Nouriel Roubini Enters The ETF Fray

Nouriel Roubini is one of the managers of the newly listed Atlas America Fund (USAF). The fund doesn't appear to capitalize on doom and dismay (funny if you know who Roubini is) but more like offer a little protection or diversification or both when there is doom and dismay.

From the fund page: the goal is seeking stable returns across a variety of economic and financial market conditions, consistent with the preservation of capital. Offering diversified exposure to U.S. Treasuries, real estate, gold, and agricultural commodities..."

There's no fact sheet yet and while the holdings are available, the asset allocation is vague without calculating the spreadsheet yourself which I did (hopefully correctly). It looks like 55% in treasuries which includes 5% in the Direxion Daily 20+ Year Treasury Bear 3x ETF (TMV). The duration of most of the long treasury exposure is pretty short so the position in TMV is a huge hedge. USAF has a little over 16% in gold, 7.5% in agricultural commodities and 13% in REITs. 

I backtested it with a couple of tweaks to be able to get a decently long period to study.

The reason I put RAAX in there is that I saw on Twitter that someone said it sounded like that fund. I don't know that fund but, based on the name...why not? I threw in 50% stocks/50% managed futures because that is viewed as being all-weather-ish.

The USAF backtest and RAAX don't really look too similar to me. RAAX is much more volatile. The USAF backtest is a horizontal line that tilts upward. It did decline about 5% in the 2020 Pandemic Crash and in 2022 it was up 1.36%. In the period studied, CPI compounded at 2.5% per data from the Minneapolis Fed while the USAF backtest compounded at 5.29% with a only a 4.10% standard deviation. The Kurtosis was -0.32 right in line with the 50/50 we backtested but oddly, the Kurtosis was inferior to RAAX. The Calmar Ratio was surprisingly high at 2.18.

Jason Buck sat for the Algorithmic Advantage podcast. Not much was new but he did say that Ray Dalio’s holy grail of 15 uncorrelated return streams doesn’t exist. I put together the following that just looks at 2022, when investors needed the uncorrelated streams;

There are 15 different return streams there in addition to VOO and VBAIX. It's just a sampling, you can decide for yourself whether they are collectively uncorrelated enough to be "15 uncorrelated return streams." I'd say it's pretty close. There's no way to fit that many into a portfolio without having a portfolio of diversifiers hedged with a little bit of equity exposure which I don't think would be optimal. There are plenty of diversifiers though to choose from if you believe in this type of exposure. PPFIX, MERIX and BTAL are client and personal holdings.

A reader left an interesting comment about the challenge of having even a small position in managed futures in periods, like last year and this year, where the "protection" turned out to be more of a drag because stocks went up so much. It has been challenging as we've talked about in other posts recently but I believe the 2010's were even worse. Check out the following.

To my knowledge, RYMFX was the first managed futures mutual fund and it had the space to itself for several years after in launched in 2007. The backtest runs from the start of 2011 to the end of 2020. Plenty of other managed futures funds came onto the scene in 2013 and 2014 but I think RYMFX is the only one to test what was a terrible time for managed futures. And since the other funds came along, RYMFX has shown to not be such a great representation of the strategy even though it helped in 2008.

In the period studied, RYMFX compounded at a negative 1.55%. I'm never going to want 50% or even 30% in managed futures but the point of the back test is that in about the worst stretch in the strategy's history with a huge weighting in a fund that is meh at best and the results ok. 50/50 still compounded at better than 9%. In that same period, the CPI compounded at 1.83%, again per Minneapolis Fed data. A 7% real return for 10 years doesn't suck. 

Bloomberg reported that Citron Research is short Microstrategy (MSTR) because the company has essentially been turned into a Bitcoin hedge fund. Um ok, but MSTR started buying Bitcoin in 2020. 

The news pasted the common and nuked the 2x version into the close of regular trading. After hours they are both bouncing back some. When something goes parabolic, it is a good bet it will revert to some sort of mean but the odds of getting the timing right are pretty low. Maybe they are short in a way where they started small and can scale in.

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.