RCM Alternatives shared conclusions from Dunn Capital about the types of alternatives to use and how to size them in a portfolio. Cutting to the chase, they say it is more effective to have 15% in volatile alternatives like managed futures than to have 30% in low vol alternatives. I would think of low vol alternatives as being various types of arbitrage or the way client/personal holding PPFIX sells volatility that is very far out of the money.
The argument is similar to the argument for capital efficiency. While I am not a fan of 15% in managed futures, putting 15% in high vol alts should be just as effective as a larger weighting to low vol diversifiers. Using their numbers, 15% in high vol alts allows more of the portfolio to be in equities which are the thing that goes up the most, most of the time.
A 14 year sample size is pretty good. Clearly, 30% in low vol alts in Portfolio 2 caused a lag but the volatility was also noticeably lower which is probably more about the smaller weight to equities than the alts. The Sharpe and Sortino numbers don't show much difference. It's not clear to me that one approach is obviously better, some will be willing to have volatility to get more basis points of growth.
The lack of differentiation between Portfolios 1 and 4 it noteworthy. Portfolio 4's result is essentially identical but it allows for better diversification with 5% each in three different high vol diversifiers instead of loading up on managed futures.
Quick pivot, GraniteShares is continuing to add to its YieldBoost suite. The basic idea is that these funds sell put option spreads, a bullish strategy, on 2X levered ETFs. I believe YSPY which does this with a 2X S&P 500 ETF is the second longest tenured fund in the suite with one for Tesla being the first one. Sticking with YPSY to avoid crazy CEO risk, here's what YSPY has done.
And here is the one for Nvidia (NVDA) which started trading in May as NVYY compared to NVDY which is the YieldMax covered call fund.
These are not proxies for their underlying reference securities. They one way or another sell the volatility of the underlying reference securities and that is a different thing.
The erosion of these, every time I look is always pretty swift but the total return is almost always positive. I can't think of an instance where the total return has been negative but there probably are at least a couple. Again, these should not be expected to track the common on a total return basis unless the common goes into a death spiral. Nvidia common stock is up 36% since NVYY started trading so not that far off but the articles that say these lag are correct in terms of simple numbers but miss the point of not being proxies for the common stock. And to make clear one point, whenever the next bear market comes along that lasts more than a month, all of the crazy high yielders should be expected to go down a lot.
GraniteShares listed two new ones including one AZYY which references Amazon.
Selling volatility is a valid strategy but there are probably more ways to get it wrong than get it right. That alone might reasonably dissuade people. I continue to spend time on this because I am convinced funds that sell volatility will at some point figure out a way to lessen the drawbacks and I want to understand that evolution when it happens.
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5 comments:
"I continue to spend time on this because I am convinced funds that sell volatility will at some point figure out a way to lessen the drawbacks and I want to understand that evolution when it happens." - excellent point, I agree.
From what I have researched Neos funds have figured it out (or have a very good approximation) with the likes of SPYI, QQQI and even BTCI. No deterioration of NAV, sustainable/ dependable monthly distributions (so far) and several layers of tax efficiency for generating an income stream in a taxable account.
Per Yahoo, price only SPYI up 7.99% since inception while the S&P 500 is up 63%. SPYI is a combo of the underlying and selling the volatility of the underlying. I think the distributions are at least part 60/40 for tax purposes but not certain. The NAV isn't eroding maybe because it doesn't "yield" 80% :-D
Thanks Roger,
Let me clarify - the reason I own these funds in a small portion of my portfolio (~12%) is to generate income since I am retired and trying to live off the income generated by my portfolio instead of selling stocks. I compare these not to equity funds (such as SPY or QQQ, which are well represented in other parts of the portfolio) but to annuity or Bonds or other income generating vehicles. In this role - I think they make a lot of sense, generating outstanding distributions (12%-14% yearly) in a tax efficient way (not only the 60/40 that you mentioned, but also: more than 90% of the distributions are classified as Return of Capital which are not taxed at all when received as they reduce my cost basis which I can eventually sell as long term capital gains or leave to my children where they will get a step up in cost basis when I pass and nobody pays taxes on these RoC distributions). The total return for these funds tells a very different story: SPYI total return since inception is 55.4% to SPY's 77.11%.
Basically I am getting ~$1,000 every month for every $100,000 invested in these funds mostly tax-deferred. Very compelling for an income investor in the deaccumulation phase considering the NAV is not eroding but even growing slightly so far.
I didn't know the Neos funds had ROC as part of their payouts. Glad it is working for you. I think I've been consistent in say there's a way to make small doses work and it looks like you've figured out one way.
Thank you, again, Roger - this is insightful and helpful.
"I think I've been consistent in say there's a way to make small doses work and it looks like you've figured out one way."
- yes, indeed!
I think that other investors in the deaccumulation/ income generating phase of their lives may also find this useful.
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