The Great Hiccup Of August, 2024?

Who knows whether the market event of the last few days is over or not, I certainly can't predict but if that was it, I think we should call it The Great Hiccup Of August, 2024. Whether it turns out that that was it or if it keeps going, I think it was a fantastic opportunity to make sure you understand you portfolio in terms of having the right expectations for your holdings and understanding why a holding didn't do what you hoped it would. Underpinning this conversation has to be the acceptance that no great stock, bond, alt, strategy or anything else can always "work" or be best. 

Let's start with some outflows from derivative income funds.

At the far end of the chart, after ages of huge inflows, you can see outflows. There are quite a few symbols on that list that we've never mentioned here which speaks to how big the derivative income niche has become. 

We talked about these funds just yesterday and if you've been reading this site for a while, you hopefully were not surprised by how much these funds went down yesterday. Over an extended period, they might go down a little less but I would not expect a JEPI in 2022 result where that fund was only down 3.5% in a down 18% world. Great if it happens but don't rely on it. 

In reaction to The Great Hiccup Of August, 2024, the ReturnStacked ETF guys hosted an impromptu webinar to coach holders through what is happening. Obviously their suite relies heavily on managed futures and managed futures has gotten pasted in the last few days. The high level takeaway from them was what we've been talking about lately including yesterday which is that events like Great Hiccups, Flash Crashes and other fast events are that those events are faster than the way trend following signals work. A 10 month trend probably isn't going to be that responsive to a one week crash in the dollar versus the Japanese yen. 

Part of the The Great Hiccup Of August, 2024 story is the blowing up of the yen carry trade (borrowing low yielding yen to buy high yielding other currencies) as yen strength picked up and then accelerated over the last week. One thing I learned from the call is that pretty much every managed futures strategy was caught wrong footed with big yen positioning over the last week. The position size in things like the yen, euro, bonds and some commodities are probably going to be relatively high most of the time versus some other markets like maybe the forint, Italian debt or tin. Managed futures can also get long or short equities and no surprise, it was long equities. 

The webinar said managed futures often will not be crisis alpha even though it did provide that attribute in the 2020 Pandemic Crash. Client and personal holding AGFiQ US Market Neutral Anti-Beta (BTAL) is pretty reliable crisis alpha. They mentioned VIX products and funds that are long puts aka tail risk funds as also being more crisis alpha. The bleed from holding them varies but VIX front month products have a habit of dropping 99% and reverse splitting. The Cambria Tail Risk ETF (TAIL) had a rough time a couple of years ago because it owns longer dated treasuries along side its put strategy.

We've looked quite a few times at the Alpha Architect Tail Risk ETF (CAOS) and I have been skeptical. On Monday it was actually up a decent bit, more than I've ever seen, but on Tuesday it gave 3/4 of it back, dropping 1.48%. 

The webinar also talked a lot about the carry strategy which is more than just the yen carry trade as we've discussed, in support of the ReturnStacked US Stocks & Futures Yield Strategy ETF (RSSY). Carry overlaps with managed futures but can and often does position differently than managed futures. They said that coming into The Great Hiccup Of August, 2024, carry was positioned different on equity beta and I'm pretty sure they said the yen. Either way they tried to differentiate the positioning but it doesn't look like it helped.

I guess it's differentiated but with no short term benefit that is obvious to me. Please comment if you see otherwise. It is too soon to know whether there is a long term benefit to carry in fund form.

They then had an interesting conversation about how to size return stacking, that is how much to leverage up. The first comment was that a couple of percent is not enough to move the needle which I can accept as being at least plausible. If you believe in the idea, 2-3% won't help. There was an interesting comment that the efficient frontier would say to leverage up the stack by 50-60% which they acknowledged is way beyond just about everyone's comfort level. Even 20% might be too much.

I feel like they changed some of the messaging in the face of the The Great Hiccup Of August, 2024. They talked about using the stack to adding more reliable crisis alpha whether that might be tail risk, VIX or something else as opposed to negatively correlated strategies that are slower to react like managed futures or strategies that are truly uncorrelated like some of the AQR funds. They also said that in events like the last few days, they would expect volatility of return stacking to be greater than plain vanilla exposure. Maybe they've said that before but I can't ever recall it.

Back to the top and trying to prepare for what comes next as opposed to trying to predict what comes next. That equities opened on Tuesday with a slight gain (I realize they were higher in the overnight session) that improved through the day is a positive development. That the S&P 500 fell about 125 basis points from the day high to the closing level is a negative development. 

As I hit the send button on this post, the futures are down 28 basis points. If nothing else, hopefully this event is over so that we can continue to refer to it as The Great Hiccup Of August, 2024.

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.