HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

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comeinvest
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by comeinvest » Wed Jul 03, 2019 2:13 am

NMBob wrote:
Wed Jul 03, 2019 2:00 am
What about the recent 3+ year period of rising interest rates effect on TMF?? Fed levels have been: Jan 2016 was .25, Jan 2017 .5, Jan 2018 was 1.5, Jan 2019 was 2.5. TMF 2016-2019 +9.57 CAGR. Annual returns TMF : 2016 -2.5, 2017 +22.7, 2018 -11.0, 2019 +29.3
I think the LTT rates are one of the major ingredients to performance of the proposed strategy, not short-term rates, at least not directly. LTT rates fell and the stock market rose during the period.

If you backtest with 8-year data plugging them into a software tool you get totally arbitrary results. The minimum is a full cycle of LTT rates.
Last edited by comeinvest on Wed Jul 03, 2019 4:50 pm, edited 1 time in total.

PluckyDucky
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by PluckyDucky » Wed Jul 03, 2019 9:43 am

comeinvest wrote:
Tue Jul 02, 2019 3:35 pm
HEDGEFUNDIE wrote:
Tue Jul 02, 2019 3:27 pm
comeinvest wrote:
Tue Jul 02, 2019 3:23 pm
HEDGEFUNDIE wrote:
Tue Jul 02, 2019 3:03 pm
If you believe that interest rates are more likely to rise than I do, the solution is simple, hold less TMF and more UPRO:
We can now do data mining and parameter fitting on 64 years of data, representing only 1 interest rate cycle, combined with one assumption for the future. Problem is we don't know the future. The 1955-1981 period shows that the strategy fails if only *one* of the two asset classes fails over a 26 year period. There are multiple major scenarios under which it would fail, and it's fair to assume that each is by magnitudes more likely than in 1982-2019 when both asset classes had the tailwind of double-digit interest rates declines.
Please offer up one of these scenarios, and attach a probability based on reasons.
(1) Stock market declines over longer period, bonds rise; (2) bond market declines over longer period, stocks rise; these scenarios would presumably result in performance similar to 1955-1981, depending on the magnitude. (3) both decline (e.g. based on rising long term interest rates) -> might be worse. (4) Several stars align (oscillating market, interest rates stay generally low) -> strategy succeeds. (5) sustained rise in both asset classes like 1982-2019: next to impossible mathematically because of low treasury yields.

The probabilities are everyone's guess based on "this time is different" or history repeats.
A regular 2-fund balanced portfolio would suck too. Just not as much, because leverage.

Is this new?

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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE » Wed Jul 03, 2019 9:44 am

Long term rates hitting yet another low today.

:moneybag :moneybag :moneybag

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lock.that.stock
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by lock.that.stock » Wed Jul 03, 2019 9:55 am

Hydromod wrote:
Tue Jul 02, 2019 11:05 pm
Funny my name should come up now. I was about to update but I haven't figured out how to post images.

I have couple of items for people to consider. I've checked out some strategy options using backtesting on fixed-duration periods (e.g., 5 years, 10 years, etc.) with the UPROSIM and TMFSIM dataset, augmented with the daily returns for UPRO and TMF for the last few months. I've been running the strategy options for every possible start day to minimize sampling bias. For example, for a 5-year test, I run for 250 trading days times 5 years, starting on day 1, day 2, ..., as far as I can fit in.

I've been checking rebalance frequency, with cases of 1 (daily), 2, 5 (weekly), 10 (biweekly), 20 ("monthly"), 40 ("bimonthly"), 60 ("quarterly"), 120 ("semiannual"), and 250 ("annual").

As a comparison strategy, I calculate nominal CAGR for each test.

There is a clear trend, with daily rebalancing on average the best frequency, dropping to about biweekly, and relatively little difference from biweekly to quarterly. The daily rebalance tends to yield an extra 1 to 2 percentage points for CAGR relative to biweekly (e.g., 18 rather than 16 or 17).

This strategy reveals that there are some quarterly cycles up to around 1996 that pop up with longer rebalance frequencies. In general, offset start dates within a month or two may differ in rolling CAGR by 5 or more percentage points. So there is a good opportunity for cherry picking results if one were so inclined.

I've looked into the inverse-volatility weighting a bit more, in particular the strategy for calculating volatility. It does seem to improve the expected CAGR by a percentage or so. I looked at 10, 20, 40, 60, 120, and 250 days for the period used to calculate standard deviations. I looked at both raw standard deviation and downward standard deviation (setting upward changes to zero) in calculating the inverse-volatility weighting. The volatility calculated with downward standard deviation tends to yield an extra half to one percentage point, at least for short volatility windows and frequent updates.

I've pretty much concluded that I will go with calculating inverse-volatility weights using the downward standard deviation with a window of ten days going forward (the last 10 trading days before rebalancing). It won’t affect much with monthly to quarterly updates. There’s something to be said for using a 40-day window with monthly to quarterly updates.

I will likely try to update weights roughly weekly going forward, but I won’t sweat it if I drop off to monthly.

The other issue that has bothered me with the method is the risk of big drops. I know that market timing is a big issue with many Bogleheads, but given the excellent performance of the method Hedgefundie has provided, I’m quite comfortable sitting out and even missing the initial bounce-back. Trend followers have long recognized that a rise in the monthly unemployment rate is a useful macroeconomic indicator that has tended to lead each recession by zero to six months since 1919. The FRED site (https://fred.stlouisfed.org/series/UNRATE) provides this data. One indicator that has been suggested is comparing the latest monthly unemployment rate with a moving average over N months. If the latest rate is higher, that is an indicator sensitive to recession. If the latest rate is lower, that is an indicator of economic health.

This information is particularly useful in two ways. It can indicate when to get out of the market (e.g., go completely to TMF), and it can indicate when the market is unlikely to badly misbehave in the short term. Folks tend to use averaging durations of 7 to 12 months as a crossover criterion between states. Short averaging durations give spurious signals, which can lead to whiplash. Long averaging durations may lag the actual start of a recession. I’ve done some playing with the index, and it seems like each of the recession events since 1986 would have been captured with an averaging period of 12 to 16 months.

I think that it is reasonable to use the index to systematically bias the overall strategy. If there is a clear signal of a recession, I would go completely to TMF. If there is a clear signal that there is no recession, I would bias the UPRO weights higher than calculated using the inverse-volatility method. In transitions, or if it is ambiguous whether there is a transition, I would stick with the weights calculated using the inverse-volatility method.

As a first approximation, I calculated a biased UPRO weight by increasing it a fraction of the way to 1 (full UPRO). For example, if the UPRO weight from the inverse-volatility calculation is w = 0.5, the biased weight is 1 * f + w * (1 – f), where f is the bias fraction. If f = 0, there is no bias. If f = 1, the UPRO weight is 1 and the TMF weight is 0.

I played with the strategies to some extent. I settled on a 15-month moving average period to detect crossovers, but the exact duration doesn’t seem too important. The best results, in terms of expected CAGR, seem to be dependent on the criterion for ambiguity. Overall, it appears that as soon as the sign changes on unemployment index criterion, the state should be considered ambiguous and no bias applied to the weights. Each succeeding month afterwards can be treated as unambiguous.

The bias fraction f is a matter of taste. Pushing f towards 1 improves the expected overall return by a couple of percentage points, but adds exposure to large dips. Black Monday (1987) is the largest crash that does not show up with the unemployment index. When f is close to 1, the portfolio takes a large dive. When f is close to 0, the portfolio is largely buffered. I would likely tend to split the difference by setting f = 0.5, which buffers the Black Monday drop substantially. One may argue about whether a Black Monday will occur again within the next 20 or 30 years, of course. Note that the volatility weights become unimportant as f goes to 1 (the UPRO weight = 1 regardless of volatility).

To give an example, consider a 15-year rolling calculation, with rebalance frequency between daily and quarterly, starting in 1986. Using the nominal 40/60 approach, the largest CAGR was about 22% (starting late 1990) and the smallest about 7% (starting 1999). Other peaks occurred for simulations starting in the late 1980s and 2001-2003. The spread in CAGR between different rebalance frequencies starting on the same date was generally 1 to 4 percent.

Going to the inverse-volatility approach, with rebalance frequency between daily and quarterly, the patterns of peaks and valleys were similar but maxima were closer to 27 %. The minimum CAGR for daily rebalance was about 16 %; overall the minimum was about 6 %. There was a much wider spread in CAGR between different rebalance frequencies starting on the same date, greater than 10 percent in spots (e.g., 7 % minimum to 17 % maximum).

Adding the unemployment index criterion to the inverse-volatility approach smoothed out the overall returns. For the daily through monthly rebalances, the rolling CAGR ranged from 20 to 31 percent and the overall range was from 15 to 33 percent. Overall this approach would have increased CAGR by as much as 10 percentage points relative to the nominal.

I think that there is something to be said for trend following in this case, using information outside the market to guide confidence in the market behavior. Given how well the method performs, it isn’t so critical to exactly time reentry, which is one of the criticisms of trend following.

As far as conditions other than observed, I’d probably be tracking whether the low/inverse correlation behavior continues in the future. If not, as a pragmatic measure I’d be tempted to try to identify if there is some other index that has low/inverse correlation to UPRO and use that instead.

I think that the ratcheting effect of getting out of UPRO when the unemployment index is unfavorable is likely to be persistent; I might be tempted to investigate additional signals as supplements. If I had the daily data back to 1955 I could check on the "lost decade", but it looks like the index would have signaled exit in 1957, 1960, 1969, and 1973.

If someone can tell me how to post images, I’d be happy to share my plots.
You hit the nail on the head.

Without a doubt Hedgefundie’s strategy appears to have some merit. I would also say that many of the arguments made against this strategy continuing to perform long term are also valid with LTT rates rising, stock market crashing, or both happening at the same time. Likelihood’s and probabilities? Your guess is as good as mine.

In my view the missing piece to this strategy is an exit plan, which you nicely eluded to in this post. Yes, there is a market timing component built into it which is frowned upon by the bh community. A lot of the posters here talk about how market timing is a poor strategy that never works, and I agree that it doesn’t work 99% of the time. Would anyone sit back while watching their investment shrink by 70%? I know I wouldn’t.

If there is an element of macroeconomics such as unemployment rates suggesting to “lay low” for a while with this strategy due to increased unemployment and/or looming recession, why not take advantage of this information and protect your gains? From a probability standpoint, in this scenario chances are higher that the strategy will lose more than gain. At the end of the day this is also the very same information that the Feds rely on for their decisions, so I’m sure adding the element of macroeconomics is of great value.

No strategy is bullet proof and this strategy will work until it doesn’t. I think with a carefully drafted exit plan you could benefit from the gains and minimize losses. The only additional component that would be missing would be a reentry plan, which in my mind would be the reversal of the parameters that triggered the exit.

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mikestorm
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by mikestorm » Wed Jul 03, 2019 10:00 am

Has anyone else figured out a way to stop watching?

This excellent adventure represents less than 15% of my total portfolio, yet every day I can't help but check its gyrations.

Before this, I was 100% equity, so holding bonds again (leveraged or otherwise) is something that's new to me.

Before this I would go weeks without checking my portfolio. I'm honestly wondering when the novelty will wear off.

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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE » Wed Jul 03, 2019 10:02 am

lock.that.stock wrote:
Wed Jul 03, 2019 9:55 am
In my view the missing piece to this strategy is an exit plan, which you nicely eluded to in this post. Yes, there is a market timing component built into it which is frowned upon by the bh community. A lot of the posters here talk about how market timing is a poor strategy that never works, and I agree that it doesn’t work 99% of the time. Would anyone sit back while watching their investment shrink by 70%? I know I wouldn’t.

If there is an element of macroeconomics such as unemployment rates suggesting to “lay low” for a while with this strategy due to increased unemployment and/or looming recession, why not take advantage of this information and protect your gains? From a probability standpoint, in this scenario chances are higher that the strategy will lose more than gain. At the end of the day this is also the very same information that the Feds rely on for their decisions, so I’m sure adding the element of macroeconomics is of great value.

No strategy is bullet proof and this strategy will work until it doesn’t. I think with a carefully drafted exit plan you could benefit from the gains and minimize losses. The only additional component that would be missing would be a reentry plan, which in my mind would be the reversal of the parameters that triggered the exit.
The exit plan should be a target number. Hit it and get out.

The volatility of this thing means a -30% year could be followed by a +100% year. Your target number could be reached at any moment. Once it does, pull the plug.

jaj2276
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by jaj2276 » Wed Jul 03, 2019 10:09 am

Has anyone figured out a way to do a backdoor roth with m1f w/o having to pay their absurd $25 conversion fee? The existing Roth IRA account that I transferred to M1 from Vanguard has been closed so I would have to open a new Roth IRA account with Vanguard (the traditional IRA account remains open) and then do the transfer to M1 but a) I'd hate to do that to Vanguard and b) they might charge a transfer fee for an account that's been open less than X months.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by willthrill81 » Wed Jul 03, 2019 10:11 am

lock.that.stock wrote:
Wed Jul 03, 2019 9:55 am
No strategy is bullet proof and this strategy will work until it doesn’t. I think with a carefully drafted exit plan you could benefit from the gains and minimize losses. The only additional component that would be missing would be a reentry plan, which in my mind would be the reversal of the parameters that triggered the exit.
One simple and 'non-market timing' strategy could be to limit how much you would let funds dedicated to this strategy grow in relation to your total portfolio. For instance, you might invest 10% of your portfolio in it and cap its size due to growth to 20%. You would simply then siphon off funds from it if it grew beyond that level, much like rebalancing.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Hydromod » Wed Jul 03, 2019 10:44 am

lock.that.stock wrote:
Wed Jul 03, 2019 9:55 am
If there is an element of macroeconomics such as unemployment rates suggesting to “lay low” for a while with this strategy due to increased unemployment and/or looming recession, why not take advantage of this information and protect your gains? From a probability standpoint, in this scenario chances are higher that the strategy will lose more than gain. At the end of the day this is also the very same information that the Feds rely on for their decisions, so I’m sure adding the element of macroeconomics is of great value.

No strategy is bullet proof and this strategy will work until it doesn’t. I think with a carefully drafted exit plan you could benefit from the gains and minimize losses. The only additional component that would be missing would be a reentry plan, which in my mind would be the reversal of the parameters that triggered the exit.
I tried to get across the idea of reentry using the same unemployment rate strategy. That's important too. I will be looking at reentry a bit more, but I would reenter the market as soon as the unemployment signal changes from clearly bear to ambiguous or clearly bull. My suggested signal for exit is two consecutive months with unemployment above the x-month average (I'd use x = 15 until further testing). As you stated, the reversal would be my initial strategy, so the clear signal for reentry is two consecutive months with unemployment less than the x-month average. The ambiguous signal for reentry is the first month with a drop. The reentry signal is probably conservative, and I suspect there could be simple refinements like using a much shorter averaging window to test for reentry to get back in months earlier.

I plan to stick with the straight inverse-volatility weightings whenever there is an ambiguous signal.

Note that none of this stuff is my idea in any way. I'm just trying some systematic follow-up on ideas discussed on various threads here.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by elderwise » Wed Jul 03, 2019 11:21 am

is the cash drag / STCG generated significant if doing quarterly vs annual in a Taxable account like chase youinvest?

Just don't have enough to do it in Roth / pre tax space so was debating doing (somewhere between 50-120K in taxable).

Also one another question, I know someone earlier asked why not 100% UPRO assuming you are playing with a small % of your portfolio.So others said due to worse / bad draw downs but is that similar to what is known as sequence of risk returns where a bad year will compound the % of returns over the following years or is this something else? Because running PV seems UPRO 100% is very tempting :twisted: :twisted:

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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE » Wed Jul 03, 2019 11:27 am

From a behavioral stay-the-course perspective, I am treating this allocation as if it were tech startup RSUs that do not vest until they reach $5M.

It’s a common scenario around these parts. I would never take that kind of risk in my real job, this will be my version of that.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan » Wed Jul 03, 2019 11:44 am

elderwise wrote:
Wed Jul 03, 2019 11:21 am
is the cash drag / STCG generated significant if doing quarterly vs annual in a Taxable account like chase youinvest?

Just don't have enough to do it in Roth / pre tax space so was debating doing (somewhere between 50-120K in taxable).

Also one another question, I know someone earlier asked why not 100% UPRO assuming you are playing with a small % of your portfolio.So others said due to worse / bad draw downs but is that similar to what is known as sequence of risk returns where a bad year will compound the % of returns over the following years or is this something else? Because running PV seems UPRO 100% is very tempting :twisted: :twisted:
Have you looked at 100% UPRO since 1955 or 1982? It’s a different story. I would never run this in taxable personally; if I did I’d consider annual rebalance.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan » Wed Jul 03, 2019 11:45 am

HEDGEFUNDIE wrote:
Wed Jul 03, 2019 9:44 am
Long term rates hitting yet another low today.

:moneybag :moneybag :moneybag
Nervous there’s less room for a further bond NAV pop if equities really hit a slowdown?

I’m now up 23% by the way :).

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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE » Wed Jul 03, 2019 12:10 pm

MotoTrojan wrote:
Wed Jul 03, 2019 11:45 am
HEDGEFUNDIE wrote:
Wed Jul 03, 2019 9:44 am
Long term rates hitting yet another low today.

:moneybag :moneybag :moneybag
Nervous there’s less room for a further bond NAV pop if equities really hit a slowdown?

I’m now up 23% by the way :).
Not nervous in the slightest.

Germany and Japan long term rates are below zero. We still have quite a ways to fall.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by robertmcd » Wed Jul 03, 2019 12:16 pm

HEDGEFUNDIE wrote:
Wed Jul 03, 2019 12:10 pm
MotoTrojan wrote:
Wed Jul 03, 2019 11:45 am
HEDGEFUNDIE wrote:
Wed Jul 03, 2019 9:44 am
Long term rates hitting yet another low today.

:moneybag :moneybag :moneybag
Nervous there’s less room for a further bond NAV pop if equities really hit a slowdown?

I’m now up 23% by the way :).
Not nervous in the slightest.

Germany and Japan long term rates are below zero. We still have quite a ways to fall.
Although I agree that long term rates can continue their downtrend, the big difference between the US and germany and japan is their Net international investment position. US is a debtor nation while germany and japan are creditor nations. Then again I think the Fed will do whatever it takes to support the market and allow the debt to grow. They can make the yield on treasuries whatever they want if they have no regard for the dollar/asset price inflation. That is the path I believe they will take.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by money » Wed Jul 03, 2019 12:49 pm

HEDGEGUNDIE, have you listed what your are invested in outside of this leveraged ETF strategy? I saw you mentioned something like having 20% in EDV for your bond allocation. Thanks for the OP and ongoing discussion.
1Fi1LTvx8KmtotRqcha9mj5h43319mJvjY

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by JBeck » Wed Jul 03, 2019 2:55 pm

Interesting article in Barron's about interest rates
https://www.barrons.com/articles/are-tr ... 1559813400

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Dr. Long » Wed Jul 03, 2019 3:07 pm

Image
In for 5k, non-taxable, quarterly rebalances
"(It's) the economy, stupid," - James Carville

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by cheezit » Wed Jul 03, 2019 3:20 pm

HEDGEFUNDIE wrote:
Wed Jul 03, 2019 12:10 pm

Germany and Japan long term rates are below zero.
Where are you looking? Bloomberg shows the German 30-year yield as +0.20% and Japanese 30-year yield as +0.34% and 20-year as +0.21% (there is no German 20-year bond).


HEDGEFUNDIE wrote:
Wed Jul 03, 2019 12:10 pm
We still have quite a ways to fall.
Definitely a possibility; 0% yield is only a mental barrier, not a real one.

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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE » Wed Jul 03, 2019 3:38 pm

cheezit wrote:
Wed Jul 03, 2019 3:20 pm
HEDGEFUNDIE wrote:
Wed Jul 03, 2019 12:10 pm

Germany and Japan long term rates are below zero.
Where are you looking? Bloomberg shows the German 30-year yield as +0.20% and Japanese 30-year yield as +0.34% and 20-year as +0.21% (there is no German 20-year bond).
Was looking at the 10-years

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan » Wed Jul 03, 2019 3:47 pm

What is the mechanism for negative yields? It isn’t like NAV gets to a point where you’re actually paying the bond provider; as NAV grows the yield should proportionally move towards (but never reach) 0%. Am I missing something? Seems the government or other provider of the bond must make a step change. And then what mechanism reverses it back as NAV decreases?

Seems like market forces themselves literally cannot achieve negative yield.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by cheezit » Wed Jul 03, 2019 3:53 pm

The German 10-years with negative nominal yields have coupon rates of zero and purchase prices above par.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan » Wed Jul 03, 2019 3:55 pm

cheezit wrote:
Wed Jul 03, 2019 3:53 pm
The German 10-years with negative nominal yields have coupon rates of zero and purchase prices above par.
Gotcha, but this only can occur on newly issued bonds, right? Market prices can’t simply push bond yields negative like they are currently push them down.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan » Wed Jul 03, 2019 4:24 pm

Friendly reminder: Both holdings paid dividends today. Mine were reinvested into TMF which was lightly underweight since my recent rebalance.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Steve Reading » Wed Jul 03, 2019 4:32 pm

MotoTrojan wrote:
Wed Jul 03, 2019 3:55 pm
cheezit wrote:
Wed Jul 03, 2019 3:53 pm
The German 10-years with negative nominal yields have coupon rates of zero and purchase prices above par.
Gotcha, but this only can occur on newly issued bonds, right? Market prices can’t simply push bond yields negative like they are currently push them down.
It can and it will. Bonds with positive yields in markets of negative yields will begin to sell at a premium. Once the premium is high enough then buying the bond, collecting the coupons and then getting the par value at maturity might still lock in a negative return. So the coupon is technically positive but the YTM will be negative.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan » Wed Jul 03, 2019 4:35 pm

305pelusa wrote:
Wed Jul 03, 2019 4:32 pm
MotoTrojan wrote:
Wed Jul 03, 2019 3:55 pm
cheezit wrote:
Wed Jul 03, 2019 3:53 pm
The German 10-years with negative nominal yields have coupon rates of zero and purchase prices above par.
Gotcha, but this only can occur on newly issued bonds, right? Market prices can’t simply push bond yields negative like they are currently push them down.
It can and it will. Bonds with positive yields in markets of negative yields will begin to sell at a premium. Once the premium is high enough then buying the bond, collecting the coupons and then getting the par value at maturity might still lock in a negative return. So the coupon is technically positive but the YTM will be negative.
Ah I see. Thank you.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by dave_k » Wed Jul 03, 2019 4:37 pm

MotoTrojan wrote:
Wed Jul 03, 2019 4:24 pm
Friendly reminder: Both holdings paid dividends today. Mine were reinvested into TMF which was lightly underweight since my recent rebalance.
They were paid yesterday in my Fidelity account, and I rebalanced along with reinvesting them. Up about 30% so far!

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by comeinvest » Wed Jul 03, 2019 5:15 pm

privatefarmer wrote:
Wed Jul 03, 2019 2:07 am
comeinvest wrote:
Wed Jul 03, 2019 1:00 am
Also, will the government be able to control its debt with only 2 - 2.5% inflation? What is the end game?
the end game is that there will be a bond "bubble" just like there are stock market "bubbles". bonds will indeed go through terrible periods. the market will correct itself. this is exactly why we should expect a premium for owning LTTs, as we should for owning stocks.

risk parity is all about DIVERSIFYING your risk. not being exposed solely to equity risk, but adding in interest rate/inflation risk. if you are shying away from this strategy bc you fear bonds will at some point get hammered due to inflation/rate increases then how could you be comfortable owning stocks when they get "hammered" all the time for all sorts of reasons? at least with this strategy are more diversified and can better withstand different adverse conditions in both the bond and equity markets.
... but the various risks can and sometimes do show up simultaneously. Even worse, equity risk and real interest rate risk are correlated - equities will fall (all other parameters being equal) along with long term bonds when real interest rates rise. 1955-1982 saw only one of the 2 asset classes fall, and the strategy had -74.4% max drawdown. I guess it was a booming equity market. Now imagine what happens to the 3x leveraged strategy with both asset classes falling simultaneously due to rising long term interest rates, a very realistic scenario. It may or may not happen. I learned a lot reading this thread, but I personally fail to see the risk-adjusted reward of the strategy, either in the backtest on the full data set, or in theory. It was a nice try, but I guess it is mathematically really difficult (impossible?) to get higher expected returns in the long run, AND lower risk in terms of max drawdown, by combining 2 asset classes one of which has significantly lower expected returns than the other, and by trying to compensate lower returns using leverage. Max drawdown is more relevant for long investment horizons than volatility, as max drawdown determines the possible leverage amount. The asset classes are contrarian at times, but move in lockstep other times. Even the rebalancing bonus sometimes works, but other times works backwards, like in the trending market 1955-1982. The idea in this thread was very nice and I learned a lot, but realistically speaking it failed both in theory and in practice (backtest). There will be some lucky people who rode the wave while the risks didn't show up, if they get out before it shows up. There is a chance it never shows up, but it's gambling - and even then, excess returns will likely be much lower than in the recent past, maybe negative.

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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE » Wed Jul 03, 2019 5:29 pm

comeinvest wrote:
Wed Jul 03, 2019 5:15 pm
It was a nice try, but I guess it is mathematically really difficult (impossible?) to get higher expected returns in the long run, AND lower risk in terms of max drawdown, by combining 2 asset classes one of which has significantly lower expected returns than the other, and by trying to compensate lower returns using leverage. Max drawdown is more relevant for long investment horizons than volatility, as max drawdown determines the possible leverage amount. The asset classes are contrarian at times, but move in lockstep other times. Even the rebalancing bonus sometimes works, but other times works backwards, like in the trending market 1955-1982. The idea in this thread was very nice and I learned a lot, but realistically speaking it failed both in theory and in practice (backtest). There will be some lucky people who rode the wave while the risks didn't show up, if they get out before it shows up. There is a chance it never shows up, but it's gambling - and even then, excess returns will likely be much lower than in the recent past, maybe negative.
All I can say is, you should educate yourself more on long term macroeconomic trends and underlying drivers before making statements like this.

What would you say to someone who thinks investing in the stock market is nothing but gambling, because sometimes it goes up and sometimes it goes down? Obviously that is true, and obviously it is also misleadingly incomplete.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Steve Reading » Wed Jul 03, 2019 5:58 pm

comeinvest wrote:
Wed Jul 03, 2019 5:15 pm

... but the various risks can and sometimes do show up simultaneously. Even worse, equity risk and real interest rate risk are correlated - equities will fall (all other parameters being equal) along with long term bonds when real interest rates rise.
Ok yes it's true. But what would you do with the money otherwise?
- Invest more in stocks? Then the risks will definitely show up at the same time.
- Invest more in cash/ST bonds? Then yes, risks won't show up simultaneously because you've avoided the risk entirely. That's like saying you will safely go skiing by... not going skiing.
comeinvest wrote:
Wed Jul 03, 2019 5:15 pm
1955-1982 saw only one of the 2 asset classes fall, and the strategy had -74.4% max drawdown. I guess it was a booming equity market.
IMO, it's a little unfortunate that the thread has focused so much on historical performance. Remember, past performance does not guarantee future performance. Backtesting is good to build intuition and maybe select the weights. I would not do much more than that.

So it's better IMO to rely on investment "truths". You expect the equity premium to have an expected return. You expect the term premium to have an expected return. And you expect that LT bonds and equities will not have a perfect 1.0 correlation, so you can expect some diversification there too. Overall, the strategy seems sound when you think of its fundamentals. Forget about how fantastic or terrible it was in the past for a second.
comeinvest wrote:
Wed Jul 03, 2019 5:15 pm
Now imagine what happens to the 3x leveraged strategy with both asset classes falling simultaneously due to rising long term interest rates, a very realistic scenario. It may or may not happen. I learned a lot reading this thread, but I personally fail to see the risk-adjusted reward of the strategy, either in the backtest on the full data set, or in theory.
If LT rates rise because people are selling bonds, then every coupon you reinvest will be at the higher rate. This is a good thing. You'll also rebalance so you'll buy more of these higher-yielding bonds. In the immediate term, it'll look like a heavy loss. And because the bonds are LT, you need to hold the fund for many decades to be somewhat "indifferent" to the rate changes. Some do not seem to see it that way and want to have exit strategies and time the market. But I think the OP does understand this and why he makes the point that this is a long term strategy.
comeinvest wrote:
Wed Jul 03, 2019 5:15 pm
The idea in this thread was very nice and I learned a lot, but realistically speaking it failed both in theory and in practice (backtest). There will be some lucky people who rode the wave while the risks didn't show up, if they get out before it shows up. There is a chance it never shows up, but it's gambling - and even then, excess returns will likely be much lower than in the recent past, maybe negative.
Hopefully you now realize that "risk" of LT rates going up is not a risk at all. In fact, it's what people should be hoping for. Heck, anyone holding bonds should desire for rates to go up if they're planning to B&H for decades.

Also, don't be so close-minded ("failed both in theory and in practice (backtest)"). I don't see the theory failure personally. And just ignore the backtest (both good and bad). There are many strategies that backtest great that are not necessarily good choices and vice-versa. Such is the nature of uncertainty and probability.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by comeinvest » Wed Jul 03, 2019 6:43 pm

305pelusa wrote:
Wed Jul 03, 2019 5:58 pm
comeinvest wrote:
Wed Jul 03, 2019 5:15 pm

... but the various risks can and sometimes do show up simultaneously. Even worse, equity risk and real interest rate risk are correlated - equities will fall (all other parameters being equal) along with long term bonds when real interest rates rise.
Ok yes it's true. But what would you do with the money otherwise?
- Invest more in stocks? Then the risks will definitely show up at the same time.
- Invest more in cash/ST bonds? Then yes, risks won't show up simultaneously because you've avoided the risk entirely. That's like saying you will safely go skiing by... not going skiing.
Maybe we need to accept that expected returns are lower than in the past, and that "demanding" returns like the past we add more risk.
305pelusa wrote:
Wed Jul 03, 2019 5:58 pm
comeinvest wrote:
Wed Jul 03, 2019 5:15 pm
1955-1982 saw only one of the 2 asset classes fall, and the strategy had -74.4% max drawdown. I guess it was a booming equity market.
IMO, it's a little unfortunate that the thread has focused so much on historical performance. Remember, past performance does not guarantee future performance. Backtesting is good to build intuition and maybe select the weights. I would not do much more than that.

So it's better IMO to rely on investment "truths". You expect the equity premium to have an expected return. You expect the term premium to have an expected return. And you expect that LT bonds and equities will not have a perfect 1.0 correlation, so you can expect some diversification there too. Overall, the strategy seems sound when you think of its fundamentals. Forget about how fantastic or terrible it was in the past for a second.
comeinvest wrote:
Wed Jul 03, 2019 5:15 pm
Now imagine what happens to the 3x leveraged strategy with both asset classes falling simultaneously due to rising long term interest rates, a very realistic scenario. It may or may not happen. I learned a lot reading this thread, but I personally fail to see the risk-adjusted reward of the strategy, either in the backtest on the full data set, or in theory.
If LT rates rise because people are selling bonds, then every coupon you reinvest will be at the higher rate. This is a good thing. You'll also rebalance so you'll buy more of these higher-yielding bonds. In the immediate term, it'll look like a heavy loss. And because the bonds are LT, you need to hold the fund for many decades to be somewhat "indifferent" to the rate changes. Some do not seem to see it that way and want to have exit strategies and time the market. But I think the OP does understand this and why he makes the point that this is a long term strategy.
comeinvest wrote:
Wed Jul 03, 2019 5:15 pm
The idea in this thread was very nice and I learned a lot, but realistically speaking it failed both in theory and in practice (backtest). There will be some lucky people who rode the wave while the risks didn't show up, if they get out before it shows up. There is a chance it never shows up, but it's gambling - and even then, excess returns will likely be much lower than in the recent past, maybe negative.
Hopefully you now realize that "risk" of LT rates going up is not a risk at all. In fact, it's what people should be hoping for. Heck, anyone holding bonds should desire for rates to go up if they're planning to B&H for decades.

Also, don't be so close-minded ("failed both in theory and in practice (backtest)"). I don't see the theory failure personally. And just ignore the backtest (both good and bad). There are many strategies that backtest great that are not necessarily good choices and vice-versa. Such is the nature of uncertainty and probability.
I agree that rising real yields would be a good thing for current investors with a very long time horizon, especially if rates fall (and assets rise again) towards the end of the horizon i.e. around retirement age for most of us. The latter would in fact be the very best scenario for current investors retiring in a few decades, probably better than rates staying low and flat. For example, if we were in 1955 right now with a 64 year time horizon i.e. retiring in 2019. The question however is, what is the risk-adjusted return in terms of expected performance vs max drawdown (or similar reasonably rational measure of risk of your choice). The 1955-2019 period was relatively "lucky" in that it exhibited exactly the best scenario (in terms of long term interest rate changes) over the period that an investor in 1955 retiring in 2019 could have hoped for. And yet, given the outcome of the strategy, I think most investors would opt for the 100% S&P500 option with 51% drawdown vs the strategy with the 74% drawdown and minimal excess return. Now, you probably noticed that in 1955 it was unlikely that someone retired around 2019. In most cases, the total outcome would have been even worse on a risk/return basis. I personally think 1955 going all the way to 2019 is a better reference point to start a simulation than starting in 1982, as interest rates in 1955 were similar to now. There are probably many good reasons to adjust the results of the full backtest period, from fed policy regimes to national debt and a gazillion more, some of which would favorable to the strategy and others would be disadvantageous. Now, if you completely dismiss backtests, and on the other hand offer no alternative model framework to simulate risk and return but a few vague statements that you made, than we just have to agree to disagree.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Steve Reading » Wed Jul 03, 2019 7:07 pm

comeinvest wrote:
Wed Jul 03, 2019 6:43 pm
And yet, given the outcome of the strategy, I think most investors would opt for the 100% S&P500 option with 51% drawdown vs the strategy with the 74% drawdown and minimal excess return. Now, you probably noticed that in 1955 it was unlikely that someone retired around 2019. In most cases, the total outcome would have been even worse on a risk/return basis. I personally think 1955 going all the way to 2019 is a better reference point to start a simulation than starting in 1982, as interest rates in 1955 were similar to now. There are probably many good reasons to adjust the results of the full backtest period, from fed policy regimes to national debt and a gazillion more. Now, if you completely dismiss backtests, and on the other hand offer no alternative model framework to simulate risk and return but a few vague statements that you made, than we just have to agree to disagree.
We can agree to disagree but I just want to clarify what it is that we'll agree to disagree on.

You claim that because this portfolio had a deeper drawdown in the past than the S&P 500, that it is hence more likely to have deeper drawdowns in the future. To me, this is like someone flipping 51 heads and 50 tail and thinking that heads are more likely on a coin.

When I say past performance is no indication of the future, I mean that in the true sense. As in "random walk" sense. As in "the future is independent of the past" sense. I frankly believe that the drawdowns you quote have no practical application to the future. Clearly, you do. That, we can agree to disagree.

Your last sentence is fair enough though. I didn't offer an alternative. I don't use this strategy (and have expressed the parts I don't like which, interestingly, are different than your concerns). But it's a good question nonetheless. "What would be a good model/framework to assess/simulate future risks of this strategy, using no backtesting and simply thinking about the fundamental securities and their dynamics/behaviors?". Personally, that would be a question I would answer if I actually put money on the line. So perhaps other posters will be able to answer that question for you.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by comeinvest » Wed Jul 03, 2019 7:27 pm

305pelusa wrote:
Wed Jul 03, 2019 7:07 pm
comeinvest wrote:
Wed Jul 03, 2019 6:43 pm
And yet, given the outcome of the strategy, I think most investors would opt for the 100% S&P500 option with 51% drawdown vs the strategy with the 74% drawdown and minimal excess return. Now, you probably noticed that in 1955 it was unlikely that someone retired around 2019. In most cases, the total outcome would have been even worse on a risk/return basis. I personally think 1955 going all the way to 2019 is a better reference point to start a simulation than starting in 1982, as interest rates in 1955 were similar to now. There are probably many good reasons to adjust the results of the full backtest period, from fed policy regimes to national debt and a gazillion more. Now, if you completely dismiss backtests, and on the other hand offer no alternative model framework to simulate risk and return but a few vague statements that you made, than we just have to agree to disagree.
We can agree to disagree but I just want to clarify what it is that we'll agree to disagree on.

You claim that because this portfolio had a deeper drawdown in the past than the S&P 500, that it is hence more likely to have deeper drawdowns in the future. To me, this is like someone flipping 51 heads and 50 tail and thinking that heads are more likely on a coin.

When I say past performance is no indication of the future, I mean that in the true sense. As in "random walk" sense. As in "the future is independent of the past" sense. I frankly believe that the drawdowns you quote have no practical application to the future. Clearly, you do. That, we can agree to disagree.

Your last sentence is fair enough though. I didn't offer an alternative. I don't use this strategy (and have expressed the parts I don't like which, interestingly, are different than your concerns). But it's a good question nonetheless. "What would be a good model/framework to assess/simulate future risks of this strategy, using no backtesting and simply thinking about the fundamental securities and their dynamics/behaviors?". Personally, that would be a question I would answer if I actually put money on the line. So perhaps other posters will be able to answer that question for you.
I agree with almost everything you said. Backtesting can be deceiving in both ways, and the future is unknown, and different from the past. And yet, if we have no other model framework or simulation, backtesting is maybe better than nothing. I think it's not entirely coin flipping - the drawdown was a direct product of the interest rate change, and the booming stock market did not help. So, what adjustments can we make, how far can interest rates rise, how would the strategy fare with moderately rising interest rates and stock market valuations mean reverting (or maybe overshooting, not that it never happened in the past)... many questions.
Last edited by comeinvest on Thu Jul 04, 2019 2:34 am, edited 1 time in total.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by unknownfuture » Wed Jul 03, 2019 8:12 pm

What's a good risk parity strategy for a taxable account? I think it's still somewhat of an open question that I've been trying to answer. To somewhat approximate the limited possibility of rebalancing in a taxable account, I ran simulations withy yearly (instead of quarterly) rebalancing. Specifically I'm comparing intermediate-term treasury bonds (ITT) with long-term treasury bonds (LTT).

Short story:
- On a yearly basis, ITT are more negative correlated with stocks than LTT. This was somewhat surprising to me. The difference is much more pronounced with the 3X ETFs than with unlevered funds.
- With yearly rebalance, the 40% stocks / 60% ITT portfolio and the 25% stocks / 75% ITT portfolio have better Sharpe ratios than the 40% stocks / 60% LTT portfolio. So, ITT is preferred in terms of risk-adjusted returns.
- An additional advantage of the portfolios with ITT is that it's significantly less volatile, therefore less in need of rebalancing, which is good for a taxable account.
- Therefore, ITT looks a lot more attractive for a taxable account.

=== Unlevered funds (Nov 1991 - Jun 2019) ===

Stocks: VFINX (S&P 500 tracker)
LTT bond: VUSTX
ITT bond: VFITX

Correlations:
https://www.portfoliovisualizer.com/ass ... &months=36
Stocks/LTT correlation of yearly returns: -0.24
Stocks/ITT correlation of yearly returns: -0.26

Risk-adjusted returns:
https://www.portfoliovisualizer.com/bac ... total3=100
40/60 Stocks/LTT Sharpe ratio: 0.84
40/60 Stocks/ITT Sharpe ratio: 0.86
25/75 Stocks/ITT Sharpe ratio: 0.93

=== 3X ETFs (Jul 2009 - Jun 2019) ===

3x Stocks: UPRO
3x LTT bond: TMF
3x ITT bond: TYD

Correlations:
https://www.portfoliovisualizer.com/ass ... &months=36
3xStocks/3xLTT correlation of yearly returns: -0.32
3xStocks/3xITT correlation of yearly returns: -0.49 (!)

Risk-adjusted returns:
https://www.portfoliovisualizer.com/bac ... total3=100
40/60 3xStocks/3xLTT Sharpe ratio: 1.14
40/60 3xStocks/3xITT Sharpe ratio: 1.44 (!)
25/75 3xStocks/3xITT Sharpe ratio: 1.37
Last edited by unknownfuture on Wed Jul 03, 2019 9:01 pm, edited 5 times in total.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan » Wed Jul 03, 2019 8:56 pm

305pelusa wrote:
Wed Jul 03, 2019 5:58 pm


If LT rates rise because people are selling bonds, then every coupon you reinvest will be at the higher rate. This is a good thing. You'll also rebalance so you'll buy more of these higher-yielding bonds. In the immediate term, it'll look like a heavy loss. And because the bonds are LT, you need to hold the fund for many decades to be somewhat "indifferent" to the rate changes. Some do not seem to see it that way and want to have exit strategies and time the market. But I think the OP does understand this and why he makes the point that this is a long term
This is less true with leveraged funds. You’ll get 3x the change in NAV but <3x the change in future interest payments due to the 2x short-term cost on leverage. Could take far longer to break even than traditional LTTs.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by unknownfuture » Wed Jul 03, 2019 9:17 pm

Three more datapoints in support of using ITT instead of LTT, this time in terms of monthly correlations:

- Since 2000, ITT and LTT have been equally good diversifiers:
https://www.portfoliovisualizer.com/ass ... &months=36
(correlation of -0.29)

- During the 2007-2009 financial crisis, ITT was a better diversifier than LTT:
https://www.portfoliovisualizer.com/ass ... &months=36
(correlation of -0.08 vs 0)

- Since 2014, ITT has been a better diversifier than LTT:
https://www.portfoliovisualizer.com/ass ... &months=36
(correlation of -0.31 vs -0.26)

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan » Wed Jul 03, 2019 11:12 pm

unknownfuture wrote:
Wed Jul 03, 2019 9:17 pm
Three more datapoints in support of using ITT instead of LTT, this time in terms of monthly correlations:

- Since 2000, ITT and LTT have been equally good diversifiers:
https://www.portfoliovisualizer.com/ass ... &months=36
(correlation of -0.29)

- During the 2007-2009 financial crisis, ITT was a better diversifier than LTT:
https://www.portfoliovisualizer.com/ass ... &months=36
(correlation of -0.08 vs 0)

- Since 2014, ITT has been a better diversifier than LTT:
https://www.portfoliovisualizer.com/ass ... &months=36
(correlation of -0.31 vs -0.26)
Correlation isn’t the full story. LTT will move further as well which provides a bigger diversification bonus for similar correlations. This is why those that use short term treasuries need closer to 20x leverage to achieve risk parity.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by privatefarmer » Wed Jul 03, 2019 11:40 pm

MotoTrojan wrote:
Wed Jul 03, 2019 11:12 pm
unknownfuture wrote:
Wed Jul 03, 2019 9:17 pm
Three more datapoints in support of using ITT instead of LTT, this time in terms of monthly correlations:

- Since 2000, ITT and LTT have been equally good diversifiers:
https://www.portfoliovisualizer.com/ass ... &months=36
(correlation of -0.29)

- During the 2007-2009 financial crisis, ITT was a better diversifier than LTT:
https://www.portfoliovisualizer.com/ass ... &months=36
(correlation of -0.08 vs 0)

- Since 2014, ITT has been a better diversifier than LTT:
https://www.portfoliovisualizer.com/ass ... &months=36
(correlation of -0.31 vs -0.26)
Correlation isn’t the full story. LTT will move further as well which provides a bigger diversification bonus for similar correlations. This is why those that use short term treasuries need closer to 20x leverage to achieve risk parity.
very interesting indeed. Using Siamonds historical return spreadsheet, you definitely get a slightly higher sharpe w/ ITT vs LTT, the best allocation I found was 25/75 SCV/ITT had a sharpe of 0.51 going back to 1928.

My concern would be that you'd obviously need to use more leverage to get the same volatility which would then lead to more borrowing costs... so not sure you could 'harvest" that extra sharpe due to the increased borrowing costs? not sure

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by unknownfuture » Thu Jul 04, 2019 12:04 am

MotoTrojan wrote:
Wed Jul 03, 2019 11:12 pm
unknownfuture wrote:
Wed Jul 03, 2019 9:17 pm
Three more datapoints in support of using ITT instead of LTT, this time in terms of monthly correlations:

...
Correlation isn’t the full story. LTT will move further as well which provides a bigger diversification bonus for similar correlations. This is why those that use short term treasuries need closer to 20x leverage to achieve risk parity.
I'm not proposing short-term treasuries, which are indeed impractical for the reason you mention. Instead I was proposing ITT which are actually practical, and lead to better risk-adjusted returns than LTT.

The philosophy of this whole thread is to find a portfolio with the best risk-adjusted return (Sharpe ratio) and then leverage it up as much as possible. In this regard, ITT are a better choice than LTT.

Going forward, LTT will win if interest rates continue to fall for the next 20 years. In that case, ITT does marginally worse in terms of CAGR, although probably still better in terms of risk-adjusted returns. In case of interest rates that go sideways or go up, ITT will probably win in terms of both CAGR and risk-adjusted returns. When averaging over these possible futures, ITT arguably has higher expected CAGR and (much) higher risk-adjusted returns than LTT.

Since I'm applying the strategy to my main taxable account, I have less risk tolerance than most people here. I want to choose an asset allocation with highest risk-adjusted return, and then apply ~ 1.5x leverage. To achieve this, my AA is 75% unlevered stocks and 25% TYD (= 3X ITT). But up to 3x leverage can be achieved by adding UPRO in the mix. Also, by starting with only little leverage, it's easier to rebalance after a market downturn by adding in UPRO with new money and/or dividends.
Last edited by unknownfuture on Thu Jul 04, 2019 12:14 am, edited 1 time in total.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan » Thu Jul 04, 2019 12:13 am

unknownfuture wrote:
Thu Jul 04, 2019 12:04 am
MotoTrojan wrote:
Wed Jul 03, 2019 11:12 pm
unknownfuture wrote:
Wed Jul 03, 2019 9:17 pm
Three more datapoints in support of using ITT instead of LTT, this time in terms of monthly correlations:

...
Correlation isn’t the full story. LTT will move further as well which provides a bigger diversification bonus for similar correlations. This is why those that use short term treasuries need closer to 20x leverage to achieve risk parity.
I'm not proposing short-term treasuries, which are indeed impractical for the reason you mention. Instead I was proposing ITT which are actually practical, and lead to better risk-adjusted returns than LTT.

The philosophy of this whole thread is to find a portfolio with the best risk-adjusted return (Sharpe ratio) and then leverage it up as much as possible. In this regard, ITT are a better choice than LTT.

Going forward, LTT will win if interest rates continue to fall for the next 20 years. In that case, ITT does marginally worse in terms of CAGR, although probably still better in terms of risk-adjusted returns. In case of interest rates that go sideways or go up, ITT will probably win in terms of both CAGR and risk-adjusted returns. When averaging over these possible futures, ITT arguably has higher expected CAGR and (much) higher risk-adjusted returns than LTT.

Since I'm applying the strategy to my main (taxable) account, I have less risk tolerance than most people here. I want to choose an asset allocation with highest risk-adjusted return, and then apply ~ 1.5x leverage. To achieve this, my AA is 75% unlevered stocks and 25% TYD (= 3X ITT). But up to 3x leverage can be achieved by adding UPRO in the mix.
EDV gives similar exposure as TYD but without the hefty ER or volatility decay issue.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by unknownfuture » Thu Jul 04, 2019 12:27 am

MotoTrojan wrote:
Thu Jul 04, 2019 12:13 am
...
EDV gives similar exposure as TYD but without the hefty ER or volatility decay issue.
Do you have evidence that supports the hypothesis that a portfolio with EDV results in better risk-adjusted returns than TYD?
Last edited by unknownfuture on Thu Jul 04, 2019 1:15 am, edited 1 time in total.

unknownfuture
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by unknownfuture » Thu Jul 04, 2019 12:46 am

unknownfuture wrote:
Thu Jul 04, 2019 12:27 am
MotoTrojan wrote:
Thu Jul 04, 2019 12:13 am
...
EDV gives similar exposure as TYD but without the hefty ER or volatility decay issue.
This is unsupported by facts, as far as I know. Do you have evidence that supports the hypothesis that a portfolio with EDV results in better risk-adjusted returns than TYD?
While EDV and TYD have similar "effective duration", they behave very differently, as one is based on LTT and the other on ITT. TYD's underlying assets refresh every 8-10 years while EDV refreshes only every 25 years. They have different dynamics, and arguably TYD will have better returns in an environment with rising rates.

E.g. note that EDV and TYD only have a correlation of 0.71 in daily returns, and their daily returns are often uncorrelated:
https://www.portfoliovisualizer.com/ass ... &months=36

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by ahnathan » Thu Jul 04, 2019 6:16 am

How would intermediate treasuries respond in a rising interest rate environment? Wouldn’t they be hit essentially just as hard as LTT? I understand that they might rebound quicker to reflect the new yield because of their shorter duration as new treasuries are added to the portfolio but shouldn’t that still take on the order of years?

reformed.trader
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by reformed.trader » Thu Jul 04, 2019 7:16 am

unknownfuture wrote:
Thu Jul 04, 2019 12:04 am
MotoTrojan wrote:
Wed Jul 03, 2019 11:12 pm
unknownfuture wrote:
Wed Jul 03, 2019 9:17 pm
Three more datapoints in support of using ITT instead of LTT, this time in terms of monthly correlations:

...
Correlation isn’t the full story. LTT will move further as well which provides a bigger diversification bonus for similar correlations. This is why those that use short term treasuries need closer to 20x leverage to achieve risk parity.
I'm not proposing short-term treasuries, which are indeed impractical for the reason you mention. Instead I was proposing ITT which are actually practical, and lead to better risk-adjusted returns than LTT.

The philosophy of this whole thread is to find a portfolio with the best risk-adjusted return (Sharpe ratio) and then leverage it up as much as possible. In this regard, ITT are a better choice than LTT.

Going forward, LTT will win if interest rates continue to fall for the next 20 years. In that case, ITT does marginally worse in terms of CAGR, although probably still better in terms of risk-adjusted returns. In case of interest rates that go sideways or go up, ITT will probably win in terms of both CAGR and risk-adjusted returns. When averaging over these possible futures, ITT arguably has higher expected CAGR and (much) higher risk-adjusted returns than LTT.

Since I'm applying the strategy to my main taxable account, I have less risk tolerance than most people here. I want to choose an asset allocation with highest risk-adjusted return, and then apply ~ 1.5x leverage. To achieve this, my AA is 75% unlevered stocks and 25% TYD (= 3X ITT). But up to 3x leverage can be achieved by adding UPRO in the mix. Also, by starting with only little leverage, it's easier to rebalance after a market downturn by adding in UPRO with new money and/or dividends.
This is my thinking. I am in the camp that we will see high inflation at some point in the near future. That is the only major risk to this strategy imo(a la 1970s). When/if bond rates rise substantially, I will shift to LTTs.

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Steve Reading
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Steve Reading » Thu Jul 04, 2019 7:26 am

unknownfuture wrote:
Thu Jul 04, 2019 12:04 am
MotoTrojan wrote:
Wed Jul 03, 2019 11:12 pm
unknownfuture wrote:
Wed Jul 03, 2019 9:17 pm
Three more datapoints in support of using ITT instead of LTT, this time in terms of monthly correlations:

...
Correlation isn’t the full story. LTT will move further as well which provides a bigger diversification bonus for similar correlations. This is why those that use short term treasuries need closer to 20x leverage to achieve risk parity.
I'm not proposing short-term treasuries, which are indeed impractical for the reason you mention. Instead I was proposing ITT which are actually practical, and lead to better risk-adjusted returns than LTT.

The philosophy of this whole thread is to find a portfolio with the best risk-adjusted return (Sharpe ratio) and then leverage it up as much as possible. In this regard, ITT are a better choice than LTT.

Going forward, LTT will win if interest rates continue to fall for the next 20 years. In that case, ITT does marginally worse in terms of CAGR, although probably still better in terms of risk-adjusted returns. In case of interest rates that go sideways or go up, ITT will probably win in terms of both CAGR and risk-adjusted returns. When averaging over these possible futures, ITT arguably has higher expected CAGR and (much) higher risk-adjusted returns than LTT.

Since I'm applying the strategy to my main taxable account, I have less risk tolerance than most people here. I want to choose an asset allocation with highest risk-adjusted return, and then apply ~ 1.5x leverage. To achieve this, my AA is 75% unlevered stocks and 25% TYD (= 3X ITT). But up to 3x leverage can be achieved by adding UPRO in the mix. Also, by starting with only little leverage, it's easier to rebalance after a market downturn by adding in UPRO with new money and/or dividends.
The philosophy of this thread is to achieve the highest risk-adjusted return via risk parity. Your portfolio is very far from risk parity though.

MondayMorningQB
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MondayMorningQB » Thu Jul 04, 2019 8:24 am

Mark for later

MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan » Thu Jul 04, 2019 8:49 am

ahnathan wrote:
Thu Jul 04, 2019 6:16 am
How would intermediate treasuries respond in a rising interest rate environment? Wouldn’t they be hit essentially just as hard as LTT? I understand that they might rebound quicker to reflect the new yield because of their shorter duration as new treasuries are added to the portfolio but shouldn’t that still take on the order of years?
ITT will lose less to cap losses in a rising rate environment but it’ll also gain less if rates decrease so you need to hold more of it to properly offset an equity loss.

TNWoods
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by TNWoods » Thu Jul 04, 2019 9:00 am

Well, I'm officially in for about 4.6% of my total portfolio.

Read every post, many of them multiple times, thought it over for a couple weeks.

TNWoods

Topic Author
HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE » Thu Jul 04, 2019 12:09 pm

TNWoods wrote:
Thu Jul 04, 2019 9:00 am
Well, I'm officially in for about 4.6% of my total portfolio.

Read every post, many of them multiple times, thought it over for a couple weeks.

TNWoods
I tip my hat to you good sir.

Happy Fourth of July everyone! May our pursuit of happiness [and profit] continue unabated.

unknownfuture
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by unknownfuture » Thu Jul 04, 2019 12:10 pm

305pelusa wrote:
Thu Jul 04, 2019 7:26 am

The philosophy of this thread is to achieve the highest risk-adjusted return via risk parity. Your portfolio is very far from risk parity though.
I should increase my exposure to ITT, but besides that, I have a close to risk parity portfolio. Risk parity can be combined with any amount of leverage:
https://en.m.wikipedia.org/wiki/Risk_parity

1.0x, 1.5x or 2x portfolios are valid too; what's best depends on your situation, whether it's a taxable account, etc. Also, not everyone might realize that a 1.5x or 2x leveraged risk parity portfolio can be build with a combination of 3x leveraged and unleveraged assets.

Locked