HEDGEFUNDIE's excellent adventure Part II: The next journey

[MotoTrojan]

Oops... my calculation was off. I am up 41% overall . XIRR was correct.

[Forester]

If anyone wants to take a look at the spreadsheet (and the paper it is based on)

[Pandananana]

I am really interested in this strategy and would like to give it a go. However, as a European who can't buy US ETF's due to them not having a PRIIPs KID, is it possible to buy some European ETFs that are equivalent to TMF and UPRO? Or should I just give up and find a different strategy?

[Forester]

I am really interested in this strategy and would like to give it a go. However, as a European who can't buy US ETF's due to them not having a PRIIPs KID, is it possible to buy some European ETFs that are equivalent to TMF and UPRO? Or should I just give up and find a different strategy?

WisdomTree Europe have S&P 3X, FTSE 3X Emerging 3X etc. Only thing you can't buy is 3X bonds, you're limited to 3X 10yr notes.

[butricksaid]

How do I learn more about what happens in the treasury/bond markets?

Clearly I'm very un-informed because I don't understand why LTT prices just went below what they were Wednesday before the Fed rate cut. TMF and EDV are both down even though in theory prices should be going up as rates go down.

[MotoTrojan]

How do I learn more about what happens in the treasury/bond markets?

Clearly I'm very un-informed because I don't understand why LTT prices just went below what they were Wednesday before the Fed rate cut. TMF and EDV are both down even though in theory prices should be going up as rates go down.

The Fed sets the short-term lending rate between banks and nothing else. TMF, EDV, and many other treasury funds of shorter duration are going up because there is less perceived risk in the market (recession, trade-wars, etc...) so people are moving from treasuries to equities in a "risk-on" move, thus reducing the price of treasuries and increasing their yields (rates went up, not down for those assets).

[Crushtheturtle]

I implemented a 25% target volatility approach with a 1 month lookback and 80% cap on UPRO back in early July. The return so far has been 8.08%. It's volatile as heck, but I'm content with the results so far. For Nov., I'm at 68% UPRO / 32% TMF.

Good sir, could you please share how you arrived at 68%?

Is it simply: (25% target volatility) / (12 * 1 month historic volatility) ?

Why not use annual historic volatility? Or Implied Volatility?

[willthrill81]

I implemented a 25% target volatility approach with a 1 month lookback and 80% cap on UPRO back in early July. The return so far has been 8.08%. It's volatile as heck, but I'm content with the results so far. For Nov., I'm at 68% UPRO / 32% TMF.

Good sir, could you please share how you arrived at 68%?

Is it simply: (25% target volatility) / (12 * 1 month historic volatility) ?

Why not use annual historic volatility? Or Implied Volatility?

This link shows the specifics. I like volatility targeting for numerous reasons, and there are relatively recent threads on the topic. Annual volatility would be terrible because it would not react quickly enough to market changes.

[Crushtheturtle]

Think I got it. For Targeted Volatility calculation:

UPRO % = ((25% Target) / (30-day Historical Vol)) * (80% Cap)

Remaining % in "safe" asset (e.g. TMF)

[ltdshred]

I am down -2.31% with a 45/55 UPRO-TMF strategy, but I began at the beginning of September. Before then, I did make huge gains with a majority solo TMF portfolio. As I saw during the monthly backtests, I expect some months in which it underperforms, but when it outperforms the SP500, it does it by a HUGE amount. Willing to stay patient and have contributed more money to the strategy.

[MotoTrojan]

Think I got it. For Targeted Volatility calculation:

UPRO % = ((25% Target) / (30-day Historical Vol)) * (80% Cap)

Remaining % in "safe" asset (e.g. TMF)

Not quite. The 80% cap is not part of the equation, but if the UPRO % comes out above 80%, he will simply use 80% instead.

[Crushtheturtle]

Not quite. The 80% cap is not part of the equation, but if the UPRO % comes out above 80%, he will simply use 80% instead.

Ah, thank you

[Pandananana]

I am really interested in this strategy and would like to give it a go. However, as a European who can't buy US ETF's due to them not having a PRIIPs KID, is it possible to buy some European ETFs that are equivalent to TMF and UPRO? Or should I just give up and find a different strategy?

WisdomTree Europe have S&P 3X, FTSE 3X Emerging 3X etc. Only thing you can't buy is 3X bonds, you're limited to 3X 10yr notes.

Thankyou for your quick reply. Does the Hedgefundie's strategy still work with 3X 10yr notes? It probably isn't quite as good, but as long as it's acceptable, then I am very interested.

[MotoTrojan]

I am really interested in this strategy and would like to give it a go. However, as a European who can't buy US ETF's due to them not having a PRIIPs KID, is it possible to buy some European ETFs that are equivalent to TMF and UPRO? Or should I just give up and find a different strategy?

WisdomTree Europe have S&P 3X, FTSE 3X Emerging 3X etc. Only thing you can't buy is 3X bonds, you're limited to 3X 10yr notes.

Thankyou for your quick reply. Does the Hedgefundie's strategy still work with 3X 10yr notes? It probably isn't quite as good, but as long as it's acceptable, then I am very interested.

It still works; you may want to hold less equity-leverage though to maintain better parity. If you can find an extended duration treasury fund (similar to EDV, which trades STRIPS to get more duration than 20 year treasuries) I would personally prefer that over a 3x 10 year fund. Similar duration/leverage but lower expense, no borrowing cost, and no volatility decay.

[DaveG75]

It still works; you may want to hold less equity-leverage though to maintain better parity. If you can find an extended duration treasury fund (similar to EDV, which trades STRIPS to get more duration than 20 year treasuries) I would personally prefer that over a 3x 10 year fund. Similar duration/leverage but lower expense, no borrowing cost, and no volatility decay.

I don't think this is just a matter of personal preference. It just is. If you don't have a long duration (~20-30yr) leveraged option, you are better off going ultra long (EDV/ZROZ/) without leverage.

[Stef]

A friend is currently building a 100 year backtest with SPY, 2x and 3x leveraged SPY. With monthly investing there was never a 30 year period where you didn't outperform the SPY. Most of the times the leveraged gains were a lot higher.

Any interest on this board for the file?

[hicabob]

A friend is currently building a 100 year backtest with SPY, 2x and 3x leveraged SPY. With monthly investing there was never a 30 year period where you didn't outperform the SPY. Most of the times the leveraged gains were a lot higher.

Any interest on this board for the file?

Not surprising considering S+P over the last 100 years but imagine being solely in S+P 3x leverage during the 2008 crash.

[Lee_WSP]

A friend is currently building a 100 year backtest with SPY, 2x and 3x leveraged SPY. With monthly investing there was never a 30 year period where you didn't outperform the SPY. Most of the times the leveraged gains were a lot higher.

Any interest on this board for the file?

Not surprising considering S+P over the last 100 years but imagine being solely in S+P 3x leverage during the 2008 crash.

3x straight leverage would have been wiped out via margin calls.

[guyinlaw]

3x straight leverage would have been wiped out via margin calls.

Yes, that would be true straight leverage. But HEDGEFUNDIE's portfolio is with Leveraged ETFs

See the back-test on how Leveraged ETF and simulated UPRO/TMF will perform.

Back-testing 2006 -now
P1 - SSO (2X S&P 500)
P2 - Simulated UPRO/TMF 55-45 (3X S&P 500 / 3X LTT)
P3 - Simulated UPRO/TMF 42-58 (3X S&P 500 / 3X LTT)
Benchmark - S&P 500

PV Link SSO and Simulated UPRO/TMF 2006 -2019

[Lee_WSP]

3x straight leverage would have been wiped out via margin calls.

Yes, that would be true straight leverage. But HEDGEFUNDIE's portfolio is with Leveraged ETFs

.......

Not sure what you're getting at. Did you read the entire conversation I replied to?

[guyinlaw]

3x straight leverage would have been wiped out via margin calls.

Yes, that would be true straight leverage. But HEDGEFUNDIE's portfolio is with Leveraged ETFs

.......

Not sure what you're getting at. Did you read the entire conversation I replied to?

Leveraged ETFs like UPRO which are reset daily will not be wiped out during 2008.

As the underlying stock (S&P500) drops, the ETF manager will keep selling the underlying stock at the end of day (daily reset). That implies the ETF will never be wiped out.

https://youtu.be/PzpanXSr1Ho?t=243

See "Simulating Historical Performance of Leveraged ETFs in Python" below

https://teddykoker.com/2019/04/simulati ... in-python/

UPRO SIM Drawdown below

[Lee_WSP]

3x straight leverage would have been wiped out via margin calls.

Yes, that would be true straight leverage. But HEDGEFUNDIE's portfolio is with Leveraged ETFs

.......

Not sure what you're getting at. Did you read the entire conversation I replied to?

Leveraged ETFs like UPRO which are reset daily will not be wiped out during 2008.
....

Again I'm even more confused; as I already know this... please re-read the discussion I was replying to.

Just leave the discussion before you get more confused.

[guyinlaw]

[elderwise]

Is now a good time to rebalance UPRO to TMF?

On a side note, in two Roth IRA's (separate M1's)

Testing TQQQ/TMF vs UPRO/TMF (80/20 and 55/45)

Seems TMF is taking a hit (not market timing just observing) the Fed's rate should have hiked it, but perhaps people are going from bonds to equities..

[Lee_WSP]

Is now a good time to rebalance UPRO to TMF?

On a side note, in two Roth IRA's (separate M1's)

Testing TQQQ/TMF vs UPRO/TMF (80/20 and 55/45)

Seems TMF is taking a hit (not market timing just observing) the Fed's rate should have hiked it, but perhaps people are going from bonds to equities..

Definitely a timing move, but that's why I got out of TMF. It's too spiky for me. I got out as it was on it's way down.

[MotoTrojan]

Is now a good time to rebalance UPRO to TMF?

On a side note, in two Roth IRA's (separate M1's)

Testing TQQQ/TMF vs UPRO/TMF (80/20 and 55/45)

Seems TMF is taking a hit (not market timing just observing) the Fed's rate should have hiked it, but perhaps people are going from bonds to equities..

80/20 TQQQ/TMF is an insane holding unless that has a timing strategy of some sort.

The Fed doesn't dictate long-term rates, economic outlook does and things look better now (as noted in equities hitting all-time highs).

You should have a rebalancing plan in place that doesn't care about conditions.

[ebot]

Long time lurker, first time poster...First let me start off by saying I like the thought behind this strategy and just have some question about execution:

1. Anyone doing this in your taxable account? I am leaning towards doing this in my taxable acct because I am ~30 years out from 59.5 so theoretically if this works, it would be life changing (in 10-15 years) and although the overall $$ may be less, I would like to enjoy the financial freedom today. If this doesn't work out, I would not be impacting my retirement accounts.

2. What's your plan for the various scenarios: Huge single day S&P drop (Black monday), Large weekly drop, drawn out 1.5 year recession.

I understand re-balancing every quarter or monthly but I like to have action plans thought ahead for when the worst case scenarios happen otherwise I find I may just freeze and do nothing...

Thanks!

[Kevin M]

Is now a good time to rebalance UPRO to TMF?

<snip>

Seems TMF is taking a hit (not market timing just observing) the Fed's rate should have hiked it, but perhaps people are going from bonds to equities..

<snip>
The Fed doesn't dictate long-term rates, economic outlook does and things look better now (as noted in equities hitting all-time highs).

You should have a rebalancing plan in place that doesn't care about conditions.

Exactly, to both points. Well, unless "conditions" include current allocation vs. target allocation, in which case conditions matter; the investment plan should specify the "conditions" that trigger rebalancing.

I notice that TMF got crushed today--down -5.42%, with UPRO up only +1.02%. TLT down -1.8% and EDV down -2.45%.

Kevin

[Crushtheturtle]

I bought a little more TMF today after its large drop, assuming the same "buy on the dip" principle applies to leveraged ETFs...

That's a lotta droppin'

[Kevin M]

I bought a little more TMF today after its large drop, assuming the same "buy on the dip" principle applies to leveraged ETFs...

That's a lotta droppin'

Buy on the dip or catch a falling knife?

[MotoTrojan]

I bought a little more TMF today after its large drop, assuming the same "buy on the dip" principle applies to leveraged ETFs...

That's a lotta droppin'

Buy on the dip or catch a falling knife?

The expected return went up today (higher yield), which is not always the same for equities after they decline, so seems a prudent move to me.

[tyou]

Hiya, I've been reading through the posts and quite like the strategy. Thinking of putting something aside for it however I'm in the UK and looking for leverage funds, it looks like only WisdomTree offers them but the buy in is ridiculously high for 3x 10year Gilts & 3x FTSE 100 (something like over £16k & £20k for a share!)

How are people doing this strategy without access to US funds?

[Lee_WSP]

While I'm no longer in TMF myself, watching it fall so precipitously from such highs is painful.

I just needed to get that off my chest.

[MotoTrojan]

While I'm no longer in TMF myself, watching it fall so precipitously from such highs is painful.

I just needed to get that off my chest.

You'd have to go all the way back to July 31st 2019 to see these prices, dividends aside.

[Forester]

Hiya, I've been reading through the posts and quite like the strategy. Thinking of putting something aside for it however I'm in the UK and looking for leverage funds, it looks like only WisdomTree offers them but the buy in is ridiculously high for 3x 10year Gilts & 3x FTSE 100 (something like over £16k & £20k for a share!)

How are people doing this strategy without access to US funds?

Ignore the quoted minimum buy, it doesn't apply to investing platforms. I bought £400 or so of the FTSE 3x ETF.

[tyou]

Hiya, I've been reading through the posts and quite like the strategy. Thinking of putting something aside for it however I'm in the UK and looking for leverage funds, it looks like only WisdomTree offers them but the buy in is ridiculously high for 3x 10year Gilts & 3x FTSE 100 (something like over £16k & £20k for a share!)

How are people doing this strategy without access to US funds?

Ignore the quoted minimum buy, it doesn't apply to investing platforms. I bought £400 or so of the FTSE 3x ETF.

Is that possible?

I’m looking at this: https://www.hl.co.uk/shares/shares-sear ... -leveraged

Says a single share is £60k! I thought with etfs you have to buy the whole share - you can’t buy in fractions?

What’s the fund you have?

[privatefarmer]

Anyone have good data on how a 60/40 unleveraged portfolio of international LTTs/international equities would’ve performed historically? Thanks

[Forester]

Hiya, I've been reading through the posts and quite like the strategy. Thinking of putting something aside for it however I'm in the UK and looking for leverage funds, it looks like only WisdomTree offers them but the buy in is ridiculously high for 3x 10year Gilts & 3x FTSE 100 (something like over £16k & £20k for a share!)

How are people doing this strategy without access to US funds?

Ignore the quoted minimum buy, it doesn't apply to investing platforms. I bought £400 or so of the FTSE 3x ETF.

Is that possible?

I’m looking at this: https://www.hl.co.uk/shares/shares-sear ... -leveraged

Says a single share is £60k! I thought with etfs you have to buy the whole share - you can’t buy in fractions?

What’s the fund you have?

That's the price in British pence, so one share is £608.50.

[keith6014]

While I'm no longer in TMF myself, watching it fall so precipitously from such highs is painful.

I just needed to get that off my chest.

You'd have to go all the way back to July 31st 2019 to see these prices, dividends aside.

I hold TMF. Its down a lot and I have been putting capital to it. As a consolation, TQQQ is up a lot so I am still down 2%. Albeit the market is up 6%. As some said before, if the market tanks AND rates fall I should be in a better position. I will rebalance to 55/45 (TQQQ/TMF).

[Lee_WSP]

While I'm no longer in TMF myself, watching it fall so precipitously from such highs is painful.

I just needed to get that off my chest.

You'd have to go all the way back to July 31st 2019 to see these prices, dividends aside.

I hold TMF. Its down a lot and I have been putting capital to it. As a consolation, TQQQ is up a lot so I am still down 2%. Albeit the market is up 6%. As some said before, if the market tanks AND rates fall I should be in a better position. I will rebalance to 55/45 (TQQQ/TMF).

I'm still in EDV like Moto. It still hurt, but not as badly. Like I said, it was a cathartic post.

[MotoTrojan]

While I'm no longer in TMF myself, watching it fall so precipitously from such highs is painful.

I just needed to get that off my chest.

You'd have to go all the way back to July 31st 2019 to see these prices, dividends aside.

I hold TMF. Its down a lot and I have been putting capital to it. As a consolation, TQQQ is up a lot so I am still down 2%. Albeit the market is up 6%. As some said before, if the market tanks AND rates fall I should be in a better position. I will rebalance to 55/45 (TQQQ/TMF).

I'm still in EDV like Moto. It still hurt, but not as badly. Like I said, it was a cathartic post.

I suppose I got in earlier than done here but it’s hard to feel hurt when I see the XIRR so far with the S&P500’s right next to it and almost 4x smaller.

[Lee_WSP]

While I'm no longer in TMF myself, watching it fall so precipitously from such highs is painful.

I just needed to get that off my chest.

You'd have to go all the way back to July 31st 2019 to see these prices, dividends aside.

I hold TMF. Its down a lot and I have been putting capital to it. As a consolation, TQQQ is up a lot so I am still down 2%. Albeit the market is up 6%. As some said before, if the market tanks AND rates fall I should be in a better position. I will rebalance to 55/45 (TQQQ/TMF).

I'm still in EDV like Moto. It still hurt, but not as badly. Like I said, it was a cathartic post.

I suppose I got in earlier than done here but it’s hard to feel hurt when I see the XIRR so far with the S&P500’s right next to it and almost 4x smaller.

True, if you bought tmf before the melt up you're just getting back to what you were.

[tyou]

Hiya, I've been reading through the posts and quite like the strategy. Thinking of putting something aside for it however I'm in the UK and looking for leverage funds, it looks like only WisdomTree offers them but the buy in is ridiculously high for 3x 10year Gilts & 3x FTSE 100 (something like over £16k & £20k for a share!)

How are people doing this strategy without access to US funds?

Ignore the quoted minimum buy, it doesn't apply to investing platforms. I bought £400 or so of the FTSE 3x ETF.

Is that possible?

I’m looking at this: https://www.hl.co.uk/shares/shares-sear ... -leveraged

Says a single share is £60k! I thought with etfs you have to buy the whole share - you can’t buy in fractions?

What’s the fund you have?

That's the price in British pence, so one share is £608.50.

Oh I see thank you!

I feel so dumb now. Will try this first thing Monday!

[MotoTrojan]

You'd have to go all the way back to July 31st 2019 to see these prices, dividends aside.

I hold TMF. Its down a lot and I have been putting capital to it. As a consolation, TQQQ is up a lot so I am still down 2%. Albeit the market is up 6%. As some said before, if the market tanks AND rates fall I should be in a better position. I will rebalance to 55/45 (TQQQ/TMF).

I'm still in EDV like Moto. It still hurt, but not as badly. Like I said, it was a cathartic post.

I suppose I got in earlier than done here but it’s hard to feel hurt when I see the XIRR so far with the S&P500’s right next to it and almost 4x smaller.

True, if you bought tmf before the melt up you're just getting back to what you were.

Indeed. I got a bit lucky too by riding the melt-up on TMF before deciding to make the switch to EDV. It would take a 20% overall decline with the S&P500 staying flat for my XIRR to be equal; EDV would need to be cut by another 35%+. Always nice to get a little head start to keep the emotions in check, but it'll be decades before any of us can properly say how these adventures worked out.

[RayKeynes]

HEDGEFUNDIE,
I think you're strategy is very interesting. Thanks for your commitment in providing us with regular updates.

I have created an excel-based calculator doing backtesting of leveraged ETFs back to 1929.

I would like to incorporate TMF data back to 1929 into my calculator to do some more backtesting to find the best risk-adjusted portfolio allocation (aka strategy).

Please find attached some pre-taste statistical pics of my analysis showing 67 time horizons à each 25 years. I've chosen 25 years as it represents the mean long-term horizon most investors in their 30s are willing to choose.



@ hedgefundie: I would appreciate if you could provide me with underlying data going back as much as possible in history (preferrably to 1929), so I can run it together with UPRO and show you my results.

[Stef]

@HEDGEFUNDIE
How would you approach this with almost no assets and a high savings rate? I was thinking about 70% VT + 30% SSO for the next 25-30 years, no bonds.

But how would you rebalance such a portfolio? Or not rebalance it at all and let things play out?

[RayKeynes]

@HEDGEFUNDIE
How would you approach this with almost no assets and a high savings rate? I was thinking about 70% VT + 30% SSO for the next 25-30 years, no bonds.

But how would you rebalance such a portfolio? Or not rebalance it at all and let things play out?

Very good question and idea. The question is also from a risk/return perspective if 70% VT and 30% SSO wouldnt be the better choice?

[MotoTrojan]

@HEDGEFUNDIE
How would you approach this with almost no assets and a high savings rate? I was thinking about 70% VT + 30% SSO for the next 25-30 years, no bonds.

But how would you rebalance such a portfolio? Or not rebalance it at all and let things play out?

Volatility decay kills these products unless they are regularly rebalanced with imperfectly correlated holdings. I would not do this.

[Stef]

Volatility decay kills these products unless they are regularly rebalanced with imperfectly correlated holdings. I would not do this.

That's not true. You can do a backtest from 1927-2019 with 25 year periods of monthly investing. Only 12 out of 67 periods SSO would have underperformed the SP500, but in all cases only slightly. You could extend it a bit to always get an outperformance.

There is no "kill" with 2x leverage. This is not a margin.

[Lee_WSP]

@HEDGEFUNDIE
How would you approach this with almost no assets and a high savings rate? I was thinking about 70% VT + 30% SSO for the next 25-30 years, no bonds.

But how would you rebalance such a portfolio? Or not rebalance it at all and let things play out?

Volatility decay kills these products unless they are regularly rebalanced with imperfectly correlated holdings. I would not do this.

I do not subscribe to the volatility decay boogeyman, but it is real. I think the true benefit to rebalancing is selling the bonds portion and buying stocks when stocks take a huge nosedive.