You Don't Need To Leverage Up

Bitcoin has gotten smacked pretty hard lately.

It touched $109,000 a while ago and has obviously backed off considerably. If you scroll Twitter, you'll see a lot of the touts telling people to buy more which always has a we need more suckers sort of vibe. I saw one Tweet from one of the Bitcoin touts a few days ago making fun of meme coins for being made up nonsense. Um, why couldn't Bitcoin also turnout to be made up nonsense that meets the same end as Fartcoin (that's a real meme coin BTW)?

If you've been watching Bitcoin for a while, on the fence about whether or not to speculate/bet/gamble on it, down twenty whatever percent isn't the worst time to buy. Of course it could go much lower which the touts don't seem to be talking about. Speculate/bet/gamble is probably the correct way to think about it. The people who say it is all BS could turn out to be correct.

If you own some Bitcoin already and you're sweating the current decline then you probably have too much. I'm not saying to sell, I'm not sure what the answer is. If you own it at $5000 and you're sweating it, sure, maybe sell a little, or more if you want. That's a harder call if you're in at $105,000 and realizing you might have too much. 

The flow of content about portable alpha continues with another article from Bloomberg. Here's another one from this week, via a paper from AQR that seems to serve up ReturnStacked ETFs on a platter as simple way to access the strategy. We've looked at it plenty of times. It is interesting of course and credit due to ReturnStacked for bringing it front and center. 

Portable alpha blends beta (stock and or bond exposure) via leverage like from the futures markets with some sort of alpha seeking strategy. Many years ago, portable alpha strategies leveraged up with more beta which ended badly in events like the Financial Crisis but now the implementation seems to focus on generating alpha from low to negatively correlated strategies like managed futures, global macro and absolute return. 

Part of the conversation surrounding portable alpha's recent popularity has been yeah leveraging up the beta was a bad idea but now we know better. If you've been reading this site you know I am not a fan of leveraging up. We've looked at what I've called leveraging down. The simplest implementation of leveraging down is probably targeting 60% to equities but bumping that up to 65% by adding in a slice to a reliable first responder defensive like client/personal holding BTAL. Another simple variation would be for an investor comfortable with a plain vanilla 60/40 portfolio putting 67% percent into WisdomTree Core Efficient ETF (NTSX) which leverages up in such a way that 67% into that fund equals 100% into VBAIX. The left over 33% could be put into T-bills and collect an extra 4% in yield (putting 33% into a T-bill at 4% actually adds 132 basis points to the overall portfolio return) and also mitigate sequence of return risk.

If the smart people running portable alpha 17 years ago could get blindsided by leveraging into more alpha, why couldn't the smart people running the new and improved portable alpha today get blindsided by the low to negatively correlated strategies like managed futures, global macro and absolute return not "working" when the next large equity market decline comes along? This is something I've been cautioning about for years. Keep allocations to diversifiers small because none of them should be counted on to be infallible. 

I can't imagine managed futures not working in the next true bear market (anything can happen in a fast panic) but I don't want to rely on not being able to imagine something. 

The AQR paper had an interesting graphic.

Building this out in simplistic fashion looks like this;

We see this time and again, the more important decision in this example is reducing exposure to AGG's duration in Portfolio 3. QSPIX is absolute return with no correlation to the S&P 500. Putting 20% into QSPIX is not something I would do in real life but someone who wanted as much as 20% in alts could build out 20% pretty easily. Dividing 20% in alts between a bunch of uncorrelated strategies reduces the consequence of a random fund malfunctioning and we've removed the risk of extra leverage that would go along with a 60/40/20 allocation. 

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