Asymmetric Extremes

Bloomberg reported that the Skybridge Capital hedge fund that focuses on crypto has gated withdrawals despite the crypto space having generally done quite well. I'm not too interested in the story but toward the end of the article there was a breakdown of the asset allocation as of the end of Q1 and I am fascinated. If reported correctly, the fund is certainly crypto-heavy but it doesn't just invest in cryptocurrencies. The allocation at the end of Q1 was 57% crypto, 21% in multi-strategy (presumably hedge funds), 7% in equities and 15% in structured credit.

We talk all the time about allocating a percent or so into something like Bitcoin or other assets with asymmetric potential. The Skybridge fund obviously does the opposite which is not a bad thing in that, I'm sure that's what they're selling and what their customers want to buy. 

I was curious to model out what this might look like. For purposes of this post, I wanted to model out the crypto exposure with a broad based fund and the only one I am aware of is the Bitwise 10 Crypto Index Fund (BITW). Portfoliovisualizer doesn't have this one in its database but the backtesting tool from Arch Indexes does. The allocation is 57% into BITW, 21% into AQR Style Premia Alternative Fund (QSPIX), 7% into Vanguard S&P 500 ETF (VOO) and 15% into iShares Treasury Floating Rate (TFLO).

The backtesting tool has nowhere near the info that Portfoliovisualizer has but this is what we've got. The numbers are obviously wild. The Skybridge replication was up 5.5x despite enduring an 80% drawdown along the way.

You can see how rough it has been and how big some of the rallies have been. There is a skew though at the far left of the chart. When BITW first started trading, it rocketed to massive premium to its net asset value. Going from memory, the NAV was in the 20's but the market price went up to the $180's. Removing the early skew is maybe a more accurate picture but not radically different. 

I filled out the rest of the portfolio with what I thought were close approximations to how the fund was reportedly allocated but there might be better ways to built out the rest of the replication. It's just an interesting thought exercise is all. 

With regard to replication, you will find differing opinions about whether it "works" or not. There is data that draws both conclusions. If nothing else, trying to replicate a portfolio with retail-accessible funds can be a good way to look at cross asset blends that might not have otherwise occurred to you which is a learning opportunity. 

Kind of a related idea, an insane idea really but it occurred to me that allocating one half of one percent of a portfolio to something with truly asymmetric potential could be thought of as being riskless. Almost literally. 

I used Bitcoin but pick whatever you think could be asymmetric to work through this idea. I set this to not rebalance. Put in 0.5% and let go to the moon or let it fail. I've said one or two other times, I think total failure for Bitcoin would be more like a 99.9% decline but not literally zero. If the allocation to asymmetry does grow into a life changing piece of money, sell it and let it change your life. If the 50 basis point allocation does disappear, I don't think anyone would miss it and maybe not even notice. If Bitcoin went almost to zero, Portfolio 2 would be equal to Portfolio 1 less $50. 

If this resonates, where is the cutoff to where this does matter? A 10% allocation that goes to zero might not be ruinous but that feels to me like setting money on fire, that would certainly be too much for me. A tiny allocation growing into a 10% weight is a different story though. Deploying 5% this way feels like a lot to me too. Do you have $1 million in your IRA? Can I interest you in setting $50,000 on fire? 

I usually talk about allocating 1% to asymmetry but I acknowledge that is more conservative than what most people talk about. Two percent is probably ok too but I personally don't know that I would start at greater than 2%. 

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