FAQ

Unlike most active mutual funds and ETFs which use a bottom-up research process to take risk, MDAA employs a top-down macro approach to taking risk. As a result, the drivers of MDAA performance are more macro such as is the fund over or underweight global equities and the country and sector allocation of the equity exposure. In addition, MDAA takes significant active risk relative to benchmark in interest rates and FX exposure so collectively these top down exposures drive the relative performance of MDAA rather than bottom-up drivers such as large active equity positions or positioning in parts of the fixed income market like MBS vs treasuries.

MDAA equity exposure ranges between 0 and 100% vs neutral of 60%. Often the equity portfolio is higher than 1 beta so for example if the beta of the portfolio vs Bloomberg World Index is 1.25 then the range of beta adjusted equity exposure is 0 to 125%. In addition, the fund is able to spend up to 2% option premium to either hedge or add to equity exposure. So MDAA can be net short equities if equity exposure is zero and MDAA is long equity put options or it could be above 100% if MDAA is long 100% plus long calls. As a result, the active risk MDAA is able to take in equities is 60% underweight plus puts to further extend the underweight to roughly 65-70% beta adjusted overweight (40% dollar) plus calls to extend the overweight.

MDAA will typically have 50-75 long equity positions in mostly large cap companies globally and a few ETF positions. ETFs can be 0-100% of equity exposure with a typical percentage being 60-80% in single stocks and 20-40% ETFs. MDAA tends to use ETFs more for foreign stock exposure so that as high as a percentage of the portfolio trades live time in US market hours as is possible. The primary drivers of active risk in the equity portfolio tend to be sector and country exposure and not idiosyncratic single stock equity risk. The largest single stock investments tend to be large cap equities.

Yes MDAA actively invests in derivative positions especially FX futures and forwards and interest and bond futures. MDAA also invests in equity calls and puts, and equity index futures. The majority of MDAA’s equity exposure is from single stock and ETF investments instead of derivatives while MDAA’s FX and interest rate risk is primarily via derivatives.

The BMAW64 Index across equities and fixed income is roughly 44% in non-dollar assets. MDAA actively monitors total exposure to non-dollar assets in the fund at all times which is the sum of foreign stocks including ADR’s and depositary receipts, foreign equity or bond exposure in ETFs, FX futures and forward positions and gold exposure. MDAA’s maximum active risk in non-dollar exposure is 100% so the sum of the non-dollar exposure ranges from -56% when we are maximum bullish on the dollar to 144% non-dollar exposure when we are maximum bearish on the dollar.

The BMAW64 Index has 40% in bonds with an average duration of 7 years. MDAA’s interest rate risk range is similar to our approach in FX, MDAA can take active risk of 100% vs this benchmark such that the maximum long position in 7-year duration is 140% of Fund NAV and the maximum net short position is 60%. Because bonds of different maturities have different duration, we always duration adjust so the risk limits are in $ per basis point move in interest rates and not notional. As a result, when exposure is in shorter than 7 year duration, the notional limits are larger and when longer than 7 year duration the notional limits are smaller.

We focus on the macro decision which is do we want to be over or under weight equity and government bond markets. In general during risk on, equities outperform spread bonds and usually in risk off government bonds outperform spread bonds. So we focus most of our time on the equity and government bond weight. There are rare circumstances when corporate bonds are dislocated like early 2009 and before that from the short side in 2007 but we see these instances as uncommon and therefore we focus primarily on equities and government bonds. However this doesn’t mean MDAA cannot invest in corporate bonds or MBS it will just take a unique dislocation in those markets for MDAA to invest and these events are rare.

Conventional wisdom is that timing the equity market is futile. Myriad has a different view which is that the vast majority of active managers are focused on stock picking both in active equity funds and hedge funds. As a result, we believe single stock alpha is extremely competitive as evidenced by the portion of active mutual funds that outperform the index. We would also observe that over the past 40 years discretionary macro hedge funds have had better results than equity long short hedge funds overall. We believe this is evidence that a macro top-down investment approach can produce excess returns if done in a highly disciplined manner by an experienced investment team. However, we would caution that outperforming markets is extremely difficult, and we find attempting to do so to be a humbling endeavor.

MDAA does have leverage via the derivatives market. MDAA does not leverage its securities holdings so all leverage comes via futures, forwards and options positions. If MDAA is very bullish on 60-40 as a strategy and therefore bullish on equities and government bonds then MDAA could be long 100% equities via stocks, ETFs and equity futures and in addition be long 66% via 10 year government bonds which would mean MDAA is effectively 166% leveraged long 60-40. MDAA does not take leveraged long risk to equities plus spread product so for example the fund wouldn’t be 100% long equities plus 50% long corporate bonds.

Yes MDAA brings a hedge fund risk management approach to the ETF. MDAA does take significant active risk with at times the active risk of the fund vs benchmark of well over 10% per annum. There are also times when we have low conviction when active risk will be relatively low. The approach to risk management is if the trailing 12 month performance of MDAA is more than 12.5% underperformance vs the BMAW64 Index then all active risk ranges are halved so the range of equity exposure changes from 0% to 100% to 30% to 80% and extra option premium spend to 1% from 2% - the one caveat is if underperformance came not from losses but lagging a very extended equity bull market then we don’t force the minimum equity exposure to 30% from 0% as MDAA does also have a secondary objective of capital preservation. Similarly, the maximum active risk vs benchmark for FX and interest rates is also have halved from 100% FX vs benchmark to 50% and 100% 7 year duration fixed income to 50%. Risk limits return to normal once trailing 12 month performance for MDAA regains less than 12.5% underperformance.

MDAA’s objective is to outperform global 60-40 over the long term. However, a secondary goal for MDAA is capital preservation in bear markets and we believe long term outperformance can come by outperformance in down markets. From 2015 to 2024 global 60-40 had 3 down years out of 10. The objective of MDAA in addition to outperformance is to have a lower percentage of down years than the benchmark.