent drawdown. This leads to the classic behavioral mistake of performance chasing, where investors abandon the strategy during its underperformance and then pile in after a major crisis-alpha event, like in 2009. This “pain of being different” is a fundamental hurdle, as the massive dispersion from popular benchmarks like the S&P 500 makes it tempting to sell the diversifier right before it is needed most. The discussion emphasizes that this difficult experience is the price of true diversification. Ultimately, the challenge is to find a way to stick with the strategy through these behavioral hardships to reap its long-term benefits.
3. The fundamental case for managed futures carry as a persistent risk premium, despite recent performance.
The fundamental case for managed futures carry is that it represents a persistent risk premium earned for providing essential economic functions in the market. Investors are compensated for taking on risks that others, such as commodity producers, wish to offload. This involves providing liquidity in areas where the market is shy, offering financing for large projects, or acting as an insurer against price fluctuations. The recent period of underperformance, while painful, does not invalidate this long-term thesis. The speakers attribute the drawdown to a tumultuous and strange market environment characterized by significant policy disruptions.
A key concept for understanding this period is “potential energy,” which is analogous to a value stock becoming cheaper. A carry position can experience a mark-to-market loss, but if the underlying futures term structure becomes even more favorable, the expected future return of that position actually increases. This is distinct from a simple “wrong way bet” where the fundamental story deteriorates. There is no evidence to suggest that the carry premium is permanently broken; rather, the underlying reasons for its existence, such as the need for commercial hedging, remain firmly intact. As long as risk exists in markets, the story for carry is as promising as it has ever been. Looking forward, the massive physical build-out required for trends like AI and reshoring will likely increase demand for hedging from producers, reinforcing the environment for carry premiums. This suggests that the fundamental drivers for positive expected returns from carry strategies persist despite recent challenges.
4. The current macroeconomic environment favoring managed futures due to concentrated U.S. portfolios and a potential inflationary shift.
The current macroeconomic environment presents a compelling case for managed futures, primarily due to the significant concentration risk within traditional investor portfolios. Most portfolios are heavily dominated by U.S. assets, particularly large-cap software and technology companies like the “Magnificent Seven.” This positioning creates vulnerabilities, as these portfolios are effectively long the U.S. dollar, long duration, and have minimal exposure to inflationary or scarce assets like materials, energy, and precious metals. They are optimized for a disinflationary boom, a regime that may be shifting. Several indicators suggest a potential transition towards a more inflationary environment, driven by changes in fiscal and monetary policy that prioritize employment over inflation control.
Furthermore, forward inflation expectations are trending towards three percent, not the Fed’s two percent target. The physical manifestation of major technological trends, such as the AI build-out, will require a massive investment in real-world assets. This includes data centers, power production, concrete, steel, copper, and rare earth metals, creating demand for the very commodities traditional portfolios lack. Managed futures strategies are uniquely positioned to capitalize on this shift. By their nature, they are diversified across commodities, global currencies, international bonds, and global equities. This provides crucial geographical diversification and exposure to assets that perform differently in inflationary regimes.
Specifically, managed futures can benefit from a weakening U.S. dollar and the outperformance of international equity markets, trends that are already underway. They offer direct participation in the commodity complex, which acts as a hedge against inflation and benefits from the physical build-out of new technologies. This diversification is especially valuable when the traditional negative correlation between stocks and bonds breaks down during inflationary periods. The strategy is designed to adapt to these new economic realities, providing exposure to the blind spots in a typical U.S.-centric portfolio. Therefore, managed futures represent a powerful tool for navigating a potential shift towards an inflationary boom and diversifying away from concentrated U.S. equity risk.
5. The physical resource demands of the AI boom and global re-industrialization as a driver for commodity trends.
The ongoing AI boom has a massive physical footprint that the market has not fully appreciated, creating a strong bullish case for commodities. While investors have priced in the success of software-centric companies, the build-out of AI infrastructure requires an immense quantity of physical resources. This includes the construction of data centers which demand vast amounts of energy, concrete, steel, copper, and rare earth metals. The speakers argue that the market is ascribing almost no future pricing power to the commodity producers and energy companies that supply these essential “atoms.” Currently, these resource sectors represent a near-historic low percentage of major market cap indices, suggesting a significant potential for re-rating.
This demand is compounded by a broader global trend of re-industrialization and reshoring, as nations prioritize sovereignty over critical assets. Fiscal policy is shifting globally, with governments in Europe and the U.S. investing heavily in industrial and military capacity, further straining material supplies. Existing excess capacity for energy and materials is being rapidly consumed, and bringing new supply online through mining or new power plants is a multi-year process. This dynamic is expected to create significant supply bottlenecks, leading to price spikes and sustained, long-duration trends in commodity markets. These are precisely the types of market environments where managed futures strategies are designed to perform well, by capturing trends in the physical assets that underpin the digital revolution. This potential shift towards an inflationary environment driven by physical demand represents a blind spot in many traditional portfolios.
6. The role of managed futures in capturing global diversification through international equities, bonds, and currencies.
Managed futures provide crucial global diversification that is often absent in traditional, U.S.-centric investment portfolios. These strategies invest across a broad universe of assets, including geographically diversified equities, bonds, and currencies, in addition to commodities. This stands in stark contrast to the typical investor portfolio, which is heavily concentrated in U.S. assets like the Magnificent Seven, creating significant exposure to the U.S. dollar and U.S. duration risk. Currently, this global diversification is particularly valuable as international equity indices have begun to outperform U.S. markets, a trend many investors have not yet realized. Managed futures are well-positioned to capitalize on these shifts, as their equity baskets include markets in the U.K., France, Germany, Italy, Hong Kong, and Australia, among others. This structure allows the strategies to benefit from a potential global rotation where capital flows out of overvalued U.S. equities and into other domestic markets around the world. Policy changes in Europe, for instance, are encouraging pension funds to increase allocations to their own domestic equities, creating durable trends that managed futures can capture. Beyond equities, the strategies also trade a variety of global bond markets, offering another dimension of geographical diversification. Furthermore, currency trading is a key component, providing an additional layer of diversification and the potential to profit from trends like the recent weakening of the U.S. dollar. The returns from international equities are often intertwined with currency movements, and managed futures capture both aspects. This global exposure can serve as a powerful tailwind, adding excess returns on top of a core U.S. portfolio when international assets perform well. Ultimately, managed futures offer a systematic way to access these global trends without requiring investors to make specific bets on which international market will outperform.
7. Using Return Stacking to mitigate the tracking error and behavioral pain of holding diversifying strategies.
Holding truly diversifying strategies like managed futures presents a significant behavioral challenge due to the pain of tracking error. When investors sell a core holding like the S&P 500 to make room for a diversifier, the periods of relative underperformance can be stark and psychologically difficult to endure. This often leads investors to abandon the strategy, missing out on its potential benefits during market crises. Return Stacking offers a powerful solution to this problem by changing how the diversification is implemented. Instead of replacing a core asset, this approach involves overlaying the diversifying strategy on top, allowing an investor to maintain their full desired equity exposure while adding the managed futures allocation. The discussion illustrates this concept with a clear example, showing that while a standalone managed futures portfolio experienced a painful 26% relative underperformance recently, a stacked portfolio’s underperformance was a much more palatable 9.6%. This dramatic reduction in tracking error makes it far easier for investors to stick with their allocation through challenging periods. The ultimate goal of Return Stacking is to help investors bridge the gap between “behavioral time,” where short-term pain dominates decisions, and “statistical time,” where the long-term benefits of diversification are realized. By making the journey smoother, it enables investors to maintain exposure to one of the few true structural diversifiers available. This allows them to keep the core assets they trust while adding a layer that can provide crisis protection or simply an additional, uncorrelated source of returns, ultimately building a more robust and resilient portfolio.
Transcript
[00:01:40]Rodrigo Gordillo: All right. Welcome everybody. Welcome, welcome to another great episode of the Get Stacked Investment Podcast. Today I am joined with my fellow co-founders of the Return Stacked ETF suite, Mike Philbrick, CEO of ReSolve Asset Management Global, Adam Butler, CIO of ReSolve Asset Management Global, and myself, CEO of ReSolve Asset Management Global.
And today we’re going to be discussing a topic that has been at the heart of every discussion we’ve had for over a decade now, which is Managed Futures, many facets of Managed Futures, and we’re going to talk specifically about why now, why are we looking to talk a little bit more about this space in the current macro environment, and what we’re seeing in the individual strategies that are out there, and we’re going to have a fun conversation. Adam just wrote a piece about Managed Futures Carry that we’ll briefly touch upon, and Mike’s been doing the rounds talking about the global macro stuff. So I think it should be a fun conversation. How you guys doing today?
[00:02:49]Adam Butler: Good to be here.
[00:02:49]Mike Philbrick: Good.
[00:02:51]Rodrigo Gordillo: All right, so one caveat here is that we have a massive thunderstorm over our heads and we’ve already seen the lights flicker. This being a live event anything could happen, we hope for the best. And if we do go dark, then then we’ll pick it up some other time. But we’re going to try and plow through for now. Gents how are we feeling about the Managed Futures space in the last few months and years?
[00:03:19]Mike Philbrick: I’m particularly excited at the moment, but…
[00:03:23]Adam Butler: Yeah. I think…
[00:03:23]Mike Philbrick: That may be counterintuitive that I’m very excited about it.
[00:03:28]Adam Butler: I agree. I did, I think it’s useful to recognize that it’s been, obviously, like it’s been a bit of a tough grind for the last few months, and not irregular for Managed Futures to go through drawdowns like this. This one’s lasted a little longer than many, but it’s far from being outside the statistical distribution.
We can’t say it’s abnormal. Obviously, it’s painful. And to make matters worse, you’ve got Trend strategies in draw down at the same time as Carry Managed Futures strategies are in draw down. So it sucks that they’re in draw down together. And the strange thing that we’ve observed is that, why do you invest in both Trend Managed Futures and Carry Managed Futures? Because they derive their edges from looking at very different dimensions of futures. Obviously Trend following. You’re just following the direction of the Trend in the prices over the last 3 to 12 months, let’s say. Carry, you’re looking at the slope and the curvature of the future’s term structure. So very different things.
And intuitively you’d expect them because of looking at different things to drive their positioning, to have very different return streams over time. And in fact, we do observe that over time they’re basically uncorrelated with one another. And indeed, over the live period, they’ve continued to be almost completely uncorrelated with one another, which is the dream. You want to add diversifiers that are actually going to diversify. But, in a weird twist of fate, they have both been perfectly diversified, and both gone down at the same time. This happens,
[00:05:03]Rodrigo Gordillo: Drift has been the same, but the squiggles are very different. They’re being driven by different dynamics.
[00:05:09]Adam Butler: Yeah, the positions are different. Some of them are long metals, some of them are short metals, some of them long energies, short energies, different equity markets, et cetera.
They’re clearly doing different things at different times. But those things have all led to a chop lower right in both cases.
[00:05:26]Rodrigo Gordillo: Yeah. And it is one of those interesting strategies both on the Carry and Trend side, that when you look at the long-term return profile of some of the major indices, let’s focus on Trend, if you look going back to the two 2000’s, it is an extremely low correlation to traditional assets from equities and bonds.
And the other interesting thing is that on the Trend side, especially when Trends do materialize, it makes sense when Trends are clear and prolonged and multi-week, multi-month, you’re going to have a bit more of a chance of doing better and offsetting. But one of the statistics that I found a little shocking because it’s very different than what people experience when they invest in the S&P, is the amount of times that you’re hitting new high watermarks in a strategy like Managed Futures Strat. Like, we discussed that before. Anybody watching, want to venture a guess of the percentage of times that on a daily basis we’re hitting new high watermarks? Anybody’s out there?
[00:06:30]Adam Butler: Versus in some kind of drawdown.
[00:06:32]Rodrigo Gordillo: Versus in some kind…
[00:06:33]Adam Butler: Either hitting a high watermark or you’re in some…
[00:06:35]Rodrigo Gordillo: Or you’re, it has this characteristic of nothing’s happening, nothing major. And then there’s a big crystallization of either a bunch of Carry signals working or a bunch of Trend signals working, and then you have this big upswing. You get to new highs, give up some of it, and then you’ve flatlined for a while and go on. This is the characteristic, but it’s around 12% of the times on a daily scale, on a monthly scale.
You’re only making new highs, a third of the observed months. And those can cluster. So it’s just a, it’s a very difficult strategy to not constantly feeling like it doesn’t work. It’s like it’s over. And yet that’s the type of diversity that we all crave and want from a theoretical perspective.
And I think Cliff Asness always talks about this idea of behavioral time and statistical time. This all looks great. If you look at a full going back to 2000 on the index, it looks fantastic in combination with equities. But behavioral time, we’ve forgotten about the benefits of owning these types of strategies in 2022, which is the last time it really paid off.
So I think we’re going through a bit of a behavioral hardship here. It’s been, I think it was 2022, we really peaked. I think Carry did pretty well the year after as well. But it’s been a bit of a flat to, specifically during the Trump administration. It’s been a bit of a rough choppy market, which doesn’t help with active strategies like these.
So here we are in a behavioral lull. I think there’s a lot of people that are holding on by very thin thread in these strategies. And they’re looking for answers. They want to have reasons to say, this is the time to buy Managed Futures Carry. This is the time to buy Managed Futures Trend, and look not to shy away from things that we could possibly look at to see if we can find solutions and give some answers. I think you did a bit of a deep dive on to see if there was any signal there for us to decide that now this very month is the time to do it. What did you find in this piece, and I’ll find the exact name of it.
[00:08:32]Adam Butler: It’s called Pent-up Energy, I think. And it’s yeah, we go through the different ways that Carry can endure a drawdown. Carry in some ways is a bit like value, right? If you’ve got, if you’ve got value stocks and they’re value stocks because they’re trading at a relatively low multiple cash flows, for example. If the cash flows stay constant or rise while the stock price falls it looks like the value of your portfolio has fallen, and it has, but you could argue that the expected returns on that portfolio have gone up in response. And then there are other periods where a stock price falls because something happens that impairs the fundamental story of the company. And so that impairs the expected earnings and cash flows in the future.
And it, the stock may fall and it may actually not even fully reflect the adjustment lower in expectations. So in one case, you’ve got, yep, your portfolio loses value, but you’ve gained this potential energy in the portfolio in terms of it’s, now you’re able to buy cash flows for cheaper.
And in the other, it’s just that you had a wrong-way bet. You bet that the fundamentals of this story were going to persist or improve relative to the price you paid, and you just were wrong. It’s the same thing in C, right? You buy futures markets that have strong backwardation. You expect the, in other words, the future, the prices of contracts in the future are trading well below the spot price or the front month contract. And you expect those future month contracts to rise towards spot and that delivers a positive expected return. The deeper the slope, the higher the expected return is the same, but flipped on the short side, you’ve got a positive slope.
Expect the prices to fall towards spot, expect negative returns. You want to be short, right? You can be, you can have this sloping term structure that leads you to believe that the fundamentals are strong for a rise towards spot. The price of the future is going to rise over time, and they don’t. In fact, the term structure gets even more steep now.
It gets steep in the right direction. So that’s like building potential energy, or it’s the same as like a value stock getting better value, right? But it could also just be that you’ve got a wrong-way bet on that. The fundamentals reflected a certain expectation of an outcome and that expectation did not materialize, and in fact, it was just an error, right? And the term structure flips, you lose on the trade and your expectancy is no better off. So we just analyzed some examples of where the current portfolio reflected past losses, but that it results in higher positive expectancy, right?
In other words, we built up potential energy in the portfolio in those positions, and that typically was, at the time, kind of bonds, the term structure of fixed income had increased leading to higher expected returns on bond Carry. The flip side for currencies. There’d been a flight from the dollar, even though the dollar had relatively high rates relative to other currencies.
So the potential energy of that short rate disparity actually made the long dollar trade even more attractive. And on the other side, we had metals, where you had a nice stimulative announcement out of China that boosted metals backwardation, but then the Trump tariff announcement flipped that completely, and it just ended up being a wrong-way bet.
So it was more illustrative, I think, than the ability to really point to strong evidence of high potential energy at the time, or negative or low potential energy. But I do still think that it is illustrative of the fact you can have trades that go against you, but in fact you’re in a better position with those trades, versus other trades that went against you, and now you are starting fresh and looking for better Carry elsewhere.
[00:12:49]Rodrigo Gordillo: I think the long and short of it is that, no pun intended that you might see a potential Carry in this period that we’re trading, but market dynamics could change and make it so that it, that bet was just wrong and worse. Now, what does this mean ultimately for Carry this what we consider to be a risk premium, a long-term positive expectancy, expected expectancy. My question is Carry no longer, is Carry broken? Is this a different paradigm? Has Trump broken…
[00:13:21]Adam Butler: There’s no evidence that he has. The Carry is just the extra return that you should get from providing liquidity, in areas where the market is currently shy to provide liquidity, right? So you are taking on extra risk and therefore should be paid extra return. In other areas you’re providing financing or insurance against financing for commodity producers with large projects.
But all of these things are, you’re either providing liquidity, or offsetting some other type of risk, right? So unless risk has completely disappeared from markets, I don’t think it has, then the story for Carry is exactly as promising as it ever has been. The fact that it’s been a tumultuous and strange period for markets with lots of policy disruptions means, that sort of explains why, or some of why we’re in this bit of a drawdown, but it says nothing about whether Carry should expect positive returns going forward.
And I think we’re going to get into some, I think, very insightful reasons why, especially commodity Carry might have more prospective expectations than average over the next few years. And we’ll get into some of the reasons why a little later.
[00:14:36]Rodrigo Gordillo: Yeah, we can get into that in a sec. Let’s just cover Trend in a similar fashion. Like Trend, I cannot tell you the amount of times that I’ve been asked, listen, I’m going to, is there anything we can do? Can we do like a 200 day overlay on the SocGen Trend Index just so we can get in at the right time, this idea of identifying some sort of auto correlation that’ll provide a good entry point and bad entry point?
The reality is, and what I tell everybody is, if a Managed Futures Trend manager could Trend follow his Trend following strategy, he would’ve done it right. The reality is that the auto correlation exists at the security level, and it has that characteristic of chop chop, chop, and then a bunch of Trends crystallized.
That’s where you get the bottom, and that’s a non-correlation. There’s been a bunch of pieces been written about the benefit of investing in Massachusetts’s Trend after it’s draw. Now, what happens after its worst draw down over the next six months? It shows that it’s done phenomenally well, that the flaw in all those analyses always is, when does, when is that final moment of the drawdown where we’re going to start to benefit from the positive six month return?
And that’s the part that’s really tough to, if not impossible to time. We’re going to talk a little bit about macro environment, but the bottom line, similar to Carry, this idea that hurting behavior is done, that the queuing effects of the Trend following that we’ve talked about in other podcasts that kind of, there’s a bit of a constipation in an asset class that needs to clear, and that creates some sort of Trend going forward.
The cascade effects, all these reasons for Trend to exist are still there. They’re not, they haven’t gone away. You’re also taking speculative risk for hedgers that don’t want to take speculative risk. And for that risk that you’re taking, you should deserve a premium. The problem is the timing.
Much like Carry, there’s nothing definitive right now to say this is, this month now that we’ve seen this overstretched under performance, that it’s going to be great. It might be flat for a bit and if we don’t analyze the macro environment, but this is where I want to bring you in, Mike, because we’ve been, you’ve been doing the rounds a little bit, mainly talking about gold and Bitcoin, that kind of feeds into the macro environment. What do you, what are your thoughts on where we are in the cycle in terms of the benefits of possibly adding diversification right now to traditional asset funds?
[00:17:01]Mike Philbrick: If you think about Managed Futures as a whole, it’s potential to add positive diversification to this sort of traditional portfolio that most people hold right now is probably at one of its greatest moments. If you think about the traditional portfolio right now, it’s dominated by U.S. assets.
Those are dominated so often by software companies and the Mag Seven. And so you’ve got a situation where that predisposes that portfolio to a number of challenges. In an inflationary regime, you’re along the U.S. dollar, your long duration, you don’t have inflationary assets in the portfolio to protect you.
You don’t have scarce assets in the portfolio to protect you. If you look at the S&P weightings, you’ve got, de minimis weighting to materials, a de minimis weight to energy at the moment and a de minimis weight to precious metals. And as you point out, when you think about how regimes manifest, you’ve got liquidity, you’ve got growth impacts, and you’ve got inflation impacts.
And, if we take growth and inflation and you’re sharing that schematic that we use often, where we think about those two dynamics of inflation and growth, create four regimes. And those four regimes are an inflationary boom, a dis-inflationary boom, think ‘03 to ‘08 disinflationary boom.
Think, 2010’s disinflationary bust, think 2008, think the Great Depression, inflationary stagflation. Think the ‘70’s. We had a moment of that in 2022. And when you think about the traditional U.S. portfolio, it is predominantly an innovative software based portfolio at the moment.
And it has a lot of U.S. dollar impact to it, and it does not have a lot of protection from the other three regimes that manifest. If you get some inflationary impacts in the portfolio, you combine that with the current administration, and both Fed policy and fiscal policy, moving to more of worrying about less of inflation and maybe more about what the employment impacts are.
If you look at the forward forwards, the five-year forward forwards on inflation expectations, they’re not at two, they’re at three, and they don’t think that’s been priced into markets yet. And then you look at the structure of what’s in a Managed Futures portfolio. It’s commodities, currencies, bonds, and equities.
Those bonds and equities have geographical diversification that they add. And by the way, those currencies, the U.S, dollar had the weakest first six months of this year since the ‘70’s, and if you look at those international equity indices, they are beating the pants off the U.S. indices, and it’s not been realized yet. It reminds me of gold a couple of years ago, when the gold price was going up relentlessly. What we saw, ETF units going down. People just didn’t believe that was manifesting. And so the complement to the traditional portfolio right now has never been better.
Adding the ability to have other currencies, to be short the dollar, adding other bond complexes, adding international diversification, adding the commodity complex, which includes precious metals and scarce assets, those assets that perform very differently. And we’re seeing allocations to gold, to silver, to platinum, palladium. These are not things people typically own in their portfolios. And so when you talk about the strategy the pent-up energy and the strategies, whether that’s Trend or Carry, you also have the underlying assets themselves that have this pent-up energy and are realizing it, and yet most aren’t quite catching onto that.
And so if we think about that inflationary regime and shifting to more of that and looking at the expectations, going maybe to 3% rather than this 2%, and you look at the Fed policy starting to reflect that, becoming more easing and maybe having a more growth environment, and then you look at the administration’s steps in the U.S. to deregulate for more economic manifestation of the things that are going to be required.
So if we’re going to have digital assets and on the rails of the U.S. where if you can’t own the currency, you’re no longer the hegemony, you’ve got to own the protocol. And then if you’ve got to build the rails for AI to really be impactful in the U.S. economy, making the U.S. still the centerpiece of where finance is done.
All of those things manifest physically. They manifest in data centers, in power production, in concrete, in steel, in copper, in rare earths. You’ve even seen a strategic reserve for metals, copper, rare earths that has been established. So you are seeing the administration take steps that are quite bullish from the perspective of actual physical growth, the physical manifestation of all the technology that has to be built to keep the U.S. as the center point. And traditional portfolios are underexposed to those things, meaning that they’re overexposed to certain risks in the portfolio. And that’s what gets me so bullish about this. And you’re starting to see that. You’re starting to see economic growth under the service.
We’ve had this, if you look at the economic indicators, PMIs and things like that, they’re actually starting to tick up. So you’re starting to see some growth. You’re starting to see small caps tick up, right, starting to outperform equal weight, starting to outperform market cap weight. So you’re seeing a broadening in the rally. Most portfolios don’t consider that they don’t have those pieces of the puzzle in there yet. And with Managed Futures, you can simply lay that on top.
And as you guys have already alluded to, the performance comes in spurts. It comes in very large spurts and oftentimes it comes when equities that are disinflationary focused like U.S. equities are disinflationary, boom focused in that regime. They manifest then when they’re needed most. So that, from a structural diversification perspective, wow, can they add a lot of value from an administrative perspective? Wow. You’re seeing things, this administration is telling that they’re going to do things, and then they are doing them. And I don’t want to get polarized on the politics of it. That’s just what’s happening. And so those, from a macroeconomic perspective the AI build out is real.
[00:23:45]Rodrigo Gordillo: Yeah.
[00:23:45]Mike Philbrick: That’s going to manifest in a lot of demand for commodities. The weakening of the U.S. dollars is real. The strength of other geographic nations and their equity indices is real. And so this is what, to me, provides a really interesting time in which to continue to hold your Managed Futures portfolios and add to them.
[00:24:05]Rodrigo Gordillo: Let’s talk about that commodity side of things because we obviously, there’s a lot of things that could go right on the commodity side. There’s a lot of things that could also disrupt it, right? These are the things about diversification and getting shocked the other way. You made a massive bull case for commodities, and I tend to agree with you, and I think it’s the right time to at the very least be participating in that space. But politics are politics, and anything could happen in the next three to five years, and you have choices here to protect yourself against inflation, right? Adam, let’s talk a little bit about the trade-off between investing in a naked position in like a broad commodity basket, versus investing in a diversified futures strategy.
[00:24:50]Adam Butler: Yeah Harvey and a few others published a paper a few years ago called the, I think it’s called The Best Strategies for Inflationary Times, and they analyzed the performance of different asset classes and different investments during inflationary periods, and all other periods. And I think there were 9 or 10 different inflationary periods that they identified between, what is it like the 1920s and the early…
[00:25:16]Rodrigo Gordillo: 1926 to whenever they wrote this a couple years ago.
[00:25:21]Adam Butler: And one thing that they, you know, the big takeaway for me was, commodities tend to perform very well during inflationary periods for obvious reasons. Typically, or often commodities are like, supply shocks are the proximate cause. A surge of inflation. And causally commodities are expected to do well, but also from a portfolio standpoint, investment managers tend to seek commodities when there is an increase in the expectation of moving into an inflationary regime, right?
So it’s a bit of a self-fulfilling prophecy. But, for both of these reasons, commodities have historically performed well. It’s very intuitive. The thing is, if you aren’t certain, and let’s face it, in markets you’re rarely certain about anything, you are only going into an inflationary regime about 20% of the time, right?
So 80% of the time you’re not in inflationary regime, and commodities really don’t do well. They typically, across the different commodity sectors, have flat to strongly negative returns in non-inflationary periods, right? So how do you get tactical commodity exposure when it matters, and avoid those stinky kind of commodity drawdowns, when you don’t end up moving into an inflationary period.
[00:26:40]Rodrigo Gordillo: Before we get to that, let’s just a couple other points here, right? We also discussed this idea of a commodity period. We also talked a lot about commodity vol, inflation volatility, so inflation period versus inflation volatility. So when you look at the ‘70’s, a lot of people think of the ‘70’s as that was a hyperinflationary period, and therefore if you just bought inflation assets, you were great.
But the reality is that there was a massive boom halfway through the decade. Then there was a correction that was double digit, pretty aggressive. And then there was the big blow off top, and inflation, we’ve seen inflation volatility go up. We’ve seen it come up and down from 2020 during COVID or after COVID.
So the deflation during COVID, reinflation, post-COVID, really strong inflation shocks during 2022. Things have moderated somewhat. And here we are again with all the data points that Mike has alluded to, and you would’ve been in a wild ride even then for commodities. So just this graphic that, for those of you listening, that comes from the paper, just basically outlines the commodities and how they do during the 19% of times that inflation is really robust. They do really well. And then what happens the other 81% of the time when there’s disinflation or anything else, moderate inflation or whatever you’re looking at, either slightly positive to slightly negative Carry on holding just a basket of…
[00:28:10]Adam Butler: Yeah. Flat, volatile returns. Yeah.
[00:28:12]Rodrigo Gordillo: … and what did they find with regards to the managed future stuff?
[00:28:16]Adam Butler: Yeah, really you want to own commodities when you want to own them and you don’t want to own them, tactically when you don’t want to own them. And that’s really what managed future strategies do, right? They’re typically, you’ve got some kind of either demand shock or supply shock. And so you’ve got either downstream producers who are experiencing more growth than expected, they need more supply of commodities. Their producers aren’t ready with that supply.
So you have this sort of intermediate term, multi-quarter period where there’s this suppl/ demand imbalance. And commodity prices tend to shoot up because the commodities themselves don’t end up, for most end products, they don’t end up being a very large percentage of the total cost of production.
So these downstream, producers of capital goods or whatever, who are the big consumers of commodities. If they don’t mind paying double or triple the price of copper or iron ore or whatever, because it doesn’t actually shift their margins very much. But they do really need it in order to meet their down downstream supply.
And at the margin, they’re still earning a lot of profits from this excess demand, so they’re willing to go in the market and pay for it. Meanwhile, commodity producers have to plan for often many years in order to ramp up the, that supply, right? So you have this imbalance that lasts for a little while, and the Trend following programs, they identify this imbalance because they see a sharp spike in the prices of these commodities. They break out to the upside, and you end up getting these long positions, and typically they’re in a broad basket of commodities around the same time, but not always. And that’s how you deliver these strong results. As Mike says, they typically end up being intermediate term shocks, right?
And the market adjusts fairly quickly. And then you end up just buying at a higher price level for a while until supply/demand comes back more into equilibrium, at which point the, maybe the commodity softens, maybe growth expectations fade, what have you, right? But that’s why you get this kind of volatility, not just in inflation expectations, but in excess growth expectations and the supply/demand imbalances in the commodities.
And Trend vol, we just historically, has done a tremendous job of identifying those pivotal moments, capturing those Trends, and then exiting, not at the top, because that’s not what they’re designed to do, but exiting as they roll over. And then often being able to crystallize some gains on the short side as well.
But also, keep in mind, they’re not just trading commodities. They are also trading financial markets. So one of the things I wanted to emphasize is that historically, Managed Futures have also done really well in periods where international stocks outperform U.S. domestic stocks, equal weight portfolios outperform cap weight portfolios, emerging markets outperform domestic or developed markets.
And just some of the things that Mike has, when small caps are outperforming large caps, Mike identified several sort of pivots that we have seen over the last few months that again continue to build this mosaic of signals that we might be moving into a period that may be more favorable.
During periods when market cap just dominates everything and you don’t need to look very far to, for everyone to be in unequivocal agreement that this has been the best period for market cap weighted indices, maybe in history, right? The top companies by market cap represent more of the index today than they have ever including in the 2000 dotcom bubble, right?
So market cap indices have done very well then, and not surprisingly Managed Futures have struggled during that period. We have seen that historically, if you could time when market cap indices are going to outperform or underperform, maybe you could also time when you want to allocate more or less to Managed Futures. But I don’t know any good way to do that.
The point is we’re seeing a constellation of signals that are suggestive that the market feels that the Mag Seven, that U.S. domestic equities, that concentration in AI growth and SaaS is fully priced and they’re looking for value elsewhere, right? Meanwhile, all of the atoms that are required to organize and to build out the grid that’s required to power all these new data centers, all the steel and concrete, to build the data centers, all the atoms need to come from somewhere.
If you go back to Porter’s Five Forces the market is pricing in the view that these Mag Seven companies are going to capture all of the value of this massive AI boom and they’re ascribing almost no probability to the view that pipeline companies and oil drillers and copper miners and silver miners, et cetera, that are going to be required to build out all the atoms necessary for these SaaS and AI companies to thrive and deliver on the expected earnings. They’re giving them no pricing power whatsoever, right?
A very small re-rating of the expected pricing power of the companies that supply electricity and materials to build out this massive AI scaling would result in a multiple ex, like multiple of returns on the 2% of the S&P that’s now chemicals and minerals, or the 7% that’s currently energy. All these atoms companies are currently representing near the lowest percentage of the market cap index that they ever have represented. So if this AI boom is going to play out as the market cap index is strongly signaling that it will, then you also have to believe that all of these other pieces that are necessary for that to play out are all also going to be re-rated, and all of these things are going to be delivered, and it’s going to be a broadening of economic good fortune, right? I think Managed Futures are positioned for that.
[00:34:38]Rodrigo Gordillo: Being able to participate in that, I think is a key thing. And it’s, if you look at the Trend Index from 2003 to 2007, maybe even 2000, mid 2008, it was some of the best performing periods for it. Why? Because the biggest markets it participates in happened to be benefiting tremendously from it.
And if you look at the Carry paper that we wrote and look at that period for Carry as well, there is also a ton of opportunity, because the Carry signals were pointing to, hey, you should buy more of this stuff.
[00:35:09]Mike Philbrick: The other thing that occurs in the inflationary side of things often is that stocks and bonds begin to correlate with one another. And that traditional diversification that you’ve relied so heavily on over the last, 1982 to 2022, which was bonds zig while stocks zag, and you had a wonderful real rate of return on them, that relationship changes and it becomes more one of physical assets, scarce assets provide a little bit more of that durability.
And you want to have those assets in there and we have sopped up pretty much all of the excess capacity. When you look at a Three Mile Island deal with Constellation, Microsoft, when you look at the extension of the number of nuclear plants in order to extend their life, and then you look at the number of regulations that are changing in order to make those things come online quicker.
So you are using up the supply that was sitting in stock in the things that go into those things as Adam says, the atoms, but the physical components and now you have to go and find new ones. And then you have the geopolitical side of things where, we entered, tried to say to China you can’t have chips. And then they said you can’t have rare earth metals. And then they said, okay, wait a second. You can have chips. And then MP resources became a priority. The one rare earth mine in the United States became a priority to develop. And so these little pieces of the mosaic are presenting more and more the reshoring, the sovereignty over these assets, these critical assets that are going to be absolutely paramount to keep the U.S. as the center point of commerce for the world.
Europe can’t do it. Japan can’t do it. China’s a closed system. And if you look at whether it’s the Genius Act, the clarification on digital assets on the regulatory side and how all of those relate to how AI is going to be coming to fruition, and agentic AI or embodied AI, how are you going to drive all these taxis with the batteries? Where’s that, where’s the material going to come from? How are you going to provide the energy for all of that? And all of these have become prime directives, and they’re going to create bottlenecks. Those bottlenecks are things that are going to create these spikes in prices and these longer duration Trends.
But they’re also going to provide more Carry, because if I have to do these types of things, if I have to secure this, again, the reason that you, the cure for higher commodity prices is higher commodity prices. Those higher commodity prices create the opportunity to build all of the things, the mines, the, drill the wells, all of those translate back into futures markets because those outputs then have to be hedged by the commercials and they’re willing to pay more, and you get higher financing costs and all of those things. So yeah we’ve gone through a rough period. So you combine that backdrop with the fact that if you’re in a Managed Futures drawdown, how does it typically perform after it’s been pretty good? That’s anecdotal, okay. But it’s just another little piece in the mosaic that starts to clarify the picture to some degree.
And if this is the direction we’re going, and we’re going to run it hotter, inflation and higher growth, these things are blind spots in the typical U.S. 60/40 portfolio, the U.S. dollar denominated highly, highly innovative, of course. And as you pointed out Adam, there’s a lot priced in on that.
But there’s a physical manifestation that has to occur in order to deliver on it, and I think that’s where we’ll see some bumps in the road. But the bumps in the road that are going to be on the sort of disinflationary assets types, are going to be upward. Spikes or bumps in the road for the Russell 2000, and those smaller companies, and the resource companies that deliver all this stuff, and the stuff that has to be physically manifested in order to create the digital world. And that’s where I start to get really excited about the fact that we’re probably going to be in a higher inflationary market with higher growth. So it’s an inflationary boom maybe.
[00:39:33]Rodrigo Gordillo: It could be.
[00:39:34]Mike Philbrick: Emerging markets are, again, you’re having, it’s not like the markets are telling you that emerging markets are doing very well.
[00:39:42]Adam Butler: That’s worth highlighting too. Rodrigo, sorry if I cut you off, one of the benefits of Managed Futures is that they, aside from investing in commodities, they also invest in a variety of global equity markets, right? Often in things like the Indian stock market or the Brazil stock market, or the Hong Kong Chinese stock market, et cetera.
And in the event that European equity markets really start to take off, because, let’s face it, the European continent has mobilized fiscal policy for the first time in 15 years, the Germans have changed laws in order to allow for the expansion of their government balance sheet and invest in military spending and other dimensions of the, like re-industrialization in Germany.
You’re seeing similar massive government balance sheet expansion in a variety of other European countries. There’s also increasing numbers of domestic mandates where pension funds are being guided to invest more in domestic equities, and where do they pull that from? They pull that out of the overweight in U.S. equities to invest in their own domestic equity markets.
This doesn’t happen all at once. It happens over many quarters, because pension funds have investment committees that meet every quarter. It takes several quarters for them to change direction even a little bit, and they typically change slowly, and then continue in that direction for many years.
And so we haven’t even really begun to see many of the shifts that are, seem to be written in the stars now based on explicit policy in the U.S., and explicit policy reactions in many other countries around the world. So when those domestic equity markets rise relative to domestic U.S. equities, or even relative to a global cap weighted equity index, like an ACWI style index, like you don’t mind. ACWI is over 60% U.S..
Now, if U.S. underperforms, you’re going to really struggle for ACWI to deliver positive returns because the other constituents just don’t add up to very much weight. So the great thing about Managed Futures is, I think three, yeah, three of the markets in the Managed Futures like equity markets in the Managed Futures Equity Index list are U.S. focused.
One of them is U.S. small caps. The, but then the balance of them are, the U.K, France, Germany, Italy, Hong Kong, Australia, Canada, et cetera. So when there’s a huge opportunity to get a payoff from this kind of global rotation into other equity markets as well, it does. It’s not just a commodity story.
[00:42:14]Mike Philbrick: Exactly.
[00:42:15]Rodrigo Gordillo: Just want to make sure.
[00:42:16]Mike Philbrick: And just one last point on that is currencies. A lot of what you’re seeing in those equity returns are the currency returns, and that’s another layer that can be built in there. Go ahead Rod.
[00:42:29]Rodrigo Gordillo: I just want to say like all of this is important to understand that for a lot of these active strategies, these Managed Futures active strategies, there’s a question here about Canadian … is how, with the lag data Trend following deal with a capricious policy environment. And I think this is just a issue of active management.
It’s a reality of risk management and active management that when there is a series of policy shocks that go against you, you’re reducing exposure. You’re not participating in the next three months of major Trends, and then you’re expanding your exposure over time until you start participating again.
It’s part of being an active manager and you, and really, where they manifest the most is when the unexpected shock that lasts for weeks and months that nobody saw coming, and you’re on the wrong side of that with your equities and bonds, or just your equities, depending if it’s inflationary or not, that’s when it really becomes a key diversifier that you want to have, and we don’t know when that’s going to happen. We don’t know where that’s going to be. With regards to the policy shocks, a policy shock is something that comes outta nowhere, right? It’s an over the weekend decision by somebody that then they announce on Monday that nobody saw coming.
And Managed Futures Carry or Managed Futures strength will be positioned a certain way. It’s not always necessary that they’ll be positioned the wrong way. It just so happens that recently for this category, they happened to have been positioned the wrong way. It’s almost like a 50/50, whether you are going to be right or wrong, after a policy shock.
And it just feels like we’ve hit tails three or four times in a row in the last 18 months. And so policy shocks should net out over time. We have gotten some bad throws of the coin. I think the category, broadly speaking, and it’s, there’s nothing to say that we won’t get really lucky. There’s been a few kind of macro events that could have been something, like the airstrikes in Iraq, for example.
We happened to be on the right side of that, it didn’t manifest into something robust, but we just happened to be on the right side that one time. So policy shocks aren’t necessarily bad. Choppy markets where only one or two markets are really blowing up, that’s up or down, are also not going to make massive impact to the portfolio.
It’s when those secular changes happen, right? It’s that 2003 to 2004 period. It’s that 2021 to 2022 inflationary period where Managed Futures did really well. That, sadly, many people got into the band, hopped on the bandwagon after that big secular Trend. And I guess this conversation is about saying okay, don’t do that again.
But we saw it in ‘08. We saw how, like we, I was a Managed Futures buyer in 2006. I benefited from ‘08 massively. I, it was a godsend. And then I saw everybody I knew who wouldn’t talk about Managed Futures buy all of the Managed Futures in March of ‘09, just when it went dormant for a…
[00:45:33]Adam Butler: Because Managed Futures did so well in…
[00:45:35]Rodrigo Gordillo: Because they recently did.
[00:45:37]Adam Butler: … alerted everybody to how they work. Yeah.
[00:45:40]Rodrigo Gordillo: Now people are thinking about maybe I don’t need diversification. Oh, now’s the time you do. I can’t tell you exactly when it’s going to, this secular Trend is going to change, or everything that we’ve talked about is going to manifest for weeks or months. But if it does, the question you have to ask yourself is, are you prepared for that? Do you have in your portfolio to do that? And then how can you actually allocate to it in a way that’s palatable, even if it doesn’t happen for a while, right?
[00:46:07]Mike Philbrick: Can I add to this policy environment a little bit too, because I think we are a little bit sensitive to that with a recency bias. The capricious policy environment was a shift from one regime in the administration to another, and that was a big change. And now I know that the Trump coordinator makes all kinds of wild claims, but they’re nothing like the adjustments that had to be made when he first came into office, laid out the plan and then started executing on that plan where we were pre- that to where we are today.
And as much as you think it’s still capricious, I would say it is far less and it is far more that the administration has laid out a plan, and they’re actually executing on that plan in a fairly methodical way, and some of it is everyone’s getting used to that, and there will be more. But I think that initial transition from the one regime to the new regime was a very large one, one that is unprecedented, and it had ripple effects globally. And the world has shifted to those as Adam talked about, the shifting policy on defense in Europe and the changes that are being made to fiscal policy globally, those wheels are now in motion. They were cold started, and they’re that inertia, that initial inertia is gone and we’re rolling in that direction.
So I think that is maybe a bit of a recency bias and there’s going to be less of that. But I can understand why everyone is very sensitive to that because it did create absolute shifts in asset pricing. But now the direction is a little bit more clear and you’re starting to see the Trends and the things manifest in asset prices.
And I think, the other thing we always have to remember is narrative follows price, and the narrative is building. The price is already there in a number of positions, in a number of things that we’ve already talked about. And I get that, it feels like it continues to be outlandish at times, but the rate of change is slowing on that, I would submit to you.
[00:48:32]Rodrigo Gordillo: And let me share something now, just to put a bow on this because we’re to the top of the hour here, which is the pain of being different, right? The pain of adding diversification. Let me share my screen quickly.
Alright, so I’m going to show you, here’s just the, some of the bigger players in space of this Managed Futures. This will apply to the concept of what, that I’m going to talk about is going to apply to any strategy that you want to overlay, whether it’s Managed Futures Carry, Trend, but here’s equal weight across for Managed Futures managers.
PIMCO, AQR, AHL, AlphaSimplex, and this goes, this is the last five years of performance against the S&P 500, right? So you can see that it’s definitely delivering that diversity that we talk about wanting and needing in our portfolios, but of course there is a big pain point here. Maybe not necessarily, 2020, it added some value in that drop in March of 2020. It added tremendous value.
This blue line was up, 20, 30% when the S&P 500 was down 20, 30%. Everybody seemed happy for a while until 2024 and onward, especially in the last 8 to 10 months, there’s been a massive divergence in returns, and you can see it here from here. So the benchmark, the relative benchmark under-performance is about 10% in the last five years. Okay? Now we always talk about return stacking here, and this is a key thing, right?
When you’re making room in your portfolio to sell something that you understand and love in order to add this diversifier, and it goes through a period of massive dispersion, it’s going to be very painful. And I think the concept of overlaying your alternatives, that has been key to our conversations over the last five years, makes allocating to things like this and being able to bide your time for when they’re useful much more much more palatable. So here I’m doing the same assets, I’m just adding the Managed Futures, is still the same portfolio of four different Managed Futures funds.
We are looking, in the second one here, we’re adding S&P 500 and doing the excess return of those same managers. And what you see visually here is that for the five year period, obviously the green line is a lot easier to hold by adding a hundred percent S&P a hundred and a hundred percent Managed Futures minus the cost of borrow over that five year period.
[00:51:03]Mike Philbrick: Yeah the green line on top is the stacked portfolio.
[00:51:06]Rodrigo Gordillo: … stacked portfolio. And then you have that blue line being really painful. And if we really look at a last, since 2023, so we, it had a very good outcome in 2022, that category. And then it’s been a little bit painful. So if we just look at ‘23, ‘24, ‘25, the relative benchmark under performance, if you had sold your S&P 500 to buy this basket of Managed Futures managers, is a 26% relative under-performance.
That’s where the pain’s coming from. If you were to stack it, again, same portfolio here during ‘23, ‘24, ’25, the relative under-performance is 9.6. Not great, but a hell of a lot more palatable, and visually when you put those together from the biggest pain point for Managed Futures Trend, and as we alluded to earlier, Managed Futures Carry and other tactical strategies, when you stack it, the relative pain of maintaining diversification is a lot easier to manage, right? So I think this is a time where the rule changes in regulatory environment in the U.S., Canada and even in Europe, it’s starting to become easier to be able to stack all these things on top, finally make it viable to turn statistical time or behavioral time into statistical time, right, to start being able to do the right thing for your own portfolio, for your clients’ portfolios and so on.
So I think that’s something that’s missing in this conversation about Managed Futures being tough to hold, and we get it. It always has been. I think now it’s a lot easier to hold than ever and it, I don’t know whether right now is the right time to hold Managed Futures, but I certainly think that, if it doesn’t happen in the next few years, and you do it one way versus the other, one way is going to be a lot harder.
[00:52:58]Mike Philbrick: It’s always the right time to diversify.
[00:53:01]Adam Butler: Yeah. There’s an extremely limited number of true diversification opportunities that are available to most investors. If you look around at all the alternative investments that you could allocate to, private equity, private credit, small caps, value stocks, whatever, but they all have very high correlation to your core 60/40 or concentrated equity portfolio.
The only real structural diversifier that the, your average investor has an opportunity to get access to is Managed Futures, okay. Managed Futures can be painful to hold on its own. That’s why we say don’t hold it on its own. Take some of that S&P 500 exposure that you want to keep, buy it back in a package that also stacks Managed Futures on top. And that’s the whole return stack concept.
But also like, how certain are you, so you really love your equity portfolio. You’re a big believer in AI and disinflation and a major disinflationary growth shock from AI and robotics, and I get it, that’s fine. I could get behind that story too, but am I a hundred percent confident that is how things are going to play out, unequivocally, no doubt that’s how it’s going to play out?
Okay. If I’m not a hundred percent confident, there is some probability that some other type of environment will play out, for whatever reason, right? Maybe it’s a policy mistake by the Fed, maybe it’s an unexpected conflict in the Pacific. There’s a bunch of things that can happen that are maybe page 19 stories or maybe not in even in the newspaper yet, that could derail that thesis.
So if you’re not a hundred percent certain, that I think is a very strong, compelling argument to add diversifiers to the portfolio that are fundamentally designed to do well if those other things happen, right? And so we always talk about get off zero, right? If you have none, now is the time to get off zero. Maybe it’s 5%. Maybe it’s 40%, but I, just getting off zero gets your toe in the water.
[00:55:10]Rodrigo Gordillo: Yeah, I think it’s time to get off 20% in private equity in your alternative bucket. Get off zero in things that actually diversify. Whatever you decide that is going to be, there’s a bunch of liquid alternatives out there that you could look at that actually truly offer liquidity and diversification.
Get off zero on your liquid alts, get off your 20% private equity, as we don’t believe that is a diversifier, that is just a diversifying structure. It’s a different structure, but it is going to be at the whims of the same types of growth shocks and negative growth shocks or positive growth shocks that equities have. And so your private credit on what bonds are going to be doing well or bad on. So true diversification, make sure you’re using that bucket for something a bit more a…
[00:55:56]Mike Philbrick: Operate from a position of strength. Make an allocation that you could rebalance to make it small enough so that you can rebalance to, and when it grows, sin a little, let it grow. And then as you build intuition, you add more. Operate from that position of strength. So you build intuition, whether it’s your allocator board, or your individual client, operate from a position of strength.
Put something in that you can stick with a 5% overlay. It’s not going to help a lot, but it’s also not going to hurt a lot. And if you can build that to be a 20% overlay, then you’ve got something in your portfolio that will thrive when that’s designed to thrive, when the traditional disinflationary assets may struggle.
And the other thing that I think is so exciting about the Managed Futures side is I also see an environment where it just adds extra returns because of the diversity. I’m not suggesting that we’re going to have a massive U.S. equity correction. I actually think that’s less likely. I am seeing, as we’ve talked about, the ability for these other diversifying assets that have lagged, to start participating and adding value on top of the thing, love and trust those U.S. equities that everyone is so deathly afraid to have tracking error away from. And so when you look at valuations of international equities, people love to talk about valuations. Okay, the U.S. equity is pretty highly valued in the context of global equities.
And so when you’re looking at your manufactured portfolio that has exposure to other equity markets with better valuations, that’s a nice diversification aspect. And as assets globally get out, reallocated at looking for better ways to get treated or better valuations, that’s going to manifest in stronger Trends in those markets, and that’s going to show up in your Managed Futures portfolio. And that’s going to be a tailwind.
So things do not have to go wrong for Managed Futures. In fact, if things go right, and maybe there’s a bottleneck for AI, and it’s the commodity side of things, and the businesses that have to do that type of thing start to prosper because they have to be put in play, and we have to build more mines, and drill more holes, and build more reactors, all of those things are going to be positive additions to that basic portfolio of U.S. large cap stocks that you love and trust.
And so I think it can actually add a tailwind to returns rather than trying to stock pick and trying to figure out, okay it’s not the Mag Seven. Which of the 493 is it? Just layer on these diversifying assets in currencies, bonds, geographically diversified bonds, geographically diversified equities and commodities, and let that add the extra return on your behalf.
That’s probably where I, in my humble opinion, and I don’t know anything. But in my humble opinion, that’s how I think that this could manifest where it’s just an excess return on top of those U.S. stocks that helps build in your international diversification without you having to worry about it.
[00:58:58]Rodrigo Gordillo: It’s a great place to leave it at. No this site, we’ve been focused a lot on these shocks that you can get, these double digit returns offsetting diversity. If it’s humble single digit returns, if you’re able to stack ’em, those are a value add over time. There’s no reason why you shouldn’t see humble single digit returns. And then that finds you time for those big offsets, and big diversifying periods like 2022, like 2008, we see Managed Futures really, like 2014 when commodities lost, I think oil and oil went down 50, 60, 70% in a short period of time. That was a boon for both Managed Futures Carry and Trend.
[00:59:42]Mike Philbrick: In 2003 to 2008, if you stacked it on top, you had a wonderful excess return. It was an inflationary growth environment. Yes, commodity prices were going up, but there was enough global growth that could be accommodated in the growth. There was enough productivity happening on the other side that things were actually progressing.
[01:00:02]Rodrigo Gordillo: Yeah.
[01:00:02]Mike Philbrick: That’s a wonderful environment to have Managed Futures to your portfolio.
[01:00:07]Rodrigo Gordillo: Fantastic. Okay, I think we’ve made a strong case for why now, why always. And I appreciate your time, gentlemen. Appreciate everybody stuck with us to the full hour and a bit. If you have any questions and you want to chat, we’re all available on Twitter. You can go book time with us on the website at returnstacked.com/Contact, and hopefully we’ll see you guys in the next live podcast, which we plan on do doing a bit more in the next few months, and look forward to hearing from all of you on the comment section. Thanks all. Thanks Mike. Thanks Adam.
[01:00:43]Mike Philbrick: Thanks,