Generational Wealth Is Created When You Know How To Manage Volatility
With 3.33% in this asset, you can beat the index by more than 12% over 20 years.
The stock market can be one of the most irrational places for the longest period possible.
Since 2012 and through the end of 2018, we have seen the volatility index remain at extremely low levels.
This makes portfolio protection extremely cheap. Irrationally, investors in this situation prefer to follow the masses and have a higher asset allocation towards eminently long positions. These assets have a VERY high correlation in periods of high volatility and cause our portfolio to suffer large drawdowns.
Cathie Woods has experienced this in her own ETFs when she has seen the largest inflows of capital coming into her funds the days before, making record highs (February 2021). Since then, her ARKK fund has declined by 60%.
"What the wise man knows before, the fool knows after."
This is well known to the fund managers, and we have seen how, since March 2020, they have started launching Tail Risk ETFs and Hedge Funds. But do they do the same job as good volatility management?
Many of you have asked us which is the best alternative so that we can implement a portfolio as asymmetric as possible in a simple way. It is an extremely complex question, and we believe that if there are very few funds today (one or two) that have all these types of assets, it is for one simple reason: the funds would not receive the number of contributions necessary for them to be profitable.
Anyway, we are doing the exercise to find out how we could simplify this process, and rest assured, we will share it with you as soon as we have an unbiased solution.
Many managers will tell you the typical KISS stuff (Keep It Simple, St...). Buy an index, and that's it. Maybe this is the best option, but only if this index is the ACWI. Here I raise a series of doubts:
As we know that MSCI or Blackrock (iShares) companies that make this type of selection of developed/non-developed countries are not going to go bankrupt.
We know that the same will not happen with the ACWI as with the Nikkei, which has gone 30 years without making highs. What would you do if you are 60 years old and see your portfolio decline by 70% during the first ten years? You would be 70 years old and have a very complicated old age ahead of you after being working for more than 40 years.
That is why it is so important to have all the necessary tools to:
Never be exposed to black swans.
Buy when everything is much cheaper.
In answer to the question of whether Tail Risk funds do their job, there is a very curious table comparing them:
*CAGR life-to-date (since its inception in March 2008).
We see that with only 3.33% of our portfolio in a worthwhile hedge such as Universa's, from 2008-2019, we get almost 12% annual return on the index.
This is a lot of profitability for your portfolio.
Universa is Mark Spitznagel's fund. You can read more about it here.
There is also an excellent book called Dynamic Hedging by Taleb, but it is very technical.
Finally, we believe many possibilities are opening up in the DeFi world. There are very simple strategies to implement that can complement a fully diversified portfolio. We already shared one of them, resulting in a +100% in one month.
Also, as you know, we are collaborating on a project in which we will publish many of these DeFi strategies that we believe can be of great help to you. This can also be a way to continue helping us to grow.
“DeFi boom is a very near equivalent of an apocalyptic event for the traditional financial institutions.”― Mohith Agadi
Analyzing the VIX is insightful for investors as it encourages them to consider the impact of a change in volatility on their portfolios. Unfortunately, most asset classes and strategies are directionally short volatility. Developed and emerging market equities, corporate and high yield bonds, private equity, venture capital, and most other assets benefit from a benign market environment.
Few asset classes or strategies benefit when volatility is increasing or elevated, although these tend to generate the largest diversification benefits and are therefore highly valuable for any asset allocation framework, even if only as a satellite position. Unfortunately, these are typically difficult to hold for investors as they do not behave like the rest of the portfolio in normal times and are therefore constantly challenged. As usual, the enemy is us.