Do a search for asymmetric investing and you'll find a mishmash of results including research exploring option strategies, dampening portfolio volatility, an ETF that unlike SPD that we looked at yesterday does appear to capture upside while muting the downside. We've looked several times at the Return Stacked 60/40 Absolute Return Index and that considers tail risk to be convexity, often synonymous with asymmetry. More on that in minute.
That's pretty broad and doesn't even hit on how I think of asymmetry which is something with the potential to go to the moon but could also go to zero. Yes crypto but even before crypto was a thing, Nassim Taleb talked about this 15 years ago, maybe earlier. I'm not sure the precise context of what he meant but in terms of applying the idea to what retail investors and investment advisors could access, the list could include, gold miners with no proven reserves, uranium miners with no proven reserves, a biotech with an unapproved drug with tremendous promise and so on.
All of those types of asymmetric bets (they are bets) still exist but be prepared to do some work unless you really just want to roll the dice. I think crypto is a great example, maybe just Bitcoin and Ether, where they could go up 20 or 30 fold or turn out to be complete BS. I've done very little investigating of coins/tokens beyond BTC and ETH. The touts say BTC and ETH will change the world as we know it and the skeptics say it is complete BS. Believe what you want but that is asymmetry.
Tail risk usually buys puts that have the potential to skyrocket in a crash. There are hedge funds devoted to this, most famously Universa, but it is negatively correlated asymmetry.
One question that I started to think about is whether or not time can be asymmetric, can deliver an asymmetric result.
I don't know the answer, the question just popped into my head earlier today. Pretty long term chart here going into the start of the bear market. With the S&P 500 up 271% in the period studied, the worst performing name was up 419% while the best one I found was up 3300%. Fair enough that 419% might just be simple outperformance but would a 5x, or 10x or greater x magnitude of outperformance merit being considered as an asset class of asymmetry? There's no wrong answer there. The implementation could be tough because you don't know which names or narrow based ETFs will be the ones to go up that much.
Outsized returns bordering on asymmetric might occur a little more frequently in the tech sector or some industry that is tech-ish but even then, hard to pick ahead of time and that isn't exclusive to tech, one of the stocks on that chart is a utility.
A few days ago we looked at an ETF that trades on the London Stock Exchange that levers up the S&P 500 by 5X. Buying that fund after a large decline for the index could bring a legitimately asymmetric return over several years...the risk would be that the manner it which that fund resets ends up ruining the result somehow. Again, unknowable on the front end.
We should probably mention alternatives assets as a source of asymmetric returns. Not the things like managed futures and absolute returns that we always talk about but things like wine, art, Air Jordans and sports memorabilia. I know nothing about wine, so I'm out there. We have a couple of pieces of art that could theoretically go up in value but they were bought as things to enjoy not as investments so to me, that's not an allocation to an asset class.
I've mentioned Air Jordans before in the context of buying a bunch of them as being wasteful (if you have to have one expensive pair go for it) but I can accept that people are legitimately investing in them. Would you put 1% into Air Jordans as an investment? If so, how may dollars is that and then how many pairs? What would you do with them? Could you emotionally tolerate them plummeting in value? Do you have a way/place to store them properly? Is there a learning curve for how to store them? Maybe I will buy a pair one day but I'm not going to make a 50 or 100 basis point investment allocation.
Sports memorabilia and collectibles are things I know a little more about. You can go through companies to buy fractional ownership of a multi-million dollar baseball card (these sorts of things exist for wine and art too). I would be concerned about authenticity and cards being over subscribed (like selling $1.3 million worth of shares for a $1 million card). If you're spending a couple of hundred bucks on something for fun, who cares, you putting in $5000, $10,000 or $20,000 into something like this then yeah you probably care.
Asymmetric returns are available with sports cards but you really have to go in heavy one way or another. I have a 1970 Bobby Orr graded a 6.5 that I bought for $20 a few years ago. Last time I looked, there was another 6.5 going on eBay for $300. That seems like asymmetry to me be but was I going to buy 250 or 500 of them to have to have an impact on my financial plan? You'd never be able to find that many to buy. Going in heavy could mean a bunch of $20-$40 cards and hoping they pan out or buying a handful of low thousands dollar cards like maybe rookie cards of Juan Soto, Julio Rodriguez or Wander Franco and then praying they don't get hurt or simply fail to live up to the hype.
Sizing any of these that resonate is something of an art form. A thematic ETF that could go up 20 fold over some number of years isn't reasonably likely to go to zero and can be sized a little larger than some of these others. I build portfolios using mostly narrower exposures but where someone uses just broad based funds with a small sleeve for this form of asymmetry, 5-10% spread over a few holdings seems reasonable. You might see all of the ones you pick do poorly but not crap out so your risk is a slight lag to the overall portfolio.
Wine and art probably have very high fees and I don't know what sort of transparency one could expect.
Crypto is the easiest for me to figure out, it goes to a bazillion or goes to zero, my approach is go no more than 1% and let it grow (or fail).
This can of course scale up in complexity which is a path I probably don't intend to pursue. I'm not sure what I will do when a spot bitcoin ETF hits the market. I've certainly invested enough time to be able to talk about it to clients and I am unlikely to push back if someone says they want to buy it but not sure yet about making a broad allocation. Asymmetry can be an asset class for anyone who thinks it so but I think it is probably less important than other non-traditional assets. Bitcoin doesn't protect a portfolio in the traditional sense, yes it it went to a bazillion while the rest of the world went to crap that would be protection but there is no way to model that, it's pure guesswork.
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