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The excitement over providing retail access to private equity seems to have turned sour with more skepticism. Cliff Asness introduced the term 'volatility laundering,' which no doubt raised awareness of the drawbacks. Check out Jeff Ptak on X for what I would call investigative finance journalism, as he tries to dissect how the ERShares Private-Public Crossover ETF (XOVR) is carrying its position in SpaceX. 

As the aforementioned excitement built, we talked frequently about not getting wrapped up with illiquid vehicles offering private equity. I have been skeptical about the need for any of it in a typical, retail-sized account. My thought has been that if you think you need to have some sort of private equity in your account, it would make more sense to own one of the companies generating the fees, which tend to be high, instead of paying the fees. 

We've talked most frequently about Blackstone (BX) in this context. I should be clear that I've never owned Blackstone for clients, I've never even considered it. I'm saying that for anyone who thinks they should have private equity, a company like Blackstone probably captures the effect, for better or for worse. 

From it's inception into year-end 2024, Blackstone compounded at about 15% versus 10% for the S&P 500, but the drawdowns are typically much larger for Blackstone than the index. Here is a chart depicting its performance.

It did much worse last April, and maybe the negative bias has lingered because of the increased skepticism I mentioned above -- or not. Either way, as a proxy for private equity, when times are good, they are great, and when times are bad, it's a very rough hold. In 2022, Blackstone was down 39% versus 18% for the S&P 500.
 

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From the top down, I think it makes more sense to add long volatility from the tech and discretionary sectors. Extremely volatile financials seem prone to blowing up entirely in ways that no one saw coming due, I believe, to the extreme complexity of the business models. 

Now, onto trying to harness short volatility.
 

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I have no personal interest in any of those funds, but it is interesting that they talk about harnessing volatility in their marketing. Most clients own Princeton Premier Income (PPFIX), which sells index puts in such a way that the fund is an absolute return vehicle with very little volatility.
 

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GraniteShares YieldBOOST SPY ETF (YSPY) sells put spreads on Direxion Daily S&P 500 Bull 3X Shares (SPXL), so it's a little similar, but they both sell puts in different ways. The PPFIX fund is like a T-bill with a slightly higher return, as you can see.

Most of the derivative income funds that have launched in the last couple of years have been crazy high-yielders, like the YSPY ETF, whose website says it "yields" 48%. I've been saying there will be more of these and that the niche will evolve. Here's a filing for Worth Charting Options Income ETF that will sell straddles on individual stocks. It's not clear to me whether it will be a crazy high-yielder or not. 

On that topic, crazy high-yielders don't really make sense to me. There is no way the NAV of a fund will keep up with a 48% distribution rate. The YSPY fund pays weekly, and, on many of the payouts, 90%+ of them are returns of capital (ROC). ROC has favorable tax status and can be used to round off a distribution, sure, but often the crazy high-yielders pay mostly ROC. Why not just have a lower distribution?

We've outlined a scenario using an extreme drawdown strategy where the question is: what will deplete faster, just taking un-invested money out of an account until it's gone, or a fund like YSPY eroding very quickly and paying out an obviously unsustainable distribution? The answer is path-dependent, so there's no way to know for certain going forward.

I've very pleased with the PPFIX fund, though an improvement in my eyes would be something that yielded 7%-8% and managed to trade horizontally after the distribution. My hunch is that the WRTH fund is not seeking such a plain vanilla outcome. The path to that result is probably with an option combo involving put options more than call options.

The PPFIX fund sells puts so far out-of-the-money that the occasional dips you see on the chart are actually because of the process they have to adhere to of marking to market. Often, the one-day dips get reversed within a day or two, and they haven't run into trouble with the puts they sell.

A little closer to the money would still be very far out-of-the-money, and it might nudge the return up. PPFIX doesn't want to do that, but someone else might -- or someone else might create the effect I'm talking about with a different strategy. 

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