We Want More Vol And Less Leverage

The ReturnStacked guys sent an email about having updated their model portfolios. These are always interesting to look at and fun to play around with. One the models is called ReturnStacked 60/40. They do a lot of volatility targeting with their work and I believe this particular model targets a volatility around 12.

Testfol.io currently has ReturnStacked 60/40 at a vol of 11 versus just under 10 for plain vanilla 60/40. The model is leveraged. The entire point is to test their thesis about using leverage and to support their funds. 

Since all of their models are behind a sign in, it's probably not ok to get too specific with all the moving parts but the notional exposure of ReturnStacked 60/40 is 173% with 62.5% in equities, 50% in fixed income and 60% in alts, 3/4 of the alts exposure is managed futures. This is all pulled together with various multi-asset and levered funds. The model owns RSST so a portion of the domestic equity exposure (S&P 500) comes from this fund as well as a portion of the portfolio's managed futures allocation. In other words they look through to the funds' holding and add up the various exposures. Most of the fixed income exposure is very basic with AGG-like exposure and intermediate treasuries. 

Sort of related to our conversation the other day about portfolio efficiency I wanted to try to replicate ReturnStacked 60/40 not with leverage but by dialing up the volatility. 

The weight to SPMO is pretty close to the S&P 500 exposure when adjusted for volatility. EEM isn't quite as close of a proxy for the foreign exposure but not ridiculously off. MFTNX has twice the volatility as AQMIX and RISR has almost twice as much vol as AGG. ReturnStacked 60/40 does not have overt negative convexity like BTAL but I wanted to throw it in anyway. Systematic macro is missing from my version. HFGM from Unlimited targets 2x volatility for global macro but its track record would shorten our backtest considerably. 

Portfolio 2 above tries to target the same volatility as ReturnStacked 60/40 while Portfolio 3 tries to target about the return by reducing each holding by 50% and then adding 50% in T-bills. Portfolio 3 is an example of leveraging down. We get a similar growth rate with less exposure to risk assets. 

Below, we remove the ReturnStacked 60/40 to allow for a slightly longer backtest that takes in all of the 2022 event.

The drawdown chart hovers over the Tariff Panic of 2025 and you can see the levered down version has a small drop. In 2022 the Replication With Volatility No Leverage version was up 14.41%, the Same CAGR With Less Volatility version was up 7.91 while Plain Vanilla was down almost 17%. It is important to note though that while 2022 looks pretty good, both of our versions lagged Plain Vanilla in 2023 by about 1200 basis points. 

Today's post was a useful exercise in taking someone else's process to create something more useful for, in this case, my approach but in refining your own process, borrowing bits of process from others is a great technique. I draw different conclusions about using leverage than the ReturnStacked guys do but I believe these versions we built mimic what they built and while our versions certainly have drawbacks there is validity to the outputs. 

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.