What Were You Expecting?

One of the pre-market emails that Bloomberg sends out included a passage on Monday morning noting that 96% of all ETFs are up in 2024 which is a very high percentage. Many ETFs are up a lot of course but "popular gauges tracking hedge-fund returns are scoring much smaller victories." The article goes on to say "higher-fee strategies have proved too complex for their own good" implying long short funds generally but without naming names which was disappointing. 

This is a point we have hit on many times in terms of understanding what a fund is trying to do and how important it is for holders to have the correct expectations. 

The blue, red and yellow on the bar chart are all alts that we talk about regularly on the blog, none of them are inverse funds. They are all intended to go up when stocks go down. They should have a negative correlation to equities far more often than not. Nothing is infallible, but I believe they are reliable. VBAIX, the green bar, is going to go up most of the time including three out of four years on the bar chart. The three alts looked nothing like VBAIX in 2022 which was a good thing and they look nothing like VBAIX in the other years which is the challenge of having huge allocations to negatively correlated alts and why I talk all the time about small exposures to diversifiers. 

At a high level, I want small exposures to the blue, red and yellow to help smooth out the ride of my large exposure to the green line. 

The second bar chart is comprised of alts that are intended to be horizontal lines that tilt up no matter what is going on and they generally do that but they are not infallible. In 2022, the red bar was down 54 basis points. Of course it would have been better for it to have been up a little but that sort of decline is far from a failure compared to expecting up a little and it dropping 25%. 

The Bloomberg note might have been referring to the type of funds that go for alpha no matter what and that can be a difficult way to make a living. There must be some funds out there that are always up and reliably beat the market but even then, that is a tough thing to rely on going forward. A more realistic expectation for equities is the likelihood of lagging some years, outperforming in other years and hopefully capturing most of the effect over the longer term.  

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.