Hedge Fund Portfolio With ETFs

This week's Electronic Investor column in Barron's was mostly about a company called Hedgeables that builds ETF based portfolios that try to capture hedge fund strategies to deliver hedge fund results. The article makes it seem as though the focus is on risk adjusted returns which is always interesting to me.

I am intentionally not looking at the website nor am taking in any other info than what was in the article to just focus on what Mike Hogan (the author) reported as being a portfolio that Hedgeables had recommended at some point (I take the following to be a past tense example not how they are positioned right now, apologies if this is incorrect).

As best as I can tell at one point they allocated as follows;

Total stock market ETF27%
Total bond ETF 23%
Pacific Region stock ETF 7-10%
European stock ETF 7-10%
Gold ETF 7-10%
Yen ETF 7-10%
US oil/gas pipelines ETF 7-10%
Malaysia ETF a few percent
Peru ETF a few percent

The article is not more specific than that on the numbers which is reasonable, I took the numbers verbatim from the article. It is not clear to me if total stock market means just US stocks or is an all world fund but I find the mix to be very interesting. Apparently the above combo was "completely uncorrelated to the S&P 500 index," only had 60% of the risk of owning SPY and had "an absolute return of 19.53% annually." I do not know the time covered and not sure what to make of it in that the Peru ETF hasn't been around that long (perhaps a back test of that fund's underlying index?).

I find the mix to be be very interesting and instructive in terms of blending things together. If you read enough ETF content you will see a lot of ETF portfolios and most of them, quite candidly, are not interesting and more importantly do not convey that much value will be added but the Hedgeables portfolio does give me the impression that some real innovative thought is behind the finished product.

I've written a lot about portfolio construction and trying to capture certain effects and nuance and anyone who has been reading this site for a while probably knows I come at this differently but still I think there is something to learn from the exposures listed above.

Using ETFs to create sophisticated, on a risk adjusted return basis, portfolios is one of the second level attractions (once you get beyond the basics of low costs and transparency) but of course there is no need, IMO, to only use one type of product. The intellectual interest of the Hedgeables portfolio is the blending of asset classes. Depending on the size of the portfolio the 27% could be $300,000-$400,000 which is certainly enough for a fully developed equity portfolio and in that instance the 23% for bonds would be enough for a fully developed bond portfolio. I'm not sure at what dollar level 27% of someone's portfolio should go into just one ETF but I certainly would not buy a total stock market fund with $100,000.

I would take this as a template to learn from not a way to do less work.