The Power Of Owning Something That Frequently Goes Down In Price

There have been some engaging reader comments lately. One pushed back on the logic behind using the AGFiQ US Market Neutral Ant-Beta ETF (BTAL) in client accounts. It is a personal holding too. The commenter said that per Yahoo Finance it has a negative return and it is expensive. As far as being expensive, selling stocks short is expensive yes and the fund bears that expense. The listed expense is not all management fee. The following makes the argument for why I use it. It's simple and it is either compelling to you or it isn't but it is simple. 

I do find it compelling obviously. We can build in much higher gross equity exposure and dialing in to essentially the same standard deviation, the BTAL blend gives an extra 221 basis points of compound growth despite the fact the BTAL goes down more often than not, down eight out of 14 full and partial years. Portfoliovisualizer shows the annual decline at 1.55% but taking out 2018 when it was up 15% and 2022 when it was up 20% and it would have been noticeably worse. Here's the year by year.

Obviously, the BTAL blend held up much better in 2022. The fact that is frequently goes down is an example of line item risk. What matters is the blend. The BTAL blend did lag 100% equities by 334 basis points compounded but 100% equities had a much higher standard deviation. The idea is that it improves versus 60/40 but should not be expected to keep up with 100% equities over anything other than very short periods. 

Now lets explore the same concept using managed futures. AQMIX is the AQR Managed Futures Fund and RYMFX is the Guggenheim Managed Futures Fund. I used RYMFX during the financial crisis, back then it may have been the only managed futures mutual fund. Since then, I would say RYMFX has been poor performer relative to the other managed futures funds and AQMIX appears to be one of the better funds in the space. 

If you've done research on managed futures then you've probably read what a rough decade the 2010's were for the strategy. I've read some theories that say the extremely low interest rate regime reduced the opportunity set for managed futures. I'm open to that possibility but not completely sold. Maybe it's as simple as equities went up a lot but either way from 2010 through 2019, RYMFX negatively compounded at 2.07% and AQMIX compounded annually at a positive 77 basis points. Blending 70% S&P 500 with 30% in each of those managed futures funds in that lost decade compares as follows to 60/40.

Not great but not bad. The performance of both is right in line, the standard deviation was noticeably higher but with the opportunity to go up more thanks to increased gross exposure to equities and they avoided the interest rate risk embedded in VBAIX all those years. The 2020's have not been lost for managed futures so the same portfolios from 2020 onward.

Much higher returns here and the managed futures blends had noticeably lower standard deviations than VBAIX for this period. The managed futures blends were close most of the time except when investors really needed the tracking error in 2022. The managed futures blends' worst years in this study were 2011 when they were down slightly versus up 4.31% for VBAIX and 2018 when they were down 5.5%-6% while VBAIX was down 2.84%.

I have long been convinced that both BTAL and managed futures can add tremendous value in terms of smoothing out the ride over the longer term. I don't discount having been lucky to have found RYMFX pretty much right after it started trading and for selling it some time in 2011. 

The real world application as I say in every post about these is smaller allocations to each than what we modeled for the blog post. I want the attributes they can give but without being overly vulnerable for an instance where they don't "work."

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.