Back To The Lab Again?

There was a post-apocalyptic movie in 2013 called Snowpiercer. There's also a TV show with the same premise which is the world freezes and humanity's fate rests on some small number of people packed into a very long train that perpetually circles the globe. An added layer of complexity is there was very much a wealth divide where the poor lived in terrible conditions and were oppressed by the wealthy and the people managing the train. One thing from the movie that made an impression was the food that was served to the poor passengers. It was a brown or maybe purple sludge that was loaded with protein that could somehow be produced with the train's resources.  

I think there is a parallel to all of the artificial meat now hitting the market. There is a lot of protein in the various fake meat and chicken out there but there's also a lot of chemicals, omega 6 fatty acids and seed oils which are flat out unhealthy. You could not pay me enough to incorporate this stuff into my diet. Fitness/low carb/carnivore Twitter rails against this stuff but I take a slightly different view. While I am clearly never going to choose to eat it, I like the fact that the food industry is trying to figure this out. They have not succeeded thus far and I have no idea if they ever will but in the face of some sort of Malthusian catastrophe, food with a lot of protein that might taste like meat might be a good fallback. 

There is also a parallel to liquid alternative funds. These continue to proliferate in search of delivering all-weather results or providing an effective hedge for an equity portfolio. I've been using these funds since long before the term "liquid alts" was coined. I called them diversifers back then. My research process led me to managed futures with RYMFX just as the bear market was starting in 2007. Before that I was using more common diversifers like gold and inverse funds. 

A point I hope I am clear on is that many liquid alts don't work so well in terms of the expectations they try to set. When I find new funds I try to understand the strategy and if it is appealing, I will test drive a few shares in a personal account before buying for clients. I test drive more funds than I actually end up buying for clients. Like fake meat, this is trial and error.

One ETF company with a lot of interesting ideas whose funds I've test driven is Simplify. The first fund of theirs I found was the Simplify US Equity PLUS Convexity ETF (SPYC). The fund has 98% in an S&P 500 ETF and an option strategy overlay that seeks to enhance returns when market moves are extreme. 

 

Has 2022 been extreme? Maybe, maybe not but the put strategy, it does buy calls too, doesn't seem to be working. I owned SPYC for a while but sold it quite ways back because I didn't see it ever outperforming which I took as the objective. 

Was 2021 extreme? Maybe, maybe not but it was pretty much right in line with the S&P 500.

  

How often is the S&P 500 up more than 24% in a calendar year and how often is it down 13% in five months? If the answer is not often, then I'm not sure what sort of extreme environment would allow the fund to outperform. 

SPD in the first chart is the Simplify US Equity PLUS Downside Convexity ETF. The put-only strategy doesn't appear to be helping with what has arguably been an extreme start to the year, extreme to the downside.  HEQT is the Simplify Hedged Equity ETF which like the others is long an S&P 500 ETF and the option strategy is collars, long puts and short calls. It has done a good job this year. HEQT started trading last November so in the abbreviated 2021 it did lag behind the S&P 500 but I believe that is justified given the collar strategy and since it appears to be passing its first test this year. It will be interesting to see how much of a drag the collar strategy is the next time the stock market is up a lot.

Simplify has a tail risk ETF that YTD is far behind the TAIL ETF from Cambria that I use for clients and own personally. Simplify has a risk parity ETF which has lagged far behind RPAR. As fascinated as I am with risk parity I can't bring myself to pull the trigger with yields that are not very high. In an 8%-ish world I could see it making more sense or at some other point where everyone hates bonds.They also have a managed futures fund that has lagged behind RYMFX since its March inception.

They really do have a lot interesting product ideas. What put Simplify on my radar today was a new fund from them called the Simplify Macro Strategy ETF (FIG). Right now it owns managed futures, hedged high yield, a muted inverse VIX strategy, gold and S&P 500 (both the index and ETF) option strategy that appears to net out to a net long exposure that is hedged. It looks like it can add in a couple of other strategies too.

As a multi-asset strategy, I think FIG is trying to be an all-weather strategy but to be clear, I found no reference to that term in the fact sheet or the prospectus. Over the weekend we looked at all weather strategies a little bit so finding FIG now is a funny coincidence. I will follow FIG, I hope it can do well as an all-weather.

All-weather in one fund might be a bit of a unicorn though, I think that is an important expectation that we as potential end-users should have. This morning I sat in on a presentation for yet another managed futures fund, the American Beacon AHL Managed Futures Strategy Fund (AHLYX). Portfolio manager Russell Korgaonkar said trend (he was using that word interchangeably with managed futures) should be all-weather. Maybe it should be, but it rarely is. I've never seen it trade as an all-weather proxy. Quick note, I'd never heard of AHLYX before six hours ago so I know nothing about it.

Manged futures has a negative to low correlation to equities and my observations are that it goes down during prolonged bull markets. If you know differently please comment, obviously just because I haven't seen it doesn't make me right.  Managed futures is getting a lot of positive attention these days for going up in what so far is a lousy year for equities. In reality, it is just doing what it always does, not trading like equities. This event will end at some point and equities will rocket higher and chances are good that a lot of people will get caught with too much in managed futures thinking it is all-weather.