The fund in question is the Simplify Tail Risk Strategy ETF (CYA). The fund owns a lot of puts and should go up a lot in the face of a crash but not necessarily a slow protracted decline like there was in 2022. According to Portfoliovisualizer, CYA dropped 46.10% in 2022. Here's what caught my eye that it might have blown up.
It was already down a lot to be at $5.44 on October 27th but it looks like last week's S&P 500 rally crushed the fund. I dug a little deeper, looking at the holdings which are of course weekly S&P 500 puts along with fixed income holdings. I made notes on the long put positions.
My process here for the notional values was that the multiplier is 100 so a put struck at 4100 would hedge $410,000 worth of stock, so then I just multiplied the dollar amount by the number of puts. It's been a while since this sort of thing was relevant for my day job so something could have changed, weeklies didn't exist for example, but if my math is correct then it was way over exposed which would account for last week's decline in the fund price. Please leave a comment if I did the work incorrectly. At $5 and change per share, the fund was worth close to $30 million, now it's worth a little over $6 million.
The S&P 500 had a nice, 5% rally last week but I don't think that should take 80% out of a tail risk fund. The Cambria Tail Risk Fund was down a little over 2% last week and the Alpha Architect Tail Risk ETF (CAOS) was up 4%. I've said a couple of times recently that CAOS seems to positively correlate to the equity market, that's my very casual observation since I stumbled across the fund a few weeks ago.
It's pretty rare for a fund to actually blow up, maybe there's an other explanation here but I don't know. I've been skeptical about Simplify's ETFs in previous posts, notably SPYC and SPD which despite both using debit put spreads managed to lag the S&P 500 last year. In looking casually at CYA before, I hadn't done the math on what the notional exposure was before now and where CYA is an actively managed fund maybe it dialed up the exposure lately. Why wouldn't the fund have already blown up earlier this year when the S&P 500 was up more?
Would you be able to spot this potential problem before it happened? Would I? This is the perfect example of why I talk so much about sizing alternatives properly, for those who even believe in using them, so that some sort of malfunction doesn't cause disproportionate harm to the portfolio. A two-three percent weighting that goes poof like CYA has done certainly could be thought of as tuition (paying for an education) but shouldn't be ruinous. Some bigger weight, at some point becomes very problematic.
While I don't think too many people are tempted to put 20% into a tail risk fund, there are other types of alternatives that investors might be willing to go heavy into. I can't see a reasonable path to CYA-like oblivion for any of the alts I use but what if I'm wrong? Diversify your diversifiers. It could be the difference between mild frustration and outright panic.
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