Historically diversified portfolios outperform concentrated portfolios with lower risk and lower volatility over time. The simple reason for such results is that different asset classes perform differently from year to year:

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Regardless of which asset you picked from the table above, it would do comparatively well in some years and not as well in others. This volatility can be (partially) eliminated through diversification. Simply mixing large caps, small caps and international would add significant performance to the portfolio over time. Numerous studies (and a simple Google search) can confirm this fact.

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We took this basic investment requirement in 2020 and applied it to Leveraged Anchor. Unfortunately, we know that Leveraged Anchor doesn’t work well on certain instruments (like GLD or SLV) or those with already extremely low volatility like government bond indices. So we chose a mix of S&P 500 (SPY), Russell 2000 (IWM / Small Caps), Large Cap International (EFA) and technology (QQQ). An argument could be made against QQQ as there is some overlap between QQQ and SPY and both focus on US large caps. However, it works well with Anchor and showed little correlation with SPY at the time of selection. If it and SPY correlate strongly again, we may try to replace a high volume REIT ETF after the test.

One year after the start of trading, the results speak for themselves. Here are the monthly returns for the Diversified Leveraged Anchor Strategy:

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All baseline values ​​were slightly different as each was based on entire contracts, with a target investment for each sector between $ 130,000 and $ 140,000. Note that these results do not include commissions. Each of the four sectors performed well, but the mix of the four was even better.

An annual return of 57.70% with a Sharpe ratio of 2.81 are returns no one should complain about – unless it was worse than just holding the underlying instruments on a risk-adjusted basis. Using published data from Morningstar and starting with identical balances (therefore partial shares were allowed), the returns of the subordinate ETFs over the same period were:

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As can be seen, if an investor had simply held their holdings in the same ETFs, they would only have received a return of 43.70% – with no hedging.

For a more concise breakdown over the past twelve months:

  • Leveraged Anchor on SPY achieved a return of 44.19%, while SPY itself only achieved a return of 38.65% (5.54% outperformance when hedged).

  • Leveraged Anchor for EFA returned 40.97% while EFA returned 37.33% (3.64% outperformance on hedging).

  • Leveraged Anchor for QQQ returned 55.00% while QQQ returned 27.79% (27.21% outperformance when hedged).

  • Leveraged Anchor on IWM returned 90.86% while IWM returned 71.62% (19.24% outperformance on hedging).

  • Diversified Leveraged Anchor returned 57.70%, while a diversified ETF returned 43.70% (14.0% outperformance if hedged).

In other words, Leveraged Anchor worked on all four of the instruments, delivering excess returns in a bull market, yet protecting themselves from large drawdowns.

Unsurprisingly, the higher volatility instruments had a wider spread over the underlying instrument. This is mainly due to the higher credits received. In the case of longer drawdowns, the opposite is to be expected – another reason for further diversification.

Due to the ongoing success of the strategy, we will start this in the near future as a fund investment with the aim of raising considerable capital. All Steady Options members are given the opportunity to invest in the company first and, if desired, contribute to the growth of the fund through an attorney’s agreement.

If anyone has any questions about the Diversified Leveraged Anchor Strategy, please submit your questions or email cwelsh@lorintinecapital.com.

Christopher Welsh is a licensed investment advisor and President of LorintineCapital, LP. He is advising clients in the US and around the world on the plant. Christopher has been in the financial services industry since 2008 and is a CERTIFIED FINANCIAL PLANNER ™. Working with a CFP® expert is the highest standard for advice on financial planning. Christopher holds a JD from SMU Dedman School of Law, a Bachelor of Science in Computer Science and a Bachelor of Science in Economics. Christopher is a regular contributor to Steady Options Anchor shops and Lorintine Capital Blog.

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