On Tuesday, Corey Hoffstein from Newfound Research and ReturnStacked ETFs gave a web presentation to explain carry in support of the ReturnStacked US Stocks & Futures Yield ETF (RSSY). The fund leverages up to provide $1 of equity exposure and $1 of exposure to futures yield (carry) for each dollar invested in the fund. RSSY has brought in a mountain of assets so far.
The fund blends a core exposure, equities, with a differentiated return stream in carry. I may have missed it but I don't they actually explained the carry strategy they are implementing. Basically, it goes long futures that are in backwardation and short futures that are in contango. You can look those terms up if you're unfamiliar. ReturnStacked has shown in many papers and blog posts that carry is legitimately a differentiated return stream so while I will push back on a couple of things here, that's not one of them.
As Corey said in the presentation, it appears there is no retail-accessible product that offers carry exclusively. It is embedded in quite a few multi-strategy and global macro mutual funds including from AQR. I'm surprised with the huge increase in interest in alternative strategies, that there isn't a fund in this space. Maybe that's not the right question but it bugs me there is no fund for this.
I mentioned this a couple of weeks ago, carry appears to be a cousin of managed futures. They both generically trade the same markets. Where carry goes long and short based on yield curve dynamics, backwardation versus contango, managed futures goes long and short based on a trend of some measure, most commonly a ten month trend. In that post, I said that I would guess managed futures would be a more reliable diversified than the way RSSY implements carry.
Managed futures "worked" as crisis alpha during the popping of the internet bubble (there were no mutual funds yet), the financial crisis (only one mutual fund), the 2020 pandemic crash and in 2022. You can click through here to the SG Trend website and see for yourself.
Corey gave the impression that carry wasn't as reliable as managed futures during adverse market events. According to this paper from Resolve, carry "worked" as crisis alpha in the popping of the internet bubble, it was spotty during the financial crisis enduring a four month pronounced drawdown in 2008. it went down less in the 2020 Pandemic Crash (differentiated return stream, not crisis alpha) and it did well in 2022.
As I develop my thoughts on this variation of carry, I think it falls in between managed futures and absolute return leaning more toward managed futures.
The other day we looked at the Simplify Quantitative Investment Strategies ETF (QIS). After writing that post I found a short paper on the Simplify site positioning QIS as a fixed income substitute like 60% stocks, 20% traditional bonds and 20% QIS. Maybe, carry could be positioned as a fixed income substitute that is a little more volatile than most income sectors? Carry as a more volatile fixed income proxy and QIS as a absolute return type of fixed income proxy blended together? I don't know, and there isn't an easy way to backtest the thought and no devoted carry fund now to start studying.
When RSSY has enough track record to study, we can play around with that for blogging purposes with 20% in RSSY, 20% in QIS, 40% in an S&P 500 fund (that plus 20% RSSY would give us 60% equities) and so we don't leverage up, the last 20% in cash.
I'm intrigued because of the theories at play here but I still do not see ever using these funds though.
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