Three Alternative Funds Walk into a Bar

We couldn’t help but be grabbed by this great line from Resolve Asset Management in their latest article to find Capital Efficiency. The “bar” the three Alts Funds walk into is actually your everyday 60/40 portfolio, and they smartly compare portfolio returns when adding the three different Alts – something you’ll see widely done across the internet. But while most people are trying to show you the benefit of adding Alts in terms of increased performance and decreased risk, Resolve has a bit more nuanced approach, looking at things not just from the point of view of the added benefits, but also on how it’s important to understand those benefits from what they call a capital efficiency (or bang for your buck) standpoint, and what we’ll call a unit pricing view.

In what must have been snuck into some law somewhere along the line, you’ll see labels like this on supermarket shelves across the US (and EU and Australia).

Milk

The concept here is easy to understand – that a cheaper price tag doesn’t mean you’re getting the cheaper price. Turns out, when buying milk or just about anything else – you can pay less (per unit) by paying more for a larger quantity. Jumping back into the investment world, Resolve is basically saying the quantity, or ounces, in the investment product world is the volatility of the investment. We’re often taught volatility is bad, but when considering costs – you want more volatility per unit of cost, all else being equal.  The question Resolve asks, is what’s the better price per unit value up there on the investing supermarket shelf, where there are no Unit Prices:

  • A market-neutral equity fund with an expected gross Sharpe ratio of 1.1, targeting 7% annualized volatility on up to 300% gross exposure, with a gross expense ratio of 2.24%, and 0 correlation with the current portfolio
  • A managed futures mutual fund with an expected gross Sharpe ratio of 1.1, targeting 12% annualized volatility on up to 300% gross exposure, with a gross expense ratio of 2%, and 0 correlation with the current portfolio
  • A GTAA ETF of ETFs with an expected gross Sharpe ratio of 0.8, expected long-term average annualized volatility of 8.25% on a maximum of 100% gross exposure, with a gross expense ratio of 0.8%, and a correlation of 0.5 with the current portfolio.

Of course, these aren’t the same jugs of Milk, so to speak. They have different correlations, market approaches, and of course – volatilities – making the math not quite as easy as at the supermarket. But it’s still just math, and Resolve crunches the numbers to show the effective weighted average fee when adding each Alts program, and resulting performance. The numbers show that the Bogle-head view of paying low fees above all else is not necessarily the best plan for ending up with the best return, or better yet – risk adjusted return.

Table 1: Hypothetical Impact of Adding a 20% Alternative Fund Allocation to a Core 60/40 Allocation: Summary Statistics

Capital Efficiency

Capital Efficiency1

Head on over to their website to view the full piece and check out their Adaptive Asset Allocation mutual fund here:  (RDMIX) Rational/ReSolve Adaptive Asset.

PS – here’s one of our favorite ‘walk into a bar’ jokes:

A Bear walks into a bar… the bartender asks him what he’ll have… he thinks a bit, mutters some umms, and ahhs, and finally, after a longer than usual time, orders some honey juice. The bartender says, coming right up… but why the big pause?

To which the Bear lifts up his arms, shakes his hands, and says…. I don’t know, I’ve had them my whole life.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.