Be Your Own Hedge Fund?

There's a firefighting expression that while the meaning is obvious, conceptually lends itself to other aspects of life. "Put the wet stuff on the red stuff." Although there is often more to fire suppression than spraying water (water on a gasoline fire will probably make it worse for spreading the fire not really putting it out), the phrase is great for what it represents which is simplicity. Simplicity is a favorite element of the topics we explore here. Building simple portfolio hedged with a little complexity. 

First up is this article from the WSJ about what I'd call DIY quant trading. Apparently there are platforms and programs that allow for various forms of quantitative trading like you're your own hedge fund. There was some vagueness as to how much trading is involved, one program had just one trade a day though, and I don't think there was any mention of whether or not the platforms or programs do the trading for you. 

What did seem clear is that 3X leveraged funds are part of the track record selling this which probably skewed results. More importantly, there was no mention of what sort of risk the people who were successful were taking. One guy profiled was up 33% in an up 26% world during 2023. Did he get that result with the same risk as the broad market or 10x the risk of the market which matters and the article didn't give an indication that he knew. 

A way I put this before in making an argument for simplicity, if the stock market is up 15% one year and someone trades frenetically all day everyday like it's their job, how much extra return would they need to make to justify the effort? Someone has a $1 million portfolio, they put it into an S&P 500 index fund, they would be up $150,000, 15%. If they trade all day everyday and they made an additional 5%, so up 20% in an up 15% world, would all that time be worth earning $50,000? They're not really earning $200,000 because the first $150,000 would have been free from the index fund. We're talking about the effort expended to earn extra return. And of course assuming they will automatically outperform is an unrealistic assumption.

I'm not saying don't do it, I just think it is worth understanding the tradeoff of your time.

Pivoting, a relatively new fund popped up on my radar. FEPI! It's a funny symbol for the REX FANG & Innovation Equity Premium Income ETF. It blends two fads into one fund, the Magnificent Seven (and a few more big tech companies) and covered calls. It owns 15 stocks and sells what appears to be monthly, out of the money calls against each of the stocks. These things always interest me so I built the following on Yahoo.

FEPI listed back in October and it has paid three dividends, $1.15, $1.18 and $1.20 for a total of $3.53. Based on its opening price at $51.67 back in October, the $3.53 would annualize out to 27% with all sorts of ifs and caveats. 

What's interesting is that unlike just about every other covered call fund I've seen, this one is more than keeping up with it's payout...for now anyway. MAGS is a Magnificent Seven ETF and QYLD is a NASDAQ 100 covered call ETF. I am not really doing any sort of across the board for clients in the covered call space and I have no idea if I ever will but I will continue to spend the time on these.

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