For a few years in the 2010's, I had a side gig working for ETF provider AdvisorShares. One of my regular tasks was a quick, monthly call with each fund manager reviewing what happened and maybe getting some sort of forward look from them. One of the funds, Morgan Creek Global Tactical ETF with symbol GTAA, was managed by Mark Yusko who runs Morgan Creek Capital. I quote him every so often, he likes to say that risk happens fast which is a great line.
It just clicked in my head that he employed capital efficiency in the running of GTAA. That term never came up with me but that is what he did. He used 3X levered ETFs which made room for a few other things including gold which I specifically remember. VettaFi still has a sheet up with the holdings from when it closed if you want to see the details.
You probably know at least something about the risks of using 3x levered funds. The objective is 3x on a daily basis so they reset daily. The way they compound could end up lagging in a catastrophic fashion, be way ahead or be pretty true to the underlying. There's no way to know and there have been instances where the compounding did hurt and other periods where it helped. If I recall correctly. GTAA always had some positioning in 3x funds, they obviously understood the risk and took it anyway with no problematic consequence.
When I put together that they were running a capitally efficient portfolio I decided I wanted to play around with the 3x funds little bit here. We've done some work with 2x funds but very little with 3x.
None of the portfolios are leveraged up. Portfolio 1 is plain vanilla, Portfolio 2 uses 3x funds such that 15% in SPXL is intended to replicate 45% into SPY in Portfolio 1 and so on, leaving 67% left over to go into T-bills. Portfolio 3 takes a page from the ReturnStacked playbook by putting 15% into managed futures and 10% into client/personal holding BTAL which are both tools to manage portfolio volatility.
Portfolios 2 and 3 lagged badly in 2020 but that corrected in 2022. Interestingly the unleveraged Portfolio 1 was down much more than the portfolios using the 3x funds.
Even if Portfolios 2 and 3 hadn't outperformed in 2022, the benefit to them is that with so much in T-bills, the portfolios are pretty bullet-proof against an adverse sequence of returns. They were built with the intention of trying to be market equaling but with fewer dollars exposed to risk assets. We've referred to this objective before as leveraging down.
For fun, I plugged GTAA's holdings as reported by VettaFi into Portfoliovisualizer to compare to VBAIX which is a proxy for a 60/40 portfolio. GTAA does not appear to have been leveraging down, I'd say they leveraged up . Factoring in the notional exposure of the 3x funds, GTAA looks like it had 125% in equities including a huge overweight to tech. There was also a little global macro in there with a couple of currency ETFs and a couple of idiosyncratic bets too with gold as maybe a hedge.
One way to implement a capitally efficient portfolio is to use the cash leftover after implementing the core exposures, which in this case are 3x SPY, 3x QQQ and 3x TLT, is to seek out alpha opportunities which is what GTAA appeared to do. Assuming no changes in the holdings, GTAA absolutely destroyed VBAIX. GTAA was of course managed actively, the static assumption is just for this blog post.
The volatility was much higher of course and in 2022 it went down 33% but it's hard to quibble with the long term result.
If I am right about weaving in global macro into GTAA, that is pretty complicated versus plain vanilla stock versus bond allocation decisions. If you want that element in your portfolio, it probably makes more sense to outsource it to a mutual fund of some sort. It is also important to really understand the tradeoff that goes with alpha seeking which is (probably) more volatility which at times will be uncomfortable.
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.
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