HEDGEFUNDIE's excellent adventure Part II: The next journey

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cos
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cos » Wed Mar 25, 2020 12:26 am

Mr.Wu wrote:
Tue Mar 24, 2020 11:59 am
How do you fit this portfolio in your asset allocation? Is it your complete portfolio, an replacement of equity portion, or your play money?
With >99% of my net worth invested in this strategy, I feel comfortable saying that it is, in fact, my complete portfolio.

guyinlaw
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by guyinlaw » Wed Mar 25, 2020 1:12 am

Please be careful with this strategy.

1. TMF will not provide the buffer as expected..

The upside for TMF from $41 is IMO maximum up to $60, in the near term. The recent peak of TMF -$58.3 happened when 30Y yield dropped below 0.9%, which is very unlikely. So IMO TMF has maximum upside of 50% in the near term

Currently UPRO is @ $23. When S&P500 was at ~1600 (50% decline from peak) UPRO was ~$9.6 in June 2013. (The all time low for UPRO was $2.03 in July 2009.)

2. In 2019 investors were "living the dream." Stocks were up 30% and US Govt bonds, the risk-free asset, were also up. (EVD up 17%, TMF up 39%). This was not normal. So don't look at the last 1 year performance to stick with this..

Many experts are calling the COVID crash to be worse than GFC.

viewtopic.php?f=10&t=309310
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by IndexCore » Wed Mar 25, 2020 2:25 am

HEDGEFUNDIE wrote:
Wed Mar 18, 2020 5:11 pm
I have my hand firmly on the ship’s wheel, staring down into the abyss. Whatever may come, I shall stay the course!
While I wouldn't listen to a new poster (like me), I predict this July 4th you'll look back and feel good about staying the course. Between March 11-March 17 S&P 500 and long duration treasuries took stunning losses together, which is exceedingly rare. The Fed dropped it's rate to 0% on March 8. From March 10-18 saw 30-year treasury yields march straight upwards, which is explained by panic rather than the Fed funds rate. So congrats on surviving all of that, and still committing to stay the course.

Rather than saying the markets hit a bottom, I'd say the level of panic has dropped significantly. The VIX was over 70 last week, and is now closer to 60. Treasury yields that peaked March 19 are making their way downwards. I hate the DJIA, but if people think it making a record upswing is informative, that happened. Meanwhile the far better S&P 500 index rose +9% yesterday, and Congress didn't even pass legislation. Things are far better in the markets now than a week ago.

Might as well finish with a question. When you check for a change to your allocation, what's involved? Without giving away whatever you wish to keep private, are you following a formula to calculate risk levels of UPRO and TMF?

LittleBitMore
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LittleBitMore » Wed Mar 25, 2020 9:01 am

mrspock wrote:
Tue Mar 24, 2020 11:27 pm
LittleBitMore wrote:
Tue Mar 24, 2020 9:12 pm
mrspock wrote:
Tue Mar 24, 2020 8:09 pm
Still up 30% vs. -28% for the S&P 500. Rebalance due next week.... right on time for the stimulus package, and infection rates to taper off. Buckle up boys and girls... UPRO is about to blast off!
Virus grows at an exponential rate and has continued to do so through the "lockdowns", now Trump is sending people back to work. Infection rate is going to double, not tamper off. Stimulus package will do all of nothing -- in 2008 the stimulus package was following by a further 40% decline (https://imgur.com/s7EkeQM). Today and tomorrow are the first bull traps, unemployment #s will crater the market despite stimulus deal (which will be announced same day).

We waited too long and bought ourselves a U recovery, not V
You know how Mr. Market was completely devoid of data when it took the plunge down? (and continues to) Exactly what makes you think it's going to wake up tomorrow and start a career as a Data Scientist? As soon as it gets a whiff that the infection rate is declining and shelter in-place orders are going to be rescinded, it's back up we go -- at least half the losses will be wiped out in short order. It's as simple as that. If you are sitting around and waiting for GDP growth, unemployment numbers, and Q3/Q4 earnings ... good luck with that.
I'm not disagreeing that it won't go up when the infection rate declines, I'm saying the infection rate isn't going to decline anytime soon -- currently increasing at a 20% daily compounded rate (https://www.cdc.gov/coronavirus/2019-nc ... in-us.html). While the virus might not be that bad, it's economic effects are and will be shown by the unemployment #. S&P 500 fundamentally will not be worth 3300 anytime soon.

The point I'm trying to make is that we likely drop from today's 2500 down to ~2100 (or lower) in the coming months. If we can see a declining infection rate by July then maybe the market gets back to 2750 by year end. The economic shutdown/slowdown will have lasting effects as debt is unwound, renter's skip payment, housing prices fall, etc. -- the FED isn't bailing out multiple sectors just because 30k people will die from a virus.

Walkure
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Walkure » Wed Mar 25, 2020 10:42 am

A few thank yous are in order to HEDGEFUNDIE et al through all of this:

1. As of today, and despite a few impulsive rebalances on the Roth side, my taxable is now at a total MWRR of +20% since inception, and the Roth is again positive at +2%.
2. All the excitement this has generated has completely cured me of any interest in fiddling with my main portfolio.
3. It adds another dimension to understanding my risk tolerance which this downturn would otherwise have barely tested. For all those who say it takes a bear to know, well some of us intrepid fools need 3X your average bear to toy with capitulation and there's no point in waiting half my investing life for a big enough unleveraged drawdown to figure that out.

Here's to our excellent adventure :sharebeer

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by HEDGEFUNDIE » Wed Mar 25, 2020 10:47 am

Walkure wrote:
Wed Mar 25, 2020 10:42 am
A few thank yous are in order to HEDGEFUNDIE et al through all of this:

1. As of today, and despite a few impulsive rebalances on the Roth side, my taxable is now at a total MWRR of +20% since inception, and the Roth is again positive at +2%.
2. All the excitement this has generated has completely cured me of any interest in fiddling with my main portfolio.
3. It adds another dimension to understanding my risk tolerance which this downturn would otherwise have barely tested. For all those who say it takes a bear to know, well some of us intrepid fools need 3X your average bear to toy with capitulation and there's no point in waiting half my investing life for a big enough unleveraged drawdown to figure that out.


Here's to our excellent adventure :sharebeer
Two underappreciated side effects of the strategy.

You’re welcome and good luck.

nolegs
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by nolegs » Wed Mar 25, 2020 10:51 am

What's the optimal way to spread the purchases of UPRO and TMF across tax-advantaged and taxable accounts? Assuming my long-term plan is a mix of UPRO/TMF, BRK.B and maybe ARKK

I'm thinking:
UPRO in Roth since greatest potential gains
TMF in taxable accounts since likely lowest gains
BRK.B, ARKK and any additional UPRO in Traditional IRA/401k

Thoughts appreciated.

Walkure
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Walkure » Wed Mar 25, 2020 11:38 am

nolegs wrote:
Wed Mar 25, 2020 10:51 am
What's the optimal way to spread the purchases of UPRO and TMF across tax-advantaged and taxable accounts? Assuming my long-term plan is a mix of UPRO/TMF, BRK.B and maybe ARKK

I'm thinking:
UPRO in Roth since greatest potential gains
TMF in taxable accounts since likely lowest gains
BRK.B, ARKK and any additional UPRO in Traditional IRA/401k

Thoughts appreciated.
Practically speaking, you have to have a bit of each in both for the rebalancing. And don't be fooled by "bonds" having lower long term gains - TMF has tripled in the past year, and you would currently be trying to sell it in taxable to replenish a severely shrunk Roth space of UPRO with that approach. The good news is that the swaps are actually very tax efficient from a holding standpoint, so the funds produce far less in drag from distributions than even a 1x fund of the same underlying. Bottom line, don't let the tax tail wag the dog if it will hinder you from effectively implementing the strategy.

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by physixfan » Wed Mar 25, 2020 11:55 am

HEDGEFUNDIE wrote:
Wed Mar 25, 2020 10:47 am
Walkure wrote:
Wed Mar 25, 2020 10:42 am
A few thank yous are in order to HEDGEFUNDIE et al through all of this:

1. As of today, and despite a few impulsive rebalances on the Roth side, my taxable is now at a total MWRR of +20% since inception, and the Roth is again positive at +2%.
2. All the excitement this has generated has completely cured me of any interest in fiddling with my main portfolio.
3. It adds another dimension to understanding my risk tolerance which this downturn would otherwise have barely tested. For all those who say it takes a bear to know, well some of us intrepid fools need 3X your average bear to toy with capitulation and there's no point in waiting half my investing life for a big enough unleveraged drawdown to figure that out.


Here's to our excellent adventure :sharebeer
Two underappreciated side effects of the strategy.

You’re welcome and good luck.
Very good point!

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Nicolas Perrault
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Nicolas Perrault » Wed Mar 25, 2020 6:58 pm

nisiprius wrote:
Mon Mar 23, 2020 4:22 pm
Also, don't let the semilog axis fool you... those funds have provided "opportunities" to do things like multiply your money eightfold in seven months (NUGT in 2017) and plenty of chances to double or triple your money in a few months... or, in the case of DUST, apparently, almost triple it in three days, just lately.

And a roulette roll gives you the opportunity to 36X your money in 20 seconds!

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cos
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cos » Wed Mar 25, 2020 8:00 pm

Nicolas Perrault wrote:
Wed Mar 25, 2020 6:58 pm
nisiprius wrote:
Mon Mar 23, 2020 4:22 pm
Also, don't let the semilog axis fool you... those funds have provided "opportunities" to do things like multiply your money eightfold in seven months (NUGT in 2017) and plenty of chances to double or triple your money in a few months... or, in the case of DUST, apparently, almost triple it in three days, just lately.

And a roulette roll gives you the opportunity to 36X your money in 20 seconds!
To be fair, using these ETFs as intended is more like betting on a roulette roll while the ball is bouncing around. You do have some information, and that information gives you a slight edge over random chance.

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by BolekLolek » Wed Mar 25, 2020 8:45 pm

I’m invested in PSLDX and trying to get some thoughts on how this fund deviates from the standard UPRO/TMF combo in terms of potential performance on the upswing. Does anyone have a good pro/con given the differences between the two approaches? I initially got into the fund to avoid dealing with rebalancing and as an alternative to follow the adventure but I’m wondering whether to switch to the standard combo instead with quarterly rebalancing. Any thoughts?

The reason I ask is because I haven’t really seen PSLDX perform that well in this downturn vs. VTSAX which is not surprising but I’m wondering how that may change on an upswing. I’m tracking performance throughout the day by looking at VTI and BND to see how the fund will do and what I’ve noticed throughout all this volatility is the following:

1) If VTI and BND are both up, PSLDX is rarely up more than VTI (seems contrary to what I thought would be the case)
2) If VTI is up but BND is down, PSLDX trails VTI
3 If VTI is down but BND is up, PSLDX beats VTI by “underperforming” less or being neutral/slightly positive
4 If VTI and BND are both down, PSLDX gets ruined (nightmare rare scenario but it obviously happened and with a vengeance recently)

I guess my problem is (1) above, I would expect PSLDX to greatly outperform VTI in that instance but I haven’t seen it. For example today PSLDX was up 2.46% while VTI was up 1.38% and BND 1.34%. Seems like a perfect scenario for a higher alpha on PSLDX than just 1% (both stocks and bonds positive and levered). What am I missing? On (4) there was a large underperformance when it happened.

I’m seeing that the real outperformance for the fund happens under (3) such that over time it compounds and builds a good alpha. Is that accurate? I also know BND isn’t the best approximation as the fund has much more corporate bonds. Is there a better ETF corollary? I assume a good portion of my findings may be chalked up to this differential but maybe I’m overthinking it.

ChrisBenn
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by ChrisBenn » Wed Mar 25, 2020 9:16 pm

Besides the difference in leverage (2x vs 3x, not daily reset vs. daily reset), the biggest difference is the bond composition; psldx has 50% more corporate exposure than us gov (50% us gov, 75% investment corporate, 6.4% EM; ref: Quarterly Prospectus)

That extra corporate exposure is hurting it's performance in this downturn; OP's adventure is all US treasury, which has comparatively done better (than corporate) paper.

MoneyMarathon
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MoneyMarathon » Wed Mar 25, 2020 10:31 pm

BolekLolek wrote:
Wed Mar 25, 2020 8:45 pm
The reason I ask is because I haven’t really seen PSLDX perform that well in this downturn vs. VTSAX which is not surprising but I’m wondering how that may change on an upswing.
It's performing roughly as expected, based on its performance in the 2008 bear market:

Image

The three components of the PSLDX sandwich (all of which can move independently of each other on any given day) are:

(1) S&P 500 (about 1x exposure)
(2) Treasury bonds (about 0.6x exposure)
(3) Corporate and other bonds (about 0.8x exposure)

In the 2008 bear market, parts (2) and (3) balanced each other.

In the last month, (2) and (3) mostly balanced each other, with greater swings in corporate.

In either case, the portfolio is appropriate for someone who's prepared for declines that are similar to 100% stocks. To be clear, if you're in 100% stocks with some extra investments, it can go down more than 100% stocks. Likewise, if you're in 165% stocks in a vehicle intended for daily trading, you can lose more than the equivalent of 165% stocks, so changing to a 55% UPRO portfolio would increase the amount of risk you're taking. Since you expressed concern right after a bear market, it's probably a bad idea to increase your risk.

Personally, I view the whole thing as an opportunity. I got the upside/downside of equities, while also holding a large amount of bonds as an overlay with leverage so I didn't have to save cash to get the returns of bonds. The downside this year is about the same as 100% equities so far. But my bond portfolio on the corporate side has much higher potential for future returns. The yield is higher. Either that yield is captured as high yields are maintained or the yield goes down as the crisis abates, and in either scenario the bonds contribute to returns on the upswing.

Because the fund has limited exposure to junk bonds, it has limited downside from the bankruptcies that may be coming in that space. On the investment grade side, some unexpected news came out recently with the Fed backing the liquidity of the investment grade bond market through a purchasing program. So the best time to own investment grade bonds this year may have just been a week ago. In any case, the bond portfolio is diversified and historically has been managed well.

My recommendation would be to keep holding to the strategy that you preferred. Not having to rebalance is certainly a benefit, and there's a different set of worries in dealing with 3x leveraged daily ETFs and much greater exposures to both long duration treasuries and stocks.

If you think that you were taking too much equity-related risk, and if you want to try to lose less than the market in the next decline, maybe you should add to a treasury bond fund like VGIT (intermediate duration), VGLT (long duration), or EDV (extended duration). This would decrease your leverage and increase the allocation to treasury bonds (longer duration has more volatility when yields change). You don't have to add to this position all at once. For example, you could wait for the current crisis in equities to let up first.

If you want to start a side account to use UPRO and TMF, I'd suggest limiting a deposit to 5% of your current assets ("play money") due to the higher uncertainty (greater than 1x exposure in the volatile asset classes of stocks and long duration treasury bonds) and greater tail risks involved (including the losses that can be incurred due to daily resetting leverage if rebalancing is not timed well).

Dovahkiin
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Dovahkiin » Thu Mar 26, 2020 12:16 am

nolegs wrote:
Wed Mar 25, 2020 10:51 am
What's the optimal way to spread the purchases of UPRO and TMF across tax-advantaged and taxable accounts? Assuming my long-term plan is a mix of UPRO/TMF, BRK.B and maybe ARKK

I'm thinking:
UPRO in Roth since greatest potential gains
TMF in taxable accounts since likely lowest gains
BRK.B, ARKK and any additional UPRO in Traditional IRA/401k

Thoughts appreciated.
I'd replicate the same allocation of UPRO/TMF in each account. Having too much TMF or UPRO in either account individually will wither it down due to volatility decay. You want to grow your tax advantage accounts as much as possible with the best portfolio.

LEVERAGED INVESTOR
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LEVERAGED INVESTOR » Thu Mar 26, 2020 5:42 am

Why not use Asset Allocation/Minimum Variance to lower your volatility and return.

https://www.portfoliovisualizer.com/tes ... odWeight=0

LittleBitMore
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LittleBitMore » Thu Mar 26, 2020 10:05 am

MoneyMarathon wrote:
Wed Mar 25, 2020 10:31 pm
BolekLolek wrote:
Wed Mar 25, 2020 8:45 pm
The reason I ask is because I haven’t really seen PSLDX perform that well in this downturn vs. VTSAX which is not surprising but I’m wondering how that may change on an upswing.
The three components of the PSLDX sandwich (all of which can move independently of each other on any given day) are:

(1) S&P 500 (about 1x exposure)
(2) Treasury bonds (about 0.6x exposure)
(3) Corporate and other bonds (about 0.8x exposure)

In the 2008 bear market, parts (2) and (3) balanced each other.

In the last month, (2) and (3) mostly balanced each other, with greater swings in corporate.

You're forgetting a very important 4th part which is a -1.1% fixed management fee. S&P 500 exposure is effectively free so you end up paying 1.1% for the (2) & (3) exposure. (2) is certainly yielding less than 1.1%. (3) is doing better but once the flight to safety subsides, those yields will drop as well. Is the weighted average yield of (2) & (3) > 1.1%? That's what I worry about (as someone who's invested in PSLDX currently).

When bonds yield 5% it seems like a no-brainer, at 2-3% yields I'm not so convinced as rising interest rates will just lead to more pain (and falling ones lead to net negative yield).

Dovahkiin
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Dovahkiin » Thu Mar 26, 2020 2:22 pm

I made a critical math mistake in estimating the margin loan interest rate on Quantconnect. I was using some variable called "Portfolio.TotalMarginUsed" which was only $1m when the algorithm had $3.2m equity and $9.6m holdings. :oops:

Here's the updated balances for SPY/UPRO for various fixed margin loan interest rates:
3.0%: $1,395,127.51
2.5%: $1,660,829.01
2.0%: $1,972,458.70
1.5%: $2,318,709.33
1.0%: $2,727,077.78
0.75%: $2,957,549.47
0%: $3,796,299.45

Keep in mind PV has SPY/TLT quarterly rebalanced at $2.5m, and UPRO/TMF at $1,575,883 during their backtest periods.

0.75% is the lowest I've seen Interactive Brokers ever offer margin. Now, I'm going have to rewrite my estimates to be more accurate, as IBKR is 0.50% + 3 month LIBOR, which spiked as high as 2.80%: https://www.macrotrends.net/2520/3-mont ... ical-chart

This will take some time as I have to figure out how to access this data, etc. I don't think this algorithm has much outsized returns over quarterly re-balancing, but it's still nice to have running managing the margin loan if I'm unable to log into my brokerage account/on vacation/etc.

I have to say I'm really embarrassed. I'm glad I caught this error. :oops:

I still 100% believe SPY+TLT > UPRO+TMF once you have access to portfolio margin for taxable.

Update Edit:
In my algorithm when I calculate the margin loan interest due at the first trading day of the month I use the 30 day rolling average of the 3 month libor rate, according to Quantconnect's history. I went through and manually verified every month of margin interest rates.

The final portfolio's equity is $1,824,835.73 with a margin loan that's +0.50% above the benchmark. It's a 20% increase over UPROSIM/TMF sim over 16 years, so it looks like it saves 1.25% in costs over UPRO/TMF, which are probably UPRO and TMF's expense ratios.

Assuming you got LIBOR rates for your margin loan then it'd be: $2,165,031.67

Now, if you start really throwing some serious money into UPRO/TMF vs SPY/TLT, say $100k initial, $8333/mo ($100k annual), here is the two results over the period 1/1/2003 - 1/30/2019:
0.5% + LIBOR SPY/TLT: $12,776,520.80
UPROSIM/TMFSIM: $11,330,257

The gap closes to 12.7% higher for SPY/TLT, probably just due to the amortization of the extra contributions over each and every year.

I admit, I admit, SPY/TLT has lost it's appeal in taxable over UPROSIM/TMFSIM. It's still coming out ahead, presumably 1.25% per year. Of course, with SPY/TLT you have margin loan risk that you don't have with UPRO/TMF. I think for big portfolios it still wins out in taxable, but now, only if you're running an algorithm to absolutely manage leverage.

I'm now updating my recommendation to stick with UPRO/TMF and keep things simple. Only switch to SPY/TLT if you're okay watching it at least weekly, if not daily, and managing the margin so leverage doesn't fall down to 2.90 or less, where an interest free margin loan doesn't beat out upro/tmf.

ChrisBenn
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by ChrisBenn » Thu Mar 26, 2020 3:31 pm

Dovahkiin wrote:
Thu Mar 26, 2020 2:22 pm
(...)
I still 100% believe SPY+TLT > UPRO+TMF once you have access to portfolio margin for taxable.
Do you assign any utility to the "non-callability" of the leverage exposure in the 3x funds? I would think there is definite value there.

Consider portfolio A with 3mil of total exposure to a 50/50, with 1 mil in asset + 2mil on margin
and portfolio B with 1 mil in 3x funds (for a total exposure of 3 mil)

In the case of a complete wipeout, you end up owing 2 million with portfolio A, while just having a balance of 0 for portfolio B.

It seems to me you would want to look at the entire probability distribution of outcomes, and not just average expected return - since the downside on margin is much worse.

You could look at the presumed lower returns of the 3x funds (volatility drag included) as almost an optionality fee limiting your downside. With that in mind the different in return might not be that good of a deal.

Edit:
I typed the above in response to your post before your update edit, which addresses some of this. I think for finding a value for that optionality you might price what kind of drag puts on your entire portfolio at a strike price that would cover your margin loans would cost. That would give a more similar risk/return profile to the 3x funds. I suspect it's going to cost a bunch more than a few percent :)

Dovahkiin
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Dovahkiin » Thu Mar 26, 2020 4:03 pm

Now that I have updated margin interest deductions it creates more selling on the algorithm. 0.43% for most tax lot methods and 0.23% for LIFO. This doesn't count wash sales yet either. SPY/TLT will also have a 1.20~% tax drag due to qualified dividends and ordinary income.

Previously UPRO/TMF tax drag was 1.23% - 1.5%. So now, after taxes, SPY/TLT has a 1% edge.

However, now I just thought of one more problematic thing about investing this portfolio on margin - taxes when you stop. 1/3 is your equity, 2/3rds is a margin loan. Therefore, you have to sell off 2/3rds of your holdings to pay off the margin loan. For this algorithm LIFO has the largest lot of unrealized long term capital gains.

For TLT: LT Unrealized: 470565.45 ST Unrealized: 1706.52
For SPY: LT Unrealized: 1229705.37 ST Unrealized: 811.68
$124,564.91 cost basis.

I'll ignore the ST taxes in my calculations, and assume 15% LTCG tax rates. I'll throw it in taxcaster and assume you do this in a year with no other income. You'll liquidate 2/3 of the portfolio, so you'll realize: $1,133,513.88 long term capital gains.

Assuming single for this calculation:
$234,542 taxes owed.

Final portfolio:
$1,590,293.73

Same value as UPRO/TMF unliquidated.

Of course, for the $1.55m of UPRO/TMF, you'll have roughly $700k unrealized LT for UPRO, $250k unrealized LT for TMF, and about $200k urnealized ST for UPRO (very little for TMF). Cost basis of $425,883. Throwing those numbers in: $266,113 taxes owed. These numbers are different as UPRO/TMF are a lot more volatile so you're realizing more of your gains as you re-balance than SPY/TLT.

When you stop UPRO/TMF, you'll probably want to liquidate the whole portfolio. So SPY/TLT > UPRO/TMF even on margin when you want to stop.

The gap has narrowed considerably between SPY/TLT, and UPRO/TMF.
Last edited by Dovahkiin on Thu Mar 26, 2020 4:17 pm, edited 1 time in total.

Dovahkiin
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Dovahkiin » Thu Mar 26, 2020 4:11 pm

ChrisBenn wrote:
Thu Mar 26, 2020 3:31 pm
Do you assign any utility to the "non-callability" of the leverage exposure in the 3x funds? I would think there is definite value there.
Great point. What would be a good cost of non-callability. Of course with the algorithm managing leverage daily it'd be very unlikely that the portfolio would be margin called. I'm starting to think 1% per year is a fair cost for non-callability.
ChrisBenn wrote:
Thu Mar 26, 2020 3:31 pm
In the case of a complete wipeout, you end up owing 2 million with portfolio A, while just having a balance of 0 for portfolio B.
A complete wipeout means SPY -> $0 AND TLT to ->$0. This would only happen if a meteor would be hitting the earth or corona virus causing zombies. At that point I don't think I'd worry about a $2m margin loan. Keep in mind your margin loan is secured by the assets and brokers will liquidate once you go below $100k net-liquidation on portfolio margin. Signing up for portfolio margin means your portfolio is risk analyzed constantly.

Now yes, you NEED to be managing the leverage weekly, if not, daily. The quarterly rebalanced SPY/TLT portfolio's leveraged increased to a shocking 8x leverage on March 9, 2003 in the housing crash market. That portfolio was close to getting margin called/100% wipe out of $0 equity (but still would be able to pay off the margin loan.) In fact, it would have been margin called with $100k starting equity in 2003 left untouch, as it's equity was $89k at that point. Ideally with PM you'd want to keep it above $125k all the times. You would have needed a starting balance of $140,449 in 2003 to not be margin called on the quarterly portfolio.

So my recommendation is UPRO/TMF unless you have a trading algorithm to watch SPY/TLT, or you at least check in on it weekly, and daily during a bear market.

Honestly, I may just stick to UPRO/TMF, as 1% per year edge doesn't seem worth the risk to me either even with the algorithm. I'd rather be on TD Ameritrade's portfolio margin instead of IBKR any day with that cost for better platform/tools/hedging options available to me.

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MoneyMarathon » Thu Mar 26, 2020 4:19 pm

LittleBitMore wrote:
Thu Mar 26, 2020 10:05 am
MoneyMarathon wrote:
Wed Mar 25, 2020 10:31 pm
BolekLolek wrote:
Wed Mar 25, 2020 8:45 pm
The reason I ask is because I haven’t really seen PSLDX perform that well in this downturn vs. VTSAX which is not surprising but I’m wondering how that may change on an upswing.
The three components of the PSLDX sandwich (all of which can move independently of each other on any given day) are:

(1) S&P 500 (about 1x exposure)
(2) Treasury bonds (about 0.6x exposure)
(3) Corporate and other bonds (about 0.8x exposure)

In the 2008 bear market, parts (2) and (3) balanced each other.

In the last month, (2) and (3) mostly balanced each other, with greater swings in corporate.
You're forgetting a very important 4th part which is a -1.1% fixed management fee. S&P 500 exposure is effectively free so you end up paying 1.1% for the (2) & (3) exposure. (2) is certainly yielding less than 1.1%. (3) is doing better but once the flight to safety subsides, those yields will drop as well. Is the weighted average yield of (2) & (3) > 1.1%?
Both PSLDX and Vanguard's BLV target the Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index.

BLV has 2.77% yield. With more than 100% exposure to bonds (closer to 1.4x - 1.5x), you're not paying 1.1% on the bonds in expense ratio. You're paying about 75 basis points. So the difference right now is about 2% yield.

Hypothetically, you can switch to NTSX (90% stocks / 60% treasury futures) at 0.2% expense ratio if there's not enough excess yield. You could also switch to a cheap index fund.

But if that's what you're worried about, hold on to PSLDX now because you benefit from declining yields, with its long duration.
Last edited by MoneyMarathon on Thu Mar 26, 2020 4:25 pm, edited 1 time in total.

ChrisBenn
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by ChrisBenn » Thu Mar 26, 2020 4:24 pm

Dovahkiin wrote:
Thu Mar 26, 2020 4:11 pm
ChrisBenn wrote:
Thu Mar 26, 2020 3:31 pm
Do you assign any utility to the "non-callability" of the leverage exposure in the 3x funds? I would think there is definite value there.
Great point. What would be a good cost of non-callability. Of course with the algorithm managing leverage daily it'd be very unlikely that the portfolio would be margin called. I'm starting to think 1% per year is a fair cost for non-callability.
(...)
I would look at the cost of rolling puts at a strike price that would cover the margin portion of the portfolio -- I think that would result in a similar risk profile to to the 3x leveraged etf's.

(and agreed, going to 0 is unlikely -just used it for easy illustrative purposes)

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Meaty » Thu Mar 26, 2020 5:32 pm

Does anyone think the bottom is actually in? I’m guessing we’re in for a ride until an inflection point in cases.
"Discipline equals Freedom" - Jocko Willink

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Lee_WSP » Thu Mar 26, 2020 5:42 pm

Meaty wrote:
Thu Mar 26, 2020 5:32 pm
Does anyone think the bottom is actually in? I’m guessing we’re in for a ride until an inflection point in cases.
Until the Vix drops to a reasonable level, I don't trust any daily price points.

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by NotTooDeepLearning » Thu Mar 26, 2020 6:30 pm

Meaty wrote:
Thu Mar 26, 2020 5:32 pm
Does anyone think the bottom is actually in? I’m guessing we’re in for a ride until an inflection point in cases.
No. The Fed and the US government just fired their response salvo. In the coming weeks there will be no such good news.

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Meaty » Thu Mar 26, 2020 6:34 pm

Agree with the above. Hard to think all is well with 3M new UE claims and virus cases still rising. I’ve enjoyed the pop in UPRO though
"Discipline equals Freedom" - Jocko Willink

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RomeoMustDie » Thu Mar 26, 2020 6:51 pm

Great last few days for this portfolio. :sharebeer

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by parval » Thu Mar 26, 2020 7:04 pm

Anyone doing volatility targeting version of this? Are you mostly in cash for now?

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by privatefarmer » Thu Mar 26, 2020 7:36 pm

Been in strategy over a year now, have switched between different variants. But I’m now up ~25% from when I got in and my old SCV portfolio would’ve been down about 30%.

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Dovahkiin » Thu Mar 26, 2020 7:53 pm

I got done re-examining the tax hits after 16 years of UPRO/TMF vs SPY/TLT 3x using my algorithm over various amounts of contributions/etc. I'll save going over the math but if you're 100% long term gains, here is how much after-tax extra you'd have over upro/tmf under these following scenarios:

$100k lump sum over 1/1/2003 - 1/30/2019:
15% LTCG:
2/3 liquidated spy/tlt - 16.2% higher than UPRO/TMF
100% liquidated spy/tlt - 11.3% higher than UPRO/TMF

23.5%:
2/3 liquidated spy/tlt - 16.6% higher than UPRO/TMF
100% liquidated spy/tlt - 5.4% higher than UPRO/TMF

$100k lump sum, then $8,330/mo over 1/1/2003 - 1/30/2019:
23.5% bracket only (as these are $10m portfolios, lol.):
2/3 liquidation: 12.4% higher
100% liquidation: 3.5% higher

You'd have to liquidate 2/3 of your holdings to pay off the margin loan when you decide to stop it. Quite frankly, you may not want to be 50% spy/50% LTT in retirement, you may want more diversified bond income/etc. So quite frankly, looking at 5.4% higher than UPRO/TMF or 3.5% higher than UPRO/TMF isn't worth the margin risk for me either of SPY/TLT.

Then finally, UPRO/TMF's tax drag goes down considerably with $8.3k added every month, down to 0.73%, while with SPY/TLT you'll have the fixed 1.25% dividend/income tax drag. I'm too tired tonight to rerun tax drag simulations of UPRO/TMF to SPY/TLT, but under the lump sum situation UPRO was 1.5% tax drag, while spy/tlt was 1.25% from dividends and 0.25% - 0.43% from capital gains. Assuming capital gains tax drag goes away completely with SPY/TLT @ $8333/mo contributions, then the old 1% edge SPY/TLT had evaporates down to a 0.48% edge.

Going through with this exercise made me change my mind. I'll be sticking with UPRO/TMF. Hurrah!

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by BolekLolek » Thu Mar 26, 2020 8:24 pm

MoneyMarathon wrote:
Thu Mar 26, 2020 4:19 pm
LittleBitMore wrote:
Thu Mar 26, 2020 10:05 am
MoneyMarathon wrote:
Wed Mar 25, 2020 10:31 pm
BolekLolek wrote:
Wed Mar 25, 2020 8:45 pm
The reason I ask is because I haven’t really seen PSLDX perform that well in this downturn vs. VTSAX which is not surprising but I’m wondering how that may change on an upswing.
The three components of the PSLDX sandwich (all of which can move independently of each other on any given day) are:

(1) S&P 500 (about 1x exposure)
(2) Treasury bonds (about 0.6x exposure)
(3) Corporate and other bonds (about 0.8x exposure)

In the 2008 bear market, parts (2) and (3) balanced each other.

In the last month, (2) and (3) mostly balanced each other, with greater swings in corporate.
You're forgetting a very important 4th part which is a -1.1% fixed management fee. S&P 500 exposure is effectively free so you end up paying 1.1% for the (2) & (3) exposure. (2) is certainly yielding less than 1.1%. (3) is doing better but once the flight to safety subsides, those yields will drop as well. Is the weighted average yield of (2) & (3) > 1.1%?
Both PSLDX and Vanguard's BLV target the Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index.

BLV has 2.77% yield. With more than 100% exposure to bonds (closer to 1.4x - 1.5x), you're not paying 1.1% on the bonds in expense ratio. You're paying about 75 basis points. So the difference right now is about 2% yield.

Hypothetically, you can switch to NTSX (90% stocks / 60% treasury futures) at 0.2% expense ratio if there's not enough excess yield. You could also switch to a cheap index fund.

But if that's what you're worried about, hold on to PSLDX now because you benefit from declining yields, with its long duration.
Good points. Is the corporate bond component a positive or negative over TMF going forward?

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MoneyMarathon » Thu Mar 26, 2020 8:57 pm

BolekLolek wrote:
Thu Mar 26, 2020 8:24 pm
Good points. Is the corporate bond component a positive or negative over TMF going forward?
They're different. Holding 45% TMF gives 135% exposure to long duration treasuries. Holding PSLDX gives about 60% exposure to long duration treasuries and 80% exposure to corporate and other bonds (mortgage backed, international, etc). Credit risk is correlated to equity risk, but the correlation is low enough that it also provides diversification. Unlike going beyond 100% in leverage on the S&P 500, taking on credit risk doesn't move in lockstep with the S&P 500.

Basically:

TMF will do better when treasury yields go down, it will do worse when treasury yields are going up.

Corporate bonds do not go up during a bear market, but they will increase returns in a bull market.

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LittleBitMore » Thu Mar 26, 2020 9:28 pm

Meaty wrote:
Thu Mar 26, 2020 5:32 pm
Does anyone think the bottom is actually in? I’m guessing we’re in for a ride until an inflection point in cases.
Next Thursday will be 6m jobless and 200k+ infected; NYC hospitals will be on triage mode.....Yeah, I think we passed the bottom. FED will just start buying equities when needed.

:sharebeer :sharebeer

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Ramjet
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Ramjet » Thu Mar 26, 2020 9:31 pm

MoneyMarathon wrote:
Wed Mar 25, 2020 10:31 pm
BolekLolek wrote:
Wed Mar 25, 2020 8:45 pm
The reason I ask is because I haven’t really seen PSLDX perform that well in this downturn vs. VTSAX which is not surprising but I’m wondering how that may change on an upswing.
It's performing roughly as expected, based on its performance in the 2008 bear market:

Image

The three components of the PSLDX sandwich (all of which can move independently of each other on any given day) are:

(1) S&P 500 (about 1x exposure)
(2) Treasury bonds (about 0.6x exposure)
(3) Corporate and other bonds (about 0.8x exposure)

In the 2008 bear market, parts (2) and (3) balanced each other.

In the last month, (2) and (3) mostly balanced each other, with greater swings in corporate.

In either case, the portfolio is appropriate for someone who's prepared for declines that are similar to 100% stocks. To be clear, if you're in 100% stocks with some extra investments, it can go down more than 100% stocks. Likewise, if you're in 165% stocks in a vehicle intended for daily trading, you can lose more than the equivalent of 165% stocks, so changing to a 55% UPRO portfolio would increase the amount of risk you're taking. Since you expressed concern right after a bear market, it's probably a bad idea to increase your risk.

Personally, I view the whole thing as an opportunity. I got the upside/downside of equities, while also holding a large amount of bonds as an overlay with leverage so I didn't have to save cash to get the returns of bonds. The downside this year is about the same as 100% equities so far. But my bond portfolio on the corporate side has much higher potential for future returns. The yield is higher. Either that yield is captured as high yields are maintained or the yield goes down as the crisis abates, and in either scenario the bonds contribute to returns on the upswing.

Because the fund has limited exposure to junk bonds, it has limited downside from the bankruptcies that may be coming in that space. On the investment grade side, some unexpected news came out recently with the Fed backing the liquidity of the investment grade bond market through a purchasing program. So the best time to own investment grade bonds this year may have just been a week ago. In any case, the bond portfolio is diversified and historically has been managed well.

My recommendation would be to keep holding to the strategy that you preferred. Not having to rebalance is certainly a benefit, and there's a different set of worries in dealing with 3x leveraged daily ETFs and much greater exposures to both long duration treasuries and stocks.

If you think that you were taking too much equity-related risk, and if you want to try to lose less than the market in the next decline, maybe you should add to a treasury bond fund like VGIT (intermediate duration), VGLT (long duration), or EDV (extended duration). This would decrease your leverage and increase the allocation to treasury bonds (longer duration has more volatility when yields change). You don't have to add to this position all at once. For example, you could wait for the current crisis in equities to let up first.

If you want to start a side account to use UPRO and TMF, I'd suggest limiting a deposit to 5% of your current assets ("play money") due to the higher uncertainty (greater than 1x exposure in the volatile asset classes of stocks and long duration treasury bonds) and greater tail risks involved (including the losses that can be incurred due to daily resetting leverage if rebalancing is not timed well).
Still confident in PSLDX long term after the stimulus package?

Lots of inflation / stagflation talk around here

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MoneyMarathon » Thu Mar 26, 2020 9:59 pm

Ramjet wrote:
Thu Mar 26, 2020 9:31 pm
Still confident in PSLDX long term after the stimulus package?

Lots of inflation / stagflation talk around here
A boy can dream.

As a buyer, a decade of sideways action due to unexpected inflation and higher yields would be ideal.

Here's an attempt to estimate returns during the 1970s, using a spreadsheet of estimated historical annual returns.

P1 is 35% UPRO / 20% TMF / 45% VCIT (instead of VCLT, I have no data for this)
P2 is 40% UPRO / 60% IEF (intermediate 7-10 yr treasury)
P3 is 40% UPRO / 60% TLT (20+ year treasury)
P4 is 40% UPRO / 60% EDV (extended duration treasury)
P5 is 40% UPRO / 15% TMF / 45% EDV (extended duration treasury)

Image

P1 is not the same as PSLDX, but it is perhaps illustrative enough to have a ballpark figure of "sideways" in nominal terms.

I would prefer to have the returns in the portfolio deferred because I gain more on a dollar-weighted basis if those gains come later, when I've made more in contributions. Rising yields that eventually stop rising are, essentially, deferred returns. Higher yields are actually good for the bond investor, even though it's bad for the bond speculator in the short term. Painful early, pleasant later.

Short of hyperinflation, it doesn't seem painful enough to cause me to change the strategy.

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by IndexCore » Fri Mar 27, 2020 12:25 am

Nicolas Perrault wrote:
Wed Mar 25, 2020 6:58 pm
nisiprius wrote:
Mon Mar 23, 2020 4:22 pm
Also, don't let the semilog axis fool you... those funds have provided "opportunities" to do things like multiply your money eightfold in seven months (NUGT in 2017) and plenty of chances to double or triple your money in a few months... or, in the case of DUST, apparently, almost triple it in three days, just lately.

And a roulette roll gives you the opportunity to 36X your money in 20 seconds!
Has gold ever had a -100% loss that is 97% likely over the course of one minute?
How does this contribute to the conversation, except to make fun of people you don't agree with?

Kbg
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Kbg » Fri Mar 27, 2020 8:13 am

I have UGLD in my mix and this whole thing has been a non-event...my mix does not generate the overall returns of the main one proposed here but it does just fine in the 70s, way better in fact.

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts » Fri Mar 27, 2020 8:56 am

Short term, I think there needs to be some bond recovery for both PSLDX and TMF. PSLDX's bond portfolio is obviously more correlated to general prosperity. Long term, I think PSLDX's bond portfolio might be dull, but I don't expect much harm from it. I could certainly be wrong. It's actively managed, and so it may be that somewhere along the line they might take too much risk.
A fool and your money are soon partners

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Nicolas Perrault » Fri Mar 27, 2020 9:07 am

Kbg wrote:
Fri Mar 27, 2020 8:13 am
I have UGLD in my mix and this whole thing has been a non-event...my mix does not generate the overall returns of the main one proposed here but it does just fine in the 70s, way better in fact.
That's assuming your 3X gold ETN does not fail.

LittleBitMore
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LittleBitMore » Fri Mar 27, 2020 9:20 am

IndexCore wrote:
Fri Mar 27, 2020 12:25 am
Nicolas Perrault wrote:
Wed Mar 25, 2020 6:58 pm
nisiprius wrote:
Mon Mar 23, 2020 4:22 pm
Also, don't let the semilog axis fool you... those funds have provided "opportunities" to do things like multiply your money eightfold in seven months (NUGT in 2017) and plenty of chances to double or triple your money in a few months... or, in the case of DUST, apparently, almost triple it in three days, just lately.

And a roulette roll gives you the opportunity to 36X your money in 20 seconds!
Has gold ever had a -100% loss that is 97% likely over the course of one minute?
How does this contribute to the conversation, except to make fun of people you don't agree with?
Well gold is very different from 3x daily gold miner's etf (NUGT) and just click on DUST's 5 year history to see how well that's done. These are certainly more gambling than investing so I'd say his comparison is appropriate.

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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by HEDGEFUNDIE » Fri Mar 27, 2020 10:00 pm

If you started the Excellent Adventure at the beginning of the year with $100, you would have $91 right now.

If you put that money in VTI instead, you'd have $79 right now.

Max drawdown of the Excellent Adventure over these three months is -45% (so far).

Max drawdown of VTI is -35% (so far).

Stay the course my friends.

guyinlaw
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by guyinlaw » Fri Mar 27, 2020 10:10 pm

HEDGEFUNDIE wrote:
Fri Mar 27, 2020 10:00 pm
If you started the Excellent Adventure at the beginning of the year with $100, you would have $91 right now.

If you put that money in VTI instead, you'd have $79 right now.

Max drawdown of the Excellent Adventure over these three months is -45% (so far).

Max drawdown of VTI is -35% (so far).

Stay the course my friends.
2019 was very atypical. Stocks were up 30% and US Govt bonds, the risk-free asset, were also up. (EVD up 17%, TMF up 39%). When earning growth was deteriorating, stocks were still rising. Fed (expected) QE was the answer for whole year. That was not normal.

My suggestion is to not look at the 2019 performance of how this will behave. Especially with the Long term rates near it's floor in the near term. (TMF hitting it's limit)
Time is your friend; impulse is your enemy. - John C. Bogle

Kbg
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Kbg » Fri Mar 27, 2020 10:45 pm

Nicolas Perrault wrote:
Fri Mar 27, 2020 9:07 am
Kbg wrote:
Fri Mar 27, 2020 8:13 am
I have UGLD in my mix and this whole thing has been a non-event...my mix does not generate the overall returns of the main one proposed here but it does just fine in the 70s, way better in fact.
That's assuming your 3X gold ETN does not fail.
And TMF and UPRO. Everyone is rolling the dice on this aspect of things. I think the risk is about the same as the rest.

ChrisBenn
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by ChrisBenn » Fri Mar 27, 2020 11:07 pm

guyinlaw wrote:
Fri Mar 27, 2020 10:10 pm
HEDGEFUNDIE wrote:
Fri Mar 27, 2020 10:00 pm
If you started the Excellent Adventure at the beginning of the year with $100, you would have $91 right now.

If you put that money in VTI instead, you'd have $79 right now.

Max drawdown of the Excellent Adventure over these three months is -45% (so far).

Max drawdown of VTI is -35% (so far).

Stay the course my friends.
2019 was very atypical. Stocks were up 30% and US Govt bonds, the risk-free asset, were also up. (EVD up 17%, TMF up 39%). When earning growth was deteriorating, stocks were still rising. Fed (expected) QE was the answer for whole year. That was not normal.

My suggestion is to not look at the 2019 performance of how this will behave. Especially with the Long term rates near it's floor in the near term. (TMF hitting it's limit)
2019 was last year, pretty sure he was talking about 2020 :D :D

guyinlaw
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by guyinlaw » Fri Mar 27, 2020 11:44 pm

ChrisBenn wrote:
Fri Mar 27, 2020 11:07 pm
guyinlaw wrote:
Fri Mar 27, 2020 10:10 pm
HEDGEFUNDIE wrote:
Fri Mar 27, 2020 10:00 pm
If you started the Excellent Adventure at the beginning of the year with $100, you would have $91 right now.

If you put that money in VTI instead, you'd have $79 right now.

Max drawdown of the Excellent Adventure over these three months is -45% (so far).

Max drawdown of VTI is -35% (so far).

Stay the course my friends.
2019 was very atypical. Stocks were up 30% and US Govt bonds, the risk-free asset, were also up. (EVD up 17%, TMF up 39%). When earning growth was deteriorating, stocks were still rising. Fed (expected) QE was the answer for whole year. That was not normal.

My suggestion is to not look at the 2019 performance of how this will behave. Especially with the Long term rates near it's floor in the near term. (TMF hitting it's limit)
2019 was last year, pretty sure he was talking about 2020 :D :D
Peak of UPRO was Feb 19. The whole premise of UPRO/TMF was they were negatively correlated..

Jan 2 2019- Feb 19 2020
UPRO was up ~137%
TMF was up ~66%

Jan 2 2019- Feb 19 2020
UPRO was up ~16%
TMF was up ~19%

both went up, when they are supposed to be negatively correlated.. This was atypical behavior...

This unusually drop in Long term interest rates has hit a floor and will not continue to drop.. Good luck.
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Lee_WSP » Fri Mar 27, 2020 11:50 pm

guyinlaw wrote:
Fri Mar 27, 2020 11:44 pm
both went up, when they are supposed to be negatively correlated.. This was atypical behavior...

This unusually drop in Long term interest rates has hit a floor and will not continue to drop.. Good luck.
LTT's are only slightly negatively correlated. -0.14 to be exact.

MoneyMarathon
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MoneyMarathon » Sat Mar 28, 2020 1:55 am

ChrisBenn wrote:
Fri Mar 27, 2020 11:07 pm
guyinlaw wrote:
Fri Mar 27, 2020 10:10 pm
HEDGEFUNDIE wrote:
Fri Mar 27, 2020 10:00 pm
If you started the Excellent Adventure at the beginning of the year with $100, you would have $91 right now.

If you put that money in VTI instead, you'd have $79 right now.

Max drawdown of the Excellent Adventure over these three months is -45% (so far).

Max drawdown of VTI is -35% (so far).

Stay the course my friends.
2019 was very atypical. Stocks were up 30% and US Govt bonds, the risk-free asset, were also up. (EVD up 17%, TMF up 39%). When earning growth was deteriorating, stocks were still rising. Fed (expected) QE was the answer for whole year. That was not normal.

My suggestion is to not look at the 2019 performance of how this will behave. Especially with the Long term rates near it's floor in the near term. (TMF hitting it's limit)
2019 was last year, pretty sure he was talking about 2020 :D :D
Yes. If you started at the beginning of the year with $100 and quarterly rebalancing, then you bought $55 of UPRO and $45 of TMF (presumably with fractional shares). You'd pay $71.90 a share for UPRO (now $26.40, holding 36.7% of its starting value) and $26.73 a share for TMF (now $44.13, up 65.1%). You'd have $20.19 in UPRO and $74.25 in TMF, so you'd have $94.44 and be down only 5.5% today.

There is one thing that I noticed, though.

On March 3, 2020, the 10-year yield was 1.02, the 20-year yield was 1.44, and the 30-year yield was 1.64.
On March 17, 2020, the 10-year yield was 1.02, the 20-year yield was 1.45, and the 30-year yield was 1.63.

On March 3, the price of TMF was $39.38. On March 17, the price of TMF was $35.39.
The investor in TMF lost 10.2% of the value of the fund (about $4/share) between those dates.

EDV was $157.25 on March 3rd. It was $154.12 on March 17th. Down 2%.
TLT was $156.33 on March 3rd. It was $152.98 on March 17th. Down 2.5%.

TMF allows 3x constant leverage, and it works in retirement accounts, and it's easy to use, which is appealing. But the implementation of timing the rebalance becomes extremely important (the investor has drifted violently to a portfolio that is almost 80% treasury bonds for the second time this year). Not rebalancing through huge swings also introduces significant volatility decay (about 8% lost in the fund in two weeks due to volatility decay). I'm pointing this out partly because I previously analyzed it and thought it held up pretty well in terms of volatility decay, but I believe I was mistaken, and that those results were influenced by the lucky historical timing of quarterly rebalancing starting in a January. Maybe a different rebalancing strategy fares better. There's significant risk of a significant loss due to volatility decay when relying on quarterly rebalancing.

MiloMoney
Posts: 49
Joined: Wed Mar 18, 2020 11:37 pm

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MiloMoney » Sat Mar 28, 2020 2:14 am

market timer wrote:
Thu Mar 19, 2020 12:29 am
ribeyesteaks wrote:
Thu Mar 19, 2020 12:16 am
More leveraged ETF's are close to liquidating in the mREIT space:

https://catalyst-insights.com/the-virus-infecting-mlps/

mREITs were an absolute blood bath today, some down almost 50%. The news is it was due to forced liquidations by a run on the leveraged ETF's above. It makes sense now the huge wide swings we've been seeing in the market since 2018. Partly it was due to low vol up to that point, and a lot of hedge funds betting long on the low vol trade by writing options -- which they absolutely got wiped with lately. But, I think mostly it has to due with the increased amount of leveraged ETF's since 2008 that are out there. I think it's these levered ETF's that are making the markets swing wildly, and in effect, causing the swings to amplify and hurt each other. It's really ironic when you think about it.

Anyways, you guys are playing with fire at this point. My thoughts now is that we'll be seeing more and more levered ETF's liquidate as the bear market carries on.
I backed up the truck on mREITs yesterday: AGNC, NLY, STWD, BXMT.

However, not sure that UPRO/TMF have the same issues with regard to liquidation. As I understand, UPRO and TMF are ETFs, not ETNs. The liquidated funds were ETNs with well-defined liquidation conditions.
Check out BHR, luxury hotel REIT. I picked up some recently, it is dirt cheap and has a great history.

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market timer
Posts: 6302
Joined: Tue Aug 21, 2007 1:42 am

Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by market timer » Sat Mar 28, 2020 2:57 am

MiloMoney wrote:
Sat Mar 28, 2020 2:14 am
market timer wrote:
Thu Mar 19, 2020 12:29 am
ribeyesteaks wrote:
Thu Mar 19, 2020 12:16 am
More leveraged ETF's are close to liquidating in the mREIT space:

https://catalyst-insights.com/the-virus-infecting-mlps/

mREITs were an absolute blood bath today, some down almost 50%. The news is it was due to forced liquidations by a run on the leveraged ETF's above. It makes sense now the huge wide swings we've been seeing in the market since 2018. Partly it was due to low vol up to that point, and a lot of hedge funds betting long on the low vol trade by writing options -- which they absolutely got wiped with lately. But, I think mostly it has to due with the increased amount of leveraged ETF's since 2008 that are out there. I think it's these levered ETF's that are making the markets swing wildly, and in effect, causing the swings to amplify and hurt each other. It's really ironic when you think about it.

Anyways, you guys are playing with fire at this point. My thoughts now is that we'll be seeing more and more levered ETF's liquidate as the bear market carries on.
I backed up the truck on mREITs yesterday: AGNC, NLY, STWD, BXMT.

However, not sure that UPRO/TMF have the same issues with regard to liquidation. As I understand, UPRO and TMF are ETFs, not ETNs. The liquidated funds were ETNs with well-defined liquidation conditions.
Check out BHR, luxury hotel REIT. I picked up some recently, it is dirt cheap and has a great history.
The luxury hotels will remain, but someone else will own them after BHR goes through bankruptcy. I don't see how it survives.

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