Should You Be 100% Trend?

That question came up in a podcast with Meb Faber and Jerry Parker. Parker is a very well known and long tenured trend (managed futures) manager. He's been in the space as a hedge fund manager since the early 80's but has transitioned to the ETF wrapper with the Blueprint Chesapeake Multi-Asset Trend ETF (TFPN) which started trading a year ago and more recently, tying up with Meb to manage the newly listed Cambria Chesapeake Pure Trend ETF (MFUT).

Meb is a huge believer in trend. The Permanent Portfolio-inspired Cambria Trinity ETF (TRTY) allocates 35% to trend. Saying TRTY is Permanent Portfolio-inspired is my impression, I don't know that Meb has ever described it that way. 

If you do some digging, you will find research that says yes, we should allocate 100% to trend. Part of the logic is that by owning what is in strong trends and shorting what is in weak trends, you avoid disaster. Occasionally, there are disasters in stocks and bonds and trend programs should be able to sniff that out. Often they do sniff that out. Meb said that one reason trend did so well in 2022 was that it was short bonds. Jerry said that his money is entirely allocated to trend but he wouldn't tell anyone else to do that not because he doesn't believe in it but because he doesn't think most people can handle the periods where it will lag. This is an important acknowledgement of something we repeat here all the time which is that no strategy can always be best, that even great strategies will struggle at times.

We've gone over the extent to which the 2010's were by and large terrible for managed futures. Could such a terrible run repeat? Probably not but there are plenty of instances where that has been the case including Japan, value stocks and Cisco and Intel are both trading below where they were 24 years ago. 

One question I started asking about managed futures years ago, back when I was side-gigging at AdvisorShares, was how much of a drag, zero percent interest rates were. Most of the actual assets of these funds are in T-bills. A zero percent yield means zero return of course and 5%, like T-bills are paying now, means a lot of return. Anytime I've asked that of people that probably understand the strategy better than I do, they said no. The first person I asked was Kurt Voldeng who kept HFRI data and ran a hedge fund replication ETF for AdvisorShares and I swear I think he thought I had rocks in my head for even asking. 

So maybe the 2010's were a coincidence. This question of "yield on collateral" came up very briefly in the podcast but they didn't address it. I can't tell whether Meb thinks it might be a real factor or not but that it came up means I am not the only one to have raised this issue. 

Managed futures did have a couple of fine years in the 2010's in the context of being a diversifier which is how we view the strategy here. It doesn't have to have high rates to offer diversification but currently collateral is earning 500 more basis points than it used to. 

Meb cited what I think he called a fascinating stat and if he didn't use that word I will. According to Katie Kaminsky at Alpha Simplex, 95% of the assets in managed futures are from institutional investors. It made me feel even luckier to have stumbled across the strategy back in 2007.

So should we be 100% trend? For me the answer is an easy no. I believe it is a fantastic diversifier. Even through the 2010's when it mostly struggled, I repeatedly blogged that it has a negative correlation to equities and equities continued to go up. Meb mentioned the possibility of a reversion to the mean for equities and that is of course possible, maybe it's even probable but equities continue to be the thing that goes up the most, most of the time which is of course a trend in its own right. 

Circling back the Cambria Trinity, it allocates 25% each to equities and bonds, 35% to trend and 15% to alternatives. I've said before that I think that is not enough exposure to equities and the 25% to bonds takes more interest rate risk than I want to take but I like the concept and we can learn some things from the strategy. 

Tweaking the Trinity idea as portfolio 3 above does, gives a competitive return versus 60/40 with a standard deviation of only 8.25 which was even lower than Trinity. In 2022 Trinity was down 3.32% and our spin on the idea was only down 3.51%. Our Trinity tweak also went down quite a bit less than Trinity in the 2020 Pandemic Crash. I used ACWI in the back test because Meb is has a pretty heavy weighting to global stocks in TRTY. BTAL is a client and personal holding.

TRTY has a little over 1% in a Bitcoin ETF which I think is interesting. My guess is that Bitcoin would be part of the alternative sleeve but regardless of which sleeve, you could also call it an allocation to its own sleeve, asymmetry. I've owned Bitcoin for a while for it's asymmetric potential. It also fits into the discussion earlier this week about uncorrelated return streams. Bloomberg had the following chart.

Aside from the asymmetric potential of maybe going to zero or a bazillion, I also believe it is an uncorrelated return stream. I think the chart supports the idea. It does its own thing. A few days ago, Jack Mallers the CEO of ZAP and very much a Bitcoin evangelist said on Bloomberg that he thinks Bitcoin will go to somewhere between $250,000 and $1 million "over the next 12 months or so." That sort of carnival barking makes me cringe and think the odds of zero are higher than I previously thought. It wreaks of "we need more suckers." I'm still in for the asymmetry but this prediction is absolute nonsense. 

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