whodidntante wrote: ↑
Wed Aug 08, 2018 7:59 pm
I don't see the mystery. Here's my hack explanation for what the fund is doing. It would be better if I were twelve.
It owns 90% large cap stocks.
It has 10% invested in cash.
It has 60% notional exposure
in a mix of 2, 5, 10, and 30-year Treasury futures contracts. This is the source of the leverage, and I think this is the part that is confusing people. But notional exposure is just a fancy way to say the exposure you bought with the futures contracts.
The cash is acting as collateral for the futures.
So here's where I am, and I still see a mystery. My understanding is that:
a) It owns 90% large cap stocks, straight out, plain and simple, no derivatives, no leverage.
b) It owns 10% of something that behaves like
a 6:1 leveraged investment in bonds.
Question #1: If it owns 90% large-cap stock plain and simple, why is Morningstar showing 60%?
Question #2: In The Case for 90/60 Balanced Fund (NTSX)
, WisdomTree keeps mentioning a portfolio of "50% Equity/30% Bond/20% (Long/Short Equity)." What is the connection
90% stocks, 6:1 leveraged bonds and between "50% Equity, 30% Bond, 20% Long-Short Equity? On careful reading, they certainly do not say that NTSX has
this composition; they are quite clear:
[In NTSX], WisdomTree applies 1.5x accounting leverage to a traditional 60/40 portfolio to create exposure equal to 90% equities, 60% bonds. This exposure is created by investing 90% of Fund assets in equities and 10% in short-term fixed income. The 60% bond exposure is achieved by overlaying Treasury futures contracts to achieve the net 90/60 target.
So why, exactly, are they talking about
"50% Equity, 30% Bond, 20% Long-Short Equity?"
Is that, in fact, the goal
, which 90/60 is a tool for achieving?
What's meant by this graphic? Are they saying NTSX is not
supposed to be used by itself as an improved version of 60/40, but only in combination with "Alpha Strategy?"
Question #3a: In terms of risk and effectiveness, explain the use of futures here. Since mutual funds are allowed to use a limited amount of leverage, why do they not actually use leverage (as QSPIX does, and as 130/30 funds used to?) What are the effective differences between 10% cash held as collateral for futures contracts representing 60% bonds, and an actual leveraged holding of actual bonds plus an actual loan?
Question #3b: What are the effective differences between:
--a 60/40 fund bought using actual 1.5X leverage, i.e. if it drops 67% you have lost all your money;
--90% plain unleveraged stocks and 60% bonds bought with 10% cash using 6:1 leverage;
--90% plain unleveraged stocks and 10% futures contracts?
Question #4: Is 90% unleveraged stocks + 10% holding of 6:1 leveraged bonds effectively the same thing as a 1.5X leveraged holding of a 60/40 portfolio? First I keep thinking it isn't, then I keep thinking that because money--even negative money, borrowed, is fungible, maybe it is.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.