The mark of great writing is encapsulating the essence of a complicated idea in a memorable and accessible way. It’s more than a little humbling that this scene from Landman in a little over 20 seconds does a better job than our previous 90 blog posts and 8 whitepapers in explaining futures markets, economic risk and (with some poetic license) our approach to portfolio construction and CTAs (Managed Futures). In the show, Tommy Norris is a Texas oil fixer and explains oil pricing like this:
“You want oil to live above 60 but below 90. And don’t get me wrong, we’re still printing money at 90, but… gas gets up over $3.50 a gallon, it starts to pinch. It hits a hundred, every product in America has to readjust its price. $78 a barrel, that’s about perfect. You know, brings enough profit to keep exploring, but it don’t sting as much at the pump.”
Every now and then the market reminds you that the most dangerous risks aren’t the ones you can see coming. They’re the ones embedded in the risk management systems themselves. Value-at-Risk (VaR) shocks are one of those paradoxes in finance where the tools designed to keep portfolios safe can end up making everything worse. Understanding how they work, and why they matter, is essential for anyone managing leveraged portfolios or trying to make sense of the violent dislocations that periodically rip through markets.
The basic idea is straightforward enough. Many portfolios size their positions based on some measure of expected risk – typically volatility, asset correlation, and the resulting VaR. In calm markets, volatility is low, correlations are well-behaved, and risk models give you the green light to run bigger positions. Life is good, until something upsets the apple cart. Volatility spikes, correlations jump, everybody’s risk model says the same thing at the same time – cut risk.
Below is a deliberately simplified illustrative simulation to walk through the mechanics of a VaR shock. Think of it as a stylized version of what happens in the real world when a stress event hits a volatility-targeted portfolio, whether it’s a risk parity fund, a sector and factor neutral fund, a spread trader or a trend follower. Any leveraged strategy that dynamically adjusts exposure based on realized risk metrics.
We use two assets, each running around 15% annualized volatility in normal times, with correlations near zero. The portfolio targets a 15% volatility max and sizes positions accordingly. With two uncorrelated assets at 15% vol each, the math is generous as the diversification benefit from near-zero correlation means you can hold around 70-80% in each asset (roughly 1.5x total exposure) and still run portfolio-level volatility comfortably below the 15% limit, closer to 10%. That’s the beauty of diversification working as intended. Low correlations give you leverage capacity for free. The risk model sees calm vol, calm correlations, and allocates accordingly. Everything is in equilibrium. Now let’s break it.
Let’s be honest about what’s sitting in most “Alternatives” buckets. Privates.
Private equity is a company raising capital from investors to build and grow their business. Public equity is a company raising capital from investors to build and grow their business. The only real difference? The platform they raise money on. Same story with private credit versus public credit, it’s lending to companies either way.
These aren’t alternatives. They’re “Equalatives”—a made-up word for investments that appear different but are exposed to the same economic drivers as what you already own.
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.
It’s late 1987. Institutional investors had just lived through the debacle of October 19, when the stock market collapsed, driven down by an idiotic idea … portfolio insurance. Shortly afterward, we had our first meeting with Rusty Olson, CIO of Eastman Kodak’s pension plan. Regardless of what you think of Kodak’s business acumen at the time, the pension plan was a star. Rusty was in the process of turning over every rock in the financial marketplace, looking for diversification for his very aggressive portfolio. He found us. We pitched him on the idea of managed futures as the ideal diversifier. Liquid, leverageable, and systematic. He loved it but with a caveat. We proposed a multi-manager managed account. But he, and his consultant, had no way of knowing how we were doing relative to some benchmark … there was no benchmark at the time. So we built one — the MLM Index. To my knowledge, it was the first rigorous, price based measurement of the risk premia available to futures traders.
Ask any self-respecting trend follower what kind of market environment favors their strategy, and you’ll get the usual suspects: volatility, uncertainty, macro and geopolitical stress, inflation, deflation, recession. But here’s the thing—those are just the conditions. The real driver? Signal versus noise. Trend needs signal.
In 2022, the signal was deafening: inflation fears, war in Ukraine, and ultimately, realized inflation. Since 2023? More like a symphony of noise. Just look at U.S. rates: 10-year yields dipped below 3.5% in April ’23 on recession fears… then hit 5% by October on “higher for longer.” They slid below 4% in Jan ’24 (soft landing), bounced to 4.5% by April (higher for longer again), dipped back under 4% in September (post-Yen carry unwind, recession vibes), then shot above 4.5% in Jan ’25 (pre-inauguration pro-growth Trump trade), and—you guessed it—dropped back under 4% in April (DOGE, tariffs, not pro-growth but outright recessionary).
2022 was a fantastic year for showcasing the benefits of adding Managed Futures to the portfolio. Inflation rears its ugly head after 40 years and commodities rip higher during the Ukraine War. Managed Futures, offering exposure to both the long and short sides of return distributions, got you long commodities and short bonds. No other asset class brought you that kind of protection in 2022. Not Gold, not TIPS, not Bitcoin. However, after down single digits in 2023, and another flat to down year in 2024 amid strong stock market results, the naysayers return.
Managed Futures – computers love us! Humans…not so much. Why is that? Take pretty much any sufficiently long Managed Futures track record, or index, run it through asset allocation models and efficient frontiers, the answer is pretty much always the same. Uncorrelated returns, with strong negative correlations in periods of market stress, lowers overall portfolio volatility and drawdowns. The efficient frontier goes up and to the left, improved returns, lower volatility, better portfolio Sharpe. The quants, and CFAs, and nerds all agree…on paper it works. For the seasoned veteran, the RIA, the institutional consultant, holding Managed Futures in a portfolio through time, not so easy with the clients.
We speak with a diverse range of investors—domestic and international, institutional and retail, alternatives-focused and equity-centric. Typically, they have a variety of questions and concerns driving their current thinking. However, in recent weeks, there’s been a singular focus: the return of President Trump. It’s remarkable how much of a Rorschach test he has become.
For macro topics like inflation or growth, we usually see a fairly narrow range of opinions—around 10-15% of people expecting slightly lower inflation, 10-15% anticipating it to be a bit higher, with most clustered near the target, expecting the status quo. Currently, not a single person thinks we are in a state of equilibrium. On one side, 50% believe we’re headed for runaway inflation fueled by exploding deficits, Fed pressure, eroding confidence in the USD, and soaring commodity prices due to global turmoil. The other 50% foresee a deflationary crisis spurred by the deportation of 10 million immigrants, a $2 trillion reduction in the federal budget, and a rampant USD disrupting emerging markets and driving commodity prices down. Adding to this uncertainty, President Trump, the world’s largest one-man volatility machine, has teamed up with perhaps the only person who could rival him, Elon Musk. Volatility squared.
These factors, among others, have realigned market assumptions, significantly increasing the likelihood of problematic inflation or deflation over the next twelve months. Investors face a FLATION complication.
The past few years have seen large moves in global yields. To (very briefly) recap, at the end of 2018, US 10-year yields were around 3% on the heels of recent rate hikes. Late in 2019, the escalation of trade tensions between the US and China led the Fed to enter a mid-cycle course correction taking yields down under 2%. The pandemic at the start of 2020 prompted emergency cuts everywhere and moves to record low yields close to 0.5%. Yields started rising again as the economy reopened, and as inflation reared its ugly head in 2022 global central banks found themselves behind the curve. The US 10-year touched 5% for a hot second in late 2023 before falling to 4% at year-end. Rates bounced around in 2024 as markets grappled with several rounds of “the Fed needs to cut” to “rates will be higher for longer.” Now, inflation near target and the balance of worries has shifted from the inflation to questions of soft landings and slowdowns.
We’ve highlighted a few times on this blog on how trend following can be helpful in portfolio construction with its ability to access a diverse set of markets as well as both sides of the return distribution (long and short) in those markets. Diversification is driven by both of those features. 2022 saw bond prices fall and commodity prices rise as inflation, war and interest rates rattled through the global economy and asset markets. The ability to get short exposure to bonds and the Japanese Yen as interest rates rose, coupled with long positions directly in the commodity markets that stoked inflationary fears, enabled trend following allocations to cushion traditional portfolios of stocks, bonds and credit. Direct exposure to the factors hurting traditional portfolios is a key benefit of trend following, as well as its adaptability in different environments. Indeed, in previous difficult periods for traditional markets the opposite exposures were the most helpful – long bonds and short commodities in the GFC were the right positions for trend to take.
On the commodity side in particular, we have long thought that owning commodities as a long only investment was a mistake, and that due to human ingenuity and product substitution prices would go down in real terms over time. The short side is too important to ignore. This can be true in financial crises like 2008/09 when crude oil dropped some 75%, but also in quieter times. The risk premium in Managed Futures comes from taking on risks producers and consumers want to shed, making participation on both the long side and short side necessary. Commodities are particularly useful as they are much less correlated to each other than something like bond markets. Crude oil, grains, softs and meats all have their own cycles driven by their own unique drivers and supply/demand curves. Current grain markets are a good example.
In 2022 grain markets spiked upwards as the Ukraine war directly impacted the wheat market. Prewar, Ukraine harvested some 33m tons of wheat as one of the larger global producers. Prices of US wheat had been trending higher through 2021 and were sitting around $8/bushel; by May they were 50% higher at $12/bushel. Wheat competes for acres with corn and soybeans, as farmers optimize a planting mix in part based on market prices. If wheat – which grows like a weed – is trading 50% higher than usual some acres shift to wheat and away from corn and soybeans, reducing expected crop sizes, pushing those prices higher. Long only caught that move. The best cure for high prices though is high prices, and possible crop shortages and fears of the same can be solved with a couple of good harvests. As those fears and shortages abate, prices fall again. This is what we have seen in 2024. Planting conditions were perfect, the growing season weather has been perfect. Seed technology and farming advances keep improving. Record yields for corn and soybeans this year. What happens when high prices meet record yields? Lower prices. It’s times like these you need your shorts.
Source: Bloomberg, Mount LucasSource: Bloomberg, Mount LucasSource: Bloomberg, Mount Lucas
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