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I was reading an article on improving the return of your portfolio which mentioned an "anti-beta" fund which I was not familiar with so I tried to do a bit of research. I found the U.S. Market Neutral Anti-Beta Fund and while I understand in principle what it is doing, I do not understand this statement:

Potential to generate positive returns regardless of the direction of the general market, so long as low beta stocks outperform high beta stocks.

(emphasis mine)

My understanding is that by definition beta refers to the volatility of the stock, and in general if the market goes up by 1% a stock with a beta of 2 would tend to go up 2%, while if the market goes does by 1% then the stock with a beta of 2 would tend to go down 2%. Neither of these of course are absolutes, but just statistically and this would go into the process of calculating beta.

So my question is, how can this fund strategy possibly work? It seems that in general high beta stocks would tend to outperform low beta stocks in a rising market, while the reverse would be true in a falling market. So saying that there is the potential to generate positive returns regardless of the general direction of the market would seem to be impossible in general statistical terms and if this actually happened it would seem to me this would cause the betas of those stocks to change and a recalculation of such would result in a new set of stocks for which the premise would be false again. In other words, the potential to generate positive returns regardless of the direction of the general market would only be possible if the beta of the stocks diverged from the value calculated to constitute the portfolio.

Am I missing something here? This product seems like nothing more than a fancy hedge against a falling market, and not something that really should be expected to generate positive returns in a rising market, except by accident.

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You're right, they (generally) are intended to be hedges against falling markets, but they're intended to enjoy some upside in rising markets too. How well they achieve their goal is very manager/fund-dependent.

Lots of alternatives (long-short, managed futures, trend-following strategies, etc.) have the goal of "positive returns regardless of the direction of the general market". A really important factor is that they're not buy-and-hold strategies. Their positions change as their top-down or bottom-up analysis indicates repositioning.

Some mechanisms these alt funds use include non-publicly-traded assets (e.g. real estate, VC/PE, infrastructure, etc.), shorting securities, buying/selling calls and puts, trading forex and commodities futures, etc.

You'll find that their benchmarks usually aren't the S&P 500 or another broad equity market index because they usually aren't trying to beat the stock market. Often it'll be some flavor of cash/US T-bill + some percentage target return (e.g. 3yr T-bill + 3%), or X% US equity + Y% US Agg. For example, a fund might want to consistently return between 3.5%-5.5% in all market conditions - over the long run you'd expect the S&P 500 or other equity indexes to outperform, but that's by design.

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This can work by shorting leveraged ETFs that are compounded daily. For example, in my portfolio I currently have a short position for TQQQ (which tracks the NASDAQ with a leverage of 3 and this is compounded daily) instead of a long position for SQQQ (which tracks the NASDAQ with a leverage of minus 3). I expect the NASDAQ to go down, so why would I have opted to short TQQQ instead of opening a long position for SQQQ, as opening a short position incurs fees?

The reason is that the daily compounding will, due to the fluctuations in the NASDAQ, cause the value of the leveraged ETF to decay. This decay is called "beta slippage". If you then short TQQQ, you can make a profit even if the NASDAQ were to rise slightly after some time.

For the longer term I plan to open short positions for SQQQ and that with an additional leverage provided by the broker to profit from the long term rise in the index. To get the most out of this trade for the long term, one then needs to compound the profits by closing the position and reopening it with the money plus profits of the closed position after a certain drop in the price that depends on the spread as follows.

If the ratio between the buy price and the sell price is written as 1 + u, and the ratio of the sell price at which we close and reopen and the previous sell price is written as 1 - v, and the leverage is L, then the optimal value for v can be expressed in a series expansion in powers of sqrt(u). To order u this expansion is given by:

v = sqrt(2u/(L+1)) + (4 L-1)u/[3(L+1)] + terms of order u^(3/2) and higher

One can then get a profit not only when the market rises, but also if it goes sideways and even slightly downward. Here one should note that a sideways market that is not expected to go down significantly, is best traded by shorting SQQQ rather than shorting TQQQ because the beta-slippage effect is significantly larger at a leverage of minus 3 than at a leverage of plus 3.

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