Heard on a podcast once that any idiot can run a portfolio backtest, but beware of their conclusions. Ladies and gentlemen, I resemble that remark, so here I am fiddling with a few leveraged 60/40s. No recommendations here, just testing some variations on a theme!
Inspired by my reading of the Cliff Asness paper arguing for balanced, leveraged portfolios instead of unbalanced non-leveraged ones, I started messing around with Portfolio Visualizer’s Backtest tool. Asness argues that a leveraged 60/40 with additional 55% leverage (so that it becomes essentially a 93/62) outperforms a 60/40 with the same volatility, and suggests that leverage can be used to achieve superior returns while maintaining true diversification. Asness showed great performance results with data from 1926 until 1994, and Jeremy Schwartz of WisdomTree later updated Asness’s backtest to include market performance up until 2021. That was another win for the 93/62.
My review also noted that WisdomTree’s US Efficient Core Fund (NTSX) is essentially Asness’s idea in investable form. NTSX combines a 90% position in the S&P 500 and uses the remaining 10% to take positions in future contracts on various types of Treasuries designed to resemble a 60% allocation to bonds. NTSX is then a 1.5X leveraged fund that should act like a 90/60. I'll call a total investment in NTSX the “Asness in Action” portfolio here.
There's a little nuance to this portfolio, though, since it is “capital efficient,” which is the ability for an investment strategy to gain exposure to a particular market while using fewer assets. An investor could go all-in with NTSX, or else devote just $66.67 of actual money to mimic the performance of $100, which would then you give you an additional slice to allocate somewhere else.
The RP recommendation, for example, would be to try to find uncorrelated assets with positive expected return for that remaining slice, namely gold, commodities, or what is becoming more and more popular, managed futures.
These days, a 66.7% allocation to NTSX combined with 33.3% in iMGP DBI’s Managed Futures ETF (DBMF) is gaining a lot of traction and press as a quick and easy way to create a capital-efficient take on the 60/40 that gives you the extra boost of whatever your managed futures strategy can deliver on top of what you would have gotten from the 60/40.
Corey Hoffstein is often credited with this portfolio idea, though when I reached out to him, he also gave credit to Jake (@EconomPic) and the real person at Unrelated Nonsense, whose actual name I don’t know. This NTSX/DBMF combo is also reminiscent of the “return stacking” idea advanced by Hoffstein and the gents at Resolve Asset Management whose work has been covered here before. For clarity, I’ll call this the Hoffstein DIY Return Stacking portfolio.
So, building on the backtests that have been done before, I wanted to see how this DIY Capital Efficiency portfolio has compared to NTSX as a stand-alone, and then also to the original vanilla 60/40. The inclusion of DBMF means that the backtest can’t go back very far, since DBMF has been around since just May of 2019.
On the one hand, this is such a short time period that I’ll be reluctant to make anything of the results; on the other hand, this three year period has been pretty action-packed. You had the Corona crash of March 2020, followed by an incredible recovery, and then just mud and debris for the past twelve months or so. Just testing it over three years could have its own story to tell.
But wait, there’s more, as we here at RPC are always looking to push things just a bit farther. If +50% leverage is good, how about a little more? OK... how about a lot more?
I’ve been thinking about an extreme version of the Hoffstein two-fund portfolio, so I present the “Carolina Reaper Return Stacking” portfolio. This is an extra-caffeinated, nitrogen-boosted, don’t-try-this-at-home version of the Hoffstein DIY Return Stacking portfolio:
- 20% UPRO, a 3X leveraged S&P 500 fund
- 13.33% TYD, a 3X leveraged Intermediate-Term Treasuries fund
- 66.67% in the aforementioned DBMF
Since UPRO and TYD are +200% leverage, this makes these two portions of the portfolio resemble a 60/40. Then you get the large allocation to DBMF on top of that.
Yes, this has been a particularly good stretch for managed futures, so take the results with a table shaker of salt. On the other hand, you’ve had two stock market bear markets in the three-year span, plus this has been a terrible year for bonds. Forbes says 2022 is definitely the worst since 1977, and a good case can be made that you have to go back to 1931 to find another double digit decline like this. I can’t be accused of cherry-picking too much, methinks.
One other disclaimer: this is not necessarily an endorsement of the use of leverage. It’s a complicated topic, and one I’m still working my way through. I’m just exploring the space here - no recommendations at all.
On to the results (click here for the link):

Whew. Before you get too excited about that dominant performance:
1) It’s a very, very, very recent data set. My mantra is that I prefer back to the 70s, and need to at least see how something performed in the GFC to get excited about any portfolio. This ain't even close.
2) This has been an extraordinarily good period for managed futures. If you take a broader look at a managed futures strategy, it hasn’t really performed that well, at least for DIY investors. DBMF may be changing that calculus with its more reasonable fees, but maybe not. Too soon to tell.
3) Leveraged funds like UPRO and TYD offer their own set of risks, including the heightened threat of complete liquidation. That existential risk was avoided in these past two drawdowns, but that doesn’t mean the next one won’t be a doozy. Be very careful of leveraged funds!
But as the best debate response goes, “Yeah, but still...”
A compound annual growth rate 2.6 times the 60/40, 1.9 times NTSX, and 29% higher than the DIY Return Stacking portfolio? Wow.
Shallowest maximum drawdown? Double wow.
Sharpe Ratio of 1.33? Triple Wow.
This didn’t even make it in the table, but the worst year of the three for the Carolina Reaper Return Stacking was +5%, when the Classic 60/40’s was -17.5% and the Asness in Action dove -25.7% Can I get a Quadruple Wow?
As part of the research, I came across a great piece on capital efficiency, if you are interested:
Look for future blog posts where I drive into more ways to achieve capital efficiency, plus the pros and cons of pursuing that in an investing strategy.
The original name for this post was "Idiot with a Portfolio Backtester, exhibit A." I have a feeling there will be quite a few more!
Disclaimer: In real life, I own shares of UPRO, TYD, and DBMF. Keep in mind that this site is intended for financial education and to amuse myself as I mess around with Portfolio Visualizer. It's not a recommendation for one asset versus another, or one portfolio versus another.