The Debasement Trade

There's been a lot of buzz about a report from JP Morgan talking favorably about Bitcoin and gold, they are benefitting from a "debasement trade." In reaction to that report, Astoria Investment Advisors wrote an article to spotlight their Real Assets Strategy separately managed account (SMA). They did not spell out the holdings or weightings but did hit on the market segments included.

• Gold
• Bitcoin
• Infrastructure 
• Data centers and digital infrastructure
• Utilities/Power stocks
• Industrials

The idea can mimicked only to a point. I doubt the strategy equalweights the six segments so I'll take a little free rein. 

Something like BTCFX is better for back testing Bitcoin because it has a longer track record than the ETFs. DTCR has "data centers and digital infrastructure" in its name so that seems like a reasonable ETF choice for that segment. Robotics and defense were suggestions from Copilot. XAR is a new one for me, I did not include utilities and I have long thought of publicly traded exchanges as being financial infrastructure which I think fits the theme. 

Four years is a decent amount of time and the results look pretty good but something is missing. There isn't a lot of differentiation. Would you expect a real asset strategy to have some defensive attributes in market drawdown? There have been three drawdowns, two in 2022 and one this year, and it was noticeably better in one of the three. Maybe that is the wrong expectation though?

Chances are this exercise isn't doing Astoria's SMA any justice but whatever is in their model, odds are pretty good that a diversified portfolio that goes narrower than a broad based index fund has holdings that get the "real asset" effect. Things like gold, materials and certain industrials like defense are ripping right now and they are part of Astoria's mix. 

ReturnStacked held a portable alpha symposium in Chicago that of course was in support of their version of it through their suite of ETFs. One of the many Tweets throughout the day highlighted a paper by Michael Crook titled "Portable Alpha for the (Taxable) Masses: Can Capital Efficient Funds Live Up to the Hype?" Gemini provided the following highlights from the paper;

Challenges and Considerations for the "Taxable Masses"

• Consistent Alpha Generation: 

  The core challenge is the ability of managers to consistently generate true alpha, which has become harder in recent years, especially after fees. 
• Costs and Leverage: 

  Portable alpha strategies can introduce increased risk and costs, as well as the potential for misuse of leverage, which needs careful management. 
• Complexity and Risk: 

  Investors must understand the inherent risks of the strategy, including the complexities of maintaining liquidity, meeting cash flows, and rigorous risk management. 
• Manager Selection: 

  The success of portable alpha strategies relies heavily on selecting a skilled and experienced investment manager capable of navigating the complexities of the strategy, according to PIMCO. 

Can They Live Up to the Hype?

• Potential: 

  The hype exists because these funds offer the potential to significantly enhance portfolio returns, particularly when traditional active management struggles to generate meaningful alpha. 
• Caveats: 

  However, this potential comes with significant caveats regarding the sustained ability to generate alpha, the appropriate management of costs, and the inherent risks of leverage and complex strategies. 
• Real-World Application: 

  While the concept is powerful, its practical success for the "taxable masses" depends on the ability of capital-efficient funds to effectively and consistently deliver on the promise of combining alpha and beta in a tax-aware and cost-effective manner, notes a paper on SSRN. 

A point toward the end articulates some of the skepticism I have about the funds. Below is similar to how we have looked at this before. I believe the ReturnStacked guys are comfortable with a 20% allocation to managed futures (I am not). I used DBMF because it uses a replication strategy and so does RSST. I used AGG because based on their other funds they appear comfortable with AGG-like bond exposure

Portfolio 2 is the only one that couldn't be implemented unless someone decided to use margin to build it. Do do that.

Portfolio 1, the one with 20% in RSST, has the lowest CAGR, second highest volatility, largest drawdown, the lowest Calmar Ratio and the lowest Sharpe Ratio. This sort of comparative result repeats every time we look. I think it can be a valid strategy but haven't seen compelling results for RSST versus building it yourself. One fund would be easier but anyone who even knows what portable alpha is can probably handle adding one more fund or two to implement the strategy. I thought that Calmar needs three years of data so the number may not be correct. 

I should probably reframe this a little. It's not that the nominal performance is so bad, other than one fund, but that the additional complexity doesn't appear to compensate fund holders. Look at their latest performance report and maybe you draw a different conclusion.

We are flying back from Maui tonight. 

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.