Jeff Malec from RCM hosted Jason Buck on a podcast to recap the recent ReturnStacked symposium that happened on October 8 in Chicago. One little funny thing before getting to the real content is that Jeff and Jason referred to them as the ReturnStacked guys which is how we refer to them.
Return stacking is a phrase they came up with to describe an older concept known as portable alpha. Thought leaders now view the way to implement it is to leverage up to add uncorrelated alternatives in pursuit of better risk adjusted returns. In decades past, portable alpha often meant just leveraging up equity exposure which went very badly during large declines. The idea of using leverage to add alternatives, they say, reduces tracking error and can help smooth out the ride.
If you've been reading this site you might recall that I am fascinated by the concept but not a fan of the funds.
The part of the podcast that was most interesting was their review of the presentation given by Roxton McNeal from Simplify. If you have the chance to ever hear him speak, it's time well spent.
One of the terms relevant to ReturnStacking/portable alpha is capital efficiency. Being able to build a full 60/40 portfolio (or whatever percentages) with less than 100% of the portfolio so that uncorrelated return streams can be added is the simplest expression of capital efficiency but it is not the only expression.
Roxton talked about being able to get more diversification bang for the buck by using more volatile alts. A portfolio needs to invest less into a managed futures program that targets a 20 vol than a 10 vol. The 20 vol version will be tough to hold, it is twice as volatile, but more efficient.
The way we've looked at this concept is having some alt exposure to something like BTAL or tail risk funds which are more volatile and some exposure to unvolatile alts like merger arbitrage. I would say most, but not all, managed futures funds fall in between those two extremes.
Also in terms of efficiency, we've looked at using BTAL to allow for having more exposure to equities which gives the opportunity for better returns but without increasing volatility. BTAL is pretty reliably negatively correlated to equities.
The other point that Jeff and Jason hit on was Roxton's belief (paraphrasing them) that you can never have too much in uncorrelated alts. Roxton even used the word orthogonal which we use here every so often. I would say you absolutely can have too much in uncorrelated alts. Equities are the thing that goes up the most, most of the time. A portfolio of alts, hedged with a little bit of equity exposure doesn't have much chance of capturing the stock market's long term growth.
If someone wanted 15% in alts and wanted to divvy that up into 30 different strategies (and they could manage that), fine, but the implication there is they'd still have something close to a normal allocation to equities while having a smaller sleeve, the alts, that hopefully makes the portfolio more resilient and robust to market calamities.
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.
1 comment:
Roger, allocating just 15% in alternatives, leaving 85% in equities, will do close to nothing. If the big event in equities happen, you are equally screwed. Specially when you are dividing that 15% alts in several of them. The point of adding alternatives is to smooth the path of returns, and that you can only do it by having a big enough portion of alts, along with a not too high portion of equities.
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