Trying To Utilize Leverage

The starting point today is the that Rational ReSolve Adaptive Asset Allocation Fund (RDMIX) has gone through a strategy change, renaming as the ReturnStacked Balanced Allocation & Systematic Macro Fund and keeping the same symbol. "For every $1 invested, RDMIX aims to provide $1 of exposure to a U.S. balanced allocation and $1 of exposure to a systematic macro strategy." 

Per the fund page under the FAQ section the balanced allocation portion will be comprised of 50% iShares S&P 500 (IVV), 25% iShares Aggregate Bond (AGG) and 25% ten year US treasury futures. The macro portion will have exposure to several hedge fund-like strategies including momentum, trend and carry. 

I backtested as follows with Portfolio 3 below being Vanguard Balanced Index Fund (VBAIX).

QSPIX is sort of a cherry pick. I plugged in several different funds in that spot. MBXIX added the best long term result but QSPIX had the best performance in 2022.

The backtest assumes the new RDMIX would be the core holding of a portfolio but I didn't find anywhere that talked about how to position the fund. Going the leveraged route has better returns but more volatility. There's very little difference in the Calmar Ratios between the leveraged and unleveraged versions but both were much better than VBAIX while the kurtosis numbers were far inferior to VBAIX. I was very skeptical of the previous iteration of RDMIX, hopefully this one will be better but anyone interested in buying the new RDMIX has to want that bond exposure to AGG and ten year treasuries. 

Next is an updated chart from Bob Elliott of Unlimited Funds that we've looked at previously.

Coincidentally, I had another tab open, that I accidentally closed, with an article about just owning all of the more typical hedge fund strategies but leveraging up to do so which ties in a little with RDMIX appearing to be multi-strategy and Bob laying out the above strategies. I excluded fixed income and emerging markets.

I built out the following on testfol.io with Portfolio 4 being VBAIX.

MERIX is a client and personal holding. The 50/50 version is the most interesting to me. 

The 50/50 version did far and away the best in 2022. None of them helped though in the 2020 Pandemic Crash.

The leveraged version outperformed going into the 2022 bear market (that started late in 2021) but has had a tough time digging out of that hole since then. It probably will eventually unless the next bear market comes before that happens. 

There's a lot of research that supports using leverage, portable alpha, with assets that should be uncorrelated but it is still difficult for me to see the value in doing so when you consider the risk. The idea of adding alts is about improving risk adjusted returns and unleveraged they do just that in almost every backtest we run and this has been my real world experience too. This post is another example where leveraging up doesn't improve risk adjusted returns when they are needed. 

Do what you think is best but I am not there with meaningful leverage. A 5% weighting in an alt mutual fund that leverages up is a different story. The consequence for the leverage going bad in that instance would be small.

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