He Built the Fund He'd Hold 30 Years | Eric Crittenden on What Investors Pick When Labels Come Off

Key Concepts

• Trend Following: A systematic investment strategy that aims to capture gains by analyzing the direction of an asset's price movement.
• Regime Shift: A fundamental change in market conditions (e.g., from low to high inflation or growth) that often renders previous strategies ineffective.
• Whipsaw: A situation where a trader is caught on the wrong side of a market move, often occurring during rapid, counterintuitive trend reversals.
• Risk Premia: The excess return an investor expects to receive for holding a risky asset or providing a service (like liquidity) to the market.
• Convexity: In finance, the ability of a strategy to provide outsized gains during extreme market moves (fat tails) while limiting losses.
• Adverse Selection: The risk that one party in a transaction has more or better information than the other, often occurring in quiet, mean-reverting markets.
• Systematic Process: A rules-based approach to investing that removes human emotion and discretion from decision-making.

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1. The Nature of Trend Following and Regime Shifts

Eric Kittinden emphasizes that the best opportunities in trend following often emerge during periods of high psychological and social pressure.

• The "Darkest Before Dawn" Principle: Significant market moves often occur in the first few innings of a regime shift. Using too many filters (fundamental, GDP, or interest rate filters) can cause managers to miss these shifts or get "whipsawed."
• Systematic Discipline: A systematic approach forces managers to exit losing positions and enter winning ones without the delay of human committee approval, which is critical during fast-moving market environments like the COVID-19 bottom or the 2025 market shifts.

2. Risk Transfer Services: The "Why" Behind Trend Following

Kittinden argues that trend following is not just behavioral; it is a risk transfer service.

• Liquidity Provision: Commercial hedgers (e.g., copper miners, farmers) often need to hedge their production to lock in profit margins and lower their cost of capital. They are not trying to "make money" on the trade; they are buying insurance.
• The Premium: Trend followers act as the counterparty to these hedgers. Because few market participants want to take the other side of these trades, the market pays a "risk premium" to those willing to provide this liquidity.
• Time Arbitrage: This strategy acts as a form of insurance, smoothing out P&L through time. It is a "punctuated equilibrium" where long periods of flat or dead money are punctuated by significant gains when supply-demand imbalances occur.

3. Portfolio Construction and Diversification

Kittinden advocates for a top-down, empirical approach to portfolio construction.

• The Optimal Mix: Research suggests that an equal risk contribution from long-only global equities and a diversified trend-following program creates the most durable path for wealth compounding.
• The "Dog Looks Like the Owner" Analogy: Investors and advisors often struggle to hold trend-following strategies because they view them as a "report card." If the strategy is down while stocks are up, they want to fire it. Kittinden argues that to be successful, one must accept that a truly diversified portfolio will have components that underperform at different times.
• Avoiding Unforced Errors: Rather than trying to "tinker" with systems after a drawdown, Kittinden focuses on removing structural risks (e.g., removing nickel due to counterparty/oligarch risks or removing low-volatility fixed income that requires excessive leverage).

4. Methodologies and Frameworks

• Diversification of Time Frames: Kittinden uses three systems—short-term, medium-term, and long-term—to ensure the portfolio is robust across different market environments.
• The "No-Tinker" Rule: While research is continuous, actual system changes are rare. Kittinden warns that "improvements" often look great in backtests but fail in real-world implementation. He emphasizes that the most successful strategies are often "blunt, simple, and durable."
• Leverage Management: A key to survival is keeping leverage low. Many firms fail because they use excessive leverage in low-volatility markets to chase returns, which leads to catastrophic drawdowns when the market shifts.

5. Notable Quotes

• "The best opportunities present themselves when you were psychologically and socially under pressure." — Eric Kittinden
• "The people that are smarter than me... and have more elaborate complicated systems—I haven't seen as much success from there. When I look at where the real money is... I see simple, blunt tools." — Eric Kittinden
• "The markets don't care that we want to make 8% a year like clockwork every year. Their job is to match willing buyers and sellers and clear the market." — Eric Kittinden

6. Synthesis and Conclusion

The main takeaway is that trend following is a legitimate, durable strategy for capturing risk premia, provided the investor has the discipline to survive the "path traveled." Success requires:

1. Accepting the "Faith" Component: Understanding that trend following is a long-term commitment that will inevitably face periods of underperformance.
2. Structural Integrity: Avoiding the temptation to "tinker" or add volatility-smoothing filters that destroy the strategy's convexity.
3. Portfolio Pairing: Combining trend following with global equities to create a balanced, anti-fragile portfolio that compounds wealth more efficiently than a traditional 60/40 split.

Kittinden concludes that the goal is not to find a "perfect" strategy, but to avoid unforced errors and maintain a systematic process that remains implementable across decades.