HEDGEFUNDIE's excellent adventure Part II: The next journey

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

Post by langlands »

Semantics wrote: Fri Aug 14, 2020 2:07 am
langlands wrote: Fri Aug 14, 2020 12:54 am
Semantics wrote: Fri Aug 14, 2020 12:11 am
langlands wrote: Thu Aug 13, 2020 6:16 pm
Semantics wrote: Thu Aug 13, 2020 5:04 pm

I think it's about as risky as 165% equities, maybe a bit less because of the negative correlation (which I assume persists), but that could very well be offset and then some by volatility decay and/or rising rates. So I'm basically assuming there's a high likelihood TMF will perform no better than cash. There's a chance rates could go down more and TMF will look great, but I want something that looks good in the case that I think is more likely. At the end of the day I don't see a really compelling alternative and am hoping timing models will help to maintain strong returns even if TMF performs poorly.

Although I guess it's also the case that the spread in rates matters more than the absolute values. So even though LTT yields are down, borrowing is cheaper, so maybe TMF will do better than it did in 2015-2018 when the spread between long-term and short-term rates became quite small.
Given your concerns, any reason you're not considering gold? Given the near zero yields, TMF is essentially a speculative bet for lower yields. Gold is essentially a bet for higher inflation. The difference is that gold of course has a lot more room to run.
Gold has almost zero historical return and high volatility - meaning a fund with daily leveraged resets like UGLD has a high chance of dragging the portfolio down due to volatility decay. Additionally, if I want the volatility to work in my favor, it ought to have a significant negative correlation with equities. Gold has a neutral correlation. It also has a mild positive correlation with treasuries (makes sense - when yields get too low people move some money into gold). Going forward, if LTT fall due to higher inflation expectations, gold will then decline as people rebalance from gold into treasuries to reap the higher yield.

I am not opposed to holding gold, but only either as a minority component of a portfolio and not as a replacement for treasuries in HFEA, or in a timing model where it's possible to dial up exposure while treasuries are falling, and then dial it back down once they've stabilized. Given the volatility of UPRO/TQQQ, I think using ballast that doesn't have a strong negative correlation would be a bit too uncomfortable for me.
You really think gold will decline with increasing inflation expectations? I think you have it backwards. LTT will fall as you say, and that is exactly because people will rebalance from LTT into gold.
No, what I said is gold will decline *after* expected real treasury yields increase, like in 2013. Once treasury yields are high enough to justify the interest rate risk there isn't much reason to prefer gold, since it doesn't yield anything.
OK, that makes more sense. But still, I find the reasoning a bit strange. You say that once real yields are high enough, people will move back into LTT. Well, the reverse logic should hold as well, right? Real yields are negative right now. Doesn't that mean people should be getting out of LTT right now? The way I see it, if LTT falls due to to higher inflation expectations, gold rises. I don't see why it needs to overshoot its fall unless you think there's some sort of momentum effect.

Perhaps I'm not being explicit enough. My case for gold is essentially stagflation/hyperinflation. If you think that those scenarios are just bogeyman/conspiracy theories that could never happen today, then of course the case for gold isn't strong. The case for gold is about as anti-Boglehead as you can get. At it's core, the entire idea is that eventually, this time will be different and you don't want to be ill-prepared when disaster finally strikes. When gold bugs pull the alarm constantly for 15 years, it's easy to tune them out. But I contend that negative real rates are not healthy, the current situation is unprecedented, and the central banks seem to have no alternative but to print money. Something has to give.
Last edited by langlands on Fri Aug 14, 2020 3:20 am, edited 1 time in total.
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Uncorrelated
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Uncorrelated »

coingaroo wrote: Fri Aug 14, 2020 12:20 am Bit of a different topic.

Anyone know what financing rates TQQQ and TMF are currently paying in this environment?

Especially interested in TMF. Want to quantify the "borrow short; lend long" effect.

EDIT: The only things I could find is the annual reports for last year.

It's hard to tell what the spread is, because you don't see when these swaps originated, but it looks like TMF is paying a spread of ~~0.36% above the 1 month LIBOR rate. As the LIBOR rate approaches zero, it's unknown what the spreads are (I suspect it's likely a lil bit higher).

Image

Using a 0.40% spread guess on top of the current LIBOR, seems like the net effect of TMF's borrow short; lend long is 1.94% of yield per year.

If only the mgmt fee could be lower :)

Image
That sounds about right. As far as I know observing the rate on swap contracts in the annual reports is the most realtime way we can currently estimate the borrowing fee. The nominal interest rate should be unrelated to the borrow spread.

Your excel sheet assumes the borrowing fee is paid twice, but it should be somewhere between 2.5x and 3x. It depends on how much of the exposure is obtained with swaps as opposed to physical replication.

I'm surprised the borrowing fee is that high. Historically it has been very close to zero. See viewtopic.php?p=4885075#p4885075. The borrow fee is based on supply/demand, a high fee indicates tons of demand for longing. A low or negative fee indicates the demand for shorting is higher than the demand for longing.

If the actual borrow fee is 0.4% above libor, then the optimal allocation to TMF is around 20% lower than previously estimated. Or 50% lower if your asset allocation includes factor funds.
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Uncorrelated
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Uncorrelated »

Semantics wrote: Fri Aug 14, 2020 2:07 am
langlands wrote: Fri Aug 14, 2020 12:54 am
You really think gold will decline with increasing inflation expectations? I think you have it backwards. LTT will fall as you say, and that is exactly because people will rebalance from LTT into gold.
No, what I said is gold will decline *after* expected real treasury yields increase, like in 2013. Once treasury yields are high enough to justify the interest rate risk there isn't much reason to prefer gold, since it doesn't yield anything.
This is now how efficient markets work. The price doesn't change after new information comes in. The price changes immediately as new information comes in. Otherwise you could trivially time the market.
RocketShipTech
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RocketShipTech »

coingaroo wrote: Fri Aug 14, 2020 12:20 am Bit of a different topic.

Anyone know what financing rates TQQQ and TMF are currently paying in this environment?

Especially interested in TMF. Want to quantify the "borrow short; lend long" effect.

EDIT: The only things I could find is the annual reports for last year.

It's hard to tell what the spread is, because you don't see when these swaps originated, but it looks like TMF is paying a spread of ~~0.36% above the 1 month LIBOR rate. As the LIBOR rate approaches zero, it's unknown what the spreads are (I suspect it's likely a lil bit higher).

Image

Using a 0.40% spread guess on top of the current LIBOR, seems like the net effect of TMF's borrow short; lend long is 1.94% of yield per year.

If only the mgmt fee could be lower :)

Image
Latest TMF borrowing cost comes from the Semi-Annual Report

http://direxioninvestments.onlineprospe ... 3X-SAR.pdf
Page 91

As of 4/30/2020 the borrow cost is around 1.0% when LIBOR was 0.15%. Making the spread 0.8% to 1.0%.

The SEC yield on TLT is 1.1%

Which basically means TMF has a negative expected value after expenses.
zhuyz05
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by zhuyz05 »

RocketShipTech wrote: Fri Aug 14, 2020 9:45 am
coingaroo wrote: Fri Aug 14, 2020 12:20 am Bit of a different topic.

Anyone know what financing rates TQQQ and TMF are currently paying in this environment?

Especially interested in TMF. Want to quantify the "borrow short; lend long" effect.

EDIT: The only things I could find is the annual reports for last year.

It's hard to tell what the spread is, because you don't see when these swaps originated, but it looks like TMF is paying a spread of ~~0.36% above the 1 month LIBOR rate. As the LIBOR rate approaches zero, it's unknown what the spreads are (I suspect it's likely a lil bit higher).

Image

Using a 0.40% spread guess on top of the current LIBOR, seems like the net effect of TMF's borrow short; lend long is 1.94% of yield per year.

If only the mgmt fee could be lower :)

Image
Latest TMF borrowing cost comes from the Semi-Annual Report

http://direxioninvestments.onlineprospe ... 3X-SAR.pdf
Page 91

As of 4/30/2020 the borrow cost is around 1.0% when LIBOR was 0.15%. Making the spread 0.8% to 1.0%.

The SEC yield on TLT is 1.1%

Which basically means TMF has a negative expected value after expenses.

How about UPRO?
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Meaty
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Meaty »

RocketShipTech wrote: Fri Aug 14, 2020 9:45 am
coingaroo wrote: Fri Aug 14, 2020 12:20 am Bit of a different topic.

Anyone know what financing rates TQQQ and TMF are currently paying in this environment?

Especially interested in TMF. Want to quantify the "borrow short; lend long" effect.

EDIT: The only things I could find is the annual reports for last year.

It's hard to tell what the spread is, because you don't see when these swaps originated, but it looks like TMF is paying a spread of ~~0.36% above the 1 month LIBOR rate. As the LIBOR rate approaches zero, it's unknown what the spreads are (I suspect it's likely a lil bit higher).

Image

Using a 0.40% spread guess on top of the current LIBOR, seems like the net effect of TMF's borrow short; lend long is 1.94% of yield per year.

If only the mgmt fee could be lower :)

Image
Latest TMF borrowing cost comes from the Semi-Annual Report

http://direxioninvestments.onlineprospe ... 3X-SAR.pdf
Page 91

As of 4/30/2020 the borrow cost is around 1.0% when LIBOR was 0.15%. Making the spread 0.8% to 1.0%.

The SEC yield on TLT is 1.1%

Which basically means TMF has a negative expected value after expenses.
But the purpose is to use TMF as a hedge
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tomphilly
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

langlands wrote: Fri Aug 14, 2020 12:54 am It makes sense to say that stocks tend to always go up in boom bust cycles so "stay the course" and reap the equity premium. I don't think it makes sense to say interest rates tend to always go down so "stay the course" and reap the "interest rates always decrease" premium. That will blow up. It's just some people are lucky enough to live an entire lifetime without seeing it.
I definitely agree about stocks - they only -eventually- go up and there's no conceivable ceiling to this. In many science fiction scenarios the world is ruled by mega corporations, not governments. It may be fanciful but the writers are merely extrapolating a trend they have observed over the history of civilization.

On the other hand, interest rates, as we currently understand them, must have a floor, it is only logical to expect a return when you lend someone money. But someone here has also made the point that interest rates have actually been dropping for centuries (I actually haven't confirmed this, but I take them on their word because they're probably much smarter than I). So what is in store for rates is definitely beyond my brain power to comprehend.
Last edited by tomphilly on Fri Aug 14, 2020 11:12 am, edited 1 time in total.
Impatience
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Impatience »

tomphilly wrote: Fri Aug 14, 2020 11:01 am
langlands wrote: Fri Aug 14, 2020 12:54 am It makes sense to say that stocks tend to always go up in boom bust cycles so "stay the course" and reap the equity premium. I don't think it makes sense to say interest rates tend to always go down so "stay the course" and reap the "interest rates always decrease" premium. That will blow up. It's just some people are lucky enough to live an entire lifetime without seeing it.
I definitely agree about stocks - they only -eventually- go up and there's no ceiling. In many science fiction scenarios the world is ruled by mega corporations, not governments. It may be fanciful but the writers are merely extrapolating a trend they have observed over the history of civilization.

On the other hand, interest rates, as we currently understand them, must have a floor, it is only logical to expect a return when you lend someone money. But someone here has made the point that interest rates have actually been dropping for centuries. So what is in store for rates is definitely beyond my brain power to comprehend.
It’s good to remember that point about interest rates. Ultimately the interest rate rests on the balance of supply and demand for money. Central banks have enormous influence but it’s not infinite. Structural changes in the world economy have made money vastly more plentiful and therefore cheap and probably will continue to do so - at least, on a very very long timescale they will. Doesn’t mean the trend won’t get disrupted for 5 or 50 years though.
Texanbybirth
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Texanbybirth »

Started in a Roth IRA on 01/09/2020, made two small contributions in Jan and Feb. (I'm pretty confident we won't be contributing anything further to this strategy, though I still believe in the fundamental premise of it.) Currently 5% of invested assets.

26.82% return so far this year, XIRR 56.19% (with and without 5% guess)

I plan to cash out June 2045. :beer

For those commenting on bonds vis a vis the downward historical trend in interest rates, what is your take on this article about bond convexity from portfolio charts?
“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
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

langlands wrote: Fri Aug 14, 2020 3:11 am
Semantics wrote: Fri Aug 14, 2020 2:07 am
langlands wrote: Fri Aug 14, 2020 12:54 am
Semantics wrote: Fri Aug 14, 2020 12:11 am
langlands wrote: Thu Aug 13, 2020 6:16 pm

Given your concerns, any reason you're not considering gold? Given the near zero yields, TMF is essentially a speculative bet for lower yields. Gold is essentially a bet for higher inflation. The difference is that gold of course has a lot more room to run.
Gold has almost zero historical return and high volatility - meaning a fund with daily leveraged resets like UGLD has a high chance of dragging the portfolio down due to volatility decay. Additionally, if I want the volatility to work in my favor, it ought to have a significant negative correlation with equities. Gold has a neutral correlation. It also has a mild positive correlation with treasuries (makes sense - when yields get too low people move some money into gold). Going forward, if LTT fall due to higher inflation expectations, gold will then decline as people rebalance from gold into treasuries to reap the higher yield.

I am not opposed to holding gold, but only either as a minority component of a portfolio and not as a replacement for treasuries in HFEA, or in a timing model where it's possible to dial up exposure while treasuries are falling, and then dial it back down once they've stabilized. Given the volatility of UPRO/TQQQ, I think using ballast that doesn't have a strong negative correlation would be a bit too uncomfortable for me.
You really think gold will decline with increasing inflation expectations? I think you have it backwards. LTT will fall as you say, and that is exactly because people will rebalance from LTT into gold.
No, what I said is gold will decline *after* expected real treasury yields increase, like in 2013. Once treasury yields are high enough to justify the interest rate risk there isn't much reason to prefer gold, since it doesn't yield anything.
OK, that makes more sense. But still, I find the reasoning a bit strange. You say that once real yields are high enough, people will move back into LTT. Well, the reverse logic should hold as well, right? Real yields are negative right now. Doesn't that mean people should be getting out of LTT right now? The way I see it, if LTT falls due to to higher inflation expectations, gold rises. I don't see why it needs to overshoot its fall unless you think there's some sort of momentum effect.
Yeah, I agree people should be getting out of LTT now - which is what we see happening with rising equities and gold. If real yields continue to fall then staying in gold a bit longer would make sense to me. I just don't see the long-term advantage over say TIPS.
Perhaps I'm not being explicit enough. My case for gold is essentially stagflation/hyperinflation. If you think that those scenarios are just bogeyman/conspiracy theories that could never happen today, then of course the case for gold isn't strong. The case for gold is about as anti-Boglehead as you can get. At it's core, the entire idea is that eventually, this time will be different and you don't want to be ill-prepared when disaster finally strikes. When gold bugs pull the alarm constantly for 15 years, it's easy to tune them out. But I contend that negative real rates are not healthy, the current situation is unprecedented, and the central banks seem to have no alternative but to print money. Something has to give.
Okay I see your point now. My concern with LTT isn't stagflation/hyperinflation, just neutral or negative returns for a while that are a drag on the performance of HFEA.
vijaym73
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by vijaym73 »

So should the allocation change to something more aggressive ?

An 80/20 ratio ? 90/10 ?

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

Post by Texanbybirth »

vijaym73 wrote: Fri Aug 14, 2020 1:20 pm So should the allocation change to something more aggressive ?

An 80/20 ratio ? 90/10 ?

VJ
HF already adjusted the original allocation (40/60) to the current allocation (55/45) after a while, but I believe that was based on updated risk-parity calculations and then current low LT rates. (See this post and following for his thought process.)
“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
parval
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by parval »

So if we don't think TMF is going to return anything, shouldn't we just move to USD? According to this:

https://www.guggenheiminvestments.com/m ... lation-map

There's even less correlation w/ SPY, -46 vs -22 for bonds

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

Post by Semantics »

Uncorrelated wrote: Fri Aug 14, 2020 3:22 am
Semantics wrote: Fri Aug 14, 2020 2:07 am
langlands wrote: Fri Aug 14, 2020 12:54 am
You really think gold will decline with increasing inflation expectations? I think you have it backwards. LTT will fall as you say, and that is exactly because people will rebalance from LTT into gold.
No, what I said is gold will decline *after* expected real treasury yields increase, like in 2013. Once treasury yields are high enough to justify the interest rate risk there isn't much reason to prefer gold, since it doesn't yield anything.
This is now how efficient markets work. The price doesn't change after new information comes in. The price changes immediately as new information comes in. Otherwise you could trivially time the market.
Wasn't claiming in any way that that's how efficient markets work, it is just a post-hoc observation/simplification. Obviously in practice this happens real time with feedback etc.
Last edited by Semantics on Fri Aug 14, 2020 2:17 pm, edited 2 times in total.
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

tomphilly wrote: Fri Aug 14, 2020 11:01 am
langlands wrote: Fri Aug 14, 2020 12:54 am It makes sense to say that stocks tend to always go up in boom bust cycles so "stay the course" and reap the equity premium. I don't think it makes sense to say interest rates tend to always go down so "stay the course" and reap the "interest rates always decrease" premium. That will blow up. It's just some people are lucky enough to live an entire lifetime without seeing it.
I definitely agree about stocks - they only -eventually- go up and there's no conceivable ceiling to this. In many science fiction scenarios the world is ruled by mega corporations, not governments. It may be fanciful but the writers are merely extrapolating a trend they have observed over the history of civilization.

On the other hand, interest rates, as we currently understand them, must have a floor, it is only logical to expect a return when you lend someone money. But someone here has also made the point that interest rates have actually been dropping for centuries (I actually haven't confirmed this, but I take them on their word because they're probably much smarter than I). So what is in store for rates is definitely beyond my brain power to comprehend.
This is what's been linked a few times re: interest rates declining for centuries: https://www.visualcapitalist.com/700-ye ... est-rates/

It makes sense to me from the perspective that loans probably carried a lot more risk in the past than they do now, and thus lenders would need to be compensated. What would a world look like where holding cash or other assets are so risky that paying to preserve the real value of assets is deemed worthwhile? Since we're talking about real rates, this would be something beyond mere deflation. Maybe it would imply some sort of extreme wealth taxation, such that it's a better idea to borrow as-needed than accumulate assets. I also can't wrap my head around it, so I'm just going to assume for now that there's a floor (since Dalio and others seem to be taking that position).
Walkure
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Walkure »

Semantics wrote: Fri Aug 14, 2020 1:57 pm
Uncorrelated wrote: Fri Aug 14, 2020 3:22 am
Semantics wrote: Fri Aug 14, 2020 2:07 am
langlands wrote: Fri Aug 14, 2020 12:54 am
You really think gold will decline with increasing inflation expectations? I think you have it backwards. LTT will fall as you say, and that is exactly because people will rebalance from LTT into gold.
No, what I said is gold will decline *after* expected real treasury yields increase, like in 2013. Once treasury yields are high enough to justify the interest rate risk there isn't much reason to prefer gold, since it doesn't yield anything.
This is now how efficient markets work. The price doesn't change after new information comes in. The price changes immediately as new information comes in. Otherwise you could trivially time the market.
Wasn't claiming in any way that that's how efficient markets work, it is just a post-hoc observation/simplification. Obviously in practice this happens real time with feedback etc.
I'm not sure how much informational efficiency one can ascribe to the speculative value of an inert brick of metal. It's not like bullion is putting out quarterly reports to generate surprises relative to expected earnings or something. The point is that, since gold is unchanging, all of the changes in the price of gold are actually reactions subsequent to changes in the prices of other things: storage costs - both physical and opportunity/carry, strength of the dollar, mining inputs, central bank demand, jewelry sales around holidays in India, attitudes toward "TINA" in equities, you name it...
Impatience
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Impatience »

parval wrote: Fri Aug 14, 2020 1:56 pm So if we don't think TMF is going to return anything, shouldn't we just move to USD? According to this:

https://www.guggenheiminvestments.com/m ... lation-map

There's even less correlation w/ SPY, -46 vs -22 for bonds

WDYT?
That correlation is for plain bonds, not 3x leveraged bonds.
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coingaroo
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by coingaroo »

RocketShipTech wrote: Fri Aug 14, 2020 9:45 am
coingaroo wrote: Fri Aug 14, 2020 12:20 am Bit of a different topic.

Anyone know what financing rates TQQQ and TMF are currently paying in this environment?

Especially interested in TMF. Want to quantify the "borrow short; lend long" effect.

EDIT: The only things I could find is the annual reports for last year.

It's hard to tell what the spread is, because you don't see when these swaps originated, but it looks like TMF is paying a spread of ~~0.36% above the 1 month LIBOR rate. As the LIBOR rate approaches zero, it's unknown what the spreads are (I suspect it's likely a lil bit higher).

Image

Using a 0.40% spread guess on top of the current LIBOR, seems like the net effect of TMF's borrow short; lend long is 1.94% of yield per year.

If only the mgmt fee could be lower :)

Image
Latest TMF borrowing cost comes from the Semi-Annual Report

http://direxioninvestments.onlineprospe ... 3X-SAR.pdf
Page 91

As of 4/30/2020 the borrow cost is around 1.0% when LIBOR was 0.15%. Making the spread 0.8% to 1.0%.

The SEC yield on TLT is 1.1%

Which basically means TMF has a negative expected value after expenses.
Thanks for this info. A 0.85-0.9% ish spread on LIBOR for TMF is insane. It seems seriously detrimental to long term returns.

Makes me want to implement the strategies using futures ;) but as an Aus investor who don’t have the futures taxations rules, considerably less tax efficient as a tradeoff...
langlands
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by langlands »

parval wrote: Fri Aug 14, 2020 1:56 pm So if we don't think TMF is going to return anything, shouldn't we just move to USD? According to this:

https://www.guggenheiminvestments.com/m ... lation-map

There's even less correlation w/ SPY, -46 vs -22 for bonds

WDYT?
I believe Cash is USD and Currencies refers to a basket of foreign currencies. Cash has zero correlation since if you look at returns in terms of cash, the value doesn't move except a tiny amount of interest which is basically zero right now (it's the baseline upon which all else is measured). It is interesting that Currencies is so negatively correlated with S&P and I wonder how robust that relationship is. I guess a weak dollar is good for the S&P.
tomphilly
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

Bit of a rough week for the strategy, I lost about 4% at 65/35. You expect bonds to respond to stocks, but that doesn't work in reverse. TMF tracked its own course, leaving UPRO stuttering at SPY's ATH and ending up nowhere. The negative correlation was barely evident at any point.
rockstar
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rockstar »

tomphilly wrote: Fri Aug 14, 2020 6:20 pm Bit of a rough week for the strategy, I lost about 4% at 65/35. You expect bonds to respond to stocks, but that doesn't work in reverse. TMF tracked its own course, leaving UPRO stuttering at SPY's ATH and ending up nowhere. The negative correlation was barely evident at any point.
TMF seems like a bad idea in this environment. The back testing for this idea wasn't done through an equivalent period of time. Volatility is much higher today, and yields are near zero. I'm flipping back and forth out of cash for this strategy and using TQQQ instead of UPRO. And now, I'm beginning to feel like we're hitting a near top with QQQ, so I'm just losing my gain over time due to the higher volatility as measured by VXN.
tomphilly
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

rockstar wrote: Fri Aug 14, 2020 6:31 pm
tomphilly wrote: Fri Aug 14, 2020 6:20 pm Bit of a rough week for the strategy, I lost about 4% at 65/35. You expect bonds to respond to stocks, but that doesn't work in reverse. TMF tracked its own course, leaving UPRO stuttering at SPY's ATH and ending up nowhere. The negative correlation was barely evident at any point.
TMF seems like a bad idea in this environment. The back testing for this idea wasn't done through an equivalent period of time. Volatility is much higher today, and yields are near zero. I'm flipping back and forth out of cash for this strategy and using TQQQ instead of UPRO. And now, I'm beginning to feel like we're hitting a near top with QQQ, so I'm just losing my gain over time due to the higher volatility as measured by VXN.
I still think there's value in keeping TMF for a market shock. But I may reduce it to 20%. It's got to be a cheaper hedge than selling ITM calls on UPRO.
rockstar
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rockstar »

tomphilly wrote: Fri Aug 14, 2020 6:53 pm
rockstar wrote: Fri Aug 14, 2020 6:31 pm
tomphilly wrote: Fri Aug 14, 2020 6:20 pm Bit of a rough week for the strategy, I lost about 4% at 65/35. You expect bonds to respond to stocks, but that doesn't work in reverse. TMF tracked its own course, leaving UPRO stuttering at SPY's ATH and ending up nowhere. The negative correlation was barely evident at any point.
TMF seems like a bad idea in this environment. The back testing for this idea wasn't done through an equivalent period of time. Volatility is much higher today, and yields are near zero. I'm flipping back and forth out of cash for this strategy and using TQQQ instead of UPRO. And now, I'm beginning to feel like we're hitting a near top with QQQ, so I'm just losing my gain over time due to the higher volatility as measured by VXN.
I still think there's value in keeping TMF for a market shock. But I may reduce it to 20%. It's got to be a cheaper hedge than selling ITM calls on UPRO.
We're pretty much in the middle of a market shock. Rates have dropped. Volatility remains high compared to pre-COVID. I think, it's job has been done. What's the value to continue holding it?
Semantics
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Semantics »

langlands wrote: Fri Aug 14, 2020 5:03 pm
parval wrote: Fri Aug 14, 2020 1:56 pm So if we don't think TMF is going to return anything, shouldn't we just move to USD? According to this:

https://www.guggenheiminvestments.com/m ... lation-map

There's even less correlation w/ SPY, -46 vs -22 for bonds

WDYT?
I believe Cash is USD and Currencies refers to a basket of foreign currencies. Cash has zero correlation since if you look at returns in terms of cash, the value doesn't move except a tiny amount of interest which is basically zero right now (it's the baseline upon which all else is measured). It is interesting that Currencies is so negatively correlated with S&P and I wonder how robust that relationship is. I guess a weak dollar is good for the S&P.
Backtest with UUP (US dollar) does slightly better on Sharpe than TMF from 2012-18 when LTT yields were flat. (Couldn't resist throwing in my current hobby horse BTAL.)

https://www.portfoliovisualizer.com/bac ... tion4_3=45

My take: currencies like UUP or EUO seems like a good substitute for cash as an out-of-market asset in a timing model where you just want to dial down your exposure to the strategy, but it won't hedge a crash like TMF does.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

rockstar wrote: Fri Aug 14, 2020 7:02 pm We're pretty much in the middle of a market shock. Rates have dropped. Volatility remains high compared to pre-COVID. I think, it's job has been done. What's the value to continue holding it?
If you're suggesting another market crash can't closely follow a previous market crash maybe you're right. But there's no shortage of geopolitical trigger points and COVID resurgence theories right now. And an election. There's also still some lingering risk of cascading defaults, right? Didn't a third of American renters miss their rent payment this month?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Impatience »

It sounds like some of you are spending too much time watching your portfolio and fiddling around the edges. Even a strong correlation is nowhere near absolute - or immediate. If you look at a simple backtest or even HF’s more elaborate backtests there are plenty of periods where this strategy underperforms or has dramatic drawdowns. But the periods of growth make up for it. You have to be ready for YEARS of potential underperformance. If you’re going to question it over a 5% weekly drawdown and fret over geopolitical risk it’s probably not for you.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by 000 »

Impatience wrote: Fri Aug 14, 2020 7:26 pm It sounds like some of you are spending too much time watching your portfolio and fiddling around the edges. Even a strong correlation is nowhere near absolute - or immediate. If you look at a simple backtest or even HF’s more elaborate backtests there are plenty of periods where this strategy underperforms or has dramatic drawdowns. But the periods of growth make up for it. You have to be ready for YEARS of potential underperformance. If you’re going to question it over a 5% weekly drawdown and fret over geopolitical risk it’s probably not for you.
User name does not check out :mrgreen:
Texanbybirth
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Texanbybirth »

Impatience wrote: Fri Aug 14, 2020 7:26 pm It sounds like some of you are spending too much time watching your portfolio and fiddling around the edges. Even a strong correlation is nowhere near absolute - or immediate. If you look at a simple backtest or even HF’s more elaborate backtests there are plenty of periods where this strategy underperforms or has dramatic drawdowns. But the periods of growth make up for it. You have to be ready for YEARS of potential underperformance. If you’re going to question it over a 5% weekly drawdown and fret over geopolitical risk it’s probably not for you.
Excellently said.
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rockstar
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rockstar »

tomphilly wrote: Fri Aug 14, 2020 7:13 pm
rockstar wrote: Fri Aug 14, 2020 7:02 pm We're pretty much in the middle of a market shock. Rates have dropped. Volatility remains high compared to pre-COVID. I think, it's job has been done. What's the value to continue holding it?
If you're suggesting another market crash can't closely follow a previous market crash maybe you're right. But there's no shortage of geopolitical trigger points and COVID resurgence theories right now. And an election. There's also still some lingering risk of cascading defaults, right? Didn't a third of American renters miss their rent payment this month?
I guess, I don''t know how much more rates can drop from here, so I struggle to value the hedge coming from TMF. I'm good with cash instead of TMF for now. How much more can I expect to make with TMF over cash at these levels? That's the math that I'm struggling with.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Meaty »

rockstar wrote: Fri Aug 14, 2020 7:48 pm
tomphilly wrote: Fri Aug 14, 2020 7:13 pm
rockstar wrote: Fri Aug 14, 2020 7:02 pm We're pretty much in the middle of a market shock. Rates have dropped. Volatility remains high compared to pre-COVID. I think, it's job has been done. What's the value to continue holding it?
If you're suggesting another market crash can't closely follow a previous market crash maybe you're right. But there's no shortage of geopolitical trigger points and COVID resurgence theories right now. And an election. There's also still some lingering risk of cascading defaults, right? Didn't a third of American renters miss their rent payment this month?
I guess, I don''t know how much more rates can drop from here, so I struggle to value the hedge coming from TMF. I'm good with cash instead of TMF for now. How much more can I expect to make with TMF over cash at these levels? That's the math that I'm struggling with.
My guess - the strategy will lag for awhile until the next crash when TMF will prove its worth as a hedge again. I have no data to back this up; just no reason to doubt the anti-correlation
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Cyclone
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Cyclone »

For anyone interested, I found this website where the author is kind of combining the Hedgefundie strategy with EUO (ProShares UltraShort Euro etf), USDU (WisdomTree US Dollar Bullish etf), UUP (Invesco DB US Dollar Index Bullish etf), and YCS (ProShares UltraShort Yen etf). So somewhat unorthodox, to say the least. For $8 a month, you will get an email newsletter with the next month's allocations. I have no interest in anything like this, but I thought someone out there might want to play around with it for fun.

https://www.trendlineprofits.com/the-white-knuckle.html
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Uncorrelated
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Uncorrelated »

coingaroo wrote: Fri Aug 14, 2020 4:46 pm
Thanks for this info. A 0.85-0.9% ish spread on LIBOR for TMF is insane. It seems seriously detrimental to long term returns.

Makes me want to implement the strategies using futures ;) but as an Aus investor who don’t have the futures taxations rules, considerably less tax efficient as a tradeoff...
There is no reason to believe futures are cheaper than leveraged ETF's after subtracting the TER and a small spread to cover the cost of the bank. Futures are priced by the same capital markets that price LETF's.

Rather, the high spread seems to indicate that there is much more demand for longing than for shorting. We saw the same thing in the 2008 financial crisis: viewtopic.php?p=4988614#p4988614, the borrowing spread was around 2% then (for equities), meaning the total expense ratio of UPRO was around 6% during that particular period.

According to my mean variance optimizer, with a borrowing spread of 1% between LIBOR and TMF, the optimal allocation to TMF is reduced to almost zero.
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Meaty
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Meaty »

Texanbybirth wrote: Fri Aug 14, 2020 12:43 pm Started in a Roth IRA on 01/09/2020, made two small contributions in Jan and Feb. (I'm pretty confident we won't be contributing anything further to this strategy, though I still believe in the fundamental premise of it.) Currently 5% of invested assets.

26.82% return so far this year, XIRR 56.19% (with and without 5% guess)

I plan to cash out June 2045. :beer

For those commenting on bonds vis a vis the downward historical trend in interest rates, what is your take on this article about bond convexity from portfolio charts?
Thank you for sharing. Great content that helps reinforce the use of TMF even at these low rates
"Discipline equals Freedom" - Jocko Willink
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RocketShipTech »

Meaty wrote: Fri Aug 14, 2020 9:47 pm
rockstar wrote: Fri Aug 14, 2020 7:48 pm
tomphilly wrote: Fri Aug 14, 2020 7:13 pm
rockstar wrote: Fri Aug 14, 2020 7:02 pm We're pretty much in the middle of a market shock. Rates have dropped. Volatility remains high compared to pre-COVID. I think, it's job has been done. What's the value to continue holding it?
If you're suggesting another market crash can't closely follow a previous market crash maybe you're right. But there's no shortage of geopolitical trigger points and COVID resurgence theories right now. And an election. There's also still some lingering risk of cascading defaults, right? Didn't a third of American renters miss their rent payment this month?
I guess, I don''t know how much more rates can drop from here, so I struggle to value the hedge coming from TMF. I'm good with cash instead of TMF for now. How much more can I expect to make with TMF over cash at these levels? That's the math that I'm struggling with.
My guess - the strategy will lag for awhile until the next crash when TMF will prove its worth as a hedge again. I have no data to back this up; just no reason to doubt the anti-correlation
The data agrees with you. Since the beginning of HFEA daily correlations have not budged at all.

Image

https://www.portfoliovisualizer.com/ass ... &months=36
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Meaty
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Meaty »

RocketShipTech wrote: Sat Aug 15, 2020 3:39 pm
Meaty wrote: Fri Aug 14, 2020 9:47 pm
rockstar wrote: Fri Aug 14, 2020 7:48 pm
tomphilly wrote: Fri Aug 14, 2020 7:13 pm
rockstar wrote: Fri Aug 14, 2020 7:02 pm We're pretty much in the middle of a market shock. Rates have dropped. Volatility remains high compared to pre-COVID. I think, it's job has been done. What's the value to continue holding it?
If you're suggesting another market crash can't closely follow a previous market crash maybe you're right. But there's no shortage of geopolitical trigger points and COVID resurgence theories right now. And an election. There's also still some lingering risk of cascading defaults, right? Didn't a third of American renters miss their rent payment this month?
I guess, I don''t know how much more rates can drop from here, so I struggle to value the hedge coming from TMF. I'm good with cash instead of TMF for now. How much more can I expect to make with TMF over cash at these levels? That's the math that I'm struggling with.
My guess - the strategy will lag for awhile until the next crash when TMF will prove its worth as a hedge again. I have no data to back this up; just no reason to doubt the anti-correlation
The data agrees with you. Since the beginning of HFEA daily correlations have not budged at all.

Image

https://www.portfoliovisualizer.com/ass ... &months=36
Thank you for sharing. The more data the better
"Discipline equals Freedom" - Jocko Willink
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coingaroo
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by coingaroo »

Uncorrelated wrote: Sat Aug 15, 2020 3:11 am There is no reason to believe futures are cheaper than leveraged ETF's after subtracting the TER and a small spread to cover the cost of the bank. Futures are priced by the same capital markets that price LETF's.

Rather, the high spread seems to indicate that there is much more demand for longing than for shorting. We saw the same thing in the 2008 financial crisis: viewtopic.php?p=4988614#p4988614, the borrowing spread was around 2% then (for equities), meaning the total expense ratio of UPRO was around 6% during that particular period.

According to my mean variance optimizer, with a borrowing spread of 1% between LIBOR and TMF, the optimal allocation to TMF is reduced to almost zero.
Thanks for sharing your data point. I did some investigation based on your post (thanks btw, great research).

Unfortunately it looks like the index got taken offline from the S&P indices website, and Yahoo Finance only shows the past month of data.

FYI, looking at the past 1 month of data (which is the only one I could get for equities), the spread for equities is 0.25%. Looks like financing has normalized :)

Code: Select all

Past month (only return history available)

TR  6922.59/6627.68 = +4.449%
FTR 482.43/462.03 = +4.415%

Difference: 0.034% over 1 month, aka 0.41% annualized
Obviously this is for equity markets then, and I'd expect different numbers for the treasury market.

The ProShares annual report for May 31st, 2020 says that they were only paying 0.07-0.32% (total! not the spread, but total rate). See page 133. Let's hope the April 30th numbers of TMF (aka: 1.1% ish!) were a... temporary liquidity-induced fluke?

https://www.proshares.com/media/documen ... report.pdf
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Uncorrelated
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Uncorrelated »

coingaroo wrote: Sun Aug 16, 2020 1:23 am
Uncorrelated wrote: Sat Aug 15, 2020 3:11 am There is no reason to believe futures are cheaper than leveraged ETF's after subtracting the TER and a small spread to cover the cost of the bank. Futures are priced by the same capital markets that price LETF's.

Rather, the high spread seems to indicate that there is much more demand for longing than for shorting. We saw the same thing in the 2008 financial crisis: viewtopic.php?p=4988614#p4988614, the borrowing spread was around 2% then (for equities), meaning the total expense ratio of UPRO was around 6% during that particular period.

According to my mean variance optimizer, with a borrowing spread of 1% between LIBOR and TMF, the optimal allocation to TMF is reduced to almost zero.
Thanks for sharing your data point. I did some investigation based on your post (thanks btw, great research).

Unfortunately it looks like the index got taken offline from the S&P indices website, and Yahoo Finance only shows the past month of data.

I'd like to ask if you have the futures financing costs for April 30, 2020, to directly compare the spreads on the last known data point?

So, given the open-ended nature of leveraged ETFs, swap contracts must be terminable at any point in time. ProShares (a different provider) says this directly: "Agreements may be terminated at will by either party without penalty. Payment is due at termination/maturity".

We know that as of Oct 31, 2019:

* the Bank of America Merrill Lynch swap terminating 12/03/2020 was 2.05% when 1 month LIBOR was 1.78%, aka a spread of 0.27%..

Based on your post, the cash-funded futures borrowing rate (AKA: spread) for equities was around 0.35% then; which is close enough. I eyeballed and treasury spreads should be a little lower than equity spreads.

And we know that as of Apr 30, 2020:

* the same Bank of America Merrill Lynch swap terminating at 12/03/2020 was 1.02% when 1 month LIBOR was 0.33%, aka a spread of 0.69%.

Could I get your data for futures spread for equities as of April 30, 2020?

FYI, looking at the past 1 month of data (which is the only one I could get for equities), the spread for equities is 0.25%. Looks like financing has normalized :)

Code: Select all

Past month (only return history available)

TR  6922.59/6627.68 = +4.449%
FTR 482.43/462.03 = +4.415%

Difference: 0.034% over 1 month, aka 0.41% annualized
The borrowing spread for equities is not necessary the same as the borrowing spread for treasuries. It depends on the supply/depend for the individual instrument. For example see viewtopic.php?p=4884654#p4884654 and viewtopic.php?p=4885075#p4885075. It would be dangerous to try to infer the treasuries borrowing spread from the equities borrowing spread.

The methodology that infers the spread from the difference between the S&P500 futures index and the S&P500 TR index is not very reliable on short time horizons because it is possible to realize a gain on the interest rate component embedded in the futures contract. With updated data I see this:

Image
(annualized borrow spread based on the following 50 days of data, smoothed by a 50ma filter. The most recent data point is from last friday)

Image
(annualized borrow spread based on the following 180 days of data, smoothed by a 50ma filter)
Data was obtained via https://markets.ft.com/data/indices/tea ... =SPXTR:REU and https://markets.ft.com/data/indices/tea ... SPXFTR:REU. Specs of the index can be viewed at https://www.spglobal.com/spdji/en/indic ... /#overview

Therefore it appears that the borrowing spread for equities has not been impacted by the recent crisis.


As far as I'm aware of, observing the borrow spread in the (semi) annual reports is the most accurate way we can currently observe the borrow spread for treasuries.

For proshares:
In N-CSR at https://www.sec.gov/Archives/edgar/data ... -index.htm
For 2x 20+ year treasury, the swap interest rate was 0.20%
For short 2x 20+ year treasury, the swap interest rate was 0.13%
The overnight libor at this time ( as of May 31) was 0.06%. Representing a spread of 0.15% for the long leg. The 1-month libor was 0.18%, representing no spread.
Proshares does not have a 3x etf.

For direxion:
in N-CSRS at https://www.sec.gov/Archives/edgar/data ... -index.htm
For long 3x 20+ year treasury, the swap interest rate was ~1.1%
For short 3x 20+ year treasury, the swap interest rate was ~0.75%
The 1-month libor at this time (april 30) was 0.32. Representing a spread of 0.8% for the long leg.

Perhaps this indicates that the spread was large at April 30 but normalized around May 31. It can further be observed that the spread between the long and the short leg was large in april (long 1.1% vs 0.75% short), much more than average.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Alfie121 »

locallyoptimal wrote: Tue Aug 11, 2020 9:36 am Greetings—these past few days I’ve noticed that the negative correlation between LTTs and stocks has been shaky.
As I write, TMF is down 4.2%, TQQ down 2.8% and UPRO is up 0.6%
Is this a sign that the low yields on LTTs make it no longer an attractive safe haven for the big institutions? Any thoughts on where the “risk off” money is flowing to instead?
Thanks for any insights!
Same here. I came across this today:
https://www.institutionalinvestor.com/a ... -Time?s=09
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

Alfie121 wrote: Sun Aug 16, 2020 11:50 am
locallyoptimal wrote: Tue Aug 11, 2020 9:36 am Greetings—these past few days I’ve noticed that the negative correlation between LTTs and stocks has been shaky.
As I write, TMF is down 4.2%, TQQ down 2.8% and UPRO is up 0.6%
Is this a sign that the low yields on LTTs make it no longer an attractive safe haven for the big institutions? Any thoughts on where the “risk off” money is flowing to instead?
Thanks for any insights!
Same here. I came across this today:
https://www.institutionalinvestor.com/a ... -Time?s=09
Reads like an infomercial for Universa of Taleb's fame. Unsurprising: the author works there. Also, this questions traditional 60/40, not HFEA type strategies.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by PicassoSparks »

taojaxx wrote: Sun Aug 16, 2020 1:35 pm
Alfie121 wrote: Sun Aug 16, 2020 11:50 am Same here. I came across this today:
https://www.institutionalinvestor.com/a ... -Time?s=09
Reads like an infomercial for Universa of Taleb's fame. Unsurprising: the author works there. Also, this questions traditional 60/40, not HFEA type strategies.
It would be a lot more effective infomercial if there were any way for retail investors to buy into the strategy…
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by taojaxx »

PicassoSparks wrote: Sun Aug 16, 2020 5:13 pm
taojaxx wrote: Sun Aug 16, 2020 1:35 pm
Alfie121 wrote: Sun Aug 16, 2020 11:50 am Same here. I came across this today:
https://www.institutionalinvestor.com/a ... -Time?s=09
Reads like an infomercial for Universa of Taleb's fame. Unsurprising: the author works there. Also, this questions traditional 60/40, not HFEA type strategies.
It would be a lot more effective infomercial if there were any way for retail investors to buy into the strategy…
He's not targeting retail. Multi billon $ Pension Funds are his market.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by danyboy7 »

rockstar wrote: Fri Aug 14, 2020 6:31 pm
tomphilly wrote: Fri Aug 14, 2020 6:20 pm Bit of a rough week for the strategy, I lost about 4% at 65/35. You expect bonds to respond to stocks, but that doesn't work in reverse. TMF tracked its own course, leaving UPRO stuttering at SPY's ATH and ending up nowhere. The negative correlation was barely evident at any point.
TMF seems like a bad idea in this environment. The back testing for this idea wasn't done through an equivalent period of time. Volatility is much higher today, and yields are near zero. I'm flipping back and forth out of cash for this strategy and using TQQQ instead of UPRO. And now, I'm beginning to feel like we're hitting a near top with QQQ, so I'm just losing my gain over time due to the higher volatility as measured by VXN.
What about using 70% UPRO combined with 30% Gold leveraged x3 etf ?
PV: https://www.portfoliovisualizer.com/bac ... mbol14=QQQ
I think TMF has not much more room left to rise and upset drop on TQQQ or UPRO. Interests won't go lower than 0% according to FED and even if they do,I bet a maximum -1% is reachable
I have seen the light
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by zarci »

I'm aware Hedgefundie stopped posting here some time ago. I can see that his last update on the 18th of march shows a significant drop in value. Would it be safe to say this strategy has blown up during the last bit of volatility? Can anybody tell me how the portfolio would have performed after the 18th?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by SVT »

zarci wrote: Mon Aug 17, 2020 5:26 am I'm aware Hedgefundie stopped posting here some time ago. I can see that his last update on the 18th of march shows a significant drop in value. Would it be safe to say this strategy has blown up during the last bit of volatility? Can anybody tell me how the portfolio would have performed after the 18th?
It has not blown up. It's done quite well.
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zarci
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by zarci »

SVT wrote: Mon Aug 17, 2020 5:35 am
zarci wrote: Mon Aug 17, 2020 5:26 am I'm aware Hedgefundie stopped posting here some time ago. I can see that his last update on the 18th of march shows a significant drop in value. Would it be safe to say this strategy has blown up during the last bit of volatility? Can anybody tell me how the portfolio would have performed after the 18th?
It has not blown up. It's done quite well.
Is there a way I can check the chart displayed in the very first post? Just pointing in the right direction would suffice thanks.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by SVT »

zarci wrote: Mon Aug 17, 2020 5:37 am
SVT wrote: Mon Aug 17, 2020 5:35 am
zarci wrote: Mon Aug 17, 2020 5:26 am I'm aware Hedgefundie stopped posting here some time ago. I can see that his last update on the 18th of march shows a significant drop in value. Would it be safe to say this strategy has blown up during the last bit of volatility? Can anybody tell me how the portfolio would have performed after the 18th?
It has not blown up. It's done quite well.
Is there a way I can check the chart displayed in the very first post? Just pointing in the right direction would suffice thanks.
That's from his personal portfolio in M1. You should be able to approximate it using portfoliovisualizer.com.

A page or 2 ago we talked about the performance and a couple of us who started just a week or 2 after him with similar amounts of money gave updates on the return.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cos »

zarci wrote: Mon Aug 17, 2020 5:37 am
SVT wrote: Mon Aug 17, 2020 5:35 am
zarci wrote: Mon Aug 17, 2020 5:26 am I'm aware Hedgefundie stopped posting here some time ago. I can see that his last update on the 18th of march shows a significant drop in value. Would it be safe to say this strategy has blown up during the last bit of volatility? Can anybody tell me how the portfolio would have performed after the 18th?
It has not blown up. It's done quite well.
Is there a way I can check the chart displayed in the very first post? Just pointing in the right direction would suffice thanks.
This should give you a rough idea of how he's doing: https://www.portfoliovisualizer.com/bac ... tion2_2=45
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zarci
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by zarci »

cos wrote: Mon Aug 17, 2020 10:40 am
zarci wrote: Mon Aug 17, 2020 5:37 am
SVT wrote: Mon Aug 17, 2020 5:35 am
zarci wrote: Mon Aug 17, 2020 5:26 am I'm aware Hedgefundie stopped posting here some time ago. I can see that his last update on the 18th of march shows a significant drop in value. Would it be safe to say this strategy has blown up during the last bit of volatility? Can anybody tell me how the portfolio would have performed after the 18th?
It has not blown up. It's done quite well.
Is there a way I can check the chart displayed in the very first post? Just pointing in the right direction would suffice thanks.
This should give you a rough idea of how he's doing: https://www.portfoliovisualizer.com/bac ... tion2_2=45
Thank you, cos.

Good to see Hedgedundie doing well. I've been pondering leveraged portfolios during the past few weeks.

Something I'm genuinely interested in is how leveraged investors plan to deal with serious downturns.

Say the stock market drops 40%, then a 3x leveraged stock portfolio would lose 120%.

So my honest question to leveraged investors; How do you plan to deal with a severe market drawdown?

I'll list some possibilities that i could come up with;

1. You expect holding historically uncorrelated assets, such as stock and bonds, will counteract the severe drawdown of one asset. Say bonds counteracting stock.

2. You expect to add more cash to the portfolio to prevent margin calls. Like Market Timer seems to have done. Add liquidity or further increase leverage.

3. You believe the maximum drawdown of stock would be something like 50%. Thereby leveraging between 100% and 200% is safe.

4. You believe you are young and have an appetite for risk. Your strategy shoots for the moon and will have amazing results. That or wipe you out. In which case you would accept the outcome and start over again. You're young and have lots of human capital.

I probably missed other options. The core question remains; Why do you think you'll not have a 100% drawdown?


For those inclined to further reading; I couldn't help but observe that leverage is traditionally used to reduce volatility. Say, use a leveraged version of 30 stock / 70 bond versus an unleveraged 70 stock / 30 bond. Banks and insurance companies tend to do this due to cashflow requirements and access to cheap capital or credit.

So then, why are so many young investors inclined to leveraging volatility upwards?
wackerdr
Posts: 118
Joined: Mon Jun 08, 2020 3:53 pm

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

Post by wackerdr »

zarci wrote: Mon Aug 17, 2020 11:19 am
cos wrote: Mon Aug 17, 2020 10:40 am
zarci wrote: Mon Aug 17, 2020 5:37 am
SVT wrote: Mon Aug 17, 2020 5:35 am
zarci wrote: Mon Aug 17, 2020 5:26 am I'm aware Hedgefundie stopped posting here some time ago. I can see that his last update on the 18th of march shows a significant drop in value. Would it be safe to say this strategy has blown up during the last bit of volatility? Can anybody tell me how the portfolio would have performed after the 18th?
It has not blown up. It's done quite well.
Is there a way I can check the chart displayed in the very first post? Just pointing in the right direction would suffice thanks.
This should give you a rough idea of how he's doing: https://www.portfoliovisualizer.com/bac ... tion2_2=45
Thank you, cos.

Good to see Hedgedundie doing well. I've been pondering leveraged portfolios during the past few weeks.

Something I'm genuinely interested in is how leveraged investors plan to deal with serious downturns.

Say the stock market drops 40%, then a 3x leveraged stock portfolio would lose 120%.

So my honest question to leveraged investors; How do you plan to deal with a severe market drawdown?

I'll list some possibilities that i could come up with;

1. You expect holding historically uncorrelated assets, such as stock and bonds, will counteract the severe drawdown of one asset. Say bonds counteracting stock.

2. You expect to add more cash to the portfolio to prevent margin calls. Like Market Timer seems to have done. Add liquidity or further increase leverage.

3. You believe the maximum drawdown of stock would be something like 50%. Thereby leveraging between 100% and 200% is safe.

4. You believe you are young and have an appetite for risk. Your strategy shoots for the moon and will have amazing results. That or wipe you out. In which case you would accept the outcome and start over again. You're young and have lots of human capital.

I probably missed other options. The core question remains; Why do you think you'll not have a 100% drawdown?


For those inclined to further reading; I couldn't help but observe that leverage is traditionally used to reduce volatility. Say, use a leveraged version of 30 stock / 70 bond versus an unleveraged 70 stock / 30 bond. Banks and insurance companies tend to do this due to cashflow requirements and access to cheap capital or credit.

So then, why are so many young investors inclined to leveraging volatility upwards?
This is what I have been doing since June.

1. Started with 10% of my portfolio. Now it is about 12.15% of my portfolio. Got about 35% returns. Running a TQQQ + TMF in 70-30 ratio.
2. This is the amount of money that I am mentally prepared to lose. It would not materially alter my retirement plans or timeline.
3. I do not play with margin. If you do play with margin, just to increase leverage, you may have to liquidate your other assets that you did not intend to. Then the strategy is not just risky. It is reckless and greed.
4. Whether TMF remains a good hedge and counter balance, remains to be seen. I plan to alter the mix a little bit to make it 65%TQQQ + 25% TMF + 10% CASH.
5. Because of circuit breakers , it is not possible to lose entire balance in a single day. But it is possible that TQQQ /UPRO stays at abysmally low levels even with QQQ or SPY increases. A simulation of dot com crisis where QQQ lost 80% is instructive. QQQ recovered in time, to give the returns. But had TQQQ existed since 2000, it would not have recovered nearly as much. That's where cash positions help, as you can buy at depressing lows.
It can be seen even in March 2020. TQQQ went down to 35$ and came back to $130 in the past few days.
Last edited by wackerdr on Mon Aug 17, 2020 11:43 am, edited 1 time in total.
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zarci
Posts: 133
Joined: Sat Jun 10, 2017 11:02 am

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

Post by zarci »

wackerdr wrote: Mon Aug 17, 2020 11:29 am ...

This is what I have been doing since June.

1. Started with 10% of my portfolio. Now it is about 12.15% of my portfolio. Got about 35% returns. Running a TQQQ + TMF in 70-30 ratio.
2. This is the amount of money that I am mentally prepared to lose. It would not materially alter my retirement plans or timeline.
3. I do not play with margin. If you do play with margin, just to increase leverage, you may have to liquidate your other assets that you did not intend to. Then the strategy is not just risky. It is reckless and greed.
4. Whether TMF remains a good hedge and counter balance, remains to be seen. I plan to alter the mix a little bit to make it 65%TQQQ + 25% TMF + 10% CASH.

Thanks for the reply. So if I'm interpreting this correctly you:

Invest in 70% 3X Total Stock and 30% 3X Long Duration Bond. You avoid margin and assume long duration bonds are a somewhat adequate counterbalance to stock. This implies a drawdown greater than 100% seems unlikely. On the off chance bonds and stock would fall over 30% in a correlated manner you wouldn't mind losing this part of your portfolio, since it's only 10% of your asset allocation. And you feel the possible reward is worth the risk.

Is that correct?
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