A Leveraged Fund Actually Did Better?

Just a couple of very quick snippets tonight.

Netflix (NFLX) has taken quite a hit over the last seven months or so with the attempt to buy Warner Brothers probably a contributing factor.

NFLY is the crazy high yielding version of Netflix, it is down a little more on a price basis but when you add the yield back in, it has actually outperformed by 800 basis points (per Testfol.io). NFXL is a 2X version of Netflix and the way the sequence of daily returns played out, it helped NFXL to be down less than 36% times two. The 2X funds and the derivative income funds are not automatically bad holds but they certainly would be tricky holds. Both have sort of worked out during this period but flip of the coin, they could have gone the other way. 

Man Financial came out with an ETF in December that goes 100% S&P 500/100% managed futures in a manner similar to the ReturnStacked fund with symbol RSST.

MATE is the new Man Financial ETF, Portfolio 2 is building MATE yourself with client/personal holding AHLT as the managed futures piece and Portfolio 4 is an AQR fund that does something similar but is not 100/100 and that one is a personal holding. 

RSST pretty much never comes out ahead in any sort of study we do. If we take MATE out and go back to RSST's inception, RSST outperformed IVV/AHLT for the first half of the back test but overall lagged by 488 basis points compounded.

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.

Insanity And Stability All In One Blog Post

Yesterday, I said I wanted to give the insanity spilling out over the weekend time to "breathe" and then things got more insane. Peter Attia of all people is apparently all over the Epstein files. Kevin Warsh is in there quite a bit, Eddy Elfenbein theorized that his nomination will be rescinded. Now I need time to breathe, I cannot wrap my head around any of this. Even Casey Wasserman is in there. Who? He's in charge of the LA Olympic Organizing Committee and he has apologized for exchanging emails with Ghislane Maxwell. 

Moving on with a quote from Russell Napier, "chasing yield is dangerous most times, but exceptionally dangerous below 2%." While I agree with the sentiment, the sample size is pretty small with the years leading into late 2021 being the only one I can recall lasting any real amount of time. A little more broadly, chasing yield regardless of the nominal levels can be dangerous. 

In wildland firefighting there is a list of what are called watch out situations. For example, fighting a fire in the dark, in a place where you've never been is something to watch out for increased risk. That doesn't mean, you don't do it, it means you do so carefully, there are way to mitigate that risk. 

Similarly, the risks of accessing yields above the prevailing risk free rate can be mitigated. One is to diversify exposures to avoid loading up on the same risk. If you own a catastrophe bond fund and a high yield fund, the risks are diversified. Of course, there could be a terrible hurricane during a credit crisis, the risks are totally unrelated. Another way to mitigate risk is to avoid risks you don't understand. No one will understand everything well enough to invest (me with autocallables), just avoid the ones you don't understand. A third one I'll add is to think long and hard before buying a derivative income fund that "yields" 80%. 

We've built much of our thesis on how to replace traditional fixed income by using liquid alternatives in a manner that spreads the risk out so that if something blows up in some sort of unpredictable manner, the portfolio impact would be very small. If you have 10% of your stability sleeve (stability, not fixed income as a nod to TPA) in merger arbitrage that might be 4% of the overall portfolio. If merger arb cuts in half, that would be awful but the impact on the portfolio would be minimal. Compare that to 40% in AGG when it drops 13% as it did in 2022. On a price basis, AGG is down 15% from its 2021 high. The only way it makes that back is if interest rates plummet. 

Barron's had warning article about alternatives that I think excludes a huge part of the use case. The context seems to focus on trying to add alpha with things like private equity. That is a much more difficult effect to try to pull off versus a lot of plain vanilla equity for growth and using alts that seek stability and in the case of the ones we look at here, succeed at delivering stability. 

AQR is out with its capital market return assumptions as follows.

The numbers are after inflation so if inflation is running at 2.8%, they'd expect 60/40 to return 6.2% (2.8 plus 3.4) in nominal terms. The 3.4% number is lower than what they say is normally a 5.0% real return for 60/40. Playing around with different time frames on testfol.io I get higher numbers than that, more like in the high sixes. Looking at the asset classes, the expectation for US equities is lower than the historical norm but the fixed income expectations seem pretty good for those income market sectors. A 2% real return for treasuries is considered good. Or at least it use to be.

That rule of thumb is built largely on the 40 year decline in yields which is now over. Buying a ten year note and holding it for a 2.4% real return is fine, not so with treasury ETFs, but that could prove out to be a very volatile ride. Is a 2.4% real return adequate compensation for the potential volatility? For me, the answer is no. With a little more engagement, management and diversification I think the real return can be nudged up and the potential volatility reduced significantly. This is the difference between 40% in bonds versus 40% in stability. 

All of the talking points we've hit on in this post are why I continually try to find new ways to improve the stability sleeve which brings us to a fund coming this week, the VistaShares BitBonds 5 Year Enhanced Weekly Option Income ETF which will have symbol BTYB. The fund will have 80% in five year treasury notes and 20% in a synthetic covered call (short put, long call, short call) position in Bitcoin with the objective of trying to get twice the yield of the five year note. 

The idea is to blend a smaller slice to higher "yielding," higher volatility with very plain vanilla exposure. I don't know, maybe an 80/20 split addresses the bleed that goes with Bitcoin derivative income funds.

I believe YBTC is the first Bitcoin covered call fund. The 80/20 mix still has plenty of downside volatility relative to fixed income products. The 90/10 mix is a little more interesting but it's more of a yield enhancement (I realize that is the name of the fund) as opposed to doubling the yield. This doesn't make a great first impression but I'll probably follow it. The path to figuring this space out has been rough. Where I believe client/personal holding PPFIX has figured it out, there will be other funds/strategies that also figure it out.

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.

A Complicated Benefit Of Working In Your 60's

This is shaping up to be an insane weekend coming after Friday's fallout, the chatter being driven by the release of more (all the remaining?) Epstein files and Bitcoin is cascading lower flirting with Strategy's (MSTR) break even price as I write this on Saturday afternoon. I'll give all of that another day to "breathe" so that we can look at some HSA/Medicare/Social Security retirement stuff.

Barron's kicked it off with Healthcare Inflation Can Be A Runaway Train In Retirement. They pegged CPI running at 2.8% and that official numbers for healthcare expenses are inflating at 3.5%. To Barron's credit they called BS on 3.5% in the next sentence. I have no idea what the inflation rate is for actual medical services but there are countless anecdotes and news stories about people being forced to pay much more for health insurance. 

A few weeks ago we looked at a scenario where Healthcare.gov subsidies stopped at $84,000 of family income being the difference between paying almost nothing and jumping up to twenty something thousand/yr. Maybe there are enough alternatives out there, I don't know but where is a family making $90,000-$100,000 supposed to get $20,000 for health insurance this year after paying nothing last year? 

The criticism that a well structured healthcare system shouldn't need subsidies like the ones that just expired (is it too late to reinstate them for 2026?). That's true but the answer isn't just ending them, leaving people stuck.

A little further down in the article, they cited 5.8% as being the average annual increase of healthcare costs throughout retirement according to a report coming soon. I'm not sure I believe the 5.8% number either. Actually, I am sure. I don't believe that number. 

The Barron's article then drifted into income levels where IRMAA kicks in which as we looked at last week is $109,000 for single filers and $218,000 for married filing jointly. Up to $274,000 IRMAA is an additional $81 per person per month for Medicare Part B. Up to $342,000 of income and Part B is a total of $405 per person per month. 

Of course health savings account entered the discussion. Starting quite a few years ago, having an HSA eligible plan rarely has made sense for us being self employed. Our insurance guy said something about certain things have to be covered that insurance companies don't want to cover so they make the plans more expensive. Awful if accurate but either way we've only had an HSA eligible plan in the 2020's. We were very diligent putting money in every year when they did make sense for us without needing to take any out.

I asked Copilot what the median HSA balance is for families making at least $150,000. I got an absurdly low number so I pushed back a little bit and it came up with $19,000 plus or minus a couple of thousand. If that number is correct, then it wouldn't be enough to pay for something expensive that insurance won't cover but there are expenses where it could cover including paying for Medicare. 

It's a little tricky. Part B premiums are deducted from our Social Security payment. But it is valid to reimburse yourself that expense out of your HSA. The reimbursement can go to your bank account to be spent however you like including Part G Medicare. Technically, you can't use HSA money to pay for Part G but once the reimbursement hits your account you can spend it as you wish. This was per Copilot and corroborated by Grok.

The table from Copilot shows what it believes are averages for Part G per person.

Copilot thinks Part G is inflating by as much as 8-15% per year.

We'll all have Part B to contend with. How likely are you to be subject to IRMAA? Copilot estimates that 7% of people on Medicare pay the IRMAA surcharge. Depending on how long I work, there's a chance we'll have to pay it. I don't know the odds but between various streams of income, it seems plausible. We are all entitled to our own opinions but an extra $160/mo will not be at the top of my list of things to be worried about. 

Somewhat more concerning is the visibility for Medicare to eat up an ever bigger piece of Social Security checks.

That leads us to another article from Barron's (used a gift link for this one) that was not easy to understand, I may not understand it but it got into the minutia of how Social Security is calculated and what seems like a reward for working beyond 60 at your maximum income level. 

Starting at age 60, the calculation stops adjusting wages for inflation which apparently can be a positive. The key is that you're making the most you've ever made in your 60's. The example Copilot gave was someone making $150,000/yr in their 60's would benefit if their $50,000 income at age 30 was only adjusted for inflation up to $120,000. In this simplified example, $150,000 at age 62 would replace inflation adjusted $120,000 from age 30. 

Our Social Security payments are based on our highest 35 years of earnings so however many years you work in your 60's at your highest income level are replacing your lowest earnings years from when you were a kid. 

When I first read the article, I thought it was saying that your whole year by year scale moves up but Copilot said not exactly but that your "primary insurance amount" PIA is moving up. I'm not entirely sure what the difference is. If you log in to your SS online account you can see your year by year earnings record adjusted for inflation. For example, I worked at Charles Schwab for a year before going to college, I made $11,000 or $12,000 from July to July but when I last looked a few years ago, that $11 or $12 had been inflation adjusted up into the high $20,000's combined if I recall correctly. At this point, whatever the correct inflation adjusted number was from 1984/85 has since been replaced in my calculation.

If I continue to work as I plan on doing then I would be able to replace most of the years from ages 23-33 which were my lowest post-college earnings years. 

A logical question is what if SS gets cut in 7-9 years? If you're going to get $4000/mo but that gets cut to $3000/mo, then working through your 60's as described above can be thought of reducing your $1000 haircut by a few hundred dollars. If that's not worth it to you then by all means, don't do it. 

A couple of final administrative points to make. Copilot couldn't read a gift link, I had to past the text in to get help with it which surprised me. I couldn't work it in easily above but I'll include my standard lift weights/cut carbs recommendation as a way to keep healthcare costs down. 

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.

"Braking News," Gold & Silver Markets Are Broken

The title of this post is a nod to a satirical account on Twitter I follow who always Tweets about braking news. While I think the title is amusing (to me if no one else), the markets for gold and silver have broken. It's not like the metals are going to disappear but this sort of panic down is a broken market. 

The broken market will repair itself and normalize tomorrow, or next week or some other time but this is the sort of event where people panic. Gold panicked higher Wednesday night and then panicked lower shortly after the stock market opened on Thursday. Silver has been on a similar journey and Bitcoin also seems to going along for part of the ride. 

All the hype over the last few days or weeks about the debasement trade lifting gold and silver, even if not Bitcoin, and then...

Thursday was a big decline and then Friday literally broke records for the size of the declines. 

Long time readers might recall what a bad idea I think enormous allocations to things like gold are and this event is exactly why. Where gold and silver are concerned this week, risk happened fast as Mark Yusko might say.

I have zero concern about gold and silver (and whatever else) sorting themselves out, crude oil was negative $50 after all, but who panic bought Wednesday and then panic sold at a big loss with far too big of a trade in relation to their account size? Realizing, there is no way to know when this ends, this has been a behavioral festival. 

I mentioned last year that I started subadvising for a couple of other advisors (they outsource portfolio management to me). One of the advisor's client base came with a larger position in GLD than I would probably want but I took no action because the market had been orderly as it was moving higher. With the disorderly, parabolic move lately, a portion of his accounts were now at more than 10% in gold which I think is too much. I built out a trade Wednesday night to execute Thursday morning to take that portion of his client base down to 7% in GLD.

The share quantity is fuzzed out. I executed the trade a minute or three into the trading day. There have been a couple of other times over the years where there has been some sort of similar panic where it made sense to go the other way. I told the advisor, don't focus on the result because it was lucky, focus on the process. Selling into upside hysteria is going to be the right trade more often than not, regardless of what happens next. 

My clients started at 2-3% of just their equity allocation in gold last February so they were up to 4-6% or so which is not a position sizes that concerns me even with the overlap in materials stocks and managed futures. I actually reduced materials by about 20% a couple of weeks ago so sized correctly, this event is in the realm of normal volatility. This is about a process that I think is repeatable. 

Personally, I bought a few shares of the iShares Silver ETF at about $82 on the way down to $70 before closing at $75. The trade amounts to catching a falling knife so I didn't step in for clients, it doesn't seem like a good fit that way but it is the same trade as selling upside hysteria, I bought a little bit of downside hysteria. Maybe silver will go to $50 and live there for a while or maybe it will go back to $90 or $100 quickly and then mellow out but it is down 30% in a couple of days and even if the result ends up being terrible, buying something that cannot go to zero after a 30% whoosh will work out more often than not. 

There's no huge barrier to entry here for the psychology. I think most people can train themselves to trade against panic, regardless of the direction, in something they understand. I certainly wouldn't buy a lottery ticket biotech that I'd never heard of before cutting in half on an adverse FDA ruling for example. 

Even if you are not buying this panic down, again it might turn out to be a terrible trade, if you can avoid panicking, that is far more important. Sized correctly, there is no reason to sell gold or silver into this decline. 

AGQ is 2x levered silver. Oof.

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.

Accessing & Harnessing Sophisticated Strategies

The excitement over providing retail access to private equity seems to have turned with more skepticism. Cliff Asness introduced the term volatility laundering which no doubt raised awareness of the drawbacks. Check out Jeff Ptak on Twitter for what I would call investigative finance journalism trying to dissect how the XOVR ETF is carrying its position in SpaceX. 

As aforementioned excitement built, we talked frequently about not getting wrapped up with illiquid vehicles offering private equity. I have been skeptical about the need for any of it in a typical retail-sized account. My thought has been that if you think you need to have some sort of private equity in your account, it would make more sense to own one of the companies generating the fees, which tend to be high, instead of paying the fees. 

We've talked most frequently about Blackstone (BX) in this context. I should be clear that I've never owned Blackstone for clients, I've never even considered it, I am saying for anyone who thinks they should have private equity, a company like BX probably captures the effect for better or for worse. 

From it's inception into year end 2024 BX compounded at about 15% versus 10% for the S&P 500 but the drawdowns are typically much larger than the index. Here's the last year plus. It did much worse last April and maybe the negatively biased lingering has been because of the increased skepticism I mentioned above, or not but either way, as a proxy for private equity, when times are good, they are great and when times are bad, it's a very rough hold. In 2022, BX was down 39% versus 18% for the S&P 500. 

From the top down, I think it makes more sense to add long volatility from the tech and discretionary sectors. Extremely volatile financials seem prone to blowing up entirely in ways that no one saw coming due, I believe, to the extreme complexity of the business models. 

Now to trying to harness short volatility. 

I have no interest in any of those funds but it is interesting that they talk about harnessing volatility in their marketing. Most clients own Princeton Premier Income (PPFIX) which sells index puts in such a way that the fund is an absolute return vehicle with very little volatility. 

YSPY sells put spreads on SPXL so a little different underlying but they both sell puts in very different ways. PPFIX is like a T-bill with a slightly higher return as you can see. 

Most of the derivative income funds that have launched in the last couple of years have been crazy high yielders like YSPY whose website says it "yields" 48%. I've been saying there will be more of these and that the niche will evolve. Here's a filing for Worth Charting Options Income ETF (WRTH) that will sell straddles on individual stocks. It's not clear to me whether it will be a crazy high yielder or not. 

Crazy high yielders don't really make sense to me. There is no way the NAV of a fund will keep up with a 48% distribution rate. YSPY pays weekly and on many of the payouts, 90 plus percent of them are returns of capital (ROC). ROC has favorable tax status and using it to round off a distribution, sure why not but often the crazy high yielders pay mostly ROC. Why not just have a lower distribution?

We've outlined using an extreme drawdown strategy where the question is what will deplete faster, just taking uninvested money out of an account until it's gone or a fund like YSPY eroding very quickly paying out an obviously unsustainable distribution? The answer is path dependent so there's no way to know going forward.

I've very pleased with PPFIX, an improvement in my eyes would be something that yielded 7-8% and managed to trade horizontally after the distribution. My hunch is that WRTH is not seeking such a plain vanilla outcome. The path to that result is probably with an option combo involving put options more than call option. 

PPFIX sells puts so far out of the money that the occasional dips you see on the chart are actually because of the process they have to adhere to of marking to market. Often the one day dips get reversed within a day or two, they haven't run into trouble with the puts they sell. A little closer to the money would still be very far out of the money and might nudge the return up. PPFIX doesn't want to do that but someone else might or someone else might create the effect I'm talking about with a different strategy. 

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.

Duration Is Just Another Alt

In promoting his latest podcast with Michael Batnick, Ben Carlson listed talking points including "diversification is working again." When I clicked through I didn't see where in the convo they got to this talking point and I wasn't able to listen to it. On the other side of the trade, Walter Bloomberg Tweeted out a quote from Blackrock that "bonds no longer offer reliable protection" for when stocks decline. 

Both things are true. Actually, the implication that diversification wasn't working was never correct, it was more like the manner in which we diversify has changed because "'bonds no longer offer reliable protection' for when stocks decline."

The conclusion coming is not that I want to own duration here, I do not, full stop. But I had a thought. If there is some sort of biggish correction this year (or worse), there is nothing preventing duration from offering protection. It's not reliable is Blackrock's point. My point is that the compensation is inadequate for the risk taken and that it's not reliable.

In this way, duration might be like managed futures. Last April, managed generally provided no protection when stocks dropped. Managed futures absolutely has the tendency to go up during market declines but the weakness is when things turn very quickly. Even fast signals won't be quick enough to react to a very quick turn around. 

I talk about small exposures to several different alts with different risk factors. Duration certainly could be thought of as having different risk factors from the other things we talk about like arbitrage, various versions long/short and so on. I don't think too many people think of duration as being an alt but for correct sizing in a portfolio, maybe it should be. 

The way we apply alts in a traditional 60/40 construct where maybe there are 5% allocations to eight different diversifiers, why couldn't one of them be duration? Maybe it will work on the next serious decline? If not, it may not be different than any other alt not "working" on the next decline.

Last April BTAL worked, merger arbitrage worked, managed futures did not and neither did duration but next time maybe the opposite will be true, sort of repeated from above.

In this light, if you wouldn't put 40% into any of the alts we talk about (I wouldn't) then you wouldn't put 40% into duration. I wouldn't put 20% into any of the alts we talk about and certainly not duration. If we're talking about 5-6%, it's just another alt, the consequence for being wrong is pretty small.

If we pivot to TPA and allocating between growth and stability, I think the argument for duration being included as stability is pretty weak and I don't think it has anywhere near the opportunity for growth or asymmetry as anything you might think to put in that bucket so I don't know how it fits in to TPA but I will give it some thought. 

But to be crystal clear, in terms of adding duration to the portfolio 

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.

This One Will Piss Some People Off

Bloomberg wrote about what looks like the unraveling of the Yale Model which of course the illiquid alt focused strategy that David Swensen is credited with deriving starting in the 1980's. As Bloomberg tells it, the beneficial effect of private equity and venture investing has deteriorated. We've looked at the Yale endowment countless times. It's interesting for learning about what alts can do but then it is also a useful lesson about having too much in alts, the extent to which illiquidity is unnecessary for retail sized accounts and the problems that arise from having too much complexity in your account.

A lot of simplicity hedged with a little complexity. 

Speaking of complexity, Jeff Ptak had a good writeup about what sort of complex (my word) funds are worth paying up for and which ones are not worth it. Although not that complex, he thinks target date funds are worth it for an interesting reason. 

Morningstar writes frequently about the gap between the returns for funds versus the return investors of those funds get which is less due to various behavioral mistakes. We talk every so often about ergodicity (long term, the market is going to go up with you or without you so you might as well go along for the ride). Target date funds rebalance for you (glide path) so there are fewer reasons to sell so you better capture the long term result says Ptak. To the extent the concept of a gap strikes a cord, holding on for a long time is obviously how the gap is overcome. 

Look at something like Amazon or anything else that is up a bazillion percent over the long term. As we talked about recently, there have been some hideous declines along the way but throughout those hideous declines people didn't stop ordering stuff or lately watching the streaming service. The next time the S&P 500 drops by 25% and Amazon cuts in half, we still will be buying stuff and watching the streaming service. Yes I am aware that AWS accounts for 20% of revenue and 60% of earnings. Chances are the AWS numbers will grow faster than the rest of the company. That all sounds great but the next time the S&P drops by 25%, I would expect Amazon to cut in half. Last April, Amazon fell 30% versus 18 or 19% for the S&P. 

Holding on isn't easy but sitting here, close to all time highs, you know it's the right thing to do. It will be the right thing in the middle of the next panic too. Usually. Owning individual stocks requires being able to discern when something has changed in such way that the company won't recover from. However infrequently stocks need to sold, funds even less so. The point of all of Ptak's articles about the gap is do less. Do less.

Alpha Architect cited a study about new retirees trading more as a result of having more time on their hands. Turns out that doesn't go very well. Do less. 

Here's another good example about thinking short term with a high likelihood of ending badly from Bloomberg. Investors, Bloomberg says, see an opportunity in long term treasuries because the yields are toward the upper end of where they've been in quite a while. Ok, but yields are below 5%. Do you think you have an edge figuring where rates are headed? I certainly do not. Assessing that the compensation isn't worth the risk (that describes my view) is not the same thing as making a prediction about where rates are headed. 

Here's a fun one to close out with. The optimal exposure for Bitcoin in terms of weaving into a portfolio to improve the Sharpe Ratio is......a negative exposure. That is the conclusion of Alistair Milne. You can decide for yourself but in terms of trying to model it in, much of its track record is not repeatable. In 2013 it was up 5400%. That's not going to happen again. In 2017 it was up 1400%. That's not going to happen again. In 2020 it was up 308%. A repeat of that would surprise me but maybe that's possible but it is also possible that turns out to be essentially worthless too. 

I've owned for a long time because of the asymmetric potential. I am not a true believer. Before the link today about negative exposure, I've made the point about backtesting it too far as being worthless because of the unrepeatable performances. I won't say don't own it but I see a lot of content from the fund providers about all of these RIA looking to make allocations and do some modeling. It's all worthless. It might go into the millions or it might crap out but there is no modeling it. 

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.