What The Hell Is This Fund Trying To Do?

We look at a lot of alternative funds here. Basically, I'm willing to dig into just about anything that does something that might be a little different or have its own take on a strategy that interests me. A high level answer I am looking for is what should the fund look like, what expectation should investors have and is the fund meeting those expectations. 

For example client/personal holding Merger Fund (MERIX) should have very little volatility and go up a small amount most of the time. Client/personal holding BTAL should have a negative correlation to equities most of the time and go up more often than not when stocks go down. You can decide for yourself whether either of them live up to those expectations but defining them is pretty simple. Some other alternatives do their own thing in such a way that they complement equity exposure to reduce volatility and drawdowns without lowering the long term growth of the portfolio. 

If you're going to buy any type of alternative strategy, I believe beyond understanding what the fund does it is important to understand the expectations and whether the fund is meeting them.

This brings us to the ABR 75/25 Volatility Fund (VOLSX). ABR has a couple of other funds too but we'll just focus on this one for today. I mentioned this fund once before. The objective is "long term capital appreciation" and there's this further description, "Seeks to generate favorable long-term risk-adjusted returns, in part, by profiting from price changes involving instruments that track volatility levels. Relies principally on models to determine allocations among (i) long exposure to CBOE Volatility Index (“VIX Index”) futures and VIX Index exchange-traded products (“ETPs”); (ii) short exposure to VIX Index futures and VIX Index ETPs; (iii) long exposure to S&P 500 Index futures and S&P 500 Index ETPs; (iv) long exposure to long-term U.S. Treasury securities, and (v) cash." In terms of trying to set an expectation, it says to "use for liquid alternative investment; long and short investment." 

It offers this pie chart to show its current asset allocation.

The fact sheet does not define what 75/25 means but the prospectus says it allocates 75% to long volatility and 25% to short volatility. I found a fact sheet from Q2 2021 that had about the same equity exposure but a much greater 13.5% to short volatility. Getting information from the website is not easy. It is not clear if something changed to account for the reduction in short volatility or if it is an active decision to reduce that exposure because VIX has been so low. Either way, it is not apparent to me how the fund had 25% allocated to short volatility in either instance. The prospectus seems to be saying that it includes equity proxies as part of the long volatility exposure. I am not saying it is doing anything wrong, if I am looking at this correctly, I'm sure prospectus gives them the wiggle room where it says "the adviser may implement adjustments to the 75/25 blend under various market conditions..."

Based on the pie chart, it looks more like a multi-asset fund than a volatility-centric alternative strategy. Below, we compare VOLSX to a home made version of their exact, most recent allocation and VBAIX a proxy for a 60/40 portfolio.

The time frame is so short because VOLSX only goes back to 2020. VOLSX outperformed in 2021 and 2023 but fell twice as much as the others in 2022. Clearly the portfolio weightings are a valid combo but the fund is capable of lagging by a lot. To be clear, just because it is valid doesn't mean it is optimal or even usable. 

What about the big picture premise of VOLSX' strategy which is a long/short combo of volatility weighted 75/25. That can be replicated several ways, I am doing it below with VIXM and SVXY and comparing it to 60/40. Maybe the Volatility Blend does something interesting?

The Volatility Blend seems to track the same uptrend, it is far more volatile than 60/40, it had three very bad years along the way but in 2022 it only fell 3%. While I'm not going to implement this as a portfolio, it reiterates an important concept, it blends together to very volatile, negative correlated assets to deliver a result that in terms of CAGR is not that far from VBAIX. Blending disparate strategies is a powerful return driver.

Let try one more idea with the 75/25 concept, not VOLSX. The following builds a return stacking sort of idea around the WisdomTree US Efficient Core ETF (NTSX) which is levered in such a way that a 67% allocation to the fund equals 100% allocated to VBAIX leaving 33% left over to either leverage up with alpha seeking or alternatives to manage volatility or even just cash to add a few basis points to the total return while managing sequence of return risk. 

Well this looks promising at first glance, higher returns and lower standard deviation. The longer term outperformance seems to have happened all at once during the 2020 Pandemic Crash. In 2022, Portfolio 1 actually lagged VBAIX by a few basis points. 

The actual VOLSX fund is a hard pass, I'm not sure what expectation the fund is trying to set so there is no way to know if it is meeting the expectation the managers have in mind. The 75/25 idea is interesting though and there might be a way to stumble into a better use of the idea than with VIX products. I will follow up on this post if I come up with something that turns out to be a better implementation.

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