Return stacking — T-bills, a market-neutral book and a gated sector sleeve

The design, in plain terms

You park all the money in one-year Treasury bills. They pay you about 4% a year and the broker still counts them as collateral, so you can run strategies on top of the same money instead of choosing between them. That is the whole idea of return stacking: the T-bills are the income, so no strategy has to manufacture it.

On top sit two engines that make money in unrelated ways. The first is the market-neutral book, which buys and short-sells roughly equal amounts and therefore does not care much whether the market rises or falls. The second is a simple trend rule across the nine US sector funds: hold a sector only while it has beaten cash over the past year, otherwise sit in cash for that slice. When markets fall apart it steps aside on its own.

Neither engine protects you by buying insurance, which is the point. Insurance bleeds money every month you do not need it. These two cost nothing to carry: one is roughly indifferent to market direction, the other simply gets out of the way. Together with the T-bill income they earned more, and fell less, than the two of them without the trend sleeve — over a window that includes both 2008 and 2022.

Why there is no "best mix", in plain words

The obvious next question is what is the ideal split between the two engines? It turns out the question has no useful answer here, for two reasons that are worth understanding rather than glossing over.

The usual measuring stick breaks. The standard way to rank a portfolio is Sharpe — return divided by how much it bounces around. But T-bills earn a return with essentially no bouncing, so by that measure they score near-perfectly. Ask a computer to find the mix with the highest Sharpe and it answers hold almost nothing but T-bills, every single time. It is like asking for the safest way to drive to work and being told not to go. The measure is not broken; the question is. So the split is a decision about how much risk you want to carry, not a sum with a right answer.

And the surface is flat anyway. Across sleeve sizes from 25% to 100% of the account, the quality score barely moves — 1.78, 1.79, 1.76, 1.70, 1.64, 1.57. The "best" one beats the runner-up by 0.01, which is noise. There is no peak to climb, only a long gentle slope downward as you add risk. Anyone reporting the top of that list as an optimum would be reporting a rounding error.

What can be answered. Two sensible, non-fitted questions do have answers. Are the two engines pulling their weight equally? Yes — they contribute 56% and 44% of the portfolio's risk, and they move independently of each other (correlation +0.02), which is about as close to a balanced pair as you get without engineering it. And is the money being spent efficiently? Not entirely: the market-neutral book returns about 0.14 per dollar of margin it consumes, the sector sleeve about 0.59 — roughly four times better, because the broker charges the market-neutral book for its long and short legs separately and gives no credit for the fact they offset. That is a real inefficiency. It is tolerated deliberately, because the market-neutral book is what holds up when the market falls: in the twelve worst months for the S&P, it lost 0.14% a month while the sector sleeve lost 1.64%. You are paying margin for protection, not for return.

What it actually felt like to hold

A single max-drawdown figure hides the thing that matters most about holding something. The worst episode in these 236 months was not a crash: it was a 19-month grind down from July 2021 to February 2023, reaching 15.9% below the previous high, followed by 15 more months to get back to it — close to three years from peak to full recovery. The two next-worst were trivial by comparison: 7.0% over two months in the 2008 crisis, recovered in two; and 5.6% in 2011, recovered in one.

Why that stretch was a grind — attributed, not guessed. It is tempting to assume the gate caused it by sitting defensively in cash while markets rose. It did not. Over the 19 months from peak to trough the gate held 76% of the nine sectors on average and was never once fully in cash, and the sleeve made money (+1.0%). So did the T-bill base (+3.7%). The entire drawdown came from the market-neutral book, which lost 21.2% over those months. Across the full 34-month episode the split is starker still: the base earned +10.0% and the sleeve +5.4% while the neutral book gave back 13.5%, leaving the stack +0.9% — flat for almost three years.

And the market was not the problem. SPY fell 7.5% from peak to trough, then rose 35.6% during the recovery; over the whole episode it gained 25.3% while this book went nowhere. That is the honest shape of the risk here: it is not that the stack falls when the market falls — it is that a market-neutral book can lose money in a rising market, and when it does, nothing else in the stack is big enough to carry it.

So the real cost of this construction is not a crash. It handles those: 2008 cost 7.0% and was recovered in two months, while SPY fell 51%. The cost is a long, shallow, dull stretch where the neutral half is not working and you watch an index you did not buy go up without you. If you would abandon a strategy after three flat years, that is the drawdown that would make you do it, not 2008.

What this is not: a promise, a frozen result, or anything running with real money. It is a construction study that says these pieces fit together on paper, at a size stated in advance.

How it earned a forward slot

See the specialist appendix below.

Forward record so far

Forward paper-trading against the frozen gate is under way; the record here is machine-generated from the live track and updates on its own. It is interim — no result is claimed until the gate's window completes.

A construction study, not an edge. Forward paper since 2026-09-25 — tracking only.

Conditions & caveats

No load-bearing caveats beyond the gate below.

The promotion gate

AMENDED 2026-09-23 on owner instruction. The spec is REGISTERED / PRE-REGISTRATION and explicitly NOT frozen, so amendment is permitted under CLAUDE.md §2A; a frozen gate would have required a new identifier instead. The original (1) was unpassable by construction and is superseded. It read: "combined Sharpe > max(single-sleeve Sharpe), AND combined max-drawdown ≤ the worst single sleeve's." The flaw: the T-bill base is riskless, so its Sharpe is degenerate — measured at 3.33 over the full 2006-2026 window and ~25 over the 2023+ holdout, purely because its volatility is near zero. No stack that contains its own collateral can ever exceed that, regardless of how good the sleeves are. The test was therefore rejecting every configuration for a reason that had nothing to do with stacking.

• (1a) Stacking helps: combined Sharpe > the best RISK-BEARING sleeve's Sharpe, AND combined max-drawdown ≤ the worst risk-bearing sleeve's. The T-bill base is excluded from this comparison: it is the funding layer every configuration shares, not a competing sleeve.
• (1b) A marginal sleeve earns its place: adding sleeve X must beat the same stack without X on Sharpe, with max-drawdown no worse. This is the criterion that governs any decision to add or replace a sleeve — (1a) only asks whether the blend beats its own best component, which a weak third sleeve can pass by riding the other two.
• Both are evaluated at a stated sizing, declared before the run. Comparing max-drawdown across sleeves of different size is not like-for-like, so the sizing is part of the claim, not a free parameter chosen after.
• (2) The tail survives the plumbing: the stressed worst-month (§5) stays within the BP buffer at the chosen sizing — i.e. no forced liquidation with ≥ 25% of stressed buying power free (owner's target, lowered from 50% on 2026-09-23). (criterion unchanged; the target is now a number)
• Miss either → the honest read is "the stack is not additive / not safe at this sizing," reported as such (no cut/kill language — this is a construction study).