Managed futures have a reputation problem. After word got out that this alternative asset class shined during the financial crisis, investors took notice and fund companies responded by launching ’40 Act products that offered much lower fees than traditional managed futures programs. But the timing was lousy, as managed futures on the whole delivered negative performance in four of the next five years following the crisis, according to the Barclay CTA index. As a result, some investors soured on the asset class.

Eric Crittenden lived through that up-and-down managed futures experience at his former job, so he understands the wariness people might feel toward these products. But he believes the fund he launched nearly five years ago is structured in a way that puts managed futures in a good position to accomplish what they’re designed to do, which is to provide portfolio diversification and stable returns throughout a market cycle.

According to Standpoint Asset Management, Crittenden’s Scottsdale, Ariz.-based firm, the Standpoint Multi-Asset Fund’s institutional share class has thumped the 20 largest alternative mutual funds on a few key metrics from its launch in late December 2019 through August 31, 2024, including funds by the likes of AQR Capital Management, BlackRock, Goldman Sachs and JPMorgan. Its 76.98% total return beat the group average of 28.44% during that period, while the annualized return was 13.00% against the group average’s 5.39% and its 0.92 Sharpe ratio bested the group average of 0.39%. (The firm also has an investor share class.)

Its maximum asset plunge during that time frame was 9.84%. Seven other funds in the group suffered less-severe maximum declines, but the average worst falloff for the entire group was 13.46%.

Crittenden says the fund’s all-weather strategy combines returns from equities, fixed income, commodities and currencies across geographic regions. The aim is to deliver a smoother ride during the market’s ups and downs, and to be competitive with risk assets in strong markets.

“We won’t outperform pure equity portfolios in a bull market, but we don’t expect to be left too far behind during the good times,” he states. “And our job is to also deliver during the bad times. The goal is to have no down years, but we can’t promise that because obviously we’re at the mercy of the markets. But we haven’t had a down year during the five years we’ve been in business.

“It’s a real simple triangle of T-bills, equities and managed futures,” he says about his fund’s strategy.

Effectively Alternative
But it’s not an equilateral triangle. Roughly half of the fund’s portfolio consists of a changing mix of short-term Treasury bills and low-cost, index-based exchange-traded funds with exposure to global equity markets. The T-bills act as a buffer when equities tumble, and equities traditionally have been the traditional go-to source for the fund’s capital appreciation.

The other half of the portfolio comprises managed futures contracts that can access roughly 75 commodity, currency, equity, and bond markets. These liquid, low-cost exchange-traded contracts can take long or short positions.

“We use effective alternative investments inside a traditional portfolio,” Crittenden says. “It’s kind of a one-stop shop for a total portfolio solution, but we don’t expect people to put all of their money into one fund.”

Crittenden defines “effective” alternative investments as any scalable asset class with at least 30 to 40 years of data and a track record of delivering constructive results in bear markets. He posits that only three such assets make the grade—and maybe four if you broaden the definition. He argues that managed futures is the best of the lot.

“Managed futures has been the best diversifier during the past 50 years,” he posits. “It has done the most to buoy a stock-heavy or 60-40 portfolio than any other asset class. Yes, it can be challenging at times, but if you look at the numbers, managed futures have been the best diversifier by my calculations.”

The other three asset classes on his list include short-term Treasurys of less than one-year duration, gold and master limited partnerships.

Blind Taste Test
Managed futures comprise a portfolio of futures contracts put together by a financial manager known as a commodity trading advisor. CTAs can invest in futures contracts consisting of stocks, bonds, commodities and foreign currencies with the goal to provide diversification and reduced volatility, along with upside potential. The first managed futures fund was created in 1949.

But CTA-operated managed futures programs can be expensive, and include management fees as high as 3%, along with a performance fee that could gobble up as much as 20% of an investor’s profits.

In a YouTube video, Crittenden describes a “blind taste test” that he devised for investors in which he presents them with the annual return, annual volatility and worst-year performance of five unidentified asset classes: stocks; bonds; managed futures; balanced strategies (of stocks and bonds); and all-weather strategies (of stocks and managed futures). They were asked to identify which asset classes they gravitated toward and which ones they shied away from.

“When I forced people to be objective, they almost always chose the stocks and managed futures [category],” he said in the video. His takeaway was that managed futures standing alone have been disappointing, but in the big picture they have been a more effective diversifier than bonds.

His taste test covered the period from 2000 through 2019. It would be instructive to see results that included the Covid year of 2020, as well as 2022 when both stocks and bonds tanked. But given the fund’s performance during its nearly five-year run, one could surmise that Crittenden’s basic contention would still hold up.

“Covid was good for us in a sense that we were able to demonstrate our diversification benefit and not go down 35% like everyone else,” he says. “The equity part of our portfolio benefited after Covid during a period when managed futures were left behind. So we’ve had a good environment to showcase what we can do.”

The Standpoint Multi-Asset Fund’s institutional version gained 16.31% in 2020, and returned 3.71% in 2022.

Trend Following
Before forming Standpoint in 2019, Crittenden was a co-founder and portfolio manager at Longboard Asset Management. He and a small group of colleagues at Longboard left that company to form Standpoint and implement the strategy behind the Multi-Asset Fund.

This strategy was the brainchild of Crittenden and Shawn Serik, Standpoint’s chief technology officer and the fund’s co-portfolio manager. The two met during their undergraduate years at Wichita State University.

Their fund is a systematic, rules-based, trend-following strategy that collects data daily on the world’s 74 most liquid futures markets. The managers look at volume, open interest, prices and term structure. It all goes into a large database, and they crunch that data and apply a set of rules to find markets that are becoming strong (which they buy) and markets that are becoming weak (which they hold short positions on).

“We’re going back to basics and getting the blocking and tackling correct on old-school, plain-vanilla, trend-oriented managed futures,” Crittenden explains. “That by far has been the best diversifier. It’s simply buying strong commodity markets and futures markets, and shorting weak markets, and then closing out those positions if they move against you and doing this according to a risk budget.”

This systematic approach means they’re not positioning the portfolio for, say, the Federal Reserve’s expected round of interest-rate cuts. “We have a process in place that will force us to adapt to reality as reality unfolds,” he says.

Taxes, Wirehouses, Etc.
Morningstar lists the Standpoint Multi-Asset Fund’s turnover rate at 8%, but that reflects only the long-term holding period of the fund’s equity ETFs. Crittenden notes that no one has figured out a way to calculate turnover in futures contracts since they have set lifespans and old contracts must roll out into new ones three to five times a year.

People look at turnover for two reasons: tax consequences and transaction costs. Crittenden describes his fund as being “reasonably tax efficient and with reasonable fees.”

The institutional share class sports a net expense ratio of 1.26%; the investor share class ratio is 1.51%. Regarding taxes, he says the strategy is designed to place the commodities in one pool of capital within a Cayman Islands subsidiary, while the other investments are in tax-efficient domestic vehicles.

“I optimized the tax structure as best I could,” he asserts. “Some of our competitors have 10% to 15% distributions in up years, and we may have a 4% distribution in an up year because we structured our fund to be as tax efficient as it can be.

“Is that a tax hit?” he asks rhetorically. “Yes, relative to buy-and-hold equities we won’t be as tax efficient. But we’re very competitive to other alts.”

Either way, the fund recently topped $1 billion in assets under management by catering to a customer base of mainly small to medium-sized, independent financial advisors.

“That has been our sweet spot for a long time,” Crittenden says. “We don’t have any institutional money. We’re on only one wirehouse platform, which is Wells Fargo, and that’s just during the past couple of months.”

He adds that it’s difficult to get on a wirehouse platform unless you’re a brand name, have a five-year track record and have more than $1 billion in assets.

“We’re at $1 billion and might be able to get to $2 billion doing what we do, but you don’t get to $5 billion to $10 billion without getting on the wirehouses,” Crittenden says, adding that a couple of other wirehouse firms have recently reached out and begun their due diligence process on Standpoint.

Meanwhile, Crittenden says that most of the advisors who use his fund put it into the alternative sleeve of their client portfolios in tandem with other alternative funds. He says these alt sleeves typically make up anywhere from 10% to 25% of a portfolio’s total AUM. “For most advisors, anything more than 25% in alts in a client portfolio is asking for trouble [from compliance].”

He notes that a smaller group of advisors view the fund as kind of a hedged-equity program that they stick in their equity bucket.

Some proponents of managed futures argue that this asset class should constitute as much as half of an investor’s portfolio in order to provide maximum diversification benefits. That seems crazy, but Crittenden says the math supports that claim.

“I’ve looked at the data over the past 50 years, and equal risk contributions from managed futures and global equity has been the optimal Sharpe ratio and Sortino ratio portfolio during that period,” he claims. “And that’s what our fund does.

“You don’t have to do that on your end, but you can put 10% into a fund that is doing it,” he adds.

Crittenden says Standpoint has been approached by other firms to develop various financial products for them based on the Multi-Asset Fund’s strategy. But for the time being he’s not taking the bait.

“We tell them we’re not interested in doing that right now,” he says.