Risk Parity Is Having A Strong Year

Neos has a suite of high yielding derivative income funds. They are not crazy high yielding, just high yielding. SPYI uses the S&P 500 as a reference security and it yields 11% and QQQI uses QQQ as its reference security and yields 13%. 

They just launched the Neos Long/Short Equity Equity Income Fund (NLSI). That sounds interesting although admittedly, they are all interesting or at least fun to look at. From the prospectus it looks like the stock picking will be bottoms up for both the long names and the short names. On top of that, it will sell put spreads on the S&P 500 for the income component. The longs will be leveraged up to 120% with 55% being short. 

I wanted to model out and this is what I came up with.

XYLG sells calls on half the portfolio and HDGE is a stock picking short fund not an inverse fund. The big step off for Portfolio 3 at the end of 2024 came a massive capital gain payout by XYLG.

If NLSI pays out something like 11%, similar to SPYI, that would be a big bogey to overcome in terms of compounding positively on a price only basis but QQQI has done it so far. FWIW, the distributions are expected to get favorable tax treatment for being index options. 

Let's check in on risk parity. The simple definition is leveraging up fixed income so the the risk contributions of equity and fixed income are the same. There's not a lot of funds in this niche and they do own more than just equities and fixed income. So they are multi-asset and I think intended to be single ticker portfolio solution like Vanguard Balanced Index (VBAIX). 

They are all doing well this year. AQRIX hasn't really had any struggles during the short period available to study. FAPYX' worst year was 2022 when it was down 9%. At first glance that might seem pretty good but that's only from August when the fund launched and much of the decline in markets had already occurred. 

RPAR is having a good year too but if you have any interest in this space, I think the conclusion is that trying to index risk parity as RPAR does is not a great idea. 

I am fascinated by risk parity but it's more intellectual curiosity than having an actual interest but it is a valid portfolio concept. I just think going heavy into duration is a tough way to make a living. 

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.