HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by Centurion »

runeberg wrote: Wed Jul 29, 2020 5:29 am I'm from Germany and I would like to use this risk-parity strategy.

However my options are quite limited, given the legislation that we Europeans, find ourselves in. For example the best stand-ins for UPRO, from European brokers, that I could find are:

DBPG / LU0411078552 // Xtrackers S&P 500 2x Lev Daily Swap UCITS ETF 1C
LQQ / FR0010342592 // LYXOR ETF NSDQ DL
QQQ3 / IE00B8W5C578 // BOOST NASDAQ 100 3X LEVERAGE DAILY

They all have pitiful volume but QQQ3 is especially terrible.

For the stand-ins for the treasury bonds I've been equally unlucky. I can't even find anything with leverage.
IS04 / IE00BSKRJZ44 // iShares $ Treasury Bond 20+yr UCITS ETF USD (Dist)
VG7L / IE00BZ163M45 Vanguard USD Treasury Bond UCITS ETF Inc

Is it just futile to attempt to try to replicate this as a European? I also wouldn't know how to create some sort of parity when the equity portion is leveraged vs the bond portion being unleveraged.

I'm very interested to hear any feedback by Europeans! Thanks in advance. :D.
I am from Germany also and at least using flatex i can buy / sell TMF (US25459W5408) and UPRO (US74347X8645). Should be possible with every german broker that supports trading on US stock exchanges...?
runeberg
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by runeberg »

Centurion wrote: Wed Jul 29, 2020 6:55 am I am from Germany also and at least using flatex i can buy / sell TMF (US25459W5408) and UPRO (US74347X8645). Should be possible with every german broker that supports trading on US stock exchanges...?
Thanks for the Information about flatex. I saw the product page for Degiro (owned by flatex) and it listed NASDAQ, NYSE, et al. but I didn't see that was only true for stock, not for ETF.

I'll check out flatex, thanks!
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firebirdparts
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

mjuszczak wrote: Tue Jul 28, 2020 6:36 pm Is anyone still doing the 55/45 UPRO/TMF method? Just curious.

Yeah. As mentioned, what would you ever need to post about it?
A fool and your money are soon partners
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danyboy7
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by danyboy7 »

runeberg wrote: Wed Jul 29, 2020 7:24 am
Centurion wrote: Wed Jul 29, 2020 6:55 am I am from Germany also and at least using flatex i can buy / sell TMF (US25459W5408) and UPRO (US74347X8645). Should be possible with every german broker that supports trading on US stock exchanges...?
Thanks for the Information about flatex. I saw the product page for Degiro (owned by flatex) and it listed NASDAQ, NYSE, et al. but I didn't see that was only true for stock, not for ETF.

I'll check out flatex, thanks!
I have the same cursed problem,the corrupt european law :oops: doesn't allow us to buy and replicate the best strategies
I'm having a terrible trouble to find the following x3 leveraged etfs:
UPRO,TMF,TYD,UTSL,UGL
Is it possible to buy them somewhere for europeans ? Does this flatex allow us italians to buy them ? Thanks for anyone wanting to help us
I have seen the light
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queso
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by queso »

firebirdparts wrote: Wed Jul 29, 2020 7:28 am
mjuszczak wrote: Tue Jul 28, 2020 6:36 pm Is anyone still doing the 55/45 UPRO/TMF method? Just curious.

Yeah. As mentioned, what would you ever need to post about it?
yep, still doing it.
Semantics
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Joined: Tue Mar 10, 2020 1:42 pm

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

Post by Semantics »

Thereum wrote: Tue Jul 28, 2020 4:29 pm Shorting leveraged inverse ETFs gives much better results than going long leveraged ETFs. (E.g. shorting SQQQ is better than going long TQQQ; shorting SPXU is better than going long UPRO.)
It sounds like you know what you are doing, but this is a very dangerous idea for most people. First, in he US you can't short in an IRA - if for some reason your broker allows it, the IRS may decide that the account is no longer an IRA. So it needs to be done in a taxable account. But that means you will pay short term capital gains when you close any positions. You will also have to maintain enough margin in the account, otherwise you'll get liquidated (and pay STCG tax if there are any gains left).

I'm not a seasoned short seller, but as far as I know, minimum margin for a short position is 125% of the market value, and 150% initially so let's use that figure because you'll be shorting more shares on a regular basis. So the short positions can make up at most 1/1.5 = 67% of your portfolio, assuming you maintain the market value of the short positions in cash, to avoid borrowing a highly volatile to buy other volatile assets. If the adventure grows to be most of your portfolio, which is the hope, you'll therefore to maintain at least 33% of it in the non-leveraged ETFs. But it can't just be 33%, because you'll also need to have enough margin buffer to withstand dips in the market and not get liquidated. In March, SPXU increased by over 240%. Thus you would have needed 240%*0.33 = 79.2% of your portfolio to be in long securities. If 45% of that is TMF, that leaves 34.2% for UPRO. But wait, the long position itself had at least a 14% drawdown (using PV monthly data -- the daily drawdown was likely worse). So you actually would have needed more like 85% of your portfolio in long securities. So you can't really safely hold much of the adventure in short positions at all. And that's March 2020. In 2008 it would have been much worse.

Of course, the margin call problem can be mitigated somewhat by aggressive rebalancing or switching up the allocation any time there's a major downturn. But then the short term capital gains taxes start eating up any wins from using this strategy. You also run the risk that the shares don't at some point become harder to borrow or interest rates rise, and borrowing fees start to outweigh the extra returns (though, at least you could somewhat offset that by holding the proceeds of the short sale in a safe bond fund). It also does have the benefit that as long as you maintain the short positions you are deferring taxes on the proceeds and can redeploy that capital.

Please let me know if I'm missing anything. This sounds good in theory, but almost impossible to sustain in more than a small fraction of your overall portfolio. It might be a nice way to run things while the adventure is small though (e.g. the recommended 5% or less).

TL;DR - there's a good reason there are shares available to borrow to short sell. The returns are, on paper, are better with this strategy, but picking up pennies in front of a steam roller, no free lunch, and so forth. Someone's going to blow up their portfolio using this.
manlymatt83
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by manlymatt83 »

firebirdparts wrote: Wed Jul 29, 2020 7:28 am
mjuszczak wrote: Tue Jul 28, 2020 6:36 pm Is anyone still doing the 55/45 UPRO/TMF method? Just curious.

Yeah. As mentioned, what would you ever need to post about it?
I am going to purchase some PSLDX and was trying to figure out:
  • How much I should have of PSLDX compared to UPRO/TMF
  • How I need to adjust my current VT/BND holdings (my only other holdings) to compensate
manlymatt83
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by manlymatt83 »

queso wrote: Wed Jul 29, 2020 9:08 am
firebirdparts wrote: Wed Jul 29, 2020 7:28 am
mjuszczak wrote: Tue Jul 28, 2020 6:36 pm Is anyone still doing the 55/45 UPRO/TMF method? Just curious.

Yeah. As mentioned, what would you ever need to post about it?
yep, still doing it.
Have you adjusted your other total market/total bond holdings to compensate for your UPRO/TMF holdings? Treating UPRO/TMF as 100% stocks, for example?
Impatience
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Impatience »

Semantics wrote: Wed Jul 29, 2020 10:59 am
Thereum wrote: Tue Jul 28, 2020 4:29 pm Shorting leveraged inverse ETFs gives much better results than going long leveraged ETFs. (E.g. shorting SQQQ is better than going long TQQQ; shorting SPXU is better than going long UPRO.)
It sounds like you know what you are doing, but this is a very dangerous idea for most people.
Hi, I’ve been studying and backtesting this short sqqq/long tmf idea since I read about it in this thread and it sounded too good to be true. I came to about the same results.

If you model a pure play of 100% TMF / -100% SQQQ in portfolio visualizer with quarterly or monthly rebalancing you get around 90% CAGR and insane gains. However this is ignoring, as you said, the short term capital gains that will be hammering you on EVERY rebalance - even if you held out for over a year because with short sales it doesn’t matter.

On top of that is the borrowing fees ... not a big deal though if you use Interactive Brokers.

More important is the threat of margin calls. FINRA requires a whopping 90% maintenance margin when someone shorts a 3x leveraged ETF. You will need to maintain a healthy cash or long equity cushion beyond merely holding the proceeds of the short sale. I modeled this as 100% TMF, 50% cash, -50% sqqq. You’ll probably still get liquidated anyway. Brings CAGR down around 40%.

The drag on this approach would be intense and it would be coming from a lot of directions at once. But maybe you could eke out a superior gain anyway? As long as tech goes on enough bull runs you may be able to outearn your margin calls.

Anyway I’m going to try it with a couple grand in my taxable account. Should be fun.
Thereum
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Thereum »

danyboy7 wrote: Wed Jul 29, 2020 3:17 am
Thereum wrote: Tue Jul 28, 2020 4:29 pm Shorting leveraged inverse ETFs gives much better results than going long leveraged ETFs. (E.g. shorting SQQQ is better than going long TQQQ; shorting SPXU is better than going long UPRO.)

In fact, you can just do a pairs trade with SQQQ/SPXU and long term treasuries and receive higher risk-adjusted and absolute returns than going long UPRO/TMF (and variations thereof). You might think that it's expensive to short leveraged inverse ETFs, but IBKR is charging 1% or less.

I will likely be switching my strategy.
How is it possible to short a short leveraged etf ? With options ? It's pretty unclear for me
You can short the same way you would any ETF. You can also short with options.

My plan is to sell an ITM/OTM call spread and buy an ATM put on SQQQ. The risk/return is roughly 1:1. My backtest shows a 41% annual return with a Sharpe ratio of 1.14. After you add in long term treasuries, it will get even better.
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

Thereum wrote: Wed Jul 29, 2020 1:29 pm
danyboy7 wrote: Wed Jul 29, 2020 3:17 am
Thereum wrote: Tue Jul 28, 2020 4:29 pm Shorting leveraged inverse ETFs gives much better results than going long leveraged ETFs. (E.g. shorting SQQQ is better than going long TQQQ; shorting SPXU is better than going long UPRO.)

In fact, you can just do a pairs trade with SQQQ/SPXU and long term treasuries and receive higher risk-adjusted and absolute returns than going long UPRO/TMF (and variations thereof). You might think that it's expensive to short leveraged inverse ETFs, but IBKR is charging 1% or less.

I will likely be switching my strategy.
How is it possible to short a short leveraged etf ? With options ? It's pretty unclear for me
You can short the same way you would any ETF. You can also short with options.

My plan is to sell an ITM/OTM call spread and buy an ATM put on SQQQ. The risk/return is roughly 1:1. My backtest shows a 41% annual return with a Sharpe ratio of 1.14. After you add in long term treasuries, it will get even better.
This is a good way to avoid margin call risk, but how did you backtest the options? I would have thought that the expected decay of SQQQ due to the compounded daily leverage resets would be priced into the premiums.
isubrama
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by isubrama »

vijaym73 wrote: Tue Jul 28, 2020 9:32 pm I am doing this at 60/40 — TQQQ/TMF with quarterly rebalancing.

Thx

VJ
How is your portfolio doing so far, compared to UPRO/TMF 55/45 ? What is the rational behind TQQQ/TMF 60/40 ?
Thereum
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Thereum »

Semantics wrote: Wed Jul 29, 2020 2:58 pm
Thereum wrote: Wed Jul 29, 2020 1:29 pm
danyboy7 wrote: Wed Jul 29, 2020 3:17 am
Thereum wrote: Tue Jul 28, 2020 4:29 pm Shorting leveraged inverse ETFs gives much better results than going long leveraged ETFs. (E.g. shorting SQQQ is better than going long TQQQ; shorting SPXU is better than going long UPRO.)

In fact, you can just do a pairs trade with SQQQ/SPXU and long term treasuries and receive higher risk-adjusted and absolute returns than going long UPRO/TMF (and variations thereof). You might think that it's expensive to short leveraged inverse ETFs, but IBKR is charging 1% or less.

I will likely be switching my strategy.
How is it possible to short a short leveraged etf ? With options ? It's pretty unclear for me
You can short the same way you would any ETF. You can also short with options.

My plan is to sell an ITM/OTM call spread and buy an ATM put on SQQQ. The risk/return is roughly 1:1. My backtest shows a 41% annual return with a Sharpe ratio of 1.14. After you add in long term treasuries, it will get even better.
This is a good way to avoid margin call risk, but how did you backtest the options? I would have thought that the expected decay of SQQQ due to the compounded daily leverage resets would be priced into the premiums.
I used this website: https://wheel.orats.com/backtest

I don't think the options market prices in directional movements -- it assumes a stock is equally likely to go up or down. If directional assumptions were priced in, then traders could perform arbitrage using conversions.
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

Thereum wrote: Wed Jul 29, 2020 3:24 pm
Semantics wrote: Wed Jul 29, 2020 2:58 pm
Thereum wrote: Wed Jul 29, 2020 1:29 pm
danyboy7 wrote: Wed Jul 29, 2020 3:17 am
Thereum wrote: Tue Jul 28, 2020 4:29 pm Shorting leveraged inverse ETFs gives much better results than going long leveraged ETFs. (E.g. shorting SQQQ is better than going long TQQQ; shorting SPXU is better than going long UPRO.)

In fact, you can just do a pairs trade with SQQQ/SPXU and long term treasuries and receive higher risk-adjusted and absolute returns than going long UPRO/TMF (and variations thereof). You might think that it's expensive to short leveraged inverse ETFs, but IBKR is charging 1% or less.

I will likely be switching my strategy.
How is it possible to short a short leveraged etf ? With options ? It's pretty unclear for me
You can short the same way you would any ETF. You can also short with options.

My plan is to sell an ITM/OTM call spread and buy an ATM put on SQQQ. The risk/return is roughly 1:1. My backtest shows a 41% annual return with a Sharpe ratio of 1.14. After you add in long term treasuries, it will get even better.
This is a good way to avoid margin call risk, but how did you backtest the options? I would have thought that the expected decay of SQQQ due to the compounded daily leverage resets would be priced into the premiums.
I used this website: https://wheel.orats.com/backtest

I don't think the options market prices in directional movements -- it assumes a stock is equally likely to go up or down. If directional assumptions were priced in, then traders could perform arbitrage using conversions.
Thanks for the backtesting site -- that looks useful!

The options markets do price in directional movements. They are driven by supply and demand. So e.g. I wouldn't be willing to sell you a SQQQ put option 10% out of the money for the same price as a call 10% out of the money, even with full knowledge that QQQ itself would stay flat, knowing that volatility decay works against me in the case of the former. The pricing also takes into account dividends and the risk-free rate.

This can also be seen with options on mean-reverting indices like VIX, which is currently above its historical mean - options on puts at -x delta are more expensive than calls at x delta. Another example where directionality is priced in is NKLA put premiums a few weeks ago where the stock would have had to halve in value for them to be profitable, whereas calls were nowhere near that expensive.

(This is also evident in the SQQQ options chain. 6.29 right now, and the 8/28 $6 put is $0.44, while the $7 call is $0.47, so an 11% increase is priced almost the same as a 4.8% decrease.)
Thereum
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Thereum »

Semantics wrote: Wed Jul 29, 2020 4:33 pm
Thereum wrote: Wed Jul 29, 2020 3:24 pm
Semantics wrote: Wed Jul 29, 2020 2:58 pm
Thereum wrote: Wed Jul 29, 2020 1:29 pm
danyboy7 wrote: Wed Jul 29, 2020 3:17 am

How is it possible to short a short leveraged etf ? With options ? It's pretty unclear for me
You can short the same way you would any ETF. You can also short with options.

My plan is to sell an ITM/OTM call spread and buy an ATM put on SQQQ. The risk/return is roughly 1:1. My backtest shows a 41% annual return with a Sharpe ratio of 1.14. After you add in long term treasuries, it will get even better.
This is a good way to avoid margin call risk, but how did you backtest the options? I would have thought that the expected decay of SQQQ due to the compounded daily leverage resets would be priced into the premiums.
I used this website: https://wheel.orats.com/backtest

I don't think the options market prices in directional movements -- it assumes a stock is equally likely to go up or down. If directional assumptions were priced in, then traders could perform arbitrage using conversions.
Thanks for the backtesting site -- that looks useful!

The options markets do price in directional movements. They are driven by supply and demand. So e.g. I wouldn't be willing to sell you a SQQQ put option 10% out of the money for the same price as a call 10% out of the money, even with full knowledge that QQQ itself would stay flat, knowing that volatility decay works against me in the case of the former. The pricing also takes into account dividends and the risk-free rate.

This can also be seen with options on mean-reverting indices like VIX, which is currently above its historical mean - options on puts at -x delta are more expensive than calls at x delta. Another example where directionality is priced in is NKLA put premiums a few weeks ago where the stock would have had to halve in value for them to be profitable, whereas calls were nowhere near that expensive.

(This is also evident in the SQQQ options chain. 6.29 right now, and the 8/28 $6 put is $0.44, while the $7 call is $0.47, so an 11% increase is priced almost the same as a 4.8% decrease.)
SQQQ calls might trade at a higher IV because they serve as a hedge against market crashes. It's similar to SPX puts or VIX calls trading at an IV premium. That is why I am selling an ITM call and hedging with a slightly OTM call. If I went further OTM with the calls, I would be risking a lot for a very small premium.

I am not an expert on options theory, which is why I like backtesting. I can say that shorting SQQQ gives much better results than shorting volatility. It's really the best strategy I've ever tested.
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physixfan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by physixfan »

I like how a Bogleheads forum now has discussions about trading a derivative of a leveraged inverse ETF. I spent some time to think about and research about buying puts of SPXU or SQQQ. It seems to be a good strategy, better than holding UPRO or TQQQ in terms of avoiding volatility decay. Now sure if there’s some caveat that I did not know.
Nthomas
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Nthomas »

How is the tax cost ratio of UPRO and TMF lower than PTI? 0.15, 0.25, and .7 respectively. Are they appropriate for a taxable account?
Walkure
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Walkure »

Impatience wrote: Wed Jul 29, 2020 11:16 am
Semantics wrote: Wed Jul 29, 2020 10:59 am
Thereum wrote: Tue Jul 28, 2020 4:29 pm Shorting leveraged inverse ETFs gives much better results than going long leveraged ETFs. (E.g. shorting SQQQ is better than going long TQQQ; shorting SPXU is better than going long UPRO.)
It sounds like you know what you are doing, but this is a very dangerous idea for most people.
Hi, I’ve been studying and backtesting this short sqqq/long tmf idea since I read about it in this thread and it sounded too good to be true. I came to about the same results.

If you model a pure play of 100% TMF / -100% SQQQ in portfolio visualizer with quarterly or monthly rebalancing you get around 90% CAGR and insane gains. However this is ignoring, as you said, the short term capital gains that will be hammering you on EVERY rebalance - even if you held out for over a year because with short sales it doesn’t matter.

On top of that is the borrowing fees ... not a big deal though if you use Interactive Brokers.

More important is the threat of margin calls. FINRA requires a whopping 90% maintenance margin when someone shorts a 3x leveraged ETF. You will need to maintain a healthy cash or long equity cushion beyond merely holding the proceeds of the short sale. I modeled this as 100% TMF, 50% cash, -50% sqqq. You’ll probably still get liquidated anyway. Brings CAGR down around 40%.

The drag on this approach would be intense and it would be coming from a lot of directions at once. But maybe you could eke out a superior gain anyway? As long as tech goes on enough bull runs you may be able to outearn your margin calls.

Anyway I’m going to try it with a couple grand in my taxable account. Should be fun.
I'd suggest you take a look at the reverse - long QQQ and short TMV. It accomplishes much the same thing but the fact that long term interest rates, while volatile, are far more rangebound than equities over short periods of time during major meltdowns, so shorting them would be less likely to trigger a margin call and would help you avoid more volatility decay. In other words, the "decay" can help you trim exposure if equities string together several days of consecutive losses, which you lose by shorting the inverse, while interest rates seem more likely to oscillate even when the overall trend is strongly in one direction.
manlymatt83
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by manlymatt83 »

For those doing this, are you reinvesting dividends, or taking the cash each time and using it to buy up what’s undervalued?
Walkure
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Walkure »

mjuszczak wrote: Wed Jul 29, 2020 9:18 pm For those doing this, are you reinvesting dividends, or taking the cash each time and using it to buy up what’s undervalued?
Many folks are using M1, which automatically buys whatever is underweighted.
manlymatt83
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by manlymatt83 »

Walkure wrote: Wed Jul 29, 2020 9:23 pm
mjuszczak wrote: Wed Jul 29, 2020 9:18 pm For those doing this, are you reinvesting dividends, or taking the cash each time and using it to buy up what’s undervalued?
Many folks are using M1, which automatically buys whatever is underweighted.
What if I’m not using m1 but have 80% in an isolated taxable account? My worry is that if I don’t reinvest dividends, it could take a few dividends to have enough to buy one share of one or the other.

Hence would want to reinvest dividends and just rebalance quarterly with the 20% I have in my IRA.

Not sure if the logic makes sense.
Impatience
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Impatience »

Walkure wrote: Wed Jul 29, 2020 9:09 pm
Impatience wrote: Wed Jul 29, 2020 11:16 am
Semantics wrote: Wed Jul 29, 2020 10:59 am
Thereum wrote: Tue Jul 28, 2020 4:29 pm Shorting leveraged inverse ETFs gives much better results than going long leveraged ETFs. (E.g. shorting SQQQ is better than going long TQQQ; shorting SPXU is better than going long UPRO.)
It sounds like you know what you are doing, but this is a very dangerous idea for most people.
Hi, I’ve been studying and backtesting this short sqqq/long tmf idea since I read about it in this thread and it sounded too good to be true. I came to about the same results.

If you model a pure play of 100% TMF / -100% SQQQ in portfolio visualizer with quarterly or monthly rebalancing you get around 90% CAGR and insane gains. However this is ignoring, as you said, the short term capital gains that will be hammering you on EVERY rebalance - even if you held out for over a year because with short sales it doesn’t matter.

On top of that is the borrowing fees ... not a big deal though if you use Interactive Brokers.

More important is the threat of margin calls. FINRA requires a whopping 90% maintenance margin when someone shorts a 3x leveraged ETF. You will need to maintain a healthy cash or long equity cushion beyond merely holding the proceeds of the short sale. I modeled this as 100% TMF, 50% cash, -50% sqqq. You’ll probably still get liquidated anyway. Brings CAGR down around 40%.

The drag on this approach would be intense and it would be coming from a lot of directions at once. But maybe you could eke out a superior gain anyway? As long as tech goes on enough bull runs you may be able to outearn your margin calls.

Anyway I’m going to try it with a couple grand in my taxable account. Should be fun.
I'd suggest you take a look at the reverse - long QQQ and short TMV. It accomplishes much the same thing but the fact that long term interest rates, while volatile, are far more rangebound than equities over short periods of time during major meltdowns, so shorting them would be less likely to trigger a margin call and would help you avoid more volatility decay. In other words, the "decay" can help you trim exposure if equities string together several days of consecutive losses, which you lose by shorting the inverse, while interest rates seem more likely to oscillate even when the overall trend is strongly in one direction.
A 3x inverse treasury etf would still have a 90% margin requirement ... and though that particular security wouldn’t swing around as much in a downturn, the long position would and that would still erode your account margin. I’m pretty sure that’s how it works anyway. Maybe just be short both SQQQ and TMV. All short portfolio!
Thereum
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Thereum »

Impatience wrote: Wed Jul 29, 2020 9:50 pm
A 3x inverse treasury etf would still have a 90% margin requirement ... and though that particular security wouldn’t swing around as much in a downturn, the long position would and that would still erode your account margin. I’m pretty sure that’s how it works anyway. Maybe just be short both SQQQ and TMV. All short portfolio!
Funny -- shortly before seeing this comment I had tested a short SQQQ + short TMV strategy, with a far OTM long call as a hedge. The annual return over 10 years was 63% with a Sharpe ratio of 1.42! I also tested the same strategy using deep ITM puts (which give the same position as short + OTM call) and got an annual return of 50% with a Sharpe ratio of 1.23. Still very good, but not as good as shorting the ETFs and hedging with long calls. I suppose the long put strategy better captures the financing costs of the short positions, so it's more accurate.

I think we are beginning to see the power of betting against leveraged inverse funds!

Edit: Tested SQQQ + TMV short call backspread. This offers more protection in case of a market crash. Got an annual return of 103% with a Sharpe ratio of 1.35. No shorting of ETFs is involved, which makes the strategy a lot easier and cheaper to employ.

A lot of this might sound too good to be true, but think about it from another point of view: Isn't a 3x daily leveraged ETF that bets against blue chip stocks a little too bad to be true? Surely it makes sense to bet against the worst investment product ever created.
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privatefarmer
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by privatefarmer »

been following this thread from the beginning and am heavily invested in LETFs now. Am intrigued by the idea of shorting the bear versions of these funds to counter act the volatility drag. However, I am a TOTAL novice when it comes to using options/short selling etc. I use interactive brokers, could someone provide a quick summary of how I would even go about transitioning from long-only TQQQ/TMF to short selling SQQQ/TMV? I would sell my securities, leaving me w/ just cash, and then use that to borrow shares of SQQQ/TMV, correct? So if i had say $100k in cash, how much negative exposure to SQQQ/TMV would I get? Would it be a 1:1 conversion or would I not be able to get as much exposure w/ the 100k as I would by just owning TQQQ/TMF? Or, if someone knows of some good "how-to" books on this subject I would greatly appreciate the recommendations. Thanks!
Impatience
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Impatience »

privatefarmer wrote: Thu Jul 30, 2020 4:32 am been following this thread from the beginning and am heavily invested in LETFs now. Am intrigued by the idea of shorting the bear versions of these funds to counter act the volatility drag. However, I am a TOTAL novice when it comes to using options/short selling etc. I use interactive brokers, could someone provide a quick summary of how I would even go about transitioning from long-only TQQQ/TMF to short selling SQQQ/TMV? I would sell my securities, leaving me w/ just cash, and then use that to borrow shares of SQQQ/TMV, correct? So if i had say $100k in cash, how much negative exposure to SQQQ/TMV would I get? Would it be a 1:1 conversion or would I not be able to get as much exposure w/ the 100k as I would by just owning TQQQ/TMF? Or, if someone knows of some good "how-to" books on this subject I would greatly appreciate the recommendations. Thanks!
I really really really recommend testing the waters in a paper trading account. If you use IBKR then you already have one set up with $1M fake dollars in it. It takes a lot of practice to understand all the weird nuances of margin and short-sale trading. There’s a reason so many people have horror stories of being suddenly liquidated by their broker. Test it extensively and please don’t commit all your 100k to this unless that is a small % or your net worth. If the strategy is half as good as it appears it won’t need that much capital to pay off.
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danyboy7
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by danyboy7 »

Thereum wrote: Wed Jul 29, 2020 1:29 pm
danyboy7 wrote: Wed Jul 29, 2020 3:17 am
Thereum wrote: Tue Jul 28, 2020 4:29 pm Shorting leveraged inverse ETFs gives much better results than going long leveraged ETFs. (E.g. shorting SQQQ is better than going long TQQQ; shorting SPXU is better than going long UPRO.)

In fact, you can just do a pairs trade with SQQQ/SPXU and long term treasuries and receive higher risk-adjusted and absolute returns than going long UPRO/TMF (and variations thereof). You might think that it's expensive to short leveraged inverse ETFs, but IBKR is charging 1% or less.

I will likely be switching my strategy.
How is it possible to short a short leveraged etf ? With options ? It's pretty unclear for me
You can short the same way you would any ETF. You can also short with options.

My plan is to sell an ITM/OTM call spread and buy an ATM put on SQQQ. The risk/return is roughly 1:1. My backtest shows a 41% annual return with a Sharpe ratio of 1.14. After you add in long term treasuries, it will get even better.
"You can short the same way you would any ETF. You can also short with options." so in either cases you would need a margin trading account,right ? I've never shorted,got long on leveraged etfs.I didn't know it was possible to do that
I have seen the light
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danyboy7
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by danyboy7 »

Thereum wrote: Thu Jul 30, 2020 12:13 am
Impatience wrote: Wed Jul 29, 2020 9:50 pm
A 3x inverse treasury etf would still have a 90% margin requirement ... and though that particular security wouldn’t swing around as much in a downturn, the long position would and that would still erode your account margin. I’m pretty sure that’s how it works anyway. Maybe just be short both SQQQ and TMV. All short portfolio!
Funny -- shortly before seeing this comment I had tested a short SQQQ + short TMV strategy, with a far OTM long call as a hedge. The annual return over 10 years was 63% with a Sharpe ratio of 1.42! I also tested the same strategy using deep ITM puts (which give the same position as short + OTM call) and got an annual return of 50% with a Sharpe ratio of 1.23. Still very good, but not as good as shorting the ETFs and hedging with long calls. I suppose the long put strategy better captures the financing costs of the short positions, so it's more accurate.

I think we are beginning to see the power of betting against leveraged inverse funds!

Edit: Tested SQQQ + TMV short call backspread. This offers more protection in case of a market crash. Got an annual return of 103% with a Sharpe ratio of 1.35. No shorting of ETFs is involved, which makes the strategy a lot easier and cheaper to employ.

A lot of this might sound too good to be true, but think about it from another point of view: Isn't a 3x daily leveraged ETF that bets against blue chip stocks a little too bad to be true? Surely it makes sense to bet against the worst investment product ever created.
Insane results for sure ! Would you mind to tell us on which software did you backtested this strategy (including options) ? And if it would be possible to make automatic this strategy on brokerage accounts including also the options management (buy/sell ecc) ? And I'm wondering statistically how many margin calls would you get in a single month :confused
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Gufomel
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Gufomel »

I know very little about shorting (and have no practical experience), much less shorting an inverse leveraged ETF :oops:

The first basic thing I think I’m lost on is how could shorting SQQQ give better return than long TQQQ?

On a daily basis, if QQQ is up 1% then TQQQ would be up roughly 3%. Wouldn’t SQQQ be down roughly 3% (thus by shorting it you would be up 3%)? Does the data show that its magnitude of change is actually greater than 3x the underlying? Or is it something else in the mechanics of shorting inverse leveraged ETFs that yields greater returns (based on backtesting) which I’m not catching?
stormcrow
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by stormcrow »

Thereum wrote: Thu Jul 30, 2020 12:13 am
Impatience wrote: Wed Jul 29, 2020 9:50 pm
A 3x inverse treasury etf would still have a 90% margin requirement ... and though that particular security wouldn’t swing around as much in a downturn, the long position would and that would still erode your account margin. I’m pretty sure that’s how it works anyway. Maybe just be short both SQQQ and TMV. All short portfolio!
Funny -- shortly before seeing this comment I had tested a short SQQQ + short TMV strategy, with a far OTM long call as a hedge. The annual return over 10 years was 63% with a Sharpe ratio of 1.42! I also tested the same strategy using deep ITM puts (which give the same position as short + OTM call) and got an annual return of 50% with a Sharpe ratio of 1.23. Still very good, but not as good as shorting the ETFs and hedging with long calls. I suppose the long put strategy better captures the financing costs of the short positions, so it's more accurate.

I think we are beginning to see the power of betting against leveraged inverse funds!

Edit: Tested SQQQ + TMV short call backspread. This offers more protection in case of a market crash. Got an annual return of 103% with a Sharpe ratio of 1.35. No shorting of ETFs is involved, which makes the strategy a lot easier and cheaper to employ.

A lot of this might sound too good to be true, but think about it from another point of view: Isn't a 3x daily leveraged ETF that bets against blue chip stocks a little too bad to be true? Surely it makes sense to bet against the worst investment product ever created.
Can you link to your back test, or at least give the parameters so we can check? What strikes/expiration, etc? Thanks!
Hydromod
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

Gufomel wrote: Thu Jul 30, 2020 6:27 am I know very little about shorting (and have no practical experience), much less shorting an inverse leveraged ETF :oops:

The first basic thing I think I’m lost on is how could shorting SQQQ give better return than long TQQQ?

On a daily basis, if QQQ is up 1% then TQQQ would be up roughly 3%. Wouldn’t SQQQ be down roughly 3% (thus by shorting it you would be up 3%)? Does the data show that its magnitude of change is actually greater than 3x the underlying? Or is it something else in the mechanics of shorting inverse leveraged ETFs that yields greater returns (based on backtesting) which I’m not catching?
I'm no expert, but you have to pay the man some expense money every day (the ER). This reduces the returns from both TQQQ and SQQQ. So SQQQ moves down more than TQQQ moves up.
langlands
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by langlands »

Gufomel wrote: Thu Jul 30, 2020 6:27 am I know very little about shorting (and have no practical experience), much less shorting an inverse leveraged ETF :oops:

The first basic thing I think I’m lost on is how could shorting SQQQ give better return than long TQQQ?

On a daily basis, if QQQ is up 1% then TQQQ would be up roughly 3%. Wouldn’t SQQQ be down roughly 3% (thus by shorting it you would be up 3%)? Does the data show that its magnitude of change is actually greater than 3x the underlying? Or is it something else in the mechanics of shorting inverse leveraged ETFs that yields greater returns (based on backtesting) which I’m not catching?
It's because the shorting of SQQQ is rebalanced monthly, which picks up beta slippage. If you ignore the effects of the expense ratio, short borrow, taxes, etc. the whole thing is just playing the leverage ratio.

Going long TQQQ means by definition of the product being leveraged 3x QQQ on a daily basis. When you short SQQQ on any given day, you are also effectively leveraged 3x QQQ. If you rebalance daily, you have basically replicated TQQQ.

What's going on with the crazy CAGR in the thread here (and which should be emphasized much more) is that the backtested results are rebalancing the short SQQQ position monthly. During that month, if QQQ goes up, your leverage decreases and if QQQ goes down, your leverage increases. An implicit assumption here is that you're even able to maintain that short position without rebalancing during the month.
Impatience
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Impatience »

Hydromod wrote: Thu Jul 30, 2020 10:17 am
Gufomel wrote: Thu Jul 30, 2020 6:27 am I know very little about shorting (and have no practical experience), much less shorting an inverse leveraged ETF :oops:

The first basic thing I think I’m lost on is how could shorting SQQQ give better return than long TQQQ?

On a daily basis, if QQQ is up 1% then TQQQ would be up roughly 3%. Wouldn’t SQQQ be down roughly 3% (thus by shorting it you would be up 3%)? Does the data show that its magnitude of change is actually greater than 3x the underlying? Or is it something else in the mechanics of shorting inverse leveraged ETFs that yields greater returns (based on backtesting) which I’m not catching?
I'm no expert, but you have to pay the man some expense money every day (the ER). This reduces the returns from both TQQQ and SQQQ. So SQQQ moves down more than TQQQ moves up.
That’s a good point. I’d be interested to see the results of a portfolio based on shorting a basket of the ETFs with the highest expense ratios. Call it “inverse bad management”.
Thereum
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Thereum »

stormcrow wrote: Thu Jul 30, 2020 7:44 am
Thereum wrote: Thu Jul 30, 2020 12:13 am
Impatience wrote: Wed Jul 29, 2020 9:50 pm
A 3x inverse treasury etf would still have a 90% margin requirement ... and though that particular security wouldn’t swing around as much in a downturn, the long position would and that would still erode your account margin. I’m pretty sure that’s how it works anyway. Maybe just be short both SQQQ and TMV. All short portfolio!
Funny -- shortly before seeing this comment I had tested a short SQQQ + short TMV strategy, with a far OTM long call as a hedge. The annual return over 10 years was 63% with a Sharpe ratio of 1.42! I also tested the same strategy using deep ITM puts (which give the same position as short + OTM call) and got an annual return of 50% with a Sharpe ratio of 1.23. Still very good, but not as good as shorting the ETFs and hedging with long calls. I suppose the long put strategy better captures the financing costs of the short positions, so it's more accurate.

I think we are beginning to see the power of betting against leveraged inverse funds!

Edit: Tested SQQQ + TMV short call backspread. This offers more protection in case of a market crash. Got an annual return of 103% with a Sharpe ratio of 1.35. No shorting of ETFs is involved, which makes the strategy a lot easier and cheaper to employ.

A lot of this might sound too good to be true, but think about it from another point of view: Isn't a 3x daily leveraged ETF that bets against blue chip stocks a little too bad to be true? Surely it makes sense to bet against the worst investment product ever created.
Can you link to your back test, or at least give the parameters so we can check? What strikes/expiration, etc? Thanks!
I use this website: https://wheel.orats.com/backtest

Here are some pics of the backtests. The strategy and parameters (DTE and delta) are listed. I didn't do anything special when it came to entering or exiting trades.

https://i.imgur.com/mbRNXgQ.png

https://i.imgur.com/Gav7PiI.png

I just put on my first SQQQ trade to get my feet wet. Here the position: https://i.imgur.com/WD01bdA.png

Normally, I'd recommend going shorter term and being more aggressive with the short calls. However, I wanted to give myself a higher probability trade for my first try.
Last edited by Thereum on Thu Jul 30, 2020 10:56 am, edited 1 time in total.
langlands
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by langlands »

Thereum, how did you backtest the short SQQQ position? When I use portfoliovisualizer to backtest a -100% allocation to SQQQ rebalanced monthly, it seems to top out at a 100% return (total, not annualized). Thus, it doesn't seem to be rebalancing.
Thereum
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Thereum »

langlands wrote: Thu Jul 30, 2020 10:56 am Thereum, how did you backtest the short SQQQ position? When I use portfoliovisualizer to backtest a -100% allocation to SQQQ rebalanced monthly, it seems to top out at a 100% return (total, not annualized). Thus, it doesn't seem to be rebalancing.
You need to go long an asset and rebalance regularly. Go 100% long EDV and -100% short SQQQ and try again. Use CASHX if you want to simulate being in cash for the long asset.
ChrisBenn
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by ChrisBenn »

Impatience wrote: Thu Jul 30, 2020 5:05 am
privatefarmer wrote: Thu Jul 30, 2020 4:32 am been following this thread from the beginning and am heavily invested in LETFs now. Am intrigued by the idea of shorting the bear versions of these funds to counter act the volatility drag. However, I am a TOTAL novice when it comes to using options/short selling etc. I use interactive brokers, could someone provide a quick summary of how I would even go about transitioning from long-only TQQQ/TMF to short selling SQQQ/TMV? I would sell my securities, leaving me w/ just cash, and then use that to borrow shares of SQQQ/TMV, correct? So if i had say $100k in cash, how much negative exposure to SQQQ/TMV would I get? Would it be a 1:1 conversion or would I not be able to get as much exposure w/ the 100k as I would by just owning TQQQ/TMF? Or, if someone knows of some good "how-to" books on this subject I would greatly appreciate the recommendations. Thanks!
I really really really recommend testing the waters in a paper trading account. If you use IBKR then you already have one set up with $1M fake dollars in it. It takes a lot of practice to understand all the weird nuances of margin and short-sale trading. There’s a reason so many people have horror stories of being suddenly liquidated by their broker. Test it extensively and please don’t commit all your 100k to this unless that is a small % or your net worth. If the strategy is half as good as it appears it won’t need that much capital to pay off.
++ this

I was interested in using futures to achieve some cheap/efficient leverage, and ran it in a paper account - as if it was my actual account (setup what my rules would be for margin, rebalancing, alerts, not leaving too much slack, etc.). After about a month I realized it was far to fiddly / wasn't comfortable with the amount of babysitting margin required. Note that this isn't saying it's categorically bad/ not the answer -- rather I just found that it wasn't a good match for myself. This wasn't what I thought going in -- so the exercise was definitely enlightening. You do have to treat it like it's real money though to make it work (i.e. dedicate the same amount of effort you would with your real account)

My original intent was to paper it for 6 months, then make a decision. Realistically if you are looking at doing this through accumulation 6 months of time isn't super material (assuming your investment is in something reasonable - i.e. 3 funder, etc. otherwise) - but is very valuable from an experience side.
langlands
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by langlands »

Thereum wrote: Thu Jul 30, 2020 10:57 am
langlands wrote: Thu Jul 30, 2020 10:56 am Thereum, how did you backtest the short SQQQ position? When I use portfoliovisualizer to backtest a -100% allocation to SQQQ rebalanced monthly, it seems to top out at a 100% return (total, not annualized). Thus, it doesn't seem to be rebalancing.
You need to go long an asset and rebalance regularly. Go 100% long EDV and -100% short SQQQ and try again. Use CASHX if you want to simulate being in cash for the long asset.
Thanks. Do you know if portfoliovisualizer simulates the returns on a daily basis? In other words, if SQQQ goes up 200% during a month and then goes back down 66% (returning to where it started), it will look like nothing happened if you're only looking at monthly returns. However, in actuality a -100% SQQQ +100% CASH portfolio would have been wiped out.
Impatience
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Impatience »

Thereum wrote: Thu Jul 30, 2020 10:57 am
langlands wrote: Thu Jul 30, 2020 10:56 am Thereum, how did you backtest the short SQQQ position? When I use portfoliovisualizer to backtest a -100% allocation to SQQQ rebalanced monthly, it seems to top out at a 100% return (total, not annualized). Thus, it doesn't seem to be rebalancing.
You need to go long an asset and rebalance regularly. Go 100% long EDV and -100% short SQQQ and try again. Use CASHX if you want to simulate being in cash for the long asset.
I don’t believe it’s really possible to do -100% short / 100% long in a brokerage account. You must keep a sufficient cash balance to cover margin. To replicate that backtest you’d need to short $X amount of the chosen LETF and then spend the entire proceeds of the short sale to buy an equal amount of the long position. At that point your remaining margin cushion for your shorts would be zero.
Thereum
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Thereum »

langlands wrote: Thu Jul 30, 2020 11:05 am
Thereum wrote: Thu Jul 30, 2020 10:57 am
langlands wrote: Thu Jul 30, 2020 10:56 am Thereum, how did you backtest the short SQQQ position? When I use portfoliovisualizer to backtest a -100% allocation to SQQQ rebalanced monthly, it seems to top out at a 100% return (total, not annualized). Thus, it doesn't seem to be rebalancing.
You need to go long an asset and rebalance regularly. Go 100% long EDV and -100% short SQQQ and try again. Use CASHX if you want to simulate being in cash for the long asset.
Thanks. Do you know if portfoliovisualizer simulates the returns on a daily basis? In other words, if SQQQ goes up 200% during a month and then goes back down 66% (returning to where it started), it will look like nothing happened if you're only looking at monthly returns. However, in actuality a -100% SQQQ +100% CASH portfolio would have been wiped out.
They don't show that, and you are right that it's a weakness. I am doing this strategy hedged with options to avoid a blowup.

As for your other point, I would have no trouble going 100% short SQQQ and 100% long EDV at IBKR. A real broker with proper portfolio margin would allow this trade.
langlands
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by langlands »

Impatience wrote: Thu Jul 30, 2020 11:06 am
Thereum wrote: Thu Jul 30, 2020 10:57 am
langlands wrote: Thu Jul 30, 2020 10:56 am Thereum, how did you backtest the short SQQQ position? When I use portfoliovisualizer to backtest a -100% allocation to SQQQ rebalanced monthly, it seems to top out at a 100% return (total, not annualized). Thus, it doesn't seem to be rebalancing.
You need to go long an asset and rebalance regularly. Go 100% long EDV and -100% short SQQQ and try again. Use CASHX if you want to simulate being in cash for the long asset.
I don’t believe it’s really possible to do -100% short / 100% long in a brokerage account. You must keep a sufficient cash balance to cover margin. To replicate that backtest you’d need to short $X amount of the chosen LETF and then spend the entire proceeds of the short sale to buy an equal amount of the long position. At that point your remaining margin cushion for your shorts would be zero.
Depends on whether long positions count as collateral against the short positions. Your'e probably right that most brokerages require cash covered shorts. But for the backtesting, you definitely need some sort of long asset. So if you want to simulate a simple short position, you need to put a +100% allocation to CASHX to get the thing to backtest correctly.
langlands
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by langlands »

Thereum wrote: Thu Jul 30, 2020 11:18 am
langlands wrote: Thu Jul 30, 2020 11:05 am
Thereum wrote: Thu Jul 30, 2020 10:57 am
langlands wrote: Thu Jul 30, 2020 10:56 am Thereum, how did you backtest the short SQQQ position? When I use portfoliovisualizer to backtest a -100% allocation to SQQQ rebalanced monthly, it seems to top out at a 100% return (total, not annualized). Thus, it doesn't seem to be rebalancing.
You need to go long an asset and rebalance regularly. Go 100% long EDV and -100% short SQQQ and try again. Use CASHX if you want to simulate being in cash for the long asset.
Thanks. Do you know if portfoliovisualizer simulates the returns on a daily basis? In other words, if SQQQ goes up 200% during a month and then goes back down 66% (returning to where it started), it will look like nothing happened if you're only looking at monthly returns. However, in actuality a -100% SQQQ +100% CASH portfolio would have been wiped out.
They don't show that, and you are right that it's a weakness. I am doing this strategy hedged with options to avoid a blowup.

As for your other point, I would have no trouble going 100% short SQQQ and 100% long EDV at IBKR. A real broker with proper portfolio margin would allow this trade.
I think your second paragraph was responding to Impatience?

I don't believe in free lunches. What is your thinking on what is going on here with the dramatic outperformance (with regard to long LETFs)? I think there is very serious risk of this thing blowing up massively, and that is the premium you're collecting. To me it looks like every month, you're rolling the dice that your account won't blow up and you get paid handsomely for it. It just so happens that the backtest period didn't show this downside. If you're doing this hedged with options, well those options cost something.
ChrisBenn
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by ChrisBenn »

Thereum wrote: Thu Jul 30, 2020 11:18 am
langlands wrote: Thu Jul 30, 2020 11:05 am
Thereum wrote: Thu Jul 30, 2020 10:57 am
langlands wrote: Thu Jul 30, 2020 10:56 am Thereum, how did you backtest the short SQQQ position? When I use portfoliovisualizer to backtest a -100% allocation to SQQQ rebalanced monthly, it seems to top out at a 100% return (total, not annualized). Thus, it doesn't seem to be rebalancing.
You need to go long an asset and rebalance regularly. Go 100% long EDV and -100% short SQQQ and try again. Use CASHX if you want to simulate being in cash for the long asset.
Thanks. Do you know if portfoliovisualizer simulates the returns on a daily basis? In other words, if SQQQ goes up 200% during a month and then goes back down 66% (returning to where it started), it will look like nothing happened if you're only looking at monthly returns. However, in actuality a -100% SQQQ +100% CASH portfolio would have been wiped out.
They don't show that, and you are right that it's a weakness. I am doing this strategy hedged with options to avoid a blowup.

As for your other point, I would have no trouble going 100% short SQQQ and 100% long EDV at IBKR. A real broker with proper portfolio margin would allow this trade.
The orats site you linked appears to be doing daily values for shorts. I'm not clear exactly what it's rebalancing against (I sort of assume cash equivalents) or what the rebalancing period is though. Interesting site.

I ran a short on spxu and long on upro just as a sanity check/evaluate the output, and it didn't cap at share price for the short (so it's obv doing rebalancing/rolling).

Image
Image

One thing to note is that the annual return values it provides appear to be the arithmetic mean, not the geometric mean. (Portfolio visualizer gives an arithmetic mean annualized of 38% for a UPRO long (CAGR of 25.5 for the same period), orats gives an "annualized return" of 39.84 (no CAGR direct calc)).

Since one is monthly I'm guessing it's an issue of their start/stop boundaries for the difference in arithmetic annualized return.

I would assume everyone is used to CAGR numbers for return, so this is a huge caveat when comparing to other strategies.
Impatience
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Impatience »

Thereum wrote: Thu Jul 30, 2020 11:18 am
As for your other point, I would have no trouble going 100% short SQQQ and 100% long EDV at IBKR. A real broker with proper portfolio margin would allow this trade.
Ah that’s interesting. I am limited to Reg T margin currently so I’m going to keep a healthy buffer of extra cash on hand. If I do reach six figures in my taxable account I plan to go portfolio margin and then will be short equal amounts SQQQ and TMV with the short proceeds all held in BSV (Vanguard short term bond fund) as an anchor of collateral.
jarjarM
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

langlands wrote: Thu Jul 30, 2020 11:05 am
Thereum wrote: Thu Jul 30, 2020 10:57 am
langlands wrote: Thu Jul 30, 2020 10:56 am Thereum, how did you backtest the short SQQQ position? When I use portfoliovisualizer to backtest a -100% allocation to SQQQ rebalanced monthly, it seems to top out at a 100% return (total, not annualized). Thus, it doesn't seem to be rebalancing.
You need to go long an asset and rebalance regularly. Go 100% long EDV and -100% short SQQQ and try again. Use CASHX if you want to simulate being in cash for the long asset.
Thanks. Do you know if portfoliovisualizer simulates the returns on a daily basis? In other words, if SQQQ goes up 200% during a month and then goes back down 66% (returning to where it started), it will look like nothing happened if you're only looking at monthly returns. However, in actuality a -100% SQQQ +100% CASH portfolio would have been wiped out.
This is always my biggest concern with backtesting at portfoliovisualizer. When I did my own analysis on daily pricing, the max drawdowns is higher. Maybe I’ll try to sim this and see what happens.
RocketShipTech
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RocketShipTech »

I'm not sure what all the excitement is about.

I'm seeing 40% CAGR vs 35% CAGR for the standard strategy

https://www.portfoliovisualizer.com/bac ... ion4_2=110

and this doesn't include borrow costs for SPXU or capital gains taxes.
Thereum
Posts: 48
Joined: Sun Jun 14, 2020 9:05 pm

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

Post by Thereum »

RocketShipTech wrote: Thu Jul 30, 2020 12:31 pm I'm not sure what all the excitement is about.

I'm seeing 40% CAGR vs 35% CAGR for the standard strategy

https://www.portfoliovisualizer.com/bac ... ion4_2=110

and this doesn't include borrow costs for SPXU or capital gains taxes.
Switch to monthly rebalancing. Also, pay attention to the Sharpe ratio, max drawdown, and market correlation. The short strategy gives much better results for these metrics and produces higher absolute returns.
RocketShipTech
Posts: 679
Joined: Sat Jun 13, 2020 10:08 pm

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

Post by RocketShipTech »

Thereum wrote: Thu Jul 30, 2020 12:45 pm
RocketShipTech wrote: Thu Jul 30, 2020 12:31 pm I'm not sure what all the excitement is about.

I'm seeing 40% CAGR vs 35% CAGR for the standard strategy

https://www.portfoliovisualizer.com/bac ... ion4_2=110

and this doesn't include borrow costs for SPXU or capital gains taxes.
Switch to monthly rebalancing. Also, pay attention to the Sharpe ratio, max drawdown, and market correlation. The short strategy gives much better results for these metrics and produces higher absolute returns.
Monthly rebalancing increases return of the short strategy from 40% to 41%. Compared to the 35% quarterly rebalancing of the standard strategy, and with similar volatility statistics.

Still not seeing it.
as9
Posts: 200
Joined: Mon Jan 27, 2020 9:26 am

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

Post by as9 »

Took the plunge this morning with about 5% of my portfolio. Timing worked out nicely as I needed to sell a total market fund at yesterday's close and then bought UPRO/TMF at around 9:45 this morning after the market opened lower.
Impatience
Posts: 177
Joined: Thu Jul 23, 2020 3:15 pm

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

Post by Impatience »

RocketShipTech wrote: Thu Jul 30, 2020 12:51 pm
Thereum wrote: Thu Jul 30, 2020 12:45 pm
RocketShipTech wrote: Thu Jul 30, 2020 12:31 pm I'm not sure what all the excitement is about.

I'm seeing 40% CAGR vs 35% CAGR for the standard strategy

https://www.portfoliovisualizer.com/bac ... ion4_2=110

and this doesn't include borrow costs for SPXU or capital gains taxes.
Switch to monthly rebalancing. Also, pay attention to the Sharpe ratio, max drawdown, and market correlation. The short strategy gives much better results for these metrics and produces higher absolute returns.
Monthly rebalancing increases return of the short strategy from 40% to 41%. Compared to the 35% quarterly rebalancing of the standard strategy, and with similar volatility statistics.

Still not seeing it.
You don’t see the 10% higher CAGR along with a lower max drawdown?

I’m not sure if those benefits are enough to offset the very real costs of doing it, but I think they may be - if you’re lucky and prudent.
langlands
Posts: 572
Joined: Wed Apr 03, 2019 10:05 pm

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

Post by langlands »

Impatience wrote: Thu Jul 30, 2020 1:08 pm
RocketShipTech wrote: Thu Jul 30, 2020 12:51 pm
Thereum wrote: Thu Jul 30, 2020 12:45 pm
RocketShipTech wrote: Thu Jul 30, 2020 12:31 pm I'm not sure what all the excitement is about.

I'm seeing 40% CAGR vs 35% CAGR for the standard strategy

https://www.portfoliovisualizer.com/bac ... ion4_2=110

and this doesn't include borrow costs for SPXU or capital gains taxes.
Switch to monthly rebalancing. Also, pay attention to the Sharpe ratio, max drawdown, and market correlation. The short strategy gives much better results for these metrics and produces higher absolute returns.
Monthly rebalancing increases return of the short strategy from 40% to 41%. Compared to the 35% quarterly rebalancing of the standard strategy, and with similar volatility statistics.

Still not seeing it.
You don’t see the 10% higher CAGR along with a lower max drawdown?

I’m not sure if those benefits are enough to offset the very real costs of doing it, but I think they may be - if you’re lucky and prudent.
Hm, if the argument is really about quarterly vs. monthly rebalancing, then there is a serious issue here. Is the implication that more rebalancing is better? What do you think happens when you do daily rebalancing?
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