March 2020 Commentary

one for the record books

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VIX Index, 1990-2020

Coronavirus panic brought stunning volatility to markets in March, with the largest-ever average daily move of any month in S&P 500 history pushing the VIX index to its highest close ever, eclipsing even the worst of the 2008 Financial Crisis. The volatility was not all on the downside either: after suffering its worst 20-day return in history into the low on March 23, the S&P 500 recorded its best 3-day return ever toward the end of the month. When it was all said and done, stocks had skidded to their worst first quarter in history.

a pillar of strength as markets crumble

True to their “risk-responsive” nature, TCM strategies all recorded very strong results after profiting during the market’s dramatic decline and subsequent bounce. Profitable on nearly 80% of days in March, Alpha Seeker (+11.2%) recorded its best overall month in six years and its best month relative to the S&P 500 since 2012, while the massive outperformance of VIX products relative to the decline in equities boosted Smart Index (+19.5%) and Legacy Navigator (+8.2%) to their best months since inception.

As of March 2020, TCM strategies are not only standouts in a brutal year, but are each ahead of their respective benchmarks with lower volatility over every annual time frame since inception (1-year, 2-year, 3-year, etc). This is no small accomplishment, and a testament to the power of risk control.

Rolling returns as of March 2020. 2- and 3-year returns are annualized. Alpha Seeker and Smart Index net of 1% management fee.

OUR crystal ball

We make no attempt to predict the future- we let the VIX do the predicting and then follow along. Right now, its message is clear: the virus shock is massive, and markets will need time to stabilize. With VIX contracts still holding at crisis levels even several months in the future, it appears that those conditioned to expect a “V” bounce for equities could be in for months of frustration.

Legacy Navigator Allocation Update

We recently made an update to the allocation of our Legacy Navigator portfolio, swapping its 10% allocation to 7-10 Year US Treasuries (IEF) for Investment Grade Corporate Bonds (LQD). With US interest rates approaching zero and the Fed explicitly supporting the investment grade corporate bond market as a result of the coronavirus shock, we feel the risk/reward trade off of fixed income has tilted decisively in favor or exposures like LQD.

As always, we will continue to monitor market developments and use signals from the VIX marketplace to guide our portfolio exposures. Please contact us with any questions.

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Legacy Navigator allocation pre- and post-3/24/20 update. Subject to change without notice.

Feb 2020 Commentary

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6 Month Return Comparison. Alpha Seeker returns from a sample account, net of all expenses and 1% management fee. Click for larger image

A Rudder In Stormy Seas

After racing to all time highs early in the month even as coronavirus cases spread beyond China, markets decided all at once that the threat was a threat after all, with the VIX Index spiking to the largest 1-week gain in its history as a trap door opened under the stock market. Alpha Seeker posted profits during the meltdown which were not quite enough to offset a dip in the first week of February, while Smart Index posted an outstanding relative month, finishing 5.6% ahead of the S&P 500 Index for the month thanks to profits in its long VIX exposures.

During every VIX spike, we find ourselves repeating the message that our system positions reactively based on certain changes in the VIX futures curve.  Starting from near-record euphoria just a week prior, it took some time for the VIX marketplace to give the signal for long VIX exposure to be put in place. Even still, while other strategies suffered, ours largely avoided (Smart Index) or even profited during the meltdown (Alpha Seeker). Most importantly, each is now in a good spot to recover or build on the gains this year, even if this crisis marked the beginning of a bear market for equities. 

With VIX, Dynamic Beats Static

The old saying among traders is that it is never possible to be happy with a position- profitable ones are always too small, losing ones always too large. This is never more true than during VIX spikes as investors review the eye-popping returns on long VIX products like iPath S&P 500 VIX Futures ETN (VXX). Conspicuously absent from this analysis is any mention of the fund’s -15% return over the past 6 months, even after returning +40% in February. For those who might take this as a green light to take the other side of the trade, the ProShares Short VIX Futures ETF (SVXY) has now returned just 0.3% over the past 6 months with 90% volatility.

While Alpha Seeker’s dynamic approach may not have been as “exciting” as VXX in February or SVXY in January, over a very challenging 6 months it has substantially outperformed these static approaches, producing an 11% annual return with just 7% volatility. For those more centered on equities, over the past 6 months Alpha Seeker has now produced roughly double the return of the S&P 500 at half of the volatility and just 0.25 daily correlation. Not just a “low vol” phenomenon, Alpha Seeker has far outpaced many of the popular “low vol” and “smart beta” indexes with a more attractive risk profile. (see chart above)

WHAT’s NEXT?

When volatility is high, short time frames carry even less information than usual and during these environments, it is often best to take a slower approach with a longer outlook. A recent tweet from the ever-insightful Chris Cole at Artemis Capital sums it up best:

Especially if it starts to affect the credit markets, the disruption from this virus certainly has the potential to become a slow-moving train wreck. As another old saying goes, we are hoping for the best and planning for the worst.

January 2020 Commentary

Led by Alpha Seeker, TCM strategies performed well in a challenging month for equity indexes as the “coronavirus” outbreak in China dented expectations for global growth. After sleepwalking higher since October, risk assets suddenly began melting as news of quarantines and a shutdown of a large portion of the Chinese economy spread in the back half of January.

This is so far just a bump in the road for equities, but is yet another microcosm of how TCM strategies can help improve portfolios. At the start of the year there was no “market outlook” that flagged a Chinese pandemic as a risk for equities, and it was certainly not on our radar. Only by systematically assessing changes in the VIX marketplace were TCM strategies able to quickly adapt to the changing landscape and provide an offset to struggling passive strategies.

The ability of this process to adapt quickly and without relying on predictions is what sets it apart. The value it creates is in line with the duration of each new environment, bearish or bullish. So while this episode may so far be mild, it serves as a reminder of the need for investors to be prepared for anything.