The Perfect Stack

A good follow up to yesterday's post about portable alpha is a research report from ReturnStacked that tries to find the optimal stack (layering of alternatives on top of equities and fixed income using leverage). ReturnStacked certainly gets credit for creating awareness of portable alpha and capital efficiency and their content is always interesting. 

That image is a good TLDR from the paper. 

The weightings appear to be risk parity-influenced. Finominal's risk weighting optimizer comes up with slightly different numbers but it's not that far off. This can be modeled out on testfol.io and playing around with it some, gives interesting results. 

The equity component is just SPY, I used IEF (simulated) for bonds, GLD (simulated) for gold, DBMF (simulated) for managed futures and the merger fund. I chose those simply to get the longest backtests, testfol.io can simulate certain things to go back pretty far. 

For Portfolio 2 I pretty much cut all the weightings in half other than equities which I reduced by 1/3. The reason to try it with no bonds in Portfolio 3 is because the time period they studied, 1999-2025, benefitted considerably from the bond sleeve up until 2021 in a manner that I don't believe can be repeated. 

The returns are adjusted for inflation, those are real returns not nominal. I adjusted them for inflation to continue the thread about CPI plus 5%. Getting CPI plus 4+% with 1/2-2/3 the volatility and downside of plain vanilla 60/40 without too much effort is impressive. 

For one other comparison, I think the Permanent Portfolio Mutual Fund (PRPFX) is worth mentioning. For the period we studied for this post, PRPFX had a real compounded return of 5.88% with volatility running at 10.07% and a Sharpe Ratio of 0.68. 

Obviously, the ReturnStacked guys believe in leverage but it is a complexity that I would prefer not to take on. I realize they say they are not misusing leverage, I'm sure that's right, but that doesn't mean that something unforeseeable can't happen that causes the leverage to malfunction. 

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