Matt Zeigler hosted Jason Buck and Dave Nadig for a fun podcast that started out talking about the proposed Crypto Reserve and how that might mesh in or overlap with a Sovereign Wealth Fund. I believe any talk from politicians on this point has blurred the line between reserve and SWF which the guys spent a little time sorting out.
We have an oil reserve already as well as a gold reserve which are sort of "break glass in case of emergency" assets while a SWF is more of a pool of capital that is typically derived from some sort of byproduct, like oil in the case of Norway, where that byproduct creates a surplus for the country.
The US obviously does not have a surplus so the logic of more debt to create an investment fund seems flawed to me. As for a Crypto Reserve, Wyoming Senator Lummis proposed that the US buy 1 million Bitcoin. We're almost 1/4 of the way there from law enforcement related seizure. Dave Nadig said he views Bitcoin as a bet on the US' complete demise and that it is odd that the country would bet on something that benefits from its own demise. It could also be thought of as a hedge then against our demise.
Keeping what we've seized, assuming it was done legally, is fine with me. Ditto with any future, legal seizures but it would be very damaging to buy a bunch of Bitcoin, going into more debt to do so, and then it turns out that it was all bullshit and it goes down 99.9%.
As the conversation evolved I started to think what might a US sovereign wealth fund look like. It might have been something the guys said but it occurred to me that it should be counter-cyclical, with a combination of assets negatively correlated to US stocks as well as uncorrelated assets. The fund needs to hold up during times of adversity but still generate a positive return.
I pretty much just pulled this out of the air. The only thing I labored over was defense contractors but decided to not include any because the government awards those contracts. USO is probably the obvious choice for a crude oil ETF but the contango deterioration has been brutal so BNO seemed like the better choice. I included SHRIX because it seems FEMA-ish. Going forward, I would actually allocate 4% to Bitcoin but the back test only has 1%. The idea there is I don't think it can go up another 22,000% from here and I don't think it can fall 80% unless, I say unless an 80% decline is on the way to a 99.9% decline.
The results were fascinating.
In 2022, it was up 104 basis points (total return). It is not intended to be a surrogate for a 60/40 portfolio, although it was close in 2024, and it clearly will not and is not intended to look like the US equity market. Maybe it could be thought of as having some all-weather attributes. The correlation of the portfolio to the S&P 500 isn't that low at 0.64 but it was low in 2022 when it mattered. Obviously the portfolio avoids the sort of interest rate risk that would go with long term treasuries or other ways of extending duration.
I don't know if it is still the case that a mutual fund can't be held by an ETF but if that still is the case, it looks like the Brookmont Catastrophe Bond ETF is coming in April.
A quick pivot, Jose Ordonez from Alpha Architect put up a quick video about the pain of owning managed futures. Basically, any backtest involving managed futures will look fantastic, but the experience of actually owning managed futures is painful because the strategy loses 70% of the time, his number. In 2022, when managed futures was having its heyday, there were all of a sudden a lot of calls about putting 20% or more in managed futures. We pounded the table here why that was probably a bad idea. Maintaining an allocation makes sense to me but 20% is way too much.
Lastly, Quantify Funds filed for 10 ReturnStacked ETFs that lever up to own 100% of two different stocks. According to the filing, one the funds would offer 100% to Tesla and 100% to Nvdia, another one is 100% Coinbase and 100% Robin Hood and so on. Eric Balchunas might call these hot sauce. I'm not convinced blending two names together like this will create the effect of owning the two underlying stocks, more like buying one of these ETFs would just be a way to add risk-on or long volatility which is interesting from a capital efficiency standpoint and barbelling potential return and volatility into a narrow slice of the portfolio as we regularly look at. I would of course expect these to get pasted in a serious market decline but sized correctly to concentrate potential return into a narrow slice of the portfolio, maybe you'd be concentrating potential declines into a narrow slice of the portfolio too.
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