I have written about the Life Hedge in here before. Let me hum a few bars for you.

You have a job, the economy is doing well, you’re getting paid and promoted, and you’re making more money. You’re taking this money and recycling it into stocks, and the economy keeps booming. So, you’re making more money from your job and your stocks. Everything is awesome. 

Then the economy starts to head south, jobless claims pick up, things start to slow down, and you get laid off from your job. Your stocks go down too. Everything is terrible. You basically live your life in such a way that everything is either awesome or terrible. This is another way of saying that you have a lot of volatility in your life.

Wouldn’t it be nice to not have a lot of volatility in your life? Wouldn’t it be nice to smooth things out a little bit so the highs are not so high and the lows are not so low, so you aren’t experiencing these big emotional ups and downs?

That is what I try to do with my newsletter Street Freak. Let me take you under the hood and talk about the portfolio construction in Street Freak for a minute.

Smooth Out Volatility

The portfolio is mostly long, but there are some shorts. Typically, it is about 80% long and 20% short, though it can be as much as 40% short, depending on the situation. There is also the occasional index hedge, in the S&P 500 or something else. It’s semi-diversified across sectors, though there are big sector bets. There is definitely a value bent, with a focus on dividends, and there is market timing. People say that it is impossible to time the market, but we do a pretty good job of it.

That’s it, in a nutshell. Now, what does this have to do with the concept of the Life Hedge?

I’m not targeting any specific level of returns with the portfolio, but the goal is to underperform a little bit in good times and outperform massively in bad times. And if you look at the returns this year, we’ve done the latter. The Street Freak portfolio is up 29.6% year to date, while the S&P 500 is up 3.8% and the S&P 500 Equal Weight Index is up 3.1%. We’re crushing it in Street Freak this year. Last year, the market was up big, with the S&P 500 eclipsing 23%, so we underperformed a little bit.

This is the goal: to smooth out the volatility in your life. There is a problem with this. In good times, people get FOMO (fear of missing out), and they wonder why they are paying some dork newsletter writer to underperform the market. Then they go subscribe to a newsletter that is chasing crypto or fad stocks. That always ends badly.

To me, there is nothing more satisfying than making 30% when the market is in the tank and everyone is getting killed. I don’t get any satisfaction out of buying Microsoft and watching it climb the walls for 10 years. I’m not saying you should subscribe to a newsletter to feel smug or smart, but the thing with consensus ideas is that they are often crowded, and we all know what happens to crowded trades eventually.

The Enemy of Investors

This is how I have personally been investing for my entire career. What have I returned, personally, over my entire career? About the S&P 500—but with very little volatility. 

Drawdowns are the enemy of investors. If you have $2 million, you don’t want to go to $1 million on the way to $4 million. You will be miserable. You will have a heart attack. The portfolio that will make you happiest is the one that goes from $2 million to $4 million in a straight line, with no pullbacks.

It’s a common misconception that people invest in hedge funds or CTAs because they are trying to make triple-digit returns. That isn’t the case at all. People look for professional money management because they want the greatest return per unit of risk, and they don’t want drawdowns.

That is the genesis of all these multi-strategy hedge funds that are out there these days—because they use hundreds of offsetting strategies, the volatility of returns basically drops to zero, and you get something that looks like those straight-line returns. I’m not going to go as far as saying that multi-strategy pod shops have solved for the problem of risk, but investors are a lot better off than they were 15 years ago when their money was being managed by a swashbuckling, risk-taking hedge fund pirate.

Risk of Ruin

I spend a lot of time thinking about stuff like this. If you’ve ever looked at one of my portfolios—Street Freak, The Daily Dirtnap, or elsewhere—you will probably walk away scratching your head after seeing all the oddball stocks in there, with shorts and options to boot. It may seem like my portfolios are constructed without rhyme or reason.

When I pick stocks, I am not just picking a stock that I like. I am thinking about how it fits into the larger context of the portfolio and how it reduces risk. That’s the case with Street Freak—our year-to-date success isn’t about one idea or one call. It’s about discipline and ironing out volatility. Remember, the goal is to underperform a little bit in good times and outperform massively when the market is in the toilet.

One last thing: The first thing you have to think about when you build a portfolio is the risk of ruin. If the market were to drop 50%, would you lose 50%? Would you lose more than 50%, or less? Or would you actually make money? 

I build portfolios that gain from disorder, a crisis trader at heart. Street Freak can back me up on that. It’s built to thrive in moments like this. And here’s the good news: You can join Street Freak at a 45% discount for a full year. The only caveat is that you have three days to act before it returns to full price.

If you’ve been reading my stuff for a while, you’ve likely seen me write about how the most important decision you will make is what to do with the next 24 hours. Well, you’ve got 72 of them!

All that to say, if you’ve been waiting for a more palatable entry point, it doesn’t get much better than this. Smooth out the volatility in your life. You won’t regret it. Let me put it this way: I didn’t hear any complaints from subscribers during the tariff meltdown in April.

Jared Dillian, MFA