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.
Topic Author
HEDGEFUNDIE
Posts: 3268
Joined: Sun Oct 22, 2017 2:06 pm

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

Post by HEDGEFUNDIE » Sun Aug 11, 2019 9:30 pm

I went back and looked at the performance of the strategy the last time long rates were this low (2.25%).

Here are the three previous occasions the 30 year yield approached these levels:

Jul 2012: 2.47%
Feb 2015: 2.25%
Jul 2016: 2.11%

On each of these occasions the rate bounced back up slightly, only to fall again.

Here are the CAGRs one would have experienced with each of the above dates as the start point, end of July 2019 as the end point, and at three different AAs of UPRO/TMF:

Jul 2012
40/60: 19.4%
50/50: 22.9%
60/40: 26.1%
S&P 500: 13.9%

Feb 2015
40/60: 12.3%
50/50: 15.4%
60/40: 18.2%
S&P 500: 11.5%

Jul 2016
40/60: 14.5%
50/50: 18.6%
60/40: 22.5%
S&P 500: 14.2%

[continued...]
Last edited by HEDGEFUNDIE on Mon Aug 12, 2019 11:11 pm, edited 1 time in total.

MoneyMarathon
Posts: 556
Joined: Sun Sep 30, 2012 3:38 am

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

Post by MoneyMarathon » Sun Aug 11, 2019 9:37 pm

privatefarmer wrote:
Sun Aug 11, 2019 9:15 pm
I don’t know nothin’, but to assume that this strategy can’t keep working going forward just bc yields are “low” (even though they’re actually higher than much of the rest of the developed world) seems flawed.
I'm not sure anyone said that (without going back lots of pages to when people who didn't understand the strategy were commenting). Lots of things can work. If yields keep marching to zero and going lower (without stocks taking a giant dump at the same time), it will 'work'. I think we can all agree on that, since it's just math that you will get the price return from the long term bonds if the yields go lower. So, yes, if you have conviction that yields are going lower, this is a position that will reward you plenty if the conviction is correct, for as long as it's correct.

Non-investors don't have to assume something can't work, because there's a thousand things that might or might not work, ex ante -- you can go out and leverage a position on individual stocks, commodities, currencies, and all kinds of things. I don't just buy a lot of bitcoin because I can't prove that it won't go up. If I put a large position in bitcoin, it might be strange if my whole reasoning was cuz I don't know nothin' but, hey, it could go up. Then again, people do make bets like that all the time. So I guess it's nothing too dangerous if people see that it's a little speculative and don't bet the farm (something the OP also recommends, not to risk any money you can't afford to lose).

Topic Author
HEDGEFUNDIE
Posts: 3268
Joined: Sun Oct 22, 2017 2:06 pm

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

Post by HEDGEFUNDIE » Sun Aug 11, 2019 9:37 pm

If you are embarking on this strategy, you are basically betting that the S&P 500 will continue to be a significant driver of returns going forward. This is why you are levering up the index by 3x, and why the benchmark of the strategy is the S&P 500.

The inclusion of long Treasuries has always primarily been for stock crash insurance. The biggest risk of that insurance is a long term rise in long rates, but I have explained here and elsewhere why I do not consider this risk to be material, in the US, at this juncture.

So all that remains to be decided is how much gas we should throw on the fire (UPRO), and how much insurance we should take out (TMF).

When long interest rates are at 2% as they are now, the insurance tends to be rather costly, not because rates are more likely to rise from here - they are not. But rather because while we wait for the insurance to eventually pay out, its inclusion crowds out UPRO that could be generating serious returns.

[continued...]
Last edited by HEDGEFUNDIE on Mon Aug 12, 2019 11:12 pm, edited 3 times in total.

User avatar
LadyGeek
Site Admin
Posts: 56330
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

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

Post by LadyGeek » Wed Aug 14, 2019 2:32 pm

On August 12, 2019, HEDGEFUNDIE's announced a a change in strategy. The discussion continues here:

HEDGEFUNDIE's excellent adventure Part II: The next journey

(Thread locked.)
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Locked