A couple of weeks ago, Adam Butler from ReSolve published a white paper called “Managed Futures Carry: A Practitioner’s Guide”. ReSolve AM is Corey Hoffstein’s partner in crime behind the Return Stack concept; they floated on Twitter the idea of stacking carry on top of stocks and I was eager to know more.
My personal relationship with “carry” goes way back: my first real job was try to implement a carry strategy in the FX space and I have been hooked since (I might have mentioned this in another post on this blog but I am too lazy to go and check).
The white paper is well written and researched but it is quite ‘heavy’. Before reading it, I was excited about the possibility to write a post on the topic; after…I fell asleep.
The good news is that they finally launched the related ETF: $RSSY, the Return Stacked US Stocks and Future Yield. With it came a succinct and more digestible guide, which gave me a way better starting point 🙂 So, if you are curious about the ins&outs of how the strategy is built, the white paper is the perfect place to look. If you are just curious, I have taken some graphs from both presentations to give you an hopefully nice overview. All the material that is not related to the white paper can be found here.
What is Futures Yields?
The returns of an asset largely can be decomposed into two sources: (1) price appreciation and (2) yield (sometimes called “carry”).
The second component can be loosely defined as the expected return of an investment assuming no change in its price. More thoroughly, the second source of return captures the economic benefit of simply holding an asset minus the costs associated with holding it.
Futures yield strategies seek to maximize exposure to this second component of returns.
Sources of Yield
The following table offers detailed examples to better understand the concept of “yield” or “carry”:
If you want to dig deeper, the first section of the white paper is dedicated to this topic. I find the Risk-Based Theory important: carry yields a return (fuuuuucking hell this English language) because investors bear a risk AND because there are other actors in the market that are interested in unloading that risk to someone else. Carry is always an expected return…but do not tell it to the dividend stans.
Futures Yield Strategy
Will invest long and short across commodities, currencies, bonds, and equities via futures contracts using a systematic and quantitative process that seeks to harvest roll yield (carry) in futures contracts.
The strategy can be split in three different approaches: calendar spreads, cross-sectional and time-series carry (see again the white paper for more details). All of them involve a long and a short position: this is essentially to enhance the carry component versus the price-movement one, considering that the price risk is impossible to remove entirely.
Also worth noting: Some markets have a structural negative (gold) or positive (bonds) carry, but this does not lead to constant negative (positive) returns because investors demand (supply) the asset for other reasons. Ah, that lovely inverted yield curve that so much joy brought to my investments in the last few years.
Portfolio Construction
The unfortunate part here is that the volatility target is rather low…because of YOU! Yep, investors would not sustain double that level of volatility, even if they would still be able to target a lower level by simply allocating less…while saving on fees. Single-line item FTW!
Investment Universe
The Goods
All of the above is fine but why should we care? Because carry follows its own path, uncorrelated to our darlings stocks and bonds.
What is even more relevant is in the next 3 graphs:
Carry tends to perform well when stocks and bonds decide to follow Sam Hinkie favourite strategy: tanking.
Having lived through the GFC, when FX carry performed as poorly as stocks, I was a bit surprised by this result. Positively surprised 🙂 I thought that carry was largely a pro-cyclical element, something that would dance at its own rhythm but goes along with stocks when it’s time to cry. I guess this speaks in favour of structuring a strategy in the right way and having a decent level of diversification.
Last but not least, an overview of what can be achieved by mixing together stocks, bonds, trend following and carry:
The fact that you can get there by a simple 50/50 of RSBT and RSSY is magical.
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