Man Financial did a study about optimizing for Sharpe Ratio, my interpretation anyway. It's a good read and I think the result is very interesting.
On the left is the asset/strategy allocation and on the the right, they believe it can be successfully levered up. Their context isn't levered up with ETFs or mutual funds, the paper is more for institutional investors but we can still learn from their idea. The levered up version could almost be implemented now but with very little choice currently so I wouldn't consider that.
For risk managed beta I went with HEQT (more on that below). Managed futures for alternative trend. Volatility l/s wasn't obvious to me, Copilot suggested RISR which we've looked along with a couple of others but it liked RISR the most and we have some familiarity with it here. Client/personal holding MERIX works for equity market neutral and ILS stands for insurance linked securities aka catastrophe bonds so SHRIX for that.
Compared to plain 60/40.
Well, it appears as though they are onto something here. I asked Copilot to critique the unlevered version in relation to the paper. At first it said that MERIX and SHRIX was a credit cluster that would get hurt in some sort of 2008 redux. It didn't know that SHRIX was ILS, second time I had to tell it that actually. The Merger Fund was up a little in 2008 as was the Swiss Re Cat Bond Index so Copilot backed off that worry. It said 50% in HEQT is still a lot of equity beta. It really isn't though. HEQT's beta is 0.44 so it's like 0.22 of equity beta coming from HEQT. Copilot backed off, essentially saying in protracted declines HEQT's beta could go up but still not like full exposure like from VOO or SPY. It then conceded that 50% in HEQT was the sweet spot which I'm sure Man had already figured out.
Based on the title of the paper, I assume that some sort of all-weather effect is the desired outcome. Copilot thought the portfolio was true to Man's intention and rated the components as follows.
Reminder that Copilot came up with the clever addition of RISR.
In starting to put this together, I asked Copilot which ETFs besides HEQT would fit the description of risk managed beta in the context that Man was using the term. It said HEQT would be the best choice. I asked if I skewed the result by asking the question that way and it said no, so who knows? It also said that Simplify Equity Plus Downside Convexity (SPD) would work but it preferred HEQT.
I don't know why anyone would want SPD. The results have been bad to be sure but it turns out it is not intended to "work" for slow declines. It is more about very fast declines. It did well during the Tariff Crash last April. Where fast declines tend to snap back quickly, I don't think protecting against fast declines at the exclusion of slow declines is a productive strategy. It's nice to have some offset to fast declines but slow declines are the thing to worry about. For this reason, I wouldn't consider SPD. I use a separate line item for fast decline protection versus the SPD strategy of bundling the protection in with the index in one fund.
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.
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