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

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

Post by MotoTrojan » Mon Feb 18, 2019 1:06 pm

M1 uses the same Apex holding company as Robinhood and others so that reduces some risk.

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

Post by PluckyDucky » Mon Feb 18, 2019 1:08 pm

MotoTrojan wrote:
Mon Feb 18, 2019 1:06 pm
M1 uses the same Apex holding company as Robinhood and others so that reduces some risk.
Robinhood stopped using Apex in 2018 and moved to their own in-house clearing company.

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

Post by MotoTrojan » Mon Feb 18, 2019 1:09 pm

PluckyDucky wrote:
Mon Feb 18, 2019 10:38 am
MotoTrojan wrote:
Mon Feb 18, 2019 10:16 am
...
Thanks. Also looking at adding some developed international but struggling to find a good fund that’s been around long enough. DZK would be the actual leveraged varient.

Now thinking I’ll roll $15K of Roth into 60/20/10/10 TMF/UPRO/TQQQ/DZK.
Attempting to over-optimize could be a fruitless endeavor.

I understand using SPXL + UPRO to try to split up the fund closure or counterparty risk.

I'm keeping mine simple.
I don’t think adding international is without merit. QQQ may just be my desire to tinker but it’s not any harder to implement.

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

Post by MotoTrojan » Mon Feb 18, 2019 1:09 pm

PluckyDucky wrote:
Mon Feb 18, 2019 1:08 pm
MotoTrojan wrote:
Mon Feb 18, 2019 1:06 pm
M1 uses the same Apex holding company as Robinhood and others so that reduces some risk.
Robinhood stopped using Apex in 2018 and moved to their own in-house clearing company.
I thought this was the other way around. Thanks. Others still use Apex.

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

Post by AlphaLess » Mon Feb 18, 2019 1:41 pm

So, OP, is the entire strategy based on a few factors:
- that SP.500 will outperform short term interest rate (by more than the expense ratios, at least),
- that long term bond will outperform short term interest rate (by more than the expense ratios, at least),
- that 40 / 60 proportional allocation is optimal,
- that SP.500 / long bond correlation is going to stay low-ish (whatever that means).

In your back-test, have you considered the fact that owning double or triple leveraged products is equivalent to daily rebalancing, while you are only rebalancing monthly or quarterly?

Are you aware that leveraged products are long gamma, and as such, sequence of returns matters?
Last edited by AlphaLess on Mon Feb 18, 2019 1:47 pm, edited 1 time in total.
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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE » Mon Feb 18, 2019 1:46 pm

MotoTrojan wrote:
Mon Feb 18, 2019 1:09 pm
PluckyDucky wrote:
Mon Feb 18, 2019 1:08 pm
MotoTrojan wrote:
Mon Feb 18, 2019 1:06 pm
M1 uses the same Apex holding company as Robinhood and others so that reduces some risk.
Robinhood stopped using Apex in 2018 and moved to their own in-house clearing company.
I thought this was the other way around. Thanks. Others still use Apex.
Including Betterment, SoFi, and Ally.
Last edited by HEDGEFUNDIE on Tue Feb 19, 2019 1:50 am, edited 1 time in total.

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

Post by HEDGEFUNDIE » Mon Feb 18, 2019 3:24 pm

AlphaLess wrote:
Mon Feb 18, 2019 1:41 pm
So, OP, is the entire strategy based on a few factors:
- that SP.500 will outperform short term interest rate (by more than the expense ratios, at least),
- that long term bond will outperform short term interest rate (by more than the expense ratios, at least),
- that 40 / 60 proportional allocation is optimal,
- that SP.500 / long bond correlation is going to stay low-ish (whatever that means).
Yes to all.
Are you aware that leveraged products are long gamma, and as such, sequence of returns matters?
If the two assets remain uncorrelated, sequence of returns should not matter, or at least, no more than it would matter for an unleveraged portfolio.
Last edited by HEDGEFUNDIE on Fri Feb 22, 2019 11:51 am, edited 1 time in total.

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

Post by MotoTrojan » Mon Feb 18, 2019 3:34 pm

HEDGEFUNDIE wrote:
Tue Feb 05, 2019 2:56 pm


Ok, you’ve convinced me. Let me copy what you're doing.
This should go without saying, but I will say it. This is a risky investment. My backtesting shows strong performance vs. holding the S&P 500 by itself, but there is no guarantee this will continue. I am risking money that is a limited amount of my net worth, and if I lost it all, would not materially change the course of my retirement savings. Proceed at your own risk.
Quoting to get your attention but curious your rationale for not including International?

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

Post by HEDGEFUNDIE » Mon Feb 18, 2019 3:53 pm

MotoTrojan wrote:
Mon Feb 18, 2019 3:34 pm
HEDGEFUNDIE wrote:
Tue Feb 05, 2019 2:56 pm


Ok, you’ve convinced me. Let me copy what you're doing.
This should go without saying, but I will say it. This is a risky investment. My backtesting shows strong performance vs. holding the S&P 500 by itself, but there is no guarantee this will continue. I am risking money that is a limited amount of my net worth, and if I lost it all, would not materially change the course of my retirement savings. Proceed at your own risk.
Quoting to get your attention but curious your rationale for not including International?
viewtopic.php?f=10&t=272007&start=500#p4387614

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

Post by MotoTrojan » Mon Feb 18, 2019 4:04 pm

HEDGEFUNDIE wrote:
Mon Feb 18, 2019 3:53 pm
MotoTrojan wrote:
Mon Feb 18, 2019 3:34 pm
HEDGEFUNDIE wrote:
Tue Feb 05, 2019 2:56 pm


Ok, you’ve convinced me. Let me copy what you're doing.
This should go without saying, but I will say it. This is a risky investment. My backtesting shows strong performance vs. holding the S&P 500 by itself, but there is no guarantee this will continue. I am risking money that is a limited amount of my net worth, and if I lost it all, would not materially change the course of my retirement savings. Proceed at your own risk.
Quoting to get your attention but curious your rationale for not including International?
viewtopic.php?f=10&t=272007&start=500#p4387614
Thank you. I recalled seeing the part about EM and it's volatility but forgot you addressed DM. I suppose historically it hasn't helped but could hedge against a US-centric problem.

Still thinking I'll kick things off with my 60/20/10/10 TMF/UPRO, TQQQ, DZK arrangement, balanced quarterly. Thanks for the very thought provoking thread.

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

Post by HEDGEFUNDIE » Mon Feb 18, 2019 4:22 pm

MotoTrojan wrote:
Mon Feb 18, 2019 4:04 pm
HEDGEFUNDIE wrote:
Mon Feb 18, 2019 3:53 pm
MotoTrojan wrote:
Mon Feb 18, 2019 3:34 pm
HEDGEFUNDIE wrote:
Tue Feb 05, 2019 2:56 pm


Ok, you’ve convinced me. Let me copy what you're doing.
This should go without saying, but I will say it. This is a risky investment. My backtesting shows strong performance vs. holding the S&P 500 by itself, but there is no guarantee this will continue. I am risking money that is a limited amount of my net worth, and if I lost it all, would not materially change the course of my retirement savings. Proceed at your own risk.
Quoting to get your attention but curious your rationale for not including International?
viewtopic.php?f=10&t=272007&start=500#p4387614
Thank you. I recalled seeing the part about EM and it's volatility but forgot you addressed DM. I suppose historically it hasn't helped but could hedge against a US-centric problem.

Still thinking I'll kick things off with my 60/20/10/10 TMF/UPRO, TQQQ, DZK arrangement, balanced quarterly. Thanks for the very thought provoking thread.
Just a warning that QQQ has been more volatile than EM over the past 20 years. 24% annual volatility for QQQ vs 22% for EM vs. 15% for S&P 500.

I’m all for intelligent risk taking (obviously, as I started this thread), I just don’t think it’s necessary to go beyond 15% volatility to get great results.

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

Post by MotoTrojan » Mon Feb 18, 2019 6:22 pm

HEDGEFUNDIE wrote:
Mon Feb 18, 2019 4:22 pm


Just a warning that QQQ has been more volatile than EM over the past 20 years. 24% annual volatility for QQQ vs 22% for EM vs. 15% for S&P 500.

I’m all for intelligent risk taking (obviously, as I started this thread), I just don’t think it’s necessary to go beyond 15% volatility to get great results.
Thank you, perhaps you are correct that this is an unnecessary introduction. At 25% of equities this showed reduced drawdown historically, including the epic meltdown of the internet market, but perhaps the Portfolio Visualizer means of analysis is not sufficient to properly capture the impact of a daily rebalancing fund? Perhaps just tilting 25% of equity to International is enough extra spice for me :mrgreen: . Will ponder while my M1 transfer of $12K completes (going to add another $3K to round out my 2019 contributions and then let this ride for a while before considering funding further).

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

Post by skeptic42 » Mon Feb 18, 2019 7:18 pm

AlphaLess wrote:
Mon Feb 18, 2019 1:41 pm
So, OP, is the entire strategy based on a few factors:
- that SP.500 will outperform short term interest rate (by more than the expense ratios, at least),
- that long term bond will outperform short term interest rate (by more than the expense ratios, at least),
- that 40 / 60 proportional allocation is optimal,
- that SP.500 / long bond correlation is going to stay low-ish (whatever that means).
I think there is one more factor the strategy is based on:
- that the volatility stays low enough (otherwise the volatility decay would be a larger drag for the leveraged ETFs)

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

Post by AlphaLess » Mon Feb 18, 2019 11:27 pm

HEDGEFUNDIE wrote:
Mon Feb 18, 2019 3:24 pm
You are confusing leverage resets (which the ETFs do daily) with portfolio rebalancing (which is up to the investor to do or not do). My backtest does both.
With due respect, I am not confusing anything.

In your OP, you mention that due to not having enough data for a 3-x leveraged SP.500 and long bond ETFs, you tested your strategy by using a long-short leveraged portfolio.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE » Mon Feb 18, 2019 11:59 pm

AlphaLess wrote:
Mon Feb 18, 2019 11:27 pm
HEDGEFUNDIE wrote:
Mon Feb 18, 2019 3:24 pm
You are confusing leverage resets (which the ETFs do daily) with portfolio rebalancing (which is up to the investor to do or not do). My backtest does both.
With due respect, I am not confusing anything.

In your OP, you mention that due to not having enough data for a 3-x leveraged SP.500 and long bond ETFs, you tested your strategy by using a long-short leveraged portfolio.
Here is the actual portfolio of TMF/UPRO for the full period those funds were in existence:

https://www.portfoliovisualizer.com/bac ... tion2_1=60

And here is the portfolio I am using to backtest, over the same period:

https://www.portfoliovisualizer.com/bac ... on3_1=-200

Decide for yourself whether it is "good enough"

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LBYM

Post by CaliJim » Tue Feb 19, 2019 12:00 am

it is not complicated or risky if you live below your means.ignore the jones it i not a competition to

I believe in the weak version of the efficient market hypothesis. I don't believe "magic formulas" can reliably juice returns, Swing tradin may work for some, bu I personnally have no interest in r[/b][/i] market timer's,[ saagaa is a cautionary tail. no inspiring!!!
IF i Recall corretlyMT headed off the rails.flamed out and crashedand burned. do not emulatMT there is an easier way avoid self-immolation!


as you know leverage is an amplifier of both good and bad result it amplifies gains and to makes them bigger, and it can turn small losses into bankruptcies.I wish you well, by the way
don't be icarus and fly too close to the sun. what's the point when you can follow the BH program and have a every sucess in life and retirement
be careful about putting your hard earned saving at risk, by departing from the bh program. stick to the program and stay on the rails, ..https://www.bogleheads.org/wiki/Boglehe ... philosophy.

be careful what you fantasize about. fantasies can lead to financial stress and trouble, destress your life and worry as little about money / networth and rate of return as you can,

try using the three fund portfoliodon't worry, be happy, and stop 'giving so many 'F's about money money money.
!free advice worth every pennythe idea;''If i CAN only get my NW to some number $X then I could retire and be really be happy.' i don't think it works that way. i got to my number, and discovered, there is still plenty to worry about, you are still you no matter what ywhat happens in portfoliovile.. living below you means is incredibly liberaating. highincom should not b confused with high and high NWno panacea.
$xxm NWdoesn't instantaniously result in but$YY income and %YY INCOME LESS (%YY*0.1 IN EXPENSIS A SORT OF Nivanna.Financial ni you got to work on that seperately. a tremenoudly richwhose expenses are out of control is a very unhappy person
Last edited by CaliJim on Thu Feb 21, 2019 2:23 am, edited 4 times in total.
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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE » Tue Feb 19, 2019 2:34 am

staythecourse wrote:
Fri Feb 15, 2019 5:28 pm
I do agree with another poster above and mentioned it in one of the first posts on this thread the biggest risk is still the fund closing. There is a risk in EVERY aspect of investing outside of typical boglehead investing so one just has to accept or reject this idea based on that risk. Have to dive in eyes wide open. One can't expect to make this level of returns without serious risk.
Sola Scriptura wrote:
Fri Feb 15, 2019 5:45 pm
Agreed 100% on fund closure being the biggest risk to this strategy. The problem is that the only way to see if UPRO and TMF could survive such drastic downturns (whether simultaneous or not) is for the funds to actually experience them, which, obviously, none of us wants to happen.
Some posters may be concerned about the ETFs closing (or the fund managers closing), unrelated to the risk of the 3x daily price action. While I don't share this concern, I thought this would be a good time for a reminder of what exactly you are buying when you buy an ETF: (from Ally Invest)
The Difference between an ETF and an ETN

An ETF is a basket of securities such as stocks, bonds or commodities. It's similar in many ways to a mutual fund, but it trades on an exchange like a stock. An important characteristic of ETFs and mutual funds is that they're legally separate from the company that manages them. ETFs are structured as "investment companies” where the assets of the fund are held separately from the parent company behind the ETF.

ETNs are unsecured, unsubordinated debt obligations of the company that issues them and have no principal protection. ETNs are complex products subject to significant risks and may not be suitable for all investors. Although an ETN's performance is contractually tied to the market index it is designed to track, ETNs do not hold any assets. Therefore, unlike investors in exchange-traded funds (ETFs), which hold assets that could be liquidated in the event of a failure of the ETF issuer, ETN investors would only have an unsecured claim for payment against the ETN issuer in the event of the issuer's failure. Before investing, please carefully consider the credit worthiness of the ETN issuer and the ETNs investment objectives, risks, fees and charges.
So if these fund managers were to shut down for some reason, you would still own the underlying assets of the ETF:

In the case of UPRO, that would be the shares of the individual companies that comprise the S&P 500, along with some S&P 500 emini futures contracts, and S&P 500 swaps with nine major global investment banks (details here). These swap contracts do carry counterparty risk (i.e. the risk that these banks will fail and be unable to fulfill the contracts), but after the failure of Lehman Brothers and Bear Stearns, global banking capital requirements have been strengthened specifically to prevent this outcome.

Similarly, TMF holds the TLT ETF (which in turn holds the actual long Treasury bonds), a Goldman Sachs money market fund, and Treasury swaps with Credit Suisse, BNP Paribas, BoA ML, and Citibank (from latest Direxion annual report, search for "TMF").

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

Post by 97trophy » Tue Feb 19, 2019 11:00 am

Well done OP interesting strategy. :sharebeer

I jumped in today with a small amount.

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

Post by EfficientInvestor » Tue Feb 19, 2019 2:32 pm

HEDGEFUNDIE wrote:
Tue Feb 19, 2019 2:34 am
staythecourse wrote:
Fri Feb 15, 2019 5:28 pm
I do agree with another poster above and mentioned it in one of the first posts on this thread the biggest risk is still the fund closing. There is a risk in EVERY aspect of investing outside of typical boglehead investing so one just has to accept or reject this idea based on that risk. Have to dive in eyes wide open. One can't expect to make this level of returns without serious risk.
Sola Scriptura wrote:
Fri Feb 15, 2019 5:45 pm
Agreed 100% on fund closure being the biggest risk to this strategy. The problem is that the only way to see if UPRO and TMF could survive such drastic downturns (whether simultaneous or not) is for the funds to actually experience them, which, obviously, none of us wants to happen.
Some posters may be concerned about the ETFs closing (or the fund managers closing), unrelated to the risk of the 3x daily price action. While I don't share this concern, I thought this would be a good time for a reminder of what exactly you are buying when you buy an ETF: (from Ally Invest)
The Difference between an ETF and an ETN

An ETF is a basket of securities such as stocks, bonds or commodities. It's similar in many ways to a mutual fund, but it trades on an exchange like a stock. An important characteristic of ETFs and mutual funds is that they're legally separate from the company that manages them. ETFs are structured as "investment companies” where the assets of the fund are held separately from the parent company behind the ETF.

ETNs are unsecured, unsubordinated debt obligations of the company that issues them and have no principal protection. ETNs are complex products subject to significant risks and may not be suitable for all investors. Although an ETN's performance is contractually tied to the market index it is designed to track, ETNs do not hold any assets. Therefore, unlike investors in exchange-traded funds (ETFs), which hold assets that could be liquidated in the event of a failure of the ETF issuer, ETN investors would only have an unsecured claim for payment against the ETN issuer in the event of the issuer's failure. Before investing, please carefully consider the credit worthiness of the ETN issuer and the ETNs investment objectives, risks, fees and charges.
So if these fund managers were to shut down for some reason, you would still own the underlying assets of the ETF:

In the case of UPRO, that would be the shares of the individual companies that comprise the S&P 500, along with some S&P 500 emini futures contracts, and S&P 500 swaps with nine major global investment banks (details here). These swap contracts do carry counterparty risk (i.e. the risk that these banks will fail and be unable to fulfill the contracts), but after the failure of Lehman Brothers and Bear Stearns, global banking capital requirements have been strengthened specifically to prevent this outcome.

Similarly, TMF holds the TLT ETF (which in turn holds the actual long Treasury bonds), a Goldman Sachs money market fund, and Treasury swaps with Credit Suisse, BNP Paribas, BoA ML, and Citibank (from latest Direxion annual report, search for "TMF").
Case in point...I owned shares of EMBU (3X Emerging Market Bond ETF) in 2018 when Direxion decided to shut it down. I assume it didn't have a high enough AUM for it to be profitable for them. They liquidated all holdings on 10/1/18, I got my money back, and reinvested it in a different fund.

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

Post by PluckyDucky » Tue Feb 19, 2019 4:10 pm

EfficientInvestor wrote:
Tue Feb 19, 2019 2:32 pm
Case in point...I owned shares of EMBU (3X Emerging Market Bond ETF) in 2018 when Direxion decided to shut it down. I assume it didn't have a high enough AUM for it to be profitable for them. They liquidated all holdings on 10/1/18, I got my money back, and reinvested it in a different fund.
How long did it take to get your money back?

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

Post by EfficientInvestor » Tue Feb 19, 2019 4:17 pm

PluckyDucky wrote:
Tue Feb 19, 2019 4:10 pm
EfficientInvestor wrote:
Tue Feb 19, 2019 2:32 pm
Case in point...I owned shares of EMBU (3X Emerging Market Bond ETF) in 2018 when Direxion decided to shut it down. I assume it didn't have a high enough AUM for it to be profitable for them. They liquidated all holdings on 10/1/18, I got my money back, and reinvested it in a different fund.
How long did it take to get your money back?
My account history shows that on 10/1, I "sold shares of EMBU @ 20.93 - Corporate Action: Final Liquidation @ 20.93". I then made my next purchase on 10/9, but I don't think I needed to wait that long. It just so happens that I didn't get around to redeploying the funds for another week. Based on how it reads, I assume the forced sale due to liquidation acts on paper like any other sale. Therefore, I probably had the ability to redeploy the funds as soon as the sale went through.

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

Post by MotoTrojan » Tue Feb 19, 2019 5:41 pm

EfficientInvestor wrote:
Tue Feb 19, 2019 4:17 pm
PluckyDucky wrote:
Tue Feb 19, 2019 4:10 pm
EfficientInvestor wrote:
Tue Feb 19, 2019 2:32 pm
Case in point...I owned shares of EMBU (3X Emerging Market Bond ETF) in 2018 when Direxion decided to shut it down. I assume it didn't have a high enough AUM for it to be profitable for them. They liquidated all holdings on 10/1/18, I got my money back, and reinvested it in a different fund.
How long did it take to get your money back?
My account history shows that on 10/1, I "sold shares of EMBU @ 20.93 - Corporate Action: Final Liquidation @ 20.93". I then made my next purchase on 10/9, but I don't think I needed to wait that long. It just so happens that I didn't get around to redeploying the funds for another week. Based on how it reads, I assume the forced sale due to liquidation acts on paper like any other sale. Therefore, I probably had the ability to redeploy the funds as soon as the sale went through.
Interesting. Do you happen to know what the AUM was when it went under? DZK is pretty low at ~$16M relative to TMF at $106M and UPRO at $1.3B. May be a reason for me to stick with the TMF/UPRO, or at-least monitor the DZK AUM.

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

Post by HEDGEFUNDIE » Tue Feb 19, 2019 6:36 pm

MotoTrojan wrote:
Tue Feb 19, 2019 5:41 pm
EfficientInvestor wrote:
Tue Feb 19, 2019 4:17 pm
PluckyDucky wrote:
Tue Feb 19, 2019 4:10 pm
EfficientInvestor wrote:
Tue Feb 19, 2019 2:32 pm
Case in point...I owned shares of EMBU (3X Emerging Market Bond ETF) in 2018 when Direxion decided to shut it down. I assume it didn't have a high enough AUM for it to be profitable for them. They liquidated all holdings on 10/1/18, I got my money back, and reinvested it in a different fund.
How long did it take to get your money back?
My account history shows that on 10/1, I "sold shares of EMBU @ 20.93 - Corporate Action: Final Liquidation @ 20.93". I then made my next purchase on 10/9, but I don't think I needed to wait that long. It just so happens that I didn't get around to redeploying the funds for another week. Based on how it reads, I assume the forced sale due to liquidation acts on paper like any other sale. Therefore, I probably had the ability to redeploy the funds as soon as the sale went through.
Interesting. Do you happen to know what the AUM was when it went under? DZK is pretty low at ~$16M relative to TMF at $106M and UPRO at $1.3B. May be a reason for me to stick with the TMF/UPRO, or at-least monitor the DZK AUM.
Direxion has a history of closing down ETFs in the low single digit $Ms.

DZK is probably ok.

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

Post by EfficientInvestor » Tue Feb 19, 2019 7:33 pm

MotoTrojan wrote:
Tue Feb 19, 2019 5:41 pm
EfficientInvestor wrote:
Tue Feb 19, 2019 4:17 pm
PluckyDucky wrote:
Tue Feb 19, 2019 4:10 pm
EfficientInvestor wrote:
Tue Feb 19, 2019 2:32 pm
Case in point...I owned shares of EMBU (3X Emerging Market Bond ETF) in 2018 when Direxion decided to shut it down. I assume it didn't have a high enough AUM for it to be profitable for them. They liquidated all holdings on 10/1/18, I got my money back, and reinvested it in a different fund.
How long did it take to get your money back?
My account history shows that on 10/1, I "sold shares of EMBU @ 20.93 - Corporate Action: Final Liquidation @ 20.93". I then made my next purchase on 10/9, but I don't think I needed to wait that long. It just so happens that I didn't get around to redeploying the funds for another week. Based on how it reads, I assume the forced sale due to liquidation acts on paper like any other sale. Therefore, I probably had the ability to redeploy the funds as soon as the sale went through.
Interesting. Do you happen to know what the AUM was when it went under? DZK is pretty low at ~$16M relative to TMF at $106M and UPRO at $1.3B. May be a reason for me to stick with the TMF/UPRO, or at-least monitor the DZK AUM.
In the Direxion annual report dated 4/30/18, EMBU had an AUM of only $1.1 million.

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

Post by MotoTrojan » Tue Feb 19, 2019 7:39 pm

HEDGEFUNDIE wrote:
Tue Feb 19, 2019 6:36 pm
MotoTrojan wrote:
Tue Feb 19, 2019 5:41 pm
EfficientInvestor wrote:
Tue Feb 19, 2019 4:17 pm
PluckyDucky wrote:
Tue Feb 19, 2019 4:10 pm
EfficientInvestor wrote:
Tue Feb 19, 2019 2:32 pm
Case in point...I owned shares of EMBU (3X Emerging Market Bond ETF) in 2018 when Direxion decided to shut it down. I assume it didn't have a high enough AUM for it to be profitable for them. They liquidated all holdings on 10/1/18, I got my money back, and reinvested it in a different fund.
How long did it take to get your money back?
My account history shows that on 10/1, I "sold shares of EMBU @ 20.93 - Corporate Action: Final Liquidation @ 20.93". I then made my next purchase on 10/9, but I don't think I needed to wait that long. It just so happens that I didn't get around to redeploying the funds for another week. Based on how it reads, I assume the forced sale due to liquidation acts on paper like any other sale. Therefore, I probably had the ability to redeploy the funds as soon as the sale went through.
Interesting. Do you happen to know what the AUM was when it went under? DZK is pretty low at ~$16M relative to TMF at $106M and UPRO at $1.3B. May be a reason for me to stick with the TMF/UPRO, or at-least monitor the DZK AUM.
Direxion has a history of closing down ETFs in the low single digit $Ms.

DZK is probably ok.
Thank you for the insight. I will keep my eye on the AUM none-the-less. If it did go under in the future though I wouldn't lose much efficiency by just ingesting that chunk into UPRO.

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

Post by PluckyDucky » Tue Feb 19, 2019 8:02 pm

EfficientInvestor wrote:
Tue Feb 19, 2019 7:33 pm
In the Direxion annual report dated 4/30/18, EMBU had an AUM of only $1.1 million.
Wow that's small! I guess not many people want to leverage international.

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

Post by sabhen » Wed Feb 20, 2019 7:59 am

These ETFs have to borrow funds for leverage. Who pays for the leverage? is that part of the expense ratio or are there other costs not accounted for in the ER? I admit I do not fully understand how they operate.

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

Post by samsdad » Wed Feb 20, 2019 8:24 am

sabhen wrote:
Wed Feb 20, 2019 7:59 am
These ETFs have to borrow funds for leverage. Who pays for the leverage? is that part of the expense ratio or are there other costs not accounted for in the ER? I admit I do not fully understand how they operate.
See this thread viewtopic.php?f=10&t=272640

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

Post by pezblanco » Wed Feb 20, 2019 9:46 am

samsdad wrote:
Wed Feb 20, 2019 8:24 am
sabhen wrote:
Wed Feb 20, 2019 7:59 am
These ETFs have to borrow funds for leverage. Who pays for the leverage? is that part of the expense ratio or are there other costs not accounted for in the ER? I admit I do not fully understand how they operate.
See this thread viewtopic.php?f=10&t=272640
I don't think that thread answers the question either ... it seems that there are various moving parts not at all understood. To get fits to the data, some are just throwing in scaling fudge factors etc etc. Nothing against the people doing the work ... just an observation that it seems that people don't really know what is under the hood of these funds.

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

Post by HEDGEFUNDIE » Wed Feb 20, 2019 10:07 am

pezblanco wrote:
Wed Feb 20, 2019 9:46 am
samsdad wrote:
Wed Feb 20, 2019 8:24 am
sabhen wrote:
Wed Feb 20, 2019 7:59 am
These ETFs have to borrow funds for leverage. Who pays for the leverage? is that part of the expense ratio or are there other costs not accounted for in the ER? I admit I do not fully understand how they operate.
See this thread viewtopic.php?f=10&t=272640
I don't think that thread answers the question either ... it seems that there are various moving parts not at all understood. To get fits to the data, some are just throwing in scaling fudge factors etc etc. Nothing against the people doing the work ... just an observation that it seems that people don't really know what is under the hood of these funds.
I disagree. If you read that thread JackoC and siamond have come to consensus on what drives the returns of a leveraged ETF:

The return of an X-levered ETF = (Index Total Return - funding rate) * X + return on cash - ER

The funding rate has been disclosed within the Direxion and Proshares reports as the LIBOR 1 month rate + negotiated spread, which is likely cheaper than any of us retail investors can borrow on our own.

The outstanding issue is how we model for this in our backtests. I am using -200% CASHX which is the 1 month Treasury bill rate, a very close proxy for 1 month LIBOR. I do not account for the spread on LIBOR but as I also do not include any return on cash, it nets out.

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

Post by pezblanco » Wed Feb 20, 2019 10:40 am

HEDGEFUNDIE wrote:
Wed Feb 20, 2019 10:07 am
pezblanco wrote:
Wed Feb 20, 2019 9:46 am
samsdad wrote:
Wed Feb 20, 2019 8:24 am
sabhen wrote:
Wed Feb 20, 2019 7:59 am
These ETFs have to borrow funds for leverage. Who pays for the leverage? is that part of the expense ratio or are there other costs not accounted for in the ER? I admit I do not fully understand how they operate.
See this thread viewtopic.php?f=10&t=272640
I don't think that thread answers the question either ... it seems that there are various moving parts not at all understood. To get fits to the data, some are just throwing in scaling fudge factors etc etc. Nothing against the people doing the work ... just an observation that it seems that people don't really know what is under the hood of these funds.
I disagree. If you read that thread JackoC and siamond have come to consensus on what drives the returns of a leveraged ETF:

The return of an X-levered ETF = (Index Total Return - funding rate) * X + return on cash - ER

The funding rate has been disclosed within the Direxion and Proshares reports as the LIBOR 1 month rate, which is cheaper than any of us can borrow on our own.

The outstanding issue is how we model for this in our backtests. I am using -200% CASHX which is the 1 month Treasury bill rate, a very close proxy for 1 month LIBOR. Also, as I do not include any return on cash, my backtests are actually somewhat conservative.
Well thank you very much Hedgefundie .... I tried to get a reply in that thread but without success. I would appreciate it if you would answer some questions. Please understand, I'm not a foe of your portfolio and I wish you success. If I can convince myself this is a good strategy, I will use it also.

1) I thought that there was some doubt about how dividends were handled in the fund? Your equation posits total return which would have
dividends and then you lever those up. The workings of the fund is that some stocks are held (and thus dividends are present for some of the exposure but not for all). Is that truly conservative? That might be a systematic source of extra return in your backtests.

2) So, if I understand your equation the "borrowing cost" is Libor*3 +ER which would be approximately: T-bill *3 + 1 = (2.4*3) +1 = 8.2 That seems large? Did I do that right? You can borrow money from IB for 3x leverage at 2(1.5 + Tbill) = 2(1.5 + 2.4) = 7.8? Maybe the return on cash ameliorates that somewhat.

3) The backtests on PV only go back to 1985? (I rarely use it so I don't know). But the real return of stocks over that time period is something like 8.3%, which is well in excess of the long term return of stocks. Do you think that you might make your backtests too optimistic?

4) Again a question about backtesting in PV ... it only allows at most quarterly rebalancing? So, you are adjusting the leverage quarterly instead of daily as the leveraged funds actually do? That might ameliorate a bit the volatility drag and thus make your backtests too optimistic?

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

Post by EfficientInvestor » Wed Feb 20, 2019 10:42 am

HEDGEFUNDIE wrote:
Wed Feb 20, 2019 10:07 am
pezblanco wrote:
Wed Feb 20, 2019 9:46 am
samsdad wrote:
Wed Feb 20, 2019 8:24 am
sabhen wrote:
Wed Feb 20, 2019 7:59 am
These ETFs have to borrow funds for leverage. Who pays for the leverage? is that part of the expense ratio or are there other costs not accounted for in the ER? I admit I do not fully understand how they operate.
See this thread viewtopic.php?f=10&t=272640
I don't think that thread answers the question either ... it seems that there are various moving parts not at all understood. To get fits to the data, some are just throwing in scaling fudge factors etc etc. Nothing against the people doing the work ... just an observation that it seems that people don't really know what is under the hood of these funds.
I disagree. If you read that thread JackoC and siamond have come to consensus on what drives the returns of a leveraged ETF:

The return of an X-levered ETF = (Index Total Return - funding rate) * X + return on cash - ER

The funding rate has been disclosed within the Direxion and Proshares reports as the LIBOR 1 month rate + negotiated spread, which is likely cheaper than any of us retail investors can borrow on our own.

The outstanding issue is how we model for this in our backtests. I am using -200% CASHX which is the 1 month Treasury bill rate, a very close proxy for 1 month LIBOR. I do not account for the spread on LIBOR but as I also do not include any return on cash, it nets out.
I'm still tinkering before I make an updated post to the other thread. But the equation I currently have in my spreadsheet for daily performance of a leveraged ETF is:

(Daily % of underlying total return index) * X - ER/250 - (X - 1) * (1 month LIBOR) * (Current date - previous date)/360

where X is the leverage (e.g. 2 or 3), the current date is the current date and the previous date is the previous trading day. As JackoC pointed out, this takes into account borrowing over the weekend and on days when markets are closed.

This equation has produced good simulation results. However, I'm still conferring with siamond offline and trying to come to consensus before I post results. One thing that is causing heartache is the difference in performance between ProShares funds and Direxion funds. For instance, you can look at the difference in performance between UPRO and SPXL. Both track the same index, but UPRO has better returns. We are trying to figure out what is driving the difference and if there is something else we need to account for.

I think the bottom line to point out for now is that the original data that was used on this thread (the stuff I gave to HEDGEFUNDIE) did not take borrowing cost into account. The original data was just based on getting a best fit of the data since inception of the leveraged funds. The problem with that is that borrowing rates have been very low since inception. Therefore, that data would not accurately simulate periods with higher borrowing costs. Until we get better data confirmed, I would agree with what HEDGEFUNDIE is saying above. Use the shorting of CASHX to simulate the borrowing of funds at the LIBOR rate. This doesn't take into account the daily reset of leverage, but it is a better approximation than the old data.

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

Post by mffl » Wed Feb 20, 2019 10:54 am

Ok, count me in. I bought $2000 of UPRO and $3000 of TMF in a separate ROTH account at Fidelity. I'm now only 99.5% Boglehead.

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

Post by pezblanco » Wed Feb 20, 2019 10:55 am

EfficientInvestor wrote:
Wed Feb 20, 2019 10:42 am
HEDGEFUNDIE wrote:
Wed Feb 20, 2019 10:07 am
pezblanco wrote:
Wed Feb 20, 2019 9:46 am
samsdad wrote:
Wed Feb 20, 2019 8:24 am
sabhen wrote:
Wed Feb 20, 2019 7:59 am
These ETFs have to borrow funds for leverage. Who pays for the leverage? is that part of the expense ratio or are there other costs not accounted for in the ER? I admit I do not fully understand how they operate.
See this thread viewtopic.php?f=10&t=272640
I don't think that thread answers the question either ... it seems that there are various moving parts not at all understood. To get fits to the data, some are just throwing in scaling fudge factors etc etc. Nothing against the people doing the work ... just an observation that it seems that people don't really know what is under the hood of these funds.
I disagree. If you read that thread JackoC and siamond have come to consensus on what drives the returns of a leveraged ETF:

The return of an X-levered ETF = (Index Total Return - funding rate) * X + return on cash - ER

The funding rate has been disclosed within the Direxion and Proshares reports as the LIBOR 1 month rate + negotiated spread, which is likely cheaper than any of us retail investors can borrow on our own.

The outstanding issue is how we model for this in our backtests. I am using -200% CASHX which is the 1 month Treasury bill rate, a very close proxy for 1 month LIBOR. I do not account for the spread on LIBOR but as I also do not include any return on cash, it nets out.
I'm still tinkering before I make an updated post to the other thread. But the equation I currently have in my spreadsheet for daily performance of a leveraged ETF is:

(Daily % of underlying total return index) * X - ER/250 - (X - 1) * (1 month LIBOR) * (Current date - previous date)/360

where X is the leverage (e.g. 2 or 3), the current date is the current date and the previous date is the previous trading day. As JackoC pointed out, this takes into account borrowing over the weekend and on days when markets are closed.

This equation has produced good simulation results. However, I'm still conferring with siamond offline and trying to come to consensus before I post results. One thing that is causing heartache is the difference in performance between ProShares funds and Direxion funds. For instance, you can look at the difference in performance between UPRO and SPXL. Both track the same index, but UPRO has better returns. We are trying to figure out what is driving the difference and if there is something else we need to account for.

I think the bottom line to point out for now is that the original data that was used on this thread (the stuff I gave to HEDGEFUNDIE) did not take borrowing cost into account. The original data was just based on getting a best fit of the data since inception of the leveraged funds. The problem with that is that borrowing rates have been very low since inception. Therefore, that data would not accurately simulate periods with higher borrowing costs. Until we get better data confirmed, I would agree with what HEDGEFUNDIE is saying above. Use the shorting of CASHX to simulate the borrowing of funds at the LIBOR rate. This doesn't take into account the daily reset of leverage, but it is a better approximation than the old data.
Well, this equation (at least on the borrowing rate) makes more sense ... so has the dividend issue been laid to rest (since it's not really addressed in the equation)? So this would give a borrowing rate of approximately 2(Tbill) + 1 vs the 2(Tbill +1.5) that you would get from IB, which is quite nice. EfficientInvestor, would you be willing to take a stab at the other questions I asked Hedgefundie?

Anyway, I quickly did a computation for long term return based on the assumption that yearly stock/Tbill/long term borrowing returns in the future will be independent samples of what went on in the last 51 years. I assumed a borrow rate of (X-1)(Tbill) + 1 where X is leverage as in EfficientInvestor's last equation. Since my data is yearly data, I can only update the leverage on a yearly basis vs daily.

Here is the plot of long term return vs leverage:

Image

So for a leverage of 3 on a 40/60 S&P 500 Long Term Bond Portfolio, you get a long term return of about 9.2% .... not bad!!

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

Post by aj76er » Wed Feb 20, 2019 11:39 am

HEDGEFUNDIE wrote:
Mon Feb 18, 2019 4:22 pm
MotoTrojan wrote:
Mon Feb 18, 2019 4:04 pm
HEDGEFUNDIE wrote:
Mon Feb 18, 2019 3:53 pm
MotoTrojan wrote:
Mon Feb 18, 2019 3:34 pm
HEDGEFUNDIE wrote:
Tue Feb 05, 2019 2:56 pm


Ok, you’ve convinced me. Let me copy what you're doing.
This should go without saying, but I will say it. This is a risky investment. My backtesting shows strong performance vs. holding the S&P 500 by itself, but there is no guarantee this will continue. I am risking money that is a limited amount of my net worth, and if I lost it all, would not materially change the course of my retirement savings. Proceed at your own risk.
Quoting to get your attention but curious your rationale for not including International?
viewtopic.php?f=10&t=272007&start=500#p4387614
Thank you. I recalled seeing the part about EM and it's volatility but forgot you addressed DM. I suppose historically it hasn't helped but could hedge against a US-centric problem.

Still thinking I'll kick things off with my 60/20/10/10 TMF/UPRO, TQQQ, DZK arrangement, balanced quarterly. Thanks for the very thought provoking thread.
Just a warning that QQQ has been more volatile than EM over the past 20 years. 24% annual volatility for QQQ vs 22% for EM vs. 15% for S&P 500.

I’m all for intelligent risk taking (obviously, as I started this thread), I just don’t think it’s necessary to go beyond 15% volatility to get great results.
In using the more volatile funds, keep in mind that there is slightly less protection from circuit breakers in the event of a rapid sell-off in the market. If the S&P drops 20% and breakers are tripped to halt trading, will QQQ have fallen so much (eg >30%) that TQQQ blows up? I think it's a very low probability event, but still something to consider. As hedgefundie says the volatility of 3X S&P is more than enough for the strategy to work.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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

Post by samsdad » Wed Feb 20, 2019 12:35 pm

So for a leverage of 3 on a 40/60 S&P 500 Long Term Bond Portfolio, you get a long term return of about 9.2% .... not bad!!
Pezblanco, what time period are you using?

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

Post by sabhen » Wed Feb 20, 2019 12:41 pm

sabhen wrote:
Wed Feb 20, 2019 7:59 am
These ETFs have to borrow funds for leverage. Who pays for the leverage? is that part of the expense ratio or are there other costs not accounted for in the ER? I admit I do not fully understand how they operate.
There is more to LETF costs than just plain ER. ER is easy to figure out. Interest and transactions costs are far harder. See extract from Investopedia. Final cost is probably more than double or triple the ER (ignoring taxes).

https://www.investopedia.com/articles/e ... ed-etf.asp

Leveraged ETFs incur expenses in three categories: management, interest, and transactions.
The management expense is the fee levied by the fund's management company. This fee is detailed in the prospectus and can be as much as 1% of the fund's assets every year. These fees cover both marketing and fund administration costs. Interest expenses are costs related to holding derivative securities. All derivatives have an interest rate built into their pricing. This rate, known as the risk-free rate, is very close to the short-term rate on U.S.government securities. Buying and selling these derivatives also results in transaction expenses. (For more, see: A Guide to Investor Fees.)

Interest and transaction expenses can be hard to identify and calculate because they are not individual line items, but instead a gradual reduction of fund profitability. One approach that works well is to compare a leveraged ETF's performance against its underlying index for several months and examine the differences between expected and actual returns.

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

Post by MotoTrojan » Wed Feb 20, 2019 12:59 pm

samsdad wrote:
Wed Feb 20, 2019 12:35 pm
So for a leverage of 3 on a 40/60 S&P 500 Long Term Bond Portfolio, you get a long term return of about 9.2% .... not bad!!
Pezblanco, what time period are you using?
I believe the key here is that they assumed a random distribution of borrowing rate, stock returns, and bond returns independently. This eliminates any benefit (or loss) from correlation between these. If my understanding is right this simplification is grossly flawed, but curious to hear more.

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

Post by MotoTrojan » Wed Feb 20, 2019 1:01 pm

aj76er wrote:
Wed Feb 20, 2019 11:39 am
HEDGEFUNDIE wrote:
Mon Feb 18, 2019 4:22 pm
MotoTrojan wrote:
Mon Feb 18, 2019 4:04 pm
HEDGEFUNDIE wrote:
Mon Feb 18, 2019 3:53 pm
MotoTrojan wrote:
Mon Feb 18, 2019 3:34 pm


Quoting to get your attention but curious your rationale for not including International?
viewtopic.php?f=10&t=272007&start=500#p4387614
Thank you. I recalled seeing the part about EM and it's volatility but forgot you addressed DM. I suppose historically it hasn't helped but could hedge against a US-centric problem.

Still thinking I'll kick things off with my 60/20/10/10 TMF/UPRO, TQQQ, DZK arrangement, balanced quarterly. Thanks for the very thought provoking thread.
Just a warning that QQQ has been more volatile than EM over the past 20 years. 24% annual volatility for QQQ vs 22% for EM vs. 15% for S&P 500.

I’m all for intelligent risk taking (obviously, as I started this thread), I just don’t think it’s necessary to go beyond 15% volatility to get great results.
In using the more volatile funds, keep in mind that there is slightly less protection from circuit breakers in the event of a rapid sell-off in the market. If the S&P drops 20% and breakers are tripped to halt trading, will QQQ have fallen so much (eg >30%) that TQQQ blows up? I think it's a very low probability event, but still something to consider. As hedgefundie says the volatility of 3X S&P is more than enough for the strategy to work.
Appreciate it. I have come to the conclusion there is no real reason to add TQQQ other than to tickle my desire for tinkering. DZK makes sense to me though and will be a 25% portion of my leveraged equity. Awaiting the M1 Roth transfer to arrive any day now!

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

Post by pezblanco » Wed Feb 20, 2019 2:45 pm

samsdad wrote:
Wed Feb 20, 2019 12:35 pm
So for a leverage of 3 on a 40/60 S&P 500 Long Term Bond Portfolio, you get a long term return of about 9.2% .... not bad!!
Pezblanco, what time period are you using?
From 1968 to 2018 inclusive ...

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

Post by pezblanco » Wed Feb 20, 2019 2:47 pm

MotoTrojan wrote:
Wed Feb 20, 2019 12:59 pm
samsdad wrote:
Wed Feb 20, 2019 12:35 pm
So for a leverage of 3 on a 40/60 S&P 500 Long Term Bond Portfolio, you get a long term return of about 9.2% .... not bad!!
Pezblanco, what time period are you using?
I believe the key here is that they assumed a random distribution of borrowing rate, stock returns, and bond returns independently. This eliminates any benefit (or loss) from correlation between these. If my understanding is right this simplification is grossly flawed, but curious to hear more.
No. The returns from each year are kept together ..... so no assumption is made about the intercorrelation between a given years borrowing rate and stock/long term bonds return rate.

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

Post by unknownfuture » Wed Feb 20, 2019 3:05 pm

Pezblanco, I assume your graph shows estimated real returns (i.e. inflation-adjusted), like your previous posts?

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

Post by pezblanco » Wed Feb 20, 2019 3:29 pm

unknownfuture wrote:
Wed Feb 20, 2019 3:05 pm
Pezblanco, I assume your graph shows estimated real returns (i.e. inflation-adjusted), like your previous posts?
Yes ... I only have been using real data.

The S&P return over the last 51 years is something like 5.9 real.
The S&P return over the last 34 years is something like 8.3 real.

That's a pretty big difference. The usual rule of thumb is that it should be something like 7 real (the value from 1950 to 2009). So it could be that my graph is a big pessimistic and maybe the studies done by Hedgefundie and EfficientInvestor are a bit optimistic. I think most people are saying returns in the next decade or so are going to be on the low side .... so I like my assumption better.

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

Post by PluckyDucky » Wed Feb 20, 2019 4:38 pm

pezblanco wrote:
Wed Feb 20, 2019 10:55 am
Well, this equation (at least on the borrowing rate) makes more sense ... so has the dividend issue been laid to rest (since it's not really addressed in the equation)? So this would give a borrowing rate of approximately 2(Tbill) + 1 vs the 2(Tbill +1.5) that you would get from IB, which is quite nice. EfficientInvestor, would you be willing to take a stab at the other questions I asked Hedgefundie?

Anyway, I quickly did a computation for long term return based on the assumption that yearly stock/Tbill/long term borrowing returns in the future will be independent samples of what went on in the last 51 years. I assumed a borrow rate of (X-1)(Tbill) + 1 where X is leverage as in EfficientInvestor's last equation. Since my data is yearly data, I can only update the leverage on a yearly basis vs daily.

Here is the plot of long term return vs leverage:

Image

So for a leverage of 3 on a 40/60 S&P 500 Long Term Bond Portfolio, you get a long term return of about 9.2% .... not bad!!
How do you think daily re-leveraging would affect the calculations? The 3x ETFs can be greatly affected by daily releveraging.

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

Post by samsdad » Wed Feb 20, 2019 7:06 pm

pezblanco wrote:
Wed Feb 20, 2019 2:45 pm
samsdad wrote:
Wed Feb 20, 2019 12:35 pm
So for a leverage of 3 on a 40/60 S&P 500 Long Term Bond Portfolio, you get a long term return of about 9.2% .... not bad!!
Pezblanco, what time period are you using?
From 1968 to 2018 inclusive ...
What return do you get if you started at 1973?

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

Post by unknownfuture » Wed Feb 20, 2019 7:18 pm

pezblanco wrote:
Wed Feb 20, 2019 3:29 pm
unknownfuture wrote:
Wed Feb 20, 2019 3:05 pm
Pezblanco, I assume your graph shows estimated real returns (i.e. inflation-adjusted), like your previous posts?
Yes ... I only have been using real data.
Great! Did, with the new formula, the estimated variance also improve? (Or, at least, the probability of negative returns...)
In any case, thanks for the simulations so far, much appreciated!

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

Post by MotoTrojan » Wed Feb 20, 2019 9:02 pm

samsdad wrote:
Wed Feb 20, 2019 7:06 pm
pezblanco wrote:
Wed Feb 20, 2019 2:45 pm
samsdad wrote:
Wed Feb 20, 2019 12:35 pm
So for a leverage of 3 on a 40/60 S&P 500 Long Term Bond Portfolio, you get a long term return of about 9.2% .... not bad!!
Pezblanco, what time period are you using?
From 1968 to 2018 inclusive ...
What return do you get if you started at 1973?
What is special about 1973 again?

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

Post by samsdad » Wed Feb 20, 2019 9:48 pm

MotoTrojan wrote:
Wed Feb 20, 2019 9:02 pm
samsdad wrote:
Wed Feb 20, 2019 7:06 pm
pezblanco wrote:
Wed Feb 20, 2019 2:45 pm
samsdad wrote:
Wed Feb 20, 2019 12:35 pm
So for a leverage of 3 on a 40/60 S&P 500 Long Term Bond Portfolio, you get a long term return of about 9.2% .... not bad!!
Pezblanco, what time period are you using?
From 1968 to 2018 inclusive ...
What return do you get if you started at 1973?
What is special about 1973 again?
Well, it is very close to the year that I was born.

But, more importantly for our purposes, it marks the start of a two-year downturn in the S&P 500, with a 17%ish loss in ‘73, followed by a very healthy 29% loss in ‘74.
https://www.macrotrends.net/2526/sp-500 ... al-returns

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

Post by pezblanco » Wed Feb 20, 2019 9:51 pm

PluckyDucky wrote:
Wed Feb 20, 2019 4:38 pm

How do you think daily re-leveraging would affect the calculations? The 3x ETFs can be greatly affected by daily releveraging.
Good question! I'm working on this .... regarding the other questions 1973 and onwards isn't too hard to do or a variance simulation .... maybe later after I've got something on daily leveraging vs yearly leveraging .... it's an interesting problem that I'm buried in right now.

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

Post by mrspock » Thu Feb 21, 2019 2:01 am

For those with Fidelity Roth 401k’s, I talked with Fidelity today and they did confirm you can transfer *just* your Roth 401k funds into Brokeragelink assuming your plan allows it, keeping the pre-tax 401k in the standard plan funds. For extra amusement you can have them sell your vanilla index fund and swap it with the triple levered UPRO/TMF combo at the same time.... the silence on the phone was priceless. Pretty sure he thought I was certifiably insane (they only see a small portion of my portfolio... the rest I keep at Schwab)...

I am now in for a solid 2.5% of the portfolio, from here it either works or I have an expensive life lesson.

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