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Never considered using options-based funds. But, after a quick review, both SWAN & DRSK look quite promising. Need to do more DD, of course.
Thanks, again.
Fred
After doing some research, I came across JHQAX, a fund that has successfully employed an options strategy for the past seven years. M*'s last fund analysis report says that:
"Attractive fees, a transparent and consistent process, and an experienced manager elevate JPMorgan Hedged Equity ahead of its peers. The strategy maintains a Morningstar Analyst Rating of Silver for its cheapest share classes."
The fund has a standard deviation of 7.94%, a Sortino ratio of 1.41, and a 5-year total return of 10.3%. JHQAX is available at Fidelity with NTF and load waived. Min. initial investment is $1,000.
I may consider matching JHQAX with DRSK which also has an excellent but very short record.
@fred495. JHQAX is very interesting. Will review the risk profile on MFO Premium and report back.
Thanks, Sven. Look forward to your assessment of JHQAX.
A quick look at its profile indicates that in its category the fund has a MFO Risk=2 ("Conservative") , a MFO Rating=5 ("Best") and is designated a "Great Owl". In last year's March debacle, the fund lost only 1.4%. On the other hand, VSCGX, an excellent 40/60 balanced fund, lost 6.6%.
I was surprised to see that the fund had only been mentioned once in the past on the MFO forum.
While JHQAX perked an interest in MFO discussion, it is important to assess how JHQAX performed in 2020 relative to its peers with respect to their returns and risk. As @fred495 noted that the fund uses an options strategy for the past seven years. The fund is categorized as “Alternative long/short” fund in MFO Premium.
I compared this fund to Vanguard S&P 500 index (VFIAX) as the proxy for S&P500 index without the option strategy for 2020. The option strategy enabled lower drawdown in March, -5.1% versus -19.5%, respectively, and having a shorter recovery period, 3 months versus 4 months, respectively.
However, this lower volatility is accomplished at the expense of the annual return as the market recovered in July; the S&P 500 index out-performed JHQAX, 18.4% versus 13.8% by year end. Question I ask myself is this an apple-to-apple comparison?
I also took this analysis further to over the 7 year period since the inception of JHQAX (2014). I also include Vanguard Balanced index fund, VBIAX to see if 40% total bond allocation would work better or not than the option strategy.
1. JHQAX has the lowest drawdown ratio and comparable Sortino ratio to VBIAX.
2. JHQAX trails the annal returns of VFIAX and VBIAX for 1,3,5 and 7 years period.
3. The negative asset correlation of bond performed better than the option strategy over this 7 year period.
4. Overall the 60/40 allocation provides the best balance on return versus risk. However this is my personal opinion but every investors need to evaluate their own risk tolerance with respect to the return.
Sven said: "Overall the 60/40 allocation provides the best balance on return versus risk. However this is my personal opinion but every investors need to evaluate their own risk tolerance with respect to the return."
Thanks for your analysis, Sven.
As a retired and somewhat conservative investor, I am in the same boat as another poster who once said on another forum : "I don't really need a lot more money - but I certainly don't want to lose a lot. I need to remind myself to err on the side of caution."
It's in that spirit that I recently started looking at options-based strategies, particularly at a time of very elevated equity valuations, a raging pandemic, high unemployment and very high public debt levels.
Hence, the question for me became: How do I stay invested in the equity market but mitigate risk? Traditionally one would de-risk once portfolio with investment grade fixed income instruments, but today, with very low and seemingly rising interest rates, that is no longer quite as risk-free a strategy as in the past.
As you rightly said, " [...] every investors need to evaluate their own risk tolerance with respect to the return". At this stage of my life, where a good night's sleep is a high priority, an options based fund like JHQAX or DRSK for a portion of my portfolio may fit my personal risk/reward parameters better than a balanced fund. Due to high debt levels, inflation may be around the corner and in an increasing interest rate environment, the fixed income part of a conventional balanced fund may be a drag on its total return in 2021 and beyond.
I think we are on a similar paths toward a respectable return in this low yield environment. I re-read Lynn Bolin's articles on alternatives over the holidays and planning to increase % allocation. Not sure how bonds will play out this year.
This week's fast uptick on the market presented opportunities to reduce growth stocks and to increase my already large cash position. For now there is too many uncertainty on top of the political risk.
Comments
Thanks, JD, for sharing.
Never considered using options-based funds. But, after a quick review, both SWAN & DRSK look quite promising. Need to do more DD, of course.
Thanks, again.
Fred
After doing some research, I came across JHQAX, a fund that has successfully employed an options strategy for the past seven years. M*'s last fund analysis report says that:
"Attractive fees, a transparent and consistent process, and an experienced manager elevate JPMorgan Hedged Equity ahead of its peers. The strategy maintains a Morningstar Analyst Rating of Silver for its cheapest share classes."
The fund has a standard deviation of 7.94%, a Sortino ratio of 1.41, and a 5-year total return of 10.3%. JHQAX is available at Fidelity with NTF and load waived. Min. initial investment is $1,000.
I may consider matching JHQAX with DRSK which also has an excellent but very short record.
Fred
Vs 45% spy, 55% ief?
Slightly less return, slightly less downside vs jhqax
Who knows going forward...
Baseball Fan
Thanks, Sven. Look forward to your assessment of JHQAX.
A quick look at its profile indicates that in its category the fund has a MFO Risk=2 ("Conservative") , a MFO Rating=5 ("Best") and is designated a "Great Owl". In last year's March debacle, the fund lost only 1.4%. On the other hand, VSCGX, an excellent 40/60 balanced fund, lost 6.6%.
I was surprised to see that the fund had only been mentioned once in the past on the MFO forum.
Fred
OJ
I compared this fund to Vanguard S&P 500 index (VFIAX) as the proxy for S&P500 index without the option strategy for 2020. The option strategy enabled lower drawdown in March, -5.1% versus -19.5%, respectively, and having a shorter recovery period, 3 months versus 4 months, respectively.
However, this lower volatility is accomplished at the expense of the annual return as the market recovered in July; the S&P 500 index out-performed JHQAX, 18.4% versus 13.8% by year end. Question I ask myself is this an apple-to-apple comparison?
I also took this analysis further to over the 7 year period since the inception of JHQAX (2014). I also include Vanguard Balanced index fund, VBIAX to see if 40% total bond allocation would work better or not than the option strategy.
Here is the result in Portfolio Visualizer,
https://portfoliovisualizer.com/backtest-portfolio#analysisResults
1. JHQAX has the lowest drawdown ratio and comparable Sortino ratio to VBIAX.
2. JHQAX trails the annal returns of VFIAX and VBIAX for 1,3,5 and 7 years period.
3. The negative asset correlation of bond performed better than the option strategy over this 7 year period.
4. Overall the 60/40 allocation provides the best balance on return versus risk. However this is my personal opinion but every investors need to evaluate their own risk tolerance with respect to the return.
Regards- OJ
Thanks for your analysis, Sven.
As a retired and somewhat conservative investor, I am in the same boat as another poster who once said on another forum : "I don't really need a lot more money - but I certainly don't want to lose a lot. I need to remind myself to err on the side of caution."
It's in that spirit that I recently started looking at options-based strategies, particularly at a time of very elevated equity valuations, a raging pandemic, high unemployment and very high public debt levels.
Hence, the question for me became: How do I stay invested in the equity market but mitigate risk? Traditionally one would de-risk once portfolio with investment grade fixed income instruments, but today, with very low and seemingly rising interest rates, that is no longer quite as risk-free a strategy as in the past.
As you rightly said, " [...] every investors need to evaluate their own risk tolerance with respect to the return". At this stage of my life, where a good night's sleep is a high priority, an options based fund like JHQAX or DRSK for a portion of my portfolio may fit my personal risk/reward parameters better than a balanced fund. Due to high debt levels, inflation may be around the corner and in an increasing interest rate environment, the fixed income part of a conventional balanced fund may be a drag on its total return in 2021 and beyond.
Good luck, and thanks, again,
Fred
This week's fast uptick on the market presented opportunities to reduce growth stocks and to increase my already large cash position. For now there is too many uncertainty on top of the political risk.