What Going Heavy Managed Futures Looks Like

Simplify included this in promoting one of its funds.

That is a great way to phrase it, not relying on past correlations. The relationship between stocks and bonds is no longer as reliable as it used to be. This makes bonds less effective at helping manage equity market volatility. Yes, I am absolutely a broken record on this point and will continue to bang that drum. 

Next item, a good blog post from Ben Carlson, Can You Live Off Your Dividends? It was really about covered call ETFs with a look not so crazy high yielders and another chart with crazy high yielders. The starting point was answering a question for a 42 year old, single guy with a lot of money saved who wants to quit his job. If he put all the money into SPYI, he said the 11% would bring in what he needs.

That's Ben's chart. We do something similar here in terms of looking at total return and price only. If a fund like SPYI (there are others of course) can pay out 10, 11, 12% and still get a price only return of 3%, I think that's pretty good. That's not keeping up with the stock market of course, that should not be the expectation. Plenty of ifs there but still. 

The way we've looked at this idea is as a short term strategy like stopping work but wanting to wait a few years to take Social Security. 

Here's a simplified version of ideas we've looked at before.

Total Return versus price only.

The "yield" is about 11%. Inflation ran at 2.41% annualized during this period. So the real return, after taking out the distributions is above inflation but it's not great. It could limp along though for several years until the person wants to take Social Security. It's not a very robust portfolio if something bad happens in markets. Ben's reader is only 42. I would not want to try to ride that idea out for the next 45 years. There's very little likelihood it survives anywhere near that long. 

The scenario of like a five year window where you might allow a small portion of investible assets to deplete while waiting until Social Security kicks in is something we started playing around with quite a while ago, there are now ETFs from several providers that are intended to deplete for just this scenario so I'm not the only one. 

Speaking of Simplify, they launched a managed futures fund in partnership with DBi who already has their own ETF, DBMF which has done pretty well but absolutely killed it in 2022. DBMF is a replicator and the new fund which has symbol SDMF is also a replicator. Today was the first day so it is too soon know what the difference is between the two. 

I got an idea from looking at the fund and how some people believe in huge allocations to managed futures. Anyone wanting to more than dabble in managed futures should probably have several funds. We've gone over the performance dispersion between strategies including just the other day. 

The period studied captures an awful run for managed futures so I am very surprised that Portfolio 1 was anywhere close to plain vanilla 60/40.

Here's what the same three portfolios look like just looking at the last six years.

Portfolio 1 didn't really crash during the Covid Crash of 2020 and it was up 71 basis points in 2022.

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.

It Keeps Getting Worse

The whole Blue Owl saga and whatever it means for private credit continues to draw more attention. Here's the latest from the WSJ, it is a festival of very long running themes we regularly explore. 

Chris Paladino, 58 years old, said he initially decided to invest around a quarter of his portfolio in private credit, hoping for yields of 9%. When he saw the headlines last week, he briefly wondered if he had made a mistake. 

This sort of yield chasing is something that repeats over and over. A 9% yield in a 4% world is risky. It's not that the risk should not be taken but 25% of your money exposed to just one risk is very aggressive. The Journal said that this guy second guessed what he had done but then doubled down with another $200,000. This guy also bought shares in Ares (ARES) common stock.

Obviously he could turn out to be correct so this really is about understanding what risks you want to take and understand the fallout if you are wrong. Paladino is in very deep. Unlike plain vanilla equities, if this goes down a lot, it doesn't have to eventually come back.

If he was enticed by 9% yields, he probably could have constructed a tranche of his portfolio of several different exposures, each with their own unique risk factors that could have gotten him the same 9%. Same yield much less risk to the bottom line value of the portfolio. 

With growth slowing from traditional pension-fund and endowment clients, private-markets giants such as Blue Owl, Apollo Global Management and Blackstone have aggressively courted individual investors from everyday millionaires on up. The firms are now pushing to get their offerings into 401(k)s. Some in the investing world said the funds aren’t well-suited for the masses, in part because they tend to come with higher fees and are harder to sell.

I read this as "we need more suckers." That was mean. I meant bag holders. 

One advisor is cited as recommending 5% to private credit. Risk-wise, that's reasonable. It either works out or it doesn't but the client is not seriously damaged if it goes badly. 

Quick pivot to a suite of four new ETFs from Innovator that they are calling Managed 10 Buffer. Basically the first 10%-14% of downside is protected but unlike other buffer products, these allow for capturing 80-90% of the upside. 

In the webinar, they talked about the possibility of these funds protecting as much as 20% down depending on how the volatility impacts the options combo embedded into the strategy. Thinking through it, if the market drops 25% and if the Managed 10 Buffer actually protects as much as the first 20%, then it's only a 5% decline for the Managed 10 Buffer.

I don't doubt these will work as intended but what they're really doing is protecting against down a little. I would be more interested in protecting against down a lot, down a little goes with the territory. There are a lot of ifs in getting the 20% protection but I am sure the 10-14% will work. Maybe the concept doesn't work not protecting the first 15% down but then protecting from -15% onward, I'm not sure but I am more concerned with down a lot than with down a little. 

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.

At Least Try To Understand What You're Criticizing

On the heels of yesterday's post about the financial sector, Jaime Dimon said that he sees some people, meaning banks, doing dumb things like they were in 2005, 2006 and 2007. Nassim Taleb has been talking about the extent to which risk is underpriced and Torsten Slok says that tail risk has increased.

This brings us to a couple of different articles about how investment products are evolving, bad per this Wall Street Journal and bad per the comments on an article at Barron's. The take from here has always been that for anyone inclined to move beyond the plainest of vanilla funds, there needs to be a lot of sifting through to find a few things that capture something very effective. 

If you can accept that observation then yes, there will be a lot of crap. The WSJ article notes that a 2x Doge fund is down 70% since its inception and that a 0dte covered call fund on MSTR is down a similar amount, both in very short periods. We covered that 0dte fund, it's from Tuttle. An exec at Morningstar is quoted as saying "many of the funds being launched just don’t pass the quality test." Yes, if you're buying an inverse Coreweave ETF, quality may not be your first priority which is fine as long as that reality is understood. Inverse XRP? I mean, hopefully anyone swimming in those waters understands what their strategy actually is. 

The comments on the WSJ article were interesting because most them didn't understand how the funds work or how to evaluate them. Same with the comments on the Barron's article which made a weak case for buying alternatives now. It was a poorly researched piece. It recommended a mutual fund that appears to be closed, not closed to new money but shut down. As a note, when you see that a fund minimum is some very high dollar amount, that's not the minimum. That's a way of communicating the shares are institutional shares or that the fund is only available through an advisor. 

Evaluating ETF slop and non-slop as well as alternatives is kind of a big thing here. Anyone curious enough to want to learn needs to make sure they are viewing funds with the right lens as well as understand the mechanics. 

A fund that "yields" 50% on a stock that goes up by 20% is going to go down a lot on a price basis. That's how going ex-dividend works. You need to look at total return to have a better sense of the result. The total return might stink too but at least you'd be looking at the right thing. Some sort of market neutral or arbitrage fund is not intended to keep up with the S&P 500. Thinking that type of fund is not a good fund because it was up 8% when the index was up 20% is not actually understanding the fund. 

To the intro of this post, if you're going to use any complexity in your portfolio make sure you understand what it is supposed to do (negative correlation, low volatility and so on) and what it is vulnerable to. A bunch of alts that all take the same risk will lead to tears if/when that particular risk has consequences. 

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.

Risks That Don't Need To Be Taken

The situation with Blue Owl seems to be getting worse at an accelerating rate. We mentioned it quickly last week when they halted redemptions with a "retail based private credit fund" but the stock continues to go down. Here's more from Yahoo and Bloomberg.

Private credit and equity have been showing signs of excess for a while. It's not clear to me how serious the excesses are but there has obviously been a big push to make private assets available in more retail accessible funds and retirement plans. I've been consistent for years in being skeptical of these type of investments, I don't believe they will give the great deals to people's 401k plans. If you want to benefit from private assets, I've argued for buying the companies selling the picks and shovels, the fund providers, the ones making the fees on the funds not the funds themselves which are paying the fees.

The history of this group is that when times are good, they are great and when things take a bad turn, like now, the stocks get pounded but they do capture what is going on in the world of private assets. They are now on a run of getting pounded. In the last month Blackstone (BX) is down 24%, Apollo (APO) is down 16% and Ares (ARES) is down 26%. I've never owned one of these. I've never thought about buying one, just making the point for blogging purposes that I believe the management companies make more sense for anyone wanting to access the space.

The reason I don't want the exposure is the complexity of these companies and the leverage. Many of the large banks are similarly complex, maybe more so, and also heavily leveraged. This is subjective but financials (meaning the banks) is probably the most complex of the sectors. It might be difficult to understand the manufacturing process and equipment in the tech sector but I believe the businesses are less complex. 

Given how complex many financials are, it should not be a black swan if this event starting with Blue Owl evolves into something very serious. To be clear, I have no idea but this is space that is prone to blow ups. There's no reason to own something with such a clear path to blowing up or at least no reason to have a meaningful position. I don't think there is asymmetric potential with private credit like there is with Bitcoin. 

Mark Baker, aka Guru Anaerobic on Twitter talks about figuring out what to avoid, via negativa, and this is very important concept in portfolio construction. Avoid can sometimes be too much as opposed to underweight. There are excesses in the AI space too of course but there I'm just underweight. This isn't a riskless endeavor, the conversation is managing risk not completely avoiding it. 

In a similar vein, we're probably all watching the news from Mexico and the apparent impact on Puerto Vallarta which as many have reported is where a lot of American, expat retirees live. Moving to another country for retirement (just a few years or permanently) is something we've been looking at for a while in various places. It is a fun exercise to think about living in another country even if you're not serious about ever doing it (that describes me). 

Quite a while ago I wrote a few posts about Ecuador in this context. I made contact through Linkedin with someone (Edd Slaton might have been his name) who had moved to Cuenca, Ecuador with his wife and had some sort business helping people relocate to Ecuador. Then there started to be political unrest pretty close to the covid outbreak but I think the unrest was more political and focused more in Quito than anywhere else. I reached out to Edd back then to see if Cuenca was impacted but and his wife were vacationing in France and he wasn't sure. 

In the last few months I saw something that gave me the impression he and his wife left Ecuador and were somewhere in Europe. My suggestion has been to not sell your house in the US. Rent it out, have the income stream and a way to come back if you want to or think you need to. I have no idea what the real story is in Mexico but it would not be unreasonable for an expat in Puerta Vallarta to think they need to get out of there when the dust settles. The nature of housing in a lot of places is that if you sell and don't rebuy, you'll get priced out. 

You can always sell later but you might not be able to buy back in later. 

Going heavy into private assets one way or another and moving to another country with no fallback are both examples of things that are easy to recognize as risks that don't need to be taken. 

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.

Navigating Managed Futures Dispersion

Just a couple of quick hits today.

AlphaSimplex has a paper that looks at some serious dispersion in managed futures. 

The first chart shows dispersion between differing signal lengths. We've talked a little about fast signals versus slower signals, I believe more programs lean toward slower signals but either way, fast or slow, they all take turns leading and lagging.

The next chart compares full implementation (wide) versus replication (narrow). To the left it looks like full implementation did better and lately, replication has led. 

The paper thinks the recent outperformance of replication strategies is just random chance. 

There are other factors addressed in the paper that might account for dispersion but I think the bigger point is to consider owning more than one fund. Not necessarily a larger allocation but adding in a second or third fund. AI can help tease out differences in how many markets a fund invests in as well as differences in risk weighting and signal length. 

Barron's looked at convertible bond funds and had this table.

This is an interesting space. The textbook on these is that when stocks go up, converts trade like equities and that when stocks go down, further away from their conversion price, they trade more like bonds. Maybe individual issues, I don't actually know, but the funds usually trade like stocks on the way down too as implied by the 2022 result. 

What's the deal with the Franklin fund listed there? I asked Copilot if it targets a lower equity beta than FCVSX. Copilot said yes. It said the Franklin fund is a more "classic, balanced convertible" strategy where the Fidelity Fund "runs a more equity-forward, higher delta book."

A little longer term, I'm not sure Copilot is correct. When I pressed, it gave what I would say is vague reasoning for why it was correct related to realized betas versus target betas. This is a good example of being curious, getting some AI help and pushing back when it seems off. 

Peter Mallouk Tweeted this out;

While I wouldn't count on a 10% growth rate, it makes an important point. Being a little older and far behind doesn't mean you can't still accumulate a meaningful piece of money. I don't think too many 60 year olds are going to be able to put away $163,000 every year but $31,000 at 50 where both partners make a decent living doesn't seem crazy to me especially if they pay off a mortgage in this window. Even $20,000 a year from age 50 to age 66 at 9% per year would be $666,000 which is enough to create a meaningful income stream even if it is not sufficient to meet all needs. 

Yes, Mallouk used 15 years but if someone is starting from scratch at age 50, maybe they would consider working a little longer. 

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.

It All Comes Back To Optionality

The daily New York Times email led off with a bit about self improvement related to people "doing favors for their future selves." We have been using that exact phrase here for ages. There are big picture applications that we talk about in terms physical and financial benefits but also very immediate but mundane things like backing into a parking spot so it is easier to get out and doing the dishes tonight instead of letting everything sit in the sink overnight. 

Doing stuff now versus having it sitting there waiting for you, more the dishes and pots than the parking spot example, resonates with me. I really dislike having a bunch of work that I need to get done just accumulating, waiting for me for when I probably won't feel like doing it. Note that I don't know if the link will work, it's what came up when I clicked view in browser. 

The writeup was pretty superficial looking first at the emotional tradeoff of making sacrifices now for an uncertain future and then wonder when the payoff comes for doing favors for your future self. 

I figured this out early. Where I think it came from is my grandmother was a great baker. My favorite thing she made was mint chocolate cake with mint frosting. The frosting was the best part and my older siblings always told me to save the frosting for last, save the best for last. I started hearing that at a very young age and so it stuck. Save the best for last made it easier for me to think about favors for my future self along with a few other examples that I won't bore you with. 

It's also akin to playing the long game which has worked out well. From the fire department, I coveted one of these trucks from when the Forest Service first started buying them.

Financially, this was nowhere close to possible, not even a remote possibility for us. It took about 15 years but it finally happened in 2023 and I'm still young enough physically that I'll be operating it for years to come. Then we got another one.

One form of payoff, from this point I will call it optionality, is getting what you want and still being able to use it or do it or benefit from it. This is probably physical optionality.

Another form of self created optionality is either wanting to do something different (work related) or having your hand forced at work without being left desperate and scrambling, forced to do work you don't want to do which is probably financial optionality.

Physical optionality is created by regular vigorous exercise and financial optionality is created by making good decisions related to saving and spending. When I turned 50, I said being that age which implies having some experience, with a little money in the bank while still being able to get it done physically is a great spot to be in and that I imagined the 60's would be the same. I'll be 60 in April and that appears to be panning out which is not surprising. I already pack tested for the 2026 fire season which is the annual physical requirement of hiking three miles with a 45 pound pack in 45 minutes or less. Sixty is old for this but not elite, like many things, success on this front comes from understanding the task and marrying that with your capabilities. 

As far as the time tradeoff, the physical optionality doesn't seem like much of a tradeoff. Go find @mangan150 on Twitter. He preaches only lifting twice a week for about 30 minutes each session and then walking regularly. He also includes HIIT in his lifting sessions too. And for the little time actually needed when done with the right intensity, you're healthier and feel better now, not just in the future. I lift twice a week for closer to 50 minutes and I jump rope almost every day (less than ten minutes). Our dogs don't like to go on real hikes too often but we take them on a mile and half loop around our house that climbs a total 400 feet or 600 feet depending on how we go, we do that pretty regularly. It all takes very little time

Financially I would say living in less house than you can afford and not replacing cars every three years, I've been driving my Tundra since 2007. There is emotional benefit to going through with a little bit of a financial cushion which is a benefit now and in the future. The house angle may not stand up anymore. I perceive buying a house has become more difficult. Beyond the headlines, which I don't know what to make of, I know that were I live there are no more starter house in terms of cost. In terms of size, yes, but not dollars. Tucson has plenty of houses in the $300,000-$400,000 range which is much more accessible for younger people who make a pretty good living even if they're not killing it. 

All of these concepts serve to make life easier. If life is easier, it stands to reason that life would have less negative types of stress like worrying about money which makes life easier (yes that is circular).

Speaking of fire department stuff, we replaced our old brush truck with a new one. 

I may have told this story already but short version, we had to replace the truck. One of our guys had the idea of lifting the pump, water tank and all the rest off the back of the old brush truck and putting it on the new Dodge. This idea probably saved us $150,000. That's the truck, being picked up from getting the graphics applied this week. 

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.

Post 1000 & Risk Management

This is post number 1000 for this URL. My first blog address disappeared (short version) when all of that content, about 4900 posts, was moved over to a site hosted by AdvisorShares when I had my side gig there a while back. I wrote at The Maven for a bit but that sort of sputtered and however many hundred articles I wrote for thestreet.com are all still up.

First up, Corey Hoffstein posted this picture with the caption "as predictable as the daybreak." I think he was referring to a good fund having a long struggle and then doing well again. 

BLNDX is of course a client and personal holding. Yep, it struggled for a while. Any valid strategy will have periods where it languishes. Speaking of AdvisorShares, when I worked there, the CEO was fond of saying that when a manager struggles for an extended period, you should double down. I don't know about doubling down but certainly throwing in the towel runs the risk of being a bad decision. Probably.

The caveat might be a stock picking fund that is always trying to beat the market. The Fairholme Fund (FAIRX) might be a good example here. 

The manager, Bruce Berkowitz, a smartest guy in the room type but this has been a very difficult hold. If you play around with the time periods though yourself, you'll see there have been different runs where it has been closer or even ahead of the index but I'm not sure how you settle in and buy this one. BLNDX is systematic though. The equity sleeve uses index funds and the managed futures sleeve, like I said is systematic and if you've ever seen fund manager Eric Crittenden interviewed, he never second guesses it. 

Here's an interesting idea. 50% BLNDX and 50% gold.

Ok, that's interesting. If you simulate it though by replacing BLNDX which only goes back six years, with a mix of ACWI and AQMIX, you get a much longer backtest that is very unimpressive. Managed futures and gold had rough run for much of the 2010's. Managed futures is great. Gold is great. But don't get carried away.

And in a related article, Bloomberg said At Long Last Being Underweight Tech Is A Winning Strategy. I don't think this is the right thought process here for what has been kind of a sneaky rolling over for big tech. Not so sneaky? I don't know actually but either way, as we've said countless times, history has not been kind to sectors that grow to be larger than 30% of the index. Where most of the revamped communications sector came out of tech, you could argue that instead of tech being 34%, it's closer to 40%.

The risk from a huge sector weighting either resonates with you or it doesn't and this pullback is either the start of something or it isn't, I don't know but I do know that I don't want to chase this sort of thing. I've been underweight tech for a while. Said differently, excesses, like 35-40% in one sector, are prone to real pain. 

I think the most important part of risk management is recognizing it before the consequences hit. That much in tech is an obvious risk factor. Maybe it will never matter, I don't know but it is obvious and one that matters to me. There is no reason you need to be overexposed to the risks that matter to you. 

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.