HEDGEFUNDIE's excellent adventure Part II: The next journey

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Thereum
Posts: 47
Joined: Sun Jun 14, 2020 9:05 pm

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

Post by Thereum »

My SQQQ trade is already showing some big profits. I also added the same trade on TMV, which has a much more favorable IV skew. The risk/reward for the TMV trade is 4:1. Even if we see rates rising (unlikely), I believe TMV will still be a loser due to volatility.
Last edited by Thereum on Thu Jul 30, 2020 1:21 pm, edited 1 time in total.
RocketShipTech
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RocketShipTech »

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.
Why would I compare the monthly rebalance of the short strategy with the monthly rebalance of the standard strategy?

If monthly rebalance is what makes the short strategy slightly better, fine whatever. Why should that require me to compare against monthly rebalancing of the standard strategy, which has been time-tested to be optimally rebalanced quarterly?
Thereum
Posts: 47
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 1:20 pm

Why would I compare the monthly rebalance of the short strategy with the monthly rebalance of the standard strategy?

If monthly rebalance is what makes the short strategy slightly better, fine whatever. Why should that require me to compare against monthly rebalancing of the standard strategy, which has been time-tested to be optimally rebalanced quarterly?
You need to rebalance monthly to capture the effect of continuously shorting SQQQ. It decays so quickly that quarterly rebalancings leave too much money on the table. Weekly or even daily rebalancing would likely be better.

Second, you need to focus more on the Sharpe ratio.
RocketShipTech
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RocketShipTech »

Thereum wrote: Thu Jul 30, 2020 1:22 pm
RocketShipTech wrote: Thu Jul 30, 2020 1:20 pm

Why would I compare the monthly rebalance of the short strategy with the monthly rebalance of the standard strategy?

If monthly rebalance is what makes the short strategy slightly better, fine whatever. Why should that require me to compare against monthly rebalancing of the standard strategy, which has been time-tested to be optimally rebalanced quarterly?
You need to rebalance monthly to capture the effect of continuously shorting SQQQ. It decays so quickly that quarterly rebalancings leave too much money on the table. Weekly or even daily rebalancing would likely be better.

Second, you need to focus more on the Sharpe ratio.
Ok, 1.8 vs 1.5 Sharpe ratio. Does that make up for my 48% tax rate on short term capital gains?
stormcrow
Posts: 89
Joined: Thu Nov 21, 2019 4:12 pm

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

Post by stormcrow »

Thereum wrote: Thu Jul 30, 2020 10:50 am
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.
Thanks for replying, I appreciate the input to the discussion. Always good to get new ideas.

At the risk of sounding obtuse, I can't get anything even close to what you are seeing on that site. Is there some trick I am missing? When I run a call backspread (a bullish strategy) on SQQQ and TMV (inverse etfs), I am getting huge negative returns (as one would expect).
Thereum
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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 1:25 pm
Thereum wrote: Thu Jul 30, 2020 1:22 pm
RocketShipTech wrote: Thu Jul 30, 2020 1:20 pm

Why would I compare the monthly rebalance of the short strategy with the monthly rebalance of the standard strategy?

If monthly rebalance is what makes the short strategy slightly better, fine whatever. Why should that require me to compare against monthly rebalancing of the standard strategy, which has been time-tested to be optimally rebalanced quarterly?
You need to rebalance monthly to capture the effect of continuously shorting SQQQ. It decays so quickly that quarterly rebalancings leave too much money on the table. Weekly or even daily rebalancing would likely be better.

Second, you need to focus more on the Sharpe ratio.
Ok, 1.8 vs 1.5 Sharpe ratio. Does that make up for my 48% tax rate on short term capital gains?
Yes, it does.

Second, you are missing the bigger issue, which is that the UPRO/TMF strategy is less likely to be successful in the future with rates so low and valuations so high. The short strategy is more robust because even if it's wrong directionally, it will benefit from volatility decay in the leveraged ETFs.
langlands
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by langlands »

Thereum wrote: Thu Jul 30, 2020 1:22 pm
RocketShipTech wrote: Thu Jul 30, 2020 1:20 pm

Why would I compare the monthly rebalance of the short strategy with the monthly rebalance of the standard strategy?

If monthly rebalance is what makes the short strategy slightly better, fine whatever. Why should that require me to compare against monthly rebalancing of the standard strategy, which has been time-tested to be optimally rebalanced quarterly?
You need to rebalance monthly to capture the effect of continuously shorting SQQQ. It decays so quickly that quarterly rebalancings leave too much money on the table. Weekly or even daily rebalancing would likely be better.

Second, you need to focus more on the Sharpe ratio.
The idea that daily rebalancing would likely be even better is wrong. Daily rebalancing SQQQ is exactly equivalent to long TQQQ.
RocketShipTech
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RocketShipTech »

Thereum wrote: Thu Jul 30, 2020 1:31 pm
RocketShipTech wrote: Thu Jul 30, 2020 1:25 pm
Thereum wrote: Thu Jul 30, 2020 1:22 pm
RocketShipTech wrote: Thu Jul 30, 2020 1:20 pm

Why would I compare the monthly rebalance of the short strategy with the monthly rebalance of the standard strategy?

If monthly rebalance is what makes the short strategy slightly better, fine whatever. Why should that require me to compare against monthly rebalancing of the standard strategy, which has been time-tested to be optimally rebalanced quarterly?
You need to rebalance monthly to capture the effect of continuously shorting SQQQ. It decays so quickly that quarterly rebalancings leave too much money on the table. Weekly or even daily rebalancing would likely be better.

Second, you need to focus more on the Sharpe ratio.
Ok, 1.8 vs 1.5 Sharpe ratio. Does that make up for my 48% tax rate on short term capital gains?
Yes, it does.

Second, you are missing the bigger issue, which is that the UPRO/TMF strategy is less likely to be successful in the future with rates so low and valuations so high. The short strategy is more robust because even if it's wrong directionally, it will benefit from volatility decay in the leveraged ETFs.
Jul 2012 - Jan 2020 had flat long rates.

The short strategy rebalanced monthly:
32% CAGR
1.5 Sharpe

The standard strategy rebalanced quarterly:
27% CAGR
1.3 Sharpe
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

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.
Indeed, these backtests cannot be trusted without knowing what borrowing costs were over that period. It's been cheap to borrow SQQQ recently, but that may not have been the case in the past. We know that the CAGR of the short strategy is probably less than what Portfolio Visualizer reports, but is it 1%? 2%? Different brokerages also seem to have different borrowing fees, e.g. Schwab looks to be significantly cheaper than Interactive Brokers for a lot of ETFs. Going forward there's no guarantee that you'll be able to get a borrowing rate for the shares that's not significantly more what you're earning on the proceeds of the short sale. Some inverse leveraged ETFs currently have borrowing fees of 5% or more, despite short term rates being 0%. If that comes to pass, you could be stuck with a bunch of short positions that underperform the long equivalents, a short-term capital gains hit, and margin call risk.

Using Sharpe and Sortino in PV to measure the risk-adjusted returns of this strategy doesn't make sense. What the proponents are doing is essentially taking risk and externalizing it with respect to what PV captures. They are also including returns that don't exist in practice because of borrowing fees. So of course the Sharpe is better, the risk is falsely decreased, and the reward is falsely increased.

(For the record, I have been experimenting with $50k invested in this short strategy for a couple months, so I am not being skeptical for contrarian purposes. I am seeing first-hand that there are benefits, but in the long run I don't think this will do better than the conventional implementation.)
langlands
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by langlands »

Semantics wrote: Thu Jul 30, 2020 1:56 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.
Indeed, these backtests cannot be trusted without knowing what borrowing costs were over that period. It's been cheap to borrow SQQQ recently, but that may not have been the case in the past. We know that the CAGR of the short strategy is probably less than what Portfolio Visualizer reports, but is it 1%? 2%? Different brokerages also seem to have different borrowing fees, e.g. Schwab looks to be significantly cheaper than Interactive Brokers for a lot of ETFs. Going forward there's no guarantee that you'll be able to get a borrowing rate for the shares that's not significantly more what you're earning on the proceeds of the short sale. Some inverse leveraged ETFs currently have borrowing fees of 5% or more, despite short term rates being 0%. If that comes to pass, you could be stuck with a bunch of short positions that underperform the long equivalents, a short-term capital gains hit, and margin call risk.

Using Sharpe and Sortino in PV to measure the risk-adjusted returns of this strategy doesn't make sense. What the proponents are doing is essentially taking risk and externalizing it with respect to what PV captures. They are also including returns that don't exist in practice because of borrowing fees. So of course the Sharpe is better, the risk is falsely decreased, and the reward is falsely increased.

(For the record, I have been experimenting with $50k invested in this short strategy for a couple months, so I am not being skeptical for contrarian purposes. I am seeing first-hand that there are benefits, but in the long run I don't think this will do better than the conventional implementation.)
You've been experimenting for a couple months, as in after the March crash this year correct? To me, the main flaw in the simulation is that rebalancing monthly on the short portfolio isn't always up to you. In March, you would have been forced through margin calls to rebalance much more (almost daily). And if you look carefully at where the supposed outperformance comes from, it is exactly during these huge downturns where the short portfolio massively outperforms the long portfolio (e.g. +8% in March 2020 for the short vs. -20% for the long). In reality, there's no way you would have ended up with a positive March performance.
Impatience
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Impatience »

RocketShipTech wrote: Thu Jul 30, 2020 1:25 pm
Thereum wrote: Thu Jul 30, 2020 1:22 pm
RocketShipTech wrote: Thu Jul 30, 2020 1:20 pm

Why would I compare the monthly rebalance of the short strategy with the monthly rebalance of the standard strategy?

If monthly rebalance is what makes the short strategy slightly better, fine whatever. Why should that require me to compare against monthly rebalancing of the standard strategy, which has been time-tested to be optimally rebalanced quarterly?
You need to rebalance monthly to capture the effect of continuously shorting SQQQ. It decays so quickly that quarterly rebalancings leave too much money on the table. Weekly or even daily rebalancing would likely be better.

Second, you need to focus more on the Sharpe ratio.
Ok, 1.8 vs 1.5 Sharpe ratio. Does that make up for my 48% tax rate on short term capital gains?
48%?? Well I am in a much lower tax bracket than you so I’m not as worried about my short term capital gains :mrgreen:

Honestly a part of the appeal of this all-short approach, to me, is just that it seems really loony. I’m a fan of over engineered financial silliness so I’m ok with trying this out with my taxable account. Even if it ends up being more work for less reward than the original Hedgefundie portfolio I will still give it a whirl for awhile.
ChrisBenn
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by ChrisBenn »

Thereum wrote: Thu Jul 30, 2020 1:31 pm
RocketShipTech wrote: Thu Jul 30, 2020 1:25 pm
Thereum wrote: Thu Jul 30, 2020 1:22 pm
RocketShipTech wrote: Thu Jul 30, 2020 1:20 pm

Why would I compare the monthly rebalance of the short strategy with the monthly rebalance of the standard strategy?

If monthly rebalance is what makes the short strategy slightly better, fine whatever. Why should that require me to compare against monthly rebalancing of the standard strategy, which has been time-tested to be optimally rebalanced quarterly?
You need to rebalance monthly to capture the effect of continuously shorting SQQQ. It decays so quickly that quarterly rebalancings leave too much money on the table. Weekly or even daily rebalancing would likely be better.

Second, you need to focus more on the Sharpe ratio.
Ok, 1.8 vs 1.5 Sharpe ratio. Does that make up for my 48% tax rate on short term capital gains?
Yes, it does.

Second, you are missing the bigger issue, which is that the UPRO/TMF strategy is less likely to be successful in the future with rates so low and valuations so high. The short strategy is more robust because even if it's wrong directionally, it will benefit from volatility decay in the leveraged ETFs.
Does it really (after tax)? Ignore state taxes, etc, and just look at federal stcg vs ltcg (single) at 100k.year it's 9% drag, 200k 17%, and top bracket also 17%. (assuming we are going to realize gains every 366 days (which in reality you wouldn't)

If we go with 17%, and the long only strategy does 35% in one year than the short only strategy would have to do 42% that same year to break even, no? With leap puts you could at least get ltcg, but they didn't backtest that well ( and i expect liquidity might be tough)

Can you short in an hsa? A quick google didn't turn up anything one way or another.
langlands
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by langlands »

Impatience wrote: Thu Jul 30, 2020 2:12 pm
RocketShipTech wrote: Thu Jul 30, 2020 1:25 pm
Thereum wrote: Thu Jul 30, 2020 1:22 pm
RocketShipTech wrote: Thu Jul 30, 2020 1:20 pm

Why would I compare the monthly rebalance of the short strategy with the monthly rebalance of the standard strategy?

If monthly rebalance is what makes the short strategy slightly better, fine whatever. Why should that require me to compare against monthly rebalancing of the standard strategy, which has been time-tested to be optimally rebalanced quarterly?
You need to rebalance monthly to capture the effect of continuously shorting SQQQ. It decays so quickly that quarterly rebalancings leave too much money on the table. Weekly or even daily rebalancing would likely be better.

Second, you need to focus more on the Sharpe ratio.
Ok, 1.8 vs 1.5 Sharpe ratio. Does that make up for my 48% tax rate on short term capital gains?
48%?? Well I am in a much lower tax bracket than you so I’m not as worried about my short term capital gains :mrgreen:

Honestly a part of the appeal of this all-short approach, to me, is just that it seems really loony. I’m a fan of over engineered financial silliness so I’m ok with trying this out with my taxable account. Even if it ends up being more work for less reward than the original Hedgefundie portfolio I will still give it a whirl for awhile.
Please do! Even though I'm skeptical, I'm very interested in how it plays out in practice for you guys.
RocketShipTech
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RocketShipTech »

Impatience wrote: Thu Jul 30, 2020 2:12 pm
RocketShipTech wrote: Thu Jul 30, 2020 1:25 pm
Thereum wrote: Thu Jul 30, 2020 1:22 pm
RocketShipTech wrote: Thu Jul 30, 2020 1:20 pm

Why would I compare the monthly rebalance of the short strategy with the monthly rebalance of the standard strategy?

If monthly rebalance is what makes the short strategy slightly better, fine whatever. Why should that require me to compare against monthly rebalancing of the standard strategy, which has been time-tested to be optimally rebalanced quarterly?
You need to rebalance monthly to capture the effect of continuously shorting SQQQ. It decays so quickly that quarterly rebalancings leave too much money on the table. Weekly or even daily rebalancing would likely be better.

Second, you need to focus more on the Sharpe ratio.
Ok, 1.8 vs 1.5 Sharpe ratio. Does that make up for my 48% tax rate on short term capital gains?
48%?? Well I am in a much lower tax bracket than you so I’m not as worried about my short term capital gains :mrgreen:

Honestly a part of the appeal of this all-short approach, to me, is just that it seems really loony. I’m a fan of over engineered financial silliness so I’m ok with trying this out with my taxable account. Even if it ends up being more work for less reward than the original Hedgefundie portfolio I will still give it a whirl for awhile.
If I had to rebalance daily like Thereum is suggesting (without the benefit of a M1 rebalance button) I would probably lose my job. So, you know, that’s one way of solving the tax cost problem.
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

langlands wrote: Thu Jul 30, 2020 2:04 pm
Semantics wrote: Thu Jul 30, 2020 1:56 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.
Indeed, these backtests cannot be trusted without knowing what borrowing costs were over that period. It's been cheap to borrow SQQQ recently, but that may not have been the case in the past. We know that the CAGR of the short strategy is probably less than what Portfolio Visualizer reports, but is it 1%? 2%? Different brokerages also seem to have different borrowing fees, e.g. Schwab looks to be significantly cheaper than Interactive Brokers for a lot of ETFs. Going forward there's no guarantee that you'll be able to get a borrowing rate for the shares that's not significantly more what you're earning on the proceeds of the short sale. Some inverse leveraged ETFs currently have borrowing fees of 5% or more, despite short term rates being 0%. If that comes to pass, you could be stuck with a bunch of short positions that underperform the long equivalents, a short-term capital gains hit, and margin call risk.

Using Sharpe and Sortino in PV to measure the risk-adjusted returns of this strategy doesn't make sense. What the proponents are doing is essentially taking risk and externalizing it with respect to what PV captures. They are also including returns that don't exist in practice because of borrowing fees. So of course the Sharpe is better, the risk is falsely decreased, and the reward is falsely increased.

(For the record, I have been experimenting with $50k invested in this short strategy for a couple months, so I am not being skeptical for contrarian purposes. I am seeing first-hand that there are benefits, but in the long run I don't think this will do better than the conventional implementation.)
You've been experimenting for a couple months, as in after the March crash this year correct? To me, the main flaw in the simulation is that rebalancing monthly on the short portfolio isn't always up to you. In March, you would have been forced through margin calls to rebalance much more (almost daily). And if you look carefully at where the supposed outperformance comes from, it is exactly during these huge downturns where the short portfolio massively outperforms the long portfolio (e.g. +8% in March 2020 for the short vs. -20% for the long). In reality, there's no way you would have ended up with a positive March performance.
Yes, exactly, that's why I'm running this in a larger account. In one of my previous posts I estimated that I'd want about 90% of the portfolio to be long positions to be comfortable with the margin call risk. Because in a crash like March, both equities and bonds tanked for a while, so not only would I have needed much more margin for the short position but my available margin would have dramatically decreased. I am also holding 2x the value of the short position in cash-equivalents (matching the equity I'd have in an equivalent long position), which means I can have my original position completely wiped out and still close it without having to liquidate unrelated securities in the portfolio, but I plan to tactically adjust my allocation in a drawdown to avoid a complete wipeout.

Target allocations with this are based on exposure, not equity, so if SPXU goes up then I'd close positions to rebalance, which reduces exposure. In the traditional approach I'd open more UPRO positions (rebalancing from TMF), which increases exposure. This means that in a long decline I should lose less than in the traditional approach because I keep decreasing exposure vs the opposite, but it also means that I'd gain less when the trend reverses and UPRO starts going up again.
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physixfan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by physixfan »

About shorting SPXU or SQQQ: I don't want to get margin calls, and take unlimited risk. So how about buying put options on them? Is this a bad idea?
Thereum
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Thereum »

physixfan wrote: Thu Jul 30, 2020 3:04 pm About shorting SPXU or SQQQ: I don't want to get margin calls, and take unlimited risk. So how about buying put options on them? Is this a bad idea?
You can buy puts, but you will be giving up a lot of profit due to the premium. What I am doing is selling ITM-OTM call spreads and buying ATM puts. The entire position is put on for a slight credit and the risk/reward is roughly 1:1.
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physixfan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by physixfan »

Thereum wrote: Thu Jul 30, 2020 3:25 pm
physixfan wrote: Thu Jul 30, 2020 3:04 pm About shorting SPXU or SQQQ: I don't want to get margin calls, and take unlimited risk. So how about buying put options on them? Is this a bad idea?
You can buy puts, but you will be giving up a lot of profit due to the premium. What I am doing is selling ITM-OTM call spreads and buying ATM puts. The entire position is put on for a slight credit and the risk/reward is roughly 1:1.
How about always buying a put option with expiration date further than 1 year, and roll it after half a year? Is the premium still a concern?
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cos
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cos »

mjuszczak wrote: Wed Jul 29, 2020 11:11 am
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?
Yes, but not in the way that you're suggesting. I got rid of my unleveraged holdings entirely, and now my portfolio is totally 55% UPRO / 45% TMF. I made this decision based on Uncorrelated's analysis about the utility of different allocations in the context of one's overall portfolio. You can find said analysis earlier in the thread here: viewtopic.php?f=10&t=288192&p=4936910&h ... d#p4936910

More information about how to interpret that analysis here: viewtopic.php?t=305919

Once he publishes the code for those figures, I might play around with adding unleveraged domestic and international small-cap value and emerging markets to my overall portfolio for the sake of diversification.
Walkure
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Walkure »

mjuszczak wrote: Wed Jul 29, 2020 9:26 pm
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.
I have a chunk in taxable as well, but in that case you really need to make sure you're getting the most rebalancing possible out of your dividends (which are pretty skimpy on these funds). At a bare minimum you should be running this in a brokerage that allows fractional shares. The list of those that do is growing fast.
Impatience
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Impatience »

The dividends will be totally inconsequential when it comes to rebalancing. Just not enough to move the needle. If you’re doing this in taxable you need to rebalance by adding additional funds or buying on margin (not recommended but it could cover you in a pinch). Eventually you’ll have to sell some stocks because the account value will be too big to rebalance purely with new funds. At least we hope it will be. But long term cap gains is peanuts compared to the projected CAGR.
qaojpoqw
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by qaojpoqw »

Thereum wrote: Thu Jul 30, 2020 10:50 am
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.
Thanks for the website (https://wheel.orats.com/backtest) .... Does the backtesting website handle stock split that accurately? I noticed a short call on SQQQ resulted in a huge loss in January 2014 when the only large change in price was due to a 4-1 reverse stock split ..
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by djeayzonne »

How is this shorting strategy really actionable at this point?
SQQQ started at something like 20,000 and is now 6 or so.
There isn't much room left to 0.

Sorry if this is a really elementary/simpleton question.
Last edited by djeayzonne on Thu Jul 30, 2020 8:34 pm, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by djeayzonne »

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

Post by RocketShipTech »

djeayzonne wrote: Thu Jul 30, 2020 8:33 pm How is this shorting strategy really actionable at this point?
SQQQ started at something like 20,000 and is now 6 or so.
There isn't much room left to 0.

Sorry if this is a really elementary/simpleton question.
Reverse splits
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by djeayzonne »

RocketShipTech wrote: Thu Jul 30, 2020 9:13 pm
djeayzonne wrote: Thu Jul 30, 2020 8:33 pm How is this shorting strategy really actionable at this point?
SQQQ started at something like 20,000 and is now 6 or so.
There isn't much room left to 0.

Sorry if this is a really elementary/simpleton question.
Reverse splits
Ok, just looked that up.
SQQQ has already had 4 of these.
So, why does this fund still exist and how much longer can it continue to exist even utilizing reverse splits?
Thereum
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Thereum »

qaojpoqw wrote: Thu Jul 30, 2020 7:06 pm Thanks for the website (https://wheel.orats.com/backtest) .... Does the backtesting website handle stock split that accurately? I noticed a short call on SQQQ resulted in a huge loss in January 2014 when the only large change in price was due to a 4-1 reverse stock split ..
Good point. I just noticed this a few hours ago as well. Some of the stock splits are not accounted for. So the returns are even better than they appear to be.
langlands
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by langlands »

djeayzonne wrote: Thu Jul 30, 2020 9:29 pm
RocketShipTech wrote: Thu Jul 30, 2020 9:13 pm
djeayzonne wrote: Thu Jul 30, 2020 8:33 pm How is this shorting strategy really actionable at this point?
SQQQ started at something like 20,000 and is now 6 or so.
There isn't much room left to 0.

Sorry if this is a really elementary/simpleton question.
Reverse splits
Ok, just looked that up.
SQQQ has already had 4 of these.
So, why does this fund still exist and how much longer can it continue to exist even utilizing reverse splits?
SQQQ (like all the leveraged/inverse ETFs) is designed primarily for short-term traders to take a leveraged daily position in the market. Unlike stocks of normal companies which have a market cap, ETFs have assets under management (AUM) that they can adjust via the share creation/redemption mechanism. When there is demand for the ETF, shares are created and when demand decreases, shares are destroyed. Thus, as long as there is a certain dollar demand for the product, shares will be continually created as the share price plummets to keep the AUM constant. In fact, it would appear that over the last 5 years, SQQQ AUM has been increasing:

https://ycharts.com/companies/SQQQ/tota ... management

Btw, if anyone has a better site that can track AUM for ETFs more than 5 years (without a subscription), please let me know. I thought I remembered using a different site for this in the past, but can't seem to recall it.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Lost Halls »

I'm trying to understand this whole shorting fiasco.

Please correct me if I'm wrong:

Let's say I wanted to do a portfolio consisting of going short 55/45 SQQQ/TMV, and I had 100k in cash (in a margin account). I would short $55,000 worth of SQQQ and $45,000 worth of TMV. In effect, this would use up my 100k in cash I had, correct? Then I would cover my short at the end of every month and re short SQQQ/TMV at 55/45. I guess the part I'm not understanding is how the initial margin requirement would work in this situation.... And would the margin maintenance be calculated for each asset separately, and this would create the margin call risk (say if SQQQ or TMV shot up triggering the margin call)?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by corp_sharecropper »

Why would one want to buy puts on SQQQ vs calls on the vastly, significantly, more liquid QQQ? Your position can be as levered as you want with the right strikes/Greeks. I'm not trying to be antagonistic, actually, I feel like I must have some obvious blind spot that I'm not accounting for. I just don't see how it could possibly be preferable than working QQQ's option chain.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

I freaking love that this thread went from discussing portfolios where volatility decay hurts, straight to portfolios where volatility decay actually helps you.

"If you can't beat them, join them".
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by physixfan »

I think the biggest problem of shorting SPXU or SQQQ directly is, in big downturns, it might be impossible to borrow them.

I am thinking about buying puts of SPXU or SQQQ, but it seems the problem is theta decay may be too large. I'm not sure what theta will become in time of big downturns. Perhaps I'll observe after a while and then decide whether it is worth it.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by danyboy7 »

physixfan wrote: Fri Jul 31, 2020 12:44 am I think the biggest problem of shorting SPXU or SQQQ directly is, in big downturns, it might be impossible to borrow them.

I am thinking about buying puts of SPXU or SQQQ, but it seems the problem is theta decay may be too large. I'm not sure what theta will become in time of big downturns. Perhaps I'll observe after a while and then decide whether it is worth it.
Agree,with this strategy there are too many things that could go wrong.From margin calls and liquidations to illiquid put options.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by keith6014 »

I am wondering about options.

Buy 55:45% (TQQQ:TMF) deep in the money (ITM) calls. How deep, 50% of current strike price. How far, 1 year away (maybe 2). Then you rebalance these every 1 month?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

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. 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.
Just to re-emphasize one of semantic's point, portfoliovisualizer is using monthly data, and daily volatility can be much higher. In another thread, someone was running a backtest using SP500 for comparison, PV concludes that max drawdown is 19% from Jan 2019 til now. But we all know in the depth of march that SP500 has significant higher drawndown. I did a quick comparison using daily data (see link below), the max drawdown is actually closer to 34%. So be very careful with PV, because the broker doesn't run margin check on a monthly basis :oops:

viewtopic.php?p=5404554#p5404554
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Impatience »

Steve Reading wrote: Thu Jul 30, 2020 11:16 pm I freaking love that this thread went from discussing portfolios where volatility decay hurts, straight to portfolios where volatility decay actually helps you.

"If you can't beat them, join them".
I’m not 100% convinced that volatility decay actually helps when it comes to shorting LETFs. Or if it does that the help is meaningful. A lot of the math I see on the subject seems kind of uninformed and I’m not smart enough to say for sure if I believe it. I think the edge may come from some other element of shorting vs holding. Also part of me suspects maybe PortfolioVisualizer is making either an error or a hidden assumption in its handling of the shorted LETF backtest. I’m not sure. Something is missing.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Thereum »

Impatience wrote: Fri Jul 31, 2020 11:17 am
Steve Reading wrote: Thu Jul 30, 2020 11:16 pm I freaking love that this thread went from discussing portfolios where volatility decay hurts, straight to portfolios where volatility decay actually helps you.

"If you can't beat them, join them".
I’m not 100% convinced that volatility decay actually helps when it comes to shorting LETFs. Or if it does that the help is meaningful. A lot of the math I see on the subject seems kind of uninformed and I’m not smart enough to say for sure if I believe it. I think the edge may come from some other element of shorting vs holding. Also part of me suspects maybe PortfolioVisualizer is making either an error or a hidden assumption in its handling of the shorted LETF backtest. I’m not sure. Something is missing.
Both ORATS and PV agree that shorting inverse volatility ETFs produced outsized absolute and risk-adjusted returns. Do you believe they are both flawed?

I am not sure why it's hard to see the theoretical benefits of shorting leveraged inverse ETFs, especially if you believe the markets will continue to trend upward and experience more up days than down days. The biggest risk of this strategy is getting a margin call due to a sharp drawdown, which is why I suggest using options to limit risk. The options are expensive, but my backtests show that this strategy is so powerful that it can overcome the drag caused by expensive insurance.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by ChrisBenn »

Would there be an interaction with the uptick rule? https://www.sec.gov/answers/shortrestrict.htm

The alternative uptick rule (Rule 201) approved today imposes restrictions on short selling only when a stock has triggered a circuit breaker by experiencing a price decline of at least 10 percent in one day. At that point, short selling would be permitted if the price of the security is above the current national best bid.

Rule 201 includes the following features:

Short Sale-Related Circuit Breaker: The circuit breaker would be triggered for a security any day in which the price declines by 10 percent or more from the prior day's closing price.

Duration of Price Test Restriction: Once the circuit breaker has been triggered, the alternative uptick rule would apply to short sale orders in that security for the remainder of the day as well as the following day.

Securities Covered by Price Test Restriction: The rule generally applies to all equity securities that are listed on a national securities exchange, whether traded on an exchange or in the over-the-counter market.

Implementation: The rule requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution or display of a prohibited short sale.


What I'm not clear on is how that impacts an open short-- i.e. does it get canceled, or is this just a restriction against further shorts. I would expect it wouldn't be too rare to see 10% drops in a 3x letf.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LadyGeek »

Thereum wrote: Fri Jul 31, 2020 12:12 pm I am not sure why it's hard to see the theoretical benefits of shorting leveraged inverse ETFs, especially if you believe the markets will continue to trend upward and experience more up days than down days. The biggest risk of this strategy is getting a margin call due to a sharp drawdown, which is why I suggest using options to limit risk. The options are expensive, but my backtests show that this strategy is so powerful that it can overcome the drag caused by expensive insurance.
I'd like to interject a very big caution to investors who are following this thread, but may not have the experience to understand the implications of Thereum's post. The tenet "Never invest in anything you don't understand" applies here for a very good reason (Thereum understands, I'm worried about investors who may not.)

Please see this FINRA article: Purchasing on Margin, Risks Involved with Trading in a Margin Account (additional risks) You can literally lose everything. Period.

Also bear in mind that "past performance" does not equate with "future performance". To quote a saying attributed to John Maynard Keynes:
Markets can stay irrational longer than you can stay solvent.
To reiterate, this approach is intended for experienced investors who have the ability, willingness, and need to take this risk. If you want to proceed, the advice is to use no more than 5% of your portfolio. Why? That's how much you can afford to lose and not ruin your retirement. This is your life's savings here, tread carefully.

Update: Revised wiki link for "ability, willingness, and need"
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Texanbybirth »

Thank you, LadyGeek.

The first page of HF’s first thread Is very informative. (I’ve followed him into this EA with a nice side bet.)

This thread has taken a lot of wild turns down the rabbit hole, and I’m not sure how much it still relates to OP’s intentions.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Aw0k3n »

Texanbybirth wrote: Fri Jul 31, 2020 1:58 pm Thank you, LadyGeek.

The first page of HF’s first thread Is very informative. (I’ve followed him into this EA with a nice side bet.)

This thread has taken a lot of wild turns down the rabbit hole, and I’m not sure how much it still relates to OP’s intentions.
have followed this thread eagerly since day 1 and I have to agree on this point, the thread is moving away from the originally intended well meaning experiment.
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perfectuncertainty
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by perfectuncertainty »

ocrtech wrote: Fri Apr 24, 2020 8:59 pm
randyharris wrote: Fri Apr 24, 2020 7:02 pm I'd really appreciate help from anyone here who is using an Adaptive Allocation with Minimum Variance and calculating the monthly allocations in Excel.

In going through Part I of this journey, I found discussion on calculating the Adaptive Allocation with Minimum Variance, which I interpreted as:

The UPRO allocation is equal to: 1- ( UPRO 21 day StDev / (UPRO 21 day StDev + TMF 21 day StDev) )
TMF allocation is equal to: 1 - UPRO Allocation

Maybe I didn't boil that down correctly because my allocations are quite similar to, but not the same as when I run the strategy on PortfolioVisualizer, when I compare my monthly allocations to the ones from PV I have very similar but different allocations than they do. Can't figure out why my numbers deviate from them. Looking for any help to figure this out and get in sync as I trust PV's allocation better than my own.

This is the comparison I'm using on PortfolioVisualizer: https://www.portfoliovisualizer.com/tes ... odWeight=0

Appreciate help with this, thanks!
This looks more like a variation of inverse volatility. For minimum variance I use something like this:

UPRO percentage allocation = (σTMF²-(ρ*σUPRO*σTMF)) / (σUPRO² + σTMF² – (2*ρ*σUPRO*σTMF))

TMF percentage allocation = 1 - UPRO percentage allocation

Where:
σUPRO = stddev UPRO
σTMF = stddev TMF
ρ = correlation between UPRO and TMF
What time period do you use to calculate the correlation between the UPRO and TMF? I assume the standard deviation is over 21 days.
Also, can you confirm the alternate formula you use for inverse volatility?

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

Post by jarjarM »

glenmalan wrote: Fri Jul 31, 2020 2:27 pm
ocrtech wrote: Fri Apr 24, 2020 8:59 pm
randyharris wrote: Fri Apr 24, 2020 7:02 pm I'd really appreciate help from anyone here who is using an Adaptive Allocation with Minimum Variance and calculating the monthly allocations in Excel.

In going through Part I of this journey, I found discussion on calculating the Adaptive Allocation with Minimum Variance, which I interpreted as:

The UPRO allocation is equal to: 1- ( UPRO 21 day StDev / (UPRO 21 day StDev + TMF 21 day StDev) )
TMF allocation is equal to: 1 - UPRO Allocation

Maybe I didn't boil that down correctly because my allocations are quite similar to, but not the same as when I run the strategy on PortfolioVisualizer, when I compare my monthly allocations to the ones from PV I have very similar but different allocations than they do. Can't figure out why my numbers deviate from them. Looking for any help to figure this out and get in sync as I trust PV's allocation better than my own.

This is the comparison I'm using on PortfolioVisualizer: https://www.portfoliovisualizer.com/tes ... odWeight=0

Appreciate help with this, thanks!
This looks more like a variation of inverse volatility. For minimum variance I use something like this:

UPRO percentage allocation = (σTMF²-(ρ*σUPRO*σTMF)) / (σUPRO² + σTMF² – (2*ρ*σUPRO*σTMF))

TMF percentage allocation = 1 - UPRO percentage allocation

Where:
σUPRO = stddev UPRO
σTMF = stddev TMF
ρ = correlation between UPRO and TMF
What time period do you use to calculate the correlation between the UPRO and TMF? I assume the standard deviation is over 21 days.
Also, can you confirm the alternate formula you use for inverse volatility?

Thanks much!
It should match the time period you're using for std, otherwise it doesn't make sense.
langlands
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by langlands »

LadyGeek wrote: Fri Jul 31, 2020 1:13 pm
Thereum wrote: Fri Jul 31, 2020 12:12 pm I am not sure why it's hard to see the theoretical benefits of shorting leveraged inverse ETFs, especially if you believe the markets will continue to trend upward and experience more up days than down days. The biggest risk of this strategy is getting a margin call due to a sharp drawdown, which is why I suggest using options to limit risk. The options are expensive, but my backtests show that this strategy is so powerful that it can overcome the drag caused by expensive insurance.
I'd like to interject a very big caution to investors who are following this thread, but may not have the experience to understand the implications of Thereum's post. The tenet "Never invest in anything you don't understand" applies here for a very good reason (Thereum understands, I'm worried about investors who may not.)

Please see this FINRA article: Purchasing on Margin, Risks Involved with Trading in a Margin Account (additional risks) You can literally lose everything. Period.
I contend that Thereum in fact doesn't understand. Look Thereum, clearly you've put a lot of thought into this strategy and I admit it's quite intriguing. You know how to backtest it properly and know where the risks are.

But one thing I don't see is a theoretical understanding of the benefits of shorting leveraged inverse ETFs that you claim. Picking up beta slippage (volatility decay) isn't free money. It's a form of negative return skew, i.e. picking up pennies in front of the steamroller, i.e. collecting an insurance premium. You seem to understand this, which is why you're hedging with options. You say that
The options are expensive, but my backtests show that this strategy is so powerful that it can overcome the drag caused by expensive insurance.
I don't believe in free lunches. The cost of the options are in all likelihood exactly the cost of insuring against a catastrophic blowup. Do you have a theoretical reason why the cost of these options should be less? If so, that sounds like the beginning of a very profitable options trading strategy.

You've said that monthly rebalancing does better than quarterly rebalancing and that weekly or daily rebalancing would be even better. Are you forgetting that the entire reason the backtesting seems to show great results is because of volatility decay (beta slippage)? What do you think beta slippage is when you rebalance your short SQQQ position daily? (It's the same as holding a long TQQQ position).

Here is the comparison that RocketshipTech brought up earlier:
https://www.portfoliovisualizer.com/bac ... ion4_2=110

Note where all the outperformance comes from: August 2011 and March 2020. Guess what happened then? That's right, the market tanked. Would the strategy really have gone that entire month without rebalancing?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by as9 »

Aw0k3n wrote: Fri Jul 31, 2020 2:23 pm
Texanbybirth wrote: Fri Jul 31, 2020 1:58 pm Thank you, LadyGeek.

The first page of HF’s first thread Is very informative. (I’ve followed him into this EA with a nice side bet.)

This thread has taken a lot of wild turns down the rabbit hole, and I’m not sure how much it still relates to OP’s intentions.
have followed this thread eagerly since day 1 and I have to agree on this point, the thread is moving away from the originally intended well meaning experiment.
+1 Not sure why this thread has taken on an extensive discussion of shorting QQQ and whatever else.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Thereum »

as9 wrote: Fri Jul 31, 2020 3:12 pm
Aw0k3n wrote: Fri Jul 31, 2020 2:23 pm
Texanbybirth wrote: Fri Jul 31, 2020 1:58 pm Thank you, LadyGeek.

The first page of HF’s first thread Is very informative. (I’ve followed him into this EA with a nice side bet.)

This thread has taken a lot of wild turns down the rabbit hole, and I’m not sure how much it still relates to OP’s intentions.
have followed this thread eagerly since day 1 and I have to agree on this point, the thread is moving away from the originally intended well meaning experiment.
+1 Not sure why this thread has taken on an extensive discussion of shorting QQQ and whatever else.
Things evolve. The OP is gone too. I am not sure how you can expect people to talk about the exact same thing for 200+ pages.

I think the recent strategy I proposed is similar in spirit to the strategy that Hedgefundie proposed but corrects a major flaw.
Last edited by Thereum on Fri Jul 31, 2020 3:21 pm, edited 1 time in total.
ChrisBenn
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by ChrisBenn »

as9 wrote: Fri Jul 31, 2020 3:12 pm
Aw0k3n wrote: Fri Jul 31, 2020 2:23 pm
Texanbybirth wrote: Fri Jul 31, 2020 1:58 pm Thank you, LadyGeek.

The first page of HF’s first thread Is very informative. (I’ve followed him into this EA with a nice side bet.)

This thread has taken a lot of wild turns down the rabbit hole, and I’m not sure how much it still relates to OP’s intentions.
have followed this thread eagerly since day 1 and I have to agree on this point, the thread is moving away from the originally intended well meaning experiment.
+1 Not sure why this thread has taken on an extensive discussion of shorting QQQ and whatever else.
-1
Seems like a reasonable direction to me? -55% SPXU / -45% TMV should be similar exposure as the OP -- though with significantly different execution logistics. Volatility decay was a huge portion of the original discussion - and this purports to address that in a different manner than has been discussed before.

Really seems like a natural progression for the discussion to me?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Texanbybirth »

ChrisBenn wrote: Fri Jul 31, 2020 3:19 pm
as9 wrote: Fri Jul 31, 2020 3:12 pm
Aw0k3n wrote: Fri Jul 31, 2020 2:23 pm
Texanbybirth wrote: Fri Jul 31, 2020 1:58 pm Thank you, LadyGeek.

The first page of HF’s first thread Is very informative. (I’ve followed him into this EA with a nice side bet.)

This thread has taken a lot of wild turns down the rabbit hole, and I’m not sure how much it still relates to OP’s intentions.
have followed this thread eagerly since day 1 and I have to agree on this point, the thread is moving away from the originally intended well meaning experiment.
+1 Not sure why this thread has taken on an extensive discussion of shorting QQQ and whatever else.
-1
Seems like a reasonable direction to me? -55% SPXU / -45% TMV should be similar exposure as the OP -- though with significantly different execution logistics. Volatility decay was a huge portion of the original discussion - and this purports to address that in a different manner than has been discussed before.

Really seems like a natural progression for the discussion to me?
Perhaps, but when OP introduced a slight allocation change to the EA (40/60 -> 55/45) it forced a new thread.

Anytime you introduce shorting (and layer the complexity of options on top of that) into a discussion, I believe you've moved further from the original intent than simply changing the allocation. Ergo, new thread.
“The strong cannot be brave. Only the weak can be brave; and yet again, in practice, only those who can be brave can be trusted, in time of doubt, to be strong.“ - GK Chesterton
jarjarM
Posts: 276
Joined: Mon Jul 16, 2018 1:21 pm

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

Post by jarjarM »

As long as no Robinhood trader comes by this thread, I think it'll be fine :twisted:
RocketShipTech
Posts: 679
Joined: Sat Jun 13, 2020 10:08 pm

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

Post by RocketShipTech »

ChrisBenn wrote: Fri Jul 31, 2020 3:19 pm
as9 wrote: Fri Jul 31, 2020 3:12 pm
Aw0k3n wrote: Fri Jul 31, 2020 2:23 pm
Texanbybirth wrote: Fri Jul 31, 2020 1:58 pm Thank you, LadyGeek.

The first page of HF’s first thread Is very informative. (I’ve followed him into this EA with a nice side bet.)

This thread has taken a lot of wild turns down the rabbit hole, and I’m not sure how much it still relates to OP’s intentions.
have followed this thread eagerly since day 1 and I have to agree on this point, the thread is moving away from the originally intended well meaning experiment.
+1 Not sure why this thread has taken on an extensive discussion of shorting QQQ and whatever else.
-1
Seems like a reasonable direction to me? -55% SPXU / -45% TMV should be similar exposure as the OP -- though with significantly different execution logistics. Volatility decay was a huge portion of the original discussion - and this purports to address that in a different manner than has been discussed before.

Really seems like a natural progression for the discussion to me?
The OP’s intent was for this to be a hands-off buy-and-hold strategy. In fact that was a core tenet, constant fiddling would introduce behavioral risk.

Options on inverse leveraged ETFs makes this a trading strategy not worthy of Bogleheads.
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