A Fascinating Hedge

A couple of quick hits today.

This chart of alternative strategies is from a webinar that the ReturnStacked guys put on last week. 

And here is a correlation matrix and you can see the order that I have the proxies listed, corresponds with the chart above.

For the most part, the correlations to the S&P 500 are quite low. Yesterday, I talked about using this screening process as a first step to exploring diversifiers. If you believe in using diversifiers, they might as well actually provide diversification. Below are some examples of commonly referenced "alternatives" that don't fit the bill in terms of reliably diversifying equity beta. 

I'm not saying these are bad funds to hold, they just don't offer too much zig when stocks zag. IGF is interesting though. In 2022 it was actually flat while in 2008 it was down more than the S&P 500. MLPs are another odd one. They did well in 2022 but did poorly in 2008. I couldn't find an apples to apples ETF that was around back then. The correlations of IGF and MLPs being high, I would not count on them to help smooth out the ride in a downturn. 

Matthew Tuttle from Tuttle Capital, an ETF provider, had an interesting comment in his daily email in the context of hedging. "13% of my risk capital is short the worst ETF ever invented (it's not ARKK and I have been sworn to secrecy on what it is)."

Respecting that he wasn't going to give up the name of the fund, I asked if it was the worst ETF because of flaws in what it tracks or a problem with the structure of the fund? His reply was that the strategy doesn't work. A fund that goes down a lot because the thing it is tracking goes down a lot is not really flawed, that's more like it's just a bad investment choice. I have suspicions that the ReturnStacked ETFs don't work for example. That will either prove out as being right or wrong but there is a difference between buying a narrow fund right before the thing it tracks goes down a lot and buying something that doesn't meet the expectation it is setting. 

The idea of hedging with something that isn't working the way it's supposed to is fascinating to me even if it goes further out on the risk spectrum, it could start working tomorrow for all we know. The idea relies on something that is not working, continuing to not work.

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