Hopefully Thursday's decline wasn't much of a shock. Whatever this is, we're still in the middle of it. I mentioned yesterday, thinking it's not over and while one day's reaction is too soon to be right or wrong about that, it makes no sense that it can be over. Who knows where the China part of the story will ultimately go. There was some vague news about changes to the team members overseeing the tariff policy, I even saw something, maybe a rumor, that some of Trump's staff were expecting a different card to be brought out at the April 2 event and were surprised with the one they had.
An early read of how alts did today, is that they did pretty well other than managed futures which cannot catch a break and longer term bonds (not an alt) also got pasted again. Yahoo Finance has TLT down 5.91% over the last 5 days and TLH down 5.07%. Sized modestly like an alt, it's no big deal, just one of those things which is how I feel about managed futures during this event but it is of course more common to have a very large allocation to bonds. Long time readers are probably sick of me saying avoid bonds with duration, sitting on them right now though, yikes.
On to some fun.
Last week I mentioned a paper from Richard Ennis in passing that highlighted the struggles of endowment funds that blames the overweight to alts for the underperformance. I found the mention of Ennis in an article at FT. This week I found the actual paper.
Maybe I misunderstood the paper but it focused on the extent to which various alts lagged a much simpler equity and fixed income portfolio and as we discussed last week, the paper said the average allocation to alts in endowments is 65%. But what seemed to be missing is the way the various alts, including hedge funds, interact as a smaller piece of the portfolio. I built out the following with two mutual funds that are hedge fund-like.
The two different hedge fund proxy mutual funds both lagged VBAIX over the period backtested. The funds I randomly chose don't Karl Popper refute the paper about lagging but when worked into portfolios in the manner above clearly is additive.
Putting 40% or even 20% into one alt is never something I'm going to do but this reasonably demonstrate there is a point where can be additive and a point where they start to detract from result. Of course plenty of people don't believe in using them in any weighting but compared to 65% in alts, a little goes a long way.
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