The excitement over providing retail access to private equity seems to have turned with more skepticism. Cliff Asness introduced the term volatility laundering which no doubt raised awareness of the drawbacks. Check out Jeff Ptak on Twitter for what I would call investigative finance journalism trying to dissect how the XOVR ETF is carrying its position in SpaceX.
As aforementioned excitement built, we talked frequently about not getting wrapped up with illiquid vehicles offering private equity. I have been skeptical about the need for any of it in a typical retail-sized account. My thought has been that if you think you need to have some sort of private equity in your account, it would make more sense to own one of the companies generating the fees, which tend to be high, instead of paying the fees.
We've talked most frequently about Blackstone (BX) in this context. I should be clear that I've never owned Blackstone for clients, I've never even considered it, I am saying for anyone who thinks they should have private equity, a company like BX probably captures the effect for better or for worse.
From it's inception into year end 2024 BX compounded at about 15% versus 10% for the S&P 500 but the drawdowns are typically much larger than the index. Here's the last year plus. It did much worse last April and maybe the negatively biased lingering has been because of the increased skepticism I mentioned above, or not but either way, as a proxy for private equity, when times are good, they are great and when times are bad, it's a very rough hold. In 2022, BX was down 39% versus 18% for the S&P 500.
From the top down, I think it makes more sense to add long volatility from the tech and discretionary sectors. Extremely volatile financials seem prone to blowing up entirely in ways that no one saw coming due, I believe, to the extreme complexity of the business models.
Now to trying to harness short volatility.
I have no interest in any of those funds but it is interesting that they talk about harnessing volatility in their marketing. Most clients own Princeton Premier Income (PPFIX) which sells index puts in such a way that the fund is an absolute return vehicle with very little volatility.
YSPY sells put spreads on SPXL so a little different underlying but they both sell puts in very different ways. PPFIX is like a T-bill with a slightly higher return as you can see.
Most of the derivative income funds that have launched in the last couple of years have been crazy high yielders like YSPY whose website says it "yields" 48%. I've been saying there will be more of these and that the niche will evolve. Here's a filing for Worth Charting Options Income ETF (WRTH) that will sell straddles on individual stocks. It's not clear to me whether it will be a crazy high yielder or not.
Crazy high yielders don't really make sense to me. There is no way the NAV of a fund will keep up with a 48% distribution rate. YSPY pays weekly and on many of the payouts, 90 plus percent of them are returns of capital (ROC). ROC has favorable tax status and using it to round off a distribution, sure why not but often the crazy high yielders pay mostly ROC. Why not just have a lower distribution?
We've outlined using an extreme drawdown strategy where the question is what will deplete faster, just taking uninvested money out of an account until it's gone or a fund like YSPY eroding very quickly paying out an obviously unsustainable distribution? The answer is path dependent so there's no way to know going forward.
I've very pleased with PPFIX, an improvement in my eyes would be something that yielded 7-8% and managed to trade horizontally after the distribution. My hunch is that WRTH is not seeking such a plain vanilla outcome. The path to that result is probably with an option combo involving put options more than call option.
PPFIX sells puts so far out of the money that the occasional dips you see on the chart are actually because of the process they have to adhere to of marking to market. Often the one day dips get reversed within a day or two, they haven't run into trouble with the puts they sell. A little closer to the money would still be very far out of the money and might nudge the return up. PPFIX doesn't want to do that but someone else might or someone else might create the effect I'm talking about with a different strategy.
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.
No comments:
Post a Comment