Barron's had a short article looking at global macro funds. We dig into the space here a little bit, several AQR funds seems to delve into macro and the article also included Campbell Systematic Macro (EBSIX) which we often use for blogging purposes as a proxy for managed futures. The article also mentioned three funds that were new to me.
- Fulcrum Diversified Absolute Return Fund (FARIX)
- OnTrack Core Fund (OTRFX)
- Quantified Alternative Investment Fund (QALTX)
It's always interesting to see whether an unfamiliar fund might blend in to improve the overall risk adjusted return. Or not. Here's how they've done compared to the iShares 3-7 Year Treasury ETF (IEI).
OTRFX had a phenomenal 2020, it also had a strong 2016 and settled in with the pack the rest of the time. Here's the year by year with 2022 highlighted.
The Calmar Ratios are good for all of them but the kurtosis numbers are not which is a strike against relying on them as low vol, total bond replacements. Next is looking at how they blend in. To keep it consistent for this post, I'll use IEI.
There is some differentiation in terms of return, standard deviation and Sharpe Ratios. I would discount the result for the OTRFX version because the huge gain in 2020 for that fund is enough to skew the whole backtest. The FARIX and QALTX versions have less differentiation.
None if the three create much of an impression of reliably delivering some effect that would enhance what I'm already doing but it was worth looking.
There was one comment on the Barron's article that said "High expense ratio and significantly lower performance than broad index fund combination (60/40). Why would anyone invest in these funds?" Regardless of whether you believe in macro strategy funds or any other type of alternative strategy, if you are one to study different types of strategies, it would be more productive to think about them in the correct way. Maybe there's a macro mutual fund out there that is a replacement for a 60/40 fund but that's typically not the objective.
Generally, macro funds and alts more broadly are trying to offer an uncorrelated return stream, uncorrelated to stocks, bonds and stock/bond combos. We've categorized these as being negatively correlated like client/personal holding BTAL or managed futures or uncorrelated like arbitrage and some macro funds would fit that bill too.
Above, I mentioned reliably delivering some portfolio effect which brings us to this recap of AQR funds from Bloomberg. I think the article is talking about AQR's portfolios outside of mutual funds in reporting on AQR Market Neutral Fund because no ticker symbol was included. That fund was up 25.3% in 2024. That's an enormous gain for a market neutral fund at least in terms of how I think of market neutral. AQR has a mutual fund with that name that has symbol QMNIX and that mutual fund was up 25.29% so maybe Bloomberg did mean the mutual fund or maybe the mutual fund is managed exactly the same. Either way, when I see something like that, my first inclination to think that if it can go up by that much, then it can go down by that much.
That's pretty much the case with QMNIX' history. Portfoliovisualizer has QMNIX dropping 19.52% in 2020 after dropping 11% in 2018 and the same 11% in 2019.
There's clearly been some overlap with QLEIX, maybe QMNIX is a less aggressive version of QLEIX but it doesn't set the expectation of being a horizontal line that tilts upward. QMNIX is a five star fund but the expectation shouldn't be a very low vol, consistent result.
This brings us to a fantastic paper written by AQR Founder Cliff Asness titled 2035: An Allocator Looks Back Over The Last 10 Years. It's obviously a tongue in cheek look at some of the crazy things going on these days like Fartcoin having a $1.5 billion market cap, the shenanigans going on with "volatility laundering" which is Cliff's term for the way private equity is made to appear to have very little volatility and a couple of other more useful reminders about important investment concepts. If you click through to read, make sure to click on the footnotes along the way, some are funny and some have very important content.
He's a big believer in Risk Parity which weights asset classes based on their risk which usually results in leveraging up the bond position. In ETF and mutual fund form, this has been disastrous but Cliff still believes in it. Bonds "are only boring if you invest in them traditionally. They are not boring in, say, risk parity or levered 60/40 portfolios which both, in this last decade, resumed their long-term pattern of outperforming unlevered, conventional stock/bond combinations of corresponding volatility, admittedly mostly because bonds were not as subpar as equities." So embedded in there is an expectation that stocks will look more like they did in the 2000's.
Maybe, the next ten years will be subpar for equities, I don't know, and we'll have to figure something out if that happens but taking on duration, never mind levering up to take on duration, is not something I am going to do. The headache avoided by just leaving out duration is something I am very confident in.
There was a quick mention of international equities which have lagged for ages. Going heavy with foreign was a huge difference maker in the 2000's and will be important again but I have no idea when. I have less foreign exposure than I used to but never bailed on it entirely.
He went on at length bagging on private equity. I don't think he's anti-private equity, just making fun of what I mentioned above. I don't think the "good" deals will be available to everyday investors and it is not clear to me why anyone needs expensive illiquidity. If you have to have this exposure, I think one of the operating companies that benefits from running private equity would be a better way to go. Not an ETF, an individual name.
He jokes around about bailing on managed futures at exactly the wrong time. I am a huge believer in managed futures, huge. Backtest it any which way you can and the results always look great but it is a very difficult strategy to just sit in. Managed futures can lag for a long time, there are several market conditions that increase the odds of languishing.
A way that I've put this previously about managed futures specifically and alts more generally is that equities are the thing that goes up the most, most of the time. It should not be surprising then that a strategy that historically has a negative correlation to equities does poorly when equities are up a lot. We have two years in a row now where equities were up a lot and managed futures languished which is exactly what should be expected. I said the same thing in various places I-don't-know-how-many-times during the 2010's.
In 2022, there were countless calls to increase managed futures to 20 or more percent which I equated to similar calls about REITs and MLPs before the financial crisis. The more time goes on, the worse the 20%-to-managed-futures calls look. God willing I live to a ripe old age and go through another 5 or 6 hideous bear markets, I am confident that managed futures will work very well in 4 or 5 of them not all 5 or 6. Picture the stock market cutting in half and your 20% allocation to managed futures dropping by a third. How bad would that be? Diversify your diversifiers and don't have a portfolio of diversifiers hedged with a little bit in equities.
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