Yeah, But They Don't Do Very Well

Early in October we looked at a portfolio concept from Bob Elliott who runs the Unlimited HFND Multi-Strategy Return Tracker ETF (HFND). Bob is a great follow on Xitter but being direct about it, it is not clear to me yet what HFND is trying to do. I'm not sure if the Simple Game Plan portfolio that I am referring to is what HFND is but here is how I recreated it two months ago.

Bob blogged an update on the Simple Game Plan (SGP) noting that however he constructed it, it is only up 1% versus 12% for a 60/40 portfolio. He goes on to note that although it has lagged 60/40 by two percentage points per year it has only had 2/3s of the volatility of 60/40. 

So I wanted revisit the idea. KKR and APO were chosen as a way to add alpha as opposed to beta. Putting 10% in each of those names is something I'd never do. Let's revisit the idea with Portfolio 1 exactly as above, Portfolio 2 replaces KKR and APO with Vanguard S&P 500 ETF (VOO) to swap out alpha seeking for beta and Portfolio 3 is the Vanguard Balanced Index Fund (VBAIX) a proxy for a 60/40 portfolio.

Portfolio 2, the version with just beta has a lower CAGR and lower standard deviation than VBAIX but apparently not lower than the volatility of SGP. The alpha-seeking version has done much better because KKR and APO tend to do very well in bull markets (more downside volatility too!) but there's really no way to know if that is repeatable. The numbers for Portfolio 1 are pretty good but really I just pulled the two alpha names out of the air. 

YTD 2023 Portfolio 1 is up 13.51% and Portfolio 2 is up 6.39% so I would be curious to see what's in Bob's version up only 1%

I think there are better and more importantly, simpler ways to get close to the muted volatility. Portfolio 1 is 80% VOO, 10% ASFYX, 10% BTAL. Portfolio 2 is 100% VBAIX. I would also note that in 2023, Portfolio 1 is up 15.12%.

What I think this reiterates is the extent to which equities are the thing that goes up the most, most of the time. We've looked at countless ways to reduce portfolio while maintaining something of a normal allocation to equities by using alts that are reliably, negatively correlated. A portfolio full of alts, hedged with a little bit of equity exposure should be expected to lag the equity market by a mile which is important to keep in mind as you see some of these alt-heavy portfolios that smart people put together.

The Return Stacked Global Stocks & Bonds (RSSB) listed today. I mentioned this one in passing the other day. The bond exposure is US Treasuries and as I though might be the case the fund will buy equity ETFs for the most part and get the treasury exposure with futures. For each dollar invested, the fund gives $1 of equity exposure and $1 of bond exposure. 

It is probably too soon draw a firm conclusion about RSBT and definitely too soon to draw a conclusion about RSST. Managed futures for the most part has had a rough 2023 which if you have a small allocation is just fine because they have a negative correlation to equities so with equities up, it would be surprising for managed futures to be up. I am of course curious to see how these do but an important thing to remember with these is that while there is appeal to the capital efficiency of the funds, you also have to want the specific exposure. In the case of RSBT and RSSB that means longer dated treasuries and with RSSB, 40% of the equity exposure in foreign. 

I had a recent conversation with someone who has a similar interest in things like return stacking and using alternatives for diversification or as I might call it, portfolio theory and he made the observation that is the title for this post, noting that they are interesting but "they don't do very well." If you have the inclination to learn about these funds, I certainly do, then by all means, spend the time. I think there is plenty to learn but know as I have described myself, if you're a sucker for a good story. 

A lot of these very sophisticated funds don't work very well...yet?

Here's a wild one. XXXX is the symbol for the MAX S&P 500 4X Leveraged ETN. Apparently ETFs can only go to 3X leverage but the ETN structure is a work around. Maybe there will be 5X soon? Quadruple X has a daily reset so it is not intended to hold long term per the boiler plate of the product. In looking at the 2X and 3X it seems that the 2X does track kind of closely longer term, much of the time, the 3X less so and I would imagine 4X will deviate further than 3X and 2X when looked at for longer periods. 

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