A few months ago we mentioned the then new Return Stacked Bonds & Managed Futures ETF (RSBT). Each dollar invested into the fund provides $1 of bond exposure that closely aligns with the Aggregate Bond Index and $1 of exposure to managed futures. The leverage used is the return stack, the one fund is capitally efficient exposure to the two asset classes.
The fund got pounded in March likely due to a very harsh counter trend move in short term treasuries that caused a lot of pain throughout the managed futures landscape.
The hit to managed futures was very big and fast compared to other down turns I've seen in managed futures over the years.
I see less chatter lately about return stacking and capital efficiency but the idea is still worth studying. Here's an hypothetical example of how to use RSBT to gain exposure to stocks, bonds and managed futures in a capitally efficient manner. We can compare to a plainer vanilla 60/40 stock/bonds portfolio.
The leverage in Portfolio 1 replicates a hypothetical long term exposure to RSBT and VBAIX is a proxy for a plain vanilla 60/40 portfolio. What does the complexity of capital efficiency in this example give the investor versus just owning VBAIX?
Well, not much. There's four more basis points for CAGR which is given back in standard deviation. That worst year column is noteworthy, those numbers come from 2008. 2022 was a similar story with Portfolio 1 down 11.70% versus a drop of 16.87% for VBAIX. Running the same study from 2009 to 2021 avoiding those two bad years shows a different result.
VBAIX has a better CAGR with a lower standard deviation.
Finally lets throw in simpler 20% allocations to AGG and RYMFX and the same 60% to ITOT as Portfolio 3, so no leverage, and see how that compares to the back test of RSBT we concocted.
This result surprises me. They're all in the same neighborhood of course but 36 bp of improved CAGR for the leveraged version is noteworthy. Is it worth it though? I don't think there is an obvious answer to that question.
Before writing this post I had forgotten about the big hit managed futures took in March. Repeated for emphasis, that big of a drop happening so quickly for managed futures is very rare if it has ever happened before. That's just bad luck for the fund provider in terms of timing but underscores a point I make repeatedly here about how to size these sorts of things into a portfolio. Hard to say what sizing would be optimal for managed futures but I believe a 40% allocation is way beyond the point of optimal. A two fund portfolio consisting of some equity proxy at 50, 60 or 70% and then the rest in RSBT strikes me as a bad idea. That kind of weighting is a very concentrated bet and for all the love that managed future got in 2022, including from me, no strategy is immune from getting hit hard which is a point I tried to make early and often. It is better to size these types of alternative strategies such that the consequence of a bad run is measured in basis points not full percentage points.
I have no positions personally or for clients in any of the funds mentioned.
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. All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time.
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