(NEW) WisdomTree 90/60 U.S. Balanced Fund

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typical.investor
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by typical.investor » Sat Aug 11, 2018 12:51 am

Theoretical wrote:
Sat Aug 11, 2018 12:24 am
From what I've read, treasury futures only require something like 3% margin, which for the 60% bonds means they've got a margin requirement of about 1.8% of total assets, meaning the fund is overcollateralized by over 5.5x before it hits a margin call. This is why it is so important that this fund is levering the interest rate futures and not the stocks. There, margin calls are far more likely than they are with the bonds. It doesn't mean bond margin calls can't happen, but those situations would likely be ones where you are already in the hole with a stocks/bonds portfolio anyway.
For a $100k position with 10% or $10k allocated to 6X bonds, the fund's margin account would need what - $1800 [or 3% * 60,000]?

OK, you are 5.5X overcollateralized, but if duration is 5 years and rates rise 3%, bonds lose what - 15%.

So your bond holding has lost $9000. Isn't that amount deducted from the margin account meaning you are facing a call of $800?

Obviously not a problem with $90,000 in stocks, but it would be within the realm of possibility for a fund that didn't hold any stocks and was only 6X treasuries futures to face such a call.

Or are my numbers way off?

ThrustVectoring
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by ThrustVectoring » Sat Aug 11, 2018 3:53 am

I didn't see what duration bonds they were buying with the 60% allocation. It makes a huge difference whether they're playing in the 2-year treasury futures market or the 10-year.

Like, from a risk perspective, you can very roughly measure your risk limit through the margin requirements of the futures contracts - they're all vaguely designed so that your posted margin can withstand one day of price movement in advance. So the S&P 500 e-mini futures contract specs are (as of today) $50 x S&P 500 price = $142k, and require $5800 of maintenance margin, for a ratio of roughly 24. The two-year treasury future contract has a notional value of $200k and requires a maintenance margin of $525 (well, that's for the next contract, the current contract is less at $460 since we're near the end of the quarterly contract roll so the duration is lower), for a ratio of 380.

380 / 24 = 15.8, so call it 15 to be on the conservative end. So, very roughly, the equivalent risk of a 100% equity portfolio is something like 1500% on the two-year treasury futures contract. With the same math on the 10-year Treasury contract, you wind up with 400%.

Honestly, you should probably just DIY it on the treasury futures contracts. Pick up a 2-year long futures contract for every $13k of portfolio equity you want to tie up covering the futures position. And just to sanity check things, if interest rates go up 2%, you'd lose 4% of 200k or $8k, which would be pretty catastrophic but not "my portfolio is completely wiped out". And interest rates going up that much that quickly is pretty much unheard of.

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vineviz
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by vineviz » Sat Aug 11, 2018 8:04 am

typical.investor wrote:
Sat Aug 11, 2018 12:51 am
Theoretical wrote:
Sat Aug 11, 2018 12:24 am
From what I've read, treasury futures only require something like 3% margin, which for the 60% bonds means they've got a margin requirement of about 1.8% of total assets, meaning the fund is overcollateralized by over 5.5x before it hits a margin call. This is why it is so important that this fund is levering the interest rate futures and not the stocks. There, margin calls are far more likely than they are with the bonds. It doesn't mean bond margin calls can't happen, but those situations would likely be ones where you are already in the hole with a stocks/bonds portfolio anyway.
For a $100k position with 10% or $10k allocated to 6X bonds, the fund's margin account would need what - $1800 [or 3% * 60,000]?

OK, you are 5.5X overcollateralized, but if duration is 5 years and rates rise 3%, bonds lose what - 15%.

So your bond holding has lost $9000. Isn't that amount deducted from the margin account meaning you are facing a call of $800?

Obviously not a problem with $90,000 in stocks, but it would be within the realm of possibility for a fund that didn't hold any stocks and was only 6X treasuries futures to face such a call.

Or are my numbers way off?
If your notional bonds lost $9,000 they’d still be worth $51,000 . So the minimum collateral would be ($52,000 x .03) = $1,560.

Since it allocates 10% of the entire fund to cash collateral ($10k in this example) there’d be no need for more collateral.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

ThrustVectoring
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by ThrustVectoring » Sat Aug 11, 2018 1:23 pm

Theoretical wrote:
Sat Aug 11, 2018 12:24 am
From what I've read, treasury futures only require something like 3% margin, which for the 60% bonds means they've got a margin requirement of about 1.8% of total assets, meaning the fund is overcollateralized by over 5.5x before it hits a margin call. This is why it is so important that this fund is levering the interest rate futures and not the stocks. There, margin calls are far more likely than they are with the bonds. It doesn't mean bond margin calls can't happen, but those situations would likely be ones where you are already in the hole with a stocks/bonds portfolio anyway.
It depends on the futures contract - longer duration bond futures require more collateral, because there's bigger price swings in response to interest rate changes. You can look up margin requirements and contract definitions here, the 2-year one has $525 of margin required for $200,000 of notional value, so roughly a quarter of a percent. The 30-year ultra bond future contract is the one that requires that much margin, at $3300 for a $100k notional value.

manusnd1
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by manusnd1 » Sat Aug 11, 2018 1:33 pm

When the fund is holding treasury note or tbill futures? Is it getting interest payments on the futures that it owns? Would not getting interest payment hurt returns.

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whodidntante
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by whodidntante » Sat Aug 11, 2018 2:01 pm

manusnd1 wrote:
Sat Aug 11, 2018 1:33 pm
When the fund is holding treasury note or tbill futures? Is it getting interest payments on the futures that it owns? Would not getting interest payment hurt returns.
Treasury futures act something like a zero coupon bond. The dividends from the underlying asset are baked into the future value. So you indeed "get" the dividends if you hold the contract.

ThrustVectoring
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by ThrustVectoring » Sat Aug 11, 2018 8:34 pm

whodidntante wrote:
Sat Aug 11, 2018 2:01 pm
manusnd1 wrote:
Sat Aug 11, 2018 1:33 pm
When the fund is holding treasury note or tbill futures? Is it getting interest payments on the futures that it owns? Would not getting interest payment hurt returns.
Treasury futures act something like a zero coupon bond. The dividends from the underlying asset are baked into the future value. So you indeed "get" the dividends if you hold the contract.
It's actually better than getting interest payments, since treasury futures get Section 1256 treatment as 60% long-term + 40% short-term capital gains, whereas the underlying bond earns interest taxed as ordinary income.

typical.investor
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by typical.investor » Sat Aug 11, 2018 9:15 pm

vineviz wrote:
Sat Aug 11, 2018 8:04 am
typical.investor wrote:
Sat Aug 11, 2018 12:51 am
Theoretical wrote:
Sat Aug 11, 2018 12:24 am
From what I've read, treasury futures only require something like 3% margin, which for the 60% bonds means they've got a margin requirement of about 1.8% of total assets, meaning the fund is overcollateralized by over 5.5x before it hits a margin call. This is why it is so important that this fund is levering the interest rate futures and not the stocks. There, margin calls are far more likely than they are with the bonds. It doesn't mean bond margin calls can't happen, but those situations would likely be ones where you are already in the hole with a stocks/bonds portfolio anyway.
For a $100k position with 10% or $10k allocated to 6X bonds, the fund's margin account would need what - $1800 [or 3% * 60,000]?

OK, you are 5.5X overcollateralized, but if duration is 5 years and rates rise 3%, bonds lose what - 15%.

So your bond holding has lost $9000. Isn't that amount deducted from the margin account meaning you are facing a call of $800?

Obviously not a problem with $90,000 in stocks, but it would be within the realm of possibility for a fund that didn't hold any stocks and was only 6X treasuries futures to face such a call.

Or are my numbers way off?
If your notional bonds lost $9,000 they’d still be worth $51,000 . So the minimum collateral would be ($52,000 x .03) = $1,560.

Since it allocates 10% of the entire fund to cash collateral ($10k in this example) there’d be no need for more collateral.
I'll be honest and say I don't understand this conceptually.

If the future contract is my promise to buy $10,000 in treasuries $Y (price - expected interest), and the value of the treasuries I promised to buy drops in value, I still promise to pay $Y for those treasuries. Why is my required collateral amount less? I still have to pay $Y.

If what you are saying is true, then I guess it's as the treasuries are expected to revert to par value as maturity approaches. I mean three days before maturity, no matter how much rates from other three day bonds are paying bond, the price can't be much different and will close as maturity approaches.

It's just counter intuitive to me that I need more cash in my account as collateral when treasuries have increased in value, but the price I agreed to pay has not.

Your description seems opposite for margin with stocks where I'd have to deposit more in cash as equity value fell.

Anyway...

hdas
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by hdas » Sat Aug 11, 2018 9:50 pm

typical.investor wrote:
Sat Aug 11, 2018 9:15 pm
I'll be honest and say I don't understand this conceptually.

If the future contract is my promise to buy $10,000 in treasuries $Y (price - expected interest), and the value of the treasuries I promised to buy drops in value, I still promise to pay $Y for those treasuries. Why is my required collateral amount less? I still have to pay $Y.

If what you are saying is true, then I guess it's as the treasuries are expected to revert to par value as maturity approaches. I mean three days before maturity, no matter how much rates from other three day bonds are paying bond, the price can't be much different and will close as maturity approaches.

It's just counter intuitive to me that I need more cash in my account as collateral when treasuries have increased in value, but the price I agreed to pay has not.

Your description seems opposite for margin with stocks where I'd have to deposit more in cash as equity value fell.

Anyway...
You seem extremely confused about how a future contract works. I recommend you this book:

https://www.amazon.com/Options-Futures- ... b_title_bk

And this abreviated CME guide:

https://www.cmegroup.com/education/file ... utures.pdf

I believe derivatives can be immensely useful but I suggest you abstain from anything related to derivatives until you understand how those products work.

typical.investor
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by typical.investor » Sat Aug 11, 2018 10:10 pm

hdas wrote:
Sat Aug 11, 2018 9:50 pm

You seem extremely confused about how a future contract works.
You think?
hdas wrote:
Sat Aug 11, 2018 9:50 pm
I recommend you this book:

https://www.amazon.com/Options-Futures- ... b_title_bk
Thanks, that's very helpful.

I was missing the daily settlement ... loss from your margin account and reset of margin requirement ...
hdas wrote:
Sat Aug 11, 2018 9:50 pm
And this abreviated CME guide:

https://www.cmegroup.com/education/file ... utures.pdf
I looked at that site and even tried some practice trades that informed me the initial margin requirements, but didn't find daily settlement.

hdas wrote:
Sat Aug 11, 2018 9:50 pm
I believe derivatives can be immensely useful but I suggest you abstain from anything related to derivatives until you understand how those products work.
Good advice. I know I don't understand and am just throwing out hypothesis to get confirmed or rejected. It's not like I think I understand this stuff.

stlutz
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by stlutz » Sat Aug 11, 2018 10:16 pm

So is this a mild form of risk-parity trading or a different beast entirely?
Not really. The goal of risk parity is that each asset class contributes the same amount of risk to the portfolio. This takes a 60/40 portfolio and levers both the stocks and bonds by 1.5. Risk parity would only lever the bonds such that they contribute the same amount of risk the portfolio as the stocks do. Risk parity also adds in more assets than stocks and bonds.

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whodidntante
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by whodidntante » Sun Aug 12, 2018 2:46 pm

hdas wrote:
Sat Aug 11, 2018 9:50 pm

I recommend you this book:

https://www.amazon.com/Options-Futures- ... b_title_bk
I realize your post was not directed at me, but I have an MBA, and I've never read a book that is exclusively about derivatives. So I feel my knowledge on the subject is too casual. I ordered a copy of this book as it seems to have good treatment of the subject and has good reviews. I didn't order from Amazon however, as I want the knowledge without the high price.

columbia
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by columbia » Sun Aug 12, 2018 4:13 pm

whodidntante wrote:
Sun Aug 12, 2018 2:46 pm
hdas wrote:
Sat Aug 11, 2018 9:50 pm

I recommend you this book:

https://www.amazon.com/Options-Futures- ... b_title_bk
I realize your post was not directed at me, but I have an MBA, and I've never read a book that is exclusively about derivatives. So I feel my knowledge on the subject is too casual. I ordered a copy of this book as it seems to have good treatment of the subject and has good reviews. I didn't order from Amazon however, as I want the knowledge without the high price.
Those twins with bald heads and pony tails on CNBC hawk a book on options; I’m guessing the above is a better treatment of the subject. :)

desafinado
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by desafinado » Sun Aug 12, 2018 9:32 pm

I'm still working through the Hull book but I think it should be required reading, along with Larry Harris' "Trading and Exchanges" for people who think the mechanics of this stuff is interesting.

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triceratop
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Re: (NEW) WisdomTree 90/60 U.S. Balanced Fund

Post by triceratop » Sun Aug 12, 2018 10:35 pm

desafinado wrote:
Sun Aug 12, 2018 9:32 pm
I'm still working through the Hull book but I think it should be required reading, along with Larry Harris' "Trading and Exchanges" for people who think the mechanics of this stuff is interesting.
I have been reading Harris' book. Highly interesting stuff! I recommend it too.

Looks like I need to pick up Hull too.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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