As I understand WisdomTree, the right thing to pair with NTSX would be something that has intriguingly low correlation with stocks and bonds, but disappointingly low return.
If you had, say, a portfolio of 100% Vanguard Balanced Index (60/40 Total Stock/Total Bond) and you cut that down to 67% of your portfolio, and filled up the other 33% with something like the WisdomTree Managed Futures fund, WTMF--nope, not that one. PCRIX, PIMCO Commodity RealReturn strategy? Nope. Vanguard Market Neutral Fund? Nope. Uh... those all have had returns-since-inception that have been too
...with a hypothetical alt fund of some kind, say one that has been earning less than Balanced Index, but more than Treasury Bills...
...you might improve the Sharpe ratio but, at the same time, drag down return. Reduced return, but volatility reduced even more.
You could fix that by leveraging up the return of Balanced Index by swapping in NTSX. If you filled the other 34% with a money market fund or Treasury bills or something, you'd be back to where you were--going round Robin Hood's barn to get back to 60/40. But if you could find something with low correlation and some kind of half
decent return, you would be ahead of where you were with Balanced Index. Instead of "reduced return, volatility reduced even more," you could get to "same return, less volatility" or you could get to "same volatility, more return."
I think that's what they mean by an "overlay" strategy. You're not trying to get 1.5X the performance of 60/40, you're trying to overcome the drag effect from typical diversifiers having lower Sharpe ratios than 60/40. You are seeking to get 1X the performance of 60/40, by filling 67% of your portfolio with 90/60, and then layer some MPT diversification benefit on top of that.
Subtle. Ain't gonna work over time periods in which your chosen "alt" diversifier is doing this:
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.