#49 S2N: To hedge or not to hedge?

Today’s Spotlight

If I presented you with the following chart, you would probably be very happy. $100,000 invested in 1990 is now worth $768,000, a cumulative return of 669%.

If I presented you with the same chart with a benchmark (green line), you would probably not be as happy. The benchmark turns $100,000 into more than $2.8 million and 2,700%. Let me explain this and the table below in more detail.

First, we are looking at the performance of the BarclayHedge Top 50 managed funds index. The BTOP50 Index seeks to replicate the overall composition of the managed futures industry with regard to trading style and overall market exposure. The BTOP50 employs a top-down approach in selecting its constituents. The largest investable trading advisor programmes, as measured by assets under management, are selected for inclusion in the BTOP50. In each calendar year, the selected trading advisors represent, in aggregate, no less than 50% of the investable assets of the Barclay CTA Universe. The benchmark I used is the SP500 index.

Secondly, for the last 4 years of the backtest, I have used investable instruments that replicate the said indexes. For the BTOP50, I use the iMGP DBi Managed Futures Strategy ETF. For the SP500 index, I use the ETF IVV, a cheaper alternative to SPY. This means that the ordinary retail investor can participate as well.

I have mentioned before that the most important way to assess investments or trades is in risk-adjusted terms. I have highlighted the Sharpe Ratio in yellow to show how the managed futures strategy produces a S.R. of 0.83 versus 0.48, almost 2x better. You can see the difference in the size and length of the drawdowns in the benchmark and the managed future strategy. In future letters, I will share some portfolio variations where I will design a balanced portfolio with a mix of both.

S2N Observations

The SP500 bull-bear spread dropped yesterday close to the zero mark, another sign that bullish sentiment is waning.

Gold continues to march higher to new highs in nominal terms. I thought I would just provide the current rally with some context by looking at gold’s performance adjusted for the US CPI (inflation rate). As you can see with the green line, we still have 2 mountain tops to climb before reaching new inflation-adjusted highs. We just saw in the numbers released yesterday that inflation remains a challenge. Interest rates will remain where they are for the foreseeable future.

With a dose of nostalgia, I read about BHP making an offer to buy Anglo American for $39 billion. Growing up in South Africa, there was no company bigger than Anglo. I even worked for Anglo for a period of time while it was still a major player. $39 billion just seems so small in the context of the big companies today.

I will end today’s note with some more nostalgia. Do you remember when everyone was buying Peleton exercise bikes during COVID. Talk about the power of the crowd. This stock was so hot, it now looks like nothing short of a crash. Be careful when riding with the peleton, I mean, crowd.

Performance Review

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