Seven months ago I wrote about the then brand new Defiance Treasury Alternative Yield Fund (TRES). It was a derivative income fund that bought short term treasuries and sold option combos on ETFs like iShares 20+ Year Treasury ETF (TLT). The fund closed in late July.
TLTW owns TLT and sells covered calls against that ETF. In March, I guess treasuries got hit a little bit in March, TRES got destroyed and then continued to deteriorate from there. This seems to be a particularly poor result and maybe even an outlier result but it is a perfect example of why it's a good a idea to let a complex fund have some time to set expectations for how it might do. Sometimes you might just know and fund will work but for the times you don't know, it's ok to wait.
Also from the wayback machine, six months ago I wrote about the Calamos Alternative NASDAQ and Bond ETF (CANQ). It's a leveraged fund with 90% in bonds and then either 90% or 100% in call options on certain stocks in NASDAQ 100 Index. The either 90 or 100 comment relates to whether they mark the stock at the out of the money strike price or at the market price. The idea is to create a proxy for convertible bonds. Are they doing that?
Yeah, probably so. It's close enough but outperforms the one actively managed mutual fund ANNPX I chose and the indexed CWB. I threw in RSSB because it owns stocks and bonds with leverage similar to CANQ I'd say. The correlation is close but RSSB has outperformed by a decent bit.
So, ok, six months in and it is probably doing what they had in mind. Here's the thing though, I'm not sure what problem this solves. Just because it mostly does what they say it should do, doesn't mean there's a reason to own it. For now, it only has $1.3 million in it so maybe no one else can figure out what problem it's solving either.
One of my favorite hobbies is writing about how risk parity funds usually don't work. I've picked on the Risk Parity ETF (RPAR), an indexed product, more than a few times but this should be a little different. I think the fund might be broken. Here's the target asset allocation. Keep in mind that it is risk parity so there is leverage involved.
To replicate it, I built it out as follows.
RPAR owns VTI, VWO and VEA. I worked in SSO and UBT to be able to leverage up to the right asset allocation. Then I tweaked it to shorten up the duration a little bit to the middle of curve as follows.
XME is a client holding.
RPAR tracks very close to the replication for the first two years and then it separates from it in early 2022. RPAR lagged the replication by 614 basis points in 2022. Interestingly, the replication was down 16.66, almost identical to Vanguard Balanced Index (VBAIX) which is a proxy for a 60/40 portfolio despite looking very different from 60/40. The one divergence in early 2022 doesn't explain the entire lag though. In 2023 RPAR lagged behind the replication by 385 basis points. There can be hiccups when using futures but it is trailing so far this year too.
I think the way I built the replication is pretty true but please leave a comment if I have a mistake in there. It makes sense that the shorter duration version trades differently than the other two. From here, if yields go down quickly, then the shorter duration version will lag instead of outperform.
This is an argument for avoiding complexity. When RAPR first came out I was intrigued but cautious. Multi asset or multi strategy absolutely works in some instances but clearly doesn't in other instances. When you're interested in one of these, take the time to pick it apart and really poke at it.
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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