Strategies heavily loaded with rates exposure

[bmessas]

Hello,

Do you think the mixed of logical investment strategies will be able to deliver performance this year in case of a strong rate rally with all the bond collapsing.
do you plan to review the allocation of the hedge strategy/ others or you are confident that your diversification will be able to offset the bond exposure in that scenario.

[brucealder]

Thanks for asking, I had the same question.

I use UISx3 and it shifted this month to 60% TMF, 89% GLD (45% UGL) and 10% SPXL…which is overly exposed to the risk of a rate rally and the subsequent collapse in bonds (which is happening today, UISx3 is down 4.75% so far today). With rates as low as they are, there’s really no upside unless they go negative…so the odds are much more likely bonds will collapse.

I can handle tons of risk (which is why I’m in UISx3), but this positioning definitely has me worried.

It would be great to get the team’s perspective on this…thanks in advance Frank, Alex, et al.

[Frank1 Grossmann]

I agree that the treasury performance was not good these last months, but this is probably rather a sort of mean reversion after the incredible performance during the covid crash March 2020. Rates will most probably stay low for the next years, but people seem to fear that inflation is picking up with all this additional covid spending. A sign is that in the non leveraged strategies the TIP (Inflation protected treasuries) since some time outperform normal treasuries. There are a lot of factors which the strategies do not know about. They did not know about the senate elections in Georgia or that Biden will probably boost infrastructure spending so we have at the moment a lot of artificial influences on normal economic cycles. The UIS strategy is mainly a minimum variance strategy seeking to minimize risk which allows even zero allocations for single assets. In these difficult markets I would probably rather prefer a strategy like the US market strategy which combines Gold and Treasuries into a hedge which can get a maximum exposure of 60% and so equity always stays at a minimum of 40% exposure.
But anyway, I will have a closer look at the strategy and see if it is better to restrict these allocations a little bit more like we did it in the more modern strategies.

[bmessas]

What do you think of replacing for the next few month UBT by UST ( 2* 10Year rates). The idea is to be still protected but at least we don’t take the full hit if the rates are going up 50 bps in the next 6 months

[Frank1 Grossmann]

In this case you could also buy just about 40% of UBT because duration acts like a leverage. Best if people fear inflation are inflation protected Treasuries (TIP)

[brucealder]

Thanks again for looking into this Frank.

With UISx3 shifting entirely out of SPXL for February, the exposure to Bonds increased. The current exposure to Bonds with both UISx3 and USMx2 seems to be very high (and with bond yields essentially at record lows, the likelihood of a bond collapse looks all too likely).

[Frank Grossmann]

I agree. The ETF choice for the leveraged strategies is rather small. I would rather use the US market strategy as this one can invest in TIPs Inflation protected Treasuries which makes much more sense seen the incredible amount of money flooding the markets. Better leverage this strategy on a margin account if you can.

[brucealder]

Thanks Frank, really appreciate the feedback!

I had a couple minor follow-up questions but I’ll email on the side in order to lighten the Forum traffic.

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