At different times I've talked about adding more absolute return in if we can no longer rely on equity returns the way we used to.That sounds ok I guess but finding absolute or market neutral products that are not prone to bouts of anxiety, even if just temporary, might be tough to do.
The chart captures a bunch of names from the space, there are others that I did not include. The ones charted are;
- Merger Fund (MERFX)
- Arbitrage Fund (ARBFX)
- Hussman Strategic Growth (HSGFX)
- JP Morgan Multi Cap Market Neutral (OGNIX)
- Permanent Portfolio (PRPFX)
- TFS Market Neutral (TFSMX)
The worst of the lot is down just under 15% YTD through Monday versus a drop of over 30% for the S&P 500. In thinking about an absolute or market neutral, is down 15% in a down 30% world acceptable? There is no right answer, to you that either is or is not acceptable.
PRPFX has been the laggard, and maybe it should not be considered in the group, but most of that lag came in the last three months. It rolled over a little starting in May but since August 1st it is down 16.5%. Keep in mind that at the same time SPX was down 26%. Great performance but I'm not sure if that is what someone seeking absolute or neutral has in mind.
TFMSX had a great run into its high in July. From July 1 it dropped about 15% versus 23% for SPX. Again, I think that is an excellent result but someone expecting flat might not be happy with an 8% beat or even a 12% beat in that circumstance.
OGNIX was, to the eye, the least volatile of the bunch. If you wanted boring (not being critical) you got it with this fund.
HSGFX was low octane the vast majority of the time (again it may be a mis-characterization to include this fund in the post but many people view it in this context) but it did have a few hiccups along the way. Coming into October it was up 4% on the year and then dropped 6% through Monday. Again, way better than SPX but I bet at least one fund holder panicked out during the hiccup.
Both MERFX and ARBFX were dull all year, had early October freak outs and are now working back. The credit market freeze potentially gets in the way of the strategies employed by the funds.
I have two funds from this category (not charted) in my ownership universe. The Nakoma Absolute Return Fund (NARFX) is down less than 5% YTD which is probably a good result by any measure but a back in May it was down 10% for the year which at the time was worse than the market. People who were patient came out very well. The other name I use (and have mentioned many times) is the Rydex Managed Futures Fund (RYMFX) which is up a little over 5% for the year. Again that is a good result but it got smacked around some when oil started to rollover but before the rebalance took oil out of the fund.
Assuming my picking RYMFX was just luck, should I put 10% of the portfolio into it? It has done pretty well so why not? The current event has shown repeatedly that things don't always work as they are supposed to, this has happened countless times in fact. Putting 10% in absolute/neutral as an asset class would be one thing (not sure I like that number, just an example) but all in one fund no matter how much I like is more than I would do.
There are ways to build your own market neutral using long versus inverse ETFs (this would not be perfect and could be labor intensive) that could be done in conjunction with owning a fund.
Anyone having any interest in pursuing this in their portfolio needs to have their own expectations and realize that every so often these funds are going to have a bit of a spasm and then it will go back to doing its thing. No product can offer perfect protection 100% of the time. If you find something that has been "perfect" thus far great but at some point it will hit a rough patch. If it really is a good fund then the rough patch would be short lived. Well hopefully.
21 comments:
Hussman was fully hedged until recently when he removed many of his hedges due to seeing good value in the market for the first time in years. It will now be acting like a stock fund. People should have been aware of his philosophy before investing.
I have owned this fund for awhile and used the recent downward move to add to the position.
DE
PS - Due to your articles {thanks :)}, I added a small position in RYMFX a couple months back. I HATE paying a 1.8% ER but I can't argue with the results so far as it must be short about every commodity and currency out there as it is up almost 10% in a short timeframe.
I'm thinking cash is market neutral. It goes up, at least a little, even in bear markets!
Good one anon 5:56
Are there any ETF's that might be classified as "Absolute"? ETF's are less cumbersome to buy/sell (not looking to "trade").
LSC is similar to RYMFX except it only goes long/short commodities, not currencies.
Caveats, it is thinly traded and fairly new, it is an ETN, not an ETF so it is a liability of a single company (I can't remember which one) and if it is less than it's original $10 value on some date in the next couple years, it can be called by the company and I am pretty sure that you only get the price of the asset as of the call date.
The thinly traded aspect gives me the willy's. If an ETF or ETN is too small, I think you are courting extra risk. I wouldn't invest in anything with less than $50 million in assets - the sponsoring company can't possibly be making money on a tiny fund as admin fees would be a huge drag as a percentage of income from the ER.
How about GATEX? <1 ER and beat SPY in YTD, 1, 5 and 10 year time frame. It buys index puts. This gives share holder some clue on how it may perform.
I believe Roger has discussed GATEX in one of his smartmoney articles.
As my dad used to say, "you learn something new every day."
I need to learn more about the Rydex ETFs; one of the things I've started to consider over the last few months is "making my portfolio a bit more complicated" by adding something like this.
Hey Roger,
Sad truth is that, in aggregate, hedge funds (or absolute return strategies ... are they the same thing anymore?) are very much more like a beta play than alpha play. Hold on hedgies before shouting back! On an individual basis, of course there's an opportunity (albeit difficult one) to find the truly non-correlated performer. But in Canada (see this chart: http://www.aima-canada.org/img_lib/banner/781886.gif) and in the US (http://www.hedgeindex.com/hedgeindex/__hedgechart.aspx/5B2AB669B68F3B5183D149B323226823FE2FB59F) the evidence shows that IN AGGREGATE, they behave a lot like the broader markets. Although the CSFB-Tremont did do well in the 2000-2002 bear market, so far this year ... not so good. At least not as bad as Canada. Hedge fund indexes are on either side of our key equity benchmark index!!! So the key is finding those funds that actually are good at defending during tough times. And the scarcity of finding such managers ... that's their rationale for remaining at 2+20. Cause if the good ones have closed doors, and you just have to get into a hedge fund (anon is right ... cash ain't bad) whatchagonnado? My bet is we're at a pretty good time to put the chips back on the table especially in areas that have been hit hard.
Off to Dubai for yet another ETF conference. You going to Superbowl?
The problem with RYMFX is not only the ER, but the extra 1.7% in fund overhead on top of it. See the prospectus. RYMFX trails its index by ~3.8% so its one expensive fund.
The Permanent Portfolio contains:
20% gold bullion coins
5% silver bullion
10% Swiss francs
15% growth stocks
15% split between energy stocks and REITs
10% tbills
25% long treasuries
Compared to the other funds mentioned this one is "simple" in concepts.
Paul
Being a believer in the 200 day moving average, it would now take a move of over 40% up just to be north of it. Wouldn't that mean that the S&P will be bouncing around these low levels for at least 1/2 year for it to get close?
From the March 10th weekly commentary at Hussman Funds:
"Investors who are inclined toward short-term timing should stay as far
away from the Hussman Funds as possible, because our long-term focus
will drive you completely out of your gourd."
- Dr. John Hussman
Paul - sure, but that's another 7 pieces of your portfolio to put together.
You're right, the expense ratio of the Rydex is quite high. But it's still an interesting idea; perhaps some competitor has a better alternative.
For Anon 6:43 AM and anyone who may be interested. There is a closed end fund, Gabelli Global Deal Fund (GDL), whose objective is positive return regardless of market conditions. Expense ratio, reasonable at 0.65%, per ETF Connect; currently selling at a big discount; appears to have a quarterly managed distribution policy. The fund is down about 26% over the last 12 months based on price, so it has not met its objective over this time period. Per Roger in previous comments about closed end funds, closed end funds tend to under-perform during bear markets, which this one has; but maybe they out-perform during recoveries, whenever that occurs. Average volume is around 70K shares per day. On a positive note, GDL is currently trading at a big discount. JCarr
I am interested in NARFX, HSGFX, & RYMFX. I have already a portfolio which I understand but I don't know how to analyze it when I add such things in. I am wondering if there is any software that can help me in analyzing more complex portfolios. Thks.
analyze it for what exactly? also however you mean analyze the data about the funds will be very stale due to how funds report.
Cash is king, it seems.
what i mean it something that can decompose all the funds & etfs in my portfolio into their moving parts and recombine to give me an overview of how it is doing on a daily basis in terms of each component. Sorry if that sounds vague. Thanks
You can thank the short selling ban for TFSMX's performance since July. There are some events that are going to be impossible to plan for in advance, and the SEC's entirely irrational response to market volatility is one of them.
Hey Roger, nice reminder of how difficult it is to produce positive returns in a negative market environment. During crisis events correlations tend toward one across all asset classes because people (rational or otherwise) want to avoid "risk" ie loss of capital and will sell indiscriminately to protect their balance sheet. Not to worry though, this market will prove who the real alpha generators are, and the wanna be's will lose capital and clients...as it should be. Do you suppose big brother will bail out the shoulda coulda woulda crowd in hedgeland too?
It just shows there is no hedge, other than cash, for now. Who needs a fund that goes down less than most other funds. Maybe in a complete market cycle it will look better but not now, for sure.
Hi Roger, thanks for the post. Here are some market neutral ideas that people can construct out of ETFs. In my cursory back testing in Morningstar these strategies seem to be more market neutral than most of the mutual funds with that objective.
JNK (junk bonds) 13.4% yield
SDS (proshares ultra short S&P) 1/2 ratio
hedged yield: 8.8%
PCY (emerging sovereign debt) 9.5% yield
EEV (proshares ultra short emerging) 1/2 ratio
hedged yield: 6.3%
REM (mortgate REITs) 25.1% yield
SKF (proshares ultra short financials) 1/2 ratio, hedged yield: 16.5%
There are also some CEFs with very high yields which could be used in a similar market neutral strategy.
Has anyone researched this or tried to do something like this before?
-Matt
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