Take Their Idea To Build Your Own Portfolio

The ReturnStacked guys Tweeted out promoting the ReturnStacked Balanced Allocation & Systematic Macro Fund (RDMIX) which we've looked at several times in the past, most recently in January. I believe the fund is on it's third strategy with the most recent change happening in January coincident to the linked post. 

The strategy is described as "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." They use IVV for equities and AGG plus ten year treasury futures for fixed income exposure. 

I think of the strategy underlying the fund as being quadrantish which is why the comparison to PRPFX. Either way, it's been a rough go for the latest strategy change. I've seen a Tweet or two where one of the ReturnStacked guys said (paraphrasing) if you're going to be critical of their funds, your critique should include a mention of the embedded costs of financing the leverage. Simplistically speaking, futures offer access with leverage and there is a cost to the leverage, a financing cost kind of like margin in a brokerage account but with futures, the leverage is paid for in the pricing of the derivatives. 

How much of the performance is attributable to the financing cost? If it's minimal then that would lead to execution questions, is what RDMIX tries to do a valid strategy or are they somehow doing it incorrectly? If the financing cost is a big obstacle then that would lead to questions about whether using leverage is just a bad idea. I suspect it is the former based on the following.

I replicated the strategy this way. QGMIX is in my ownership universe.

If the cost of financing is tied to a T-bill yield of 4%+/- and the backtest runs through yesterday, then simplistically, the cost to carry the leverage could be expressed as 225/365 of 4% or 2.46%. Not exact, but a framework. FWIW, testfol.io says that CASHX' total return (just yield) is 2.58% so shorting it might account for the financing cost in the return of 8.23% for the leveraged replication versus 5.4% for the unleveraged replication. The sum of CASHX and the levered replication is 10.81% almost exactly double the result of the unleveraged replication so I think we're doing a reasonable job, even if not precise to the basis point, of accounting for the financing cost. 

Rational ReSolve took over management of RDMIX on February 27, 2018 and ran it as a capital efficient macro fund and then changed it to tie into the ReturnStacked suite of funds earlier this year. 

This is not apples to apples before 2025 but it captures the struggles of RDMIX and also makes the argument that the premise underlying the current version of RDMIX is valid. It only has 25% in equities so it shouldn't be expected to keep up with 60/40 but the volatility attributes are attractive and the return above inflation also looks good for a non-equity centric portfolio. 

Any sort of real life application should have several funds for the macro sleeve. Having, in the unlevered version, 50% in one alt seems like a terrible idea to me. I would also want to swap out AGG-like exposure and ten year treasury exposure with less volatile fixed income holdings. 

Trying a closer to real life application with the following as Portfolio 3;

MERIX and BLNDX are in my ownership universe.

It lags behind PRPFX by 67 basis points annually but that much of a drop off in volatility and smaller drawdowns is probably worth it. At least the Sharpe Ratio thinks so. Again, this is RDMIX' concept. It's valid so this could be thought of as taking a bit of someone else's process to create your own process. 

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.