Macro Hedge ETP Update and Analysis

Hello Wall Street Bets community.

A volatile world needs a stable means of keeping value.

Like the International Monetary Fund’s (IMF) “Special Drawing Right” (SDR) is designed to be a macro-currency for central banks to transact with each other as inflation occurs, it’s time we the people had something similar. Something modernized to the needs of today’s volatile world that isn’t just an extension of inflation.

The “WSB Macro Hedge ETP”, is inspired by the failed SDR model. Designed to be a highly liquid global digital currency - allowing market participants on any level to park their value and transact without worrying about any 1 currency’s purchasing power (or degradation thereof).

We’re launching our Macro Hedge ETP this month and we wanted to give you an updated look at the performance in the markets.

Since there’s a mixture of stable coins and crypto currencies, it reflects a basket that can weather market conditions in a more practical way. This is how the big guys do it. WSB’s vision is to offer such powerful tools globally and frictionlessly.

The WSB Macro Hedge ETP should act like the bedrock to the full WSB Roadmap. We think it’s important to offer the community sound and solid strategies and starting with a product that will stand the test of time and the volatility of markets first, makes the most sense.

Performance:

As we have been diligently working with Balancer Labs, our technology partners to realize the dream of wholly collateralized, liquid and self-custodial ETPs and now that we are getting close to launch, we needed to perform a final back-test and analysis.

As you can see below we kept up with the S&P 500, which has been extremely bullish. Compared to Gold the Macro Hedge performed well. Bitcoin and Ethereum are still performing well, and holding them alone is a common strategy when it works but isn’t as conservative or useful in a bear market. Here we’ve included an overview of the performance, and we hope this makes a clear case as to why one would use this product.

We want to make it clear that this is fully decentralized and that’s why it’s taken more time.

Auditing and testing has been challenging but worthwhile to ensure protective provisions are taken - we are after mass-scalability. Our partners at Balancer have been working hard, especially around reducing fees on Ethereum main net, circuit breakers and automation. We do not own your funds, and contracts are thoroughly audited. The problem with many other ETP-like solutions is you do not control the keys or they practice fractional-reserve practices - something we believe is not fit or safe long-term.

Thanks for keeping up and please ask any questions below.

WSB Macro Hedge ETP - Pre-Launch Updated Analysis

Refresher links to previous Macro Hedge posts:

Original WSB Dapp Voting Proposal (June 30, 2021): ETP #2 (Macro Hedge) Result of WSBDApp ETP Vote (July 7. 2021):

https://wsbdapp.medium.com/landmark-unlocked-result-of-the-2nd-wsbdapp-etp-vote-5bc9ba5a b054

Snapshot Voting proposals

https://snapshot.org/#/wsbdapp.eth/proposal/QmZ5KSYBGoLPunJ8SWBdDe6VXJ8ed1kmjz52 mNU2ieLhUB

Investment Objective

A passive ETP that seeks to outperform inflation with the aim to retain purchasing power in an inflationary macroeconomic environment. The ETP would physically hold onto the underlying assets in a non-custodial way by deploying a Public Smart Pool on the Balancer protocol (Balancer.Finance).

The idea for this test portfolio was to use a basket of currencies (stablecoins) with a small exposure to precious metals (WDGLD) and Bitcoin (WBTC) and Ethereum (WETH). Due to the restrictions and liquidity of certain assets on Balancer Finance, not all inflation vectors could be included. However, over time the ETP could add tokenized representations of REITS, Royalty and Streaming company stocks and Traditional ETF Hedging Products.

Strategy:

The ETP is a passively-managed ETP that seeks to achieve its investment objective by investing primarily in fiat-pegged stablecoins, tokenized commodities and wrapped crypto native assets.

Asset Constituent & Weighting

The below table was the starting allocation for the test basket portfolio. However, to capture historical data back to 2015, Tether USDT was used instead of USDC, and EUR/USD, NZDUSD and XAUUSD were used instead of their counterparts.

Name Ticker Type Weight
USD Coin (Centre) USDC Currency 30.00%
STASIS EURO EURS Currency 23.60%
New Zealand Dollar Stablecoin NZDS Currency 21.40%
Wrapped Bitcoin WBTC Crypto 5%
Wrapped Ethereum WETH Crypto 5%
CoinShares Wrapped Digital Gold WDGLD Commodity 10%

DGLD, more specifically Wrapped DGLD was chosen as it represents a digital proof of ownership of allocated gold, which is physically held in a vault in Switzerland.

The original weightings were based on a 60/40 rule; where 60% was currencies based on the IMF SDR ratios and 40% metals and crypto. 15% BTC, 15% ETH and 10% Gold. We are currently slightly constrained as we wait for more liquidity to migrate over from the BalancerV1 pools to V2. Because of this limitation, we dropped CNY, GBP and JPY and gave more weight to NZD. This can be amended in the future.

However, after back testing the above weighting mechanism, the 30% allocated to BTC and ETH gave too much exposure so we reduced these down to 5% each.

The below charts compare the cumulative returns and maximum drawdowns from August 2015 and year to date (2021). Some of the instruments compared in the below charts are as follows:

S&P 500 (SPX):

The US SPX 500 is based on a US stock market index that measures 500 of the largest US publicly traded companies, weighted by market capitalisation.

GOLD:

This is the XAUUSD market which represents the price of 1 troy ounce of gold in U.S. dollars.

TIP:

The iShares TIPS Bond ETF seeks to track the investment results of an index composed of inflation-protected U.S. Treasury bonds.

VNQ:

The investment seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index that measures the performance of publicly traded equity REITs and other real estate-related investments.

The below chart compares the cumulative returns of the ETP Hedge vs the S&P 500 vs Gold vs TIP vs VNQ, since August 2015.

The below charts show the Maximum Drawdowns (MDD) since August 2015. The MDD is the maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained.

The below chart compares the cumulative returns of the ETP Hedge vs the S&P 500 vs Gold vs TIP vs VNQ, from the start of the year, Jan 2021.

Risk Adjusted Returns

The below tables measure how much risk is associated with producing a certain return. I compare the ETP to the S&P 500 over a 5 year period and another year to date (2021).

(Since 2015) ETP Hedge S&P
CAGR 17.77% 12.30%
Risk Free Rate 2.00% 2.00%
Annualised Volatility 12.16% 15.51%
Sharpe Ratio 1.30 0.66
Beta 1.44 1
Max Drawdown -14.57% -33.92%
(YTD 2021) ETP Hedge S&P
CAGR 25.05% 32.07%
Risk Free Rate 1.70% 1.70%
Annualised Volatility 10.08% 10.64%
Sharpe Ratio 2.32 2.86
Beta 4.43 1
Max Drawdown -5.47% -4.23%

We have used a conservative “risk free rate” of around 2% to calculate the Sharpe Ratio, although the crypto industry hasn’t quite established a risk free rate we could change this to 0% to see a slightly different measure of risk.

Conclusion:

If the information here is a bit over your head, that’s ok. We included expert information and tried to also make it easy for the average investor to understand. In the charts above you can see the performance of the Macro Hedge versus a number of other ways people seek stability. The S&P 500 has been on a major rise, but Macro Hedge still tracked it well. In addition Gold has not performed like investors hoped this past year and was out paced - but we all know black swan events and macro-economic conditions are all time volatile and thus we keep a good % weighting of gold as part of the ETP.

In general we hope we helped make a case for why to use our product or at least good ways to form critique.

The WSB Macro-Hedge ETP can add further stablecoins and real-world assets like Silver when they become liquid enough and as always $WSB token-holders will have the ability to vote on rebalancing this and all future ETP products.

We look forward to the Macro Hedge ETP launch and we will continue this level of information and transparency, because we want to function like the big boys do - but without the fractional reserve practices or 3rd party custodianship.

If you have any questions about the data please feel free to post below.

~ WSB DApp team

6 Likes

this is a great post. HODL!

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Hard not to be bullish when amazing content like this comes out. Good job WSB team!

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I’m so excited for this ETP, thanks for all your hard work!!