Return Stacking DIY

Over the last few weeks I've stumbled into an interesting group of DIY investors on Twitter. They spend a lot of time on their portfolios and are having conversations that not too many people are having related to leverage, capital efficiency, risk parity, managed futures and so on. I draw very different conclusions for implementation though, they tend to be all in on these things in a way that takes risks that I don't think they appreciate versus my preference to tweak at the margin while still having the largest allocation to the thing that goes up the most, most of the time. Of course I mean equities and even then, pretty plain vanilla equities at that. I've recently been describing the portfolio I manage for clients as simplicity hedged with a little bit of complexity.

The catalyst for this post was a deep dive write up on the recently launched Simplify Macro Strategy ETF (FIG), a fund of funds and options which attempts to be an all in one portfolio solution that appears to more specifically be all-weather or at least all-weatherish. The holdings and allocation are complicated but here's my understanding. It allocates approximately 25% each to managed futures and hedged high yield fixed income and another 20% to a leveraged down inverse VIX strategy. There are smaller allocations to risk parity and gold. It then goes down a return stacked leverage path with a series of option combos that reportedly works out to a 60% equity allocation. The fund website isn't clear on this point so if you know differently, please comment. 

In terms of understanding the leverage, if you blended equities together with a strategy like managed futures which pretty consistently is negatively correlated to equities, you could think of that as leveraging down. That should work. Those two, equities and managed futures, should go in opposite directions. As long as that is the case, then the consequence should not be the same as buying some sort of 2X leveraged equity product. You're relying on that relationship to work. 

FIG is relying on a bunch of different things to work but doing so in one fund so you have no control to make changes. Look again at the holdings, they are mostly complicated strategies that each rely on their own factors working as they should and then blending all that complexity together. I think I understand what FIG is doing but maybe not. There are funds, especially in the global macro (a vague term) realm, that I can't figure out. 

Buying FIG then is to rely on a whole bunch of stuff working the way it's supposed to. That's very complicated and not in a good way I don't believe. The things that need to work, usually do but occasionally they don't like with 60/40 this year and when that happens the results can be painful. I think it makes much more sense to build a portfolio with narrower funds or very specific strategies, not multi strategy, and control the inputs directly. This is even truer now and many in the crowd I'm talking about believe they've discovered a safer way to use a lot of leverage. I would not make that bet. Most of the above about FIG, I've written before.

With just a few months of trading under it's belt, here's a chart comparing to to Vanguard Balanced Index Fund (VBAIX), a proxy for a 60/40 portfolio. 

Is it supposed to mirror VBAIX? I don't know the answer but so far that is what it has done. Either it is supposed to do that in which case you have four complex strategies, a couple of asset classes and an options strategy delivering the same thing as 60/40 but more expensive and more complicated. Maybe it's not supposed to look like 60/40 but if that is the case then maybe it's not doing what it is supposed to, that's not good either. A third alternative here is that three months is not enough time to draw any conclusions. 

I will circle back to the following I put together recently for a blog post.

 

BTAL is a client and personal holding. 

 

If the idea is to buffer equity volatility, that can be done much simpler. I've said before, 20% into BTAL, or 10% into any alt is heavier than I am going to go but both alts in this hypothetical are relatively uncomplicated, certainly compared to FIG and if FIG is trying to approximate 60/40 with more robustness, well I will argue for simpler every time. 

I know the guys in what I will call Return Stacking DIY Twitter don't want input on avoiding leverage and complexity from me but it is a drum I will continue to bang. There is influence to be had from what they and some professionals are doing and I am taking it, have tweaked a little here and there because there is value in the concepts, I just disagree with what I see as an extreme implementation.