Twitter Experts

One of funniest aspects of Twitter is in the immediate aftermath of some event like yesterday plane crash in India (not funny), there will then be a lot of opinions voiced to dissect the news/event. The funny part is the Tweets that say something to the effect, here come the Twitter experts on aviation safety or vaccinations or whatever. 

I have opinions on what has gone on in the middle east since October a year and half ago of course and I take in the news like many people. While we are all entitled to our opinions, I am certainly no expert of the geopolitics of the middle east or anywhere else. In terms of managing client portfolios, I believe the important thing is making portfolios robust in the face of whatever might come along to create an adverse market reaction. 

Something like Israel attacking Iran would seem to have the potential to cause a market decline but I have no idea. As opposed to trying to predict the effect some event will have on markets, I want portfolios to be generally ready for whatever negative surprise might come along regardless of my ability to analyze that event.

That brings us to the prompt for today's post from Bob Elliott who posted a short video saying "most investors are totally unprepared for war." He went on to talk about the shortcomings of the typical 60/40 portfolio in terms of lacking robustness in the face of war and I would add, in the face of just about any serious event that takes markets down. 

Specific to war, Bob says that stocks and bonds underperform. Owning just stocks and bonds, Bob says, is a huge bet on growth and low inflation. He suggests owning gold and commodities and keeping in the same vein I would add commodity stocks to Bob's comments. 

The way we've talked about first responder defensives and second responders hopefully is useful for readers, it is for me. No matter what causes the market to go down, an inverse fund is going to go up. Client/personal holding BTAL has been extremely reliable in this regard but is not infallible. 

Loading up on just one defensive is a bad idea in case something goes wrong but for me, after an inverse fund and BTAL it boils down to assessing reliability or maybe predictability is a better word. How reliable do you think gold and other commodities are in a defensive context? If you believe in any of this then I'd suggest going through a similar process of weighing out what the correct expectation is for any alt you own and any you'd consider.

Down a lot, up a lot, flat or bouncing all over the place, the result for client/personal holding Merger Fund this year is exactly what I would hope for in all market types. 

We spend a lot of time here trying to better understand what to expect from managed futures. It worked so fantastically well in 2022 and struggled badly in recent times. In 2022 in the face of fantastic outcomes and calls for 20 or more percent in managed futures I was very clear about what a bad idea I thought 20% was because you never know when it won't "work." Work is obviously not the correct word, it's doing exactly what it is supposed to do, it's just that the trendless nature of quite a few markets don't let themselves to favorable result. If you have 5% in managed futures as one of several alts, then the result this year can just be a shoulder shrug. With a 20% allocation, the impact is more serious. 

The ReturnStacked guys have another paper out in support of their version of portable alpha, leveraging up to add managed futures. 

Citing work from the Man Institute with the above chart, you can see the results of adding a larger allocation with leverage. Just looking at the chart you can see a lot of outperformance in the popping of the internet bubble. There was outperformance in the Financial Crisis, it's visible on chart but a little harder to see. We do have a fund we can look at for 2008 with what started out as the Rydex Managed Futures Fund that still trades with symbol RYMFX. That fund was up just over 6% in 2008. And again, if you look closely you can see outperformance in 2022. 

I can't seem to ever recreate the results with funds however. I couldn't recreate the above result. I pretty much go through the same exercise when I see different models that have large weightings to managed futures and I can't get there. It could be me, clearly. But it also could be that it can't be recreated using brokerage accessible funds and that is probably the only way most of us can access the strategy. 

A 5% weighting to a managed futures fund that goes up 20% in a year like 2022 adds 100 basis points of positive return to a portfolio's result. As opposed to using leverage to add the 5% (in my example), if that 5% avoids exposure to something that goes down 15 or 20% (AGG or SPY) then the portfolio is spared another 75-100 basis points of negative performance. When you need managed futures the most, you don't want full equity exposure like in a portable alpha strategy, you want less, managed futures tend to go up when stocks are going down even if that is not infallible. 

Barron's wrote about a survey showing that 94% of advisors believe they don't own enough alternatives while 57% said they don't know enough about them. The context was mostly private equity and private credit but not exclusively I don't believe. My use and our conversation started before the word alternatives started being used. For anyone willing to make the time to learn, prudent use of alts, not 20% in one type of alt, I think they can make adverse market events much easier to endure. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.