Study Many, Use Few

This post will revisit our look at the Simplify Macro Strategy ETF (FIG) thanks to a prompt from blogger Nomadic Samuel. FIG is a multi-asset/multi-strategy fund that tries to modernize a balanced portfolio by leveraging up to gain most of its equity exposure and balance out the leverage up by using strategies like managed futures and risk parity to leverage down in such a way that they are trying to mitigate the downside. 

From that post a couple of months ago you can see that FIG allocates about 25% each to managed futures and  hedged high yield, 20% to a variation of inverse VIX, 10% to risk parity, a few smaller things and then options combos to build up the equity allocation. I observed back then, with only two months under it's belt, that it looked a lot like the Vanguard Balanced Index Fund (VBAIX) which is a proxy for a 60/40 portfolio. Two months later and...

...it still looks a lot like VBAIX.

Sam Tweeted about Simplify Managed Futures (CTA) saying that he owned via its 25% weighting in FIG. He owns FIG. I pulled up the above chart and said I don't think he's really getting much benefit from CTA that way. FIG looks a lot like VBAIX. It would make more sense to own VBAIX and some sort of managed futures fund, CTA or whatever else, separately. If FIG is trying to be a proxy for 60/40, which I doubt, then it is a more expensive proxy. If it should outperform 60/40 then I'm not sure it's making a compelling case it can do that.

I've been on the I don't like multi-strategy funds soapbox for ages. I don't think they work very well. Strategies can cancel each other out which might be going on with FIG. I also think the value of an individual strategy can be undercut when lumped in with several other strategies. Here's an article taking the other side that would be worth reading. FIG may do better in the future but it makes no sense to me to own a bunch of complex strategies in one fund that nets out to being a proxy for 60/40.

Client and personal holding Standpoint Multi Asset (BLNDX/REMIX) is an exception that proves the rule but it only blends two things together; equities and managed futures. I've written quite a few times about the Rational ReSolve Adaptive Asset Allocation Fund (RDMIX). It started out great this year and has given just about all of it back. What's going on? No idea. There are many strategies under the hood, several of which are extremely complex. There are two levels here, how the strategies are doing and how they are interacting with each other. Why did it work so well before? No idea. Why is it down so much from its high? No idea. I don't think a holder can really assess what's going on compared to managed futures. Managed futures is long energy, just an example, and oil and nat gas are both down a ton this week. Much simpler to dissect.

I've been writing for ages about what sort of expectation a fund is trying to set for holders. What should it look like? The expectation doesn't always correspond to the name of the fund. 

 

NOPE is the Noble Absolute Return Fund. It just started trading and is already down close to 20%. It "seeks capital appreciation across a full market cycle."  That sounds absolute return-ish. It's a long/short fund so that fits but down 20% in about 10 minutes. It came out of the blocks with some very large bets. It's short 78% in Tesla (TSLA) and short 36% in ARK Innovation ETF (ARKK) so even more short of TSLA. All other positions are mid-single digits or less other than a 9% weight to US dollar ETF which gets 9%. It's not obvious what this fund is trying to look like. I'd say the same thing if it was up 20% in 10 minutes. 

I can accept that the managers of the fund expect big swings from how it builds is long/short book but from where I sit, unpredictability is an extra risk on top of any other more typical risks in a fund.

The best shot for success with liquid alt funds is to spend time looking at a lot of them, choosing very few of them to actually use. I've learned quite a bit looking at RDMIX and the guys who run it. I just don't think there's anyway to know what the fund is doing in real time. Study many, use few.