Primary Factor Driving Performance

Because the Flex Strategy has both long positions (profit when prices move higher) and short positions (profit when prices move lower), the factors driving performance, good or bad, differ from period-to-period. In May, the majority of the losses were the result of the use of leverage combined with our long positions going down. Here is a simplified illustration:

The average stock in the S&P 500 declined -3.8% in May. Let’s assume, for illustration purposes, that our average long position is similar to the average S&P 500 stock and fell -3.8% for the month. Let’s combine this with the impact of leverage remembering that leverage amplifies performance. At the start of the month our longs were leveraged about 2.5 times. Here is how this math works:

Without getting too deep into the weeds, the above, again, is a simplified explanation of the primary driver of performance in May…the long positions went down and we owned a lot of them.

17 Similar Losses Since 2010

Although May was the third worst month in more than 13 years, declines of this magnitude and pace are a bit more common than this would suggest. Here is what May looked like day-by-day:

As the above graph shows, the Strategy was down just -1.1% mid-month. It was the latter part of the month, or the last 13 trading days of May, when the majority of the losses occurred. Looking back at the Strategy’s performance history, there have been 17 other times when losses were similar or worse during a similar number of days. In other words, over the Strategy’s more than 13-year history, such performance has occurred more than once a year.

Focusing on the Long-Term

The Flex Strategy is unique in that it delivers two things to investors:

Since the launch of the Strategy in 2010, the Flex has produced a cumulative return net of an estimated 1.5% annual management fee, of +484.7% as compared to the S&P 500’s +405.9% (even after the difficult May!).

The second point, that the Strategy has a low R-squared to stocks (see the “R-squared Explained”), is extremely important and unique. This is “investment geek” stuff and incredibly important to our long-term performance expectations! The Flex Strategy’s R-squared to the S&P 500 is 14.5% meaning that only 14.5% of the Flex’s performance is explained by the performance of the S&P 500. Essentially, it suggests the S&P 500’s performance is nearly inconsequential to the performance of the Flex.

The Flex Strategy’s low R-squared to the S&P 500 is important for two reasons. First, it tells us that the bull market for the S&P 500 that has existed for the majority of the time since the launch of the Flex in 2010 was not the reason for the Flex’s long-term strong performance. Therefore, the Flex could continue to deliver strong long-term returns even if the bull market in stocks does not persist. In other words, the strong performance of the Flex is not dependent on a bull market.

The second reason a low R-squared is important is that, just like the Flex is not dependent on a bull market in stocks to perform well, it is not at significant risk of a bear market in stocks as well. As 2022 demonstrated, the Flex Strategy was little changed in value while the S&P 500 and NASDAQ fell sharply.

The fact is that you usually only get one or the other…strong long-term performance or a low R-squared but seldom both. The Flex is delivering both.

What’s next – June 2-day bounce

I wish I could see the future but I cannot! I do know that the first two days of June recovered about one-third of the loss in May. The recoveries from such losses can be very fast but they also can drag on for a while.

Every bit of research and real-time experience suggest the Flex Strategy will continue to deliver great long-term performance and add diversification and overall risk reduction to a portfolio.