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leverage in low correlated assets

Posted: Fri Nov 20, 2020 6:03 pm
by leenaerts
Basically I like leverage, but it looks like you can overleverage on 1 thing, lose it all and never recover. If you spread it out to un/very low correlated assets your chances of losing all become way less and make it way more likely to recover. Especially comparing Hedgefundie and a straight 100% UPRO made me realize this.

Currently I'm having 100k in UPRO, 100k loaned out on crypto.com for 12% interest a year before taxes (I know not without risk, but imo low risk). 300k in bitcoin that I am planning on selling at least half of it.

My plan after reading this: I don't like TMF with low interest rates, but like to keep my investments in crypto.com-loans and bitcoin so I was thinking of a 33/33/33 upro/crypto/btc, which should be earning similar (besides the decay) to 60/20/20 spy/crypto/btc. btc is probably as volatile as upro or not more so dont feel like putting more than 1/3 of my equity in.

What do you think about this? Any other advice?

What about putting some extra margin on upro (and maybe btc?) and investing some more in crypto @ 12%?
Way more profitable, just how much leverage can i put on upro without risking margin calls? 33% (yearly rebalanced?)? so starting with 4x leverage on spy?

I am thinking yearly rebalancing for tax reasons to make profits count long term.

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 6:13 pm
by 000
leenaerts wrote: Fri Nov 20, 2020 6:03 pm What do you think about this?
I think this has a high chance of blowing up catastrophically.

I don't think BTC and stocks have low correlation, at least not when you need it most like the March 2020 liquidity crisis.

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 6:55 pm
by absolute zero
I support taking risk in the right situation, and I’m open to the idea of using leverage for those with unusually high risk tolerance. But this sounds like a half-baked plan. I wouldn’t wish this portfolio on my worst enemy if I had one.

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 7:04 pm
by JBTX
craps has a zero correlation with stocks. You may want to look into borrowing $100k and putting it on the craps table for diversification purposes.

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 7:36 pm
by alex_686
The first problem is the UPRO is not exactly leveraging up. The problem is that it rebalances daily. The higher the volatility- and leveraging does increase volatility - the worse it tracks the underlying index. There are fact patterns where the index will go up and the 3x leveraged portfolio will close down. The prospectus, IIRC, mentions 1 day. In reality you can get about 30 to 60 days before you need to reallocate.

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 7:51 pm
by alex_686
The second problem is that I don’t think the 3 assets gave a low correlation.

Correlation and Bitcoin is a bit if a oxymoron. Correlations assumes constant volatility, Bitcoin does not. If we ignore the math I can’t think of any reason why Bitcoin would move in a different direction against the other 2 assets.

Next, during times of stress and crisis assets tend to move down together fast. I know very little about crypto.com-loans, but credit spreads increase, causing prices to crash. Default rates increase. And markets tend to freeze.

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 8:02 pm
by alex_686
A last observation. I worked the margin desk during the dot.com boom and bust. I currently work on portfolio risk reporting.

From my viewpoint you are engaging in a highly aggressive pursuit with a high probability of blowing up your portfolio. As long as you know that you are doing that - well, it is your life. However what I am seeing is a naive approach where you gave identified asset classes that have recently done well and just piling in. This is common right before the asset class blows up, thus leading you to ruin.

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 8:10 pm
by David Jay
leenaerts wrote: Fri Nov 20, 2020 6:03 pmI don't like TMF with low interest rates
Please explain (I presume you mean Total Market Funds). It would seem that cheap liquidity would be a boon to many different types of companies, which would tend to buoy the market.

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 8:11 pm
by 000
David Jay wrote: Fri Nov 20, 2020 8:10 pm
leenaerts wrote: Fri Nov 20, 2020 6:03 pmI don't like TMF with low interest rates
Please explain (I presume you mean Total Market Funds). It would seem that cheap liquidity would be a boon to many different types of companies, which would tend to buoy the market.
TMF is the ticker for a leveraged long term treasury fund.

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 8:14 pm
by David Jay
000 wrote: Fri Nov 20, 2020 8:11 pm
David Jay wrote: Fri Nov 20, 2020 8:10 pm
leenaerts wrote: Fri Nov 20, 2020 6:03 pmI don't like TMF with low interest rates
Please explain (I presume you mean Total Market Funds). It would seem that cheap liquidity would be a boon to many different types of companies, which would tend to buoy the market.
TMF is the ticker for a leveraged long term treasury fund.
Got it. Never thought I would see BH types using leveraged ETF tickers without labels...

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 8:18 pm
by 000
David Jay wrote: Fri Nov 20, 2020 8:14 pm
000 wrote: Fri Nov 20, 2020 8:11 pm TMF is the ticker for a leveraged long term treasury fund.
Got it. Never thought I would see BH types using leveraged ETF tickers without labels...
:sharebeer

Time to call the top? :twisted:

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 8:18 pm
by ivgrivchuck
leenaerts wrote: Fri Nov 20, 2020 6:03 pm Currently I'm having 100k in UPRO, 100k loaned out on crypto.com for 12% interest a year before taxes (I know not without risk, but imo low risk). 300k in bitcoin that I am planning on selling at least half of it.
When the Crypto winter comes, your portfolio is toast. This is an extremely risky portfolio. You have a high probability of losing most of it in many scenarios. And you have a low/medium probability of losing it all in certain scenarios.

You seem to like gambling?

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 8:38 pm
by leenaerts
ivgrivchuck wrote: Fri Nov 20, 2020 8:18 pm
leenaerts wrote: Fri Nov 20, 2020 6:03 pm Currently I'm having 100k in UPRO, 100k loaned out on crypto.com for 12% interest a year before taxes (I know not without risk, but imo low risk). 300k in bitcoin that I am planning on selling at least half of it.
When the Crypto winter comes, your portfolio is toast. This is an extremely risky portfolio. You have a high probability of losing most of it in many scenarios. And you have a low/medium probability of losing it all in certain scenarios.

You seem to like gambling?
I have quite some fixed assets besides this. I want the best average return for my liquid ones
if I have 500k. i rather see a 10% chance of making it 6M and a 90% chance of losing it all than a 100% chance of making it 550k in the same period. I know this wouldn't be the case for most people. That's why I mention it.

I don't call it gambling, but if you want you could maybe call it gambling with profitable odds. I realize I could lose it all.
What would you recommend for my strategy?

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 8:38 pm
by leenaerts
ivgrivchuck wrote: Fri Nov 20, 2020 8:18 pm
leenaerts wrote: Fri Nov 20, 2020 6:03 pm Currently I'm having 100k in UPRO, 100k loaned out on crypto.com for 12% interest a year before taxes (I know not without risk, but imo low risk). 300k in bitcoin that I am planning on selling at least half of it.
When the Crypto winter comes, your portfolio is toast. This is an extremely risky portfolio. You have a high probability of losing most of it in many scenarios. And you have a low/medium probability of losing it all in certain scenarios.

You seem to like gambling?
I have quite some fixed assets besides this. I want the best average return for my liquid ones
if I have 500k. i rather see a 10% chance of making it 6M and a 90% chance of losing it all than a 100% chance of making it 550k in the same period. I know this wouldn't be the case for most people. That's why I mention it.

I don't call it gambling, but if you want you could maybe call it gambling with profitable odds. I realize I could lose it all.
What would you recommend for my strategy?

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 8:50 pm
by ivgrivchuck
leenaerts wrote: Fri Nov 20, 2020 8:38 pm I have quite some fixed assets besides this. I want the best average return for my liquid ones
if I have 500k. i rather see a 10% chance of making it 6M and a 90% chance of losing it all than a 100% chance of making it 550k in the same period. I know this wouldn't be the case for most people. That's why I mention it.

I don't call it gambling, but if you want you could maybe call it gambling with profitable odds. I realize I could lose it all.
What would you recommend for my strategy?
Everybody has their own strategy. As long as you know what you're up to you, it's your money.

Are the odds profitable or not, that's very hard to say. There is no reliable way to evaluate the true value of crypto or crypto industry.

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 8:55 pm
by luckyducky99
leenaerts wrote: Fri Nov 20, 2020 8:38 pm
ivgrivchuck wrote: Fri Nov 20, 2020 8:18 pm
leenaerts wrote: Fri Nov 20, 2020 6:03 pm Currently I'm having 100k in UPRO, 100k loaned out on crypto.com for 12% interest a year before taxes (I know not without risk, but imo low risk). 300k in bitcoin that I am planning on selling at least half of it.
When the Crypto winter comes, your portfolio is toast. This is an extremely risky portfolio. You have a high probability of losing most of it in many scenarios. And you have a low/medium probability of losing it all in certain scenarios.

You seem to like gambling?
I have quite some fixed assets besides this. I want the best average return for my liquid ones
if I have 500k. i rather see a 10% chance of making it 6M and a 90% chance of losing it all than a 100% chance of making it 550k in the same period. I know this wouldn't be the case for most people. That's why I mention it.

I don't call it gambling, but if you want you could maybe call it gambling with profitable odds. I realize I could lose it all.
What would you recommend for my strategy?
I would leave crypto out of it[1], jump on some variant of the HFEA at IBKR, sign up for portfolio margin, and max that sucker out. Good luck.

[1] Do you really think that if the stock market crashes, people are going to flood into crypto? I don't.

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 9:06 pm
by nisiprius
Just to be clear, leenaerts, I would appreciate it if you would take a look at the the Bogleheads investment philosophy. It would be nice if you could say "OK, I've read it, I understand it--but it's just not for me."

Also, be aware that there is no such thing as "low correlated assets" any more than there is any such thing as "high return assets." There are assets that have had low correlation in the past, but just as with return, past correlations are no sure indication of future correlations. Thus, to rewrite your sentence, "if you spread it out over assets that turn out to have very low correlation going forward, then your chances of losing all become way less."

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 9:22 pm
by alex_686
David Jay wrote: Fri Nov 20, 2020 8:14 pm
000 wrote: Fri Nov 20, 2020 8:11 pm
David Jay wrote: Fri Nov 20, 2020 8:10 pm
leenaerts wrote: Fri Nov 20, 2020 6:03 pmI don't like TMF with low interest rates
Please explain (I presume you mean Total Market Funds). It would seem that cheap liquidity would be a boon to many different types of companies, which would tend to buoy the market.
TMF is the ticker for a leveraged long term treasury fund.
Got it. Never thought I would see BH types using leveraged ETF tickers without labels...
I can make a decent argument for a portfolio consisting of UPRO / TMF. With frequent rebalancing it preforms better then a unlevered portfolio both in terms of risk & return.

But that is historical. Not sure that would hold today with such low rates.

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 10:28 pm
by leenaerts
nisiprius wrote: Fri Nov 20, 2020 9:06 pm Just to be clear, leenaerts, I would appreciate it if you would take a look at the the Bogleheads investment philosophy. It would be nice if you could say "OK, I've read it, I understand it--but it's just not for me."

Also, be aware that there is no such thing as "low correlated assets" any more than there is any such thing as "high return assets." There are assets that have had low correlation in the past, but just as with return, past correlations are no sure indication of future correlations. Thus, to rewrite your sentence, "if you spread it out over assets that turn out to have very low correlation going forward, then your chances of losing all become way less."
OK, I've read it, I understand it--but it's just not for me.

Re: leverage in low correlated assets

Posted: Fri Nov 20, 2020 10:33 pm
by leenaerts
luckyducky99 wrote: Fri Nov 20, 2020 8:55 pm
leenaerts wrote: Fri Nov 20, 2020 8:38 pm
ivgrivchuck wrote: Fri Nov 20, 2020 8:18 pm
leenaerts wrote: Fri Nov 20, 2020 6:03 pm Currently I'm having 100k in UPRO, 100k loaned out on crypto.com for 12% interest a year before taxes (I know not without risk, but imo low risk). 300k in bitcoin that I am planning on selling at least half of it.
When the Crypto winter comes, your portfolio is toast. This is an extremely risky portfolio. You have a high probability of losing most of it in many scenarios. And you have a low/medium probability of losing it all in certain scenarios.

You seem to like gambling?
I have quite some fixed assets besides this. I want the best average return for my liquid ones
if I have 500k. i rather see a 10% chance of making it 6M and a 90% chance of losing it all than a 100% chance of making it 550k in the same period. I know this wouldn't be the case for most people. That's why I mention it.

I don't call it gambling, but if you want you could maybe call it gambling with profitable odds. I realize I could lose it all.
What would you recommend for my strategy?
I would leave crypto out of it[1], jump on some variant of the HFEA at IBKR, sign up for portfolio margin, and max that sucker out. Good luck.

[1] Do you really think that if the stock market crashes, people are going to flood into crypto? I don't.
Plan is to reduce my crypto anyway. But I feel it could help this situation. If upro crashes down to 5$. I don't think bitcoin will necessarily lose 90% of its value. It could but it definitely doesn't need to. It could go both ways depending on what the reasons behind the crash would be.

I spent over 60k on websites to use my bitcoins in the past years. I just can't use it fast enough. I had 10.0btc @1200$. Now I got 17.8btc @18500$ and all I did was spending 7-8 btc in the past years. I am slowly selling them but earning more than I sell (spending them on purse.io etc.)