Risk Parity Resources: All About Capital Efficiency

White Paper #1: Hoffstein and Sibears (2017)

“Portable Beta: Maximizing the Returns Investors Are Getting Already”

Portable Beta: Making the Most of the Returns You’re Already Getting - Flirting with Models
We introduce the idea of “portable beta”: synthetic, additional exposure to asset classes achieved through efficient derivative exposure.
This page directs to a summary of the paper, though you can read the original by submitting an email address.

This paper from Newfound Research does a great job on covering the logic behind capital efficiency. They cover Modern Portfolio Theory and the basic case behind using leverage to amplify the returns on a well-balanced portfolio, and go through some simple empirical tests showing different scenarios. The key term in the paper is “portable beta,” which they define as the “select application of leverage (to) allow investors to both benefit from enhanced diversification and capital efficiency.” Short (fourteen pages) and clear, this paper really lays the groundwork for the capital efficient ETFs that Newfound Research is now advising on.

White Paper#2: Crook (2023)

“Portable Alpha for the (Taxable) Masses: Can Capital Efficient Funds Live Up To The Hype?”

Portable Alpha for the (Taxable) Masses: Can Capital Efficient Funds Live Up to the Hype?
Capital efficient retail products offer the promise of institutional-style portable alpha in an exchange traded fund (ETF) or mutual fund wrapper. Previous stud

This paper by the CIO of Mill Creek Capital Advisors is chock full of backtests and different scenarios for portable alpha, and takes special care to account for tax issues in the use of capital efficient funds. The advantage of this one is that it is recent, and comments on some of the new capital efficient products to come on the market in the past few years. It may be more than most people need, but a good read if you want to look at how different versions of portable alpha would have performed in the past.

Previously Reviewed RP Resource #1: Gordillo et al. (2021)

“Return Stacking: Strategies for Overcoming a Low Return Environment”

Risk Parity Resources: Gordillo et al. (2021)
Not exactly RP, but adjacent to it. This is an industry white paper about one way to use leveraged funds to free up space in the portfolios to make them more balanced. Authors are influenced by Risk Parity principles, and provide ideas for implementation, even though they call it something else.

I reviewed this paper back in April of 2022, and though it's not exactly about Risk Parity, per se, it definitely shows how risk parity is being repackaged and renovated over time. Little did I know at the time that it was also about to become the launching paper for a new line of ETFs: RSBT and RSSB (available soon). An excellent intro to the topic of capital efficiency in general terms, and well worth a read. One thing to be aware of: the authors here use the term “Return Stacking,” but it is pretty much the same thing as “portable alpha,” both of which are made possible by “capital efficiency.” Don’t let the shifts in nomenclature trip you up - these are all pretty much the same thing.

Previously Reviewed RP Resource #2: Asness 1996

“Why Not 100% Equities?”

Risk Parity Resources: Asness (1996)
Short, provocative case in favor of a leveraged, balanced portfolio over an unleveraged, unbalanced portfolio. Should be read in context with Ray Dalio’s work about leveraged Risk Parity and Asness’s later piece (with Frazzini and Pedersen) about aversion to use of leverage.

This is a great paper and notable since as the paper that basically launched NTSX, though that didn’t come from Asness’s firm AQR (AQR has similar funds, but they are not available for everyday investors). In this paper, Asness basically takes a 60/40 and then applies leverage to it, showing that such a portfolio will deliver better returns than a 60/40, but will be much more stable than a 100% equity portfolio, though they are competitive in terms of return. My review also has a link to a paper by Jeremy Scwartz which carries forward Asness’s tests up to 2020. That paper is also well worth your time.

Video #1: Optimized Portfolio on NTSX

Here’s a really thorough review of NTSX, WisdomTree’s US Efficient Core fund, from John of Optimized Portfolio. He’s an enthusiastic proponent of the fund, noting that it has various use cases and can help different investors at different stages of their investing journeys. John is an evidence-based, “just the facts, ma’am” type of investing influencer, so his glowing review here is actually quite notable. He breaks down how the fund works and the principles behind capital efficiency, but also gives really practical guidance here about how the fund differs from SWAN (Amplify BlackSwan Growth & Treasury Core ETF, essentially a 70/90 fund).

Video #2: Kara Marciscano of WisdomTree on GDE and GDMN:

This short one is from a Research Associate at WisdomTree walking the viewers through the two capital efficient gold funds they offer. NTSX gets a lot of attention, and deservedly so, but it was nice to see this explanation of their gold-based offerings.

Website #1: WisdomTree’s Capital Efficient page

Capital Efficient ETFs | WisdomTree
WisdomTree’s outlook for investing in emerging markets can help you capitalize on emerging market equities. Grow your portfolio with an emerging markets ETF.

Especially helpful are the three PDFs over on the right that start with the phrase: “The Case For…” They cover the rationale behind all five of the capital efficient funds, and are way more accessible than reading the prospectuses, though you can find those through the page, as well.

Website #2: Return Stacked ETFs RTSB homepage

The documentation is over on the right, and especially helpful was this summary presentation. Again, easier than the prospectus. By the way, their other fund is coming in a few months (or so I have heard), so it is kind of a ghost link now, but check back when the fund is released to the public.

Bonds Managed Futures - Return Stacked ETF
RETURN STACKED™ RSBT Bonds & Managed Futures Why Invest in RSBT ETF? For every $1 invested, RSBT is designed to provide $1 of broad U.S. bond exposure and $1 of a managed futures strategy. 01 // The Case Investment Case Capital Efficiency: Aims to provide simultaneous exposure to U.S. bonds and a ma…