Managed Futures-Why Now! Positioning, Energy, De-Dollarization, and Portfolio Blind Spots

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[00:00:32] Rodrigo Gordillo: All right. Welcome everybody. 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?

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[00:01:34] Mike Philbrick: Good.

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Gents, how are we feeling about the Managed Futures space in the last few months and years?

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[00:02:07] Adam Butler: Yeah. I think…

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[00:02:13] 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 Future 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, 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.

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[00:03:54] 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.

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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. Like, anybody watching, want to venture a guess of the percentage of times that on a daily basis we're hitting new high watermarks? anybody out there…

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[00:05:17] Rodrigo Gordillo: … versus in some kind…

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[00:05:20] 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 flatline 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.

look at a full, going back to: 2000

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 it 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.

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And then there are other periods where the, 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 your, 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 … 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 resulted 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 medals 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.

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[00:12:06] 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.

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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 it's worst draw down over the next six months? It shows that it's done phenomenally well, that the flaw in all those analysis always is, 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, at times. 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?

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If you look at the S&P weightings, you've got, de minimus weighting to materials, a de minimus weight to energy at the moment, and a de minimus 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.

disinflationary boom. Think,: 2010

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 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. 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 in 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 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 in 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 you 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.

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[00:22:30] 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 e 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.

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So we actually manage private and public funds as well as bespoke, separately managed accounts for investors that seek the potential to smooth out portfolio returns in the long run. So if you do want to see that theory that we've been talking about put into practice, please do go ahead and check us out at www.investresolve.com. Now back to the podcast.

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.

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[00:24:44] Rodrigo Gordillo: 1926 to whenever they wrote this a couple years ago, 20…

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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 an 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?

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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…

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[00:27:39] Rodrigo Gordillo: … and what did they find with regards to the Managed Futures stuff?

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So you have this sort of intermediate term, multi-quarter period where there's this supply/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 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 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 commodities soften, 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 following, 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 an unequivocal agreement that this has been the best period for market cap weighted indices, maybe in history, right? The top, by the top companies by market cap, represent more of the index today than they have ever including in the 200 dot com 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 manage 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, X, 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 rerated, 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.

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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. Oh,

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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 a, 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 … 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, that, there's a lot priced in on that.

s in the road for the Russell: 2000

[00:39:00] Rodrigo Gordillo: It could be…

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[00:39:09] 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 reindustrialization 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 like 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 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.

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[00:41:42] Rodrigo Gordillo: Just want to make sure.

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[00:41:56] 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 out of 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 Future Trend 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 happen 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.

nges happen, right? It's that: 2003

But we saw it in ’08. We saw how, like, 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…

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[00:45:02] Rodrigo Gordillo: Because they recently did…

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[00:45:07] 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 it 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?

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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.

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Alright, so I'm going to show you, here's just the, some of the bigger players in space of this is 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.

here. Maybe not necessarily,: 2020

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, and a hundred percent Managed Futures, minus the cost of borrow over that five year period. But…

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[00:50:34] 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 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.

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[00:52:28] Adam Butler: Yeah. There's an extremely limited number of true diversification opportunities that are available to most investors. Okay. 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 your average investor has an opportunity to get access to is Managed Futures. 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 features 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, I'm, 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, but 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. And so we always talk about get off zero. If you have none, now is the time to get off zero. Maybe it's 5%. Maybe it's 40%, but just getting off zero gets your toe in the water.

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[00:55:23] 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 things you 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 a 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.

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[00:59:09] 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.

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[00:59:29] Mike Philbrick: That's a wonderful environment to have Managed Futures in your portfolio.

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[01:00:10] Mike Philbrick: Thanks.

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