Managing Risk - The Spire Portfolio

C2
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I want to introduce myself – my name is Michael S. I am the Trade Leader for two portfolios on C2: Spire, aimed at aggressive capital growth, and Alphastone, designed for moderate growth and consistency. You can check them out on C2 here:

Spire
Alphastone

I’ve received questions about the expected risks and returns for Spire, especially considering its 12-month track record during an aggressive bull market. I’d like to share insights on the strategy to help potential subscribers understand how it works.

Spire Portfolio Introduction
Spire uses a discretionary trading strategy that mimics a long call option on equity markets with leveraged ETFs. My capital allocation is influenced by macroeconomic, fundamental, and sentiment analysis, with monthly re-balancing and more frequent adjustments as needed. For risk management, I rely on dynamic hedging, stress testing, and exposure limits, avoiding arbitrary stop losses in favor of continuously monitoring the portfolio NAV and market.

Primary Return Drivers
The quality of returns depends on managing beta, selecting investments, and mitigating risk. I expect Spire to largely produce a “long-vol” return stream, capturing significant pro-cyclical moves in both bull and bear markets. In 2024, the portfolio benefited from favorable macro conditions and strong fundamentals, largely due to an equity overweight. However, my cautious stance on inflation may have limited stronger performance. My sector selections, including Nasdaq and gold, aligned well with top-performing market segments.

Opportunistic Trades
Market conditions will sometimes necessitate short-term, event-driven or risk management trades. These can be pro-cyclical or counter-cyclical in nature. For instance, I initiated a pro-cyclical long event-driven position in Small Cap equities in November to capitalize on sentiment around the U.S. election. This benefited the portfolio. In December, I reduced risk counter-cyclically after a 2% increase in portfolio NAV, perceiving that most “good news” was priced in for the month and anticipating potential market-wide profit-taking. This tactical move helped protect the portfolio.

Synergy
The key driver of returns will likely be the structural alignment of market prices with the strength and visibility of fundamental factors that support those prices. Selecting the right assets and strategically blending event-driven, tactical, and risk management trades is crucial.

Long-Term Outlook
I expect returns will be strongest in bull markets with consistent price action and solid fundamental support. In bear markets, my goal is capital protection and potential profit generation, especially during downturns when safe-haven assets may outperform. Choppy markets may pose challenges due to shifting fundamentals, potentially leading to under-performance, especially if defensive positions drag on returns.

Risks & Performance Detractors
Potential performance detractors include:

  • Exogenous shocks for which the portfolio is poorly positioned or insufficiently hedged.
  • Misinterpretation of macro or market signals.
  • Performance drag induced by defensive positions
  • Poor timing, as seen at the end of October when I re-risked just before a 2.5% market decline.

While I strive to minimize these risks, they can occur.

Risk Management Philosophy
My risk management balances three key factors: returns, standard deviation, and drawdowns. My aim is to maximize returns while accepting higher volatility as necessary. I seek to cap drawdowns relative to the broader market, where performance utility diminishes.

To manage drawdowns, I assess their magnitude and causes against my fundamental market views. Small drawdowns with stable fundamentals may not prompt action, whereas larger ones could lead to aggressively reduced exposures irrespective of my views. In other cases, I rely on “in-the-moment” judgment. As of 2024, drawdowns have been limited to mid-single digits, but I continuously track market risk and prepare contingency plans.

Conclusion
In summary, I anticipate that Spire’s returns will act like a perpetual long call option on equities, performing best in bull markets. It can experience significant drawdowns in bear markets, choppy markets which induce me to change positions rapidly or when I am wrong in my views or execution. Although Spire’s use of leveraged ETFs introduces higher risk, I believe it can ultimately deliver strong absolute, market-relative, and risk-adjusted returns. I have a personal financial interest in Spire and hold a long-term perspective on its success. You can view the portfolio here: Spire Portfolio.

For a lower-risk investment, please see the Alphastone Portfolio I manage on Collective 2: Alphastone Portfolio . Unlike Spire, Alphastone uses un-leveraged ETFs and has less frequent re-balancing. It focuses on long-term hedging and diversification to minimize risk and I expect it to keep pace with the stock market through complete macro cycles while facing lower volatility and drawdowns. In essence, Alphastone serves as a “moderate volatility cash flow generator.”

Hopefully, that gives you adequate insight into my process and performance expectations. Feedback & questions are always welcome. Alternately, feel free to DM me.

Happy New Year & Kind Regards,

Michael S.

2

My name is Michael S. I am the Trade Leader for two portfolios on C2: Spire, aimed at aggressive capital growth, and Alphastone, designed for moderate growth and consistency. You can check them out on C2 here:

Spire
Alphastone

I wanted to follow up on my prior post about portfolio management by touching on correlation risk and how I manage it.

Introduction
I aim to replicate the return profile of a long call option, capturing upside potential while minimizing downside risk. My portfolio construction focuses on three main components: return drivers (primarily equities), diversifiers, and cash. I use gradual position shifts, targeting a full macro cycle that includes both a bull and bear market, typically spanning several years. My primary goals are to maximize returns, control downside, and maintain diversification.

Why Dynamic Correlation Management is Important
Equity markets are efficient in the long term but can be volatile in the short term, often wiping out years of gains quickly. These losses usually occur when economic conditions deviate far from the norm, such as during deflation or stagflation. To reduce downside risk in these regimes, you have two choices: time the market or hedge the portfolio. I use both, but hedging is tricky since it often brings two additional risks: (1) lower returns than equities, and (2) unpredictable correlations over time. Generally, the more reliable the hedge, the more expensive it is.

For example, US T-Bonds have historically been an unreliable hedge, with a 12-month rolling correlation to the S&P 500 ranging from +0.9 to -0.9 from 2000 to 2024. During the extended equity bear market from 1966 to 1980, T-Bonds fell 56% while gold gained 672%. This shows that hedging assets need to be carefully understood and managed.

How I Manage Hedging
I balance capital allocations between return drivers, hedges, and liquidity. Within the hedge component, I select a mix of markets that thrive in different economic regimes—such as bonds and long VIX futures for deflation, and gold and commodities for stagflation. The key properties I aim for in hedges are:

  • Strong returns over a full macro cycle
  • Negative beta during bear markets
  • Consistent negative correlation with equities across economic conditions

As with all parts of the portfolio, I rely on ongoing, multi-faceted research to identify and manage the best hedging candidates.

Performance Expectations
When executed well, both market timing and selecting appropriate markets should lead to strong performance. However, my gradual approach to portfolio changes means that short-term results may be more volatile. The shorter the evaluation period, the more random the results due to my style of trading.

Recent Results
Since the Spire portfolio has been active for just over a year, it’s too early for conclusive analysis. However, early results are promising. In April, October, and December of 2024, when both stocks and bonds fell, Spire limited losses: stocks lost 6.9%, bonds dropped 17.5%, and Spire fell just 2.5%. While not extraordinary, these results reflect:

  • Effective market timing, with an overweight toward hedges
  • Strong selection within the hedge component, particularly with gold, which performed well

Conclusion
The stock market is a powerful return driver but can lead to significant losses. Managing both gains and protection is crucial. I do this by utilizing complementary components, multi-layered analysis, and dynamic risk management. While this approach doesn’t eliminate short-term volatility, it aims to capitalize on bull markets and protect against extreme market fluctuations caused by extreme economic shifts. This combination should lead to very attractive portfolio results that are delivered more efficiently and consistently than those available in passive investing.

Hopefully, that gives you additional insight into my process and performance expectations.

Kind regards,

Michael S.