As we close out 2025 and look toward 2026, it’s worth taking a step back to think about how we build portfolios.

The traditional 60/40 stock-bond allocation has been the go-to for decades. It’s been taught in business schools, recommended by advisors, and quietly implemented in retirement accounts everywhere. But some of the world’s largest institutional investors have been evolving their thinking. The Total Portfolio Approach, championed by pension giants like CalPERS and CalSTRS, offers a different way to think about risk and return, creating compelling opportunities for diversifying strategies like managed futures.

But here’s the thing: for this approach to actually work, each portfolio element needs to do its job. And we need to stop judging them all by the same yardstick.

What Is the Total Portfolio Approach?

The Total Portfolio Approach (TPA) represents a fundamental shift in how institutional investors think about asset allocation. Rather than optimizing individual asset classes in silos, TPA focuses on managing risk and return at the total portfolio level.

CalPERS, managing over $450 billion in assets, has been at the forefront of this evolution since implementing their framework in the mid-2010s. That’s real money with real obligations to real retirees. They can’t afford to get this wrong.

Here’s how it works: TPA identifies risk factors (equity risk, interest rate risk, credit risk, and inflation risk) that drive returns across the entire portfolio. Instead of thinking “I need 60% stocks and 40% bonds,” the framework asks “what mix of risk factors will help me meet my long-term obligations?”

This is different from traditional strategic asset allocation, which sets target weights for asset classes and rebalances back to those weights. TPA is more dynamic. It doesn’t care if your asset class is public equity or private equity, it focuses on the underlying economic drivers of returns and how those risks interact across the entire portfolio. It’s about understanding what risks you’re actually taking, not just what labels you’re putting on your holdings.

CalSTRS, with approximately $330 billion in assets, has similarly adopted this approach. They explicitly recognize that traditional diversification often breaks down precisely when you need it most. Their framework emphasizes risk factor diversification and seeks exposures that perform differently across various economic environments.

The key insight? Different portfolio elements should play different roles.

Some are there for growth. Some for income. Some for inflation protection. And some (like managed futures) for crisis diversification and macro volatility exposure. It’s like building a team where everyone has a specific position to play.

Here’s something worth noting: over the past decade, “alternatives” allocations in institutional portfolios have grown substantially, but they’ve been dominated by private equity, private credit, and real estate. These are valuable investments, but they’re primarily adding to growth risk, not diversifying away from it. They’re correlated with public markets, just with a lag and less frequent pricing. What’s often missing is true diversification. Strategies that zig when traditional growth assets zag. That’s where liquid alternatives like managed futures come in.

Why Diversification Actually Matters

The beauty of TPA is that it forces honest conversations about what diversification really means.

2022 provided a stark reminder that stocks and bonds don’t always provide the diversification we assume. When inflation showed up uninvited to the party, both the S&P 500 and Bloomberg Aggregate Bond Index fell together. Stocks down 18%, bonds down 13%. The traditional balanced portfolio offered little balance. If you were in a typical 60/40 portfolio, there was nowhere to hide.

And 2022 wasn’t just a theoretical problem. It was the year that showed why you hold things that aren’t correlated. Managed futures delivered exactly when traditional allocations struggled, offering exposure to both the long and short sides of return distributions. Long commodities during the Ukraine War, short bonds as yields spiked. No other asset class brought that kind of protection. Not gold, not TIPS, not Bitcoin.

But then came 2023 and 2024-2025. More challenging years for managed futures amid strong stock market results. And right on cue, the naysayers returned. We’ve seen this pattern before. Traditional portfolios love stability and steady growth and struggle in periods of macro uncertainty and volatility.

This is where diversifying strategies create value in a TPA framework. By adding exposures that respond differently to macro dislocations, investors can reduce their dependence on any single economic scenario. The goal isn’t just lower volatility for its own sake. It’s building a portfolio that can weather multiple economic regimes and deliver on long-term obligations regardless of the environment.

Enter Managed Futures

Managed futures sit at an interesting intersection within the TPA framework.

Unlike stocks and bonds, which primarily capture growth and credit risk premiums, managed futures capture a fundamentally different return stream: the price risk premium that comes from systematic trend following across global markets.

Think about it this way. Futures markets exist to allow commercial enterprises to transfer price risk to investors willing to accept it. When an ethanol producer needs to lock in corn costs, or a grain elevator operator needs to hedge falling prices, someone needs to be on the other side of those transactions.

Managed futures investors, particularly trend followers, systematically accept this price risk and volatility. They provide price certainty to businesses while earning a premium for doing so. It’s like being the insurance company rather than the policyholder.

The risk doesn’t disappear when hedgers transfer it. It gets compensated.

This creates a return profile that’s essentially uncorrelated with traditional growth assets. More importantly, that correlation historically has turned negative during periods of price shocks (both positive and negative) as trends extend over longer periods of stress that cause traditional markets pain.

Fitting Into the Framework

Within TPA, managed futures address several critical objectives.

First, they provide crisis alpha—gains when macro uncertainty spikes and traditional assets struggle. Looking back at the Global Financial Crisis, the COVID crisis of early 2020, and the inflation shock of 2022, managed futures consistently delivered positive returns during equity drawdowns. When everyone else was panicking, managed futures strategies were doing their job. Like a high leverage relief pitcher in baseball, comes in during periods of peak stress to put out fires, does his job, keeps his team in the game.

Second, they’re naturally dynamic. Unlike static long positions in stocks or bonds, trend-following strategies can profit from both rising and falling markets. Strong performance often comes partly from going short bonds as yields rise (something a long-only bond allocation obviously cannot do) or from capturing moves in currencies and commodities in either direction. From the offensive side, a switch hitter that matches up to any reliever brought in.

Third, they help manage tail risk without the negative carry of options strategies. You’re not paying a premium that bleeds away; you’re accepting price risk that historically earns a positive return, with the added benefit of convexity when you need it most. The veteran clutch player who has seen it all before and doesn’t let the moment overwhelm him, while not being a payroll hit.

For allocators thinking in terms of total portfolio risk factors, managed futures represent exposure to macro volatility and price uncertainty—factors that are negatively correlated with the growth and stability factors that drive stocks and bonds. This makes them particularly valuable in a regime-agnostic framework designed to perform across multiple economic environments. You don’t have to predict the future correctly. You just need to be positioned for multiple versions of it.

The Challenge of Comparing Apples to Oranges

Here’s where things get tricky, and where a lot of well-intentioned portfolios go off the rails.

Most investment committees still evaluate all their managers using the same traditional metrics. One-year returns, three-year returns, five-year returns, Sharpe ratios. Everyone lines up in the same performance table, and the bottom performers get questioned. We’ve all been in those meetings. Just take a look at managed futures batting average against stocks in the below chart.

More often than not, stocks, and other growth assets that look like stocks, beat managed futures in a side by side comparison.

But let’s consider the statistical reality: stocks and bonds are negatively skewed. They go up in small, steady increments and crash down in dramatic moves. They’re built for stable growth environments. Managed futures, by contrast, are positively skewed—they have lots of small losses (like paying insurance premiums) with occasional big gains, often exactly when stocks crash.

These are fundamentally different return profiles designed to perform in fundamentally different environments. Comparing them side-by-side in a traditional performance table is like comparing your homeowner’s insurance premium to your investment returns. Did your homeowner’s insurance “underperform” this year because your house didn’t burn down? Of course not. It did its job by being there in case you needed it.

So what does this mean in a total portfolio context? Let’s view it through an efficient frontier lens.

The chart above shows that a managed futures allocation of just 10% to a 60/40 portfolio improves annualized return, lowers standard deviation, and reduces maximum drawdown.

How can managed futures, given its underperformance in batting average, be such a contributor to the total portfolio? Well, the answer lies in the fact that managed futures is the “Happiest” asset class. It has the most beautiful smile.

The above chart shows this “smile”, created by having positive outcomes in both extreme positive and negative periods in stocks. This is the managed futures job, and any attempts to optimize batting average risks reducing the smile.

Why Role Discipline Matters (And Why It’s So Hard)

The biggest threat to a well-designed total portfolio isn’t market volatility. It’s behavioral drift.

And it happens so gradually you barely notice. Your diversifying allocation underperforms for a couple years during a calm market environment. It sits at the bottom of the performance table. Someone asks why you’re paying for something that’s losing money. It’s a fair question, honestly.

Maybe you trim it a bit. Just to 15% instead of 20%. Then a bit more the next year.

Before you know it, your “diversified” portfolio looks an awful lot like everyone else’s: heavily concentrated in growth assets, all hoping for the same benign environment. You’ve drifted from your plan without really meaning to.

This is exactly what happened to many portfolios pre-2008. Energy stocks, emerging markets, commodities, and currency carry trades all did well together throughout the mid-2000s. If you looked at your portfolio in 2006, you felt like a genius. Everything was working.

But the common factor was narrowing, and it wasn’t obvious until everything unwound simultaneously in 2008. Those who had trimmed their diversifying strategies during the good times, when they looked “unnecessary,” were left overexposed when it mattered most.

For TPA to work, each element needs to stick to its role. Managed futures need to stay managed futures, maintaining exposure during both quiet periods and chaotic ones. This requires viewing performance through a different lens. Instead of asking “did this manager beat their peer group this year?” the question should be “is this allocation fulfilling its role in the total portfolio context?”

Putting It All Together

As we look ahead to 2026, the case for thoughtful, disciplined diversification remains compelling. Uncertainty is rarely in short supply, whether it’s inflation dynamics, geopolitical tensions, central bank policy pivots, or unexpected market dislocations. TPA reminds us that the goal isn’t to predict which risk factor will win next year. It’s to build a portfolio that can succeed across multiple scenarios.

The institutional investors leading with this framework have the right insight: optimize for the whole, not the parts. This requires discipline on multiple fronts. First, it means allocating to truly diversifying strategies like managed futures based on their role in the portfolio, not their standalone metrics. Second, it means evaluating those strategies differently, acknowledging that positive skew and negative correlation to growth assets have value that doesn’t show up in traditional performance tables. Third, it means rebalancing, using gains in one area to add to others, maintaining the risk factor exposures you’ve designed. It’s the closest thing to a free lunch in finance, just do it and don’t let perfect be the enemy of good.

Whether you call it a Total Portfolio Approach or just thoughtful diversification, the principle is the same: build a portfolio of complementary parts, judge each part by how it contributes to the whole, and maintain the discipline to stick with the plan. That’s how you build a portfolio that can handle whatever 2026 brings.