You Won't Have WFRPX To Kick Around Anymore

We spend a good bit of time looking at risk parity, trying to see if it can work in a retail accessible fund. There aren't too many of them and they don't seem to work very well. When I say work, I mean do what an investor would hope it would do, I don't necessarily mean accurately track the thing it is supposed to track because most of the ones that don't work are tracking correctly. And looking at the history of the few risk parity funds, it is hard to believe any of them are doing what an investor would hope they would do. 

The Wealthfront Risk Parity Fund (WFRPX) is closing to new money as of 12/27/2024 and expects to be liquidated on January 3rd. It's a $1.3 billion fund charging 25 basis points. The fee seems pretty fair but the performance has been bad, compounding negatively by a few basis points. 

Invoking a recently found term, the risk parity funds seem to be a form of uncompensated complexity. Even RPAR, compounding at 2% in an 8% world for VBAIX has struggled. RPAR has 70% in treasuries although not all of them are long term. You can see on the backtest, RPAR fairing worse than VBAIX by almost 600 basis points in 2022 and then didn't really come back the way VBAIX did.

Risk parity is a good example of a great story. It sounds very sophisticated and that plays to ego, I get it. The funds came out when rates were extremely low meaning prices were high. Leveraging up, which it what risk parity does, it leverages up on bonds, when prices are close to or at all time highs is very risky and it turns out, there were serious consequences for that risk in 2022. Before then, RPAR tracked VBAIX pretty closely. WFRPX did well in 2019 but lagged VBAIX by a lot in every other year of its existence. 

It is easy to get carried away with overly sophisticated strategies bundled into funds. I believe in these conceptually but I think it is important to keep exposures small, be appropriately skeptical and diversify your diversifiers. 

On a personal note, I've been particularly busy for a few days, nothing bad, and hope resume normal blogging shortly.

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.

Carry On Wayward Fund

ReturnStacked ETFs added some very interesting info to the pages for its ETFs. They are now providing transparency on risk weighting of the markets that they invest in as well as whether they are long or short for managed futures and carry. 

Here's today's screen shot for Stocks and Managed Futures (RSST).

And for Stocks and Futures Yield (RSSY) aka carry. 

There's a lot of differentiation between the two. Additionally, RSST is long metals while RSSY is short the same metals. Managed futures and carry do two different things and the screenshots do a great job of explaining the difference. Managed futures goes long markets in favorable trends and short markets in unfavorable trends. The variation of carry that RSSY uses goes long markets in backwardation and short markets in contango. Those are different things (repeated for emphasis) and so they can be differentiated return streams from each other. I've heard managed futures and carry referred to as being cousins. Similar but different. 

The chart compares RSSY to RSST, the S&P 500 and the AQR Managed Futures Fund. RSST appears to be more volatile than RSSY and there appears to be short stretches where the two trade similarly and other short stretches where they diverge. 

The chart goes back to RSSY's inception and where RSST and RSSY have sawtoothed to small declines, I don't think there's much information yet for backtesting how much differentiation either fund adds to a portfolio but I do think they painting a good picture of how they differentiate from each other.

I don't believe there is a fund that just tracks carry in this manner but the breakout of information for RSSY versus RSST is helpful for learning about carry in case a fund ever does come along. There's plenty to ready about carry and the research is pretty consistent about it being a differentiated return stream so it is surprising there is no fund that just does what the carry half of RSSY does (please comment if you know of a fund that does this).

As for the title of the post, the song is Carry On Wayward Son, the lyrics have the word my, but the title does not. 

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.