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Updated: October 12, 2023
Disclaimer:
The following is designed to be informative in nature, but is not exhaustive and should not be considered apart from the full disclosures contained in the Fund’s offering memorandum. Any offer or solicitation of the Fund(s) may be made only by delivery of the Memorandum(s). There are no guarantees the strategy will perform as expected or designed, and any information described herein may change or evolve without notice. All discussions of costs relate solely to the U.S. Funds – Cockroach Fund, LLC and Long Volatility Fund, LLC. Investors into Mutiny Cayman Funds, Ltd. may be subject to other costs.
The question of what you should invest in is, of course, unique to your situation. Nothing we say here can or should be considered a substitute for speaking with a financial advisor and the use of your own judgment. Having said that, we will offer a few ways of how we personally think about it.
In our opinion, the Cockroach Strategy is the best liquid total portfolio solution for those looking to maximize long-term compound growth while reducing drawdowns.
The way we look at it is that the best portfolio should perform across all major macroeconomics environments: Growth, Deflation, Decline and Inflation.
We believe that this requires roughly equal parts offense and defense.
Offensive assets would be assets such as public equities, angel, private equity, and real estate.
Defensive assets would be assets such as the Volatility Strategy, gold, commodity trend strategies, and cash.
The Cockroach Strategy seeks to provide exposure to a diversified ensemble of offense and defensive assets in a liquid portfolio.
In our view, Mutiny Funds’ other offerings including the Defense Strategy, Volatility Strategy, Volatility+Stocks Strategy, and Trend Strategy are best used as tools for investors which want to customize other parts of their portfolios within the Cockroach framework.
For instance, an investor that focuses on stock selection and wants discretion over the stock portion of their portfolio could do so as they see fit and use the Volatility Strategy and Trend Strategy to complement it and provide their defensive exposure.
Similarly, an investor focused on income from Real Estate may want to manage the Income component themselves through their real estate holding and could use the Volatility+Stocks Strategy as well as the Trend Strategy to round out the portfolio.
Of course, you may have differing views on what the appropriate portfolio construction is for your situation and should allocate using your own judgment.
In the Cockroach Strategy, we will automatically rebalance the assets each month. For investors wishing to implement themselves, we believe they must rebalance regularly to achieve the best results. This means adding to the strategies when they are losing money as well as redeeming when they are performing well.
If you are investing through a retirement account, the rebalancing can be difficult to do since sometimes new funds cannot be transferred in when you would like to and so the Volatility+Stocks Strategy or Cockroach Total Portfolio Strategy may be more appropriate as the rebalancing is done “in house.”
We don’t believe in trying to time our exposures. For instance, Calpers missed a billion dollar payday in March 2020 when they redeemed their tail risk exposure just months before. Our philosophy is that investors should focus on building a balanced portfolio rather than trying to time macroeconomic trends.
Rather than engaging in market timing, we believe it is important to remember that the Volatility Strategy, Trend Strategy or any other component of the Cockroach Portfolio should be seen as part of a broader portfolio and viewed holistically.
There will be periods where Mutiny Funds’ Volatility Strategy or any long volatility strategy underperforms short volatility strategies and/or outright loses money. Similarly, there will be periods where Mutiny Funds’ Commodity Trend Strategy underperforms or suffers losses. However, what matters is how it is performing its role in the portfolio. If a long volatility strategy is struggling while the rest of the portfolio is doing well, that’s nothing to be unhappy about – indeed that is part of its role.
We strongly believe that the combination of long and short volatility strategies will produce the best risk-adjusted returns over the long run of a lifetime, a form of True Diversification.
Please note that nothing said in this document constitutes tax advice and you should consult with a tax professional.
In the normal course of business, we are able to offer monthly liquidity. That means that if we get 8 business days’ notice before the end of the month, we are able to send the majority of your funds the following month.
Typically, you will receive 90% of your funds back by the 15th of the following month.
For example, any request made before the March cut off (circa March 22nd) the ~90% wire would go out by April 15th. We do reserve the right to hold up to 10% of your investment until the next calendar year to finalize the audit and prevent any unnecessary back and forth, though this is not typical and we aim to finalize the full redemption within 30 days.
As a remnant of the financial crisis and people reading about gates and hedge fund lockups, some people worry about the impact of redemptions on other investors in the Fund.
In general, we are trading highly liquid markets and so do not anticipate any situation in which one investor redeeming would materially affect other investors.
Given the types of strategies our managers are trading and the situations in which they would be required, we have never had an issue and do not anticipate this to be an issue.
If you are investing via a self-directed IRA custodian like Midland or Millenium, all redemption requests should be directed to Mutiny instead of an IRA in order to prevent delays.
To add or redeem funds, please complete our change form.
In order to accept additional funds or new investments, we need to receive the wires with funding five (5) business days before the month to make sure we are able to deploy the funds to our managers in a timely manner so we ask that you submit the change form no later than eight (8) business days before the end of the month.
Forms received later than eight (8) business days before the end of the month and wires received later than five (5) days before the end of the month will be held for allocation the subsequent month. (e.g. If the wire is received May 29, it will be invested July 1 rather than June 1 as it was not received 5 business days prior to June 1).
If you are redeeming funds, please note there are two parts to the process:
First, your investment will be reduced/end as of the last day of the month the request is made (assuming it is done before the 8 business day cut off date). For example, if you request a redemption on May 15th, your investment will be liquidated by the amount requested on the last trading day of May.
Second, the 3rd party administrator has to calculate the monthly performance and finalize the accounting for that month before we are able to send the full amount of your redemption.
Because we need all of our managers to finalize their accounting before we can finalize ours, this is unlikely to be completed before the 20th of the month and usually happens around the 25th-30th. Given this, our standard practice is to wire out 90% of your estimated capital account amount around the 10th-15th wires of the month. The remaining 10% of funds would go out after accounting is finalized, usually around the end of the month. In our example here of a request made on May 15th, the first wire would go out around June 10th-15th with 90% of the value. The second wire would go out around June 30th with the remaining balance.
Please be advised that this means any redemption request received inside of eight (8) business days prior to the end of the month (say May 29th) would mean your investment would remain active through the end of the following month (June 30), and the withdrawal redemption amount would be wired out the month after that (July in our example).
We anticipate you will typically receive your monthly statement around the 25th of the new month depending on how long it takes our sub-advisors to complete their monthly close process. We will also provide an estimate on the 1st of each month via our email distribution list which investors are automatically added to.
If you are not receiving the monthly estimate or the updated statement, please email invest@mutinyfund.com.
Each month, investors will receive a statement from our Third Party Administrator similar to the one below. Statements should come out around the 25th of the month. They will typically look similar to the below:
We have annotated the document with the blue text to explain each line item.
To help clarify what each of the line items represents:
Please note that all our funds use a high watermark or benchmark. In the case of a high watermark, investors are only assessed an incentive fee on net new profits. As an example, if you were to invest $100k and the value of your investment goes down to $95k then up to $105k, you would only pay the incentive fee on the $5,000 gain from $100k to $105k.
This means that depending on when someone invests, they will receive different returns than someone who invested at a different time. We try to account for the high watermark in the public number in the Tortuga Times or first of month estimates email but given everyone began investing at a different time, there will likely be discrepancies between the public numbers and your statements. Your statement number is the one you should rely on for tracking your personal investment’s value.
We can provide access to an online portal. Please note that the fund only strikes a Net Asset Value (NAV) once per month (around the 15th) so this number will not change other than the one day per month when we will also send out your statement via email. That means the portal will not give you any additional information to what you will receive via email, merely let you access it in your browser as opposed to in an email.
If you would like access to the portal as a reference then we are happy to facilitate that. Simply complete the form at the bottom of this page and select the “I want access to the portal with my monthly statements” option from the drop-down menu.
Updated: October 12, 2023
Disclaimer:
The following is designed to be informative in nature, but is not exhaustive and should not be considered apart from the full disclosures contained in the Fund’s offering memorandum. Any offer or solicitation of the Fund(s) may be made only by delivery of the Memorandum(s). There are no guarantees the strategy will perform as expected or designed, and any information described herein may change or evolve without notice. All discussions of costs relate solely to the U.S. Funds – Cockroach Fund, LLC and Long Volatility Fund, LLC. Investors into Mutiny Cayman Funds, Ltd. may be subject to other costs.
Many approaches to diversification, such as the 60/40 stock/bond approach, rely on historical statistical correlations. We believe that historical correlations can be informative, they should not be solely relied upon as they are often subject to change as the economy moves through different regimes.
Instead of starting with historical correlations, we start with the four quadrant model of different macroeconomic regimes: growth, decline, inflation and deflation. All periods of financial history can be categorized as one, or a combination, of these four regimes.
For each of those quadrants, we sought to identify asset classes and investment strategies with return drivers that we feel will benefit from each of these macroeconomic regimes.
A return driver is the primary underlying condition that drives the price of a market. As opposed to using shorter term historical correlations, return drivers seek to identify fundamental relationships between an asset or strategy and the different macroeconomic environments.
The four return drivers we believe will do well in these different environments are:
We view each of these strategies as having one core environment where it should do the best, but also able to “overlap” and augment the other strategies. For instance, income strategies can do well in growth environments as can trend strategies. Volatility can do well in an inflationary environment and Trend can do well in Decline.
This seeks to provide more robustness and resilience to the overall portfolio and maximize the chance number of periods in which the overall return is positive which should increase the long-term returns.
We call this approach fractal diversification. Diversification across the four macro quadrants is a good starting point, but even better is diversification within each of those quadrants.
By including not just US markets, but global stocks and global bonds, different income strategies, three different volatility strategies and three different trend approaches, the Cockroach Strategy diversifies within each of the quadrants, seeking to further reduce the risk and increase the returns of the portfolio.
Ultimately, we believe this approach will help investors improve their risk-adjusted returns, both more efficiently compound their while better mitigating drawdowns in the interim.
We see stocks as fundamentally correlated to economic growth. When GDP is increasing, corporate profits tend to increase as well which is the long-term driver of equity prices (though there can be plenty of fluctuations in the short to medium term).
Within the equities strategy, the Cockroach Strategy intends to have 60% allocated to a broad basket of US stock index futures (S&P 500, Nasdaq, and Russell 2000) and 40% to International stock index futures (developed and emerging markets) to achieve broad diversification across equity markets.
Specifically, the stock sub-strategy includes:
The Income sub-strategy is designed to replicate the consistent source of income historically provided by bond investments and consequently perform well in a deflationary environment.
Where stocks can struggle in deflationary periods (or periods of declining inflation known as disinflation) because of the increased debt service, the bond holders which are providing that debt can benefit.
While bonds are the most common and easily accessible return driver for a deflationary environment, we believe that other assets which provide a yield such as carry trades also serve the same core function of providing income to the portfolio while offering diversification benefits beyond just bonds.
The Cockroach Strategy has a diversified income strategy that includes exposure to:
The Commodity Trend sub-strategy seeks to do well in prolonged declines in equity markets, as well as Inflationary environments due to their substantial exposure to commodity markets. We believe that commodities are the most fundamental return driver linked to inflation, since inflation is (typically) measured against a basket of commodities or products made using commodities.
That’s not to say an inflationary environment will just affect commodity prices. Currencies, interest rates, and stock markets would likely move as well. The Trend sub-strategy includes exposure to all of them (going both long and short) as part of our Trend bucket.
We believe the Trend bucket should help augment our volatility bucket in the case of a prolonged recession while leading the charge in a sustained period of high inflation.
We believe that this makes it superior to buy and hold commodities approaches as it is able to benefit from both rising and falling commodity markets as well as trends in other markets.
We include managers with short-term, medium-term, and longer-term look back periods (ranging from a few days to many months) trading across 100+ futures markets. We believe this maximizes our chance of capturing the bulk of a sustained trend move.
For more detailed information on the managers and strategies we employ, please see our Commodity Trend Strategy DDQ.
Volatility is known to expand, sometimes dramatically, in both sharp and extended stock market declines. Volatility then is the return driver which appears most fundamentally linked to such declines.
We do not believe that the most common equity hedge, U.S. government bonds, will necessarily do well if stock prices decline sharply. Rather, our research indicates that this is a historical correlation which has come and gone over history. We see no such structural reason that traditional safe haven assets like government bonds will fare well whereas a put option on the S&P, for example, will pay out if the S&P declines past its strike price.
There is a cost to buying such put options, of course, which is why they are a piece of a larger strategy.
To achieve its long volatility exposure, The Cockroach Strategy will invest into the same sub-managers as those used in Mutiny Funds’ Volatility Strategy.
It is intended as an efficient vehicle for investors seeking diversification, long volatility exposure, and tail risk protection, and combines four types of long volatility strategies across a basket of managers.
This ensemble approach is designed to have minimal carry costs in good years for the market, while maximizing the certainty of providing large, convex returns in volatile market crashes (e.g. 2001-2003, 2008-2011, Q1 2020).
For more detailed information on the managers and strategies used, please see our Volatility Strategy.
Since the four core strategies (stocks, volatility, trend, and income) are predominantly denominated in U.S. dollars, we include gold as a hedge against fiat risk from a prolonged period of high inflation.
Additionally, gold provides another uncorrelated return stream which, when rebalanced with the rest of the portfolio, should improve the risk-adjusted returns during “normal” periods with low to moderate levels of inflation.
Many of the same fiat protection logic exists for owning crypto currencies such as Bitcoin and Ethereum. In addition, crypto assets such as Bitcoin are historically uncorrelated to traditional asset classes and offer the potential for asymmetric risk/return profiles. The Strategy will seek limited Bitcoin exposure via CME Group Bitcoin and Ethereum futures contracts. In the future, if the regulatory landscape for these assets becomes more clear, we may add other crypto assets, and likely apply our ensemble approach to combine niche active managers implementing different trading strategies across the crypto landscape.
A portion of our gold exposure is held in physical gold, resulting in about 5% of the Cockroach Strategy currently sitting in physical gold bars. The remainder of the exposure is via Futures contracts.
Due to our structure, we are not able to customize the exposures inside of the Cockroach Strategy based on individual investors preferences.
Our Defense Strategy, Volatility Strategy, and Commodity Trend Strategy are available as standalones to give investors the ability to construct their portfolio as they see fit.
The Volatility Strategy is designed to act as a so-called ‘black swan’ investment, achieving asymmetric gains in times of high volatility or tail risk (e.g. March 2020). The Commodity Trend Strategy is designed to profit during inflationary periods (e.g. 2022) as well as during extended ‘crisis periods’ for stocks and bonds (e.g. 2008).
The Defense Strategy combines Mutiny Fund’s Volatility Strategy and Commodity Trend Strategy. It is intended for investors who wish to add a Defensive component to their own offensive assets such as stocks, bonds, and private equity.
Having said that, our view is that having a truly diversified portfolio means that you will almost always hate at least one thing in the portfolio. It’s not uncommon that the most hated asset will go on to perform the best: in the wake of the 1970s, many investors in the early 1980s didn’t want to include bonds in their portfolios. The media sometimes referred to bonds as “certificates of confiscation” in 1980. Then, the 1980s and 1990s ended up being a huge bull market in bonds.
We take no view on where interest rates or bond prices (or any other asset prices for that matter) will go, but rather focus on diversifying our income sub-strategy (as we do all other strategies) such that we do not feel overly exposed to any single asset or strategy.
In a sense, the Cockroach Strategy is designed to be the “least bad” portfolio rather than the “best” over any short term period. It is designed to have some asset which performs well in any macroeconomic environment, seeking to minimize drawdowns and maximize risk-adjusted returns without needing to predict macroeconomic regime changes. It is our belief that the key to being the best in the long run is more about trying to make sure you are never the worst over any short period.
The Cockroach Strategy will rebalance between its sub-strategies on a monthly basis.
We believe the main limiter to the scale and strategy capacity will be the capacity of the volatility strategy. We believe capacity constraints wouldn’t be experienced until around $1-2 Billion in assets under management in the Cockroach Strategy.
Of course, the question of how much you should invest is unique to your situation and nothing we say here is a substitute for speaking with a financial advisor or the use of your own judgment. Having said that, we can offer a few ways of how we personally think about it.
We personally view the Cockroach Strategy as a core liquid portfolio that can be effectively paired with illiquid alternatives such as Real Estate, Venture, or Private Equity.
For instance, an investor with a 50%/50% split between liquid/illiquid assets could allocate 50% of their assets to the Cockroach Strategy or similar total portfolio approaches and then use the remaining portion to diversify into illiquid alternatives and rebalance as those investments became liquid.
Investors that wanted to retain some of their liquid assets at another custodian could also do that and utilize whatever liquid strategy they deemed appropriate there.
One barbell-like approach would be to allocate 50% to the Cockroach Strategy of the Cockroach Fund, 25% to a diversified portfolio of liquid assets at a custodian (e.g. Schwab, Fidelity, TD Ameritrade) and 25% into illiquid alternatives such as Real Estate, Venture Capital, or Private Equity.
Of course, this is our personal view and investors should carefully consider the risks and use their own good judgment to make whatever allocation they deem appropriate.
There are a number of other products with philosophically similar approaches to our Cockroach Strategy using a variety of structures. In particular, some investors prefer ETF structures for their simplicity and ability to hold them in existing brokerage accounts.
We have done a substantial amount of research on ETFs and other structures. Our research has indicated to us that the limitations which are inherent in an ETF substantially reduce the risk-adjusted performance of the strategy.
In particular, ETFs restrict the use of active managers. It is not possible, to our knowledge, to include active managers in an ETF structure. About half the Cockroach portfolio relies on actively managed long volatility and trend strategies.
As a result, substitutions or alternate approaches need to be taken for half of the portfolio. Our research and belief suggests that this significantly impairs the effectiveness and performance of the strategy. We believe that a structure which allows the use of active managers is ultimately better for investors. Additionally, because we primarily utilize commodity futures, we are able to be more capital efficient.
Though we are all about making it as easy as possible for investors and will continue to look at different vehicles, ultimately our goal is to build the most effective product and we believe our current structure best facilitates that.
We have also done a lot of work to streamline our onboarding and redemption process and generally find that it takes most investors about 20-30 minutes to go through the onboarding and 5 minutes to redeem.
The portfolio will have a target nominal exposure of 220%. This means that for a $100k investment that the investor will get $220k of nominal exposure to the different return drivers.
Approximate weightings exposure across the strategies in this example would be:
How is the exposure greater than 100%?
We overlay the exposures on top of each other via the built in leverage of commodity futures,*1
which results in our exposure being roughly ~2.2x the assets of the strategy. We offer this level of exposure for two reasons.
For one, we believe that the use of modest leverage such as this across a well-diversified portfolio such as the Cockroach Total Portfolio Strategy is a better way to achieve return targets – as contrasted with taking more risks in an unlevered portfolio.
The whole idea of a well diversified portfolio is to achieve better risk adjusted returns which means either
If your diversification results in both lower return and lower risk, we believe the prudent approach is to add a modest amount of leverage to increase the return while remaining well within acceptable risk limits.*2
We believe this level of exposure will mostly “keep up” with more traditional portfolios (such as the 60% stock/40% bond portfolio) in good markets and significantly outperform these traditional portfolios in bear markets.
Consider a period where stocks and bonds are performing well but where the volatility and trend buckets are flat. In this scenario, the portfolio would perform roughly as well as a stock/bond only portfolio, while still carrying protection against a recession or inflationary period.
Further, there are cost savings to this approach for the investor. As the Fund’s fees are based on the cash invested, not the nominal exposure amount. That means that for the $225,000 of exposure gained through a $100,000 investment, the 1% annual management fee is just $1,000 instead of $2,250. This allows for investors to pay less fees in order to get the same level of exposure.
In sum, our research indicates that for a portfolio that is as highly diversified as the Cockroach strategy, this use of leverage keeps our risk within acceptable limits while allowing a more capital efficient and fee efficient solution for our investors.
*1 Because the bulk of the assets in the strategy are done using the futures markets, we just have to post margin to control the positions. What this looks like in practice is generally needing to post around 5% to 20% of the nominal size of the exposure as a “performance bond” in the account to put on and maintain those positions.
So, for example, you could get $1 million worth of futures exposure with just $200,000 in the account. Because of this natural leverage built into futures markets and the cash efficiency it affords – there is sufficient capital to put on exposures greater than the cash amount invested.
If you are unfamiliar with how futures contracts work, we recommend this presentation from Dr. Kathryn Kaminski beginning at 4:10 as a short introduction.
*2 See AQR’s explanation of leverage used in their risk parity strategy here for a more robust explanation of this logic.
Updated: July 1, 2023
Disclaimer:
The following is designed to be informative in nature, but is not exhaustive and should not be considered apart from the full disclosures contained in the Fund’s offering memorandum. Any offer or solicitation of the Fund(s) may be made only by delivery of the Memorandum(s). There are no guarantees the strategy will perform as expected or designed, and any information described herein may change or evolve without notice. All discussions of costs relate solely to the U.S. Funds – Cockroach Fund, LLC and Long Volatility Fund, LLC. Investors into Mutiny Cayman Funds, Ltd. may be subject to other costs.
The goal for the Volatility Strategy is to attempt to have flat or only slightly negative returns in non-volatile years for the market while achieving substantial 25-50% returns in very volatile years. The Volatility Strategy uses an ensemble of long volatility focused hedge funds which seek to create this payoff profile.
Said another way, we designed the Volatility Strategy to be convex in the event of a crisis. That means if the markets go down -10%, the volatility strategy may not post significant gains and could even have losses. However, if the markets go down 30%, we would hope for the Volatility Strategy to be up 30%+ as the convexity kicks in. Of course, it is impossible to know this a priori, but, we have constructed the portfolio with this in mind.
The convexity of the strategy is achieved through the structure of the instruments that they employ such as VIX futures and options. For example, the last week of February 2020– the stock market fell -7%, and the VIX (for sake of easy math) spiked +70%. However, the VIX didn’t spike 10% for every 1% down move in stocks. It maybe did 5%, then 15%, then 35%, and so forth. The VIX increases non-linearly, that is, at an increasing rate. That structure creates convexity in our return profile.
Similarly, the sub-managers who buy options have a set price they pay for an option, but the amount they can gain on the option is unbounded. They can earn 1 to 1, 5 to 1, or 100 to 1, depending on the speed and extent of a given market move. Because they are buying options, there is an asymmetry: gains are uncapped while losses are capped. They can’t be wrong and lose 1 to 100, they can only lose the premium they pay for the option.
In short, the convexity of the portfolio is driven by sub-managers targeting an unbounded, asymmetric payoff structure for the amount of risk they are taking.
The question of how much you should invest is, of course, unique to your situation and nothing we say here is a substitute for speaking with a financial advisor or the use of your own judgment. Having said that, we can offer a few ways of how we personally think about it.
We believe that the best combination of offensive assets and defensive assets is approximately equal weight as embodied in our Cockroach Strategy.
In that framework, long volatility accounts for approximately 25% of the total exposure across the portfolio. Investors wishing to follow that guideline would then need to allocate ~25% to the Volatility Strategy.
For investors that wish to use the Volatility Strategy in some other way or to customize the weightings, we can offer this guidance.
We designed the Volatility Strategy to be convex in the event of a crisis. That means if the markets go down -10%, the volatility strategy may not post significant gains and could even have losses. However, if the markets go down 30%, we would hope for the Volatility Strategy to be up 30%+ as the convexity kicks in. Of course, it is impossible to know this a priori, but, we have constructed the portfolio with this in mind.
As a simple example, if you have a portfolio that is 90% stocks and 10% Volatility Strategy, then a 30% decline in stocks with an offsetting 30% increase in Volatility Strategy would lead to the overall portfolio being down 24% rather than 30% (compared to if it was 100% allocated to stocks). To more fully offset risks in short volatility instruments like stocks would likely require a larger allocation.
Of course, your investment amount is a personal choice and you should consult with your financial advisor and exercise your own good judgment.
Based on our research, we believe that:
To take these points in turn:
We believe a portfolio is better with a long volatility allocation.
Most investors begin with the question, what is the best possible asset to own? We start with a question that seems only slightly different but leads to a much different conclusion than what most investors own: What is the best possible portfolio to own?
As a simple example, let’s say you have the ability to buy two assets out of a possible three choices.
The first two assets (Zig and Zog) have positive returns but are highly correlated; they track one another and the business cycle. Both do well when markets are up and poorly when markets are down.
The third asset (Zag) loses money overall. It has a slightly negative return. However, while Zag loses money overall, it makes profits in periods where markets, along with Zig and Zog, are falling. That is, its most substantial gains are reserved for the periods when the other assets are in crisis.
If you can only buy one asset, Zig or Zog seem like the two best choices.
But, if you can buy two, what is the best overall portfolio?
Counterintuitively, the portfolio that combines the worst performing, but negatively correlated asset (Zag) with Zig outperforms from a risk-adjusted perspective.
In this example, by combining Zig and Zag, which are negatively correlated to each other, when Zig goes down, Zag tends to go up, and vice versa.
If you are rebalancing between the two assets, you are effectively buying low and selling high. When Zig is doing well and Zag is losing money, you are selling some of Zig to buy some of Zag.
Vice versa, when there is a market crash and Zig loses value, Zag increases and so you are selling Zag to buy more of Zig at reduced prices. That means when the market rallies, you will own more of Zig and participate in more upside.
By combining Zig & Zag, you generate better risk-adjusted, long-term returns than Zig & Zog. Though it’s counterintuitive, that is how the math works out and why we believe that diversification is so important.
If you want to increase your returns, we believe you are much better off adding a modest amount of leverage to the properly diversified portfolio (Zig and Zag) rather than using a portfolio that has correlated risks (Zig and Zog).
Assuming correlations hold, Portfolio Zig & Zag is less susceptible to blow-up risk or large declines, so you know that money will be there when you need it. If an investor has to eventually reduce their exposure because of losses, or because of retirement, or a lost job, or because a loved one got sick and needed an expensive treatment, they will probably be happier to have the Zig & Zag portfolio.
In this example, Assets Zig and Zog are intended to reflect the performance of short volatility assets (stocks, bonds, real estate, VC, PE, etc.) and Zag is a long volatility asset such as the Volatility Strategy. The combination of the two outperforms either individually.
Mutiny Funds’ Volatility Strategy seeks to perform the role of Zag, performing well when the rest of your portfolio struggles. The Volatility+Stocks Strategy seeks to function similarly to the Portfolio of Zig & Zag.
Our Cockroach Strategy seeks to provide a fully diversified portfolio via a single vehicle and so may be most appropriate for investors seeking a single solution rather than wanting to use the Volatility strategy as part of a broader DIY approach.
There are lower fee options that are designed to offer long volatility strategies which perform like Zag.
However, in our experience, passive long volatility strategies are inferior over the long run when compared to more actively managed strategies. While net of fees, passive stock and bond strategies can be very effective, we have not found this to be the case in the long volatility space where we believe active management is worth the additional costs. Please see our post on What is the VIX and how is it traded? for more information on the challenges of passive long volatility strategies.
The skill that we’re paying our sub-managers for is being able to do better than a passive approach over the course of a full market cycle (typically 5-10 years). We believe they can offer more upside in bad years for the market, with lower bleed in good times.
You could think about buying volatility as playing Roulette. There are 36 numbers on a Roulette wheel and so, rationally, anytime someone offers you better than 1 in 36 odds, you should take that bet because it is a positive expected value.
If you could place a bet that paid off 100 to 1 for number 23, that’s a good bet even though you are unlikely to win. You can think about the vol market like a Roulette wheel where the croupier, the market, has a short memory. If 17 came up three times in the last 10 spins, then you may only get 5 to 1 odds for 17 because the market is worried about another 17.
However, you may get 100 to 1 on 23 because there hasn’t been a 23 in quite some time. What our sub-managers are doing is going around and looking for the 23s, the relatively cheap vol which helps us to maintain the convexity while managing our carry costs in good years. This introduces the risk that there will be periods where 23 will not come up as much as expected and so they will underperform more passive approaches, but over the long run, we believe they will be able to take advantage of market inefficiencies and achieve superior risk-adjusted returns.
Because these strategies are capacity constrained and it requires a great deal of skill, we believe those sub-managers can demand and justify their fees.
The Volatility Strategy has been live since April 17, 2020.
We choose sub-managers by first identifying the broader universe of long vol managers and doing due diligence, reviewing data, decks, phone calls, and in person meetings. We then classify them into one of our three sub-strategies:
We build the portfolio around our long options sub-managers as the core. We like long options because we view them as a form of “debit card investing”, which acts as a sort of non-recourse leverage. That is, long options positions have the potential to return 10 to 1 or even 100 to 1, but you can only lose the principle that you pay in.
We have the largest percentage of the strategy allocated to long option strategies as they provide the most convexity and tail risk protection, they also typically have the most bleed associated with them and rely on spikes in volatility to perform.
Around the Long Options sub-strategy, we added our Relative Value sub-strategy.
The Relative Value strategy can profit in up markets, attempting to provide an income stream that helps us to achieve a positive carry over a risk on cycle. Our implementation of relative value managers is different from other relative value strategies because we seek out managers that have a ‘long volatility bias’ to their trading strategies. That means, they can flip and go long volatility so it can also do well in a crisis event along with the rest of the portfolio. We believe that combining it with our existing strategies further improves the overall return profile.
Finally, we include our tail risk sub-strategy. Like the Long Options sub-strategy, they offer a good deal of convexity in the case of a sharp sell-off. However, they are different in that they offer a type of ‘always on’ protection.
Our Long Options sub-managers engage in some form of market timing which seeks to limit their losses and increase their gains. This timing usually involves a reliance on market data and so may not necessarily exogenous events. For instance, an exogenous event like a war breaking out on a Sunday would not be reflected in any market data from the prior trading day on Friday. The Tail Risk sub-strategy accepts the slightly higher bleed that can be associated with ‘always on’ protection in exchange for being able to protect against exogenous ‘tail risk’ events such as war or, dare I say, an unexpected pandemic.
Within each of these sub-strategy, we aim to have multiple sub-managers to diversify the idiosyncratic risk of any single sub-manager. We also have different flavors of market microstructures which we believe should improve the risk-adjusted return of the Volatility Strategy. For example, one sub-manager in our relative value sub-strategy could trade exclusively U.S. markets while another trades European and Asian markets.
All of this allows us to cover more potential path dependencies with the goal of maximizing our probability of capturing any sort of risk off event with a convex return profile while not bleeding too much in good years for the market.
We feel that this structure is the best combination of the three components we want out of a long volatility strategy:
Generally, we think of each sub-strategy in this way:
We believe that our ensemble approach of multiple sub-strategies will allow us to achieve a strategy which will be roughly flat over the course of a bull market cycle (3-7 years) while exhibiting a high certainty of convex returns in the case of a major sell-off.
We have hosted many of our managers on the Mutiny Investing Podcast. You can download the podcasts on your favorite podcast app or listen/read the transcripts on our website.
Note: Manager composition is subject to change without notice.
We built the core of the portfolio around buying options. An option is a financial instrument that allows investors the right, but not the obligation (hence the option) to buy or sell an underlying asset at a specified time at a specified price.
For example, if there is a stock currently trading at $100, you could buy a put option for the right to sell the asset at a specified time (say the end of next month) at a specified strike price (say $90).
Let’s say this option costs $1. So, you pay $1 up front for the right to sell the stock for $90 at the end of the coming month. If the price of the stock falls to $85 in that time period, you can buy the stock for $85 in the open market and use your option contract to sell it for $90, pocketing a $4 profit: $90-$85-$1 that the option cost you.
If the stock ends the month at any price higher than $90, then the option expires worthless and you lose the $1 you paid for the option.
We like buying options because they have a fixed downside (the $1 this example) but an uncapped upside. It is a form of “debit card investing” – you can’t lose any more than you spend.
The benefit of options is that they function as a form of non recourse leverage. You get convex exposure in the way you would if you used leverage, but unlike using leverage, your downside is capped – you don’t have to risk any more than the premium you put in.
You could think about buying options as playing Roulette. There are 36 numbers on a Roulette wheel and so, rationally, anytime someone offers you better than 1 in 36 odds, you should take that bet because it is a positive expected value.
If you could place a bet that paid off 100 to 1 for number 23, that’s a good bet even though you are unlikely to win. You can think about the vol market like a Roulette wheel where the croupier, the market, has a short memory. If 17 came up three times in the last 10 spins, then you may only get 5 to 1 odds for 17 because the market is worried about another 17.
However, you may get 100 to 1 on 23 because there hasn’t been a 23 in quite some time. What our sub-managers are doing is going around and looking for the 23s, the relatively cheap vol which helps us to maintain the convexity while managing our carry costs in good years. This introduces the risk that there will be periods where 23 will not come up as much as expected and so they will underperform more passive approaches, but over the long run, we believe they will be able to take advantage of market inefficiencies and achieve superior risk-adjusted returns.
We use an ensemble of sub-managers trading different options strategies in different markets to gives us diversified exposure to options strategies, with both calls (bets on the market going up in a volatile way) and puts (bets on the market going down in a volatile way).
The Relative Value strategy can profit in up markets, attempting to provide an income stream that helps us to achieve a positive carry over a risk on cycle. Our implementation of relative value managers is different from other relative value strategies because we seek out managers that have a ‘long volatility bias’ to their trading strategies. That means, they can flip and go long volatility so it can also do well in a crisis event along with the rest of the portfolio.
One example of a relative value sub-strategy we employ is to trade the relative value between the VIX and S&P or the VIX calendar term structure. For instance, a volatility arbitrage strategy might be long the VIX and long the S&P at the same time because the VIX and S&P tend to be anti-correlated. This means that if equity prices fall sharply, they would benefit from the pickup in volatility on the VIX side but lose money on the S&P side.
The sub-managers we use here are using their proprietary algorithms to know when they want to be in the market and how to ratio the trades appropriately. If the market falls sharply and you have more exposure to the VIX than the S&P then your gains on the VIX will overcome your losses on the S&P. Getting this ratio and positioning right is what our sub-managers have spent their careers focusing on.
We also employ some short-term trend following approaches as part of this sub-strategy. One place where options struggle is after the first leg down in markets such as after the Lehman collapse in 2008. At that point, options have become more expensive because suddenly everyone wants to buy insurance. This is great for our long options sub-managers: we have all the long options and other people are scrambling to buy them and willing to pay up so the option sub-managers can perform really well in that first leg down.
However, after the crisis, it means that options are likely to be more expensive. If you were buying options for $1 with a max payout of $10 going into the crisis, you had 10x upside. Once options prices go up, that same option with a $10 upside may cost $3 or $4, so you have more like 2x or 3x upside. Options can still do well, but don’t have the same level of convexity at that point.
The short-term trend following approaches in our relative value sub-strategy can do well in this environment. They can go long and short on the futures indices such as the S&P in the United States or DAX and Hang Seng globally.
Shorting is structurally different from buying an option in that the return profile is the same regardless of recent volatility in the market. It doesn’t cost you anymore to go short after a 20% down move than it does during a low volatility period. That means short futures can help after we have a significant first leg down in markets to seek to increase our ability to provide returns as the market declines.
These strategies can also do well in the first leg down as well, though they will not have the same level of convexity as the options sub-strategy given the instruments they are trading.
In keeping with our belief about broad diversification and using an ensemble approach, we include managers that do other variations on these approaches with a long volatility bias.
Finally, we include a tail risk sub-strategy alongside our other three strategies. Unlike our Long Options sub-managers which are coming in and out of the market at different times and in different sizes, the tail risk sub-strategy is in the market 24/7 and 365 days a year. This offers us increased certainty in the case of a large sell off.
All of the active sub-managers in our other strategies are providing a valuable service because they are using their proprietary experience and algorithms to try and outperform passive long volatility approaches.
We believe that combining sub-managers in an ensemble approach helps to increase the odds that they are going to capture an event. Because we are using multiple sub-managers across multiple strategies, if one or two sub-managers miss a big sell off, the ensemble can still do well as others would catch it.
However, our other sub-managers are typically engaging in some form of market timing which seeks to limit their losses and increase their gains. This timing usually involves a reliance on market data and so does not manage exogenous events. For instance, a war breaking out on a Sunday would not be reflected in any market data from the prior trading day on Friday. The Tail Risk sub-strategy accepts the slightly higher bleed that can be associated with ‘always on’ protection in exchange for being able to protect against exogenous ‘tail risk’ events such as war or, dare I say, an unexpected pandemic.
This should help us protect against an exogenous event that our sub-managers’ algorithms won’t pick up as it’s not showing up in market data such as a 9/11 style event. It also enhances our convexity in the case of a sharp sell off.
There is a good deal of room for the strategy to scale, given the desire and ability to add sub-managers and further diversification across strategy ‘sub-strategy’. The main limiter to the scale and strategy capacity will be the capacity of sub-managers themselves, and exchange position limits across the total portfolio; however, we currently believe capacity constraints wouldn’t be experienced until around $1 Billion in assets.
Mutiny’s Volatility Strategy is designed to do well in periods of increasing volatility and/or decreasing US stock prices. It is expected to struggle in periods of decreasing volatility and/or increasing stock prices. Slowly grinding up markets like 2017 and 2019 are challenging environments for us, but good environments for short volatility assets such as stocks, bonds, and real estate. As we believe investors should hold both long and short volatility assets, our goal for the Volatility Strategy is to be flat to slightly positive over a risk on cycle when short volatility assets perform well.
The Volatility Strategy would also struggle in a flat and low volatility market such as 2015 where equities could also struggle. We would point out that the opportunity cost of holding it is relatively low over these periods since most other assets would be mostly flat as well.
It could also struggle in a slow grind down for markets where markets were falling with low levels of volatility. We employ different strategies such as our Commodity Trend Strategy which can do well in a protracted grind down in our Cockroach Portfolio to help cover this possibility. In general, we feel that long volatility and trend-following strategies work well together and we employing both as part of our Cockroach Portfolio.
Our Defense Strategy also contains a blend of the Volatility Strategy and Commodity Trend Strategy for investors looking for broad-based defensive allocation.
There is a strong historical anti-correlation between volatility and equity prices which is why we believe it is an effective diversifier. That being said, there have been and will always be periods where implied volatility and equity prices drift down at the same time.
Consider that a VIX of 30 means option prices are reflecting 30% annualized volatility, which equates to roughly 2% daily moves and about 8.6% monthly moves. That means equities can fall 1.5% per day or 8.5% per month, and volatility would still be lower than what is expected from a VIX print of 30, causing the VIX to fall alongside the market.
Based on our historical research, we believe it’s the case that these periods are short-lived. Either equity prices rebound within a few months, or, if equity prices continue to decline, then volatility picks up, however, it’s certainly possible to have a ~6-12 month period (or longer) of both falling equity markets and flat to declining volatility where both Mutiny’s Volatility Strategy and Volatility+Stocks Strategy would struggle.
It is not clear if the Volatility Strategy will perform well in an inflationary scenario. Some people believe that inflation creates instability and therefore higher volatility environments. However, no one has traded volatility products in an inflationary environment.
The last time we saw significant inflation in the US in the 1970s, the volatility markets didn’t exist in anything like their current form so we do not count on the Volatility Strategy to do well if we were to see significant inflation, though it is possible. For investors concerned about inflation, our Commodity Trend Strategy is more directly designed to do well in an inflationary scenario.
Though we do not anticipate such an event, the worst case scenario is always a complete loss of capital.
The Volatility Index (VIX) is a common measure of stock market volatility. It uses option prices to gauge expectations for the speed and severity of market moves. If options are expensive, it suggests that market participants are worried and willing to pay more for insurance. If they are cheap, it suggests participants are unconcerned.
The options prices that feed into the VIX calculations are only designed to be forward looking – about 30 days out – so it’s an estimate of short-term volatility expectations. This makes it an imperfect, but useful proxy for long volatility as an asset class. As a result, so many investors expect a long volatility investment to perform similar to the VIX.
The historical average of the VIX is around 20 though it tends to be bimodal: clustering around 12-15 in calm years for the market and then clustering around 25-30 in volatile years.
The relationship between VIX, volatility, and the performance of the Volatility Strategy is incredibly complex. In 8 out of 10 cases, it would be fair to expect the Volatility Strategy to do well when the VIX appreciates more than +10 points.
Unfortunately, we could write a PhD thesis on the 9th and 10th cases.
From a structural perspective, the VIX is not an investable index. Consider October 2020 as an example. While the VIX did rise sharply month-over-month, investable instruments tracking volatility were up much less. Front-month VIX futures, for example, were only up 7.5% despite the VIX index climbing some 45%.
Why such a discrepancy? A simplified answer is that the VIX is a measure of volatility expectations for a certain time frame, and the investable products have different time frames and structures.
VIX is measuring “floating strike vol” when we buy “fixed strike vol”. As a toy example: say the VIX is at 10, but you buy a Put -5% OTM. You are paying up for skew and Implied Vol is priced at 15.
So, as the market moves down to your strike the VIX goes from 10-14, a “+40% increase”, but your Puts are down 1 vol point, from 15 to 14, so you are actually down -6.6%.
Part of what we are seeking to do by employing an ensemble of active sub-managers is to reduce the “bleed” typically associated with long volatility and tail risk strategies. This means sub-managers may risk bleeding more than a naive tail risk strategy (such as simply buying puts) over any one day, month, or quarter in order to limit the overall bleed of their tail risk protection schemes over a full market cycle.
They employ a variety of strategies to accomplish this including:
While track records and stress testing indicate to us that these strategies have long-term positive expectancy, there can and will be periods when such strategies are “out of phase.”
There will be large down moves in Europe that whipsaw back to breakeven during the US session. There will be exposure to long call options that lose value as the market takes a breather from a 30% rebound. There will be weeks and months where the VIX sells off alongside the stock market, breaking the typical negative correlation between the VIX and S&P.
The goal of diversification is to reduce the odds of all of these things happening at the same time, though there will still be some instances in which many of them coincide.
This is how the alpha seeking active trading we employ works. We are risking something (in this case a bit more bleed in the short term) to seek to gain something greater (much less bleed over a full market cycle).
We believe that the core long options and tail risk components of our portfolio will act in an “as expected” / “instant on” sort of way during volatility spikes and significant market sell-offs.
The relative value pieces of the portfolio, which were included to seek to limit bleed over a full risk-on cycle, will act more independently and provide lumpier (sometimes on/sometimes off) type returns.
The Volatility Strategy was primarily designed in an effort to offset much larger moves down in equity markets: the type that is ultimately most damaging to long-term compounded growth.
Our goal is to help investors improve the long-term, risk-adjusted performance of their portfolios. We believe The Volatility Strategy, when combined and rebalanced with other long volatility and short volatility assets is the best way to do this.
For a more in-depth answer, please see What is the VIX and How is it Traded?
The Mutiny Funds’ Volatility Strategy was launched on April 17, 2020. All performance since then is live performance.
Our Long Volatility Strategy Presentation available to QEP investors also includes hypothetical performance going back to January of 2016.
While the Volatility Strategy was not live for all the years shown in the back tests, most of our sub-managers at the time of launch were. As a result, we are able to use their live track records. The whole back test is hypothetical in the sense that those sub-managers have never been combined in this way before, and were combined in such a manner with the benefit of hindsight. The regulations refer to this type of performance as Hypothetical Composite Performance.
We use actual sub-manager returns where available (which it typically is, though not always) and their own backtests or proprietary performance when not.
Updated: October 12, 2023
Disclaimer:
The following is designed to be informative in nature, but is not exhaustive and should not be considered apart from the full disclosures contained in the Fund’s offering memorandum. Any offer or solicitation of the Fund(s) may be made only by delivery of the Memorandum(s). There are no guarantees the strategy will perform as expected or designed, and any information described herein may change or evolve without notice. All discussions of costs relate solely to the U.S. Funds – Cockroach Fund, LLC and Long Volatility Fund, LLC. Investors into Mutiny Cayman Funds, Ltd. may be subject to other costs.
Updated: October 12, 2023
Disclaimer:
The following is designed to be informative in nature, but is not exhaustive and should not be considered apart from the full disclosures contained in the Fund’s offering memorandum. Any offer or solicitation of the Fund(s) may be made only by delivery of the Memorandum(s). There are no guarantees the strategy will perform as expected or designed, and any information described herein may change or evolve without notice. All discussions of costs relate solely to the U.S. Funds – Cockroach Fund, LLC and Long Volatility Fund, LLC. Investors into Mutiny Cayman Funds, Ltd. may be subject to other costs.
The Commodity Trend Strategy is designed to achieve broad diversification across futures markets including stocks, bonds, currencies, and commodities (e.g. energies, metals, grains and meats). The Commodity Trend Strategy aims for greater than 40% exposure to commodity markets in order to maximize its ability to capture inflationary moves. The exposure to currencies, bonds and equities is intended to deliver so-called ‘crisis alpha’ during prolonged declines in equity markets such as the 2008 Financial Crisis.
Some of the markets it can trade include:
The Commodity Trend Strategy seeks to differentiate itself from other trend following approaches by achieving broad diversification across three different dimensions.
For asset class exposure, the Cockroach Portfolio Commodity Trend sub-strategy diversifies across many commodities markets as well as stocks, bonds, and currencies.
A broadly diversified trend following approach can cover financial markets like stocks, bonds, and currency markets in addition to commodity markets like energies, softs, grains and precious metals.
Many modern trend strategy implementations do not include very significant allocations to commodities which may impact their ability to perform well in an inflationary environment.*1 The primary role of trend in the Cockroach Portfolio is to perform well in an extended period of inflation. The Cockroach implementation of trend tries to keep at least 30% (and ideally more like 40% to 50%) of its exposure in commodities as part of it’s goal to perform well in inflationary periods.
There are many techniques to identify what constitutes a trend. One popular one is a moving average crossover where you look back at the 120 day moving average. If the price goes above that, you go long. If it goes below that, you go short. Trend strategies gained their first wave of popularity in the 1970s and practitioners have developed many other techniques with empirical support such as the double (and triple) moving average crossover, Donchian System, and Bollinger Bands.*2
Source: RCM Alternatives. Past Performance is not indicative of future results. All data from Bloomberg.com.
In essence, these different trend models are all seeking to accomplish the same basic goal of identifying a trending market (up or down) and following the trend but defining what constitutes a trend in somewhat different ways.
As we believe there is reasonable support for all these approaches, we take the position that diversifying across them will produce the best long term results.
Similarly, trend strategies can use different look-back periods. Instead of a 200 day moving average crossover, a shorter term Trend model might use a 50 day moving average crossover. A longer term model might use a 200 day moving average crossover.
The challenge with trend strategies is that different trend models and look-back periods can substantially change the returns of a strategy, a form of timing luck.*3
A painful example for many longer-term trends following strategies was the March 2020 sell off, where the market moved sharply down and then sharply back up. Many strategies using longer lookbacks sold near the bottom and didn’t get back in until the market had recovered significantly – locking in all the losses while missing out on most of the gains from the recovery.
Shorter-term strategies, by contrast, got out much sooner and got back in much sooner, which lead to superior performance.
The flipside is equally possible. After bonds declined throughout 2022, many trend followers were short bonds going into 2023. When Bonds aggressively rallied in anticipation of Fed rate cuts in the Spring, many short term trend followers took sizable losses. When the market reversed and bonds began their decline again, shorter-term trend followers missed out where many longer-term trend followers stayed in the trade the whole time and so were able to recoup some or all their losses from the bond rally.
Hoffstein (2020) found that their “…constructed indices exhibit high levels of rebalance timing luck, often exceeding [1%] annualized…” *4We believe this supports the idea that diversification within the Trend sub-strategy could improve performance compared to a single trend model or lookback timing. The Commodity Trend Strategy diversifies across lookback periods ranging from 10 days to 18 months and so seeks to more reliably capture trends wherever they show up and minimize the impact of timing luck.
While it’s tempting to try and identify the “best” signal or “best” look back period, this sort of over-fitting to history is exactly what the Cockroach Portfolio approach is trying to avoid. What was “best” over the past year, ten years or twenty years may not be best in an unknown future.
As with the other components of the Cockroach Portfolio, the goal is not to predict the future but to identify strategies that can all do well across a broad regime (inflationary periods in the case of trend) and add another layer of diversification to try and improve the long-term compounding.
*1 There are various speculations as to why this might be. The most likely seems to be that there were not a lot of trends in commodity markets in the 2010s leading to poor performance of commodity focused trend strategies which may have caused investors to shift their focus elsewhere. Additionally, commodity markets are more capacity constrained than stock, bond and currency markets so as a trend manager’s assets under management grows, they may be inclined to do less and less in commodities.
*2 Our friends at RCM Alternatives publish an annual trend following guide which goes into more detail about various Trend following models and approaches.
*3 Corey Hoffstein of Newfound Research has written extensively on the concept of timing luck and we would direct you to his research to learn more.
*4 Ibid
The Commodity Trend Strategy contains an ensemble of what we consider to be blue chip Commodity Trading Advisors (CTAs). An overview of the firms and their strategies is provided below.
Chesapeake was founded by Jerry Parker, who began his money management career in 1983 as a member of the “Turtles”, a legendary group of individuals from a variety of backgrounds recruited by Chicago money manager Richard Dennis.
The Chesapeake trading methodology is long-term trend following, utilizing robust trading systems across a broadly diversified set of markets. It is a rules-based investment approach that focuses on capital preservation, while attempting to provide positive annual returns. Utilizing diversification and robust systems, the firm’s goal is to maximize the profit in each trade by following the system entries and exits, regardless of market conditions or temptations.
They believe using robust trend following systems with minimal filters, conditions or other parameters minimizes the risk of curve fitting and positions them well for market conditions that may not have occurred in the past. They invest in over 110 markets worldwide including currencies, commodities, interest rates and equities.
The strategy is designed to approximately target an equal exposure split (25% each) between the currency, commodities, interest rate and equity markets.
Dunn’s World Monetary and Agriculture (WMA) Program is a fully diversified 100% systematic medium to long-term trend following program, encompassing a portfolio of financial, energy, metal and agricultural futures markets. The WMA Program is a compounded growth strategy. The investment objective is to extract profits from up and down trends, resulting in a return stream that exhibits very low correlation with traditional asset classes. It seeks to have a 40% allocation to commodities and has a lookback period typically in the 180-200 day range.
EMC is a systematic global macro investment management firm founded in 1988. EMC’s Classic Program seeks to provide long-term positive returns with low correlations to equity, fixed income and traditional hedge funds.
EMC trades stock indices, currencies, financial futures, precious and base metals, energies, agricultural and soft commodities.
The Classic Program employs multiple proprietary independent trading systems that range in duration from 15 to 90 days. Individual systems are trend following and momentum based in nature and are designed to capture directional price movement over different time frames and under different market conditions. EMC actively manages risk at every level of the portfolio using current market volatility, account equity, correlations and other portfolio components to quantify and limit risk at the trade, market, sector and portfolio levels.
Quest’s flagship strategy, AlphaQuest Original (AQO) is designed to perform well during periods of volatility expansion or potential fixed income and/or equity market corrections.
By utilizing shorter-term trading time frames and focusing on positive skew, AQO seeks to benefit in environments where tail risk is most likely to materialize. Quest programs, due to their positively convexed trading style are a particularly attractive portfolio diversifier and can act as a hedge to traditional portfolios, hedge fund portfolios and CTA portfolios.
The Volt Diversified Alpha Program is fundamental in nature, primarily seeking to capture price moves that are motivated by a change in underlying economic factors, but it also uses technical information for risk management, trade timing and execution decisions.
The program trades over 80 liquid futures markets, covering the main global financial and commodity markets.
Because Volt is using economic data rather than price data as an input to their models, it should be uncorrelated to other short term trend sub-managers in good times, helping improve the carry costs, while still performing well in sell-offs.
Note: Though we strive to keep the manager list as up to date as possible, we are constantly re-evaluating the portfolio and the manager composition is subject to change without notice.
We instruct the managers to trade approximately 1.5x the cash value of the Commodity Trend Series.
Because we are trading trend strategies where we and our managers are extremely focused on eliminating any sort of blow up risk in the portfolio, this modest amount of leverage does not seem problematic, but does allow investors to be more capital and fee efficient.
However, Mutiny itself is only charging fees on the cash amount. In the case of an investor that put in $1mm, they would get $1.5mm in exposure to the underlying trend managers but only pay Mutiny’s fees on the $1mm cash.
Note that the Commodity Trend Strategy inclusion in the Cockroach Strategy does not include this leverage so the numbers there will be slightly different. E.g. If the Commodity Trend Strategy as a standalone is up +3% then the commodity trend sub-strategy included in the Cockroach portfolio will be up +2%. This is done because we believe the Trend strategy needs to be balanced within the broader Cockroach portfolio.
The question of how much you should invest is, of course, unique to your situation and nothing we say here is a substitute for speaking with a financial advisor or the use of your own judgment. Having said that, we can offer a few ways of how we personally think about it.
We believe that the best combination of offensive assets and defensive assets is approximately equal weight as embodied in our Cockroach Strategy.
In that scenario, the Commodity Trend Strategy accounts for 20-25% of the total exposure of the portfolio. For investors seeking to use it in a similar way then, an allocation along those lines seems appropriate to us. Given the capital efficiency of our structure noted in WHAT IS THE EXPOSURE OF THE COMMODITY TREND STRATEGY, a ~13-17% allocation to the Commodity Trend Strategy would achieve this total exposure.
For investors that have a different view of the role and sizing of trend strategies in a portfolio, they are able to size their investment however they deem appropriate.
Of course, your investment decision and amount is a personal choice and you should consult with your financial advisor and exercise your own good judgment.
Updated: October 12, 2023
Disclaimer:
The following is designed to be informative in nature, but is not exhaustive and should not be considered apart from the full disclosures contained in the Fund’s offering memorandum. Any offer or solicitation of the Fund(s) may be made only by delivery of the Memorandum(s). There are no guarantees the strategy will perform as expected or designed, and any information described herein may change or evolve without notice. All discussions of costs relate solely to the U.S. Funds – Cockroach Fund, LLC and Long Volatility Fund, LLC. Investors into Mutiny Cayman Funds, Ltd. may be subject to other costs.
Our goal at Mutiny Funds is to help investors maximize the long-term growth of their portfolios. Unlike most, we believe that combining defensive-minded strategies such as long volatility with offensive-minded strategies providing the best opportunity for long-term capital growth, while reducing drawdowns in the interim.
Copyright © 2024 Mutiny Funds, LLC is a registered commodity pool operator and commodity trading advisor with the Commodity Futures Trading Commission and member of the National Futures Association, and TaylorPearson.Me is a registered DBA of Mutiny Funds, LLC. This website is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed are solely the opinions of the authors, and do not necessarily reflect the opinions of Mutiny Funds, LLC, their affiliates, co-managers of their funds, or companies featured.Investing is risky, and you are reminded that futures, commodity trading, forex, volatility, options, derivatives , and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors, and you should not rely on any of the information as a substitute for the exercise of your own skill and judgment in making such a decision on the appropriateness of such investments.
DISCLAIMER
This website provides information regarding the following commodity pools: The Long Volatility Fund LLC and The Cockroach Fund, LLC (collectively the “US Funds”) and Mutiny Funds Cayman Ltd. (together with the US Funds, collectively the “Fund(s)“), which are managed and operated by Attain Portfolio Advisors LLC and Mutiny Funds LLC (the “Managers”). Investments in the US Funds are only available to Accredited Investors as defined in Rule 501 of Regulation D of The Securities Act of 1933. Investments in Mutiny Funds Cayman Ltd. are only available to non-US investors. This content is being provided for information and discussion purposes only and should not be seen as a solicitation for said Fund(s). Any information relating to the Fund(s) is qualified in its entirety by the information included in the Fund’(s)’ offering documents and supplements (collectively, the “Memorandum(s)”) described herein. Any offer or solicitation of the Fund(s) may be made only by delivery of the Memorandum(s). Before making any investment in the Fund(s), you should thoroughly review the Memorandum(s) with your professional advisor(s) to determine whether an investment in the Fund(s) are suitable for you in light of your investment objectives and financial situation. The Memorandum(s) contain important information concerning risk factors, including a more comprehensive description of the risks and other material aspects of an investment in the Fund(s), and should be read carefully before any decision to invest is made. This site is not intended for European investors, and nothing herein should be taken as a solicitation of such investors. Use the following links to view the full terms of use and risk disclaimer and our privacy policy.
