In the first 5 months of 2019, Steady Momentum 6.7% return. This compares to 3.2% return for our PUTW benchmark. Not only our strategy outperformed the benchmark, but it did it with less volatility.
May was a good example how the strategy can reduce the volatility of your portfolio. While S&P 500 was down 6.6%, Steady Momentum was down only 1.8%. The term risk premium (IEI-BIL) was positive this month, with IEI outperforming BIL by 160 bps (1.81% vs. 0.21%). Overall, it was a strong month for our strategy on a relative return basis, and the strategy is performing very well so far.
Over the long term, the put write strategy is expected (based on historical data) to produce stocks like (or slightly better) returns with about 30% less volatility.
On May 4 (when we last received the BIL dividend), SPY hit 294.75, which was the high transaction point for Anchor. Over the past several weeks, we've finally experienced a "significant" market decline, from our transaction peak and from the last time I rolled the long hedge. Specifically, the market is down 6.50% over that period and 2.3% since our last roll of the long hedge.
How is the strategy performing during this down move on the market?
Since our last roll of the short hedge (5/19), in Leveraged Anchor, SPY has declined 2.3% and we've declined 2.45% -- that's actually a GREAT result. Our long position is levered, we have a short option position that is hurt in declines, and we're declining at close to the same rate as the market.
Remember, the strategy was "adjusted" to accept some of these draw-downs in exchange for a cheaper hedge. The hedge won't really start kicking into gear until it's hit. It's at 270 -- so until SPY is below 270, if we can track market losses, in a leveraged account, above our hedged price, that's a stellar result.
In January, our account started with $100k in the Leveraged Anchor and SPY was at $249. SPY is currently at $278.59 and our account is at $113,225. That means our Leveraged Account is up 13.22% while SPY is up 11.88%. In other words, we're still beating the market in a hedged strategy.
To say that result exceeds our expectations is an understatement. We had an amazing bull run to the start of the year, where we had to roll our long hedge (rolling the long hedge during the year is always a significant cost and, historically), one of the biggest drags on Anchor performance. We then have had a swift drop from that point, resulting in losses on the short puts -- but the losses aren't exceeding what is expected and having them hedged at a higher point than the entire portfolio has been helpful.
We are very pleased with the performance of both strategies. Remember: those strategies are designed to reduce the volatility of your portfolio, and provide you protection in case of a big market decline. When the next bear market finally comes, you will be protected and able to stay in the game.