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

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Locked
MotoTrojan
Posts: 10788
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan »

P90XBC wrote: Tue Jul 16, 2019 12:01 pm I have my Vanguard IRA switched over to M1 finance and the transfer was executed right as the s&p crossed 3000. Now that cash is sitting in the M1 roth IRA and ready to go, I'm wondering if i should be a bit cautious on the buy in for the leveraged fund. I'm not one to try and time things but buying in "high" and getting crushed on a 3x fund right from the start seems counter intuitive. Should I wait until at least a small dip before starting this up? Am I looking at this wrong? The funds i'm playing with here are very minimal roughly 10k. Thanks.
If you’re afraid of investing in any strategy at a market top then this may not be the right strategy for you.
RandomWord
Posts: 119
Joined: Tue Jun 18, 2019 1:12 pm

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

Post by RandomWord »

no simpler wrote: Mon Jul 15, 2019 5:14 pm
MoneyMarathon wrote: Mon Jul 15, 2019 4:11 pm
When evaluating this on recent data, I wouldn't just go for maximizing returns. We know that returns of different asset classes change over time, and some gain when others lose, so we want to hold some asset class that gains when both the S&P 500 and LTTs lose (and which at the same time may often lose when the other two make gains). Since Sharpe is a function of returns, I wouldn't just go for maximizing Sharpe over a historical time period. If you've already chosen asset classes that have some expected return and in which you want to invest for diversification, then some of the more interesting characteristics of a portfolio, over a short time period (even 40 years is short), are the risk characteristics (volatility of the portfolio) and how well the asset classes did in balancing out the others. When deciding a split between asset classes, the actual returns over a recent time period should be heavily discounted & you should, probably, want to do a little less than perfectly optimal on that data (trying to avoid overfitting). The perfect is the enemy of the good here.
^This. If you backtest a portfolio of 90% tbills and 10% bitcoin, it looks amazing. Max drawdown is 10% and you'd still have a 500%+ return in 7 years.

I work as a data scientist. So much of our work is just trying to prevent overfitting. It's incredibly hard to avoid. You need to take extreme precautions to avoid contamination of hold out sets when doing cross validation. I also have the very real world experience of building a portfolio according to MPT and then having the live portfolio behave nothing like the past. Based on both academic, professional, and just straight up hard knocks, I would not extrapolate based on historical time series. Nobody knows what will happen.

That said, I like the risk parity approaches in that JPM paper and the Bridgewater papers. It's based on a more qualitative understanding of how assets respond to economic conditions and makes very few assumptions. But it definitely makes sense to hold more than two assets using this strategy so that you can survive multiple environments.
That would be great, but does such a thing exist? I'm not convinced that it does. Sure you can backtest and show that gold, bitcoin, fine art, etc did well at some times that stocks and bonds both did poorly. But that seems extremely flukey to me, with no guarantee that they'll help in the future, and could equally likely just make things worse. The "all-weather" portfolio seems to be chasing a holy grail, looking for something with strong returns but no risk. I like the fundamental concept of Hedgie's strategy better- just accept that the risk is extremely high, and that there will be some times that it drops catastrophically.
RandomWord
Posts: 119
Joined: Tue Jun 18, 2019 1:12 pm

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

Post by RandomWord »

To put it another way, I really have a hard time convincing myself to invest in assets that I would never want to own individually (shiny rocks, digital codes, barrels of oil, etc) even if they do look good in backtesting. Something just seems wrong when I have to pay to own something that generates no return and costs money to maintain, and I'm just hoping some greater fool will come along and pay even more for it.
no simpler
Posts: 109
Joined: Sat Jul 13, 2019 4:54 pm

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

Post by no simpler »

RandomWord wrote: Tue Jul 16, 2019 1:00 pm
no simpler wrote: Mon Jul 15, 2019 5:14 pm
MoneyMarathon wrote: Mon Jul 15, 2019 4:11 pm
When evaluating this on recent data, I wouldn't just go for maximizing returns. We know that returns of different asset classes change over time, and some gain when others lose, so we want to hold some asset class that gains when both the S&P 500 and LTTs lose (and which at the same time may often lose when the other two make gains). Since Sharpe is a function of returns, I wouldn't just go for maximizing Sharpe over a historical time period. If you've already chosen asset classes that have some expected return and in which you want to invest for diversification, then some of the more interesting characteristics of a portfolio, over a short time period (even 40 years is short), are the risk characteristics (volatility of the portfolio) and how well the asset classes did in balancing out the others. When deciding a split between asset classes, the actual returns over a recent time period should be heavily discounted & you should, probably, want to do a little less than perfectly optimal on that data (trying to avoid overfitting). The perfect is the enemy of the good here.
^This. If you backtest a portfolio of 90% tbills and 10% bitcoin, it looks amazing. Max drawdown is 10% and you'd still have a 500%+ return in 7 years.

I work as a data scientist. So much of our work is just trying to prevent overfitting. It's incredibly hard to avoid. You need to take extreme precautions to avoid contamination of hold out sets when doing cross validation. I also have the very real world experience of building a portfolio according to MPT and then having the live portfolio behave nothing like the past. Based on both academic, professional, and just straight up hard knocks, I would not extrapolate based on historical time series. Nobody knows what will happen.

That said, I like the risk parity approaches in that JPM paper and the Bridgewater papers. It's based on a more qualitative understanding of how assets respond to economic conditions and makes very few assumptions. But it definitely makes sense to hold more than two assets using this strategy so that you can survive multiple environments.
That would be great, but does such a thing exist? I'm not convinced that it does. Sure you can backtest and show that gold, bitcoin, fine art, etc did well at some times that stocks and bonds both did poorly. But that seems extremely flukey to me, with no guarantee that they'll help in the future, and could equally likely just make things worse. The "all-weather" portfolio seems to be chasing a holy grail, looking for something with strong returns but no risk. I like the fundamental concept of Hedgie's strategy better- just accept that the risk is extremely high, and that there will be some times that it drops catastrophically.
Well, if you're not worried about volatility, large draw downs or concentration risk, might as well just go 100% into equities with no leverage. This is a (much) cheaper and probably higher expectation strategy that takes way less time.

The all-weather portfolio isn't riskless; depending on leverage it can be quite risky. It's just the closest you can get to a true tangent portfolio. It's not a way to "beat" the efficiency of markets or CAPM. It's just a better approach than MPT for constructing an efficient portfolio, since it's less sensitive to overfitting and forecasting errors w.r.t returns and correlations.
RandomWord
Posts: 119
Joined: Tue Jun 18, 2019 1:12 pm

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

Post by RandomWord »

no simpler wrote: Tue Jul 16, 2019 1:17 pm
RandomWord wrote: Tue Jul 16, 2019 1:00 pm
no simpler wrote: Mon Jul 15, 2019 5:14 pm
MoneyMarathon wrote: Mon Jul 15, 2019 4:11 pm
When evaluating this on recent data, I wouldn't just go for maximizing returns. We know that returns of different asset classes change over time, and some gain when others lose, so we want to hold some asset class that gains when both the S&P 500 and LTTs lose (and which at the same time may often lose when the other two make gains). Since Sharpe is a function of returns, I wouldn't just go for maximizing Sharpe over a historical time period. If you've already chosen asset classes that have some expected return and in which you want to invest for diversification, then some of the more interesting characteristics of a portfolio, over a short time period (even 40 years is short), are the risk characteristics (volatility of the portfolio) and how well the asset classes did in balancing out the others. When deciding a split between asset classes, the actual returns over a recent time period should be heavily discounted & you should, probably, want to do a little less than perfectly optimal on that data (trying to avoid overfitting). The perfect is the enemy of the good here.
^This. If you backtest a portfolio of 90% tbills and 10% bitcoin, it looks amazing. Max drawdown is 10% and you'd still have a 500%+ return in 7 years.

I work as a data scientist. So much of our work is just trying to prevent overfitting. It's incredibly hard to avoid. You need to take extreme precautions to avoid contamination of hold out sets when doing cross validation. I also have the very real world experience of building a portfolio according to MPT and then having the live portfolio behave nothing like the past. Based on both academic, professional, and just straight up hard knocks, I would not extrapolate based on historical time series. Nobody knows what will happen.

That said, I like the risk parity approaches in that JPM paper and the Bridgewater papers. It's based on a more qualitative understanding of how assets respond to economic conditions and makes very few assumptions. But it definitely makes sense to hold more than two assets using this strategy so that you can survive multiple environments.
That would be great, but does such a thing exist? I'm not convinced that it does. Sure you can backtest and show that gold, bitcoin, fine art, etc did well at some times that stocks and bonds both did poorly. But that seems extremely flukey to me, with no guarantee that they'll help in the future, and could equally likely just make things worse. The "all-weather" portfolio seems to be chasing a holy grail, looking for something with strong returns but no risk. I like the fundamental concept of Hedgie's strategy better- just accept that the risk is extremely high, and that there will be some times that it drops catastrophically.
Well, if you're not worried about volatility, large draw downs or concentration risk, might as well just go 100% into equities with no leverage. This is a (much) cheaper and probably higher expectation strategy that takes way less time.
Eh? Of course I'm worried about those things. I just don't see any reason to believe gold or anything else will reduce them. Other than backtesting based on very limited samples, which doesn't convince me.

Is there some fundamental reason to think that gold or whatever *should* go up whenever equities and bonds go down?
no simpler
Posts: 109
Joined: Sat Jul 13, 2019 4:54 pm

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

Post by no simpler »

RandomWord wrote: Tue Jul 16, 2019 1:05 pm To put it another way, I really have a hard time convincing myself to invest in assets that I would never want to own individually (shiny rocks, digital codes, barrels of oil, etc) even if they do look good in backtesting. Something just seems wrong when I have to pay to own something that generates no return and costs money to maintain, and I'm just hoping some greater fool will come along and pay even more for it.
I was joking about the bitcoin allocation. That was to demonstrate the silliness of basing an allocation on historical returns in a backtest. I do own a tiny amount of bitcoin (less than .75% of my liquid assets), but it's irrelevant for purpose of my main portfolio.

My main point is the opposite: an allocation should be based on more of a qualitative understanding of how assets behave and respond to economic conditions, and an understanding of how they generate returns from first principles. The nice thing about risk parity is it uses about as naive a prior as you can get for weightings w.r.t historical statistical information. In fact, if you used implied volatility (and unlike returns, volatility is predictable) you could set up the strategy without any regard for historical time series at all.
no simpler
Posts: 109
Joined: Sat Jul 13, 2019 4:54 pm

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

Post by no simpler »

Not take things on a tangent, but I do thing it's also worth considering hedging against an explosion in volatility, e.g. a black swan or collapse in the short vol trade. Even if you rebalance based on historical or implied volatility, volatility can change with an incredibly sharp discontinuity.

There was a very recent massive short volatility bubble, a bubble so extreme it was larger than bitcoin, and it was recognizable before it collapsed:
https://qr.ae/TWnFV8


Look at the insane one-week drop in XIV (short vol index):
https://qph.fs.quoracdn.net/main-qimg-e ... ef017dd02

Reason this is relevant is that even with monthly rebalancing, volatility can change massively in a much shorter time period. For sake of honesty, it also suggests that my previous suggestion to rely on implied vol is flawed, and empirical vol of the actual asset is more robust. This is because tons of people piled into the short vol trade and then had to cover, leading to a disconnect with the actual volatility with equities for technical reasons.
Last edited by no simpler on Tue Jul 16, 2019 1:59 pm, edited 1 time in total.
robertmcd
Posts: 554
Joined: Tue Aug 09, 2016 9:06 am

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

Post by robertmcd »

RandomWord wrote: Tue Jul 16, 2019 1:21 pm
no simpler wrote: Tue Jul 16, 2019 1:17 pm
RandomWord wrote: Tue Jul 16, 2019 1:00 pm
no simpler wrote: Mon Jul 15, 2019 5:14 pm
MoneyMarathon wrote: Mon Jul 15, 2019 4:11 pm
When evaluating this on recent data, I wouldn't just go for maximizing returns. We know that returns of different asset classes change over time, and some gain when others lose, so we want to hold some asset class that gains when both the S&P 500 and LTTs lose (and which at the same time may often lose when the other two make gains). Since Sharpe is a function of returns, I wouldn't just go for maximizing Sharpe over a historical time period. If you've already chosen asset classes that have some expected return and in which you want to invest for diversification, then some of the more interesting characteristics of a portfolio, over a short time period (even 40 years is short), are the risk characteristics (volatility of the portfolio) and how well the asset classes did in balancing out the others. When deciding a split between asset classes, the actual returns over a recent time period should be heavily discounted & you should, probably, want to do a little less than perfectly optimal on that data (trying to avoid overfitting). The perfect is the enemy of the good here.
^This. If you backtest a portfolio of 90% tbills and 10% bitcoin, it looks amazing. Max drawdown is 10% and you'd still have a 500%+ return in 7 years.

I work as a data scientist. So much of our work is just trying to prevent overfitting. It's incredibly hard to avoid. You need to take extreme precautions to avoid contamination of hold out sets when doing cross validation. I also have the very real world experience of building a portfolio according to MPT and then having the live portfolio behave nothing like the past. Based on both academic, professional, and just straight up hard knocks, I would not extrapolate based on historical time series. Nobody knows what will happen.

That said, I like the risk parity approaches in that JPM paper and the Bridgewater papers. It's based on a more qualitative understanding of how assets respond to economic conditions and makes very few assumptions. But it definitely makes sense to hold more than two assets using this strategy so that you can survive multiple environments.
That would be great, but does such a thing exist? I'm not convinced that it does. Sure you can backtest and show that gold, bitcoin, fine art, etc did well at some times that stocks and bonds both did poorly. But that seems extremely flukey to me, with no guarantee that they'll help in the future, and could equally likely just make things worse. The "all-weather" portfolio seems to be chasing a holy grail, looking for something with strong returns but no risk. I like the fundamental concept of Hedgie's strategy better- just accept that the risk is extremely high, and that there will be some times that it drops catastrophically.
Well, if you're not worried about volatility, large draw downs or concentration risk, might as well just go 100% into equities with no leverage. This is a (much) cheaper and probably higher expectation strategy that takes way less time.
Eh? Of course I'm worried about those things. I just don't see any reason to believe gold or anything else will reduce them. Other than backtesting based on very limited samples, which doesn't convince me.

Is there some fundamental reason to think that gold or whatever *should* go up whenever equities and bonds go down?
In a world of endless liquidity in which trillions can be plowed into equities and bonds with the click of a mouse, this strategy will only fail when there is runaway inflation and we see currencies collapse. Real interest rates will never rise enough before the money supply changes direction to support bonds and equities again. We saw this in December 2018. I think an allocation to gold is a wise one to sacrifice some returns as insurance to ensure this portfolio survives if rates start to skyrocket.
no simpler
Posts: 109
Joined: Sat Jul 13, 2019 4:54 pm

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

Post by no simpler »

robertmcd wrote: Tue Jul 16, 2019 1:58 pm
RandomWord wrote: Tue Jul 16, 2019 1:21 pm
no simpler wrote: Tue Jul 16, 2019 1:17 pm
RandomWord wrote: Tue Jul 16, 2019 1:00 pm
no simpler wrote: Mon Jul 15, 2019 5:14 pm

^This. If you backtest a portfolio of 90% tbills and 10% bitcoin, it looks amazing. Max drawdown is 10% and you'd still have a 500%+ return in 7 years.

I work as a data scientist. So much of our work is just trying to prevent overfitting. It's incredibly hard to avoid. You need to take extreme precautions to avoid contamination of hold out sets when doing cross validation. I also have the very real world experience of building a portfolio according to MPT and then having the live portfolio behave nothing like the past. Based on both academic, professional, and just straight up hard knocks, I would not extrapolate based on historical time series. Nobody knows what will happen.

That said, I like the risk parity approaches in that JPM paper and the Bridgewater papers. It's based on a more qualitative understanding of how assets respond to economic conditions and makes very few assumptions. But it definitely makes sense to hold more than two assets using this strategy so that you can survive multiple environments.
That would be great, but does such a thing exist? I'm not convinced that it does. Sure you can backtest and show that gold, bitcoin, fine art, etc did well at some times that stocks and bonds both did poorly. But that seems extremely flukey to me, with no guarantee that they'll help in the future, and could equally likely just make things worse. The "all-weather" portfolio seems to be chasing a holy grail, looking for something with strong returns but no risk. I like the fundamental concept of Hedgie's strategy better- just accept that the risk is extremely high, and that there will be some times that it drops catastrophically.
Well, if you're not worried about volatility, large draw downs or concentration risk, might as well just go 100% into equities with no leverage. This is a (much) cheaper and probably higher expectation strategy that takes way less time.
Eh? Of course I'm worried about those things. I just don't see any reason to believe gold or anything else will reduce them. Other than backtesting based on very limited samples, which doesn't convince me.

Is there some fundamental reason to think that gold or whatever *should* go up whenever equities and bonds go down?
In a world of endless liquidity in which trillions can be plowed into equities and bonds with the click of a mouse, this strategy will only fail when there is runaway inflation and we see currencies collapse. Real interest rates will never rise enough before the money supply changes direction to support bonds and equities again. We saw this in December 2018. I think an allocation to gold is a wise one to sacrifice some returns as insurance to ensure this portfolio survives if rates start to skyrocket.
A lot of things that seem so obvious turn out not to be. In 2012, a lot of the smartest people, including those who shorted MBS and CDS before the crisis, thought that commodities were the smartest place to be. They thought most developed economies had unsustainable debt loads which would lead to speculative attacks and rising interest rates. Also, it also seemed extremely obvious that emerging markets were incredibly undervalued relative to the US and had to outperform. Neither of those things happened - commodity prices actually collapsed. Check out Michael Lewis' Boomerang - it did not age well.

Now, everyone thinks that US nominal bonds and US stocks are the place to be. Like in 2012, this is a result of strong recent trailing performance.
rascott
Posts: 2450
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott »

Where can one find the current swap rates these funds are paying?

I saw Hedgie post it was 2.8% for UPRO and 1.8% for TMF.... Back in October. Is this info updated quarterly?

I have a hard time in my brain justifying paying nearly 2.8% (rate+ER) to leverage long-dated Treasurys yielding less than that. That seems to violate common sense. I understand we are trying to get insurance coverage for the equity position... via projected negative correlation....but still doesn't sit right. I'm sure I'm missing something.

I had come across another UPRO/LETF strategy that uses a trend-following (200 day MA) to be in/out of the position (and into LTTs).

https://seekingalpha.com/article/422616 ... since-1928
MotoTrojan
Posts: 10788
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan »

rascott wrote: Tue Jul 16, 2019 3:05 pm Where can one find the current swap rates these funds are paying?

I saw Hedgie post it was 2.8% for UPRO and 1.8% for TMF.... Back in October. Is this info updated quarterly?

I have a hard time in my brain justifying paying nearly 2.8% (rate+ER) to leverage long-dated Treasurys yielding less than that. That seems to violate common sense. I understand we are trying to get insurance coverage for the equity position... via projected negative correlation....but still doesn't sit right. I'm sure I'm missing something.

I had come across another UPRO/LETF strategy that uses a trend-following (200 day MA) to be in/out of the position (and into LTTs).

https://seekingalpha.com/article/422616 ... since-1928
I'd rather use the volatility directly to determine timing than to use a different metric that is correlated to it.

As to the TMF, I don't think you are missing anything. For example compare these two portfolios; I am using the past month's volatility which was quite low for equities so they are skewed high, but it is just an example:

57% UPRO, 43% TMF
36.5% UPRO, 63.5% EDV

These are balanced in risk-parity, at-least for the last month. Long-term it is probably closer to 40/60 UPRO/TMF and 20/80 UPRO/EDV.

EDV is much more efficient than TMF (low expense ratio, no borrowing costs, etc...), but in order to maintain risk-parity you have to hold less UPRO, which results in less expected return. So don't look at TMF in a vacuum as the key is the additional equity exposure it allows you to "safely" hold.
no simpler
Posts: 109
Joined: Sat Jul 13, 2019 4:54 pm

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

Post by no simpler »

https://retirementresearcher.com/good-v ... latility/
VIX explains 80% of variance in future vol, vs only 50% based on using historical (lookback) vol. So better just to use the VIX than a lookback window.

TYVIX would give you 10 yr interest rate volatility:
http://www.cboe.com/products/vix-index- ... rest-rates

It just makes intuitive sense that these indices would be more predictive than a simple lookback model we can easily cook up. The indices reflect all participants' knowledge and the equilibrium of far more sophisticated strategies competing against each other.
MoneyMarathon
Posts: 992
Joined: Sun Sep 30, 2012 3:38 am

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

Post by MoneyMarathon »

MotoTrojan wrote: Tue Jul 16, 2019 8:35 am Thank you for the numbers. Interesting indeed. If it isn't much effort I would be curious to see the performance of 40% UPRO, 30% TMF, 30% TLT/similar long treasury fund, as that is what I was directly comparing and found performed not far from the UPRO, TMF, IEF instance.
Jan 1982 - Dec 2018

40% UPRO, 60% IEF ----------> 13.29% CAGR, 0.56 Sharpe, 2.60 Sortino
40% UPRO, 30% TLT, 30% IEF -> 14.01% CAGR, 0.59 Sharpe, 3.40 Sortino
40% UPRO, 60% TLT ----------> 14.68% CAGR, 0.61 Sharpe, 3.73 Sortino
40% UPRO, 30% EDV, 30% IEF -> 15.23% CAGR, 0.61 Sharpe, 3.64 Sortino
40% UPRO, 30% TMF, 30% IEF -> 17.09% CAGR, 0.64 Sharpe, 4.05 Sortino
40% UPRO, 30% TMF, 30% TLT -> 17.60% CAGR, 0.64 Sharpe, 3.90 Sortino
40% UPRO, 60% EDV ----------> 16.83% CAGR, 0.61 Sharpe, 3.16 Sortino
40% UPRO, 30% TMF, 30% EDV -> 18.48% CAGR, 0.62 Sharpe, 3.48 Sortino
40% UPRO, 60% TMF ----------> 19.9% CAGR, 0.62 Sharpe, 3.78 Sortino

100% SPY (S&P 500 index) -> 11.19% CAGR, 0.53 Sharpe, 1.33 Sortino

Jan 1955 - Dec 1981

40% UPRO, 60% IEF ----------> 9.08% CAGR, 0.25 Sharpe, 0.95 Sortino
40% UPRO, 30% TLT, 30% IEF -> 8.24% CAGR, 0.22 Sharpe, 0.81 Sortino
40% UPRO, 60% TLT ----------> 7.40% CAGR, 0.18 Sharpe, 0.67 Sortino
40% UPRO, 30% EDV, 30% IEF -> 6.78% CAGR, 0.16 Sharpe, 0.54 Sortino
40% UPRO, 30% TMF, 30% IEF -> 5.33% CAGR, 0.10 Sharpe, 0.34 Sortino
40% UPRO, 30% TMF, 30% TLT -> 4.44% CAGR, 0.07 Sharpe, 0.21 Sortino
40% UPRO, 60% EDV ----------> 4.37% CAGR, 0.06 Sharpe, 0.18 Sortino
40% UPRO, 30% TMF, 30% EDV -> 2.87% CAGR, 0.02 Sharpe, 0.04 Sortino
40% UPRO, 60% TMF ----------> 1.26% CAGR, -0.03 Sharpe, -0.08 Sortino

100% SPY (S&P 500 index) -> 8.57% CAGR, 0.26 Sharpe, 0.71 Sortino

Jan 1955 - Dec 2018

40% UPRO, 60% IEF ----------> 11.49% CAGR, 0.42 Sharpe, 2.18 Sortino
40% UPRO, 30% TLT, 30% IEF -> 11.54% CAGR, 0.41 Sharpe, 2.16 Sortino
40% UPRO, 60% TLT ----------> 11.55% CAGR, 0.41 Sharpe, 2.14 Sortino
40% UPRO, 30% EDV, 30% IEF -> 11.58% CAGR, 0.40 Sharpe, 2.02 Sortino
40% UPRO, 30% TMF, 30% IEF -> 11.98% CAGR, 0.40 Sharpe, 2.03 Sortino
40% UPRO, 30% TMF, 30% TLT -> 11.86% CAGR, 0.39 Sharpe, 1.89 Sortino
40% UPRO, 60% EDV ----------> 11.40% CAGR, 0.37 Sharpe, 1.62 Sortino
40% UPRO, 30% TMF, 30% EDV -> 11.62% CAGR, 0.36 Sharpe, 1.65 Sortino
40% UPRO, 60% TMF ----------> 11.65% CAGR, 0.35 Sharpe, 1.67 Sortino

100% SPY (S&P 500 index) -> 10.08% CAGR, 0.41 Sharpe, 1.42 Sortino

If 2.0 Sortino overall from 1955-2018, 0.4 Sharpe overall from 1955-2018, and 5% CAGR from 1955-1981 is the cutoff (i.e. non-negative real return), then, in my opinion, if this were the set of options, these portfolios seem like they could reasonably be described as not being a very strong bet against rising rates: either 60% in normal LTT or at least 30% in intermediate term treasuries.

Of these options, only 60% intermediate-term treasuries beat the benchmark (S&P 500) in both the multi-decade rising-rates and falling-rates environment. It's basically a traditional portfolio of 65% stock / 35% bonds (120% stock / 60% bonds) on leveraging steroids (higher volatility, higher return). It's not a "risk parity" portfolio because it accepts taking about 90% of the risk on the equity side. Instead it uses bonds for "true safety" in all environments (excepting truly extreme scenarios like US sovereign debt default or USD hyperinflation... but it seemed good enough to limit the bleeding in the 1970s).
MoneyMarathon
Posts: 992
Joined: Sun Sep 30, 2012 3:38 am

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

Post by MoneyMarathon »

So I'm considering joining the club in part of a Roth IRA at M1 finance. They seem to make it easy to have two "pies" for different strategies. I'd like to try two: a highly leveraged, sort-of "risk parity" (somewhat overweight equities, underweight gold) approach that takes advantage of high volatility in each uncorrelated asset for a higher risk/reward proposition. And a moderately leveraged, sort-of traditional portfolio (almost all risk in equities) that takes advantage of the fact that the rest of the portfolio is unlevered with relatively low volatility. I'd be happy with 8-14% CAGR for the higher-risk portfolio and 10-12% CAGR for the lower-risk portfolio, but I'm not depending on anything here.

Each strategy has an exposure to equity risk (UPRO), an exposure to duration risk without credit risk (TMF or IEF), and an exposure to an asset class that might weather high inflation relatively better than the other two (gold or real estate equity - this is my opinion, I know a lot of experts disagree on whether they have any value for inflation protection). I considered going full 3x levered but figured it'd be hard to bear if it went to the moon and then (somehow) to zero by the magic of 3x ETFs - or just the risk of being unable to hit the rebalance button - so I kept 10% unleveraged.

The first portfolio is 2.8x leveraged:

40% UPRO - ProShares UltraPro S&P500
40% TMF - Direxion Daily 20+ Year Treasury Bull 3X Shares
10% UGLD - VelocityShares 3x Long Gold ETN
10% GLDM - SPDR Gold MiniShares

The second portfolio is 1.8x leveraged:

40% UPRO - ProShares UltraPro S&P500
40% IEF - iShares 7-10 Year Treasury Bond ETF
20% REET - iShares Global REIT ETF

I welcome criticism / questions / suggestions / telling my why I'm screwed. :)
MotoTrojan
Posts: 10788
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan »

MoneyMarathon wrote: Tue Jul 16, 2019 5:58 pm


If 2.0 Sortino overall from 1955-2018, 0.4 Sharpe overall from 1955-2018, and 5% CAGR from 1955-1981 is the cutoff (i.e. non-negative real return), then, in my opinion, if this were the set of options, these portfolios seem like they could reasonably be described as not being a very strong bet against rising rates: either 60% in normal LTT or at least 30% in intermediate term treasuries.

Of these options, only 60% intermediate-term treasuries beat the benchmark (S&P 500) in both the multi-decade rising-rates and falling-rates environment. It's basically a traditional portfolio of 65% stock / 35% bonds (120% stock / 60% bonds) on leveraging steroids (higher volatility, higher return). It's not a "risk parity" portfolio because it accepts taking about 90% of the risk on the equity side. Instead it uses bonds for "true safety" in all environments (excepting truly extreme scenarios like US sovereign debt default or USD hyperinflation... but it seemed good enough to limit the bleeding in the 1970s).
Thank you for this. I'll have to play around more in PV, or perhaps you will feel the urge to as well, but I am wondering how much of the boost of the 30% (or greater) IEF cases actually comes from the correlation differences of the 7-10 year movements, and how much is simply a reduction in effective duration on the bond side. The best way to set this up would be to compare the 30% TMF 30% IEF 40% UPRO to an allocation of 40% UPRO plus a split of TMF & EDV that has equivalent effective-duration (or volatility). My gut says there is less boost coming from IEF itself and thus the TMF/EDV combo, which will hold less TMF (less ER/leverage costs) will outperform.
User avatar
willthrill81
Posts: 23653
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

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

Post by willthrill81 »

MotoTrojan wrote: Tue Jul 16, 2019 12:26 pm
P90XBC wrote: Tue Jul 16, 2019 12:01 pm I have my Vanguard IRA switched over to M1 finance and the transfer was executed right as the s&p crossed 3000. Now that cash is sitting in the M1 roth IRA and ready to go, I'm wondering if i should be a bit cautious on the buy in for the leveraged fund. I'm not one to try and time things but buying in "high" and getting crushed on a 3x fund right from the start seems counter intuitive. Should I wait until at least a small dip before starting this up? Am I looking at this wrong? The funds i'm playing with here are very minimal roughly 10k. Thanks.
If you’re afraid of investing in any strategy at a market top then this may not be the right strategy for you.
I agree. This strategy has not been closely correlated with the stock market's performance, so worrying about a market top is indicative of not understanding the strategy properly. The fact that there is seeming hand wringing over $10k is further evidence that this isn't the right strategy for P90XBC; anyone implementing it should be prepared for a multiple G-force roller coaster ride.
“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
MoneyMarathon
Posts: 992
Joined: Sun Sep 30, 2012 3:38 am

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

Post by MoneyMarathon »

MotoTrojan wrote: Tue Jul 16, 2019 9:00 pmI am wondering how much of the boost of the 30% (or greater) IEF cases actually comes from the correlation differences of the 7-10 year movements, and how much is simply a reduction in effective duration on the bond side
Look at the annual returns for IEF against the other ones. It's still very correlated. It moves much less. This is the #1 difference.

IEF sometimes ends years up when TMF is down because it doesn't have the expenses or volatility decay. But mostly it just moves less.
MotoTrojan
Posts: 10788
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan »

MoneyMarathon wrote: Tue Jul 16, 2019 10:22 pm
MotoTrojan wrote: Tue Jul 16, 2019 9:00 pmI am wondering how much of the boost of the 30% (or greater) IEF cases actually comes from the correlation differences of the 7-10 year movements, and how much is simply a reduction in effective duration on the bond side
Look at the annual returns for IEF against the other ones. It's still very correlated. It moves much less. This is the #1 difference.

IEF sometimes ends years up when TMF is down because it doesn't have the expenses or volatility decay. But mostly it just moves less.
So that would agree with my point? There is nothing really special about holding IEF and it would actually be better to hold a larger allocation of EDV and a small amount of TMF, reducing your overall exposure to 3x funds and their costs.

For example here is a comparison of 50/50 TMF & IEF with 12% TMF and 88% VEDTX (EDV Mutual Fund). Essentially the same overall performance, marginally improved efficiency in the variant that holds only a fraction of the TMF and I would imagine that shows itself even more over a longer time-span.

https://www.portfoliovisualizer.com/bac ... 0&total3=0
MoneyMarathon
Posts: 992
Joined: Sun Sep 30, 2012 3:38 am

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

Post by MoneyMarathon »

MoneyMarathon wrote: Tue Jul 16, 2019 8:28 pm The first portfolio is 2.8x leveraged:

40% UPRO - ProShares UltraPro S&P500
40% TMF - Direxion Daily 20+ Year Treasury Bull 3X Shares
10% UGLD - VelocityShares 3x Long Gold ETN
10% GLDM - SPDR Gold MiniShares

The second portfolio is 1.8x leveraged:

40% UPRO - ProShares UltraPro S&P500
40% IEF - iShares 7-10 Year Treasury Bond ETF
20% REET - iShares Global REIT ETF
Here is a telltale chart. The baseline is 100% in the S&P 500, so if it's going down, it's going down faster than the S&P 500 (or going up less fast than S&P 500), and likewise if going up. The final numbers show returns that were 1.9x, 2.4x, 4.8x, and 9.4x the S&P 500.

Image

P1 in black is 40% UPRO / 60% TMF.
P2 in red is the portfolio with 40% UPRO / 40% TMF / 10% UGLD / 10% GLDM.
P3 in orange is a portfolio with 40% UPRO / 40% IEF / 20% US REIT (so, more like VNQ than like REET).
P4 in light blue is a portfolio with 40% UPRO / 60% IEF.
P5 is a balanced traditional portfolio, specifically 60% SPY / 40% IEF.

These are simulated historical returns with a little inaccuracy, since the ETFs didn't exist. Rebalancing and all figures are annual. Here are the relevant statistics for each portfolio.

Image

And here are some funny numbers, if anyone's thinking of using this to stretch a pot of retirement money (but... please don't).

Image

This is not your father's buy & hold strategy. Expect more volatility and a need to rebalance punctually, if nothing else. All of the LETF strategies fail badly if not rebalanced at least annually (preferably quarterly or monthly). You would need to be comfortable with holding through some greater-than-market swings. This includes losing more money in some bear markets and even losing money when stocks are flat or going up. Don't invest money into this that you can't 100% lose or that wouldn't stay invested for the long term, without a style change, through some big losses. Past performance may not be indicative of future results! :wink:
MoneyMarathon
Posts: 992
Joined: Sun Sep 30, 2012 3:38 am

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

Post by MoneyMarathon »

MotoTrojan wrote: Tue Jul 16, 2019 10:57 pm
MoneyMarathon wrote: Tue Jul 16, 2019 10:22 pm
MotoTrojan wrote: Tue Jul 16, 2019 9:00 pmI am wondering how much of the boost of the 30% (or greater) IEF cases actually comes from the correlation differences of the 7-10 year movements, and how much is simply a reduction in effective duration on the bond side
Look at the annual returns for IEF against the other ones. It's still very correlated. It moves much less. This is the #1 difference.

IEF sometimes ends years up when TMF is down because it doesn't have the expenses or volatility decay. But mostly it just moves less.
So that would agree with my point? There is nothing really special about holding IEF and it would actually be better to hold a larger allocation of EDV and a small amount of TMF, reducing your overall exposure to 3x funds and their costs.
Sometimes return of capital is more important than return on capital. That's the only sorta-special thing. Consistent return of liquid capital for the purposes of the next round of rebalancing. Relatively small duration risk, no credit risk, & the US pays you to hold it. Lower duration risk was more important than lower costs for coming out with real returns in the rising rates period of the 1970s.

In 1972, SPY up 18%, IEF would return 3.3%, EDV would return -13.34%, and TMF would return -18.68%.
In that year, 40% UPRO / 60% IEF would go up 21.17%, but 40% UPRO / 60% EDV would go up only 11.18%.

In 1973, SPY down -14.77%, IEF would return 3.51%, EDV would return -11.23%, and TMF would return -15.41%.
In that year, 40% UPRO / 60% IEF would go down -18.97%, but 40% UPRO / 60% EDV would go down -27.81%.

In 1974, SPY down -26.54%, IEF would return 7.07%, EDV would return -1.12%, and TMF would return -8.98%.
In that year, 40% UPRO / 60% IEF would go down -24.83%, but 40% UPRO / 60% EDV would go down -29.75%.

In those three years, 40% UPRO / 60% IEF would be down -9.63% but 40% UPRO / 60% EDV would be down -17.38%.

From 1955-1981, the difference is between 4.37% CAGR for 40% UPRO / 60% EDV and 9.08% CAGR for 40% UPRO / 60% IEF. A difference of having a 10x return (with IEF) instead of a 3x return (with EDV).

For comparison, 2007-2009 were some of the best years for rebalancing from long-duration treasuries into the S&P 500, especially if timed in Jan 2009. Yet they both performed their function of bonds being for safety, when the timing and correlation was great for LTT. In those three years, 40% UPRO / 60% EDV returned 5.1% over three years while 40% UPRO / 60% IEF returned -4.9% over three years. (In those years, the annual spreadsheet says UPRO would have lost 79% of its value if not rebalanced.)

It's intermediate duration. Its yield is often more than the loss from duration risk. It participates in the upside from duration risk, though not hugely. IEF is just okay. It won't make a lot of money when rates are falling (although it will do okay then too), so it's not going to look as good in a backtest done during a great long bull market for bonds, when yields were falling, decade after decade. But being okay in most situations is very useful, and it can be better than the alternatives.

Holding long-term treasuries with longer duration provides more duration risk, so the portfolio will go up more (or go down less) with falling rates and go down more (or go up less) with rising rates. If it's an extremely concentrated position, this can be an issue if rates are going up over the time period invested. If someone doesn't want to bet against that scenario in the hopes of doing better if it doesn't materialize, they can hedge against rising rates by not holding such a large position in long-term treasuries. If they don't worry about that scenario, that's okay too.
Last edited by MoneyMarathon on Wed Jul 17, 2019 12:27 am, edited 1 time in total.
MotoTrojan
Posts: 10788
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan »

MoneyMarathon wrote: Tue Jul 16, 2019 11:59 pm
MotoTrojan wrote: Tue Jul 16, 2019 10:57 pm
MoneyMarathon wrote: Tue Jul 16, 2019 10:22 pm
MotoTrojan wrote: Tue Jul 16, 2019 9:00 pmI am wondering how much of the boost of the 30% (or greater) IEF cases actually comes from the correlation differences of the 7-10 year movements, and how much is simply a reduction in effective duration on the bond side
Look at the annual returns for IEF against the other ones. It's still very correlated. It moves much less. This is the #1 difference.

IEF sometimes ends years up when TMF is down because it doesn't have the expenses or volatility decay. But mostly it just moves less.
So that would agree with my point? There is nothing really special about holding IEF and it would actually be better to hold a larger allocation of EDV and a small amount of TMF, reducing your overall exposure to 3x funds and their costs.
Sometimes return of capital is more important than return on capital. That's the only sorta-special thing. Consistent return of liquid capital for the purposes of the next round of rebalancing. Relatively small duration risk, no credit risk, & the US pays you to hold it. Lower duration risk was more important than lower costs for coming out with real returns in the rising rates period of the 1970s.

In 1972, SPY up 18%, IEF would return 3.3%, EDV would return -13.34%, and TMF would return -18.68%.
In that year, 40% UPRO / 60% IEF would go up 21.17%, but 40% UPRO / 60% EDV would go up only 11.18%.

In 1973, SPY down -14.77%, IEF would return 3.51%, EDV would return -11.23%, and TMF would return -15.41%.
In that year, 40% UPRO / 60% IEF would go down -18.97%, but 40% UPRO / 60% EDV would go down -27.81%.

In 1974, SPY down -26.54%, IEF would return 7.07%, EDV would return -1.12%, and TMF would return -8.98%.
In that year, 40% UPRO / 60% IEF would go down -24.83%, but 40% UPRO / 60% EDV would go down -29.75%.

In those three years, 40% UPRO / 60% IEF would be down -9.63% but 40% UPRO / 60% EDV would be down -17.38%.

From 1955-1981, the difference is between 4.37% CAGR for 40% UPRO / 60% EDV and 9.08% CAGR for 40% UPRO / 60% IEF. A difference of having a 10x return (with IEF) instead of a 3x return (with EDV).

For comparison, 2007-2009 were some of the best years for rebalancing from long-duration treasuries into the S&P 500, especially if timed in Jan 2009. Yet they both performed their function of bonds being for safety, when the timing and correlation was great for LTT. In those three years, 40% UPRO / 60% EDV returned 5.1% over three years while 40% UPRO / 60% IEF returned -4.9% over three years. (In those years, the annual spreadsheet says UPRO would have lost 79% of its value if not rebalanced.)

It's intermediate duration. Its yield is often more than the loss from duration risk. It participates in the upside from duration risk, though not hugely. IEF is just okay. It won't make a lot of money when rates are falling (although it will do okay then too), so it's not going to look as good in a backtest done during a great long bull market for bonds, when yields were falling, decade after decade. But being okay in most situations is very useful, and it can be better than the alternatives.

Holding long-term treasuries with longer duration provides more duration risk, so the portfolio will go up more (or go down less) with falling rates and go down more (or go up less) with rising rates. If it's an extremely concentrated position, this can be an issue if rates are going up over the time period invested. If someone doesn't want to bet against that scenario in the hopes of doing better if it doesn't materialize, they can hedge against rising rates by not holding an such a large position in long-term treasuries. If they don't worry about that scenario, that's okay too.
You seem to be ignoring my point but otherwise your post makes sense.
MoneyMarathon
Posts: 992
Joined: Sun Sep 30, 2012 3:38 am

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

Post by MoneyMarathon »

MotoTrojan wrote: Wed Jul 17, 2019 12:24 am
MoneyMarathon wrote: Tue Jul 16, 2019 11:59 pm
MotoTrojan wrote: Wed Jul 17, 2019 12:24 amThere is nothing really special about holding IEF and it would actually be better to hold a larger allocation of EDV and a small amount of TMF, reducing your overall exposure to 3x funds and their costs.
From 1955-1981, the difference is between 4.37% CAGR for 40% UPRO / 60% EDV and 9.08% CAGR for 40% UPRO / 60% IEF. A difference of having a 10x return (with IEF) instead of a 3x return (with EDV).
You seem to be ignoring my point but otherwise your post makes sense.
I thought the example was relevant to the statements that there is "nothing really special about holding IEF" (intermediate term) and "it would actually be better to hold a larger allocation of EDV and a small amount of TMF." The example uses 60% EDV and 60% IEF (no leveraged bonds) so the costs should be roughly equal and neither should participate in the leveraged ETF issues.

The example shows how a 60% bond allocation in EDV can do worse than a 60% position in IEF. One of the portfolios beat the S&P 500 and had a 9.08% CAGR. The other one, with 60% EDV, had a negative real return over that time period. Having a 60% position in EDV is taking on a lot of duration risk.

It could make sense just to hold a smaller position in EDV or TMF and make room for other things in the portfolio besides treasuries.
MotoTrojan wrote: Wed Jul 17, 2019 12:24 amFor example here is a comparison of 50/50 TMF & IEF with 12% TMF and 88% VEDTX (EDV Mutual Fund). Essentially the same overall performance, marginally improved efficiency in the variant that holds only a fraction of the TMF and I would imagine that shows itself even more over a longer time-span.
That point makes a lot of sense. TMF is expensive. If your desired bond duration risk exposure can be reached with EDV/TMF, then that would be more cost effective than mixing (more) TMF with an intermediate term treasury ETF.
jminv
Posts: 1076
Joined: Tue Jan 02, 2018 10:58 pm

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

Post by jminv »

This thread was the subject of a post at r/wallstreetbets a few hours ago - wait for the fun to begin.

https://www.reddit.com/r/wallstreetbets ... _and_hold/
EfficientInvestor
Posts: 394
Joined: Thu Nov 01, 2018 7:02 pm
Location: Alabama

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

Post by EfficientInvestor »

jminv wrote: Wed Jul 17, 2019 6:11 am This thread was the subject of a post at r/wallstreetbets a few hours ago - wait for the fun to begin.

https://www.reddit.com/r/wallstreetbets ... _and_hold/
I haven't read anything on that thread before. That seems to be a colorful group. I don't think the poster completely understands how the leveraged ETFs work based on how he tried to explain it, but hopefully the other readers will find their way to this thread and get more educated. Despite the shade the poster threw at our thread, it was still at least worth the read due to the entertainment value.
MotoTrojan
Posts: 10788
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan »

EfficientInvestor wrote: Wed Jul 17, 2019 7:01 am
jminv wrote: Wed Jul 17, 2019 6:11 am This thread was the subject of a post at r/wallstreetbets a few hours ago - wait for the fun to begin.

https://www.reddit.com/r/wallstreetbets ... _and_hold/
I haven't read anything on that thread before. That seems to be a colorful group. I don't think the poster completely understands how the leveraged ETFs work based on how he tried to explain it, but hopefully the other readers will find their way to this thread and get more educated. Despite the shade the poster threw at our thread, it was still at least worth the read due to the entertainment value.
Colorful puts it lightly! They usually dabble in high-risk options strategies and then call each other profanities while sharing Robinhood screengrabs of huge gains and losses. A few Bogleheads were called out, some with more colorful language than others, but I would not take anything personally.

Interesting group for sure. One has already jumped in with 70% UPRO & 30% TMF. Another wants to go 50/50 but with cash instead of bonds :D .
MotoTrojan
Posts: 10788
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan »

Just discovered saved benchmarks in PV, whichs makes it a lot easier to compare conventional portfolios with market timing strategies.

Portfolio 1: 50/50 VEDTX (EDV) & TMF as combined bond component, rebalanced monthly for risk-parity w/ UPRO (20 day look-back)
Portfolio 2: TMF & UPRO rebalanced monthly for risk-parity
Portfolio 3: Original 40/60 UPRO/TMF quarterly rebalance
S&P500

The TMF/UPRO risk-parity is a significant boost in returns, but you can still get a significant leg-up on the original strategy with significantly less risk/drawdown via the risk-parity variant dosed with EDV. Shown here are the above 4 portfolios from January 2008 to January 2019:

Image

Here is the original strategy compared to the 1-month lookback risk-parity with TMF/UPRO from 1987 to 2019:

Image
MoneyMarathon
Posts: 992
Joined: Sun Sep 30, 2012 3:38 am

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

Post by MoneyMarathon »

HEDGEFUNDIE wrote: Sun Jul 14, 2019 10:00 pm If I wanted more modest leverage I would probably just buy PSLDX and let the professionals handle everything.
Decided to take a look to see if this could be worth doing.

PSLDX, PSPAX, and other PIMCO funds trailed a simple 50% SSO (2x SP500) / 50% TLT with only 50% leverage. Both these funds have history going through the 2008 crisis. Apparently, not enough treasuries. They fail to close the gap post-2011 too. During the post-2008 bull market the anti-correlation between SPY and TLT has indeed been remarkably tight, with great benefits from rebalancing into SPY outweighing (presumably) slightly higher yield from the bond side when using corporate bonds.
schismal
Posts: 203
Joined: Sat Apr 13, 2019 8:53 pm

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

Post by schismal »

A few people have mentioned trying this strategy in a taxable account, but that discussion seems to have ended. Any thoughts re: the trade-off of holding LTTs in a taxable account if your marginal rate is, say, 35%?
Topic Author
HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

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

Post by HEDGEFUNDIE »

MoneyMarathon wrote: Thu Jul 18, 2019 4:43 am
HEDGEFUNDIE wrote: Sun Jul 14, 2019 10:00 pm If I wanted more modest leverage I would probably just buy PSLDX and let the professionals handle everything.
Decided to take a look to see if this could be worth doing.

PSLDX, PSPAX, and other PIMCO funds trailed a simple 50% SSO (2x SP500) / 50% TLT with only 50% leverage. Both these funds have history going through the 2008 crisis. Apparently, not enough treasuries. They fail to close the gap post-2011 too. During the post-2008 bull market the anti-correlation between SPY and TLT has indeed been remarkably tight, with great benefits from rebalancing into SPY outweighing (presumably) slightly higher yield from the bond side when using corporate bonds.
Not sure where you are getting your data:

https://www.portfoliovisualizer.com/bac ... 0&total3=0

PSLDX isn’t trailing here
PluckyDucky
Posts: 280
Joined: Tue Jan 15, 2019 8:29 pm

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

Post by PluckyDucky »

schismal wrote: Thu Jul 18, 2019 5:13 am A few people have mentioned trying this strategy in a taxable account, but that discussion seems to have ended. Any thoughts re: the trade-off of holding LTTs in a taxable account if your marginal rate is, say, 35%?
I'm doing it in taxable because my 401k/iras are maxed and I need to have money to retire before I'm 60. If it goes kaput, I guess I'll work until I'm 60.
MotoTrojan
Posts: 10788
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan »

PluckyDucky wrote: Thu Jul 18, 2019 10:51 am
schismal wrote: Thu Jul 18, 2019 5:13 am A few people have mentioned trying this strategy in a taxable account, but that discussion seems to have ended. Any thoughts re: the trade-off of holding LTTs in a taxable account if your marginal rate is, say, 35%?
I'm doing it in taxable because my 401k/iras are maxed and I need to have money to retire before I'm 60. If it goes kaput, I guess I'll work until I'm 60.
What’s your rebalancing frequency?
rascott
Posts: 2450
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott »

HEDGEFUNDIE wrote: Thu Jul 18, 2019 8:35 am
MoneyMarathon wrote: Thu Jul 18, 2019 4:43 am
HEDGEFUNDIE wrote: Sun Jul 14, 2019 10:00 pm If I wanted more modest leverage I would probably just buy PSLDX and let the professionals handle everything.
Decided to take a look to see if this could be worth doing.

PSLDX, PSPAX, and other PIMCO funds trailed a simple 50% SSO (2x SP500) / 50% TLT with only 50% leverage. Both these funds have history going through the 2008 crisis. Apparently, not enough treasuries. They fail to close the gap post-2011 too. During the post-2008 bull market the anti-correlation between SPY and TLT has indeed been remarkably tight, with great benefits from rebalancing into SPY outweighing (presumably) slightly higher yield from the bond side when using corporate bonds.
Not sure where you are getting your data:

https://www.portfoliovisualizer.com/bac ... 0&total3=0

PSLDX isn’t trailing here

What's the deal with this fund? Can individuals buy? Is it $100k minimum?
PluckyDucky
Posts: 280
Joined: Tue Jan 15, 2019 8:29 pm

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

Post by PluckyDucky »

MotoTrojan wrote: Thu Jul 18, 2019 11:02 am
PluckyDucky wrote: Thu Jul 18, 2019 10:51 am
schismal wrote: Thu Jul 18, 2019 5:13 am A few people have mentioned trying this strategy in a taxable account, but that discussion seems to have ended. Any thoughts re: the trade-off of holding LTTs in a taxable account if your marginal rate is, say, 35%?
I'm doing it in taxable because my 401k/iras are maxed and I need to have money to retire before I'm 60. If it goes kaput, I guess I'll work until I'm 60.
What’s your rebalancing frequency?
Right now, technically 0 because my monthly contributions still get it back to balanced each month. Once that stops working, I will either increase contributions or start manually rebalancing quarterly.
EfficientInvestor
Posts: 394
Joined: Thu Nov 01, 2018 7:02 pm
Location: Alabama

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

Post by EfficientInvestor »

Kbg wrote: Sun Jul 14, 2019 10:20 pm
EfficientInvestor wrote: Sun Jul 14, 2019 2:58 pm
Kbg wrote: Sat Jul 13, 2019 8:25 pm Futures: To the person who posted earlier...please do the math. Futures (I’ve used them for years) are great but they are unforgiving, very unforgiving. A quick eyeball suggested to me you are quite undercapitalized. Read your futures agreement closely, depending on the firm you could lose your entire margin balance and get a bill for more depending on how and when you were liquidated. Do not forget futures are marked to market continuously the entire time they are active - Sunday evening until Friday afternoon and there can be huge overnight moves due to lack of liquidity combined with major news. Without sufficient cash you could easily wake up in the morning with zero in your account. However, you will be able to pull up an overnight chart and see the precise moment you were liquidated. It will be doubly painful as by the morning you probably would have been fine.
I assume you may have been referring to me with this comment. I currently have $32k invested in futures. My approximate notional exposures are $30k S&P 500 (/MES), $214k 2-year treasuries (/ZT), and $14k gold (/MGC). I have about $3k tied up in margin, $3k in liquid cash, and $26k in a ultra-short treasury ETF (MINT). My thought is I should always keep about 1X initial margin in cash and then sell some of the MINT etf if I need more cushion or if I get a margin call. Would you recommend something different? Any rules of thumb for how much buying power to maintain? Even if the notional value of my stock position dropped 10% in a single day, the $3k I have in cash could cover that. Maybe I should have an amount of cash equal to a 20% single-day drop? Or maybe I should talk to my broker, TastyWorks, and get a better understanding of what their protocol is in the event of a margin call. If I can get them to confirm that they will just sell some of my MINT etf to cover margin, then it's not a big issue.
Why yes I was. :-) Good to see the 26K in MINT, I must have missed that. What TW may or may not do with MINT in a bummer situation is probably worth a phone call to them. Use the scenario I provided and see what they have to say. Any good firms worth having your money at are NOT going to mess around with futures risk as they have to make good on it if their customer(s) do not. And as mentioned, it is not day time risk you really need to be concerned about it's the risk that could happen while you are sleeping. During a day time unfortunate event a margin reserves level will be hit and they will just start selling your stuff off to maintain the level and your MINT will be liquid and can be sold. No idea on MINT, but most ETFs do not trade O/N and if they do the market probably sucks. With TW you may be fine and they will give you some credit for the MINT holding, but you need to know the details. At the end of the day your cash stash is not what is driving the returns in this strategy, accordingly you should posture to make sure you are not going to have a sudden terminal cash flow problem. This is actually a small advantage for using 3x ETFs (O/N risk is not on you).
I received feedback from TastyWorks about margin call situations. My questions and their answers are below. In summary, it sounds like their isn't too much risk of getting closed out as long as I keep plenty of funds in MINT and sell shares during the next trading day to resupply the margin.

1. Q: In the event of a margin call, will I always have a full trading day (T+1) to meet the margin call? Or does TastyWorks have the right to close me out of contracts prior to 24 hours after the margin call is issued?
A: We will typically give our customers ample time to resolve any Margin Call that is generated in an account. The risk department will not take action to liquidate positions, without first providing you past due notifications.

2. Q: In the event that I don't answer the margin call appropriately, will TastyWorks always just close out my futures positions? Or can I make a request that they close out enough shares of MINT (which will have substantial funds) in order to cover the margin call?
A: The risk department will take all precaution to choose the least invasive actions, in a customer's account, however the decision to close specific positions are subjective. If you have a preference, and choose not to deposit funds to meet Margin Calls, you can simply liquidate the desired positions yourself.
MoneyMarathon
Posts: 992
Joined: Sun Sep 30, 2012 3:38 am

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

Post by MoneyMarathon »

HEDGEFUNDIE wrote: Thu Jul 18, 2019 8:35 am
MoneyMarathon wrote: Thu Jul 18, 2019 4:43 am
HEDGEFUNDIE wrote: Sun Jul 14, 2019 10:00 pm If I wanted more modest leverage I would probably just buy PSLDX and let the professionals handle everything.
Decided to take a look to see if this could be worth doing.

PSLDX, PSPAX, and other PIMCO funds trailed a simple 50% SSO (2x SP500) / 50% TLT with only 50% leverage. Both these funds have history going through the 2008 crisis. Apparently, not enough treasuries. They fail to close the gap post-2011 too. During the post-2008 bull market the anti-correlation between SPY and TLT has indeed been remarkably tight, with great benefits from rebalancing into SPY outweighing (presumably) slightly higher yield from the bond side when using corporate bonds.
Not sure where you are getting your data:
That was for PSPAX. From Portfolio Visualizer.

50% SSO / 50% UBT (both 2x) was very close (slightly over) compared to PSLDX.
HEDGEFUNDIE wrote: Thu Jul 18, 2019 8:35 am PSLDX isn’t trailing here
Is this accessible to a retail investor with $50,000 to put in?
Topic Author
HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

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

Post by HEDGEFUNDIE »

MoneyMarathon wrote: Thu Jul 18, 2019 12:49 pm
HEDGEFUNDIE wrote: Thu Jul 18, 2019 8:35 am PSLDX isn’t trailing here
Is this accessible to a retail investor with $50,000 to put in?
Absolutely:

Image
MoneyMarathon
Posts: 992
Joined: Sun Sep 30, 2012 3:38 am

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

Post by MoneyMarathon »

HEDGEFUNDIE wrote: Thu Jul 18, 2019 1:25 pm Absolutely:
Thanks! I appreciate it. And thanks for the great discussion in this thread.

I just checked Vanguard and they also let you buy it, with a $25,000 minimum. :)
columbia
Posts: 3023
Joined: Tue Aug 27, 2013 5:30 am

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

Post by columbia »

MoneyMarathon wrote: Thu Jul 18, 2019 1:53 pm
HEDGEFUNDIE wrote: Thu Jul 18, 2019 1:25 pm Absolutely:
Thanks! I appreciate it. And thanks for the great discussion in this thread.

I just checked Vanguard and they also let you buy it, with a $25,000 minimum. :)
And the fee is $20/transaction, for those interested.
rascott
Posts: 2450
Joined: Wed Apr 15, 2015 10:53 am

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

Post by rascott »

HEDGEFUNDIE wrote: Thu Jul 18, 2019 1:25 pm
MoneyMarathon wrote: Thu Jul 18, 2019 12:49 pm
HEDGEFUNDIE wrote: Thu Jul 18, 2019 8:35 am PSLDX isn’t trailing here
Is this accessible to a retail investor with $50,000 to put in?
Absolutely:

Image


Merrill Edge shows it closed for initial purchases for me. Also only shows $1k min invest.


Edit: Checked TDA....they list it as a $1m minimum..... BUT a $0 minimum within an IRA. $49.99 TDA fee to buy, of course.

Why is there such variation...and why does ME list it as closed to initial investments?
MoneyMarathon
Posts: 992
Joined: Sun Sep 30, 2012 3:38 am

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

Post by MoneyMarathon »

rascott wrote: Thu Jul 18, 2019 2:19 pm Merrill Edge shows it closed for initial purchases for me. Also only shows $1k min invest.

Edit: Checked TDA....they list it as a $1m minimum..... BUT a $0 minimum within an IRA. $49.99 TDA fee to buy, of course.

Why is there such variation...and why does ME list it as closed to initial investments?
I think it's because of this line in the prospectus: "The minimum initial investment for Institutional Class and I-2 shares of the Fund is $1 million, except that the minimum initial investment may be modified for certain financial firms that submit orders on behalf of their customers." So, I suppose Vanguard has negotiated a better deal and/or passed on more of their savings.
MoneyMarathon
Posts: 992
Joined: Sun Sep 30, 2012 3:38 am

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

Post by MoneyMarathon »

Here's the prospectus:

https://www.pimco.com/handlers/displayd ... BrQp1k4%3D

Here's a white paper from PIMCO:

https://www.pimco.com/en-us/insights/in ... fficiency/

Here's a key line: "PIMCO actively manages the Fixed Income Instruments held by the Fund with a view toward enhancing the Fund’s total return, subject to an overall portfolio duration which normally varies within two years (plus or minus) of the portfolio duration of the securities comprising the Bloomberg Barclays Long-Term Government/Credit Index, as calculated by PIMCO, which as of May 31, 2018 was 14.57 years."

The equity side is passive. I'm more comfortable with active management of bonds since they suffer less from the needle/haystack problem of excluding the stocks with the biggest gains, since bonds can't really deliver much more than they promise, just duration exposure and credit risk. I also think the duration risk on the bond side is reasonable and they do seem to have enough in treasuries. They had a reasonable 2008 drawdown (-50% and pretty much matching the S&P 500 index).

I agree with HEDGEFUNDIE and think I will use this for roughly 2x leverage. If it loses a couple basis points, against something I could have done manually, at least they pushed the buttons for me.
butricksaid
Posts: 32
Joined: Fri Nov 03, 2017 11:24 pm

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

Post by butricksaid »

HEDGEFUNDIE, I had 2 questions.

1) So would it make more sense for a retail investor with several hundreds of thousands to invest through PSLDX or use M1Finance or some monthly rebalancing feature and setup a 40% UPRO / 60% TMF portfolio?

2) I have never dealt with mutual funds before but the way you described PSLDX seems very inconsistent with the graph that Google describes about it's historical performance. What am I missing here?

Image

However MorningStar does indicate in it's $10,000 lump sum investment at the beginning would yield over $50k today which is more inline with the level of success you have described.

Image

Thanks
MotoTrojan
Posts: 10788
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan »

MoneyMarathon wrote: Thu Jul 18, 2019 3:27 pm Here's the prospectus:

https://www.pimco.com/handlers/displayd ... BrQp1k4%3D

Here's a white paper from PIMCO:

https://www.pimco.com/en-us/insights/in ... fficiency/

Here's a key line: "PIMCO actively manages the Fixed Income Instruments held by the Fund with a view toward enhancing the Fund’s total return, subject to an overall portfolio duration which normally varies within two years (plus or minus) of the portfolio duration of the securities comprising the Bloomberg Barclays Long-Term Government/Credit Index, as calculated by PIMCO, which as of May 31, 2018 was 14.57 years."

The equity side is passive. I'm more comfortable with active management of bonds since they suffer less from the needle/haystack problem of excluding the stocks with the biggest gains, since bonds can't really deliver much more than they promise, just duration exposure and credit risk. I also think the duration risk on the bond side is reasonable and they do seem to have enough in treasuries. They had a reasonable 2008 drawdown (-50% and pretty much matching the S&P 500 index).

I agree with HEDGEFUNDIE and think I will use this for roughly 2x leverage. If it loses a couple basis points, against something I could have done manually, at least they pushed the buttons for me.
Best of luck, interesting fund indeed. Seems to be too correlated to US equities for my tastes, but it definitely did boost returns/efficiency compared to S&P500; what is the exact leverage/exposure breakdown for equities/bonds?

Some stats from January 2008 to Jan 2019:
PSLDX - 13.6% return, 18.1% Stdev, -49.7% drawdown, 0.86 correlation
1-month look-back parity UPRO/TMF - 23.1% return, 24.6% Stdev, -39.9% drawdown, 0.48 correlation
1-month look-back parity UPRO/(TMF/EDV 50/50) - 19.5% return, 19.9% Stdev, -32.2% drawdown, 0.48 correlation
Original 40/60 UPRO/TMF quarterly balance - 18.1% return, 25.3% Stdev, -47.8% drawdown, 0.45 correlation

Historically you could get hundreds of bp more and had less risk with something you did yourself, so not sure about that comment.
Last edited by MotoTrojan on Thu Jul 18, 2019 3:59 pm, edited 1 time in total.
MotoTrojan
Posts: 10788
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan »

butricksaid wrote: Thu Jul 18, 2019 3:40 pm HEDGEFUNDIE, I had 2 questions.

1) So would it make more sense for a retail investor with several hundreds of thousands to invest through PSLDX or use M1Finance or some monthly rebalancing feature and setup a 40% UPRO / 60% TMF portfolio?

2) I have never dealt with mutual funds before but the way you described PSLDX seems very inconsistent with the graph that Google describes about it's historical performance. What am I missing here?


However MorningStar does indicate in it's $10,000 lump sum investment at the beginning would yield over $50k today which is more inline with the level of success you have described.


Thanks
The risk profile of this fund is vastly different than the 40/60 UPRO/TMF portfolio so that is not a 1-1 comparison.

Looks like it has a massive yield so the gains must be returned in that form and reinvested, netting you the growth shown via MorningStar. Perhaps not a very tax-efficient fund but would work fine in an IRA.
columbia
Posts: 3023
Joined: Tue Aug 27, 2013 5:30 am

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

Post by columbia »

That fund would be a disaster in a taxable account. :D

In fact, when I looked earlier, Vanguard won’t sell it to you in one.
MotoTrojan
Posts: 10788
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan »

columbia wrote: Thu Jul 18, 2019 4:02 pm That fund would be a disaster in a taxable account. :D

In fact, when I looked earlier, Vanguard won’t sell it to you in one.
Interesting that they protect you from that, very cool.
MoneyMarathon
Posts: 992
Joined: Sun Sep 30, 2012 3:38 am

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

Post by MoneyMarathon »

MotoTrojan wrote: Thu Jul 18, 2019 3:54 pmSeems to be too correlated to US equities for my tastes, but it definitely did boost returns/efficiency compared to S&P500
I'm currently 90-100% in equities in my Roth IRA, so I think I'm willing to have the correlation to US equities. It's a traditional equity-heavy risk profile (not risk parity), but I tend to anchor performance to equity returns and delta +/- from them anyway.

I am willing to increase my allocation to international inside of my non-Roth accounts to compensate.

I'm considering another, smaller allocation in Roth at M1 to a risk-parity style 40% UPRO / 40% TMF / 10% UGLD / 10% BIV. When I saw that BIV lowered drawdowns and had higher returns in some decades, I figured it would make sense to swap that in for the 1x gold ETF.
Historically you could get hundreds of bp more and had less risk with something you did yourself, so not sure about that comment.
Depends on the historical time period. There will be more periods of outperformance for 40% UPRO / 60% TMF in 1987-2018, a great time to hold a lot of duration exposure, but their risk profiles are very different, and they will underperform/outperform each other going forward depending on what the conditions are in the future.

For example, the majority of 4-year time periods since the 1980s show outperformance for 40% UPRO / 60% TMF, but it isn't always so. From 2015-2018, inclusive, for example, there was a slight advantage in CAGR in favor of the PIMCO fund ... with lower standard deviation (14% instead of 22%), lower max drawdown (-14% instead of -23%). It also had higher correlation with the market, while the UPRO/TMF pair had its non-correlation to the market driven by changes in LTT yield.

I'm not comfortable with having such high duration exposure. But, yes it would be much better to go with the 60% TMF if the thesis about solved inflation & only slow yield increase (generally when markets are doing well) is true.
Last edited by MoneyMarathon on Thu Jul 18, 2019 4:23 pm, edited 1 time in total.
MotoTrojan
Posts: 10788
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan »

MoneyMarathon wrote: Thu Jul 18, 2019 4:08 pm
MotoTrojan wrote: Thu Jul 18, 2019 3:54 pmSeems to be too correlated to US equities for my tastes, but it definitely did boost returns/efficiency compared to S&P500
I'm currently 90-100% in equities in my Roth IRA, so I think I'm willing to have the correlation to US equities. It's a traditional equity-heavy risk profile (not risk parity), but I tend to anchor performance to equity returns and delta +/- from them anyway.

I am willing to increase my allocation to international inside of my non-Roth accounts to compensate.

I'm considering another, smaller allocation in Roth at M1 to a risk-parity style 40% UPRO / 40% TMF / 10% UGLD / 10% BIV. When I saw that BIV lowered drawdowns and had higher returns in some decades, I figured it would make sense to swap that in for the 1x gold ETF.
If you already have a lot of US exposure I’m not sure I understand why it’s a good thing that the correlation is high here. Still seems like a prudent plan. I’m also 100% equity outside of this, with a small-value tilt and some International.
MoneyMarathon
Posts: 992
Joined: Sun Sep 30, 2012 3:38 am

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

Post by MoneyMarathon »

MotoTrojan wrote: Thu Jul 18, 2019 4:22 pm
MoneyMarathon wrote: Thu Jul 18, 2019 4:08 pm
MotoTrojan wrote: Thu Jul 18, 2019 3:54 pmSeems to be too correlated to US equities for my tastes, but it definitely did boost returns/efficiency compared to S&P500
I'm currently 90-100% in equities in my Roth IRA, so I think I'm willing to have the correlation to US equities. It's a traditional equity-heavy risk profile (not risk parity), but I tend to anchor performance to equity returns and delta +/- from them anyway.

I am willing to increase my allocation to international inside of my non-Roth accounts to compensate.

I'm considering another, smaller allocation in Roth at M1 to a risk-parity style 40% UPRO / 40% TMF / 10% UGLD / 10% BIV. When I saw that BIV lowered drawdowns and had higher returns in some decades, I figured it would make sense to swap that in for the 1x gold ETF.
If you already have a lot of US exposure I’m not sure I understand why it’s a good thing that the correlation is high here. Still seems like a prudent plan. I’m also 100% equity outside of this, with a small-value tilt and some International.
I'm comfortable with the risks of US market exposure already, so it fits my overall level of willingness, ability, & need to take on risk. I'm able to keep my international equity balance by shifting more into international equity in my other space (pre-tax and taxable).
MotoTrojan
Posts: 10788
Joined: Wed Feb 01, 2017 8:39 pm

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

Post by MotoTrojan »

MoneyMarathon wrote: Thu Jul 18, 2019 4:25 pm
MotoTrojan wrote: Thu Jul 18, 2019 4:22 pm
MoneyMarathon wrote: Thu Jul 18, 2019 4:08 pm
MotoTrojan wrote: Thu Jul 18, 2019 3:54 pmSeems to be too correlated to US equities for my tastes, but it definitely did boost returns/efficiency compared to S&P500
I'm currently 90-100% in equities in my Roth IRA, so I think I'm willing to have the correlation to US equities. It's a traditional equity-heavy risk profile (not risk parity), but I tend to anchor performance to equity returns and delta +/- from them anyway.

I am willing to increase my allocation to international inside of my non-Roth accounts to compensate.

I'm considering another, smaller allocation in Roth at M1 to a risk-parity style 40% UPRO / 40% TMF / 10% UGLD / 10% BIV. When I saw that BIV lowered drawdowns and had higher returns in some decades, I figured it would make sense to swap that in for the 1x gold ETF.
If you already have a lot of US exposure I’m not sure I understand why it’s a good thing that the correlation is high here. Still seems like a prudent plan. I’m also 100% equity outside of this, with a small-value tilt and some International.
I'm comfortable with the risks of US market exposure already, so it fits my overall level of willingness, ability, & need to take on risk. I'm able to keep my international equity balance by shifting more into international equity in my other space (pre-tax and taxable).
Understood. This entire thread relies on the efficiency boost of uncorrelated assets hence why I find it ironic you’re spinning it as a positive. Your plan sounds great though so let’r rip.
Locked