The Last Mutual Fund Manager Standing | How Eric Crittenden Defied the ETF Boom to Build a $1B Fund
57:28 Share

When is the last time you heard about an exciting new mutual fund launch? It's probably been a while. Big name hedge funds, the never ending onslaught of ETFs and burgeoning asset classes like private credit dominate the capital raising headlines. But the mutual fund industry is still powering along at over 20 trillion in AUM and growing.

While much of that AUM is tied up in legacy products, large issuers like AQR and PIMCO and even smaller ones are continuing to raise significant AUM in newer vintage mutual funds. Of course, when you have a big brand name like AQR or PIMCO, distribution is less of an issue. But what about those smaller managers? What does it take to raise real money as a mutual fund in the 2020s?

I'm speaking with one of the most successful of the smaller managers today to hear about how they've reached over 1 billion in AUM since launching in 2020. Let's get into it. I want to do a quick disclaimer that nothing we say here is advertising or marketing for standpoint or any of their funds or products. Everything we say here is meant to be educational and informative about the fund management industry.

Welcome to another edition of Other People's Money. I am joined today by Eric Crittenden, the CIO and founder of Standpoint Asset Management. Eric, thank you so much for being here with me today. Glad to be here. Thanks for having me, Max. We talk a lot about private funds here. The episode that's going to go out before this one airs is with our first ETF manager. You are our first mutual fund manager that we're going to have on the program. I know

I know you've invested in a lot of different sort of fund wrappers, but you've been in the business for a long time. You talk to me a little bit about what standpoint is and why you chose the mutual fund wrapper. Standpoint is an asset management firm. We focus on one thing. We try to do one thing and do it well.

We think of what we do as all-weather investing. Some people would describe us as multi-asset or multi-strategy. As you mentioned, we chose the mutual fund wrapper. We can get into why and what the differences are. So we basically just do one thing and do it well, all-weather investing in a mutual fund format. And that means global investing. It means commodities, currencies, equities, bonds, metals, energy.

All the good stuff we try to put in there to give people a reasonably smooth ride and compound wealth at a reasonable rate over time.

Now, I know that some of the strategies that you incorporate, many people would recognize as CTA or trend. And one of the things that I know that you do that makes Standpoint unique compared to a lot of trend or CTA investors is that you layer in the equity exposure. So many fund managers, they say, if you put my fund on top of your 60-40 or on top of the equity, it has all these great benefits, but you chose to just

put that all into sort of one bucket. Yeah. And I did that for a reason. So I lived that life for a long time where I did, you know, dedicated long short equity or dedicated systematic macro. Some people call it managed futures.

it's an uphill battle. People want and need something that's different, but holding onto something that's different can be challenging at times. Last year, the S&P is up a lot. A lot of macro strategies were down. Advisors find it difficult to hold onto things that truly diversify a primarily stock or stock and bond portfolio. So it's a frustrating thing over time where you do a good job for people and they just can't hold onto it. So

I had this bright idea, at least I think it was a bright idea, to offer a product that matches what I like to do with my own money. I'm a very much-in-all-weather kind of guy. I'm not trying to get rich quick. I'm trying to get rich slow and stay rich over time. So I like diversification. I like scale.

And the standpoint thesis was that if we build what we think is the optimal portfolio, if we use the right amount of macro slash trend mixed in with tax efficient, fee efficient global equities and have a fixed income overlay also to capture the risk free rate of return, if we blend those three things together and offer people a gentle or a gentler ride over time,

And we do it at a fee that's fair and transparent with tax consequences that are reasonable. We think we can retain assets over time. So-

We decided to give that a shot and here we are wrapping up year five and so far so good. I believe we've crossed over a billion in assets under management. Is that correct? Yeah, we're slightly over $1 billion and we'll have a five-year track record in about seven days. Congratulations on that. And what did that path to a billion look like? Did you have some big anchor or seed investors who were willing to go with you on day one or did you really have to grind this out over that five-year period?

It was a grind, Max. We had a one-seat investor. I think it was $4 million. And then we put a few million dollars of our own money collectively in. So we were very small in the beginning. When COVID struck, we were pretty small back then. Since then, we've raised about a billion dollars. And it's come from a wide variety of small and medium-sized financial advisors all around the U.S. I think our biggest account's probably $60 million.

I would say our median account's probably like six to eight million. So we have a nice diversified asset base. And can you tell who your investors are? I know like an ETF issuer, for instance, the flow comes in, you can't really see where it's coming from, but you know that you just took some money in. Is it different as a mutual fund issuer? To a large degree, yes. I'd say we know we can map probably 75% to 85% of the money back to who owns that money or controls that money.

That's somewhat of a competitive advantage, I think, because it allows you to reach out and be in contact with and develop relationships with the people that are holding assets in your fund. In the ETF world, it is far more anonymous and you're relying on them to kind of self-report to you that they own your fund.

Obviously, people have different ideas of what equity exposure looks like. Some people love to pick stocks. Some people love to buy the index. And if you're layering alternatives on top of that, they can kind of pick and choose what they want. What is it like for you with saying, hey, this is really the total package of what we think you should do? Having that conversation with people who might want to do other things on the side and what you're doing is less layering on top. It's

It's more its own holistic thing. Yeah, I'd say it's a different game that we're in. People look at us and they see an alt that has the kind of risk-reward characteristics that they've told us over the years they want. They want something with a reasonable, real rate of return after fees, taxes, and slippage. And they want reasonable downside controls and something that's – I use the word reasonable a lot, sorry –

reasonably smooth over time. It's not that we don't have any volatility, but it's less volatile than the stock market. And they view that as kind of their ideal alt, something that they can put in the alts bucket. We're not in the portable alpha business where we're trying to give people the one ingredient that they're missing from their portfolio and do it with leverage. That's just a different discipline. That's a different business model.

And it's a fine business model. It's just we wanted to go down this road. You know, we're looking at scale. We think we have the skills and the interests and the infrastructure to offer what we think is an ideal alternative investment to people. So that's what we've been pursuing. What are the horror stories that come from being...

being something that is a true diversifier in the periods where that diversification is not working in your favor as the manager. Well, the whole path traveled the sequence for us, right? Like nobody wants diversification until disaster strikes. And then all of a sudden they're scrambling for it. And I say nobody, that's probably hyperbole, but the vast majority

become interested in what you're doing after the damage is done. They want to close the barn door after the animals are gone. And it's pretty easy to raise money. It was easy to raise money in 2009 for managed futures for macro. That wasn't the right time for people to be investing in those asset classes for the first time though. So then what happens is they have the exhale process and risk assets go back up and they're under pressure from their investment committees, from their compliance officer in front of clients.

to explain why, you know, you wrote the stocks down, you sold them, you bought these alts, stocks are bouncing, the alts aren't, what's going on? Like, you got the timing wrong, and then they yell at us. And so I lived that for a long time. You know, you're familiar with the Dalbar study where people get, you know, a 4% return by investing in something that's actually been compounding at 8%. It's even worse for alternatives.

where they can take an 8% return and turn it into a negative number through the timing of their investment decisions. So by mixing everything together and pulling it all into what I think is the optimal portfolio, you kind of liberate people from that trap of having to get the timing right. You can just buy it and hold on to it. That's the way I look at it. And that's what we've seen for clients so far. The horror stories, that's a long conversation. I've

Done the ups and downs. I've never seen anyone be successful at it either. Maybe some in the institutional world where they have some contracts or captive audience or whatnot. But when you're dealing with financial advisors who have emotional clients, it's just an uphill battle. We get people to stay invested in things that are out of favor so that they own them when they need them the most. They come in after the fact. And in that post-08 period, were you in liquid alts at that time?

I was running a hedge fund at that time, so we were not considered a liquid oil now. The example that I think about is like the tail risk managers where like the whole study of why they're valuable is predicated on rebalancing at the bottom, but then there's like a lockup in the fund.

Even if you got the timing right and you were in it before the big sell-off, it's got however many months of lockup, so you can't even liquidate and go buy stocks like you're supposed to be doing anyway. Well, here's another horror story for you. I can't tell you how many CTAs I know

That got redeemed dramatically in the fourth quarter of 2008 and in the first quarter of 2009 because they were the only asset in people's portfolio that was liquid and allowed them to liquidate, meaning they were getting margin calls or they had lockups in their other hedge funds. So they just went to the one thing that held up and delivered. It had to pull all their money out. So as the CTE, you go out of business for having delivered and done the right thing.

So the business model, it's madness. But if you mix it in with other risk assets, you just run a multi-strap program, just a humble, realistic expectations, multi-strap program. You can sidestep a lot of these boom-bust cycles. My opinion. So your typical investor, are they buying this alongside BNP?

a more traditional risk portfolio? Or are these people who are true believers in all weather multi-asset strategies and you make up a big portion of the portfolio of the end client? It's the former, not the latter. So most people that are in our fund have anywhere from a two to a six or 7% position in us. And they generally put us in their alts bucket.

I see. And so you were a hedge fund manager before. I think, you know, naturally, anybody can go look up what the fee structure are for your two products. I know you've got a retail version and an institutional share class. Fees differ slightly from one to the other. But I think everyone's familiar with the 2 and 20 fee model. And if you can do that, you can charge 2 and 20. It's certainly a better business for the manager.

Um, so why didn't you choose to go the private fund route this time around? A couple of reasons. Um, I'm in Phoenix, Arizona and trying to run a hedge fund from Phoenix. If it's not real estate based is kind of an uphill battle. Um, this is a real estate town and, um,

He, they drag you onto their terrain when you're dealing with high net worth people here, they, they have their own glossary, um, their own way of thinking about risk and reward. And I found that it's just, it's an uphill battle, right? So you're swimming against the tide. Um, and I'm not moving, so I like it here. It's sunny and warm, no tornadoes, no earthquakes, no hurricanes, no Gators. So, um, there's that the other one is, you know, with hedge funds, you've got to get people to fill out paperwork. Um,

And, you know, to them, how do I say this in a nice way? You know, if they give you $5 million, that's a big, big deal to them, right? Whereas if a financial advisor gives you $5 million, it's not $5 million of their own money, right? They may be managing $800 million.

So it's just not that big a deal. So they're not calling you, you know, every Friday for a recap on what happened. The workload, it's, it's skate. I guess what I'm getting at is when you run into mutual fund, are you trying to get two to 10% allocations for people? Those numbers are big and this thing can scale pretty easily. Whereas if it's QEP LP structure, it's,

You're limited in how many people. The workload is quite a bit higher. And I prefer to spend my time doing research and managing the fund. That's what I like to do. It's not sitting down walking people through paperwork. So there's a scale issue. And you're right. Like our fee structure, I think we're charging 1.24 or something like that. It's quite a bit less than 2.20.

But the amount of money that we can manage with a strategy like this is really high. So the economics, if you multiply it through, we looked at this and considered the stability of the cash flows. This was just a better business decision given our geographic location and our interests. I'm not ruling out-

offering a hedge fund at some point in the future, but we didn't want to do that in the first five years. Do you find that most of your clients are from the Phoenix area or are they from places that are maybe similar, just outside of the large financial hubs like New York? So that's always been the case for us. We raised a lot of money at our previous firm and we've raised considerable money here. It always seems to be from...

Topeka, Boise and Birmingham and Tulsa and Cleveland. You know, it's not San Francisco, Seattle, Chicago, New York, Miami or L.A. We have any money from those cities. We we find success dealing with these medium sized cities and it's mostly small to medium sized financial advisors, usually sub one billion.

that don't have like a giant political investment committee and there's, you know, maybe two or three key decision makers. That's generally been our sweet spot so far. I think that'll change once we have a five-year track record and we're fortunate enough to stay over a billion in AUM. I think it's going to open up some doors and some bigger financial advisors will at least become aware of us. But so far that

that template that was successful for us years ago at the previous firm has continued to work here. And are these independents? I mean, even in the private fund world, maybe this wasn't as big when you started in 2019, but I think one of the biggest areas of growth right now in the private fund world is getting onto the platforms for a lot of these wealth managers. And these are

maybe advisors that are tied to a much larger financial institution. They're an independent, they have their own business in their town, but they've got the backing of Morgan Stanley or Wells or something like that. Are you dealing with people who are much more independent than that? Yeah, much more independent. We only recently got on at Wells and we're not on any of the other wire houses. We're not on any rec lists or in any TAMPs or models that I'm aware of. I think we're in one

small model from a firm down in Alabama. But no, we did it the hard way, the bootstrap. This was direct relationships with small, medium-sized financial advisors. And I think that's how you have to expect to do it in the first five years, unless you're

your pedigree and your network is elite and you're meeting some specific demand for a specific product that, and you're, and you're dialed in with, with a warehouse or some other institutions, but that wasn't us. You've been doing this for, you know, successfully for over, over 20 years. I mean, what, what is the level of pedigree that you think is, you know, that, that next level then? Yeah, I still feel like an outsider, Max. It's, it's,

Macro managed futures, it's just very different. And only in the past few years, I would say, have people in the securities world, the stewards of capital when it comes to the kind of money that goes into mutual funds and ETFs,

only recently have they considered what I consider like true diversifier alts. 2008 created a little bit of interest, but then the disappointment was thick from 2009 to like 2012. And then 2022, I think, opened some people's eyes. And now with the risk-free rate up at 500 basis points, people are looking around going, wait a minute, now there's no real return in a lot of these fixed income products. And they're starting to look at alts. So

I'm optimistic that things will change, but no, I think that we're still considered outsiders and hopefully we won't be forever. To be able to speak to an RIA that has somewhere between 500 million and a billion dollars and have a real conversation with them about buying your product is a dream for most people. So was it relationships that you had prior? You got a guy who's on the road, you know?

40 weeks a year going from town to town. How do you get in front of these people? Yeah, we did travel because we launched, you know, Jan 1 of 2020. So, you know what happened right after that COVID hit and then our entire business model. We had a whole plan for travel. We had a huge travel budget and that all went out the window. So I had to learn what a zoo was. Yeah.

And look at us now. Yeah, look at us now. Changed everyone's lives in some ways for the better, meaning a lot less commute time, a lot less wasted. I mean, I travel a little bit, mostly for board meetings and compliance type stuff. I'm like, I couldn't do this. A traveling salesperson, I think that's too much. It's too 1990s for me. No, we specifically use software and databases to target people

specific kinds of financial advisors. It's similar to what I mentioned earlier. We want smaller teams,

a small or non-existent investment committee. I'm not saying we won't do business with those people, but in the beginning, as a new company with a new product that they probably haven't heard of before, we needed to actually talk directly to the decision makers because we weren't going to make it through that gauntlet of a due diligence process of a highly political organization that's got investment committees. They're just going to go with BlackRock and State Street, whatever.

So we did a micro targeting of people that were, you know, decision makers, the right asset base, they use alts, um, and there's some other parameters and whatnot. And then did focused, uh, phone calls, emails, and mailed them, um, things like water bottles, books, you know, something to just get their attention, to guilt them into, you know, having a conversation with us. And it's a pretty simple model and it worked.

Maybe you don't want to give away the secret list or whatever, but can you do a service provider shout out to some of the people you've used? My head of sales, Matt Kaplan, would say that Broadridge is a really good software company that offers a lot of functionality. It allows you to locate, find people.

that meet parameters and criteria that are important to you. With this sort of like RIA client base, that as much as like the product definitely needs to solve a problem for the end customer, their client, you're also solving a problem for that person in the middle, who is the advisor. When you think about like what is the problem that you're solving for the advisors that they have in dealing with their own clients, as much as you are solving a problem for clients

for the end investor? Yeah. I would say that every now and then, every eight to 10 years, there's some sort of a risk off of that where clients and advisors have indigestion and regret that they didn't have something in their portfolio that mitigated the downside volatility, which is like clockwork. You're going to get it from time to time. The most recent was 2022, and I guess COVID as well, but that one was fast.

The problem is if you put something in there that buffers the decline, oftentimes that same thing creates a headache for you during good times. You know, it either dramatically underperforms or goes nowhere or whatever. It's something like that. So now you're faced with a timing issue and no one ever gets the timing right. Especially if you're dealing with emotional clients, it's nearly impossible to get the timing right. So...

In essence, they recognize that there is some need for a true diversifier. And let's define true, true diversifier. Something that stands up and delivers when you need it the most. And when do you need it the most? Well, it's when everything else in your portfolio is just getting smoked. Historically, that's been managed futures to some degree, gold, short-term treasuries, and occasionally MLPs kind of almost make the list, right? Those are your true diversifiers by my calculations.

They're hard to hold on to. They're hard to explain to people. They tend to have high fees. They tend to have like tax consequences. So they just they cause problems. They solve a few, but they cause some other ones. And it's time varying over time, the degree to which they solve our problems and they create for you. And that's where the whole timing aspect comes in.

So what we try to do is use the right combination of true diversifiers with risk equities and fixed income and offer it on a standalone basis so that if someone was going to consider making a 5% allocation to Managed Futures and then deal with all the madness I just talked about, well, they could just make a 10% allocation to us, which is effectively the same thing. Right.

And not have to deal with the madness because they can look at the track record and say, well, I mean, instead of having a negative beta and completely getting left behind in a bull market, you've got enough equity exposure, fixed income exposure.

in the portfolio to not completely get left behind in a bull market, but you still provide quite a bit of downside protection in a down market. And you're not killing me with a 3% management fee and no performance incentive. So from that perspective, some advisors look at us and say, you're solving more problems than you create for me over a 5, 10 year window. So they hold the product. And within the listed alts world, is anybody else doing this? What does the competition look like?

Yeah. So it's weird. We're in the embryonic stage of this. So I don't view my competitors as competitors. It's more important right now to grow the pie, to build a good reputation and to get information and insight out there so that people can develop some knowledge and hopefully wisdom around this. Sure, we'll be at each other's throats seven years from now fighting through the same clients. But right now it's actually a credence that

that were cooperative. So yeah, there's firms out there doing stuff like this. Corey Hofstein at Newfound is doing stuff like this. Simplify, Resolve, Aptis, I think Half Architect is looking into doing stuff like this. Those people are all ETF experts. We're the lone weirdo doing it in mutual fund structure. We can get into why later on, but Abby is doing stuff like this. Who am I missing? I'm missing somebody.

Grant Park. There's a few. There's a few. Okay. And yeah, so it's just the education. The fact that there's more people out there talking about it makes it so that when you happen to be the one whose turn it is to go knocking on the door, they're a little bit more receptive to the word.

Yes, but also just having other things to invest into, right? Like if I came to you in a different context and I said, I've got this amazing thing, it's going to change your life or it's going to solve a problem. You look at it and you go, yeah, I agree with you. But if anything goes wrong with you, I have no other options. I don't want to become dependent upon this thing if you're the only provider, right? So you want two or three providers so that you can spread your risk around. Anything go wrong with one firm, I could die tomorrow, although we do have a plan for dealing with that.

But you just want to have some choice to diversify your risk. If you're going to bring this into your portfolio and commit to it, you want to be able to hold on to it even if one or the two of the firms don't last forever. Do you think it's helpful to actually not be the first mover on it, to see some other people doing it, that you're on the trail of something that other people might not?

agree is the right way for innovation to move versus you're totally alone on an island. Yeah, I'm a huge believer in second mover advantage.

So you're familiar with pioneers versus settlers? Pioneers get arrows in the face and the settlers come in and just basically build stuff after they've cleared the land, right? So I'm eternally grateful to AQR and PIMCO for spending all the millions and millions of dollars to get the legal and the compliance and all that other stuff ironed out with the SEC.

So that us little guys could come in behind and actually have a fruitful, you know, terrain to build something upon. So second, third mover advantage is definitely a real thing. You know, you don't want to be being early in this business is dangerous and expensive. Okay.

Yes, it is very expensive. I guess let's talk about that. I mean, the sort of breakeven that most people think about, depending upon the strategy, I mean, if it's just like vanilla equity, it's a little bit lower in the ETF world is generally somewhere between 50 and 100 million is what people talk about. What is it like in the mutual fund world? And how long did you guys think it was going to take you to get to that breakeven point? So define breakeven for me, you mean for the fund or the firm?

For the firm where you are not losing money running the product. There's so many products out there that maybe the fund management company has 10 products and three of them reach scale where they start to make money and seven of them are losing money and eventually they shutter those seven and then they try a new 10 and three stick around and so on and so forth. Maybe you have to shutter some of the old ones eventually. Yeah.

because they're not making money. So I guess, what is the point where it starts to make money for standpoint fund manager? Yeah, it's going to be a function of your net revenue. So for us, that was about $130 million in the fund where the firm was breakeven. We were no longer having to spend our own money to subsidize the fund. And I think we hit that 18 months in, something like that, 20 months in.

It was slow for us in the beginning. It was mainly because we couldn't get on platforms. After COVID, it was nearly impossible to even get through to any of the platforms to let us on. We had demand. But getting these large platforms to do all the back office work and connect the pipes and allow people to buy your fund is actually a workload that could be six-month turnaround time. And sometimes they don't answer the phone for six months. So

Yeah, that's the thing you got to factor in when you're launching a new alt fund. There's some serious fixed costs up front. And then you got to play the game with the platforms just to be able to let people buy your fund, even if you have demand. For us, breakeven, I think was about $134 million. And it took almost two years to get there. And when you say the platforms, who are these platforms that you're talking about? Yeah, that'd be like Schwab, Pershing, Fidelity,

You know, the custodians where they, you know, people can actually purchase your fund and have the fund shares be on that custodian. And do they have their own due diligence process or is being approved by the SEC enough for them?

For a couple of them, it's, yeah, if you're a legit mutual fund and you've been approved by the SEC to go, they'll let you on. But most of them, no, they've got their, especially if you're an alt, they've got an additional due diligence package that's going to take you a few months to grind through and it can take six to nine months for them to make a decision to let you on.

And what are the types of things that can get you rejected from getting on these platforms? Well, some of them, it's AUM, right? Like we, there's a lot of platforms that we weren't allowed on until we got to a hundred and others at 500. And there's even others that require a billion that we can't get on. Well, we can now, I guess. So it's kind of a chicken and egg thing where it's like, well, go raise money before and then we'll let you on. We can't raise money unless you let us on. Right.

So, there's that, you know, and then, you know, they make you fill out kind of the equivalent of a TDQ and they're looking at your staffing, your IT, they're looking at your compliance track record to see, you know, if there's any red flags there. They're all a little different.

It's not that hard. It's just time consuming. Someone has to fill out all the paperwork and just keep harassing them and following up. Hedge fund managers love to gripe about how much back office has come into the world that they think should be just purely investment staff. What is it like in the mutual fund world? Do you find that it's actually as much or more back office than it would be in the hedge fund world?

I think it's a lot more, but if you're in a shared trust, like most mutual funds are these days, you know, you're paying your administrator and the transfer agent and all the guys up top to do all that work. And they're going to be able to do it a lot better than you a lot more because they're doing it for hundreds of funds and they've got all the systems in place and the people are 50 person board of directors and whatnot.

So it's, it's a bigger workload, but we don't have to do it. You know, we have to pay for it. We don't have to do it. When I ran a hedge fund, that was 2003 to 2016. Yes. It wasn't that bad. Cause again, you can outsource most of it. But you're, you're accountable, you know, you're, you're, you're responsible for, for all of it. So you don't want to outsource everything.

So I would say the workload is much bigger in the mutual fund space, but you don't do it yourself. You pay for it in the form of like anywhere from 10 to 15 basis points is going to go to your administrator and they're going to do the bulk of that work. I brought it up at the top and I'm really interested in is the mutual fund wrapper. So all of those people that you listed as being in the same space have chosen to do so in the ETF world.

Why did you choose mutual funds? I mean, you know, I, I, I just turned 30. I think many of my friends who are my age, like have probably never bought a mutual fund in their life couldn't name one, if you ask them, but could name a bunch of different ETFs.

Not to poo-poo mutual funds, but it's an interesting decision. Yeah, that list of firms that I rattled off earlier, you know, Resolve, Simplify, Aptis, Newfound, Cambria, and Wes over at Alpha Architect, they're all doing cutting-edge stuff in the ETF world, launching ETFs, doing all kinds of cool, interesting things. And then when they talk to me, they're perplexed. They ask me the same question, like, why don't you do this in a mutual fund? And my response is, I ask them, why do you do an ETF?

And it's usually, you know, tax efficiency. That's where all the demand is. They have a whole host of things. Right. And then I show them what my strategy is. And I, and I asked them, show me where the tax efficiency is. And they scratched their head and they're like, well, okay. Yeah. If you're doing macro it's you're getting 60, 40, 12, 56 tax treatment on the future is like, yeah, the in-kind distributions and all that other stuff. It's like, you're not going to get much out of that. There's not a meaningful benefit.

If you're running a common stock program or something that could be essentially indexed, it makes a lot of sense to offer an ETF structure. The tax advantages are pretty impressive. But if you've got mostly futures contracts...

It's just there's not a lot of benefit to it. Now, there's a downside to ETFs that I don't like. And the risk reward for me was such that I'm going to stick with the mutual fund structure. I like the mutual fund structure. It's very well suited to what we do. In the ETF structure, though, there's certain control you have to give up. So I'm running a portfolio that

We invest in the 75 most liquid futures markets in the world, about half of which are overseas. Of those, about half are in Europe and the other half are in Asia. So what time is it? It's two o'clock right now here. So it's four o'clock on the East Coast. Let's just rewind back to half an hour ago where there's a lot of market on close orders. A lot of people are trying to buy the stuff they want to own and whatnot.

half of my portfolio is closed because it's in Germany, it's in France, it's in the UK, it's in Tokyo, it's in Sydney and whatnot. What are the market makers going to do when they've got all this order flow coming in and half of my portfolio is closed because it's overseas? They're going to widen out those bid-ask spreads. They can't lay off their risk in real time because a lot of the markets are closed. So when you're running a global portfolio,

But the ETF is most active 30 minutes after the open and 30 minutes before the close. Well, that open's got some overlap with Europe, but none with Asia. And the close has no overlap with either one of those jurisdictions. So that puts pressure on the market makers who already, in my experience, don't really want to trade French wheat or

or Japanese government bonds or carbon emission credits in France. If what you're trading is in North America, primarily in the US, and it's equity-based and there's the tax benefit, yeah, the ETF is a total no-brainer. It's a much smarter way to go. If it's a global macro portfolio that's got futures contracts in it, there's very little argument that makes any sense to me

To move to the ETF structure, it's okay. You can do it. But you're going to have to deal with the market makers who may not like it. And let me ask you this, Max. If you're buying my ETF and you're getting a 60-set bid-ask spread because the market makers have blown it out and you're upset, who do you call? You call me. But there's nothing I can do about it.

So anytime you have where the responsibility and the accountability aren't in the right spot, shy away from that. And I would be creating that situation for myself if I tried to ram a global future strategy into the ETF wrapper. If it was all US, that's a different story. So that was the main thing that scared me. And when I talked to experts, you know, people at Alpha Architect and Simplify and whatnot,

They say, yeah, back when you were launching 2019, it made no sense whatsoever to try to cram that into an ETF structure. Things have gotten better, though. And the market makers have become more engaged and you are seeing more futures-based strategies in an ETF wrapper. So it could be that I was right then and I'm less right today. I'm open-minded to that. But the other thing I would say is if you look at all the ETFs and all the mutual funds that are alts and you rate them by AUM,

It's really small in the ETF space. I think the biggest alt ETF is like 800 million bucks, right? It's enormous in the mutual fund space. And the big firms like AQR and whatnot, they're sticking with the mutual fund space. I think there's a reason for that. And I think that reason is the flexibility in the mutual fund structure and the control of the trading, meaning you're not relying upon market makers is valuable. Just like my intuition told me,

So I'm not ruling out offering an ETF, maybe even an ETF share class or launching an ETF in the future. But like we talked about earlier, I don't want to be a pioneer. I don't want an arrow in the face. I want to be a settler. I'm going to let other people, I'm going to learn vicariously through their mistakes. And then someday we may,

say it makes sense from a business perspective to offer an ETF structure, but the mutual fund was the right choice at the time. I think a lot of people maybe have never even purchased a mutual fund before. So what does it look like to buy a share of a mutual fund and how does that differ from the ETF where you're getting a bid-ask spread?

You know, and there's a market maker. So here's where I'll probably show my ignorance. You know, I am 52 years old, so I don't use Robin Hood or any of these. I've got an interactive brokerage account personally. I've done Fidelity, you know, Schwab, whatnot. And it's it's simple, right? You just log in, click on mutual fund, type in the ticker, buy the amount you want, and you're off and running. So these young kids that are using Robin Hood and other things that I don't even know the name of, they may not even have an option to buy mutual funds.

You know, I've run into many people who say, you know, like you're the first mutual fund we've ever bought. We had to make an exception to bring it in because it's an all ETF portfolio. So, yeah, I mean, that's just look at the AUM and active mutual funds. It's been going down for, what, 20 years now? And ETFs are soaring. So if that continues, we'll probably have to adapt.

Yeah. But I mean, like when you put in the buy order, you know, on interactive brokers, is there is there a bid ask spread? Is there a price? Is it you get the closing price as you're actually asking that question? I didn't realize you were serious. No, no. I mean, I'm serious. There are people who probably have no idea. It does look a little bit different. You just buy it in half. Right. You just type in the dollar amount and it'll tell you how many shares that is and ask you, are you sure you want to transact this? And then you hit it.

And you get filled, you know, because you're going to get the NAV for that day and you're done. And the next day it shows up in your account. Okay. And so it's closing NAV at the end of the day? Okay. You get the NAV as long as you put your order in before the cutoff. And the cutoff is different for different custodians. It's generally an hour or two hours before the market closes and you'll get whatever the NAV is that day. And then it'll show up on my desk an hour later in the form of flows. And I look at it and go, okay, well, these are the trades I need to do tomorrow morning.

To account for the fact that Max just put $10 million in my foot. Or if you take the money out, I have to sell, you know, down to rebalance the portfolio. You talk about like there may be a point where you do have to consider, you know, a different share class or a different fund altogether that fits the ETF level. Like,

Is it somebody who comes to you and says, hey, I'm willing, if you spin out an ETF, I'll give you 100 million bucks of my client's money. What is the point? Is it people wanting to leave the mutual fund? You know, what are the considerations for launching new products? Most likely it would be in the model world where people said, look, Eric, I love what you're doing, but all models are going to be ETFs going forward. So if you want a legitimate shot at getting into these models,

You got to launch an ETF first, which is no problem. You know what I mean? We can do that. It's just a workload. Um,

And you got to deal with the stuff I talked about. So that would be, it would be a supply demand thing. I don't think our current asset base is under threat because these financial advisors we're dealing with, well, maybe when they start to retire and baby boomers start passing away and then their kids inherit it and they're like, what's a mutual fund. But you know, that's,

That's a problem for eight, 10 years from now. And we're thinking about it. We're just not doing anything about it yet. What is capacity for a strategy like this? You said you're in the 75 most liquid futures market. So I'm assuming it's pretty high. Is there a point at which you close the fund or can you guys just take inflows forever? Yeah.

Yeah. So it's a 75 most liquid futures markets in the world for our macro exposure. And then we're using a ladder treasury bill portfolio for fixed income. So that's deeply liquid market as well. Yeah. And then it's market cap weighted global equities, very similar to like the MSCI World Index. So that's maximum capacity there. So by my calculations, we have about 12 billion in capacity in the program without us having to change the strategy or come up with new ones.

It doesn't mean we won't run into position limits in like agricultural commodities, but that's not that big a deal. That'll probably happen at around $4 billion if we're fortunate enough to grow that part. It's not a big deal, though, because most of our exposure is in energies and metal bond futures, currencies and whatnot. It's not so much the grains or the markets where they have regulatory position limits.

So 12 billion is, I think, a realistic estimate of where if we were approaching 12 billion, I'd have to do some sort of a soft close. And under current market liquidity metrics, 12 billion would require a hard close. How are you weighting those? I mean, market cap weighting makes a lot of sense. Are those liquidity weighted or is there some sort of confidence weighting? Yeah, that's an important question. And it was an important consideration for me. I'm

I built it to have the maximum capacity and I built it the other way too, where I called maximum alpha. And I looked at the difference and if the maximum capacity gave up too much, you know, that's, that's going to incentivize me to put a lower target on the capacity.

It turns out that the difference was negligible. It was like 20 basis points a year to go with the max capacity version as opposed to the max alpha version, which was very surprising. I've actually been surprised by a couple of things during the research phase in 2019 when I was building all this. A lot of my pre-existing projects

biases and beliefs were shown to be incorrect. So what do we do to maximize capacity? We open interest weight our futures positions, which is the equivalent of float weighting your equity positions or free float. So our crude oil position is really big relative to our heating oil position because crude's a bigger, deeper market.

our gold position is a lot bigger than our silver position and our core position is a lot bigger than our canola position because we're being consistent with the supply and demand reality of the underlying market and futures market itself. So it's super easy to do. You just calibrate everything proportionally to the open interest of the markets.

Do you think the results of the study would have been different if you opened up the liquidity question beyond just the 75 most liquid futures markets? Like if you really got into the super liquid stuff, do you think the question about alpha weighting versus liquidity weighting would have been would have been more of a debate?

It's a great question. And it's, I alluded to this a little bit earlier when I said my biases and preexisting beliefs got challenged and proved wrong in a couple of cases. That was one of them. My bias from my earliest memories was towards, I call it a small cap bias. Like I really do. And my brain is wired that if something's scarce, it must be valuable. Um,

And that alpha is going to have an inverse relationship with accessibility.

And there's a strong element of truth to that in the physical world, but it doesn't translate very well over into the derivatives and financial products world. I really thought that if you went into trading small, obscure futures markets like platinum in Japan or white maize or yellow maize in South Africa and all these things that because the big boys can't play there, that there's tremendous opportunity.

And I did that research. That was painstaking research to do. It was fun though. And I was surprised at the results that if you just simplify what you're doing and focus on the liquidity, go to where the liquidity is, there's almost no deterioration in the alpha. And I struggle with that because I'm like, why? Why then would people trade rice and lumber and all these smaller markets if it's just not translating into anything meaningful? Yeah.

in your total returns. And this gets, you know, the gap gets even narrower as you're trying to manage more and more money. At some point, it flips over and you're actually harming yourself through slippage, transaction costs, operational heartache of trying to trade, you know, foreign markets that are tiny.

And what I came to believe is that trend followers in the futures world collect a risk premium from hedgers. It's a zero-sum game. It's actually a negative-sum game because the brokers and the clearing houses are getting paid. The risk premium is flowing from hedgers who are getting something out of this towards speculators or futures investors.

And hedgers are liquidity. These markets weren't invented for you or me. They weren't invented for traders. They were invented for hedgers to lay off risk they don't want to take. So it does make sense from that perspective that the risk premiums would kind of overwhelmingly be concentrated in the liquid markets because it's the liquidity that creates the risk premium in the first place, or at least they would be proportionate. There's really not that much benefit to trading obscure, tiny markets.

So part of me was disappointed in that because it means a research dork like myself that's willing to get in there and create three-way spreads between disparate markets all around the world. There's not really a lot of opportunity in there, but the businessman in me that says, you know, you need a scalable opportunity that can be run consistently with discipline over time. You're not really giving anything up through scale. Well, that was good news. So yeah.

That's what I found. And I think a lot of people that they're trading milk and cheese futures and whatnot, they're convinced that there's some benefit to that. I just don't see it. It didn't translate into anything meaningful in my world. So we don't worry about it. It's funny that I think, you know, a lot of people believe that

Minimizing transaction costs, minimizing fees is the best thing you can do. And, you know, no matter which way you cut it, whatever your strategy is, it seems to generally come back around to that. It really adds up over time. I can tell you what my, because the way I calculate slippage and market impact is a function of the underlying liquidity. And I reconcile that back to my real world experience, try to close that gap and make it realistic. And yeah, when you're trading orange juice futures with size, you are paying a lot in terms of slippage. It hurts. Yeah.

Well, what is the market like right now? We are recording this here at the end of 2024. We've had just an absolute ripper of a year in the equity market. Maybe one of the years that, you know, the diversification benefits are not showcasing themselves, you know, at full power. What is it like for you from a business perspective in a year like this in terms of conversations with new potential clients as well as existing clients?

A couple of things I would point out. You're familiar with the concept of expected value, right? So if I gave you an option and said, here's a bet or an asset. It's got a 70% chance of being up 8% in the next year and a 30% chance of being down 40. You would multiply through and you would get a negative number and say, well, this is a crappy bet or investment, right?

But most people would say, well, I'm going to go long because it's got a 70% chance of being up eight and I'll take the risk 30% chance of being down 40. Because I can't, if you inverted that, you know, they can't. In other words, what I'm saying is most people can't pursue a positive expected value if the probability of success is really low. That's why tail risk hedging is hate. And that's why people hate trend following. You know, trend following has a 35, 40% success rate. But when it's successful, its gains are big. When it's unsuccessful, its losses are small.

So I have been having this conversation with clients over the past couple of months, and it feels to me like all the math is coming back saying, I think we've transitioned into a market environment where almost all positive expected value bets going forward have a low probability of success.

And the things that have a high probability of success have so much downside cooked into them that the expected value is actually negative. And that's a nightmare scenario for most people that don't have the diversification opportunities to go into positive expected value bets that have a low probability of working out. It's psychologically tough. It usually means alts.

Um, and you desperately need to diversify that because you know, that, that whole fear of a low winning percentage is real, right? Your clients won't stick with you if you just end up being wrong four or five times in a row. So you need to be able to find positive expected value bets that have a low probability of success that are uncorrelated with each other. And that means going

sourcing diversification. That means metals. That means grains. It means bonds. It means currencies. It means soft commodities, energies. Your menu needs to be wide around the globe. So I look at it and say that's kind of the sweet spot for systematic global macro going forward. So I'm hoping. That's what the market environment feels like to me right now. The other thing I would say is that

You know, in February of 2020, we were getting signals to short almost every energy market on the planet. And that was not a fun time because shorting crude oil is 67. I mean, I had people calling me up asking me if I was crazy, like how much lower can it possibly go? Are you nuts? It went to negative 35, right? Yeah.

And we did well during that period of time, but it wasn't because we were timing stocks or any of this other stuff. It's because we had the short shorts on. We were on the right side of that big trend. But at the time that you have to put those trades on, it's psychologically and socially not very comfortable. And that's a reoccurring theme in my business, that the trades are the investments themselves.

that end up working out the best over time are always the hardest ones socially, politically, and psychologically to put on with time, which is why we're systematic and I never skip trades.

Fast forward to January of 2022, same thing with the bonds. It was shorting the bonds, which nobody wanted to do. And no one was patting you on the back for doing it back then until it started paying off, right? You had to be short bonds in 2022 to gun out a positive return, right? Again, no. Socially, psychologically, and politically, very difficult to put those trades on. But we were, you know, unmoved by that because we're completely rules-based and systematic and we just do what we're supposed to do. No apologies. Right?

So I feel like we're getting into another environment like that. And I won't talk about current positions or what's happening, but another slew setups are coming into focus that I'm looking at saying, well, people are going to have a real hard time getting on.

let's say right side of this. I don't know what's going to happen, so I don't know that it's right, but to get in with the trend that's developing right now is going to be psychologically, socially, and politically very difficult. So whether it works out or not, I can't tell you. But if I'm right about the low probability, positive expectancy bets being the way to go going forward, and we have another setup of difficult positions to put on,

you better put your helmet on. It looks, it's very risky out there. I guess what I'm saying is a long way of saying someone's about to get smoked. It's very risky. All right. Well, I'm going to ask one question that I might lean in a little bit to some of the unanswered bits that you gave there, which is I know that your equity exposure is like mostly like Acqui, obviously us outperformance has been, you know, the story of the last five years in, in many cases. Um,

Are you getting people asking you why you have a global equity exposure? Are people questioning you saying, hey, why don't you just put it all in U.S. stocks? And how do you feel about the trend that has been going on now? Yeah. Yes. Not a lot, but we're getting some. And it's one of those things where sometimes they do ring a bell at the top. Yeah, a little bit.

I don't feel about it. I just look at empirical data and I do not get carried away with trends or I'm very leery of the seeking comfort from others. In this business, you got to learn that lesson fast that if everyone thinks it's a good idea, it's generally not a good idea. So for that attitude to become the prevailing attitude makes me want to lean the other way.

Now, I'd see it at the it seems strong. You look at it, you look at the demographics of, say, Germany, Spain and China, and you look at their contract law situation and their natural resource situation and you look at it and you're like, I don't see how these countries can.

thrive going forward. I don't even see how some of them can survive going forward. I mean, it looks really terrible. And then you look at the U.S.'s geography and pent up demand and it's you look at it and go, yeah, I can see for the next 20 years, the U.S. just becoming ultra dominant relative to that

But if you study history and you've been down this road before it, and always, there's always compelling reasons. What's being left out of that equation is how do the other guys adapt? Right. So you look at some of these European companies, you're like, I don't know how they're ever going to compete. Um, well, they're going to do what they're doing right now. They're building stuff in Alabama and Louisiana, and they're moving stuff offshore and they're going to, uh, they're going to sell off, you know, uh, unproductive assets and leverage their brand. Um,

They're going to make adjustments. And I mean, how much of their revenue actually comes from continental Europe anymore? Anyways, I mean, it's everyone's global at this point. So I look at it and say, don't get carried away. Don't think that it's fine, though. You know, if the U.S. becomes dominant, I live in the U.S. I was born in the U.S. I'm happy to see that happen. But doesn't mean I'm going to give up on diversification. Just don't.

Because the U.S. has done better. And then if you look at the historical data, the U.S. has done better in the past. And then for 10 years after that, just done terribly while other people did great. I'd like to go back in time in a time machine and figure out how confident people were back then, because I'll bet you it's the same as today. And they're looking at it going, the U.S. can't be beat. These other guys don't know what they're doing. So, again, learn vicariously through the mistakes of others and learn from from empirical data.

And if you look at the spread between the US and other countries, it's way up there. So it won't be the least bit of surprise if the US underperforms over the next 10 or 15 years. It doesn't make any sense right now, but it never does. Yeah. Well, and besides, you are market cap weighted too. So if the market caps continue to expand here in the US, you'll reap some of that benefit. Not as much as if you could completely issue a diversification, but not that you don't get

get to follow that trend as well, too. Yeah. It's amazing how fast people forget, like the last decade from 2000 to 2009 in the S&P 500, when there were other things that were compounding at 12% a year during that period of time, how that felt, right? So I love the S&P 500. I think it's a great way to get really cheap exposure that's effective and whatnot, but it could have a lost decade and that could start tonight.

Yeah. Well, I mean, it's trend following too. Yes, it is. It is basically a dumb, big, dumb, mean, tax efficient, low fee trend following vehicle. That's what it is. So anybody who wants to just buy the index, you're following the trends too. All right, Eric, well, we'll leave it right there. Thank you so much for coming on and sharing with us your experience with Standpoint. Awesome. Thanks for having me.