A Fresh Eye On 100/100 Leverage

Yesterday I mentioned the importance of being able to change your mind or maybe view things a little more broadly when the circumstance arises. I've written a couple of times about the recently listed Return Stacked US Stocks & Managed Futures ETF (RSST). For each dollar you invest, you get $1's worth of exposure to US equities and $1's worth of managed futures so the fund is leveraged.

I would not say the fund is leveraged up, I think it more tries to leverage down because equities and managed futures tend to have a negative correlation. Managed futures are a diversifier and an important part of my investment process is to diversify your diversifiers so I don't want a huge exposure to any single diversifier including managed futures. 

RSST is similar to client/personal holding Standpoint Multi Asset (BLNDX/REMIX) in that both blend equities and managed futures but I think they are targeting different return profiles. I think RSST is intended to look like equities but with less volatility and hopefully better returns but to be clear a close correlation to equities. I believe Standpoint is intended to have much less volatility than equities and less volatility than the 100/100 exposure RSST offers and if you replicate RSST with 100% SPY, 100% LOTIX and -100% CASHX and compare that to BLNDX' inception you see that has been the case.

I had trouble though replicating/backtesting a longer term result though where RSST's idea would track equities fairly closely with less drawdown. I gave it another shot and was able to get close to what I think the RSST crew is trying to do.

The portfolio constituents are labeled on the screen grab. The teens were essentially a lost decade for managed futures yet the 100/100 still tracked closely to equities. The reason for the dramatically better CAGR with the 100/100 is attributable to 2022. If we stop the back test at the end of 2021, VOO has a CAGR 14.90 of compared to 14.50 for 100/100. Notice though that the standard deviation for 100/100 is much higher. I think that is attributable to a terrible year for 100/100 in 2018.

A point we make here all the time is that no single strategy will always "work" as hoped for. Pick your poison. Terrible year in 2018 or 2022?

How about tweaking the 100/100 with Portfolio 3 to add a little bit of AGFiQ US Market Neutral Anti Beta ETF (BTAL) which is a client and personal holding and tends to act as a negatively correlated hedge?

 

That doesn't actually change the outcomes all that much. 2018 was still lousy and 2022 was very good.

 

I am more open to RSST as a core position than I was but 2018 is a good example of how it can go poorly. A possible core position is not the same thing as saying put all equity exposure into it, not even close. I probably won't be using this fund anywhere but I think it could be useful to someone really puts in the time to understand return stacking and the idea of leveraging down. 

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