It was a lousy year for the strategy. Check out the detailed stats here. Tl;dr: -19.75% in 2022, versus -16.32% for a global 60/40 and -18.17% for SPY. Not the end of the word by any means, but the last two years have been a far cry from the salad days of 2019 and 2020.

The portfolio behaved much better in 4Q22 as correlations across stocks, bonds and gold came down and risk assets rallied. I was pleased with 4Q22. No victory laps, though. It remained a bad year overall.

Current allocation:

Gross exposure is a smidge on the low side today. If the gold weight goes much higher, I’ll sell some and add back to NTSX to bring the gross up a bit. A new addition to the allocation is a Global Long/Short Value fund. I’ve been nibbling more and more at the value equity style as it has come back into favor.

The Big(ger) Picture

2022 was not a fun year. In fact, it highlighted the strategy’s most significant vulnerability: unstable correlations. The theoretical basis for this strategy is leveraging assets that tend to exhibit low correlations. If those correlations increase, and returns to the underlying assets are positive, the portfolio outperforms expectations. If correlations increase, and returns are negative, it underperforms.

This risk is the reason I limit the amount of leverage I will apply to the portfolio, even though more benign environments will always argue for higher levels of gross exposure (sometimes significantly higher). It is not worth the risk of ruin in my view.

There other are ways to manage this risk. They have their own pros and cons. Broadly speaking, these are different types of tactical overlay. Trend following, tactical asset allocation views and the like. While I will do some discretionary style tilting in this portfolio, more dramatic forms of discretionary tactical allocation are not something I intend to pursue here. This is meant to function as a simple portfolio core. I invest in a speculative portfolio alongside this. The galaxy brain investment ideas belong in that sleeve (in an ironic twist of fate, the public equity portion of that sleeve was -6.20% in 2022–significantly better performance than the leveraged permanent portfolio but still down for the year).

I have a complicated relationship with trend following. When I began this experiment, I used a trend and volatility targeting overlay. Ironically, in hindsight, I gave it up out of frustration after the 2020 COVID drawdown recovery. My approach was too slow adding back exposure. It has cost me a couple hundred basis points of annualized performance versus a static approach.

Obviously, the path the markets took in 2022 was quite different than 2020. Trend would have likely worked much better in 2022. Not so sure about the volatility targeting element, as the year was more of a grind down than a sharp selloff. Regardless, I think I have a behavioral preference for a static allocation. So I’m going to suck up the drawdown and soldier on with this static approach. I don’t want to repeatedly whipsaw myself tinkering with overlays.

Something I might consider is splitting some of the gold allocation across other liquid alternative strategies. Managed futures would be the leading candidate I think. I haven’t made up my mind about this though.

Ultimately, the purpose of this strategy is to harvest risk premia over long periods of time across assets that tend to exhibit low correlations. In that sense, I don’t believe anything is irrevocably broken here. It’s just been a bad run the last couple years.