When it comes to portfolio construction most investors are laser focused on offensive assets.
Stocks and bonds.
The 60/40 portfolio.
But 2022 revealed this type of classic configuration is woefully unprepared for certain economic regimes such as high inflation.
What if there was a portfolio that cared just as much about its ability to defend?
Well, such a portfolio exists!
The Cockroach Portfolio.
Aside from having the coolest name in the game it also cleverly attempts to be “the least shitty portfolio”.
Now that’s a refreshing take in an industry rife with ego, bold claims and unfulfilled promises.
What’s different about The Cockroach Portfolio is that it takes a balanced approach to diversification between traditional and adaptive assets.
Fortunately, we have its creator Jason Buck to unpack everything in detail as we continue our “Strategy Behind The Fund” series.
Without further ado, let’s turn things over to Jason!
Meet Jason Buck of Mutiny Funds
Jason Buck is an entrepreneur and trader specializing in volatility, options hedging, and portfolio construction.
After living through 2008 as a commercial real estate developer, Jason became focused on how investors could better manage their risk.
He spent the following decade consulting on portfolio construction and building bespoke long volatility strategies for family offices and high net worth individuals.
This experience in cross asset class trading spotlighted the need to create a diversified long volatility and tail risk fund designed to hedge the risks associated with economic downturns.
A former D1 soccer player and IMG academy graduate, Jason currently resides in Napa Valley, California.
Reviewing The Strategy Behind The Cockroach Portfolio with its creator Jason Buck
Hey guys! Here is the part where I mention I’m a travel content creator! This “The Strategy Behind The Fund” interview is entirely for entertainment purposes only. There could be considerable errors in the data I gathered. This is not financial advice. Do your own due diligence and research. Consult with a financial advisor.
What’s The Strategy Of The Cockroach Portfolio?
For those who aren’t necessarily familiar with a “Cockroach Portfolio style of asset allocation” (that extends beyond merely stocks and bonds), let’s first define what it is and then explain this strategy in practice by giving some clear examples.
Our goal at Mutiny Funds is to help investors maximize the long-term growth of their portfolios.
We approach this problem differently than most because of our core belief that:
“Offense wins games. Defense wins championships.”
In an investing context, this means we believe that combining defensive-minded strategies such as long volatility or trend with offensive-minded strategies such as stocks or fixed income provides the best opportunity for long-term capital growth while reducing drawdowns in the interim.
The promise of diversification is to allow investors to improve risk-adjusted returns – either by realizing less risk for a similar return or a higher return for the same risk.
We view true diversification as the ability to accomplish the two things most investors care about in their portfolios:
Having a lot of assets in the future: That is, maximizing the long-term compounding, or expected terminal wealth of a portfolio.
Having enough assets in the interim: That is, making sure that if we need to use our assets for a family emergency, illness, or other unexpected life events (dare I say global pandemic?) in the near term, that it will be there when we need it.
We believe building a team of diversified strategies with different return drivers is the best way to facilitate these dual objectives.
The Mutiny Investment Strategy takes a multi-strategy, multi-manager approach.
This approach hopes to offer broader and more effective diversification across both offensive and defensive strategies.
Unique Features Of The Cockroach Portfolio
Let’s go over all the unique features your fund offers so investors can better understand it.
What key exposure does it offer?
Is it static or dynamic in nature?
Is it active or passive?
Is it leveraged or not?
Is it a rules-based strategy or does it involve some discretionary inputs?
How about its fee structure?
We use the four quadrant model, originally designed by Harry Browne to cover as many macroeconomic environments as possible along the cross axis of Growth and Inflation.
We use equal allocations to: Global Stocks, Global Bonds, Long Volatility, and Commodity Trend.
We also carve off a little bit for Fiat Hedges with Gold, BTC futures, and ETH futures.
The asset class buckets are fixed weights that are rebalanced monthly.
We use an ensemble of active managers to be able to harness the dispersion of returns within the asset class buckets.
We use the implicit leverage that we can achieve in the futures and options markets.
This gives us notional exposures of: 50% Global Stocks, 50% Global Bonds, 50% Long Volatility ensemble, 50% Commodity Trend ensemble, and 20% for Fiat Hedges.
Every strategy, including the ones we don’t utilize, is a combo of rules-based and discretionary inputs, no matter how systematic they try to be, their discretionary inputs create the system.
We are a high fee product.
For us it is about what are your net return after fees on a risk/drawdown adjusted basis?
We provide 100% exposure to active management Defensive strategies, but we overlay the 100% exposure to the Offensive assets and manage those in-house.
What Sets The Cockroach Portfolio Apart From Other Asset Allocation Strategies?
How does your fund set itself apart from other asset allocation funds being offered in what is already a crowded marketplace?
What makes it unique?
My partner, Taylor Pearson, and I built exactly what we wanted that was not available in the marketplace.
Studies show that investors should have large allocations to Commodity Trend and Long Volatility.
Yet, no one actually does this in practice.
We run equal exposures to the Defensive side of our portfolio.
We also built this because non-institutional investors generally do not have access to products like ours.
Most of our managers have minimums of $5M, which becomes even more prohibitive when you are building ensembles.
We built our products so that we could personally access these strategies, and in taking on outside clients this allows us to collectively get access to these ensembles of active managers starting at a $100,000 initial investment.
source: Flirting With Models on YouTube
What Else Was Considered For The Cockroach Portfolio?
What’s something that you carefully considered adding to your fund that ultimately didn’t make it past the chopping board?
What made you decide not to include it?
We constantly are assessing managers across the investing landscape.
For example, we allocate to 14 Volatility managers and track another 30-40, which we believe is basically everyone in the Vol space.
There are a myriad of reasons why a strategy is not a good fit.
It’s more about finding niche managers that have a specific strategy that will fill out any holes in our ensemble approaches.
We decided early on not to include equity short selling strategies into our Long Volatility and Tail Risk ensemble because we believe these strategies are negative expected value, negatively skewed, and there are too many counterparty risks to their margin and borrow costs.
source: Mutiny Funds on YouTube
When Will The Cockroach Portfolio Perform At Its Best/Worst?
Let’s explore when your fund/strategy has performed at its best and worst historically or theoretically in backtests.
What types of market conditions or other scenarios are most favourable for this particular strategy?
On the other hand, when can investors expect this strategy to potentially struggle?
We try to build the least shitty portfolios.
Most people are trying to optimize for the perfect portfolio.
We do not believe this is possible.
We try to build boring, robust portfolios that just muddle along in any environment.
We are never going to be the best or worst portfolio in any given year.
By reducing the drawdowns, we believe our Cockroach portfolio will effectively and efficiently compound savings over the short and long term.
The point to proper portfolio diversification is that you will always have a part of your portfolio that makes you want to puke.
We do not have a crystal ball, we cannot predict the future, so we try to structure a portfolio that should survive any market environment.
source: ReSolve Asset Management on YouTube
Why Should Investors Consider The Cockroach Portfolio?
If we’re assuming that an industry standard portfolio for most investors is one aligned towards low cost beta exposure to global equities and bonds, why should investors consider your fund/strategy?
We have no problem with beta as they tend to do well for very long stretches of time, until they crash unexpectedly.
We just believe that if we pair them with Defensive assets then it will improve your long-term risk-adjusted returns.
Long Volatility assets should do well when there is a liquidity cascade and everything sells off sharply.
Commodity Trend has historically done well in a long, slow, protracted drawdown or recession.
More importantly, it is about the emergent quality of a diversified portfolio and what rebalancing can do for you.
Take March 2020 as an example, as markets sell off, long volatility was providing a ballast, which is incredibly helpful from a behavioral standpoint of managing fear and not panicking.
In addition, the ability to rebalance the gains from the Volatility portion into Stocks at that lower cost basis, is exactly what we need to do to improve compounding.
source: Rocket Dollar on YouTube
How Does The Cockroach Portfolio Fit Into A Portfolio At Large?
Let’s examine how your fund/strategy integrates into a portfolio at large.
Is it meant to be a total portfolio solution, core holding or satellite diversifier?
What are some best case usage scenarios ranging from high to low conviction allocations?
We believe the Cockroach Strategy is a Total Portfolio Solution.
We have 17 sub-managers, while continually adding more as AUM increases.
We also have almost 20 assets that we roll in-house on a monthly basis using the futures markets.
We feel this is one of the most broadly diversified Total Portfolio Solutions we have ever seen, which is why we built it.
We believe that the Cockroach Strategy tends to pair well with deterministic cash flows that one can get from private Real Estate or private businesses.
The combo of our liquid markets portfolio and private illiquid assets has a nice symbiotic effect.
The Cons of The Cockroach Portfolio
What’s the biggest point of constructive criticism you’ve received about your fund since it has launched?
Generally I think people have hindsight bias and they don’t like true diversification.
People want all aspects of their portfolio to have positive returns, but this simply is not proper diversification.
Investing requires time which is multiplication not addition, and a portfolio like ours really shines over time.
We are not likely to be impressive over a month or a quarter.
source: Excess Returns on YouTube
The Pros of The Cockroach Portfolio
On the other hand, what have others praised about your fund?
Our clients tend to love the “set it and forget it” aspect of our strategy.
Clients love having access to the Defensive strategies that they previously did not have access to.
I would like to see people go back to a time where they were not checking their portfolios 7 times a day on their smartphones.
We hope to manage their savings prudently, so they can enjoy their daily passions and be more present with the people they love.
source: RCM Alternatives on YouTube
Constantly Improving & Working On Cockroach 2.0
We’ll finish things off with an open-ended question.
Is there anything that we haven’t covered yet that you’d like to mention about your fund/strategy?
We are constantly working on improving our portfolio and finding new niche managers.
We are always working on what Cockroach 2.0 could look like by combining what we do with those deterministic private cash flow investments into one capital efficient vehicle that holds all the world’s asset classes and rebalances them.
Connect With Jason Buck of Mutiny Funds
Website: Mutiny Funds
Fund: The Cockroach Portfolio
Nomadic Samuel Final Thoughts
I want to personally thank Jason for taking the time to participate in the “Strategy Behind The Fund” series by contributing thoughtful answers to all of the questions!
Jason was also a guest for the “Investing Legends” series (The Cockroach Portfolio | A Diversified Portfolio Ready For All Economic Regimes) which I recommend checking out.
If you’ve read this article and would like to have your fund featured, feel free to reach out to nomadicsamuel at gmail dot com.
That’s all I’ve got!
Ciao for now!