JPMorgan Hedged Equity (JHQAX) has been on my watchlist for a while.
This fund would assume a role similar to that of a moderate allocation fund in my portfolio.
I've compared JHQAX to three well-regarded moderate allocation funds.
It had the lowest max drawdown/volatility and the highest Sharpe/Sortino ratios.
The fund's CAGR lagged by 20 bps - 55 bps.
Portfolio Backtester During its lifetime, JHQAX has performed well on a risk-adjusted basis.
Are there any potential material risks associated with this fund's options strategy which
have not been realized but may become evident during certain market events in the future?What am I missing?
I've read Devesh's recent "Opting out of Options ETFs" article where he states:
"These products are complex, incur significant bid-offer costs for the ETF providers, and they are all passed on to the end buyer in one form or another. If you must own stocks and are afraid of a stock market crash, reduce your stock allocation."https://www.mutualfundobserver.com/2024/08/summer-thoughts/Perhaps
@Devo could provide his professional assessment of JHQAX
including corresponding risks for its options strategy?
Edit/Add: After posting, I read again the following article written by Devesh.
https://www.mutualfundobserver.com/2024/04/options-based-funds-a-deeper-diver/
Comments
Speaking for myself, I look at how funds behaved in the rising-rate environment of 2022. I'm gloomy on the topic of inflation and interest rates. I'm not convinced inflation has been spiked for good.
Inflation is heading in the right direction for now. That can change.
Since Giroux is on our minds today, I see that the bond duration at PRWCX is only 3.84. I Have some longer durations between FBALX and WCPNX, but I won't be adding to those positions any time soon. Any new buys will be under 4. I'm still getting back in the swim after a couple of weeks in the forests and prairies of the upper midwest. So nothing cooking yet.
Here's some numbers to consider. Assume all of the below to be Approximately true:
As of July 31, 2024, portfolio on their website,
https://am.jpmorgan.com/us/en/asset-management/adv/products/jpmorgan-hedged-equity-fund-a-46637k315#/portfolio
JHQAX held about $19.7 Billion in Large Cap stocks.
They use some active management to decide on which of the stocks to hold and what to avoid. I dont know what active management they do and if it is any good for stocks.
On that date, the SPX was at 5522.
JHQAX was long $20Bn of the SPX 5170 Put, short $20Bn of the SPX 4360 Put and Short $20 Bn of the SPX 5750 Calls. This structure is called a Put spread collar.
This structure expires on Sep 30th 2024.
Somewhere around the expiry, (I know there are fixed rules but I am going with the big picture), this collar is retired and new 3 month collar is initiated.
Thus every 3 months, $20bn * 3, or $60Bn of options are traded, or about $240bn a year for a portfolio of about $20bn in stocks. That, as you might suspect, has transaction costs in terms of bid-offer paid to market makers of options, clearing fees paid to exchanges, etc.
Now, if you look at the Beta of JHQAX to SPY, its around 44%
And if you create the replication basket of 44% spy and 56% tbills, you will notice the portfolio is basically a replica of JHQAX (give or take).
So, my question back, is why pay the 85 bp in fees per year, and then have the fund go through hundreds of billions of dollars of options transactions, when all can be accomplished with a low weight SPX portfolio.
Positives of JHQAX: it IS long the 5170 put and were the market to drop 20%, you would feel good about holding the fund,
Negatives: below 4360 the fund is not protected as it is short the 4360 puts. You would be long 100% Large cap equities if the market was to head down 50%. (however unlikely a scenario it is in such a short time frame, it is a tail risk). Also above 5750 on the SPX, you would lose all exposure to equities.
At the end of the day, remember these JPM funds have a cool 80-90BN$ in AUM. That should tell you that large portions of the market believe these products make sense. (even if I suggest otherwise).
I hope the above is enough for now. No perfect answers. I always find it is better to play and invest a small amount. Live with it and breathe it. If you dont like what you own you will have better reasons to avoid it in the future.
Thanks @Devo
I sometimes compare investment risk to the ice that covers local lakes in winter - some a mile or more across. Generally speaking, a half-inch of “good” ice will support a 150+ lb human (quality can vary). And were I to traverse the lake 100 times on a half-inch of ice, chances are I’d make it across safely every time. (Who? Me worry?) However, if something unexpected occurs (maybe the ice has been weakened by numerous freeze - thaw cycles) and I fall through into 200 feet of cold water, I might decide crossing on a half-inch of ice, however small the risk, just isn’t a risk I care to take.
I think 2 weeks ago a lot of people bought puts in a panic and now may be unwinding those puts. Could the current relentless rise in stocks be a function of those unwinds similar to a short squeeze?
Well, you can believe this report:
• If I buy something because I think that the market is going up, the market immediately goes down.
•If I sell something because I think that the market is going down, the market will invariably go up.
End of report.
Thank you so much for sharing your expertise!
I have not created a replicating portfolio yet but will do so after reviewing your corresponding article.
Truth be told, I'm generally not very fond of "alt funds" since they tend to be overly complex and expensive.
JHQAX captured my interest with its ostensibly attractive risk/reward profile.
If the market or stocks rise instead, the put buyer just loses the premium, and put seller just pockets the premium. These are small amounts.
It would be different for investors who are short the market/stocks/calls.