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How dynamic, risk-managed investment solutions are performing in the current market environment

3rd Quarter | 2024

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Current market environment performance of dynamic, risk-managed investment solutions.

By Jerry Wagner

In the early 1980s, traders Richard Dennis and William Eckhardt set out to settle a debate that would forever change futures trading. Dennis argued that trading success could be taught, while Eckhardt was skeptical. They put their theory to the test in what became known as the Turtle Trading experiment.

In a real-life scenario reminiscent of the film “Trading Places,” Eckhardt and Dennis trained a group of everyday people—no experience required—in a systematic approach to trading. Both men co-created and taught the system, although it has been written that Eckhardt, a former Ph.D. candidate in mathematics, trained them on the “meat and potatoes” of the trading methodology.

The outcome? Their “turtles” didn’t just succeed; they thrived. By most accounts, they generated over $150 million in profits, with many novice traders becoming millionaires and highly successful money managers in their own right. Eckhardt and Dennis proved that trading could indeed be taught and successfully carried on once the traders learned to use rules and discipline to cut through the noise of emotions and intuition.

Today, the legacy of that experiment lives on in Eckhardt Trading Company (ETC), a firm founded by Eckhardt in 1991. Over decades, ETC has refined its approach to trend-following strategies, developing its own branded methodology that is employed across over 70 different futures markets, trading 24/7. In doing so, ETC has managed hundreds of millions of dollars and generated a 33-year documented track record.

How ETC refined the successful Turtle methodology

ETC created a testing process called The Gauntlet, which examines each potential strategy under a wide range of adverse market conditions. The Gauntlet puts potential trading strategies through an intense series of stress tests.

The Gauntlet is similar to NASA’s rigorous spacecraft testing program. Before any rocket carries astronauts into space, it must survive an exhaustive series of stress tests—from vibration testing and temperature extremes to simulated launch conditions. NASA can’t afford to discover weaknesses during an actual mission.

Similarly, The Gauntlet puts trading strategies through intense stress tests before they’re trusted with real money. Just as NASA simulates every possible challenge a spacecraft might face in space, The Gauntlet tests trading systems against multiple market conditions they might encounter—from crashes to rallies, high volatility to low, inflation to deflation. Only strategies that survive this grueling testing process are considered “spaceworthy” enough for actual trading.

This thorough, scientific approach is the foundation of Eckhardt’s managed futures strategy, Evolution. (Coincidentally, we have a strategy that started in the 1990s with the same name!) ETC’s Evolution has been operating in a commodity trading account (CTA) that has been available only to Eckhardt’s hedge fund investors until recently. When Flexible Plan Investments (FPI) sought to add a managed futures fund to our lineup of sub-advised Quantified Funds, ETC’s CTA, with its enviable track record, was just the type of investment vehicle we wanted.

Managed futures: A layer of stability in market uncertainty

Why managed futures? In our recent managed futures webinar (for financial professionals only), we highlighted several benefits:

•  Diversification: Managed futures can be true diversifiers. Over 70 global futures markets—stocks, bonds, commodities, and currencies—can be used. As a result, they typically have low or negative correlations with traditional asset classes.

•  Ability to profit in different market conditions: Managed futures can go long or short in various asset classes. This allows them to potentially profit in rising or falling markets as they adapt to market volatility or uncertainty.

•  Systematic approach: Managed futures rely on a rules-based, quantitative approach to identify trends and shifts in market conditions. This helps remove emotional biases from decision-making, ensuring disciplined investment execution.

•  Trend following: Managed futures typically use trend-following strategies to capitalize on sustained price movements. Trend following can exploit momentum across short-term to medium-term time frames.

•  Crisis alpha: Managed futures can perform well during periods of market stress. They can capture significant market moves during economic or financial crises.

ETC has delivered these benefits to its hedge fund investors over the last 33 years. Its CTA has demonstrated true diversification with a correlation to the S&P 500 of negative 0.3. The following chart illustrates that it has proven itself in quite hostile stock market environments. It has correctly zigged when the stock market has zagged.

A new structure for wider access

One problem: The Eckhardt CTA has been available only to wealthy, sophisticated hedge fund investors. Classically, that has meant very high minimum account sizes, limited liquidity with lockup periods and only periodic exit points, K-1 tax reporting, and high-performance fees. The typical hedge fund has charged a 2% annual maintenance fee plus a performance fee equal to 20% of profits.

I proposed a different structure to Eckhardt: a mutual fund that could bring his years of expertise and management to a broader audience. I argued that FPI could structure a mutual fund wrapped around a CTA strategy to deliver the following:

•  Access to the Eckhardt trading strategy: Previously out of reach for most retail investors since the ETC CTA’s inception (1991), now combined with FPI’s fixed-income management.

•  Low minimum investment and daily liquidity: A mutual fund can provide easy access for even small accounts—and with no lockup periods or limited exit points.

•  1099 tax treatment: Commodity futures investors are taxed on an artificial allocation of gains and losses as commodities or collectibles. A mutual fund can be structured to be taxed as an everyday mutual fund with no K-1s.

•  Competitive costs: No performance fees. A mutual fund could limit its expense ratio to a point below the Morningstar Managed Futures category average to make it more cost-effective.

Eckhardt agreed to the proposal, and the Quantified Eckhardt Managed Futures Strategy Fund (QETCX) was born—the 14th fund in our lineup of sub-advised Quantified Funds. While FPI isn’t registered as a broker-dealer and doesn’t offer or sell shares in the fund, we are passing on to you some of the ways we, as your investment adviser, will use the new fund in our QFC strategies. These strategies allow us to deliver multiple levels of risk management, diversification by strategy, and a fee credit that can offset our portion of your investment management fee.

Integrating QETCX: The QFC Managed Futures and QFC Dynamic Trends strategies

FPI integrates QETCX into two specialized strategies, each designed to complement the fund’s capabilities: the QFC Managed Futures strategy and the QFC Dynamic Trends strategy.

Our new QFC Managed Futures strategy pairs QETCX with an additional allocation to The Gold Bullion Strategy Fund (QGLDX). Gold is often viewed as a “safe harbor” asset, holding its value during turbulent times. Together, QETCX’s ability to navigate various global markets and QGLDX’s steady presence result in a strategy that helps investors face various market landscapes.

Imagine you’re preparing for a journey across different terrains—mountains, rivers, forests. You’d pack gear to handle each environment rather than relying on a single tool. The QFC Managed Futures strategy follows a similar principle. QETCX brings flexibility and can move across stocks, bonds, and commodities. At the same time, QGLDX adds a grounding element, creating a diversified portfolio that can handle more than one type of market shift. This strategy is available for inclusion in adviser-created FPI portfolios. It is also used in our QFC Multi-Strategy Explore: Low Correlation portfolio, an option for investors who want to add low-correlated strategies to their portfolios.

FPI’s new QFC Dynamic Trends strategy takes a very different approach, dynamically managing risk and opportunities by systematically shifting its focus based on market volatility. When markets are calm, it focuses on the Quantified STF Fund (QSTFX), which follows NASDAQ trends to capture shorter-term gains. When volatility rises, the strategy pivots to QETCX, using its broader market coverage to stabilize returns. This adaptability allows the portfolio to take advantage of calm conditions when they occur but switch to a more balanced, diversified approach when markets become choppy.

Think of it like setting out on a road trip with a GPS that adjusts the route based on current traffic and weather conditions. If there’s a straightforward, open path, the GPS keeps you on track for a faster route. But if a storm hits or traffic builds up, it reroutes you to a safer, more predictable route. QFC Dynamic Trends functions in much the same way, seeking growth when the path is clear but switching to a steadier, more defensive approach when necessary. This strategy is available for adviser-created FPI portfolios and through our QFC Multi-Strategy Explore: Equity Trends portfolio, offering investors a balanced approach to handling calm and stormy markets.

Strengthening your portfolio’s defense

Consider your investment portfolio like a professional sports team. You wouldn’t field a team with only offensive players, would you? While traditional investments play offense, these strategies can act as your defensive squad, designed to help protect your portfolio during market downturns while still attempting to score points when opportunities arise.

As such, we have added the new fund to our standard defensive portfolio, which we turn to in most of our strategies to provide a safe harbor during financial storms. That portfolio will include our managed income, gold, and managed futures options.

The strategies, including the fund, will also be used in our turnkey, multi-strategy options, including our QFC Multi-Strategy Core and Portfolio strategies. Each of these is available for five different suitability profiles.

Why does this matter for your portfolio?

In today’s investment landscape, traditional portfolios of stocks and bonds are like a garden filled with only summer-blooming flowers. They might be beautiful in the right conditions, but what happens in other seasons? Our new strategies incorporating managed futures are like adding plants that can thrive in different seasons—they are designed to help your investment garden produce value year-round.

But launching these strategies represents more than just new investment options—it democratizes institutional-quality systematic trading. Just as Formula 1 innovations—like paddle shifters and traction control—eventually make their way into regular cars, Eckhardt’s professional-grade trading system is now accessible through our managed futures strategies.

Whether you’re an adviser looking to enhance client portfolios or an investor seeking sophisticated diversification tools, these new strategies offer:

•  Access to institutional-quality systematic trading

•  Potential diversification benefits

•  Sophisticated risk management

•  Professional oversight from both ETC and FPI

•  Daily monitoring and systematic reallocation

Next steps to diversify and protect

We invite you to learn more about how these strategies might fit into your investment approach. Our team is ready to provide detailed information about our new strategies, including:

•  Strategy-specific fact sheets

•  Implementation suggestions

While the fund will automatically be added to the client portfolios invested in the strategies mentioned above, feel free to contact your FPI representative today to further explore how our innovative strategies might benefit your investment approach.



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