Perhaps I can chime in
@wayneL ...since it doesn't really seem like anyone actually bothered to engage with the topic at hand on its merits but rather just talk their book or their d***.
The strategy is not called "The Hawk and the Serpent" it is called the Dragon Portfolio. Allegory being that the dragon tames both hawk and serpent.
I follow Chris Cole closely and his writings, especially the Dragon Portfolio concept since it is an interesting twist on the Permanent Portfolio construct which I use for my own SAA.
The main thing to understand is that this is a global macro portfolio. So you have to give up some expectation of niche specialisation (like investing in individual ASX issues) and go for asset classes under the assumption that each asset class is somewhat efficiently priced
within itself. You might be able to move within the asset classes to some degree, and I do as have previously discussed several times on ASF, but by and large you are running a global macro portfolio and returns are dependent on macro regime shifts, not any niche specialisation.
The purpose of this global macro portfolio is akin to the Permanent Portfolio, to "harvest volatility" (
https://thepfengineer.com/2016/04/25/rebalancing-with-shannons-demon/) of uncorrelated asset classes that each do well in different macro regimes. Key here being uncorrelated, not negatively correlated. The "twist" being to add two trading strategies and treat the return stream of those strategies as an asset class and subtract cash as an asset class.
Both the trading strategies are actually what you would consider, from a quantitative return profile, as long vol strategies.
* Commodity trend following: using commodity futures only to capture inflation trend, compared to most CTA funds which "diversify" across all futures.
* Long options vol: if you follow Artemis Capital filings etc you will see that their long vol strategy is not something you can replicate easily because it isn't systematic. They are professional options traders looking for options idiosyncracies across asset classes. As just one example, I recall they were long some GC calls in early 2020. It isn't just what most people think of buying puts or other long vol strategies for equities only. They are very tactical and sophisticated on the trades.
The purpose of both of these strategies is to capture macro risks
which are not present in the market today and have not been for some decades, but which are believed may eventually return and are completely mispriced today.
* Inflation
* Regime shift from mean reversion (negative autocorrelation in daily returns) to momentum (positive autocorrelation in daily returns) across macro asset classes.
* Changes in interest curves (inflation) which influence options Rho,
in the past long options strategies actually carried positive and they may one day again!
* Capture eruptions in vol pricing, this is not always price negative. In commodity space, vol increases are quantitatively associated with price increase quite often. Long vol is not necessarily bearish.
* Take the other side of structural short vol bets from equity buybacks/VaR/risk parity/explicit short vol structured products which currently rule the roost.
If you don't think that simple commodity trend following can be long vol just look at the return profile of
http://www.40in20out.com/ as a trendfollowing benchmark.
The point is to get into these "strategies as asset classes" today, even though they have not done well over the last few decades. The goal is not to get into them for profit per se, the goal is to capture their uncorrelated rebalancing volatility (see above link) against macro risks that are not currently present but may return one day.
In the same way as when you enter into a Permanent Portfolio, you have an expectation that some components of that portfolio will do badly while others do well,
this is an explicit part of the portfolio construction. You expect drawdowns in whichever asset classes are not expected to perform favorably in whatever the current macro regime is, and actively rebalance into them using profits from the asset classes that are performing favorably in the current macro regime.
Almost nobody in the world (aside from a few PP adherents and even smaller cohort of Dragon Portfolio) are running Constant Mix (
https://cssanalytics.wordpress.com/...et-allocation-lessons-from-perold-and-sharpe/) portfolios that have concave payoff profiles today, which adequately hedge against all macro risks that Chris Cole has spoken about and I summarised above. A
lottttttt of people are running Constant Mix in the form of 60/40 portfolios but both the assets in that SAA will not do well if Risk Parity shits itself again or inflation picks up. That is Chris' whole point. If you are running 60/40 or Risk Parity, you need to change it up to hedge the future. If you are a niche specialist who thinks nothing macro matters, then none of this is relevant for you at all.
And that concave action is so important to understand in all of this. It's the rebalancing that makes it powerful. Not the exposure to long vol, not the commodity trend, etc. That concave return profile is in a sense long of vol itself, in that it is always on the other side of the trade of structural short vol trades like those mentioned above.
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Personally I haven't switched from PP to DP. The lessons from Hawk/Serpent are different for US investors than AU investors! If you are a US investor running PP on US long bonds, gold, USD and US equities then you are very heavy on deflation trades. AUD holdings and AU equity indices are a different beast (due to sectoral differences) and should be expected to do a lot better in inflation/autocorrelation regimes like we saw 2003-2007 where AUD and Aussie equities just smashed it out of the park. Similar shape up from the March 2020 lows.
So I have kept to the PP but I try and tweak the holdings within the cash and equity asset classes to get some natural exposure to commodity trend (higher weight to AU equities and EM equities) and dynamic changes to USD and AUD allocation within cash because AUD absolutely crushes it on reflation shifts. I also take some discretionary and tactical long options positions and if vols are cheap (not really the case since Feb 2020 when being long vol reaaallly paid) I will put on some equity tails based on
https://thefelderreport.com/2016/08...-heres-how-you-can-tail-hedge-your-portfolio/ this strategy.
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Hopefully that is more engaging on the topic you wanted to discuss.