Private Equity Needs Bag Holders Like You!

Some very quick hits. I mean it, very quick.

The title of this post came from the following image. Like with buffer funds, just don't with the private equity funds that appear soon to launch. While I am not interested in the ETFs comprised of private equity fund managers, those would be better than what's coming. If I am wrong, I'm wrong but they have bag holder written all over them.

Many details to come but Cambria and Alpha Architect are working to issue a fund where investors can exchange low basis, taxable investment portfolios for shares in this new ETF that will have the symbol TAX without it being a taxable event. This all falls under Rule 351 which you should research for yourself and with your accountant once all the details of the fund come out. When we've talked in the past about ETFs evolving to democratize access to sophisticated strategies, this wasn't what I had in mind but seems to fit the bill. If you have a couple million dollars worth of Microsoft you bought in the 90's, or earlier, at a minimum, I would tell you to learn about this. At this point, I have no idea if this will be a good thing or not but again worth investigating for the right circumstance. 

Precidian launched the first of what is slated to be many ETFs that own one ADR and hedge out the currency risk to create the effect of owning whatever company you buy as a local investor in that company's home market. I first heard about this a little over ten years ago. I know the idea as belonging to former Bank of New York executive Julio Lugo. I met him once during my time at AdvisorShares. He has since passed away. The product line is called ADRhedged. 

The difference between being exposed to the currency or hedged could be significant at times. The difference between Novartis ADRs (NVS) which is a client holding and the shares traded in Switzerland over the last year charted below. That seems like a big gap and the difference is accounted for by strength of the Swiss franc against the US dollar.

You can see a dollar rally in this chart from early 2024 into May as the two converged before the franc rallied again. Sometimes just owning the ADR will be right and sometimes holding the hedged version will be right. It would be difficult to have an edge here. If this makes your radar at all, pick one and stick with it. Personally, I want the currency exposure. 

Corey Hoffstein shared a thread about portable alpha which is an older term for return stacking. In one of the Tweets, that's right I said Tweets, he talked about 2008 being a disaster as correlations went to 1. The context from Corey about this was that the capital efficiency back then was usually allocated to long only managers who could outperform the indexes thus adding alpha. ReturnStacked ETFs differentiates by using the leverage to add exposure to diversifiers, not piling on the long equity exposure.

I think the only capitally efficient funds back in 2008 were the PIMCO PLUS suite including the PIMCO Stocks PLUS Long Duration (PSLDX) which leveraged up 100/100 stocks and long bonds. A 50% allocation equals 100% into a fully invested stock and bond portfolio leaving 50% for adding long equity as Corey says was common in 2008, diversifiers or just cash. Capital efficiency with diversifiers worked though in 2008.

In 2008 I owned MERFX, RYMFX and SH for clients so I think my using them for this post is credible. I did not leverage up with PSLDX but that is not something I am likely to ever do. In 2008, Portfolio 1 outperformed VBAIX by 697 basis points, down 14.66 versus down 21.63%. 

Bloomberg wrote about the "100% Yield" ETFs we look at here regularly. Obviously, this was about all the options funds that have it the market lately including single stock covered call funds and the higher yielding 0dte index funds and so on. It's a good read. What stood out to me was the anecdote toward the end, someone who was presented as some sort of professional investor who said he lost 40% on the YieldMax TSLA Option Income ETF (TSLY) but that fortunately it was only 1% of his portfolio.

How did he lose 40%? This is what we always talk about. If he lost 40% it's because he spent the dividend. If you have exposure to something that yields 30% or 40% or whatever these things yield and you don't reinvest the vast majority of the dividend, then yes, the size of the position will erode very quickly. There's not much to like on that screen grab from Portfoliovisualizer, but it's nowhere near a 40% loss. 

Managed futures funds are going through some stuff.

ASFYX is a client and personal holding. For not quite two years, stocks have been rocketed higher and after a great run, managed futures funds have it a wall and are struggling. This is probably going to become a theme we talk about for a while, same as MLPs and REITs right before the financial crisis. Well, not the same but similar. The volume of content in 2022 about having huge allocations to managed futures was constant, similar to suggestions of 20-25% into MLPs and REITs in 2006. 

I am a big believer in managed futures but one of the reasons to own the strategy is that it tends to have a negative correlation to equities, it tends to go up in years like 2022. Managed futures can absolutely do well at the same time as equities but it is a diversifier, I do not view it as a core in terms of portfolio weight. Yes for blogging purposes which are theoretical purposes, we use large weightings but I try to be consistent with saying to keep exposures small, to diversify your diversifiers in case something goes "wrong." I don't think something is wrong here, the space has done struggled before and for much longer periods than this. 

Finally, Helene and Milton are impacting the catastrophe bond space.

I'm not sure if CBYYX was really flat today, sometimes mutual fund pricing does weird things but this sort of weather event is a useful litmus test for seeing how this space navigates through something terrible. I've been test driving EMPIX for a little while to decide if I would ever use them in client accounts. SHRIX was the only fund in the space two years ago during Hurricane Ian (EMPIX existed but was not fully invested) and it dropped about 10%, reportedly ahead of time, pricing in the threat before the damage had been quantified. Not sure how far they will drop this time of course and more interestingly, if they will complete their decline before the extent of the damage is known. This example is exactly why I believe in test driving some of these. 

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