Zweig Weighs In On Complexity

Earlier this week, we took a very quick look at the new ReturnStacked Bonds & Merger Arbitrage ETF (RSBA). In support of the launch, they published a paper looking at adding alts in to the bond allocation to improve overall results. Of course they looked at alts for which they have funds, bonds with managed futures (RSBT) which is their oldest fund, bonds with carry (RSBY) and the new RSBA. The odds of learning from their research are always good. 

I've been skeptical of the premise of leveraging up to add exposure to alternative strategies. The idea is innovative so it's worth trying to figure out how they could help. 

I am using DBMF for managed futures for this post because it uses a replication strategy which is what RSBT does for managed futures. RSBT uses AGG for bond exposure. No one is going to put 100% into RSBT but that sets the table for how the fund as done. 100% AGG/100% DBMF should be a reasonable comparison, again no one allocates this way but it is a simple comparison. 50% RSBT/50% cash is unleveraged, that might fit the bill of leveraging down to collect extra interest which can be valid in certain instances.

The next two screenshots take several different approaches to trying to work RSBT into a portfolio to try to make it work.

Between all the variations I could think of I couldn't get to a compelling outcome, if there is a another approach that will cast a better light, please leave a comment. 

Kind of related, Jason Zweig wrote an article about what I'll call the dark side of alternatives. Here's a list of some of what Jason is talking about in his article.

investments with “guaranteed” yields of 15% or more that evaporated, now being investigated by federal and state authorities;

“interval funds” that charge lavish fees but let you take money out only a few times a year;

illiquid portfolios that sometimes do change hands—for 75% or less of their reported value;

funds purporting to offer high returns at impossibly low risk; 

nontraded companies that don’t even exist claiming to have sold more than $344 billion in imaginary shares;

brokers hawking illiquid shares and debt in companies they control, without disclosing their conflicts of interest;

private real-estate funds that lock money up and open the door for only a fraction of investors to sell at a time.

First, hopefully it is clear that any alternatives we talk about here are ETFs or mutual funds, accessible through brokerage accounts without any sort of lock up or gating. Part of the story with any alternative is the complexity of the strategy or exposure and whether it is worth it. Something that creates a sense of exclusivity like including the word private is certainly something to ask questions about and I would say avoid. 

A couple of the mutual funds in my ownership universe are only available through an advisor which I am not crazy about. The general idea with that restriction seems to be the belief that do-it-yourselfers aren't sophisticated enough to understand the exposures. There are plenty of advisors not "sophisticated" enough to understand the exposures. Puh-lenty. 

For my money, a limited exposure to alternative ETFs/mutual funds is the way to go. I've invested a ton of time trying to understand a lot of these types of funds, allocating to a few to help smooth out the ride. Repeating for emphasis from countless other posts, to the extent you even believe in alts, they should be used in moderation to help manage equity volatility. Equity is the thing that goes up the most, most of the time. A portfolio consisting of a lot of alternatives, hedged with a little equity or put differently, a portfolio with a lot of complexity, hedged with a little simplicity is likely to get left behind. Quite the opposite of seeking outperformance, I expect the alts to go up less than equities or go the opposite direction which can mean going down. 

We spend time here dissecting things like RSBT trying to find whether that form of complexity can actually help. Their stock and managed futures product might be more effective but I am not seeing it with the complexity of the bonds and managed futures product. 

Closing out on the Zweig article, read the comments. Always read the comments. 

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.